Bridge Products, Inc. v. Quantum Chemical Corp.

No. 88 C 10734 (N.D. Ill. April 27, 1990)

The court holds that defendant's counsel suffers from a conflict-of-interest and disqualifies counsel from this hazardous waste case for learning privileged information while being interviewed as a potential replacement for plaintiff's outside counsel. Plaintiff had retained law firms from Chicago and Virginia. In seeking to replace the Chicago firm, plaintiff interviewed but did not retain the firm subsequently retained by defendant. During the interview, plaintiff discussed with defendant's counsel the status of the litigation, the facts, privileged communications with the Virgina firm, strategy, and what defendant was prepared to accept in settlement. The court holds that an implied attorney-client relationship existed between plaintiff and defendant's counsel because confidential information was divulged and plaintiff had a reasonable belief that an attorney-client relationship existed during the interview. The court holds that a substantial relationship exists between the prior representation of plaintiff and the present representation of defendant and that plaintiff could be prejudiced by the confidential information revealed to defendant's counsel. The court holds that the Chinese Wall defense can be used when an infected attorney joins the firm, but not where the attorneys were infected at the firm seeking to avoid disqualification.

Counsel for Plaintiff
Donald Egan
Katten, Muchin & Zavis
525 W. Monroe St., Ste. 1600, Chicago IL 60606-3693
(312) 902-5211

Counsel for Defendant
John D. Rice
Quantum Chemical Corp.
11500 North Lake Dr., Cincinnati OH 45249
(513) 530-6563

[20 ELR 20940]

Kocoras, J.:

Memorandum Opinion

This matter is before the court on Plaintiff Bridge Products, Incorporated's motion to disqualify Sidley & Austin, a Chicago-based law firm, from representing Defendant Quantum Chemical Corporation as its new outside counsel in this litigation. For the following reasons, the motion is granted.

Background

At the beginning of this litigation, Bridge Products was represented by the Chicago law firm of Gardner, Carton & Douglas and Quantum was represented by another Chicago firm, Chadwell & Kayser. Bridge Products was the first party to change counsel. In its search for a replacement for Gardner, Carton & Douglas, Bridge, in mid-1989, interviewed four other Chicago-area law firms. One of these was Sidley & Austin.

There were two contacts of substance between Bridge and Sidley. The first of these was a telephone conversation between Deborah Stonebraker, Bridge's general counsel and Vice President of Legal Affairs, and James Cahan, a partner at Sidley. Stonebraker explained that Bridge was seeking new outside counsel to represent it in this case and gave Cahan a brief synopsis of the case's underlying facts and procedural status. It was decided to pursue the matter further and a meeting was scheduled for August 11, 1989. In the meantime, Sidley obtained the court file in the case in order to better prepare for the meeting.

On the appointed date, Stonebraker and Bridge's chief executive officer, Edwin C. Parker, met with Cahan and another partner in Sidley's environmental group, J. Andrew Schlickman. The meeting lasted slightly over one hour. The parties of course discussed the status of the litigation as well as its underlying facts in great detail. But this was not all. Since the property at issue in this case is located in the state of Virginia, Bridge had also retained the services of the Virginia firm known as Hunton & Williams to represent it before the Virginia as well as the federal environmental protection agencies. Stonebraker and Parker state in sworn affidavits that they disclosed to Sidley some of their privileged communications to Hunton & Williams as well as some of Hunton & Williams' findings and plans regarding the strategy that was to be taken in dealing with the regulatory agencies. In addition, Bridge divulged information concerning (1) its own view as to proper trial strategy; (2) its opinion of Quantum as well as Quantum's view of the case; and (3) its conversations with Gardner regarding settlement as well as what Bridge was prepared to accept. Quantum does not dispute that this information was in fact divulged. Lastly, Parker and Stonebraker sought an initial opinion from Sidley with respect to how it thought the case had been handled so far and how, in general, Sidley would pursue the matter if hired. Sidley, in fact, did offer some preliminary observations along with advice and the meeting was adjourned.

At the meeting, Sidley did nothing at all to indicate that the information that it was receiving from Parker and Stonebraker would not be held in confidence, or that it might be used against Bridge if it did not officially retain Sidley as outside litigation counsel. Indeed, Schlickman and Cahan informed Parker and Stone-braker that they had already performed a conflicts check and that Bridge was clear. Finally, although the issue was not discussed, Bridge did not condition the August 11th meeting on Sidley's agreement not to bill the time. Parker and Stonebraker engaged in similar interviews on behalf of Bridge with McDermott, Will & Emory, Baker & McKenzie, and Katten, Muchin & Zavis.

After meeting with all four law firms, Bridge chose Katten to represent it. Sidley was informed of this decision and this ended their contact. Bridge and Sidley never entered into a formal agreement; nor did Bridge ever pay any money to Sidley for its services.

Several months later, Quantum also found itself in need of new litigation counsel. The law firm of Chadwell & Kayser had dissolved and the attorney there who had been handling the case had gone to work as in-house counsel for a corporation. The firm that Quantum chose to represent it, however, turned out to be Sidley. On March 13, 1990, Sidley appeared before this court on behalf of Quantum and indicated that it would be filing a formal appearance shortly.

Bridge has now moved to disqualify Sidley from representing Quantum, arguing that it has a hopeless conflict of interest. Bridge takes the position that a lawyer/client relationship existed between it and Sidley at the time of the August 11, 1989, meeting and that Sidley, armed with confidential disclosures of Bridge, cannot now switch sides in the same piece of litigation to represent Quantum.

Quantum responds with three arguments. First, it argues that Bridge's interview with Sidley was not in the context of an attorney/client relationship, describing the August 11th meeting as part of a mere "beauty contest." Second, Quantum takes the position that even if an implicit attorney/client relationship did exist for purposes of the August 11th meeting, it is not reasonable to infer that confidential information was disclosed to Sidley at that meeting given "the limited and introductory nature of [Bridge's] contact" with the firm. Third, Quantum argues that the fact that it has now built a so-called "Chinese Wall" around James Cahan and J. Andrew Schlickman should avoid disqualification of the entire Sidley firm in this case.

Discussion

I. Attorney/Client Relationship

Normally, the attorney-disqualification issue commences with an application of what is known as the "substantially related" test. That test, however, assumes that the lawyer in question is attempting to "represent] [ a party in a matter in which the adverse party is that lawyer's former client." DCA Food Indus., Inc. v. Tasty Foods, Inc., 626 F. Supp. 54, 58 (W.D. Wi. 1985) (applying Seventh Circuit precedent). In other words, it assumes the existence of a prior attorney/client relationship between the lawyer at issue and the party seeking his disqualification. Here, however, the existence of such a relationship is in dispute and, thus, must be addressed as a preliminary matter.

In this case, it is undisputed that there was no formal attorney/client relationship between Bridge and Sidley. The parties never entered into an actual agreement, and Bridge never paid Sidley any money for its services. This, however, is far from conclusive because Bridge can still prove that there was an implicit attorney/client relationship which derived from the nature of the parties' interview.

It is well-settled in this circuit that a party seeking to establish an "implied attorney/client relationship" must demonstrate that (1) he "submitted confidential information to a lawyer," and (2) that he did so "with the reasonable belief that the lawyer was acting as the party's attorney." DCA Food Indus., 626 F. Supp. at 59-60 [20 ELR 20941] (synthesizing the Seventh Circuit's decisions in Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311 (7th Cir.), cert. denied, 439 U.S. 955 (1978) and Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263 (7th Cir., 1983)); Pain Prevention Lab v. Electronic Waveform Labs, 657 F. Supp. 1486, 1495 (N.D. Ill. 1987) (following DCA Food). Thus,we must apply each of these criteria to the facts of this case.

A. Confidential Information

With respect to the first prong of the test, we conclude that confidential information was actually disclosed to Sidley by Bridge. The affidavits of Parker and Stonebraker initially establish, in part, that Bridge disclosed to Sidley its innermost strategies and desires regarding settlement, and some of the privileged communications it had had with both Gardner, Carton & Douglas and Hunton & Williams.

Sidley does not refute that these communications were made. Instead, it makes three counterarguments which attempt to negate the confidentiality of the information. First, it argues that the Parker and Stonebraker affidavits are too vague to prove the confidentiality of the information. Second, Sidley takes the position that any confidentiality in these communications was destroyed by the fact that Bridge, through its attorney Gardner, had already made many disclosures to Quantum concerning most aspects of the litigation. And third, Sidley argues that, in any event, confidentiality was destroyed by the fact that Parker and Stonebraker made similar disclosures to Gardner's other potential replacements, and not just Sidley. These arguments all fail, however.

Contrary to Quantum's first argument, Bridge's affidavits are sufficient to establish prima facie confidentiality. As an initial matter, it must be restated that "[i]t would defeat the very purpose of the disqualification motion — preserving client confidence — if in order to obtain disqualification any client were forced to reveal what had earlier been told to his or her lawyer." Donohoe v. Consolidation Operating & Prod. Corp., 691 F. Supp. 109, 112 (N.D. Ill. 1988). Thus, quoting the confidential disclosures is unnecessary. Rather, Bridge must merely raise an evidentiary inference that actual confidences were disclosed. Under this standard, the assertions that Bridge disclosed in the August meeting with Sidley disclosed private communications it had made to both Gardner and Hunton & Williams are by themselves sufficient to raise such an inference. This inference derives from the rule that any information a client gives to an attorney in the course of the attorney/client relationship is presumed to be confidential. See, e.g., Analytica, 708 F.2d at 1267; Schiessle v. Stephans, 717 F.2d 417, 420 n.2 (7th Cir. 1983). Since Parker and Stonebraker clearly allege that they disclosed to Sidley information that they shared with Gardner and Hunton & Williams in the context of undisputed attorney/client relationships, it is legally presumed that this information was confidential.

Second, the fact that Bridge and Gardner had already made many disclosures to Quantum about the condition of the site and the possibility of settlement does not destroy confidentiality. As Bridge correctly points out in its reply, such disclosures were all made within the context of an adversarial proceeding. Quantum's affidavits do nothing to show that Gardner gave away Bridge's entire strategy simply by making specific disclosures regarding certain matters in conducting settlement negotiations.

Finally, the fact that Bridge made similar disclosures in interviews with three other law firms also does not destroy confidentiality. There is no indication that Bridge did not expect the same confidentiality to attach to these disclosures. Moreover, as will be discussed below, the law firms, including Sidley, could easily have avoided an implied attorney/client relationship had they wished to do so.

Thus, we conclude that confidential information was obtained by Sidley at its meeting with Bridge's agents on August 11, 1989. But, in order to prove up an implicit attorney client relationship, Bridge must also satisfy the second prong of the Seventh Circuit's formulation.

B. Reasonable Belief

The second prong of the test asks whether the confidential information was disclosed with the reasonable belief that there was an attorney/client relationship. We conclude that it was.

Sidley's argument on this prong focuses on the context of the meeting. In this regard, it asks us to view the August 11th meeting as part of a mere "beauty contest." Having apparently failed the swimsuit competition, Sidley does not wish to be saddled with the ethical encumbrances of an attorney/client relationship for which it never received any money.

The focus, however, must be on what Bridge, and not Sidley, reasonably believed. Sidley was [the] one that knew of the ethics rules, and thus it was Sidley that was responsible for making clear to Bridge that the initial meeting was purely preliminary and that confidences would not necessarily be protected. This it did not do. Sidley did not have Bridge sign a conflicts waiver; this would have put Bridge on notice with respect to making confidential disclosures. Sidley did not even indicate whether Bridge would be billed for the meeting; such knowledge would also have made Bridge more wary of making indiscriminate disclosures. Thus, it is Sidley, and not Bridge, who must pay for this confusion by being deemed part of an implicit professional relationship and all the ethical responsibilities arising therefrom.¹

II. Substantial Relationship

Once a prior attorney/client relationship with the party seeking disqualification has been established, the next step is to determine whether a substantial relationship exists between the prior and present representations. In Westinghouse Electric Corp. v. Gulf Oil Corp., 588 F.2d 221 (7th Cir. 1978), the Seventh Circuit first articulated its three-part test for determining whether a substantial relationship exists:

Initially the trial judge must make a factual reconstruction of the scope of the prior legal representation. Second, it must be determined whether it is reasonable to infer that the confidential information allegedly given would have been given to a lawyer representing a client in those matters. Finally, it must be determined whether that information is relevant to the issues raised in the litigation pending against the former client.

Id. at 225. If all three criteria are met, a substantial relationship is deemed to exist between the two representations and, unless one of the narrow exceptions from the rule is applicable, disqualification is usually proper.

Although Sidley makes much of its attempt to negate the first two criteria in this case and the presumption of confidential disclosures which results from their having been met, we find them to be satisfied simply by the fact that an implicit attorney/client relationship has been found to exist here. As discussed above, the implied attorney/client relationship is grounded in a finding that actual confidences were disclosed. Thus, the first two criteria of the substantial-relationship test — which ask whether it is appropriate to presume that confidential information has passed in the prior relationship — are, in a way, irrelevant to the analysis because more than a mere presumption of such disclosures has already been found. This leaves the third factor.

The third factor inquires whether the information gleaned in the earlier representation would likely be relevant in the context of the later representation. Obviously, the greater the relevance, the greater the likelihood that the lawyer will be able to put his former client at an unfair advantage by using his own secrets to defeat him.

In this case, it is evident that the confidential information that Sidley obtained in its interview with Parker and Stonebraker is highly relevant to its current representation of Quantum in this litigation. This is primarily because the matters are identical: Sidley is switching sides in the same case. In such instances, relevance is almost impossible to avoid. See Hughes, 565 F. Supp. at 670. Sidley, of course, is correct in stating that the fact the representation occurred in the same litigation does not necessarily establish relevance in every [20 ELR 20942] case. Nonetheless, we find it to do so here. Just to take one example, we concluded above that Bridge disclosed confidential communications it had made to Hunton & Williams regarding its administrative dealings thus far with the Virginia and federal environmental protection agencies. This case, on the other hand, has now expanded to include a private claim under the Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C. §§ 9601-75 (1988). And as part of proving under CERCLA that Quantum should pay for the environmental cleanup that Bridge has already accomplished, Bridge will have to show that its operations were performed in accordance with federal and state environmental regulations. Quantum, therefore, would no doubt love to have any information about Bridge's strategy in dealing with the state and federal agencies in the hope of finding some way to defeat the CERCLA claim. This is the essence of relevance.

III. The Chinese Wall

Despite the fact that there was an implicit attorney/client relationship between Sidley and Bridge; and despite the fact that this relationship is substantially related to its current representation of Quantum in this case; Sidley makes one final attempt at avoiding disqualification. It suggests that we not impute the knowledge gained by Cahan and Schlickman to the rest of the Sidley law firm because it has built a "Chinese Wall" around these infected lawyers.

Imputation, of course, has long been the general rule, and the Seventh Circuit has also long held that it is generally irrebuttable. Nonetheless, the Seventh Circuit has condoned one important exception to this rule where the infected lawyer has come from another law firm or government service and was infected there rather than at his new place of employment. In such cases, the Seventh Circuit has indicated that the new law firm may rebut the imputation of confidential knowledge by building what has been referred to as a Chinese Wall around the infected newcomer. The wall must be sufficient to isolate the infected lawyer from those who are currently charged with executing the more recent representation. See, e.g., LaSalle Nat'l Bank v. County of Lake, 703 F.2d 252, 257-58 (7th Cir. 1983).

The Seventh Circuit, however, has explicitly rejected the concept of a Chinese Wall where the infected attorney is not an associate who has come from another firm or government service, but is simply another lawyer within the firm in question. In Analytica, supra, the court stated that the exception is not available where "the law firm itself changed sides." 708 F.2d at 1267. This is precisely what has happened in this case.

Although we recognize that Judge Moran, in Hughes v. Paine, Webber, Jackson & Curtis, Inc., 565 F. Supp. 663, 672-73 (N.D. Ill. 1983), expanded the Chinese Wall exception to situations such as this where the prior representation was a mere preliminary interview, we decline to follow that approach here. The exceptions condoned by the Seventh Circuit have all involved what has been termed the "shifting associate problem." As such, the allowance of a Chinese-Wall procedure in these instances primarily reflects a desire by the courts to avoid destroying young lawyers' mobility within the legal market because of matters over which they have little or no control. See, e.g., Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 723 n.11 (7th Cir. 1982) ("an irrebuttable presumption 'might seriously jeopardize [young lawyers'] careers by temporary affiliation with large lawfirms'"). In cases such as this, however, the law firms who are participating in interviews with the goal of obtaining new business are far from helpless. By putting their prospective clients on notice that there is no attorney/client relationship as yet, they can avoid the possibility of having one imposed on them by law because of the potential client's misperception about the safety of their confidential disclosures. Of course a law firm who is selling itself to a prospective client with the greatest of zeal will not find it easy to insert disclaimers into the all-important interview, but if it fails to do so in the interest of heightening its sales pitch, this court, at least, finds that it must live with the consequences, including potential disqualification in the future. We find our approach to be more faithful to Seventh Circuit precedent as well as the better rule of law.

For the foregoing reasons, the plaintiff's motion to disqualify Sidley & Austin from representing the defendant in this litigation on conflict-of-interest grounds is granted. It is so ordered.

1. Quantum's reliance on B.F. Goodrich Co. v. Formosa Plastics Corp., 638 F. Supp. 1050 (S.D. Tex. 1986), is misplaced. There, the court first found that the preliminary interview at issue did not lead to a direct attorney/client relationship on the undisputed facts. Quantum cites this portion of the Goodrich case for the proposition that an initial interview will not lead to an implicit attorney/client relationship. Quantum's postion, however, is undermined by the very next portion of the Goodrich opinion. Thus, the court continues: "The fact that the attorney-client relationship had not yet been established does not mean that the . . . firm owed no duty whatever to Goodrich." Id. at 1052. The court goes on to set forth the criteria for the implied attorney/client relationship as espoused by the Seventh Circuit. While the Goodrich court ultimately concluded that there was no such implicit relationship on the facts of that case, that conclusion was based not on any inference drawn from the preliminarity of the negotiations, but rather on the finding that no actual confidences were divulged to the law firm.