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Southern Visions, LLP v. Red Diamond, Inc.

United States District Court, N.D. Alabama, Southern Division

February 25, 2019

SOUTHERN VISIONS, LLP, Plaintiff,
v.
RED DIAMOND, INC., Defendant.

          MEMORANDUM OPINION

          R. DAVID PROCTOR UNITED STATES DISTRICT JUDGE

         The Wonder Years was an award-winning comedy-drama broadcast on ABC television from 1988 to 1993. Set in a turbulent time in our nation's history, the late 1960s and early 1970s, the show portrays the life and perspectives of Kevin Arnold, a typical teenager raised by stereotypical parents in Anytown, USA. In one particular episode, “Dance with Me, ” Kevin's relationship with Lisa Berlini is blossoming (ever since their four-minute phone call). As they joke around together in homeroom, the upcoming school dance is announced over the PA system. Kevin decides it is time to take his burgeoning relationship with Lisa to the next level. So, he asks her to the dance (in the most intimate form of communication known to twelve year olds-by passing a note in class).

         To his great glee, Lisa writes “OKAY!” (including a smiley face in the “o”). Kevin cannot believe it. Lisa Berlini, who has “the best smelling head of hair in the seventh grade, ” is going to the dance with him; after all, he has it in writing. But soon after the bell rings, as Lisa and Kevin are filing out of class, the taller, cooler Brad Gaines arrives on the scene. To Kevin's surprise, he asks Lisa to attend the dance with him. And to his dismay, mere minutes after saying yes to Kevin, Lisa accepts Brad's offer. After Brad smiles and walks off, Kevin, obviously confused, confronts Lisa: “But you just said you'd go [to the dance] with me.” Lisa is uncomfortable, but puts up a defense: “That was before Brad asked me. . . . I didn't know he was gonna ask me when I said ‘yes' to you.” Red Diamond, Inc., the defendant in this case, may have some sympathy for Kevin. Red Diamond and the law firm Bradley Arant Boult Cummings (“Bradley”) have been to several dances over the years. Over the better part of a decade, from 2009 to 2018, Bradley represented Red Diamond in various small matters from time to time. But on December 23, 2018, Bradley began representing Southern Visions, LLP in this significant patent infringement lawsuit against Red Diamond. Bradley knew that its client Red Diamond objected strenuously to the representation, but, much like Lisa Berlini, it was happy to accept what it doubtless viewed as a substantial upgrade. Three days after saying “yes” to Southern Visions, on December 26, 2018, Bradley withdrew from all matters in which it was representing Red Diamond.

         Red Diamond has moved to disqualify Bradley from representing Southern Visions against it in this lawsuit. (Doc. # 76). Among other things, Red Diamond claims Bradley violated Alabama Rule of Professional Conduct 1.7(a), which generally forbids the simultaneous representation of two directly adverse clients, when it began representing Southern Visions in this lawsuit. The court held a hearing on the matter on February 11, 2019. After careful consideration of the parties' submissions and argument at the hearing, and for the reasons explained below, the court agrees with Red Diamond. Bradley violated Rule 1.7(a) when it began representing Southern Visions, and disqualification is an appropriate sanction for the violation. Red Diamond's motion to disqualify (Doc. # 76) is accordingly due to be granted.[1]

         I. Background

         To provide relevant context, the court first summarizes Bradley's prior representations of Red Diamond and then reviews the circumstances that gave rise to Red Diamond's disqualification motion.

         A. Bradley's Prior Representations of Red Diamond

          Bradley began representing Red Diamond in January 2009. (Doc. # 76-1 at 1, ¶ 2). At that time, Bradley attorney Ray Gibbons sent a letter to Red Diamond CEO William A. Bowron, Jr. confirming “our engagement as legal counsel to provide general representation” to Red Diamond. (Id. at 6). Since 2009, Bradley's work for Red Diamond has been light and sporadic.

         In 2011, pursuant to that “general representation” agreement, Red Diamond sought Bradley's assistance during the divorce of Tom Bowron. (Id. at 2, ¶ 3). Tom Bowron is the brother of Red Diamond CEO William Bowron and a part owner of Red Diamond. (Id.). Because Tom Bowron's ownership interest in Red Diamond was at issue, Red Diamond's financial records were subpoenaed and several Red Diamond executives were deposed. (Id.). Bradley attorney Stewart Cox was involved in objecting and responding to the financial subpoenas and representing Red Diamond at the depositions of Red Diamond's CEO William Bowron and its CFO Sherman Pitts. (Docs. # 85-7 at ¶ 3; 76-1 at 2, ¶ 4).

         Those sealed deposition transcripts, submitted by Red Diamond for the court's in camera review (Doc. # 86), show that Bradley received certain confidential, nonpublic information about Red Diamond during the course of this representation. The information includes, broadly, information about Red Diamond's board of directors, director fees, distributions to owners, ownership interests in the company, shareholder voting rights, audits, facilities, income, loans and guarantees, family trusts, corporate structure, operating divisions, annual reports, customer identities, company expenses, employee salaries, charitable giving, and other financial information including debt, liabilities, total cost of goods sold, and total sales.

         In March 2014, Red Diamond engaged Bradley to advise it on employee benefit matters, including the company's retirement and welfare benefit plans. (Docs. # 76-1 at 2, ¶ 6; 85-5 at ¶ 3). Bradley attorney David Joffe was principally responsible for handling these matters. (Doc. # 85-5 at ¶ 3). Over the four years (2014-2018) that Joffe provided occasional advice to Red Diamond about employee benefit matters, he billed only 26.5 hours for a total of $10, 295. (Doc.# 85-5 at 3, ¶ 6).

         In December 2014, Red Diamond engaged Bradley to advise it on tax matters. (Doc. # 76-1 at 2, ¶ 5). Bradley attorney Bruce Ely was principally responsible for this representation, and he handled three tax matters for Red Diamond. In the first matter, Ely provided Red Diamond advice about a pending tax audit by a private auditing company. (Doc. # 85-3 at ¶ 3). That matter concluded in 2015. (Id.). In the second matter, which occurred in 2017, one of Red Diamond's tax officers was a witness in a proceeding before the Alabama Tax Tribunal relating to a state audit of one of Red Diamond's vendors. (Id. at ¶ 4). Bradley billed 13.25 hours to Red Diamond on this matter. (Id.). Finally, Ely also billed fifteen minutes to Red Diamond in 2018 for his review of Red Diamond's coffee-maker lease agreement for potential Alabama rental tax issues. (Id. at ¶ 3).

         Finally, in February 2016, Red Diamond engaged Bradley attorney Ethan Tidmore to represent it in various debt collection matters. (Doc. # 76-1 at 3, ¶ 7). These matters involved restaurants, food marts, or day cares that had purchased food supplies from Red Diamond on credit and then defaulted on payment. (Doc. # 85-4 at ¶ 4). None of these debts exceeded $25, 000, and most were under $5, 000. (Id. at ¶ 5). Some of these debt collection matters remained pending when Red Diamond filed its motion to disqualify. (Doc. # 76-2 at 2, ¶ 4). As recently as December 12, 2018, Tidmore met for lunch with Red Diamond's Vice President of Finance to discuss the status of these matters. (Id. at ¶ 5; Doc. # 85-4 at ¶ 14).

         At the outset of most of the engagements described above, Red Diamond signed an engagement letter purporting to provide Red Diamond's prospective consent to Bradley undertaking future representations of other clients “in any matter that is not substantially related” to Bradley's work for Red Diamond, “even if the interests of such clients in those other matters are directly adverse” to Red Diamond, and “even if such representations would be simultaneous.” (Doc. # 76-1 at 10, 15, 26). Bradley did not advise Red Diamond to seek independent legal counsel about these advance conflict waivers, and Red Diamond did not seek independent counsel about the waivers. (Doc. # 76-1 at 1-4).

         B. The Current Dispute

         In September 2018, one of Red Diamond's competitors, Southern Visions, filed a major patent infringement action against it in the Northern District of Georgia. (Doc. # 1). Southern Visions claims one of Red Diamond's products -- a device for simultaneously brewing and sweetening tea -- infringes several of Southern Visions' patents. (Id. at 5-17). The action was transferred to this court on December 11, 2018. (Doc. # 58).

         On December 18, 2018, Bradley attorney Matthew Lembke received a call from one of Southern Visions' owners, Paul Stewart. (Doc. # 85-2 at ¶ 4). Stewart told Lembke that, in light of the transfer to this court, Southern Visions planned to hire a lawyer in Birmingham to work on this case and that Lembke was under consideration. (Id.). Lembke responded that he would need to check for potential conflicts. (Id.).

         After that call, Lembke asked his legal assistant, Amy Hersey, to run a conflicts check with Southern Visions as the potential client and Red Diamond as the adverse party. (Id. at ¶ 6). Before coming to Bradley, Hersey had worked as a legal assistant at the law firm Lightfoot, Franklin & White (“Lightfoot”), which represents Red Diamond in this patent infringement suit. (Id. at ¶ 3; Doc. # 76-3 at ¶ 2). When asked to run the conflicts check, Hersey immediately informed Lembke that she had worked on the case while at Lightfoot. (Doc. # 85-2 at ¶ 6). Lembke had another legal assistant run the conflicts check instead of Hersey, and she was immediately screened from any involvement in the conflicts review process. (Id. at ¶¶ 6-7). Hersey left the office for scheduled vacation from December 22-30, 2018 and was placed on paid administrative leave (where she remains) on December 31, 2019. (Id. at ¶ 14; Doc. # 85-1 at ¶ 13).

         The day after running the conflicts check, on December 19, 2018, Lembke called Lightfoot attorney Harlan Prater to determine whether Hersey had obtained confidential information about this case. (Doc. # 85-2 at ¶¶ 8-9). If she had, Lembke wanted to know whether Red Diamond would consent to an ethical screen around Hersey to cure any conflict created by her employment with Bradley. (Id.). At the hearing on February 11, 2019, counsel for Red Diamond represented that this was the first time Red Diamond learned Bradley was considering representing Southern Visions in this lawsuit.

         On the afternoon of December 21, 2018, after completing the conflicts check and learning that Red Diamond was a current client of Bradley's, Lembke met with Southern Visions personnel. (Id. at ¶ 11). At the hearing, Lembke described the meeting as a “beauty contest.” While in the meeting, Lembke learned that Red Diamond had earlier that day told Bradley it did not consider itself to have consented to any conflict created by Bradley's representation of Southern Visions, and that in any event Red Diamond revoked any such consent, effective immediately. (Id. at ¶ 12; Doc. # 76-1 at 33-34). At the end of that meeting, at about 4:00 pm, Southern Visions decided it wanted Bradley to represent it as lead counsel in this case. (Docs. # 85-2 at ¶ 11; 92-1 at ¶ 3).

         Earlier in the day on December 21, at 12:53 pm, Red Diamond CEO William Bowron had sent an email to Bradley attorney Stewart Cox expressing his dismay that Bradley was considering representing Southern Visions in this case. (Doc. # 76-1 at 33-34). Though Bowron is not a lawyer, the email contains classic legalese. In the email, Bowron explained that he was “frankly shocked” Bradley believed the general advance conflicts waivers Red Diamond had signed entitled Bradley to sue Red Diamond while it continued to represent Red Diamond in other matters. (Id. at 33-34) (internal quotation marks omitted). In his view, Bowron explained, the advance conflict waivers did not permit Bradley to sue Red Diamond while it simultaneously represented Red Diamond in other matters. (Id. at 34). But, Bowron went on, “[t]o the degree that [Bradley] or any other relevant party, board, agency, or court could conclude that Red Diamond has consented to [Bradley] representing Southern Visions in the Patent Lawsuit, I want to be clear that Red Diamond unequivocally revokes that consent.” (Id.). Bowron also expressed his view that Bradley's attempt to represent Southern Visions was nothing “less than a violation of the trust I placed in your firm.” (Id.).

         On the morning of December 23, 2018, Lembke asked Bradley's general counsel, John Watson, to have the firm's business review committee determine whether to approve Bradley's representation of Southern Visions in this lawsuit. (Doc. # 92-1 at ¶ 4). A few hours later, Watson notified Lembke that the Southern Visions representation had been approved. (Id.). In Lembke's view, “Bradley represented Southern Visions beginning on December 23, 2018, following approval of the representation by the firm.” (Id. at ¶ 8). December 23 “was the first day on which Bradley billed any time for work in connection with” this lawsuit. (Id.). A review of Bradley's invoice to Southern Visions, submitted for the court's in camera review (Doc. # 93), shows that Bradley lawyers performed about six hours of work on this case on December 23 and 24, the two days before Christmas.

         Three days after Bradley lawyers began work on this case for Southern Visions, on December 26, 2018 at 11:18 am, Bradley's general counsel sent an email to Red Diamond withdrawing from its current representations of Red Diamond, effective immediately. (Doc. # 85-1 at 7-8). The email stated that Bradley believed it could represent Southern Visions in this case because of Red Diamond's advance conflict waivers. (Id. at 7). Bradley explained that it routinely requires large companies like Red Diamond to agree to such waivers in advance when it handles relatively small matters for them, so that Bradley is not precluded from undertaking more substantial representations on behalf of other clients in the future. (Id.). Bradley stated it would not have agreed to represent Red Diamond in the few, small matters that it did without the advance conflict waivers, and that the waivers were an express condition of Bradley's representation of Red Diamond. (Id.). The email closed by listing three pending debt collection matters Bradley was handling for Red Diamond, noting that those matters had no pending deadlines, and explaining that Red Diamond would need to obtain other legal counsel if it wished for any further action to be taken in those matters. (Id. at 8).

         Forty-three minutes after Bradley withdrew from representing Red Diamond, Bradley attorney Matthew Lembke entered an appearance on behalf of Southern Visions in this case. But, to be clear, it is undisputed that Bradley's representation of Southern Visions began on December 23, not December 26.

         II. Legal Standard

         “Because a party is presumptively entitled to the counsel of his choice, that right may be overridden only if ‘compelling reasons' exist.” In re BellSouth Corp., 334 F.3d 941, 961 (11th Cir. 2003). One compelling reason to deny a client counsel of its choice is counsel's violation of an applicable rule of professional conduct. See Banque de Rive, S.A. v. Highland Beach Dev. Corp., 758 F.2d 559, 561 (11th Cir. 1985); Miccosukee Tribe of Indians of Fla. v. Cypress, 686 Fed.Appx. 823, 825-26 (11th Cir. 2017); McGriff v. Christie, 477 Fed.Appx. 673, 677-79 (11th Cir. 2012); Herrmann v. GutterGuard, Inc., 199 Fed.Appx. 745, 747, 755-57 (11th Cir. 2006).

         “The party moving to disqualify counsel bears the burden of proving the grounds for disqualification.” Id. “A disqualification order is a harsh sanction, often working substantial hardship on the client and should therefore be resorted to sparingly.” Herrmann, 199 Fed.Appx. at 752 (quoting Norton v. Tallahassee Mem'l Hosp., 689 F.2d 938, 941 n. 4 (11th Cir.1982)) (internal quotation marks omitted).

         Two sources of law govern motions to disqualify: the local rules of this court and federal common law. Herrmann, 199 Fed.Appx. at 752.

         Local Rule 83.1(f) provides that attorneys appearing before this court are governed by: (1) this court's local rules; (2) the Alabama Rules of Professional Conduct (to the extent they are not inconsistent with the court's local rules); and (3) the American Bar Association Model Rules of Professional Conduct (to the extent they are not inconsistent with either the court's local or Alabama rules). N.D. Ala. L.R. 83.1(f). The local rules also provide that violations of those standards may result in a variety of sanctions, including “removal from a particular case.” Id.

         Though state-court interpretations of the Alabama Rules of Professional Conduct are not binding on a federal court tasked with determining whether an attorney should be disqualified based on a violation of the Rules, they are persuasive authority concerning the Rules' meaning. See Clark v. Alfa Ins. Co., No. CIV.A. 00-AR-3296-S, 2001 WL 34394281, at *5 n.1 (N.D. Ala. Feb. 7, 2001) (Acker, J.).

         In deciding whether to grant a motion to disqualify, a district court must first “identify a specific rule of professional conduct applicable to that court and determine whether the attorney violated that rule.” Herrmann, 199 Fed.Appx. at 755; see also Schlumberger Techs., Inc. v. Wiley, 113 F.3d 1553, 1561 (11th Cir. 1997) (“[W]here the district court's disqualification order is based on an allegation of ethical violation, . . . [t]he court must clearly identify a specific Rule of Professional Conduct which is applicable to the relevant jurisdiction and must conclude that the attorney violated that rule.”). A district court “may not disqualify an attorney on the basis of some transcendental code of conduct that existed only in the subjective opinion of the court, of which the attorney had no notice.” Schlumberger, 113 F.3d at 1561 (cleaned up).

         If a violation of an ethical rule is found, disqualification may be an appropriate sanction. See Herrmann, 199 Fed.Appx. at 747 (affirming disqualification order where district court found violation of Georgia Rule of Professional Conduct). Upon finding a violation of an applicable ethical rule, a district court must then, “considering binding and persuasive federal case law, decide whether or not the ethical lapse warrants disqualification.” Clark, 2001 WL 34394281, at *3.

         III. Analysis

         Red Diamond's motion to disqualify requires the court to resolve two distinct issues. First, the court must determine whether Bradley violated a rule of professional conduct applicable in this court by undertaking representation of Southern Visions in this lawsuit. Second, if such a rule violation occurred, the court must decide whether disqualification is an appropriate sanction.

         The local rules of this court are silent on attorney conflicts of interest, but they do incorporate by reference the Alabama Rules of Professional Conduct and require attorneys practicing in this court to abide by those rules. See N.D. Ala. L.R. 83.1(f). As explained below, the court concludes (1) that Bradley violated Alabama Rule of Professional Conduct 1.7(a) and (2) that disqualification is warranted.

         A. Bradley ...


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