Worley v. Moore , 370 N.C. 358 ( 2017 )

IN THE SUPREME COURT OF NORTH CAROLINA
No. 310A16
Filed 8 December 2017
DENNIS WORLEY, STERLING KOONCE, FLYING A LIMITED PARTNERSHIP
L.P., JOSEPH W. FORBES JR., KENNETH CLARK, JAMES BOGGESS, JOEL
WEBB, JAIMIE LIVINGSTON, JAMES E. BENNETT JR., DAVID MINER,
RONALD ENGLISH, and MDF, LLC
v.
ROY J. MOORE, PIERCE J. ROBERTS, DAVID BROWN, MICHAEL ADAMS,
CHRISTOPHER BAKER, JAMES KERR, FRANK McCAMANT, NEIL KELLEN,
GINI COYLE, JOSEPH MOWERY, TOSHIBA CORPORATION, ALAMO
ACQUISITION CORP., and STEPHENS, INC.
Appeal pursuant to N.C.G.S. § 7A-27(a)(3) from an order dated 13 May 2016
by Judge Gregory P. McGuire, Special Superior Court Judge for Complex Business
Cases appointed by the Chief Justice under N.C.G.S. § 7A-45.4, in Superior Court,
Columbus County. Heard in the Supreme Court on 29 August 2017.
Nexsen Pruet, PLLC, by R. Daniel Boyce and David S. Pokela; and Ganzfried
Law, by Jerrold J. Ganzfried, pro hac vice, for plaintiff-appellees.
Kilpatrick Townsend & Stockton LLP, by Adam H. Charnes and John M. Moye,
for defendant-appellants.
NEWBY, Justice.
In this case we consider whether the trial court properly disqualified
defendants’ counsel under North Carolina Rule of Professional Conduct 1.9(a). This
rule balances an attorney’s ethical duties of confidentiality and loyalty to a former
client with a party’s right to its chosen counsel. The rule permits disqualification of
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an attorney from representing a new client if there is a substantial risk that the
attorney could use confidential information shared by the client in the former matter
against that same client in the current matter. This analysis requires the trial court
to determine whether confidential information that would normally have been shared
in the former matter is also material to the current matter. To do so, the trial court
must objectively assess the scope of the representation and whether the matters are
substantially related. Rather than applying an objective test, here the trial court
disqualified defendants’ counsel based on the former client’s subjective perception of
the past representation as well as the now replaced “appearance of impropriety” test.
As a result, we reverse the trial court’s decision and remand this matter to that court
for application of the appropriate legal standard.
The factual background leading to the instant litigation involves three other
disputes, all relating to plaintiff Joseph W. Forbes’s former employer Consert, Inc.
(Consert): a patent dispute between Forbes and Consert (the patent dispute),
Forbes’s 220 shareholder inspection rights action against Consert (the 220 action),
and a contract dispute between Itron, Inc. (Itron) and Consert (the Itron litigation).
Plaintiff Forbes is one of thirteen named plaintiffs in the present action, all
former shareholders of Consert. Beginning in 2008, Forbes was a shareholder and
member of the Board of Directors of Consert and served as Chief Operating Officer.
In the fall of 2011, Forbes was removed as an officer and director but remained a
significant shareholder. Soon after his removal, Forbes and Consert disagreed about
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Forbes’s unpaid compensation and ownership of certain patents (the patent dispute),
but the dispute never resulted in direct litigation even though Forbes was
represented by counsel.
Sometime in 2012, Toshiba, a technology company, expressed interest in
purchasing Consert. Concerned about the proposed sale, Forbes sued Consert in
December 2012 under Section 220 of the Delaware General Corporation statutes (the
220 action), asserting his shareholder rights and requesting certain corporate records
regarding the sale. In the 220 action, Forbes referenced, inter alia, the ongoing patent
dispute in his allegations concerning Consert’s mismanagement.
At the same time, Consert was also defending a lawsuit filed by Itron, a
licensee and successor in interest to a development agreement with Consert, over
certain payment terms under that agreement (the Itron litigation). Based on Forbes’s
allegations in the 220 action, Itron amended its complaint to include claims based on
Consert’s failure to disclose the ongoing patent dispute with Forbes.
Amidst the Itron litigation, Toshiba acquired Consert on 5 February 2013 as a
wholly owned subsidiary. Following the Consert–Toshiba merger, Consert engaged
Kilpatrick Townsend & Stockton LLP (Kilpatrick) to represent it in the Itron
litigation. Itron sought to depose Forbes regarding the Consert–Toshiba merger, the
220 action, and primarily the patent dispute with Consert.1 By mid-February 2013,
1 Forbes produced requested documents during the Itron litigation while represented
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Forbes and Consert settled the 220 action, and by May 2013, Forbes and Consert
resolved the patent dispute, leaving only the Itron litigation unresolved.
In October 2013, counsel from Winston & Strawn, LLP, who represented
Forbes at the time, communicated with Joe Bush of Kilpatrick (Bush),2 counsel to
Consert, about Forbes’s deposition. Bush disclosed to Forbes’s counsel that, in
addition to his primary representation of Consert, he also represented former
employees and shareholders of Consert in the Itron litigation. Bush later offered
limited representation to Forbes at Consert’s expense as long as Forbes agreed to the
proposed engagement terms. Forbes eventually agreed that Bush would represent
him in the Itron litigation regarding his role as a former Officer and Director of
Consert.
On 23 January 2014, Forbes signed an engagement letter that outlined the
terms of Bush’s limited representation of Forbes (the engagement letter), which
began by stating, “As you are aware, this firm is outside litigation counsel to [Consert]
in connection with the [Itron litigation].” The engagement letter then explained that
the representation of Forbes would “be limited to legal services associated with
discovery efforts (such as depositions, witness statements, factual development, and
by Winston & Strawn, LLP. Kilpatrick did not assist Forbes with document production.
2 Plaintiff seeks to disqualify both Bush and Kilpatrick, his law firm, from
representing defendants. For simplicity, references hereinafter to “Bush” include both him
and his law firm as counsel.
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document analysis), [Forbes’s] potential testimony at trial, and specifically in
connection with [Forbes’s] former role as Chief Operating Officer of Consert.” Forbes
agreed that he would be “willing to permit Kilpatrick Townsend to disclose to Consert,
to any related entities, and to the employees of these entities, any of the information
it learns in its communications with [him] if, in [counsel’s] discretion, it becomes
necessary or appropriate to the defense of this lawsuit.” Forbes also agreed that he
would “not object to Kilpatrick Townsend continuing to represent Consert and its
related entities in this lawsuit” should a conflict of interest arise. Winston & Strawn
negotiated the terms of the limited representation on behalf of Forbes.
Forbes’s counsel from Winston & Strawn initially prepared him for his
deposition and communicated with Forbes via teleconference two to three times for
approximately an hour on each occasion. In final preparation, Forbes met with Bush
once for approximately two to three hours the night before the deposition. Forbes’s
privately retained counsel from Winston & Strawn attended approximately an hour
of that meeting.
During the deposition the next day, Itron’s counsel asked Forbes about his
relationship with Consert, the 220 action, the Consert–Toshiba merger, and
primarily the patent dispute. Twice during the deposition, Forbes requested a break
and spoke with his privately retained counsel from Winston & Strawn, even though
Bush was present at the deposition. When asked about the Consert–Toshiba merger,
Forbes stated, “I have not read the agreement of the merger between [Toshiba] and
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Consert. That might come as a surprise to you, but I have not read it.” The Itron
litigation settled on 1 February 2015.
At some point on or before 5 February 2015, Forbes and counsel at Winston &
Strawn recognized Forbes’s potential claims at issue in the present action. As a
result, on 5 February 2015, Winston & Strawn sent a litigation hold letter to Bush,
based on his representation of Toshiba affiliates, informing him that Forbes and other
former Consert shareholders were considering filing the present action. On 9
November 2015, Forbes and other former Consert shareholders filed the present
action against Toshiba (as the parent company of Consert) and former officers,
directors, and shareholders of Consert, some of whom were jointly represented by
Bush in the Itron litigation.3 Defendants retained Bush to represent them against
plaintiffs. Plaintiffs allege that, through the Consert–Toshiba merger agreement,
defendants engaged in a “collusive scheme” to “benefit themselves and to defraud
Plaintiffs out of millions of dollars that Plaintiffs should have received for the shares
of stock they had purchased and held in Consert.”4 The merger agreement included
“earn out” provisions that obligated Toshiba to pay certain future proceeds directly to
3 On 16 November 2016, the Chief Justice designated this case as a complex business
case.
4Specifically, plaintiffs assert the following claims against defendants: (1) breach of
fiduciary duty, (2) common law fraud, (3) constructive fraud, (4) conspiracy to defraud, (5)
fraudulent inducement, (6) violation of the North Carolina Securities Act, (7) unlawful
taking, conversion, and unjust enrichment under common law, and (8) violation of the North
Carolina Unfair and Deceptive Trade Practices Act.
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a “Shareholders Fund” for distribution to Consert stockholders. Two post-merger
events, including resolution of the Itron litigation, would fund this account.
Plaintiffs, however, contend that the earn out provisions were “illusory and a sham”
because defendants knew at the time of the agreement that the triggering events
required to generate the proceeds at issue would never occur, thus precluding any
payment to the shareholders.
Before the trial court, plaintiffs moved to disqualify Bush from the present
action based on his past representation of Forbes during the Itron litigation. In
support of the motion, Forbes filed a declaration stating his views of the prior
relationship and outlining his communications with Bush. Defendants responded
that the communications between Forbes and Bush were not confidential because the
engagement letter expressly limited the nature of Bush’s representation of Forbes
and specifically authorized Bush to disclose, in his discretion, “any of the information”
he learned in his communications with Forbes to “Consert,” “any related entities,”
and their “employees” during the Itron litigation.
Recognizing that the facts here presented a “close case,” the trial court noted:
In considering a motion to disqualify counsel, the Court
considers the professional obligations imposed on
attorneys by the North Carolina Rules of Professional
Conduct . . . , as well as the goal of preventing the
appearance of impropriety in the profession.
Disqualification of counsel is a serious matter . . . and the
moving party has a high standard of proof to meet in order
to prove that counsel should be disqualified. Nevertheless,
a motion to disqualify counsel . . . . should succeed or fail
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on the reasonableness of a client’s perception that
confidences it once shared with its lawyer are potentially
available to its adversary.
(Second ellipsis in original) (internal citations and quotation marks omitted).
The trial court found that an attorney–client relationship existed between
Bush and Forbes in the past representation and that defendants’ position is
materially adverse to Forbes’s position in the present action, thus leaving unresolved
only whether the current matter is “substantially related to the matter in which Bush
and Kilpatrick previously represented Forbes.” In particular, quoting Plant Genetic
Systems, N.V. v. Ciba Seeds, 933 F. Supp. 514, 518 (M.D.N.C. 1996), the trial court
sought to answer whether “there is a reasonable probability that confidences were
disclosed in the prior representation which could be used against the former client in
the current litigation.”
In its analysis the trial court resolved this issue by trying to discern what
actually occurred during the past representation as stated by Forbes and Bush. The
trial court relied on Forbes’s declaration, which included his characterizations of the
attorney–client relationship. The trial court quoted portions of the declaration
detailing Forbes’s impressions of the nature of his communications with Bush and
conversely observed that Bush had not refuted Forbes’s “descriptions or
characterizations of the information he shared with Bush during the prior
representation.”
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In reviewing the engagement letter, the trial court focused on the absence of
evidence showing that Bush actually disclosed any confidential information provided
by Forbes while the Itron litigation was ongoing. Moreover, by the terms of the
engagement letter, Forbes’s permission to disclose ended with the Itron litigation,
thereby limiting future disclosure by Bush. Absent evidence of actual disclosure, the
trial court found the engagement letter had little bearing on its analysis. The trial
court gave substantial weight to Forbes’s “perception” that the prior disclosures could
be used to his disadvantage, which the trial court found was not “unreasonable.”
Ultimately, the trial court determined that “the significant areas of overlap between
the issues in the two representations strongly suggest that the two matters are
‘substantially related.’ ”
Notably, the trial court determined, “Even if the matters are not substantially
related within the strict meaning of Rule 1.9(a), however, the Court would
nonetheless conclude, in its discretion, that Bush and Kilpatrick should be
disqualified in order to avoid the appearance of impropriety.” As a result, the trial
court disqualified Bush because his “continued representation of Defendants in this
matter creates an appearance of impropriety that the Court cannot allow.”
Defendants appealed.
“Decisions regarding whether to disqualify counsel are within the discretion of
the trial judge,” Travco Hotels, Inc. v. Piedmont Nat. Gas Co., 332 N.C. 288, 295, 420
S.E.2d 426, 430 (1992), but a trial court’s exercise of discretion is subject to reversal
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when the court orders disqualification based on a misunderstanding of the law, see
In re Estate of Skinner, ___ N.C. ___, ___, 804 S.E.2d 449, 457 (2017); see also Cooter
& Gell v. Hartmarx Corp., 496 U.S. 384, 405, 110 S. Ct. 2447, 2461, 110 L. Ed. 2d 359,
382 (1990) (noting that the “[trial] court would necessarily abuse its discretion [in
deciding a Rule 11 motion] if it based its ruling on an erroneous view of the law”).
The movant seeking to disqualify his former counsel must meet a particularly high
burden of proof. See Gov’t of India v. Cook Indus., 569 F.2d 737, 739 (2d Cir. 1978)
(“[T]here is a particularly trenchant reason for requiring a high standard of proof on
the part of one who seeks to disqualify his former counsel . . . .”).
Rule 1.9(a), governing the disqualification of counsel for a conflict of interest
relating to a former client, balances the prevented use of confidential information
against a former client with a current client’s right to choose his counsel freely. See,
e.g., N.C. St. B. Ethics Op. RPC 48 (Oct. 28, 1988), reprinted in North Carolina State
Bar Lawyer’s Handbook 2016, at 217 (2016) (recognizing, inter alia, “the right of
clients to counsel of their choice”). The rule prevents an attorney from using
confidential material information received from a former client against that client in
current litigation. See N.C. St. B. Rev. R. Prof’l Conduct r. 1.9 cmt. 1 (“After
termination of a client-lawyer relationship, a lawyer has certain continuing duties
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with respect to confidentiality and conflicts of interest and thus may not represent
another client except in conformity with this Rule.”).5
Rule 1.9(a) provides:
A lawyer who has formerly represented a client in a matter
shall not thereafter represent another person in the same
or a substantially related matter in which that person’s
interests are materially adverse to the interests of the
former client unless the former client gives informed
consent, confirmed in writing.
N.C. St. B. Rev. R. Prof’l Conduct r. 1.9(a). Under Rule 1.9(a), a party seeking to
disqualify opposing counsel must establish that (1) an attorney–client relationship
existed between the former client and the opposing counsel in a matter such that
confidential information would normally have been shared; (2) the present action
involves a matter that is the same as or substantially related to the subject of the
former client’s representation, making the confidential information previously shared
material to the present action; and (3) the interests of the opposing counsel’s current
client are materially adverse to those of the former client.
In applying Rule 1.9(a), the trial court considers the circumstances
surrounding each representation to objectively assess what would “normally” have
occurred within the scope of that representation.6 See id. r. 1.9 cmt. 3 (“A conclusion
5See Nix v. Whiteside, 475 U.S. 157, 168-70, 106 S. Ct. 988, 994-96, 89 L. Ed. 2d 123,
135-37 (1986) (relying on the guidance offered in the commentary of the Rules of Professional
Conduct to interpret the Rules).
6 See Normal, Black’s Law Dictionary (10th ed. 2014) (“According to a regular pattern;
. . . In this sense, its common antonyms are unusual and extraordinary. . . . According to an
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about the possession of such information may be based on the nature of the services
the lawyer provided the former client and information that would in ordinary practice
be learned by a lawyer providing such services.”). The test is whether, objectively
speaking, “a substantial risk” exists “that the lawyer has information to use in the
subsequent matter.” Id.; see id. r. 1.9 cmt. 2 (“The underlying question is whether
the lawyer was so involved in the matter that the subsequent representation can be
justly regarded as a changing of sides in the matter in question.”). The test does not
rely on the subjective assessment provided by the former client or the attorney. See
Restatement (Third) of The Law Governing Lawyers § 132A cmt. d(iii) (Am. Law Inst.
2017) (“[It] would be self-defeating if, in order to obtain its protection, the former
client were required to reveal in a public proceeding the particular communication or
other confidential information that could be used in the subsequent representation.”).
Here it is undisputed that the third prong of the test under Rule 1.9(a) is
satisfied: the interests of Forbes and defendants in the present action are “materially
adverse.” For the two remaining prongs, the trial court must consider the scope of
the past representation to determine whether the former client would normally have
shared confidential information in the course of that representation and, if so,
whether that information is material to the present action. See N.C. St. B. Rev. R.
established rule or norm . . . .”); Objective, Black’s Law Dictionary (10th ed. 2014) (“Of,
relating to, or based on externally verifiable phenomena, as opposed to an individual’s
perceptions, feelings, or intentions . . . .”).
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Prof’l Conduct r. 1.9 cmt. 2 (“The scope of a ‘matter’ for purposes of this Rule depends
on the facts of a particular situation or transaction. The lawyer’s involvement in a
matter can also be a question of degree.”).
The first prong of Rule 1.9(a) explores the existence and scope of an attorney–
client relationship between the attorney and the former client. “[A]n attorney-client
relationship is formed when a client communicates with an attorney in confidence
seeking legal advice regarding a specific claim and with an intent to form an attorney-
client relationship.” Raymond v. N.C. Police Benevolent Ass’n, 365 N.C. 94, 98, 721
S.E.2d 923, 926 (2011) (emphasis added) (citation omitted). The scope of such a
relationship, however, is a matter of contract, and a lawyer may reasonably limit the
scope and expectations of the representation “by agreement with the client or by the
terms under which the lawyer’s services are made available to the client.” N.C. St.
B. Rev. R. Prof’l Conduct r. 1.2 cmt. 6.
The commentary to Rule 1.9(a) anticipates the use of engagement letters that
outline both the scope of representation and limitations on confidentiality at the time
the former client engaged counsel. See id. r. 1.9 cmt. 2 (describing a lawyer’s
involvement in a “matter” as dependent “on the facts of a particular situation or
transaction” and the “degree” of engagement). For example, a common
representation agreement could provide for the sharing of confidential information
among the co-parties represented by the same attorney but keep the information
confidential as to third-parties. Likewise, a former client’s concurrent representation
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by another attorney also informs as to the degree of the contested counsel’s
involvement and the confidences normally shared by a client in that situation. Thus,
under the rule, the emphasis is not on the traditional notions of the formation of an
attorney–client relationship, but on the scope of that relationship, when ascertaining
the reasonable expectation of confidentiality under the circumstances. See Allegaert
v. Perot, 565 F.2d 246, 250 (2d Cir. 1977) (Disqualification is not warranted unless
“the attorney was in a position where he could have received information which his
former client might reasonably have assumed the attorney would withhold from his
present client.”).
Here the trial court erred by trying to determine whether Forbes actually
shared confidential information with Bush that Bush did not share with the other
parties to the common representation agreement. Instead, the trial court should
apply the objective test of whether a client in Forbes’s position would normally have
shared confidential information given the terms of the engagement letter and the
type of disclosure that usually occurs within that common representation
arrangement. Further, the trial court failed to consider the normal implications of
simultaneous and ongoing representation of Forbes by other counsel. On remand,
the trial court should objectively consider what confidential factual information
“would normally have been obtained” within the scope of the past representation.
N.C. St. B. Rev. R. Prof’l Conduct r. 1.9 cmt. 3.
If the trial court determines that confidential information would normally have
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been shared within the scope of the past representation, it must then consider
whether that information is material to the present action by deciding if the two
matters are “substantially related.” A former client must objectively demonstrate “a
substantial risk that [confidential] information as would normally have been obtained
in the prior representation would materially advance the client’s position in the
subsequent matter.” Id. Through an objective, fact-intensive inquiry, the trial court
is best suited to determine whether such a substantial risk exists. See id. (considering
“the nature of the services the lawyer provided the former client and information that
would in ordinary practice be learned by a lawyer providing such services”); see also
Restatement (Third) of The Law Governing Lawyers § 132A cmt. d(iii) (Am. Law Inst.
2017) (“The substantial-relationship test . . . focus[es] upon the general features of the
matters involved and inferences as to the likelihood that confidences were imparted
by the former client that could be used to adverse effect in the subsequent
representation.” (emphasis added)).
In assessing whether two matters are “substantially related,” the trial court
should consider, inter alia, the following illuminative factors: (1) the initial
engagement letter, including the scope of the representation and any limitations on
confidentiality; (2) the factual background leading to the past representation,
including common representation of others and any concurrent representation of the
former client; (3) the amount of time spent with the attorney; (4) the subject matter
of the two representations; and (5) all of the facts and circumstances of the current
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litigation, particularly as compared with those of the past representation. A former
client’s subjective perception or conclusory allegations that he shared confidential
information during the past representation should not be considered. See, e.g., Silver
Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 518 F.2d 751, 756-57 (2d Cir. 1975).
Here the trial court erred by concluding that the matters appeared to be
“substantially related” based on Forbes’s conclusory belief that he had shared
confidential information with Bush “directly related to the claims . . . against
Defendants in this case.” Thus, the trial court improperly determined
disqualification in reliance on the former client’s subjective judgment, which Rule
1.9(a) prohibits, rather than objectively comparing the facts and circumstances of
both representations.
In its final rationale, the trial court mistakenly applied the now replaced
“appearance of impropriety” test as a consideration in favor of disqualification.
Unlike its predecessor, the Model Code of Professional Responsibility, the Rules of
Professional Conduct do not recognize “appearance of impropriety” as a basis for
disqualification, having deleted any reference to this standard in the 2002 revisions.7
7 The Model Rules of Professional Conduct, of which Rule 1.9 is a part, replaced the
ABA Code of Professional Responsibility, which dated back to canons first promulgated in
1908. See Monroe H. Freedman, The Kutak Model Rules v. the American Lawyer’s Code of
Conduct, 26 Vill. L. Rev. 1165, 1165 (1981). Under the ABA Code, parties generally moved
for disqualification under Canon 4, “A Lawyer Should Preserve the Confidences and Secrets
of a Client,” and Canon 9, “A Lawyer Should Avoid Even the Appearance of Professional
Impropriety.” Model Code of Prof’l Responsibility Canons 4, 9 (Am. Bar Ass’n 1980). By 1986
North Carolina had adopted the Model Rules of Professional Conduct as its governing
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The tendency of the old test to lean towards a subjective, rather than objective,
analysis rendered it “no longer helpful.”8 As a result, the “appearance of impropriety”
test is no longer an appropriate legal standard for determining whether to disqualify
counsel.
In sum, the trial court applied the incorrect standard under Rule 1.9(a) in
disqualifying defendants’ counsel. In making its determination upon remand, the
trial court must objectively assess the facts surrounding the motion to disqualify
counsel without relying on the former client’s subjective perception of his prior
representation. The trial court should avoid the outmoded “appearance of
impropriety” test. We reverse the trial court’s decision and remand this case to that
court for application of the correct legal test.
REVERSED AND REMANDED.
Justice ERVIN did not participate in the consideration or decision of this case.
standard.
8 See A Legislative History 242 (Art Garwin ed., 2013) (noting that the Ethics 2000
Commission Reporter’s Explanation of Proposed Changes included the statement that
comment 5, referencing the appearance of impropriety standard, was “deleted as no longer
helpful to the analysis of questions arising under this Rule”).
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