The US Court of Appeals for the Federal Circuit concluded that a firm’s ongoing representation of the opposing parties’ indirect subsidiary and affiliate in three patent infringement appeals created a concurrent conflict of interest, and therefore granted the opposing parties’ motion to disqualify. Dr. Falk Pharma GmbH v. Generico, LLC, Case Nos. 17-2312, -2636, 18-1320, -2097 (Fed. Cir. Feb. 8, 2019) (O’Malley, J).

Valeant Pharmaceuticals International and Salix Pharmaceuticals moved to disqualify Katten Muchin Rosenman as counsel for Mylan in several patent infringement appeals. The motions to disqualify stemmed from Katten’s ongoing representation of Bausch & Lomb (an indirect subsidiary of Valeant and an affiliate of Salix) in trademark litigation, and from Katten’s concurrent representation of Mylan, which was adverse to Valeant and Salix in the patent infringement matters.

To support its motion for disqualification, Valeant argued that it was a longstanding Katten client, both directly and through its subsidiaries. As part of its representation of Bausch & Lomb, Katten signed an engagement letter that generally governed the overall representation between Katten and Valeant—the ultimate parent of Bausch & Lomb. The engagement letter incorporated by reference Valeant’s outside counsel guidelines, which in turn governed the relationship between outside counsel and Valeant, its subsidiaries and affiliates. Valeant and Salix thus argued that Katten’s representation of Mylan presented a concurrent conflict through the terms of the engagement letter itself and because Valeant and its subsidiaries are so interrelated that representation of one constitutes representation of all.

The Federal Circuit applied regional circuit law, under which the Model Rules of Professional Conduct apply to disqualification matters. The Court reasoned that Rule 1.7(a) establishes a concurrent conflict where “the representation of one client will be directly adverse to another client.” Although comments to the rule noted that representation of a corporation does not necessarily constitute representation of affiliated entities such as a parent or subsidiary, the comments also recognized that representation of affiliated entities would be barred where the circumstances warranted that the affiliate also be considered a client. The Court explained that such circumstances could arise either through the express language of the engagement letter or where the affiliates are so interrelated that representation of one constitutes representation of all.

In the case at hand, the Federal Circuit found that both the express terms of the engagement letter and the interrelatedness of the corporate entities supported disqualification. The Court reasoned that because the engagement letter expressly stated that it governed the general relationship between Katten and Valeant, the text on its face showed that the client relationship extended beyond Bausch & Lomb to at least its parent, Valeant. The Court also cited to the outside counsel guidelines, which included language defining the client relationship to include “subsidiaries and affiliates.” Even if the engagement letter was ambiguous, the Court reasoned that the entities were so interrelated as to constitute one client because the entities depended financially on one another and shared a common infrastructure. As to financial contribution, the Court found that Bausch & Lomb contributed significant revenues to Valeant. As to a common infrastructure, the Court noted that the two affiliate companies shared the same in-house legal department as the parent company, and the parent company provided support services such as accounting, cash management, employee benefits, finance, human resources, travel, computer systems, insurance and payroll services. Thus, the Court concluded that the entities were financially interdependent and shared a high degree of operational commonality. Under the circumstances, the court concluded that an ethical wall would be insufficient to overcome the concurrent conflict.

Practice Note: This case demonstrates that companies and counsel should be mindful of broad outside counsel guidelines that could extend a client relationship beyond the specific corporate entity that is the subject of the representation. Moreover, companies and counsel should be mindful that where affiliated corporate entities exist, they may create conflicts of interest in legal representation through either the express terms of the engagement or the interrelatedness of the affiliated entities.