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Standard Conflict Waivers May Not Be Sufficient In A Swiss Verein Structure

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By Michael L. Temin and Martha B. Chovanes

A Swiss verein is a formal legal structure recognized under Swiss law, akin to a voluntary association under U.S. law.  Several U.S. law firms are members of vereins.  Recently, several courts considered whether the law firms who are members of a Swiss verein structure were conflicted from representing certain parties in the bankruptcy context.  In making this determination, courts have looked to the rules of professional conduct.

The ABA Model Rules of Professional Conduct form the basis of the ethics rules in every United States jurisdiction.  Model Rule 1.7(a) is the basic conflict rule.  It provides:

[A] lawyer shall not represent a client if the representation involves a concurrent conflict of interest.  A concurrent conflict of interest exists if:

1) the representation of one client will be directly adverse to another client; or

2)  there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

Model Rule 1.10(a) is the general rule of imputation of conflicts of interest.  It provides:

While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7 or 1.9, …

Model Rule 1.0(c) defines a “firm” or “law firm” as:

a lawyer or lawyers in a law partnership, professional corporation, sole proprietorship or other association authorized to practice law;

DLA Piper Verein Case

In 2020, DLA Piper (US) (“DLA Piper”) filed an application in the Bankruptcy Court for the Southern District of New York to be employed by a chapter 11 debtor as general bankruptcy counsel.  As required by Bankruptcy Rule 2014(a), DLA Piper filed declarations in support of its employment application.  One of these declarations disclosed that DLA Piper International, LLP, a separate affiliate of DLA Piper, represented General Electric International (GEII), the largest unsecured  creditor in the chapter 11 case. A second declaration explained that DLA Piper and DLA Piper International were two components of DLA Piper Global, a Swiss verein entity.  The U.S. Trustee objected to the retention application. The court agreed with the U.S. Trustee and denied DLA Piper’s application. In re Project Orange Assocs., LLC, 431 B.R. 363 (Bankr. S.D.N.Y. 2010).

Although DLA Piper obtained a conflict waiver from GE to shield it from allegations of ethical wrongdoing (the “Conflict Waiver”), the bankruptcy court commented on the waiver as follows:

DLA Piper attempts to distance itself from GE, maintaining that the creditor in this case, GEII, is not even a client of DLA Piper, but rather a client of DLA Piper International. But the Conflict Waiver severely undermines DLA Piper’s effort to segregate its relationship to GEII. Specifically, the Conflict Waiver was sent by DLA Piper, not DLA Piper International. Moreover, it is addressed to GEII “care of” an attorney at GE itself. Lastly, the Conflict Waiver combines GEII and GE into a single entity, GE, when requesting a waiver. Thus, the Court does not accept DLA Piper’s effort to draw artificial lines in an attempt to isolate itself from GEII. As DLA Piper’s Conflict Waiver conflates GE and GEII as a single entity, this Court too will treat them as one and the same for purposes of this motion.

Id. at 371.

In a footnote, the court described DLA Piper’s public face as follows:

DLA Piper holds itself out to the world as one firm, although it now tries to separate itself into separate firms for conflicts purposes.  Followed to its logical conclusion, this would lead to the anomalous result that DLA Piper, on behalf of one client, could be adverse to DLA Piper International, on behalf of one of its clients, without violating ethical standards.

Id. at 371 n.3.

Dentons Verein Case

The applicability of Rule 1.7 to vereins was discussed most recently in RevoLaze LLC v. Dentons US LLP, 2022 Ohio 1392 (Ohio Ct. App. Apr. 28, 2022), an appeal of a malpractice verdict against Dentons.  Dentons US LLP is a member of Dentons, a global full-service law firm and a Swiss verein.

RevoLaze is a family-owned business that holds patents relating to methods of “laser abrading” which utilizes lasers to create the “worn” and “faded” look on new jeans and other denim garments.  RevoLaze suspected that denim companies were illegally using its patented technology.  It decided to file a complaint in the United States International Trade Commission (“ITC”) against multiple infringers.  Its ultimate goal was to obtain a general exclusion order to block importation by companies identified as importing infringing products.

In February, 2014, RevoLaze hired Dentons US to litigate the case in the ITC.  On August 18, 2014, Dentons US filed a complaint in the ITC against seventeen  respondents including The Gap, Inc. (“Gap”).  On March 11, 2015, Gap filed a motion to disqualify Dentons US as counsel to RevoLaze.  Gap alleged that for more than two decades Dentons and its predecessors had represented Gap in multiple matters around the world.

Dentons US opposed the motion on the basis that although Dentons US and Dentons Canada LLP (“Dentons Canada”) were members of the Dentons verein, the two were separate law firms that did not impute conflicts of interest upon each other.  They did not have access to each other’s client files, did not share client confidential information unless acting as co-counsel, did not share profit and losses and were financially and operationally separate.  In addition, Dentons US argued that the retainer agreement Gap signed with Dentons Canada contained a provision waiving potential future conflicts, reasoning, that if the instant matter was in fact a conflict, Gap consented in advance.

On May 7, 2015, the ITC’s Chief Administrative Law Judge determined that the Dentons verein was a single law firm for purposes of Model Rule 1.7 and disqualified Dentons US from representing RevoLaze in the ITC while Gap was a respondent in the investigation.[1]

RevoLaze hired replacement lawyers who settled with the respondents in the ITC litigation and terminated the ITC investigation. RevoLaze sued Dentons for malpractice.  A jury found Dentons liable and awarded RevoLaze $32 million.

In its appeal of the malpractice verdict Dentons contended, among other errors, that the lower court erred in denying the judgment notwithstanding the verdict because the risk of disqualification was unforeseeable as a matter of law.

RevoLaze presented expert testimony detailing a number of ways that Dentons US violated the conflict-of-interest principles embodied in Rule 1.7 and presented evidence that Dentons US’ inclusion of Gap in the ITC litigation created a foreseeable risk of disqualification. Among the expert witnesses presented was Walter J. Rekstis III (“Rekstis”), who opined that Dentons US had a clear conflict of interest when it included Gap in the ITC litigation.

Rekstis noted that although Dentons US claimed that they were a separate firm from Dentons Canada, he found no distinction because they were both members of the Dentons verein. Rekstis testified that all the documents he reviewed, including materials Dentons US presented to RevoLaze and to other clients, reflected the opposite — that they were a singular firm.

Rekstis added that the Dentons verein’s website listed all their lawyers collectively, not separate websites based on different countries or geographic regions and that all their lawyers’ email addresses ended with dentons.com. Significantly, Rekstis noted that he reviewed documents that revealed that the Dentons verein had a common conflict base, that they shared confidential information about their clients throughout the verein, across the globe, and dealt with each office as though they were part of one firm.

The court found that Dentons US’ membership in a verein, with a common conflicts base, that shares client confidential information throughout the organization, is irreconcilable with Dentons US’ contention that it was separate from Dentons Canada. Critically, Dentons US, by initially identifying Gap as a conflict, even though it had done no work for Gap, strongly indicated that Dentons US did not think it was sufficiently separate from Dentons Canada, to be allowed to represent RevoLaze against Gap.

Dentons US’ protestations to the contrary, the overwhelming evidence suggested the Dentons verein operated as a single firm. As such, the Model Rules regarding conflicts with a current and imputed conflict among members of the firm applied. Given this conflict, in accordance with Rule 1.7(b), Dentons was not permitted to proceed without first obtaining informed written consent from both Gap and RevoLaze.

In this respect, Rekstis testified that Dentons US never obtained informed written consent, as prescribed by Rule 1.7(b). Rekstis further opined that in not obtaining the requisite consent, Dentons US failed to meet the standard of care in handling the conflict flowing from what amounted to concurrent representation of RevoLaze and Gap. Rekstis added that had Dentons US sought to obtain informed written consent, it should have provided RevoLaze with a full explanation of the conflict and of how the litigation could be affected. RevoLaze should also have been advised of the risks involved and, specifically that disqualification was the normal result where a court finds there was a conflict of interest.

In noting the impact, Rekstis added “so [disqualification] puts you behind the eight ball in that you’ve gone down the road with somebody putting a case together, then all of a sudden they’re not your lawyer anymore.” Further, Rekstis noted, had Dentons properly sought to obtain the informed consent, RevoLaze would have been provided a list of available alternatives, such as advising RevoLaze to seek independent counsel’s legal opinion on the conflict at issue. Also, Dentons US should have suggested that RevoLaze contemplate having conflict counsel on standby to take over the litigation in the event Dentons US was disqualified. Thus, Rekstis opined, Dentons failed to meet the standard of care by the above actions and inactions and thereby breached their duty to RevoLaze.

The Ohio appellate court affirmed the judgment.  The case is now on appeal to the Ohio Supreme Court.

Conclusion

Legal professionals organized as a Swiss verein may have unforeseen conflict issues due to the nature of the verein structure, and standard conflict waivers may not be enforceable under the various states’ Model Rules of Professional Conduct.  Accordingly, extra attention should be given to crafting specific conflict waivers in conformance with the Model Rules of Professional Conduct in the given jurisdiction.

[1]  Dentons sought review of the disqualification order from the ITC.   On April 12, 2016 the commission issued a notice finding the issue of disqualification was moot because the investigation had been terminated against all respondents by settlement, consent order, or withdrawal of the complaint and vacated the disqualification order. See Id. at fn. 8.

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