Picker International, Inc. v. Varian Associates, Inc.
1989 WL 18284, 869 F.2d 578 (1989)
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Rule of Law:
When two law firms merge, the newly formed firm cannot resolve a concurrent conflict of interest by dropping one existing client in favor of another without that client's consent. A firm's attempt to withdraw from representing a client is ineffective if it fails to comply with applicable court rules requiring leave of court.
Facts:
- The law firm Jones, Day, Reavis & Pogue (Jones Day) represented Picker International, Inc. (Picker) in patent infringement litigation against Varian Associates, Inc. (Varian).
- Simultaneously, the law firm McDougall, Hersh & Scott (MH&S) had a long-standing attorney-client relationship with Varian, representing it in several unrelated matters.
- Jones Day and MH&S announced their intention to merge, which would create a single firm representing both Picker in its suit against Varian, and Varian in other matters.
- Before the merger, MH&S sought Varian's consent for the merged firm to continue this simultaneous representation.
- Varian explicitly refused to grant consent.
- In response to the refusal, MH&S sent a letter to Varian stating it was unilaterally withdrawing from representing Varian in all matters, effective before the merger date.
- MH&S failed to obtain the required leave of court to withdraw from representing Varian in a pending case in the Northern District of California.
- On February 1, 1987, the two law firms officially merged.
Procedural Posture:
- Varian Associates, Inc. filed a motion in the U.S. District Court for the Northern District of Ohio to disqualify the law firm of Jones Day from representing Picker International, Inc. in a patent case.
- Varian filed a similar motion to disqualify Jones Day in a separate patent infringement case in the U.S. District Court for the District of Utah.
- The Ohio district court granted Varian's motion, disqualified Jones Day, and certified a question for interlocutory appeal.
- The Utah district court also granted Varian's motion, disqualified Jones Day, and certified a question for interlocutory appeal.
- Picker petitioned the U.S. Court of Appeals for the Federal Circuit for permission to appeal both disqualification orders, which was granted, and the two appeals were consolidated.
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Issue:
Does a law firm, created by a merger, violate its duty of loyalty under Disciplinary Rule 5-105 when it attempts to cure a concurrent conflict of interest by unilaterally withdrawing from representing one client in order to continue suing that same client on behalf of another, particularly when the withdrawal is procedurally defective and the disfavored client has not consented?
Opinions:
Majority - Michel, Circuit Judge.
Yes. A newly merged law firm violates its duty of loyalty under DR 5-105 when it continues to sue a client it acquired through the merger without that client's consent. MH&S's procedurally defective attempt to withdraw from representing Varian was ineffective, meaning Varian was an existing client of the newly merged firm. Under DR 5-105, a firm cannot represent clients with differing interests without full disclosure and consent from both parties. Varian explicitly refused to consent. A firm cannot resolve such a conflict by dropping one client to continue an adverse representation; this violates the duty of undivided loyalty. To permit the merged firm to 'pick and choose' which clients survive the merger would fundamentally undermine this duty.
Dissenting - Archer, Circuit Judge,
No. The court should not have applied a per se rule of disqualification and should instead remand for a balancing test considering the current facts. Disqualification is a 'drastic measure' that should be used with extreme caution because it can be used for tactical harassment and harms the client who loses their chosen counsel. The district courts erred by applying a rigid rule without balancing the potential detriment to Picker. The conflict arose from a merger, not from a firm intentionally taking on an adverse client. The court should have considered that most of Varian's matters with the firm had been resolved and applied a flexible balancing test weighing the prejudice to each client.
Analysis:
This case firmly establishes the principle that a law firm's duty of loyalty to a current client cannot be severed unilaterally to resolve a conflict of interest, especially one created by a business decision like a merger. It solidifies the 'hot potato' doctrine, which prohibits firms from dropping a client to convert a concurrent conflict (governed by a strict loyalty standard) into a former-client conflict (governed by a more lenient confidentiality standard). The ruling forces merging firms to conduct thorough conflict checks and secure necessary consents before finalizing a merger, as attempting to 'fire' a non-consenting client is not a viable solution. This precedent significantly impacts law firm merger practices by prioritizing client loyalty over the firm's strategic or financial preferences.
