Dr. Falk Pharma GmbH v. GeneriCo, LLC (Fed. Cir. 2019)

by McDonnell Boehnen Hulbert & Berghoff LLP

This decision of the Federal Circuit in Dr. Falk Pharma GmbH v. GeneriCo, LLC involves disqualification due to conflict of interest of counsel representing Mylan Pharmaceuticals in three separate appeals.  As set forth in the beginning of the opinion:

Valeant Pharmaceuticals International, Inc. ("Valeant-CA") and Salix Pharmaceuticals, Inc. ("Salix") move to disqualify in Valeant Pharmaceuticals International, Inc. v. Mylan Pharmaceuticals Inc., No. 2018-2097 ("Valeant II"), Salix moves to disqualify in Salix Pharmaceuticals, Inc. v. Mylan Pharmaceuticals Inc., Nos. 2017-2636, 2018-1320 ("Salix II"), and Valeant-CA and Salix move to disqualify in Dr. Falk Pharma GmbH v. GeneriCo, LLC, No. 2017-2312 ("Dr. Falk II").

The facts surrounding this representation (and motions to disqualify) are as follows.  Lawyers from Katten Muchin Rosenman LLP represent Bausch & Lomb ("B&L") in trademark litigation (over the mark MOISTURE EYES).  Bausch and Lomb is a "corporate affiliate" of Valeant-SA and Salix, who are adverse to Mylan in these litigations.  Katten's engagement letter with B&L defined the scope of the engagement to be with any Valent entity and, importantly, incorporated Valeant's Outside Counsel Guidelines into the terms of the engagement.  The Katten lawyers representing Mylan were first at Alston & Bird and during the course of their representation which continues, after they moved to Katten.  These circumstances raised the conflict predicate for Valeant's motion to disqualify, which was heard by the Federal Circuit because the parties were before that Court when the conflict arose.

Regarding the OC Guidelines, they specified that the engagement was between "Valeant Pharmaceuticals International[,i.e. Valeant-DE], its subsidiaries and affiliates. . . and outside counsel."  Any conflicts that were to arise could "only be approved, waived or otherwise cleared by the written agreement of the Valeant General Counsel" under the Guidelines.  The Guidelines also stated that Valeant expected "a significant degree of loyalty from its key external firms," and these firms "should 'not represent any party in any matters where such party's interests conflict with the interests of any Valeant entity.'"

The matter raising the conflict was ANDA litigation between Valeant and Salix and Mylan for infringement of U.S. Patent No. 8,552,025, and separate proceedings between Mylan and Salix and Dr. Falk in district court and before the PTAB in an inter partes review involving U.S. Patent No. 8,865,688, also in the ANDA context.  In all these cases, the parties appealed to the Federal Circuit while the Katten lawyers were still at Alston and Bird, and thus the basis for disqualification arose during the course of the three appeals."  Valeant et al. asserted to grounds for disqualification:  first, that Katten's representation of B&L was on-going and fell within the scope of the engagement letter and OC Guidelines (requiring Valeant's agreement to affirmatively waive the conflict, which it refused to do) and second, the relationships between Valeant and its affiliates was "so interrelated that representation of one constitutes representation of all."

The Federal Circuit issued an Order granting the motions to disqualify, in an opinion by Judge O'Malley (herself a former U.S. district court judge) joined by Judges Lourie and Reyna.  Applying the law of the regional Circuits (Third Circuit, Valeant; Fourth Circuit, Salix; and the U.S. PTO's ethical rules under 37 C.F.R. §11.107(a), Dr. Falk), the opinion found recourse in the American Bar Association's Model Rules of Professional Conduct (specifically, Rule 1.7(a) to determine the scope of the conflict and the proper ethical consequences thereof.  The Rule, as set forth in the opinion, is thus (in pertinent part):

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 . . . .

The Court also made reference to Comment 34 of the Model Rules to establish corporate context for their decision:

A lawyer who represents a corporation or other organization does not, by virtue of that representation, necessarily represent any constituent or affiliated organization, such as a parent or subsidiary.  See Rule 1.13(a).  Thus, the lawyer for an organization is not barred from accepting representation adverse to an affiliate in an unrelated matter, unless the circumstances are such that the affiliate should also be considered a client of the lawyer, there is an understanding between the lawyer and the organizational client that the lawyer will avoid representation adverse to the client's affiliates, or the lawyer's obligations to either the organizational client or the new client are likely to limit materially the lawyer's representation of the other client.

Based on these rules and this context the Federal Circuit found a conflict of interest existed sufficient to justify disqualification of Katten from the lawsuit.  Specifically, the panel held that this conclusion was supported by the terms of the engagement letter and OC Guidelines between Katten and Valeant, and the interrelatedness of Valeant and its affiliates, specifically B&L.  The engagement letter creates an on-going representation by Katten of Valeant and its affiliates, including B&L.  The Court rejected Katten's argument that because they were not a "key firm" they should be held to a lower ethical standard; on the contrary, key firms according to the Court's reading of the OC Guidelines were held to an even higher standard of loyalty, precluding adverse representations that might be ethical but would be otherwise objectionable to Valeant (for example, so-called "business conflicts).  The OC Guidelines expressly require firms representing Valeant to "adhere to local rules and ethics rules relating to conflict of interest and client representation" such as Model Rule 1.7(a).  And "even if there were any plausible ambiguity in the engagement letter," the opinion states, the interrelationships established by Valeant were sufficient to give rise to a "corporate affiliate conflict."  In this regard, the Federal Circuit followed Second Circuit law (which provided guidance on the question lacking in the other Circuits; see, GSI Commerce Solutions, Inc. v. BabyCenter, L.L.C., 618 F.3d 204, 211–12 (2d Cir. 2010)), where the Court set forth the following factors relevant to the issue:  "(i) the degree of operational commonality between affiliated entities, and (ii) the extent to which one depends financially on the other."  Applying these rubrics to the relationships between Valeant and B&L, the panel found that Valeant and B&L satisfied them and thus were sufficiently related that a conflict arose by Katten's simultaneous representation of these parties and Mylan.

The opinion notes that the only Federal Circuit precedent for disqualification based on a Rule 1.7(a) violation was in a nonprecedential opinion (Freedom Wireless, Inc. v. Bos. Commc'ns Grp., Inc., No. 2006-1020, 2006 WL 8071423 (Fed. Cir. Mar. 20, 2006)) and that different district courts in the Third Circuit have favored mandatory disqualification while others have considered the totality of the circumstances including "the impact, nature, and degree of a conflict, the prejudice or hardship to either party, and which party was responsible for creating the conflict," for example Bos. Scientific Corp. v. Johnson & Johnson Inc., 647 F. Supp. 2d 369, 374 (D. Del. 2009).  The Court considered none of these complicating factors here, finding that they all weigh in favor of disqualification.  Specifically, the panel found that Mylan would not be prejudiced or suffer undue hardship because they will not need to file new briefs in two of the appeals (Salix II and Dr, Falk II) and the Court had stayed briefing in Valeant II so new counsel can draft its briefs in the first instance.  Finally, the course of conduct (including not notifying Valeant of the conflict as required under the OC Guidelines) made insufficient Katten's offer to raise an ethical wall between the conflicted lawyer and lawyers representing B&L in other matters.

This decision raises at least the following Practice Tips.  First, engagement letters should limit the scope of representation to the client engaged and leave for another day representation of affiliates, related companies, etc.  Second, OC Guidelines should be negotiated and, if there is no flexibility in them, ensure that there are ways to exit representation without risking disqualification.  Finally, when assessing the desirability of hiring lateral lawyers, a firm should be very diligent in identifying existing or potential conflicts and their effects on current and prospective relationships with clients or potential clients.

Dr. Falk Pharma GmbH v. GeneriCo, LLC (Fed. Cir. 2019)
Panel: Circuit Judges Lourie, O'Malley, and Reyna
Order by Circuit Judge O'Malley

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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