United States District Court,
W.D. Virginia,
Abingdon Division.

HARLEYSVILLE INSURANCE COMPANY, Plaintiff/Counterclaim Defendant
v.
HOLDING FUNERAL HOME, INC., et al., Defendants/Counterclaim Plaintiffs.

Case No. 1:15-cv-00057
Signed 02/09/2017

Attorneys and Law Firms  

David Paul Abel, Robert S. Reverski, Jr., Robert Tayloe Ross, Midkiff Muncie & Ross, P.C., Richmond, VA, John Lester Cooley, Jr., Cooleysublett PLC, Roanoke, VA, for Plaintiff/Counterclaim Defendant.

Eric Broch Lawson, Glenn H. Silver, Charles Thomas Brown, Caitlin Marie Brown, Silver & Brown, P.C., Fairfax, VA, for Defendants/Counterclaim Plaintiffs.

Memorandum Opinion

Pamela Meade Sargent, United States Magistrate Judge

This matter was heard before the undersigned on the Plaintiff's Motion Requesting The Disqualification of Defendants' Counsel, (Docket Item No. 52) (“Motion”), on January 17, 2017. Based on the reasoning set forth below, the Motion will be denied insofar as it seeks the disqualifications of defense counsel. Nonetheless, the undersigned finds that some sanction is appropriate and will award plaintiff its fees and costs incurred in pursuing the Motion.

The material facts are not in dispute. Plaintiff, Harleysville Insurance Company, (“Harleysville”), has sued the defendants seeking a declaratory judgment that it does not owe the defendants' fire loss claim for an October 22, 2014, loss of a funeral home in Castlewood, Virginia, based on the fire being intentionally set, material misrepresentations and failure to cooperate. The defendants have filed counterclaims alleging breach of insurance contract and bad faith against Harleysville. At issue before the court is defense counsel's access to Harleysville's entire claims file, and whether the facts and circumstances surrounding this access require the disqualification of defense counsel.

In an effort to share information electronically, Thomas Cesario, a Senior Investigator for Nationwide Insurance Company, (“Nationwide”), which owns Harleysville, uploaded video surveillance footage of the fire loss scene, (“Video”), onto an internet-based electronic file sharing service operated by Box, Inc. Cesario then sent an email containing a hyperlink to the Box, Inc., internet site, (“Box Site”), by which Wes Rowe of the National Insurance Crime Bureau, (“NICB”), could access the file containing the Video using the internet and download the Video. The Video was placed on the Box Site, and the hyperlink to the Box Site sent by email to Rowe on September 22, 2015. The email to Rowe stated: “Here is the link to access the video” and provided the hyperlink. The email also contained the following statement:

CONFIDENTIALITY NOTICE: This e-mail contains information that is privileged and confidential, and subject to legal restrictions and penalties regarding its unauthorized disclosure or other use. You are prohibited from copying, distributing or otherwise using this information if you are not the intended recipient. If you received this e-mail in error, please notify me immediately by return e-mail, and delete this e-mail and all attachments from your system.

(Docket Item No. 55-5 at 2.) Harleysville concedes that any person who used the hyperlink to access the Box Site had access to the electronic information stored there. The information was not password protected. Harleysville also concedes that any person who had access to the internet could have accessed the Box Site by simply typing in the url address in a web browser.

After receiving the September 22, 2015, email, Rowe used the hyperlink included to access the Box Site on two occasions, once on September 22, 2015, and, again, subsequently, to download the Video. On the occasions that Rowe used the hyperlink to access the Box Site, the only information contained there was the Video.

On April 28, 2016, Cesario placed files containing Harleysville's entire claims file and Nationwide's entire investigation file for the defendants' fire loss, (“Claims File”), on the Box Site to be accessed by Harleysville's counsel. Cesario then sent an email to Harleysville's counsel with the same hyperlink he sent to Rowe to be used by counsel to access the Box Site and retrieve a copy of the Claims File.

Defense counsel issued a Subpoena Duces Tecum, dated May 24, 2016, to NICB requesting NICB's entire file related to the fire. On or about June 23, 2016, NICB sent defense counsel electronic copies of all documents and information it had received from Harleysville, including a copy of the September 22, 2015, email from Cesario to Rowe containing the hyperlink to the Box Site. That same day, defense counsel, without the knowledge or permission of Harleysville or its counsel, used the hyperlink to gain access to the Box Site, which now contained the Claims File. Defense counsel downloaded the Claims File and reviewed it without ever notifying Harleysville's counsel that they had accessed and reviewed potentially privileged information.

On August 22, 2016, in response to a request for production of documents, defense counsel produced a thumb drive to Harleysville's counsel. When Harleysville's counsel reviewed the information contained on the thumb drive, counsel discovered that it contained potentially privileged material inadvertently produced by the defendants. Harleysville's counsel alerted defense counsel. Defense counsel requested that the disclosed privileged documents be destroyed, and Harleyville's counsel complied. Upon further review of the information contained on the thumb drive, Harleysville's counsel discovered on October 27, 2016, that its Claims File was contained on the thumb drive and had been produced by defense counsel. The Claims File was located in a computer file entitled “NICB Video.”

On November 1, 2016, Harleysville's counsel contacted defense counsel and requested that defense counsel destroy their copy of the Claims File. Defense counsel have conceded that all defense counsel of record have reviewed the materials accessed on the Box Site and that the materials have been shared with the defendants. Nationwide, subsequently, disabled the Box Site so it was no longer accessible to anyone, and Harleysville filed the Motion with the court.

Harleysville's counsel argues that defense counsel's access to Harleysville's Claims File was an improper, unauthorized access to privileged information requiring the disqualification of all defense counsel of record. Defense counsel argue that the Motion should be denied because Harleysville waived any claim of privilege or confidentiality by placing the information on the Box, Inc., site where it could be accessed by anyone.

Harleysville asserts that the Claims File reviewed by defense counsel contained information protected from disclosure by the attorney-client privilege and the work-product doctrine. Jurisdiction in this declaratory judgment action is based on diversity of citizenship, and the claims raised by the parties are governed by Virginia state law. Therefore, under Federal Rule of Evidence 501, Virginia state law governs the applicability and waiver of any evidentiary privilege. See Fed. R. Evid. 501. The work-product doctrine, however, it not a privilege, but rather a qualified immunity from discovery. See Continental Cas. Co. v. Under Armour, Inc., 537 F. Supp. 2d 761, 769-70 (D. Md. 2008) (citing 8 CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE: CIVIL 2d § 2023 at 335 (2d ed. 1994)). Thus, Rule 501 does not apply, and federal law, not Virginia law, governs the applicability and waiver of the protection available under the work-product doctrine. See Continental Cas. Co., 537 F. Supp. 2d at 769-70.

Under Virginia law, confidential attorney-client communications are privileged from disclosure. See Walton v. Mid–Atl. Spine Specialists, 694 S.E.2d 545, 549 (Va. 2010). “Nevertheless, the privilege is an exception to the general duty to disclose, is an obstacle to investigation of the truth, and should be strictly construed.” Commonwealth v. Edwards, 370 S.E.2d 296, 301 (Va. 1988). Also, the attorney-client privilege may be expressly or impliedly waived by the client's conduct. See Edwards, 370 S.E.2d at 301. The proponent of the privilege has the burden to establish that the attorney-client privilege applies to a communication and that the privilege was not waived. See Edwards, 370 S.E.2d at 301; United States v. Jones, 696 F.2d 1069, 1072 (4th Cir. 1982).

Although it is hard to imagine that the entire Claims File would be protected by the Virginia attorney-client privilege, the court will assume that at least a portion of the file contains privileged information for the purpose of addressing the parties' arguments at issue here. See Westchester Surplus Lines Ins. Co. v. Clancy & Theys Const. Co., 2013 WL 6058203, at *6 (E.D. N.C. Nov. 15, 2013) (“Similar to work product, application of the attorney-client privilege can be complicated in the context of insurance claims).  Harleysville argues that the court should treat defense counsel's access to its claims file as an unauthorized involuntary disclosure or, in the alternative, as an inadvertent disclosure by Harleysville. Defense counsel argues that Harleysville's actions waived any claim that the information should be protected by the attorney-client privilege.

The Virginia Supreme Court addressed the difference between involuntary and inadvertent disclosures of privileged information in Walton. See 694 S.E.2d at 551-52. “... [I]n the waiver context, involuntary means that another person accomplished the disclosure through criminal activity or bad faith, without the consent of the proponent of the privilege....” Walton, 694 S.E.2d at 551. Inadvertent disclosure, on the other hand, includes action by the proponent of the privilege to knowingly, but mistakenly, produce a document or to unknowingly provide access to a document by failing to implement sufficient precautions to maintain its confidentiality. See Walton, 694 S.E.2d at 551-52. The court further reasoned that the determination of whether a disclosure was involuntary does not rest on the subjective intent of the proponent of the privilege:

The ... intention to maintain the attorney-client privilege does not lead inevitably to the conclusion that the disclosure was involuntary instead of inadvertent. If subjective intention of the proponent of the privilege controlled, a disclosure would always be considered involuntary. However, in the waiver context, involuntary means that another person accomplished the disclosure through criminal activity or bad faith, without the consent of the proponent of the privilege.

Walton, 694 S.E.2d at 551.

In this case, Harleysville argues that defense counsel gained access to its claims file by their unauthorized use of the hyperlink to access the Box Site. Therefore, Harleysville argues, the disclosure should be considered involuntary on its part and not a waiver of its claim of privilege. Harleysville argues that the only persons it authorized to use the hyperlink to access the Box Site and the materials located there were the NICB, to retrieve a copy of the Video, and its own counsel, to retrieve a copy of the Claims File. Harleysville argues that, in uploading its Claims File to the Box Site, it did not intend to share the information with anyone other than its own counsel. As stated above, however, the court in Walton held that a proponent's intention is not determinative of whether the disclosure was involuntary or inadvertent. In this case, Harleysville has conceded that its agent, Cesario, an employee of its parent company, intentionally and knowingly uploaded its Claims File to the Box Site. Under these facts, I find that the disclosure was not involuntary but, rather, was inadvertent under Virginia state law, in that Harleysville unknowingly provided access to information by failing to implement sufficient precautions to maintain its confidentiality.

Once a court determines that a disclosure was inadvertent, the court next must decide whether the disclosure waived the attorney-client privilege. The Virginia Supreme Court in Walton adopted a multi-factor analysis which requires the court to assess whether the holder of the privilege took reasonable steps to prevent disclosure and promptly took reasonable steps to rectify the error. Under this approach, the court stated, the following factors should be considered:

(1) the reasonableness of the precautions to prevent inadvertent disclosures, (2) the time taken to rectify the error, (3) the scope of the discovery, (4) the extent of the disclosure, and (5) whether the party asserting the claim of privilege or protection for the communication has used its unavailability for misleading or otherwise improper or overreaching purposes in the litigation, making it unfair to allow the party to invoke confidentiality under the circumstances.

Walton, 694 S.E.2d at 552.

In this case, there is no claim that the third factor—the scope of discovery—contributed to this inadvertent disclosure. This case does not involve the production of a few privileged pages among voluminous pages of production. Also, there is no claim that the fifth factor is pertinent to the court's decision in this case. The cases cited in Walton in support of this factor all hold that allowing a party to disclose some potentially privileged information for its advantage, while refusing to disclose other information, would be unfair. See Walton, 694 S.E.2d at 552. The defendants, here, are not claiming that Harleysville has disclosed the information, or a portion of the information, to gain any advantage in this litigation.

The remaining three factors, however, are determinative in this court's decision on this issue. With regard to the reasonableness of the precautions taken to prevent the disclosure, the court has no evidence before it that any precautions were taken to prevent this disclosure. The employee who uploaded Harleysville's Claims File to the Box Site had used the site previously to share information with a third-party, the NICB. It does not matter whether this employee believed that this site would function for only a short period of time or that the information uploaded to the site would be accessible for only a short period of time. Because of his previous use of the Box Site, this employee either knew—or should have known—that the information uploaded to the site was not protected in any way and could be accessed by anyone who simply clicked on the hyperlink. Despite this, this employee purposefully uploaded the Claims File to the Box Site, making it accessible to anyone with access to the internet, thus making the extent of the disclosure vast. Also, Harleysville has stated that the Claims File was uploaded on April 26, 2016. The entire Claims File remained accessible on the Box Site until sometime after October 27, 2016, the date that Harleysville's counsel asserts that they discovered that defense counsel had the Claims File. Harleysville concedes that no action was taken any earlier than this date to block access to the Claims File despite the fact that Harleysville's counsel, themselves, used the unprotected hyperlink to access the Box Site to download the Claims File sometime after it was uploaded on April 26. Therefore, they, too, knew—or should have known—that the information was accessible on the internet. The court in Walton plainly stated, “waiver may occur if the disclosing party failed to take reasonable measures to ensure and maintain the document's confidentiality, or to take prompt and reasonable steps to rectify the error.” 694 S.E.2d at 552.

Based on these facts, I find that Harleysville has waived any claim of attorney-client privilege with regard to the information posted to the Box Site. It has conceded that the Box Site was not password protected and that the information uploaded to this site was available for viewing by anyone, anywhere who was connected to the internet and happened upon the site by use of the hyperlink or otherwise. In essence, Harleysville has conceded that its actions were the cyber world equivalent of leaving its claims file on a bench in the public square and telling its counsel where they could find it. It is hard to image an act that would be more contrary to protecting the confidentiality of information than to post that information to the world wide web.

The court believes that its decision on this issue fosters the better public policy. The technology involved in information sharing is rapidly evolving. Whether a company chooses to use a new technology is a decision within that company's control. If it chooses to use a new technology, however, it should be responsible for ensuring that its employees and agents understand how the technology works, and, more importantly, whether the technology allows unwanted access by others to its confidential information.

The court's ruling on waiver of the attorney-client privilege under Virginia state law, however, is not determinative of whether any claim to work-product protection has been waived under federal law. See Continental Cas. Co., 537 F. Supp. 2d at 769-70. As stated above, the court will assume that the Claims File contains some information of the type that would be protected from disclosure by the work-product doctrine. The Fourth Circuit has recognized that the inadvertent disclosure of attorney work product, even opinion work product, can result in a waiver of its protected status. See Martin Marietta Corp. v. Pollard, 856 F.2d 619, 626 (4th Cir. 1988); Doe v. United States, 662 F.2d 1073, 1081 (4th Cir. 1981); Dunlap Corp. v. Deering Milliken, Inc., 540 F.2d 1215, 1223 (4th Cir. 1976). The Fourth Circuit has held, however, that a waiver should occur only when an attorney's or client's actions are “consistent with a conscious disregard of the advantage that is otherwise protected by the work product rule.” Doe, 662 F.2d at 1081. In general, this occurs only when the disclosure occurs under circumstances that substantially increase the possibility that an opposing party will obtain the protected information. See Continental Cas. Co., 537 F. Supp. 2d at 772-73. Nevertheless, the Fourth Circuit has held that “release of otherwise protected material without an intent to limit its future disposition might forfeit work product protection.... [T]o effect a forfeiture of work product protection by waiver, disclosure must occur in circumstances in which the attorney cannot reasonably expect to limit the future use of the otherwise protected material.” Doe, 662 F.2d at 1081.

The cases cited above were decided prior to the adoption of Federal Rule of Evidence 502. Rule 502 specifically applies to disclosures of information covered by the “work-product protection,” which it defines as “the protection that applicable law provides for tangible material (or its intangible equivalent) prepared in anticipation of litigation or for trial.” FED. R. EVID. Rule 502; FED. R. EVID. Rule 502(g)(2). Rule 502(b) states that when a disclosure is made in a federal proceeding,

the disclosure does not operate as a waiver ... if:

(1) the disclosure is inadvertent;

(2) the holder of the ... protection took reasonable steps to prevent disclosure; and

(3) the holder promptly took reasonable steps to rectify the error, including ... following Federal Rule of Civil Procedure 26(b)(5)(B).

FED. R. EVID. Rule 502(b). Rule 26(b)(5)(B) states: “If information produced in discovery is subject to a claim of privilege or of protection as trial-preparation material, the party making the claim may notify any party that received the information of the claim and the basis for it.” FED. R. CIV. P. 26(b)(5)(B). Also, the party seeking the protection of Rule 502(b) bears the burden of proving that each of it elements have been met. See Maxtena, Inc. v. Marks, 289 F.R.D. 427, 444 (D. Md. 2012) (citing Amobi v. D.C. Dep't of Corrs., 262 F.R.D. 45, 53 (D.D.C. 2009)). A disclosure operates as a waiver of work product protection unless Rule 502 applies. See Waste Connections of N.C., Inc., v. K.R. Drenth Trucking, Inc., 2015 WL 4647823, at *3 (W.D. N.C. Aug. 5, 2015).

Our sister district, the Eastern District of Virginia, has recognized a scarcity of federal law defining what is meant by an inadvertent disclosure. See ePlus Inc. v. Lawson Software, Inc., 280 F.R.D. 247, 254-55 (E.D. Va. 2012) (citing Francisco v. Verizon South, Inc., 756 F. Supp. 2d 705, 710–11 (E.D. Va. 2010)). Based, in part, on the Black's Law Dictionary definition of “inadvertence” as “[a]n accidental oversight; a result of carelessness,” In advertence, BLACK'S LAW DICTIONARY (8th ed. 2004), the Eastern District has found that inadvertent disclosures must be based on unintentional acts. See ePlus Inc., 280 F.R.D. at 254-55 (citing New Bank of New England v. Marine Midland Realty Corp., 138 F.R.D. 479, 483 (E.D. Va. 1991)). In reaching this conclusion, the court quoted an unpublished opinion, McCafferty's Inc. v. Bank of Glen Burnie, Case No. MJG–96–3656, 1998 U.S. Dist. LEXIS 12861 (Apr. 23, 1998), which states:

[A]n inadvertent waiver would occur when a document, which a party intended to maintain as confidential, was disclosed by accident such as a misaddressed communication to someone outside the privilege scope or the inadvertent inclusion of a privileged document with a group of nonprivileged documents being produced in discovery. In contrast, when a client makes a decision—albeit an unwise or even mistaken, decision—not to maintain confidentiality in a document, the privilege is lost due to an overall failure to maintain a confidence.

ePlus Inc., 280 F.R.D. at 255.

Based on this reasoning, Harleysville's disclosure should not be considered “inadvertent” under federal law. Harleysville has not claimed that its agent's posting of its Claims File to the Box Site was not an intentional act. Also, based on my reasoning above, I cannot find that Harleysville, or its counsel, took reasonable steps to prevent its disclosure or to rectify the situation. Therefore, I find that Rule 502 does not apply in this situation to prevent a waiver of the work-product doctrine. Also, under the prior precedent, the agent's actions in posting the Claims File where it could be accessed by anyone on the internet is certainly a release of protected information in a way that did not limit its future use. See Craft v. S.C. State Plastering, LLC, 2017 WL 121854 (D.S.C. Jan. 12, 2017) (work-product protection waived when plaintiffs' counsel shared information at meeting open to the public); E.I. Du Pont de Nemours and Co. v. Kolon Indus., Inc., 2010 WL 1489966, at *4-5 (E.D. Va. Apr. 13, 2010); Little v. Brown & Williamson Tobacco Corp., 1999 WL 33591437, at *3-4 (D.S.C. Oct. 25, 1999) (posting information to internet waives claim of protection by work-product doctrine).

The conclusion that the acts of Harleysville, in hindsight, waived any claim of privilege or work-product protection over its Claims File does not, however, provide an answer to whether defense counsel acted properly under the circumstances and whether any sanction should be imposed. The conduct of attorneys appearing before this court is governed by the Virginia Rules of Professional Conduct as adopted by the Virginia Supreme Court. See W.D. VA. FED. R. DISC. ENF., Nov. 4, 1992 (amended Nov. 6, 1998 & June 16, 2016). Virginia Rule of Professional Conduct 3.4(d) states: “A lawyer shall not: ... (d) Knowingly disobey or advise a client to disregard a standing rule or a ruling of a tribunal made in the course of a proceeding....” VA. SUP. CT. R. Rule 3.4. Both Virginia's and the federal rules of civil procedure address what is required of receiving counsel when counsel is notified that an opposing party is claiming that information produced in discovery is subject to a claim of privilege or work-product protection.

Under the federal rules, the receiving party, after being so notified,

... must promptly return, sequester, or destroy the specified information and any copies it has; must not use or disclose the information until the claim is resolved; must take reasonable steps to retrieve the information if the party disclosed it before being notified; and may promptly present the information to the court under seal for a determination of the claim.

FED. R. CIV. P. 26(b)(5)(B). The Virginia Rule states:

Upon receiving such notice, any party holding a copy of the designated material shall sequester or destroy its copies thereof, and shall not duplicate or disseminate such material pending disposition of the claim of privilege or protection by agreement, or upon motion by any party. If a receiving party has disclosed the information before being notified of the claim of privilege or other protection, that party must take reasonable steps to retrieve the designated material.

VA. SUP. CT. R. 4.1(b)(6)(ii).

While not binding on this, or any, court, the Virginia State Bar Standing Committee on Legal Ethics has issued at least two Legal Ethics Opinions that address what the proper conduct should be when an attorney receives information an opposing party may claim as privileged or protected from disclosure. Legal Ethics Opinion, (“LEO”), No. 1702, issued November 24, 1997, addressed the conduct required when an attorney mistakenly received privileged information by facsimile from opposing counsel. This LEO states “once the receiving lawyer discovers that he has a confidential document inadvertently transmitted by opposing counsel or opposing counsel's client, he has an ethical duty to notify opposing counsel, to honor opposing counsel's instructions about disposition of the document, and not to use the document in contravention or opposing counsel's instructions.” The committee noted it had considered that, under the rules of evidence, an inadvertent disclosure might cause a loss of the attorney-client privilege. Nonetheless, the committee, quoting Gunter v. Va. State Bar, 385 S.E.2d 597, 600 (Va. 1989), wrote:

The lowest common denominator, binding lawyers and laymen alike, is the statute and common law. A higher standard is imposed on lawyers by the Code of Professional Responsibility.... [W]e emphasize that more is required of lawyers than mere compliance with the minimum requirements of that standard. The traditions of professionalism at the bar embody a level of fairness, candor, and courtesy higher than the minimum requirements of the Code of Professional Responsibility.

While LEO No. 1702 was issued before the adoption of the Rules of Professional Conduct, its continuing validity recently was reaffirmed by the committee. In LEO No. 1871, issued July 24, 2013, the committee addressed an attorney's responsibility when a document containing privileged information was discovered among documents produced by opposing counsel for review in discovery. The committee opined that LEO No. 1702 required the receiving attorney to promptly notify opposing counsel that the document had been produced. The committee also opined that the reviewing attorney should have “either sequestered or destroyed his copy of the [document] pending a judicial determination of whether he could use the document.”

In this case, defense counsel have admitted that they accessed the Box Site by the hyperlink provided in the email from Cesario to Rowe. The face of this email contained the Confidentiality Notice, which should have provided sufficient notice to defense counsel that the sender was asserting that the information was protected from disclosure. Nonetheless, defense counsel downloaded the Claims File from the Box Site, did not reveal to Harleysville's counsel that they had obtained and reviewed the Claims File and further disseminated the Claims File to their clients and to law enforcement officials. At no time prior to the filing of the Motion, did defense counsel seek a determination from this court with regard to whether the materials they received were privileged or protected and what, if any, use they could make of the materials in this litigation. The only action defense counsel claim they took in response to discovering that they had access to Harleysville's Claims File—calling the Virginia State Bar Ethics Hotline for advice—belies any claim that they believed that their receipt and use of the materials without Harleysville's knowledge was proper under the circumstances.

This court should demand better, and the ruling here is intended not to merely tolerate the bare minimum ethically compliant behavior, but, instead, to encourage the highest professional standards from those attorneys who practice before the court. The court holds that, by using the hyperlink contained in the email also containing the Confidentiality Notice to access the Box Site, defense counsel should have realized that the Box Site might contain privileged or protected information. This belief should have been further confirmed when defense counsel realized that the Box Site contained not only the Video, but Harleysville's Claims File. That being the case, defense counsel should have contacted Harleysville's counsel and revealed that it had access to this information. If defense counsel believed that the circumstances which allowed its access to the information waived any claim of privilege or protection, they should have asked the court to decide the issue before making any use of or disseminating the information. Counsel chose not to do so, however, and, therefore, the court believes that such conduct requires some sanction.

Based on the decision that the posting of the Claims File to the internet waived any attorney-client privilege or any work-product protection over the information contained in the file, I find that the disqualification of defense counsel is not warranted in this situation. The disqualification of counsel is an extreme sanction. See Shaffer v. Farm Fresh, Inc., 966 F.2d 142, 145 (4th Cir. 1992); Rogers v. Pittston Co., 800 F. Supp. 350, 353 (W.D. Va. 1992). Disqualification of counsel must be decided on a case-by-case basis with consideration of the harm imposed should counsel's representation continue. See Rogers, 800 F. Supp. at 353. Harleysville urges that such a sanction is necessary since all defense counsel have reviewed the Claims File. However, even if current counsel were disqualified, based on the court's ruling on waiver, substitute counsel would have access to the same information. Therefore, there can be no harm to Harleysville by allowing defense counsel to remain in this case. See Aetna Cas. & Sur. Co. v. United States, 570 F.2d 1197, 1201 (4th Cir. 1978) (disqualification inapplicable where “practical considerations” eliminate any real harm). Therefore, I find that the more reasonable sanction is that defense counsel should bear the cost of the parties in obtaining the court's ruling on the matter.

An appropriate order will be entered.

473 Mass. 336

Supreme Judicial Court of Massachusetts, Suffolk.

Chris E. MALING

v.

FINNEGAN, HENDERSON, FARABOW, GARRETT & DUNNER, LLP, & others.¹

SJC–11800.

Submitted Sept. 8, 2015.

Decided Dec. 23, 2015.

Thomas M. Bond, Boston, for the plaintiff.

Erin K. Higgins (Christopher K. Sweeney with her), Boston, for the defendants.

Paul A. Stewart, of California, & Sara E. Hirshon, Boston, for Knobbe, Martens, Olson & Bear, LLP, & others, amici curiae, submitted a brief.

Heather B. Repicky & Lauren E. Ingegneri, Boston, for Boston Patent Law Association, amicus curiae, submitted a brief.

Present: GANTS, C.J., SPINA, CORDY, BOTSFORD, DUFFLY, LENK, & HINES, JJ.

Opinion

CORDY, J.

In this case we consider whether an actionable conflict of interest arises under Mass. R. Prof. C. 1.7, as appearing in 471 Mass. 1335 (2015), when attorneys in different offices of the same law firm simultaneously represent business competitors in prosecuting patents on similar inventions, without informing them or obtaining their consent to the simultaneous representation.²

The plaintiff, Chris E. Maling, engaged the defendant law firm Finnegan, Henderson, Farabow, Garrett & Dunner, LLP (Finnegan), including the three individual attorneys named in this suit, to represent him in connection with the prosecution of patents for Maling's inventions for a new screwless eyeglass. After obtaining his patents, Maling learned that Finnegan had been simultaneously representing another client that competed with Maling in the screwless eyeglass market. Maling then commenced this action, alleging harm under various legal theories resulting from Finnegan's failure to disclose the alleged conflict of interest. A judge in the Superior Court dismissed Maling's complaint for failure to state a claim under Mass. R. Civ. P. 12(b)(6), 365 Mass. 754 (1974). Maling appealed, and we transferred the case to this court on our own motion. We conclude that the simultaneous representation by a law firm in the prosecution of patents for two clients competing in the same technology area for similar inventions is not a per se violation of Mass. R. Prof. Conduct 1.7. We further conclude that based on the facts alleged in his complaint, Maling failed to state a claim for relief. Accordingly, we affirm the judgment of dismissal.

1. Background.

In 2003, Maling engaged Finnegan to perform legal services in connection with the filing and prosecution of patents for Maling's inventions for a new screwless eyeglass, including a screwless eyeglass hinge block design. Finnegan prepared patent applications for Maling's inventions after ordering “prior art” searches. Over the next several years, Finnegan successfully obtained four separate patents for Maling.

Attorneys in Finnegan's Boston office represented Maling from approximately April, 2003, to May, 2009.³ During this period of time, attorneys in Finnegan's Washington, D.C., office represented Masunaga Optical Manufacturing Co., Ltd. (Masunaga), a Japanese corporation that also sought patents for its screwless eyeglass technology. Upon learning of Finnegan's representation of Masunaga, Maling brought suit, asserting claims stemming from the alleged conflict of interest that arose from Finnegan's simultaneous representation of both clients.⁴ We describe the allegations in Maling's complaint germane to our decision.

Maling alleges that he engaged Finnegan to “file and prosecute a patent for [his] inventions for a new screw-less eyeglass, including without limitation, his invention of a ‘screwless' eyeglasses hinge block design,” and that in September, 2003, Finnegan ordered prior art searches relating to Maling's inventions.⁵ Maling alleges that Finnegan “belatedly” commenced preparation of a patent application for his inventions in or about May, 2004, and that it “[inexplicably] took [fourteen] months” to do so. Maling also alleges that Finnegan filed patent applications for Masunaga more quickly than it did for him. At the same time, Maling acknowledges that Finnegan successfully obtained patents for his inventions. Maling further claims that he paid Finnegan in excess of $100,000 for its services, and that he invested “millions of dollars” to develop his product. He claims he would not have made this investment had Finnegan “disclosed its conflict of interest and/or its work on the competing Masunaga patent.” He further alleges that the Masunaga applications are very similar to the Maling applications, and that Finnegan knew it was performing work in the “same patent space” for both clients. Maling also alleges that he was harmed when Finnegan, in 2008, declined to provide him with a legal opinion addressing similarities between the Masunaga patents and the Maling patents. Because Finnegan did not provide the legal opinion Maling claims, he was unable to obtain funding for his invention, and his product was otherwise unmarketable on account of its similarities to the Masunaga device; as a result, his patents and inventions have diminished in value. In sum, Maling contends, Finnegan's simultaneous representation of both clients, as well as its failure to disclose the alleged conflict, resulted in “great harm” and “tremendous financial hardship” for Maling.

Finnegan moved to dismiss Maling's complaint for failure to state a claim under Mass. R. Civ. P. 12(b)(6). The motion was granted in October, 2013, and Maling appealed. We then transferred the case to this court on our own motion.

2. Discussion.

We review the sufficiency of Maling's complaint de novo, taking as true the factual allegations set forth therein and drawing all inferences in his favor. Curtis v. Herb Chambers I–95, Inc., 458 Mass. 674, 676, 940 N.E.2d 413 (2011). “[W]e look beyond the conclusory allegations in the complaint and focus on whether the factual allegations plausibly suggest an entitlement to relief.” Id., citing Iannacchino v. Ford Motor Co., 451 Mass. 623, 635–636, 888 N.E.2d 879 (2008).

Maling's complaint sets forth four bases for relief: (1) breach of fiduciary duty; (2) legal malpractice; (3) unfair or deceptive practices in violation of G.L. c. 93A; and (4) “inequitable conduct” before the United States Patent and Trademark Office (USPTO). Because each count hinges on the existence of an undisclosed conflict of interest arising from Finnegan's representation of both Maling and Masunaga, we focus our inquiry on whether, under the facts alleged, an actionable conflict arose in violation of the Massachusetts Rules of Professional Conduct.

Rule 1.7 of the Massachusetts Rules of Professional Conduct, which applies to conflicts of interests between current clients, governs the issues in this case.⁶ By its terms, rule 1.7, with limited exceptions, provides that a lawyer shall not represent a client if the representation is “directly adverse to another client,” Mass. R. Prof. C. 1.7(a)(1), or where “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.” Mass. R. Prof. C. 1.7(a)(2). The purpose of rule 1.7 is twofold. It serves as a “prophylactic [measure] to protect confidences that a client may have shared with his or her attorney ... [and] safeguard[s] loyalty as a feature of the lawyer-client relationship.” SWS Fin. Fund A v. Salomon Bros., Inc., 790 F.Supp. 1392, 1401 (N.D.Ill.1992).⁷

In the practice of patent law, the simultaneous representation of clients competing for patents in the same technology area is sometimes referred to as a “subject matter conflict.” See, e.g., Dolak, Recognizing and Resolving Conflicts of Interest in Intellectual Property Matters, 42 IDEA 453, 463 (2002); Hricik, Trouble Waiting to Happen: Malpractice and Ethical Issues in Patent Prosecution, 31 AIPLA Q.J. 385, 412 (2003) (Hricik). Subject matter conflicts do not fit neatly into the traditional conflict analysis. Maling advocates for a broad interpretation of rule 1.7 that would render all subject matter conflicts actionable, per se violations. We disagree. Rather, we conclude that although subject matter conflicts in patent prosecutions often may present a number of potential legal, ethical, and practical problems for lawyers and their clients, they do not, standing alone, constitute an actionable conflict of interest that violates rule 1.7. 45

a. Adverse representation under rule 1.7(a)(1).

Representation is “directly adverse” in violation of rule 1.7(a)(1) when a lawyer “act[s] as an advocate in one matter against a person the lawyer represents in some other matter, even when the matters are wholly unrelated.” Mass. R. Prof. C. 1.7 comment 6. In other words, “[a] law firm that represents client A in the defense of an action may not, at the same time, be counsel for a plaintiff in an action brought against client A, at least without the consent of both clients.” McCourt Co. v. FPC Props., Inc., 386 Mass. 145, 145, 434 N.E.2d 1234 (1982).

In the instant case, Maling and Masunaga were not adversaries in the traditional sense, as they did not appear on opposite sides of litigation. Rather, they each appeared before the USPTO in separate proceedings to seek patents for their respective screwless eyeglass devices.

Maling contends, however, that he and Masunaga were directly adverse within the meaning of rule 1.7(a)(1) because they were competing in the “same patent space.” We disagree that the meaning of “directly adverse” stretches so far. The rules of professional conduct make clear that

“simultaneous representation in unrelated matters of clients whose interests are only economically adverse, such as representation of competing economic enterprises in unrelated litigation, does not ordinarily constitute a conflict of interest and thus may not require consent of the respective clients.”

Mass. R. Prof. C. 1.7 comment 6. Put differently, “[d]irect adverseness requires a conflict as to the legal rights and duties of the clients, not merely conflicting economic interests.” American Bar Association Standing Committee on Ethics and Professional Responsibility, Formal Op. 05–434, at 140 (Dec. 8, 2004) (ABA Op. 05–434).

Curtis v. Radio Representatives, Inc., 696 F.Supp. 729 (D.D.C.1988), a case involving broadcast licenses, offers a useful example. In Curtis, the United States District Court for the District of Columbia found that no actionable conflict of interest existed where a law firm simultaneously represented clients in the preparation and prosecution of applications for radio broadcast licenses from the Federal Communications Commission (FCC). Id. at 731–32, 737.⁸ The court reasoned that “the fact that an attorney is simultaneously representing two companies that are competitors in the same industry does not itself establish an actionable breach of an attorney's fiduciary duty.” Id. at 736, quoting D.J. Horan & G.W. Spellmire, Jr., Attorney Malpractice: Prevention and Defense 17–1 (1987). It went on to explain that a conflict of interest could develop between clients seeking broadcast licenses under circumstances where “objectionable electrical interference existed between two stations.” Curtis, supra. However, because the defendant failed to assert such interference, or even the potential for such interference, the court could not conclude that a conflict of interest existed in violation of the rules of professional conduct adopted by the District of Columbia. Id. at 736–37.

The analysis undertaken by the court in Curtis is instructive in our evaluation of Maling's claims. Finnegan's representation of Maling and Masunaga is analogous to that undertaken by the law firm in Curtis. Finnegan represented two clients competing in the screwless eyeglass device market in proceedings before the USPTO. As Maling acknowledges, Finnegan was able successfully to obtain patents from the USPTO for both his device and Masunaga's, in the same way that the law firm in Curtis was able to obtain radio broadcast licenses for each of its clients from the FCC. Maling and Masunaga were not competing for the same patent, but rather different patents for similar devices.

Like the court in Curtis, we acknowledge that an actionable conflict of interest could arise under different factual circumstances. For example, where claims in two patent applications filed prior to March 16, 2013, are identical or obvious variants of each other, the USPTO can institute an “interference proceeding” to determine which inventor would be awarded the claims contained in the patent applications. 35 U.S.C. § 135(a) (2002).⁹, ¹⁰ If the USPTO had called an interference proceeding to resolve conflicting claims in the Maling and Masunaga patent applications, or if Finnegan, acting as a reasonable patent attorney, believed such a proceeding was likely, the legal rights of the parties would have been in conflict, as only one inventor can prevail in an interference proceeding. In such a case, rule 1.7 would have obliged Finnegan to disclose the conflict and obtain consent from both clients or withdraw from representation. See Mass. R. Prof. C. 1.7 comments 3 & 4.

Maling's conclusory allegations as to the high degree of similarity between his device and the Masunaga device are contradicted by his acknowledgment elsewhere in the complaint that patents issued for both his applications and the Masunaga applications. Although Maling alleges that the Masunaga and Maling applications are “similar ... in many important respects,” he does not allege that the claims are identical or obvious variants of each other such that the claims in one application would necessarily preclude claims contained in the other. Additionally, we appreciate that the claims comprising a patent application may be sufficiently distinct so as to permit the issuance of multiple patents for similar inventions, or components of an invention, as was the case here. Accordingly, Maling's allegations do not permit any inference as to whether the similarities between the inventions at the time Finnegan was retained to prepare and prosecute Maling's patent applications were of such a degree that Finnegan should have reasonably foreseen the potential for an interference proceeding.¹¹ Maling's conclusory statement that the inventions were very similar is precisely the type of legal conclusion that we do not credit. See Iannacchino, 451 Mass. at 636, 888 N.E.2d 879. Moreover, Maling makes no allegations that an interference proceeding was instituted, nor has he alleged facts supporting the inference that Finnegan took positions adverse to Maling and favorable to Masunaga in the prosecution of their respective patents.

We also recognize that subject matter conflicts can give rise to conflicts of interest under rule 1.7(a)(1) in nonlitigation contexts. Comment 7 to rule 1.7 explains that directly adverse conflicts may also arise in the course of transactional matters. For example, “a lawyer would be precluded ... from advising a client as to his rights under a contract with another client of the lawyer.... Such conflict involves the legal rights and duties of the two clients vis-[à]-vis one another.” ABA Op. 05–434, supra at 140.

Here, such a conflict likely arose in 2008 when Maling sought a legal opinion from Finnegan regarding the likelihood that he might be exposed to claims by Masunaga for patent infringement. Finnegan declined to provide the opinion, and Maling alleges that he lost financing as a result. Providing the opinion arguably would have rendered the interests of Maling and Masunaga “directly adverse” within the meaning of rule 1.7(a)(1), and either declining representation or disclosing the conflict and obtaining consent would have been the proper course of action.¹² But there is no allegation that Finnegan had agreed to provide such opinions in its engagement to prosecute Maling's patents. Without such a claim, we cannot conclude that a conflict based on direct adversity has been adequately alleged.

b. Material limitation under rule 1.7(a)(2).

We turn next to the question whether Finnegan's representation of Masunaga “materially limited” its representation of Maling in contravention of rule 1.7(a)(2), which prohibits representation where “there is no direct adverseness ... [but] there is a significant risk that a lawyer's ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer's other responsibilities or interests.” Mass. R. Prof. C. 1.7 comment 8. The “critical inquiry” in analyzing potential conflicts under rule 1.7(a)(2), “is whether the lawyer has a competing interest or responsibility that ‘will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.’ ” Matter of Driscoll, 447 Mass. 678, 686, 856 N.E.2d 840 (2006) (quoting comment 4 to previous version of Mass. R. Prof. C. 1.7[b], which contained language now in rule 1.7[a][2] ).

In his complaint, Maling alleges in conclusory terms that Finnegan was unable to protect both his interests and Masunaga's and ultimately chose to protect Masunaga at his expense in the patent prosecution process. In Maling's view, Finnegan “pulled its punches” and got more for Masunaga than for Maling before the USPTO. He has failed, however, to allege sufficient facts to support such a proposition.

The case of Sentinel Prods. Corp. v. Platt, U.S. Dist. Ct., No. 98–11143–GAO, 2002 WL 1613713 (D.Mass. July 22, 2002) (Sentinel), illustrates how a subject matter conflict resulting from the prosecution of patents for competing clients could give rise to a conflict of interest under rule 1.7(a)(2). In the Sentinel case, a law firm prosecuted patents for two clients, a company (Sentinel), and one of Sentinel's former employees. Id. at 1. Sentinel brought suit, claiming that because of the simultaneous representation, its patent applications “were denied, delayed, or otherwise impeded” and that it suffered economic losses as a result. Id. at 5. On a motion for summary judgment, the court concluded that the law firm filed applications with the USPTO for Sentinel, and then two weeks later for the former employee. Id. at 1–2. The firm's attorneys testified that they thought the applications “overlapped” and that they were unable “to discern a patentable difference between” the applications. Id. at 5. A patent for the employee's application was issued first, and Sentinel's application was rejected after the USPTO found it conflicted with claims contained in the employee's patents. Id. at 2–3. The firm subsequently narrowed the claims in Sentinel's application to avoid conflict with the former employee's application, and the USPTO issued Sentinel patents containing the narrower claims. Id. at 3, 6–7.

The so-called “claim shaving,” see Hricik, supra at 415, that occurred in Sentinel clearly implicates rule 1.7(a)(2). Altering the claims in one client's application because of information contained in a different client's application at least creates a question of fact as to whether “courses of action that reasonably should be pursued on behalf of the client” were foreclosed. Mass. R. Prof. C. 1.7 comment 8.

Unlike the facts in Sentinel, Maling's complaint provides little more than speculation that Finnegan's judgment was impaired or that he obtained a less robust patent than if he had been represented by other, “conflict-free” counsel. Maling does not allege that the claims contained in his applications were altered or narrowed in light of the Masunaga applications, as the plaintiffs demonstrated in Sentinel, or, importantly, that his client confidences were disclosed or used in any way to Masunaga's advantage.¹³ Nor does he allege that Finnegan delayed filing his patent application to ensure the success of Masunaga's application over his own. Ultimately, Maling's bare assertions that Masunaga was given preferential treatment and was “enrich[ed]” to his “detriment” as a consequence do not support an inference that Finnegan was “materially limited” in its ability to obtain patents for Maling's inventions.

Finnegan's subsequent inability or unwillingness to provide a legal opinion regarding the similarities between the Maling and Masunaga inventions also raises a question whether the simultaneous representation “foreclose[d] [a] course[ ] of action” that should have been pursued on Maling's behalf. Mass. R. Prof. C. 1.7 comment 8. As previously discussed, rendering such an opinion would likely have created a direct conflict between Maling and Masunaga in violation of rule 1.7(a)(1). To the extent that such a conflict was foreseeable, because, as Maling alleges, the Masunaga and Maling inventions were so similar, it is possible that Finnegan should have declined to represent Maling from the outset of his case so as to also avoid a violation of rule 1.7(a)(2). This, however, depends in large measure on the nature of Finnegan's engagement by Maling in 2003.

Before engaging a client, a lawyer must determine whether the potential for conflict counsels against undertaking representation. Comment 8 to rule 1.7 elaborates:

“The mere possibility of subsequent harm does not itself require disclosure and consent. The critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.”

Maling's complaint does not contain any allegations as to the services or scope of representation agreed upon by Maling and Finnegan other than that Finnegan “agreed to file and prosecute a patent for Maling's inventions.” Nor is it adequately alleged that Finnegan should have reasonably anticipated that Maling would need a legal opinion that would create a conflict of interest. There are simply too few facts from which to infer that Finnegan reasonably should have foreseen the potential conflict in the first place. See, e.g., Vaxiion Therapeutics, Inc. v. Foley & Lardner LLP, 593 F.Supp.2d 1153, 1173 (S.D.Cal.2008) (deciding that expert testimony created question of fact as to likelihood that conflict of interest would develop from firm's simultaneous representation of competitor clients in patent prosecution). Based on these inadequacies, we agree with the motion judge that the complaint does not sufficiently allege that Finnegan violated its duties under rule 1.7(a)(2) by undertaking representation of both Maling and Masunaga.

Because Maling's claims hinge on the existence of a conflict of interest, and because we conclude there was none adequately alleged in this case, he fails to state a claim on each of the counts in his complaint.¹⁴, ¹⁵

c. Identifying conflicts of interest.

This case also raises important considerations under Mass. R. Prof. C. 1.10, as appearing in 471 Mass. 1363 (2015), which prohibits lawyers associated in a firm from “knowingly represent [ing] a client when any one of them practicing alone would be prohibited from doing so by Rule[ ] 1.7.” Mass. R. Prof. C. 1.10(a).¹⁶ To ensure compliance with both rules 1.7 and 1.10, firms must implement procedures to identify and remedy actual and potential conflicts of interest. See Mass. R. Prof. C. 5.1 comment 2, as appearing in 471 Mass. 1445 (2015) (requiring firms to make “reasonable efforts to establish internal policies ... designed to detect and resolve conflicts of interest”).

What constitutes an adequate conflict check is a complex question. As a member of this court observed, “[a]gainst a backdrop of increasing law firm reorganizations and mergers, lateral transfers, and the rise of large-scale firms that transcend State and national borders, the issue of dual representation is one of multifaceted overtones and novel complexity.” Coke v. Equity Residential Props. Trust, 440 Mass. 511, 518, 800 N.E.2d 280 (2003) (Cowin, J., concurring). Nothing we say here today, however, should be construed to absolve law firms from the obligation to implement robust processes that will detect potential conflicts.

This court has not defined a minimum protocol for carrying out a conflict check in the area of patent practice, or any other area of law. However, no matter how complex such a protocol might be, law firms run significant risks, financial and reputational, if they do not avail themselves of a robust conflict system adequate to the nature of their practice. Although Maling's complaint does not plead an actionable violation of rule 1.7 sufficiently, the misuse of client confidences and the preferential treatment of the interests of one client, to the detriment of nearly identical interests of another, are serious matters that cannot be reconciled with the ethical obligations of our profession.

3. Conclusion.

As noted throughout this opinion, there are various factual scenarios in the context of patent practice in which a subject matter conflict may give rise to an actionable violation of rule 1.7. On the facts alleged in Maling's complaint, however, we find that no actionable conflict of interest existed. The dismissal of the complaint is affirmed.

So ordered.

^{1. Lawrence R. Robins, Eric P. Raciti, and Matthew R. Van Eman.}

^{2. We acknowledge the amicus briefs submitted by the Boston Patent Law Association and by Knobbe, Martens, Olson & Bear, LLP; Honigman Miller Schwartz and Cohn LLP; Nixon & Vanderhye P.C.; Lewis Roca Rothgerber LLP; Schiff Hardin LLP; Steptoe & Johnson LLP; Snell & Wilmer LLP; Barnes & Thornburg LLP; Pillsbury Winthrop Shaw Pittman LLP; Verrill Dana LLP; and Morrison & Foerster LLP.}

^{3. Finnegan, Henderson, Farabow, Garrett & Dunner, LLP (Finnegan), withdrew its representation of Chris E. Maling before the United States Patent and Trademark Office (USPTO) on May 20, 2009; however, it is not clear from the record when the firm and Maling terminated their relationship.}

^{4. The original complaint was filed by Maling and his company, The Formula, LLC, in the United States District Court for the District of Massachusetts in April, 2012. It was dismissed following the United States Supreme Court's decision in Gunn v. Minton, ––– U.S. ––––, 133 S.Ct. 1059, 1068, 185 L.Ed.2d 72 (2013), which held that legal malpractice claims arising from representation in patent proceedings are not within the exclusive subject matter jurisdiction of the Federal courts. Maling refiled his case in the business litigation section of the Massachusetts Superior Court in April, 2013. After judgment entered dismissing the complaint on October 29, 2013, notices of appeal were filed by both plaintiffs, but no filing fee was paid in the Appeals court on behalf of The Formula, LLC. Therefore, Maling is the sole appellant.}

^{5. Prior art is “the collection of everything in a particular art or science that pre-dates the patent-in-suit.” Princeton Biochemicals, Inc. v. Beckman Coulter, Inc., No. 96–5541, 2004 WL 1398227 (D.N.J. June 17, 2004), aff'd, 411 F.3d 1332 (Fed.Cir.2005). See 35 U.S.C. § 102 (2012).}

^{6. Since Maling's complaint was filed in 2012, the Massachusetts Rules of Professional Conduct have been revised and updated. Because the substance of rule 1.7 remains unchanged, we analyze Maling's claims against the most recent version of the rules, published in 2015. See Mass. R. Prof. C. 1.7, as appearing in 471 Mass. 1335 (2015).}

^{7. The USPTO also sets standards of conduct for attorneys who practice before it. In 2013, the USPTO adopted new ethics rules based on the American Bar Association's Model Rules of Professional Conduct. See 78 Fed. Reg. 20,180, 20,180 (2013). The current regulation on concurrent conflicts of interest, 37 C.F.R. § 11.107 (2013), is virtually identical in language to Mass. R. Prof. C. 1.7.}

^{At the time this action was brought, concurrent conflicts of interest were governed by 37 C.F.R. § 10.66 (2012) (entitled, “Refusing to accept or continue employment if the interests of another client may impair the independent professional judgment of the practitioner”), which provided:}

^{“(a) A practitioner shall decline proffered employment if the exercise of the practitioner's independent professional judgment in behalf of a client will be or is likely to be adversely affected by the acceptance of the proffered employment, or if it would be likely to involve the practitioner in representing differing interests, except to the extent permitted under paragraph (c) of this section.}

^{“(b) A practitioner shall not continue multiple employment if the exercise of the practitioner's independent professional judgment in behalf of a client will be or is likely to be adversely affected by the practitioner's representation of another client, or if it would be likely to involve the practitioner in representing differing interests, except to the extent permitted under paragraph (c) of this section.}

^{“(c) In the situations covered by paragraphs (a) and (b) of this section a practitioner may represent multiple clients if it is obvious that the practitioner can adequately represent the interest of each and if each consents to the representation after full disclosure of the possible effect of such representation on the exercise of the practitioner's independent professional judgment on behalf of each.}

^{“(d) If a practitioner is required to decline employment or to withdraw from employment under a Disciplinary Rule, no partner, or associate, or any other practitioner affiliated with the practitioner or the practitioner's firm, may accept or continue such employment unless otherwise ordered by the Director or Commissioner.”}

^{8. There are very few appellate court decisions that deal with the issues raised in this case. The most instructive cases are those decided by judges in the Federal District Courts. See generally Gunn v. Minton, 133 S.Ct. 1059, discussed in note 4, supra.}

^{9. Under the America Invents Act, inventorship of patents and patent applications that do not contain any claims entitled to a priority date before March 16, 2013, must be challenged through a derivation, rather than interference, proceeding. See 35 U.S.C. § 135 (2012); United States Patent and Trademark Office, Manual of Patent Examining Procedure (MPEP) § 2159 (rev. Nov. 2013), available at http://www.uspto.gov/web/offices/pac/mpep/mpep-2100.pdf [http://perma.cc/8TB2-B5RN]. Derivation proceedings permit a true inventor to challenge a first-to-file inventor's right to a patent by demonstrating that claims contained in the first application derived from those in the true inventor's patent application. 35 U.S.C. § 135.}

^{Because the Maling and Masunaga Optical Manufacturing Co., Ltd. (Masunaga), patents were filed prior to the effective date of the relevant provisions of 35 U.S.C. § 135, the applications would have been subject to an interference proceeding had a question arisen as to whether the patent applications contained conflicting claims.}

^{10. Interference proceedings are meant to assist the director of the USPTO in determining priority, that is, which party first invented the commonly claimed invention. See MPEP, supra at § 2301 (rev. Oct. 2015) at http://www.uspto.gov/web/offices/pac/mpep/mpep-2300.pdf [http://perma.cc/T2D9-G52D]. This first-to-invent system was supplanted by the enactment of the America Invents Act, which updated various provisions of the patent code, and which gives priority to the first party to file an application. See 35 U.S.C. § 135 (2012). Prior to the American Invents Act, 35 U.S.C. § 135(a) (2006) provided, in relevant part:}

^{“Whenever an application is made for a patent which, in the opinion of the Director [of the USPTO], would interfere with any pending application, or with any unexpired patent, an interference may be declared and the Director shall give notice of such declaration to the applicants, or applicant and patentee, as the case may be. The Board of Patent Appeals and Interferences shall determine questions of priority of the inventions and may determine questions of patentability.”}

^{11. Maling's allegation that he and Masunaga competed in the “same patent space,” without more, fails to demonstrate entitlement to relief. Maling cites no authority, and we have found none, that gives this term special meaning in the context of patent jurisprudence.}

^{12. The record does not reflect Finnegan's rationale for declining to provide the opinion.}

^{13. Contrast Tethys Bioscience, Inc. v. Mintz, Levin, Cohn, Ferris, Glovsky & Popeo, P.C., No. C09–5115 CW, 2010 WL 2287474, at *2 (N.D.Cal. June 4, 2010) (allegations that defendant law firm's use of “nearly identical” language in patent applications for plaintiff and plaintiff's competitor were sufficient to plead actionable conflict of interest because court could draw inference of the improper disclosure of client information).}

^{14. At oral argument, Maling's counsel implied that Finnegan's failure to discover and disclose Masunaga's patents in the course of its prior art searches constituted malpractice or negligence. Because Maling's complaint contains no allegations to this effect, we do not decide the question whether an attorney has an ongoing obligation to discover prior art.}

^{15. Maling also alleges that Finnegan failed to disclose information to the USPTO such that it engaged in “inequitable conduct.” “Inequitable conduct” in the USPTO occurs when a party withholds information material to patentability, or material misinformation is provided to the USPTO, with the intent to deceive or mislead the patent examiner into granting the patent. Outside the Box Innovations, LLC v. Travel Caddy, Inc., 695 F.3d 1285, 1290 (Fed.Cir.2012)}

^{Even if this claim arises from conduct unrelated to the alleged conflict of interest, Maling nonetheless fails to state a claim. First, it is unsettled whether the “inequitable conduct” doctrine is merely a defense or whether it provides an independent cause of action against counsel. See ShieldMark, Inc. v. Creative Safety Supply, LLC, No. 1:12–CV–221, 2012 WL 6824003, at *6 (N.D.Ohio Oct. 9, 2012), report and recommendation adopted, No. 1:12–CV–221, 2013 WL 123567 (N.D.Ohio Jan. 9, 2013) (describing “the dearth of case law on the issue”). We need not decide the issue, however, as Maling failed to plead sufficient facts to state a claim for inequitable conduct. “To successfully prove inequitable conduct, the accused infringer must provide evidence that the applicant (1) made an affirmative misrepresentation of material fact, failed to disclose material information, or submitted false material information, and (2) did so with intent to deceive the [USPTO].” Cancer Research Tech. Ltd. v. Barr Labs., Inc., 625 F.3d 724, 732 (Fed.Cir.2010), cert. denied, ––– U.S. ––––, 132 S.Ct. 499, 181 L.Ed.2d 346 (2011). Maling, at a minimum makes no allegations as to Finnegan's intent to deceive the USPTO, and therefore fails to state a claim of inequitable conduct.}

^{16. The lawyers working on Masunaga's patent prosecution worked out of a different office than the lawyers working on the prosecution of Maling's patents. Although the risks of inadvertent confidential client information disclosure or misuse may be reduced in such circumstances, this makes little difference from a disciplinary rules standpoint as conflicts are generally imputed to all members of the firm regardless of their geographical location or work assignments.}

United States District Court, N.D. California
San Jose Division

Stephanie LENZ, Plaintiff,

v.

UNIVERSAL MUSIC CORP., Universal Music Publishing, Inc. and Universal Music Publishing Group, Defendants.

No. 5:07–cv–03783 JF (PVT).

Nov. 17, 2010.

Corynne McSherry, Jason M. Schultz, Marcia Clare Hofmann, Julie P. Samuels, Electronic Frontier Foundation, Ashok Ramani, Michael Soonuk Kwun, Keker & Van Nest, LLP, San Francisco, CA, for Plaintiff.

Melissa Jeanne Miksch, Keker & Van Nest, LLP, San Francisco, CA, for Plaintiff/Defendants.

Kelly Max Klaus, Laura Ashley Aull, Melinda Eades Lemoine, Munger Tolles & Olson LLP, Los Angeles, CA, for Defendants.

ORDER OVERRULING DEFENDANTS' OBJECTIONS TO DISCOVERY ORDER

JEREMY FOGEL, District Judge.

Pursuant to Local Rule 72–2, Plaintiff Stephanie Lenz seeks relief from an order of Magistrate Judge Trumbull compelling discovery with respect to subject matter that Lenz contends is protected by the attorney-client privilege. Because Judge Trumbull's order is neither clearly erroneous nor contrary to law, the objections will be overruled.

I. BACKGROUND

On June 4, 2007, Defendant Universal Music Corp. sent a takedown notice to YouTube alleging that a 29–second home video of Lenz's toddler dancing to the Prince song, “Let's Go Crazy,” infringed Universal's copyright. YouTube complied. Lenz, represented by the Electronic Frontier Foundation (“EFF”), sued Universal under § 512(f) of the Digital Millennium Copyright Act (“DMCA”) for knowingly materially misrepresenting in the takedown notice that her video infringed the copyright. At issue in the case is whether Universal knew or should have known that Lenz's video did not infringe its copyright and whether and to what extent Lenz was injured by Universal's actions.

Prior to and during the litigation, Lenz made comments in emails and electronic “chats” with friends, postings on her blog, and statements to reporters, in which she discussed conversations she had with her counsel. Universal moved to compel discovery relating to such conversations, alleging that Lenz had waived attorney-client privilege. Judge Trumbull found that the privilege had been waived in three areas and required production of responsive documents and two additional hours of deposition. Dkt. 334, Order of October 22, 2010. On November 2, 2010, pursuant to Local Rule 72–2, Lenz objected to Judge Trumbull's ruling.

II. LEGAL STANDARD

Where, as here, the magistrate judge's ruling addresses a non-dispositive matter, the district judge will modify or set aside “any portion of the magistrate judge's order found to be clearly erroneous or contrary to law.” Fed.R.Civ.P. 72(a); see also 28 U.S.C. § 636(b)(1)(A). “The clearly erroneous standard, which applies to a magistrate judge's findings of fact, is ‘significantly deferential,’ requiring ‘a definite and firm conviction that a mistake has been committed.’ ' ” Crispin v. Christian Audigier, Inc., 2010 WL 2293238, at *3 (C.D.Cal. May 26, 2010) (quoting Concrete Pipe & Prods. v. Constr. Laborers Pension Trust, 508 U.S. 602, 623, 113 S.Ct. 2264, 124 L.Ed.2d 539 (1993)). In contrast, “[t]he ‘contrary to law’ standard ... permits independent review of purely legal determinations by the magistrate judge.” F.D.I.C. v. Fidelity & Deposit Co. of Md., 196 F.R.D. 375, 378 (S.D.Cal.2000) (citing Haines v. Liggett Group, Inc., 975 F.2d 81, 91 (3d Cir.1992) (“[T]he phrase ‘contrary to law’ indicates plenary review as to matters of law”)); see Med. Imaging Centers of America, Inc. v. Lichtenstein, 917 F.Supp. 717, 719 (S.D.Cal.1996) (“Section 636(b)(1) ... has been interpreted to provide for de novo review by the district court on issues of law”).

“Parties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense ....” Fed.R.Civ.P. 26(b). As a general matter, “a party is not entitled to discovery of information protected by attorney-client privilege.” Phoenix Solutions, Inc. v. Wells Fargo Bank, N.A., 254 F.R.D. 568, 575 (N.D.Cal.2008). The party claiming the privilege bears the burden of proving that the material is privileged, including demonstrating that the privilege has not been waived. Pauline Weil v. Investment/Indicators, Research and Management, Inc., 647 F.2d 18, 25 (9th Cir.1981) “The disclosure of confidential information resulting in the waiver of the attorney-client privilege constitutes a waiver of privilege as to the communications relating to the subject matter that has been put at issue.” Phoenix Solutions, Inc., 254 F.R.D. at 575. “There is no bright line test for determining what constitutes the subject matter of a waiver, rather courts weigh the circumstances of the disclosure, the nature of the legal advice sought and the prejudice to the parties of permitting or prohibiting further disclosures.” Id.

“The privilege which protects attorney-client communications may not be used both as a sword and a shield.” Akamai Technologies, Inc. v. Digital Island, Inc., No. C–00–3508 CW(JCS), 2002 WL 1285126 at *8 (N.D.Cal. May 30, 2002). The doctrine of waiver of attorney-client privilege is rooted in notions of fundamental fairness and serves to “protect against the unfairness that would result from a privilege holder selectively disclosing privileged communications to an adversary, revealing those that support the cause while claiming the shelter of the privilege to avoid disclosing those that are less favorable.” Tennenbaum v. Deloitte and Touche, 77 F.3d 337, 340 (9th Cir.1996).

III. DISCUSSION

A. Communications Regarding Plaintiff's Motivations for Pursuing Litigation

In an email to a friend, Lenz stated that EFF was “very, very interested in the case,” and that “EFF is pretty well salivating over getting their teeth into [Universal Music Group] yet again.” Klause Decl. Ex. 3. Lenz also sent an email to her mother stating that she could not “say much,” but that EFF was planning a “publicity blitz and/or a lawsuit against Universal.” Id. Ex. 4. Based on these statements, Judge Trumbull granted Universal's motion to compel further discovery regarding Lenz's communications with her attorneys as to her motives for bringing the action. Order of October 22, 2010, at 5 (“[P]laintiff has voluntarily waived the privilege as to communications with her attorney regarding the possible motives for bringing action.”).

Universal contends that statements by Lenz about her motivations for this action are relevant to show whether and to what extent Lenz was injured by Univeral's takedown notice. MTC at 4 (“In her communications with third parties ... Plaintiff has revealed a different motivation for pursuing her lawsuit. That motivation is not about vindicating Plaintiff's First Amendment rights, but rather giving her lawyers at [EFF] a forum in which to “get [ ] their teeth into [Universal]”). In her objections, Lenz argues that her comments disclosed only information regarding “her counsel's motives for representing her pro bono,” and therefore did not waive the attorney-client privilege with respect to her own motivations for filing suit. Judge Trumbull found that because Lenz's “communications with the third parties relate to the actual substance of her conversations with her attorney.... Universal shall obtain further discovery regarding communications involving this subject matter.” Order of October 22, 2010 at 5.

This ruling is not clearly erroneous. Because information about Lenz's motivations for filing suit reasonably may lead to discoverable evidence about her claimed injury, her conversations about those motivations are discoverable if the privilege has been waived with respect to that subject matter. Lenz contends that her disclosure of EFF's motivations for taking the suit pro bono constitutes separate subject matter with respect to whether she has waived the privilege. However, as noted above, there is no “bright line test” for determining what constitutes the subject matter of a waiver. Instead, courts must weigh “the circumstances of the disclosure, the nature of the legal advice sought and the prejudice to the parties of permitting or prohibiting further disclosures.” Phoenix Solutions Inc. v. Wells Fargo, N.A., 254 F.R.D. 568, 575 (N.D.Cal.2008). While Lenz argues that her motivations for filing the suit and EFF's motivations for representing her are distinct subject matter, the circumstances of her disclosures indicate that the two subjects are closely intertwined and cannot easily be separated. Such integration is well illustrated in Lenz's statement to her mother that EFF was planning a “publicity blitz and/or a lawsuit against Universal.” While the statement indicates that EFF was planning the lawsuit against Universal, no such suit could be undertaken without active involvement by Lenz. The statement also suggests that EFF was considering the possibility of a publicity blitz in lieu of a lawsuit, indicating that EFF had some say as to whether the suit went forward. Universal is entitled to examine the context of Lenz's voluntary statements in order to assess their probative value, if any.

B. Communications Regarding the Rossi Decision

Lenz also made disclosures to third parties about communications she had with EFF about specific legal issues. Universal sought to discover communications about these matters, including discussions about Lenz's decision to abandon her state law claim for interference, whether Lenz had potential exposure in a “SLAPP” suit, and the timing of the lawsuit itself. Judge Trumbull determined that while Lenz had waived the attorney-client privilege as to those matters, such matters are not relevant to a claim or defense by either party and therefore are not discoverable. Order of October 22, 2010, at 6. However, in an electronic chat with a friend, Lenz stated that “I told [EFF counsel] Corynne [McSherry] that since pursuing the federal portion of the case achieves the ends I have in mind, that's [sic] fine to drop the state portion (that they filed a false DMCA notice, tha[t] they're accusing me of copyright infringement and that a ruling in your case could clarify a cloudy decision known as ‘Rossi’).” Klaus Decl. Ex 7 at 1. Judge Trumbull determined that Lenz's comments regarding “clarification of the Rossi decision” were relevant. Order of October 22, 2010, at 6.

Lenz points out that at the time of the chat she already had challenged the Rossi standard in opposing Universal's motion to dismiss her first amended complaint. However, the reference to “clarifying Rossi” as one of the “ends I have in mind,” is relevant to Lenz's motivations in pursuing her case, which, as discussed above, is relevant to Lenz's damage claims. Judge Trumbull's determination that Lenz voluntarily waived the attorney-client privilege as to this matter is not clearly erroneous.

C. Communications Regarding Plaintiff's Factual Allegations

Judge Trumbull's order also addresses four statements made by Lenz to third parties regarding subject matter that Universal contends is relevant to Lenz's factual allegations. First, Lenz told a friend that her lawyer was hinting in her second amended complaint that “Prince bullied” Universal into going after Lenz and that “there has been ample public proof that he wants everyone targeted, no matter whether they're actually guilty of anything.” Second, Lenz told a friend in a separate chat that her attorney thought Prince was forcing Universal to fight the suit rather than settle. Third, Lenz indicated to a reporter for Zerogossip.com that she had contacted EFF on the recommendation of a lawyer friend from Canada, and that “[i]n discussing the situation with one of the EFF lawyers, we came to the conclusion that I did not infringe the copyright and eventually we decided to file this lawsuit.” Klaus Decl. Ex. 11 at 3. Finally, in a response to a reader comment on her blog about a fair use defense, Lenz wrote “You're right Richard. Mine's not a ‘fair use’ case at all.... It's something different. I've never heard of anything like it, which is why I contacted EFF.” Id. Ex. 6 at 2. When asked about this comment at her deposition, Lenz testified that “[a]t the time it may have been my opinion. It may have been I was misunderstanding what I'd been told by counsel.” Id. Ex. 2 at 286:12–14.

Universal argues that the first two comments were communications about “the core allegations ‘that Prince himself demanded that Universal seek the removal of’ Plaintiff's posting.' ” MTC at 7 (quoting SAC ¶ 31). According to Universal, Lenz's statement to the Zerogossip.com reporter that she discussed the situation with her lawyer and “came to the conclusion” that the posting did not infringe any copyright is relevant to Lenz's claim that Universal knew or should have known that the take-down notice was noninfringing. Finally, Universal contends Lenz's blog posting that her case was “not a ‘fair use’ case at all” may or may not reflect a misunderstanding of what Lenz had been told by counsel.

Judge Trumbull determined that Lenz voluntarily waived the privilege, and that Universal therefore could “obtain further discovery regarding plaintiff's communications with her attorney on this subject matter as well.” Lenz objects on the grounds that her speculations about Prince's role in the case are irrelevant. She also argues that her deposition statement about her blog posting was speculation that immediately followed statements that she did not remember why she said what she did.

Judge Trumbull's determination was not clearly erroneous. When a client reveals to a third party that something is “what my lawyer thinks,” she cannot avoid discovery on the basis that the communication was confidential. Nor did Judge Trumbull clearly err in determining that the comments at issue are relevant to “specific factual allegations,” about which Universal may obtain further discovery. Order of October 22, 2010, at 7. Lenz's second amended complaint alleges that “Prince himself demanded that Universal seek the removal of” Lenz's YouTube video. Universal is entitled to discover information about the basis of such allegations. Similarly, the nature and extent of the investigation by Lenz and her counsel to determine whether Lenz had infringed a copyright may be relevant to the issue of whether Universal itself should have known that there was no copyright violation.

Finally, Lenz's assertion in her deposition testimony that she may have based her earlier comment that her case was “not a ‘fair use’ case at all” on conversations with her attorneys—even if her interpretation of those conversations was mistaken—waived any claim of privilege. A party may not attempt to explain an apparent admission as a misinterpretation of a conversation with counsel, and then deny the opposing party on the basis of privilege access to the very conversations at issue.

ORDER

Good cause therefore appearing, the objections are OVERRULED.