In re American Airlines, Inc. ( 1992 )

IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 92-7493
IN RE: AMERICAN AIRLINES, INC.,
AMR CORPORATION,
Petitioners.
Petition for Writ of Mandamus
to the United States District Court
for the Southern District of Texas
( September 4, 1992 )
Before POLITZ, Chief Judge, HIGGINBOTHAM, and BARKSDALE, Circuit
Judges.
HIGGINBOTHAM, Circuit Judge:
American Airlines, Inc. petitions for a writ of mandamus
directing the district court to disqualify its former counsel
Vinson & Elkins from representing plaintiff Northwest Airlines,
Inc. We hold that the district court erred in denying American's
motion and issue the requested writ.
I
Continental Airlines filed a complaint against American in the
United States District Court for the Southern District of Texas on
June 8, 1992, charging American with attempted monopolization by
predatory pricing in violation of the Sherman Act. American filed
a declaratory judgment action against Continental and Northwest in
the United States District Court for the Northern District of
Illinois the following day. Three days later, Northwest sued
American in the Southern District of Texas. The Continental and
Northwest suits have been consolidated by order of the district
court.
On June 9, 1992, the day after Continental filed its
complaint, David Schwarte, American's in-house counsel, asked
Alison Smith, a VE partner, if VE would represent American in this
case. Smith accepted the American representation on June 10,
unaware that four days earlier Harry Reasoner, another VE partner,
had promised Joe Jamail, Northwest's counsel, that VE would not
consider representing another airline until Jamail and Reasoner had
discussed joining forces. When Smith informed Reasoner of her
acceptance of the American representation, Reasoner directed her to
inform Schwarte that "there might be a problem with Northwest" and
that Reasoner would make the final decision the next day. On June
11 Reasoner accepted the Northwest representation.
American asserted that VE's prior representation of American
and its agreement to do so in this case made its representation of
Northwest improper. It requested that VE withdraw from the case in
letters sent on June 12 and June 19. Northwest refused and on
July 1 American moved to disqualify VE. The parties at this time
became aware that Weil, Gotshal & Manges, American's lead counsel,
had previously represented Northwest and Continental. An exchange
of "conflicts" was briefly considered. When American indicated
2
that it would not withdraw its motion to disqualify VE, Northwest
moved to disqualify Weil, Gotshal on July 13.
American rests its motion to disqualify Vinson & Elkins on
VE's representation of American in prior antitrust matters and its
alleged agreement to represent it in this case. According to
American, Vinson & Elkins has served as its "Houston" antitrust
counsel since 1987. In this role VE defended American in suits by
Continental and a Continental affiliate. VE also provided
antitrust advice in connection with American's possible acquisition
of Continental.
On July 24, after extensive briefing and the submission of
numerous affidavits, the district court denied both motions to
disqualify counsel. The court held that VE's initial acceptance of
the American representation was a "mixup," that the past matters in
which VE had represented American were only "tangentially related
to this litigation," and that any confidential information
possessed by VE was "not sufficient to cause any material prejudice
to [American]." The court directed the parties to submit a plan
for a Chinese Wall to safeguard against adverse use of confidential
information in the case. American then filed the petition for writ
of mandamus now before us.
II
We must first determine our jurisdiction. Orders denying
motions to disqualify counsel are not appealable before final
judgment under 28 U.S.C. § 1291. Firestone Tire & Rubber Co. v.
Risjord, 449 U.S. 368, 375 (1981); see also Richardson-Merrell,
3
Inc. v. Koller, 472 U.S. 424 (1985) (extending rule to orders
granting motions to disqualify). While holding that
disqualification orders are not immediately appealable as a matter
of course, the Firestone Court indicated that a writ of mandamus
might be available "in the exceptional circumstances for which it
was designed." Firestone, 449 U.S. at 378 n.13; Koller, 472 U.S.
at 435. American contends that this case presents the requisite
"exceptional circumstances."
The standards are well established: "[P]etitioners must show
that they lack adequate alternative means to obtain the relief they
seek . . . and carry the 'burden of showing that [their] right to
issuance of the writ is "clear and indisputable."'" Mallard v.
United States Dist. Ct. for the S. Dist. of Iowa, 109 S. Ct. 1814,
1822 (1989) (citations omitted); In re Fibreboard Corp., 893 F.2d
706, 707 (5th Cir. 1990); In re Willy, 831 F.2d 545, 549 (5th Cir.
1987). The test contains two prongs, one procedural and one
substantive, and unless American demonstrates that it lacks an
adequate alternative means to obtain relief, we need not consider
whether its right to a writ of mandamus is "clear and
indisputable."
Courts confronting this question have suggested that "[d]enial
of a motion to disqualify counsel will rarely justify the issuance
of a writ of mandamus." In Re Ford Motor Co., 751 F.2d 274, 275
(8th Cir. 1984); see also In re Mechem, 880 F.2d 872, 873 (6th Cir.
1989); In re Bushkin Assocs., Inc., 864 F.2d 241, 243-44 (1st Cir.
1989). We agree that frequent use of the writ would "'undermine[]
4
the policy against piecemeal appellate review,'" Mechem, 880 F.2d
at 875 (quoting Allied Chemical Corp. v. Daiflon, Inc., 449 U.S.
33, 36 (1980) (per curiam)), and thus we have stressed that
"mandamus may not serve as a substitute for appeal." Warren v.
Bergeron, 831 F.2d 101, 103 (5th Cir. 1987). We also have
recognized, however, that the standard governing the availability
of mandamus is not "never," but "hardly ever." Allied Chemical,
101 S. Ct. at 190. Thus, this court has recently held that a writ
of mandamus will be available in certain cases to obtain immediate
review of a district court's denial of a disqualification motion.
In re Dresser Industries, No. 92-2199 (5th Cir. Aug. 21, 1992).
See also In re American Cable Publications, Inc., 768 F.2d 1194
(10th Cir. 1985) (issuing writ on petition to review a grant of
disqualification motion); Merle Norman Cosmetics, Inc. v. United
States Dist. Ct., Central Dist. of Cal., 856 F.2d 98, 101 (9th Cir.
1988) (recognizing that "if petitioners' claims were wellfounded
[sic], the damage would be irremediable," but denying writ on other
grounds). As in Dresser, we find the special circumstances of the
present dispute sufficient to place it within that narrow class of
cases warranting mandamus review.
American claims that immediate review of its disqualification
motion is appropriate because it will otherwise suffer "irreparable
harm" and also because "attorneys and clients throughout Texas need
the benefit of this Court's guidance on this issue of grave
importance." We agree. First, the nature and size of this
litigation would seem to preclude effective appellate review upon
5
final judgment. In addition, this case raises several questions
pertaining to the proper interpretation and application of ethical
standards in disqualification cases. As illustrated by our recent
Dresser opinion, it is relevant to mandamus review that the
"district court's order was not a mere discretionary one but rather
turns on legal questions appropriate for appellate review." In re
Burlington N., Inc., 822 F.2d 518, 523 (5th Cir. 1987). It is also
relevant that, as in Dresser and Burlington, "[t]he issues here
also have importance beyond the immediate lawsuit." Id. at 523; In
re EEOC, 709 F.2d 392, 394-95 (5th Cir. 1983). For these reasons,
we hold that American has demonstrated the absence of an adequate
alternative to mandamus review.
Having met the "procedural" requirement for a writ of
mandamus, American must also demonstrate that its right to the
issuance of the writ is "clear and indisputable." This test goes
to the merits, and we pause only to set out the standard of review.
The Supreme Court has indicated that "[w]here a matter is committed
to discretion, it cannot be said that a litigant's right to a
particular result is 'clear and indisputable.'" Allied Chemical,
101 S. Ct. at 191. In accord with these dictates, this court has
held that a writ of mandamus should not issue merely because we
believe that "we might have exercised the discretion vested in that
court differently than the district court exercised it." Matter of
Hester, 899 F.2d 361, 367 (5th Cir. 1990).
In this circuit, however, a district court's ruling upon a
disqualification motion is not a matter of discretion. Rather, the
6
appellate court "review[s] findings of fact for clear error 'while
carefully examining the district court's application of relevant
ethical standards.'" Johnston v. Harris County Flood Control
Dist., 869 F.2d 1565, 1569 (5th Cir. 1989) (quoting Cossette v.
Country Style Donuts, Inc., 647 F.2d 526, 531 (5th Cir. 1981)).
Conceding that abuse of discretion review is not appropriate,
Northwest asserts that this case centers on disputed factual
matters, and that the district court's findings deserve deference.
Assuming arguendo that the district court made findings on these
contested questions of fact, it is clear that the court was guided
by a particular reading of the Texas Disciplinary Rules in making
these relevant factual determinations. Whatever deference due the
court's factual findings, little or no deference is proper in
reviewing its interpretation of ethical rules. We have recently
held that a "district court's interpretation of the state
disciplinary rules [is] an interpretation of law, subject
essentially to de novo consideration." Dresser, No. 92-2199, slip
op. at 6975-76. In accord with Dresser, our review of the district
court's reading of the relevant ethical standards will be de novo.
III
We turn to the applicable law. The Local Rules of the
Southern District of Texas provide that "[t]he Code of Professional
Responsibility adopted by this court is the Code of Professional
Responsibility of the State Bar of Texas, as amended from time to
time." Tex. Rules of Court, Federal App. A, Rule 4B. Texas
replaced the Texas Disciplinary Code with the Texas Disciplinary
7
Rules of Professional Conduct in 1990. Recognizing the new Rules
as an amendment of the old Code, this Court has applied the Rules.
See In re Medrano, 956 F.2d 101, 102 n.3 (5th Cir. 1992). The
parties do not contest application of the Rules.
We have recently held, however, that the Texas Rules, as
adopted by the Southern District of Texas, are not the "'sole'
authority governing a motion to disqualify." Dresser, No. 92-2199,
slip op. at 6976. In reviewing a motion to disqualify, "we
consider the motion governed by the ethical rules announced by the
national profession in light of the public interest and the
litigants' rights." Id. As Dresser indicates, our precedents have
applied the ethical canons contained in the ABA Model Code. See,
e.g., Brennan's Inc. v. Brennan's Restaurants, Inc., 590 F.2d 168
(5th Cir. 1979); Woods v. Covington County Bank, 537 F.2d 804 (5th
Cir. 1976).
The parties' extensive citation of this court's precedents
applying the ABA Model Code suggests their recognition that the
Texas Rules, as adopted by the Southern District of Texas, are not
the "sole" authority governing this case. Moreover, we do not
believe that our holding in Dresser has rendered the parties'
arguments grounded in the Texas Rules irrelevant to our decision.
The Texas Rules were patterned after the ABA Model Rules of
Professional Conduct, which the Dresser court cited along with the
Model Code as the national standards utilized by this circuit in
ruling on disqualification motions. Since the relevant ABA Rules
do not differ materially from the corresponding Texas Rules, the
8
parties' interpretations of the Texas Rules are equally applicable
in this case. Our discussion will therefore center on the Texas
Rules.
As we confirmed in Dresser, "[m]otions to disqualify are
substantive motions affecting the rights of the parties and are
determined by applying standards developed under federal law."
Dresser, No. 92-2199, slip op. at 6976; see also In re Snyder, 105
S. Ct. 2874, 2881 n.6 (1985); In re Finkelstein, 901 F.2d 1560, 1564
(11th Cir. 1991); United States v. Miller, 624 F.2d 1198, 1200 (3d
Cir. 1980); Cord v. Smith, 338 F.2d 516, 524 (9th Cir. 1964).
Federal courts may adopt state or ABA rules as their ethical
standards, but whether and how these rules are to be applied are
questions of federal law. We stress this because Northwest
contends that the Texas Rules control the discretion of a district
court. According to Northwest, "a trial court is not forced by
literalism or mechanical standards to do injustice serving the mere
litigation tactics of a party. Rather, a trial court, according to
the Rules, is to determine if there is actual prejudice or
threatened interference with the fair administration of justice."
See Texas Rule 1.06 Comment 17; ABA Rule 1.7 Comment.
As we have indicated, disqualification cases are governed by
state and national ethical standards adopted by the court. We
disagree with Northwest's suggestion that these sources also
determine the discretion of a district court applying these rules.
That issue is one governed by federal law.
9
Some courts have taken the position Northwest advances, namely
that "[t]he business of the court is to dispose of litigation and
not to act as a general overseer of the ethics of those who
practice here unless the questioned behavior taints the trial of
the cause before it." W.T. Grant Co. v. Haines, 531 F.2d 671, 677
(2d Cir. 1976); Board of Educ. v. Nyquist, 590 F.2d 1241, 1246 (2d
Cir. 1979); Armstrong v. McAlpin, 625 F.2d 433, 445-46 (2d Cir
1980). See also Sutton, How Vulnerable is the Code of Professional
Responsibility?, 57 N.C.L.Rev 497, 514-16 (1979). An attorney's
ethical violation by itself does not warrant disqualification under
this approach. Rather, disqualification is proper only in cases
where a court also finds that the unethical conduct threatens to
taint the trial. This more limited test largely rests on a belief
that disqualification motions are often made for tactical reasons
such as delay or harassment. While the "taint" standard "fails to
correct all possible ethical conflicts," Armstrong, 625 F.2d at
445, it is argued that this limited disqualification rule serves to
deter many meritless, tactical motions that would otherwise be
filed.
This circuit, however, has struck a different balance,
electing to remain "sensitive to preventing conflicts of interest."
Matter of Consolidated Bankshares, Inc., 785 F.2d 1249, 1256 (5th
Cir. 1986). We have squarely rejected this hands-off approach in
which ethical rules "guide" whether counsel's presence will "taint"
a proceeding, holding instead that a "[d]istrict [c]ourt is obliged
to take measures against unethical conduct occurring in connection
10
with any proceeding before it." Woods v. Covington County Bank,
537 F.2d 804, 810 (5th Cir. 1976) (emphasis added); Musicus v.
Westinghouse Elec. Corp., 621 F.2d 742, 744 (5th Cir. 1980); E.F.
Hutton & Co. v. Brown, 305 F. Supp. 371, 376-77 (S.D. Tex. 1969);
see also Kevlik v. Goldstein, 724 F.2d 844, 847 (1st Cir. 1984)
("the district court has the duty and responsibility of supervising
the conduct of attorneys who appear before it"); Trust Corp. v.
Piper Aircraft Corp., 701 F.2d 85, 87 (9th Cir. 1983) (same);
United States v. Agosto, 675 F.2d 965, 969 (8th Cir. 1982) (same).
For this reason, we have emphasized that "[a] motion to disqualify
counsel is the proper method for a party-litigant to bring the
issues of conflict of interest or breach of ethical duties to the
attention of the court." Musicus, 621 F.2d at 744. We recognize
of course that disqualification motions may be used as "procedural
weapons" to advance purely tactical purposes. But we do not
believe that a priori assumptions concerning the motivations
underlying disqualification motions in general justify a more
relaxed ethical rule. Our prior cases disclose that a careful and
exacting application of the rules in each case will separate proper
and improper disqualification motions.
Our rejection of the "taint" standard finds additional support
in the questionable nature of the assumptions underlying the test.
First, the "taint" standard rests on a belief that "ethical
conflicts surfacing during a litigation are generally better
addressed by the 'comprehensive disciplinary machinery' of the
state and federal bar." Armstrong, 625 F.2d at 446 (quoting
11
Nyquist, 590 F.2d at 1246)). It is not not clear that the vitality
of state enforcement is relevant to the judicial duty of the
federal courts to clean its own house. Policy aside, it is equally
uncertain that the disciplinary boards have performed this role.
Moreover, clients and fellow attorneys have little incentive to
file formal complaints with disciplinary boards, and the evidence
suggests that they in fact do not. This is especially true in
cases of alleged conflicts of interest. See David B. Wilkins, Who
Should Regulate Lawyers?, 105 Harv. L. Rev. 799, 827-28 (1992);
Note, Developments in the Law--Conflicts of Interest in the Legal
Profession, 94 Harv. L. Rev. 1244, 1496-1500 (1981). To a very
large extent, unless a conflict is addressed by courts upon a
motion for disqualification, it may not be addressed at all. More
to the point, it is our business--our responsibility.
Second, we believe that today there is less reason to suspect
tactical motivations behind disqualification motions than at the
time the "taint" standard was initially formulated in the 1970's.
This is not due to any moral transformation of the bar, but to the
relative absence of tactical advantages that might be secured by
disqualification orders under today's law. At that time,
disqualification orders were immediately appealable; the greatest
tactical advantage offered by these motions was delay, as the trial
proceedings were halted while the motion went up on appeal. See,
e.g., Nyquist, 590 F.2d at 1246. Under the Firestone regime,
however, disqualification motions are not appealable prior to final
judgment, thus severely limiting any advantages a party might have
12
achieved through delay. See Armstrong, 625 F.2d at 452 n.2
(Newman, J., concurring in part and dissenting in part).
Accordingly, we will rigorously apply the relevant ethical
standards in reviewing American's disqualification motion, just as
we have done in the past. See, e.g., Johnston v. Harris County
Flood Control Dist., 869 F.2d 1565, 1569 (5th Cir. 1989); Doe v. A
Corp., 709 F.2d 1043, 1046 (5th Cir. 1983); In re Corrugated
Container Antitrust Litigation, 659 F.2d 1341 (5th Cir. Unit A Oct.
1981); Duncan v. Merrill Lynch Pierce, Fenner & Smith, Inc., 646
F.2d 1020 (5th Cir. Unit B June 1981). We will now examine the
three arguments offered by American in support of its motion to
disqualify Vinson & Elkins from representing Northwest.
IV
American first argues that VE must be disqualified from
representing Northwest because a law firm may not switch sides in
the same case. According to American, a binding attorney-client
relationship between VE and American was formed when Alison Smith,
a VE partner, agreed to represent American on June 10. VE's
withdrawal from the American representation and acceptance of the
Northwest representation on June 11 was a switch of sides in the
same case, a clear violation of legal ethics.
Texas Rule 1.06(a) provides that "[a] lawyer shall not
represent opposing parties to a litigation." As American
indicates, this rule applies even in cases where an attorney-client
relationship has not been formed: A lawyer may not "switch[] sides
and represent[] a party whose interests are adverse to a person who
13
sought in good faith to retain the lawyer." Texas Rule 1.09
Comment 4A; see also Hazard & Hodes, The Law of Lawyering § 1.9:111
(1991). The parties agree that Alison Smith agreed to represent
American on behalf of VE on June 10, and that Harry Reasoner
formally agreed to represent Northwest on June 11. There are
significant differences, however, on several points that bear on
the dispositive question of whether American sought to retain VE in
good faith.
On June 5, 1992, Northwest, through Joe Jamail, spoke to Harry
Reasoner, managing partner of VE, about the possibility of VE
serving as Northwest's co-counsel in a suit against American.
After checking to see whether American was a current client and
reviewing the matters that VE had handled for American in the past,
Reasoner promised Jamail that VE would accept no other
representation of an airline until he had the chance to discuss the
matter further.
On June 9, David Schwarte of American, after first attempting
to reach Reasoner, called Alison Smith, another VE partner.
Schwarte asked Smith if VE would represent American in a suit that
Continental had filed against it in Galveston. Unaware of the
previous discussion between Jamail and Reasoner, Smith stated that
she would be "delighted" to take on the case, but added that she
would first have to run a conflicts check. American sent VE copies
of the complaints filed against it later that day.
Smith called Schwarte at around 9:00 a.m. the next morning,
June 10. When Smith stated that the conflicts question had not yet
14
been resolved, Schwarte asked if there was a problem with
Northwest. Smith responded that no such conflict was apparent.
Smith and Schwarte then discussed American's possible litigation
strategy, focusing on American's desire to transfer the Galveston
case to Chicago.
A disputed conversation between David Boies of Cravath, Swaine
& Moore, lead counsel for Continental, and Ira Millstein of Weil,
Gotshal & Manges, lead counsel for American, occurred at about 9:30
a.m. According to Boies, Millstein stated that he hoped to retain
VE to represent American in the Galveston case. Boies responded
that this probably was not possible, for it was his understanding
that VE would be representing Northwest in a suit against American.
Millstein, however, asserts that he told Boies that VE would be
representing American in Galveston, and that Boies responded that
VE might have a conflict with Northwest, not that VE was going to
sue American on Northwest's behalf.
At 10:30 a.m., Smith informed Schwarte that there were no
conflicts that might prevent VE from representing American. Upon
hearing this, Schwarte asked Smith if there was any reason why "we"
could not begin to act as a team. Smith responded that she did not
see why not. The two again spoke of American's desire to transfer
the Galveston case to Chicago. Schwarte asked Smith to begin
thinking about this question and told her that he would send her a
memorandum on the subject prepared by Weil, Gotshal attorneys.
After the call, Smith left Reasoner a note in his office, stating
15
that she had accepted the American representation in the Galveston
case.
Reasoner learned of Smith's acceptance of the American
representation when he called his office at around 12:30 p.m. He
advised Smith to explain to Schwarte that until Smith and Reasoner
were able to discuss the matter, it was uncertain whether VE would
be able to accept. Smith called Schwarte at 2:20 p.m. The
contents of this conversation are in dispute. According to Smith,
she told Schwarte that Reasoner had informed her that there was a
problem with VE representing American. Schwarte responded that he
was not surprised, for he had learned from Millstein that Reasoner
had spoken to Northwest about suing American. According to
Schwarte, however, Smith stated only that she had received a
"cryptic note" from Reasoner indicating that "there might be a
problem with Northwest." Schwarte swears that he made no mention
of the possibility that VE might represent Northwest. At 3:45
p.m., VE received a copy of the memorandum prepared by Weil,
Gotshal that Smith and Schwarte had discussed earlier.
Schwarte and Smith spoke again at 5:30 p.m. Smith informed
Schwarte that the "problem with Northwest" had not yet been
resolved. Schwarte stated that he needed to know as soon as
possible in order to make other arrangements if it turned out that
VE could not represent American. At 5:45 p.m., Reasoner told Smith
that he planned to read the complaints in the case and would speak
to American the next day. Smith called Schwarte to convey this
information.
16
Northwest alleges that Irv Terrell, a partner at Baker &
Botts, informed Joe Jamail this same afternoon that Baker & Botts
would be representing American. Both Terrell and Schwarte,
however, sharply contradict this account, asserting that American
did not retain Baker & Botts until the afternoon of June 11, after
VE told American that it would be representing Northwest.
The next afternoon, June 11, Reasoner and Jamail agreed that
VE would serve as co-counsel for Northwest. Reasoner then called
various members of American's legal team with this news. Millstein
at this time asked Reasoner if he could recommend other Houston
counsel. Reasoner told him that Baker & Botts would be a good
choice. On Reasoner's instructions, Smith returned unread the
Weil, Gotshal memorandum she had received the day before.
According to American, American retained Baker & Botts later that
afternoon.
The parties' respective accounts of these events diverge at
several significant points. The rule barring lawyers from
switching sides in the same case applies only where the complaining
party sought in good faith to retain the lawyer. Texas Rule 1.09
Comment 4A. Northwest's version of events might lead a court to
question American's good faith. According to Northwest, American's
lead counsel was informed that VE would be representing Northwest
in a suit against American before Alison Smith, who, unlike
American, had no knowledge of VE's previous commitment to
Northwest, agreed to represent American. Northwest also contends
that American hired Baker & Botts during the afternoon of June 10,
17
before VE's final decision that it would not represent American.
Northwest alleges that American sent VE the confidential memorandum
prepared by Weil, Gotshal after these two events, that is, with
knowledge that VE would likely be representing Northwest and after
it had hired Baker & Botts. These alleged facts, if accepted as
true, might establish that American's efforts were motivated
primarily by a desire not to secure representation from VE, but to
ensure that VE would not, or could not, represent Northwest.
American, of course, contests Northwest's account, insisting
that it had no knowledge of VE's prior commitment to Northwest and
that it hired Baker & Botts on June 11, only after it was informed
that VE would be representing Northwest. When American learned of
VE's commitment to Northwest is a factual issue crucial to
determining whether American sought VE's representation in good
faith, as Texas Rule 1.06 requires. The district court made no
factual findings on this issue. We need not remand for further
fact finding because we hold that VE must be disqualified on other
grounds.
V
American's final two contentions rest on VE's prior
representations of the airline in antitrust matters. American
contends that VE must be disqualified because VE has represented
American in matters substantially related to the present case and
VE's representation of Northwest in this case will likely involve
the use to American's disadvantage of confidential information
obtained during this earlier representation. We will first discuss
18
the applicable ethical standards. We will then apply these
standards to the prior representations alleged by American to
warrant VE's disqualification.
A.
American contends that VE's prior representations of American
make disqualification appropriate under this court's precedents and
the Texas Rules. Our review in previous cases involving prior
representations has been governed by the "substantial relationship"
test:
A party seeking to disqualify opposing counsel on the
ground of a former representation must establish two
elements: 1) an actual attorney-client relationship
between the moving party and the attorney he seeks to
disqualify and 2) a substantial relationship between the
subject matter of the former and present representations.
Johnston v. Harris County Flood Control Dist., 869 F.2d 1565, 1569
(5th Cir. 1989); In re Corrugated Container Antitrust Litigation,
659 F.2d 1341, 1345 (5th Cir. 1981); Duncan v. Merrill Lynch,
Pierce, Fenner & Smith, 646 F.2d 1020, 1028 (5th Cir.), cert.
denied, 454 U.S. 895 (1981). Because it is not disputed that VE
represented American in the matters under consideration, the sole
issue is whether these prior representations are substantially
related to the present case. Our inquiry may be narrowed to this
single question because the substantial relationship test is
governed by an irrebuttable presumption. Once it is established
that the prior matters are substantially related to the present
case, "the court will irrebuttably presume that relevant
confidential information was disclosed during the former period of
19
representation." Duncan, 646 F.2d at 1028; Corrugated, 659 F.2d at
1347.1
The test is categorical in requiring disqualification upon the
establishment of a substantial relationship between past and
current representations. But we have never applied the test in a
mechanical way that might "prevent[] an attorney from ever
representing an interest adverse to that of a former client."
Duncan, 646 F.2d at 1027-28. Rather, a substantial relationship
may be found only after "the moving party delineates with
specificity the subject matters, issues and causes of action"
common to prior and current representations and the court engages
in a "'painstaking analysis of the facts and precise application of
precedent.'" Duncan, 646 F.2d at 1029 (quoting Brennan's, Inc. v.
Brennan's Restaurants, Inc., 590 F.2d 168, 174 (5th Cir. 1979)).
Finally, the party seeking disqualification bears the burden of
proving that the present and prior representations are
substantially related. Duncan, 646 F.2d at 1028.
This circuit adopted the substantial relationship test before
the promulgation of the Rules of Professional Conduct. We must
decide the application of the substantial relationship test under
these new Rules. Texas Rule 1.09 provides in relevant part:
(a) Without prior consent, a lawyer who personally has
formally represented a client in a matter shall not thereafter
represent another person in a matter adverse to the former client:
1
A second irrebuttable presumption is that confidences
obtained by an individual lawyer will be shared with the other
members of his firm. See Corrugated, 659 F.2d at 1346. This
presumption is not at issue in this case, for all of the VE
lawyers involved have previously represented American.
20
. . .
(2) if the representation in reasonable probability
will involve a violation of Rule 1.05; or
(3) if it is the same or a substantially related
matter.
Rule 1.09(a)(2) incorporates Rule 1.05, which prohibits a lawyer's
use of confidential information obtained from a former client to
that former client's disadvantage. Rule 1.09 thus on its face
forbids a lawyer to appear against a former client if the current
representation in reasonable probability will involve the use of
confidential information or if the current matter is substantially
related to the matters in which the lawyer has represented the
former client.2
In providing two distinct grounds for disqualification, the
Rules expand the protections for former clients beyond those
afforded by the substantial relationship test. The Rules are not,
however, broader than the protections provided by our precedents.
While the focus of our cases has been on the substantial
relationship test, we have indicated that a former client could
2
ABA Rule 1.9 is identical to Texas Rule 1.09 in all
important respects:
(a) A lawyer who has formally represented a client in a
matter shall not thereafter represent another person in
the same or a substantially related matter in which
that person's interests are materially adverse to the
interests of the former client unless the former client
consents after consultation
. . . .
(c) A lawyer who has formally represented a client in a
matter . . . shall not thereafter:
(1) use information relating to the representation to the
disadvantage of the former client . . . .
ABA Rule 1.9.
21
also disqualify counsel by showing that his former attorney
possessed relevant confidential information in the manner
contemplated by Rule 1.09(a)(2). As Duncan, for example, stated:
"[The moving party may disqualify counsel on the basis of prior
representations] either by establishing that the present and
previous representations are substantially related or by pointing
to specific instances where it revealed relevant confidential
information regarding its practices and procedures." Duncan, 646
F.2d at 1032. Thus, it does not appear that the Texas Rules make
material addition to the basic approach we have used in the past.
But do the Rules take something away? That is, do the Rules
offer less protection to former clients than our precedents?
Northwest offers two related arguments on this score. First,
Northwest contends that a substantial relationship between past and
current matters exists only where the two cases are so closely
related that the risk of adverse use of the former client's
confidences threatens to "taint" the trial. Northwest also argues
that a close relation between a past and current representation is
irrelevant if the attorney relied on publicly available information
in advising the former client. These two arguments are rooted in
Northwest's larger assertion that the substantial relationship test
is solely concerned with protecting a former client's confidences.
Northwest offers three distinct grounds in support of its
"taint" standard. It first makes a brief attempt to locate this
more demanding standard in Duncan. According to Northwest, Duncan
provides that a party may establish a substantial relationship
22
between past and current representations only by demonstrating that
the two matters are so closely related that there is a "genuine
threat that confidences revealed to his former counsel will be
divulged to his present adversary." Duncan, 646 F.2d at 1028.
Duncan, however, stands for a different proposition, for we held
that a "genuine threat" of adverse use of confidences is
established by showing that a prior representation is substantially
related to the present case. Id. Under Duncan, a party demonstrates
a "genuine threat" by establishing a substantial relationship
between past and present cases, not, as Northwest would have it,
the other way around.
Northwest's other two arguments rest on its interpretation of
Texas Rule 1.09's substantial relationship language. First,
Northwest contends that the commentary to Rule 1.09 makes
"abundantly clear" that the Rule's substantial relationship
language is directed to "actual and genuine threats to the
integrity of the trial process." Comment 8 to Rule 1.09 provides:
Although not required to do so by Rule 1.05 or this Rule,
some courts, as a procedural decision, disqualify a
lawyer for representing a present client against a former
client when the subject matter of the present
representation is so closely related to the subject
matter of the prior representation that confidences
obtained from the former client might be useful in the
representation of the present client. See Comment 17 to
Rule 1.06.
Comment 17 provides that alleged conflicts should be raised by an
opposing party only where the alleged "conflict is such as clearly
to call in question the fair or efficient administration of
justice." Northwest concludes that this commentary reveals that
23
"the substantial relationship language of Rule 1.09 is bottomed on
a concern about the actual fairness of the proceedings in which
disqualification is sought."
Northwest also contends that the Texas Rules' conscious
omission of the "appearance of impropriety" standard contained in
Canon 9 of the Model Code independently establishes "taint" as the
appropriate disqualification standard. Northwest points out that
some of our broader substantial relationship cases, notably In re
Corrugated Container Antitrust Litigation, 659 F.2d 1341 (5th Cir.
1981), were decided under Canon 9. Northwest asserts that
Corrugated's broad language was intimately tied to Canon 9's
"appearance of impropriety" standard. Since the Texas Rules
eliminated this rule, "disqualification is no longer appropriate
unless counsel's continued involvement threatens to taint the
underlying trial: a mere appearance of impropriety will not
suffice."
We reject both of Northwest's arguments. A party seeking to
disqualify counsel under the substantial relationship test need not
prove that the past and present matters are so similar that a
lawyer's continued involvement threatens to taint the trial.
Rather, the former client must demonstrate that the two matters are
substantially related. Second, we adhere to our precedents in
refusing to reduce the concerns underlying the substantial
relationship test to a client's interest in preserving his
confidential information. The second fundamental concern protected
by the test is not the public interest in lawyers avoiding "even
24
the appearance of impropriety," but the client's interest in the
loyalty of his attorney.
Northwest's argument that the Texas Rules' commentary bottoms
Rule 1.09's substantial relationship language on a concern for
"actual fairness" rests on its general interpretation of the Texas
Rules. Northwest suggests that courts' use of disciplinary
standards in disqualification matters is "understandable in courts
that have not yet developed their own specific procedural
disqualification rules or standards." Courts may borrow from the
rules, with two important qualifications: "First, any violation of
a disciplinary standard must be demonstrated by movant to have been
actually prejudicial to movant; and, second, disqualification
should be denied unless the litigation will be 'tainted' by the
continued participation of a lawyer or firm that may have violated
a disciplinary standard."
This argument is closely related to Northwest's larger
assertion that the Texas Rules are "guides" for courts and are not
to be "literally" applied in disqualification cases. We addressed,
and rejected, this general argument in Part III. We understand
this particular argument concerning the substantial relationship
test to be something more than a reiteration of this general point.
Northwest's initial argument was that a breach of an ethical
standard does not by itself require disqualification; an additional
showing of taint is needed. Here, Northwest appears to concede
that such a breach requires disqualification, but asserts that the
rule barring representation in substantially related matters is not
25
violated unless the cases are so similar that there is a genuine
threat of taint. We reject this argument. The substantial
relationship test, as applied in this circuit and elsewhere, does
not have its source in disciplinary rules. To the contrary, the
test was developed at common law. Our precedents did not rely on
the Model Code or Model Rules in formulating the substantial
relationship test, but on the landmark T.C. Theatre Corp v. Warner
Bros. Pictures, Inc., 113 F. Supp. 265 (S.D.N.Y. 1953), which
predated the Model Code and of course the Model Rules. See, e.g.,
Wilson P. Abraham Construction Corp. v. Armco Steel Corp., 559 F.2d
250, 252 (5th Cir. 1977); In re Yarn Processing Patent Validity
Litigation, 530 F.2d 83, 89 (5th Cir. 1976).
The actual development of Rule 1.09's substantial relationship
provision is the just the opposite of the version Northwest gives.
The initial drafts of both the ABA and Texas Rules did not include
a rule barring representation in substantially related matters. In
both cases, the substantial relationship rule was added as a
reflection of case law. See Robert P. Schuwerk & John F. Sutton,
Jr., A Guide to the Texas Disciplinary Rules of Professional
Conduct, 27A Hous. L. Rev. 1, 152 n.20, 153 n.34 (1990); Note, In
Defense of the Double Standard in the Rules of Ethics: A Critical
Reevaluation of the Chinese Wall and Vicarious Disqualification, 20
U. Mich. J.L. Ref. 245, 257 & n.66 (1986) (ABA Rules). Schuwerk &
Sutton's account is instructive:
[T]he Texas committee originally avoided [the substantial
related matter language] in proposed Texas Rule 1.09 . .
. . Subsequently, however, a difficulty emerged as a
result of failure to employ the substantial relationship
26
test in a disciplinary context. A lawyer might accept or
continue employment in a matter against a former client
believing (correctly) that no disciplinary violation was
involved under the initially proposed version of Rule
1.09, only to be disqualified subsequently--perhaps at
great cost and expenses to the client--by a court
employing the traditional substantial relationship test
. . . . The drafting committee, therefore, concluded
that the danger of having its narrowly drawn Rule 1.09
turn into a trap for the unwary outweighed its objections
to the substantial relationship test as a standard of
discipline. It would be in keeping with the committee's
thinking, however, to construe "substantially related"
narrowly for disciplinary purposes.
Schuwerk & Sutton, supra, at 153 n.34 (emphasis added); see also
Rule 1.09 Comment 9.
As this account suggests, the difficulty posed by Rule 1.09
does not concern the "literal and mechanical" application of a
disciplinary rule in disqualification cases. Rather, the concern
is the transfer of the substantial relationship test developed by
courts to the disciplinary context. See also Charles W. Wolfram,
Modern Legal Ethics 366 (1986) (discussing ABA Rules' "adoption of
the substantial relationship standard as a disciplinary rule").
Contrary to Northwest's contentions, the Rules did not supplant,
but adopted, the common law substantial relationship test. The
argument thus provides no basis for applying the substantial
relationship test through the "taint" filter it proposes.
Northwest's argument concerning the Rules' deletion of Canon
9's appearance of impropriety standard has more purchase.
Northwest argues that the Model Rules' omission of the "appearance
of impropriety" standard contained in the Model Code indicates that
the substantial relationship test should be solely concerned with
ensuring "actual fairness" in the proceedings. But Northwest does
27
not mention loyalty, itself a substantial addition under the Rules.
As several commentators have noted, the Model Code provided no
express protection to the former client's interest in loyalty.
See, e.g., Geoffrey C. Hazard & W. William Hodes, The Law of
Lawyering 292 (1991); Wolfram, supra, at 363 (1986). This interest
is singled out only under the Rules. See Texas Rule 1.06 Comment
1 ("Loyalty is an essential element in the lawyer's relationship to
a client"); ABA Rule 1.9 Comment ("The second aspect of loyalty to
a client is the lawyer's obligation to decline subsequent
representations involving positions adverse to a former client
arising in substantially related matters"); Hazard & Hodes, supra,
at 292-93; Wolfram, supra, at 361; Sutton, supra, at 147; Stephen
Gillers, What We Talked About When We Talked About Ethics: A
Critical View of the Model Rules, 46 Ohio St. L.J. 243, 250-55
(1985).
The Rules' express establishment of loyalty and
confidentiality as the interests protected by the substantial
relationship test is a return to T.C. Theatre Corp. v. Warner Bros.
Pictures, Inc., 113 F. Supp. 265, 268-69 (S.D.N.Y. 1953), where the
court held that once it is established that the two representations
are substantially related,
[t]he court will assume that during the course of the
former representation confidences were disclosed to the
attorney bearing on the subject matter of the
representation. It will not inquire into their nature
and extent. Only in this manner can the lawyer's duty of
absolute fidelity be enforced and the spirit of the rule
relating to privileged communications be maintained.
Id. (emphasis added).
28
We believe the replacement of the "appearance of impropriety"
with loyalty provides no basis for altering the substantial
relationship test found in our precedents. This is because we read
our cases involving Canon 9 as protecting the same interest in
loyalty now explicitly provided for under the Rules. As the
Comment to ABA Rule 1.9 notes, "[r]epresentation adverse to a
former client was sometimes dealt with under the rubric of Canon 9
of the Model Code." This was true of this court as well as others.
The link between loyalty and the appearance of impropriety is
most evident in Brennan's Inc. v. Brennan's Restaurants, Inc., 590
F.2d 168 (5th Cir. 1979), where the court disqualified a former
counsel even though there was no chance that confidential
information might be used against the former client. We held:
The obligation of an attorney not to misuse information
acquired in the course of representation serves to
vindicate the trust and reliance that clients place in
their attorneys. A client would feel wronged if an
opponent prevailed against him with the aid of an
attorney who formerly represented the clients in the same
matter. As the court recognized in E.F. Hutton & Co. v.
Brown, 305 F. Supp. 371, 395 (S.D. Tex. 1969), this would
undermine public confidence in the legal system as a
means for adjudicating disputes.
590 F.2d at 172. As Professors Hazard and Koniak observe: "In
Brennan's, the Court recognizes two underlying concerns of the
substantial relationship test: the duty to preserve confidences
and the duty of loyalty to a former client." Geoffrey C. Hazard &
Susan P. Koniak, The Law and Ethics of Lawyering 658 (1990). See
also E.F. Hutton & Company v. Brown, 305 F. Supp. 371, 395 (S.D.
Tex. 1969) ("If courts protect only a client's disclosures to his
attorney, and fail to safeguard the attorney-client relationship
29
itself--a relationship which must be one of trust and reliance--
they can only undermine the public's confidence in the legal system
as a means for adjudicating disputes."); Duncan, 646 F.2d at 1027
("the integrity of the judicial system would be sullied if courts
tolerated such abuses by those who profess and owe undivided
loyalty to their clients") In re Yarn Processing Patent Validity
Litigation, 530 F.2d 83, 90 (5th Cir. 1976) (prohibition of
representation of conflicting interests rests on lawyers duties of
loyalty and confidentiality); Cf. In re Corn Derivatives Antitrust
Litigation, 748 F.2d 157, 161-62 (3d Cir. 1984); In re Agent Orange
Product Liability Litigation, 800 F.2d 14, 17-18 (2d Cir. 1986).
As these decisions suggest, the existence of a lawyer's duty
of loyalty means that the substantial relationship test is not
solely concerned with the adverse use of confidential information.
What the duty of loyalty adds to the duty of confidentiality is
clearly presented in Corrugated:
Container's complaint is that the district court failed
to explain how [the lawyer's] advice would be relevant or
substantially related to this action. The advice does
not need to be "relevant" in the evidentiary sense to be
"substantially related." It need only be akin to the
present action in a way reasonable persons would
understand as important to the issues involved.
Corrugated, 659 F.2d at 1346 (emphasis added).
We emphasize "advice" because a court solely concerned with
the possible adverse use of confidential information might not be
obliged to protect legal advice. As at least one court has noted,
"the concern of the Confidentiality Rule and the case law is the
protection of what the client tells his attorney, not what the
30
attorney tells the client." Laker Airways Ltd. v. Pan American
World Airways, 103 F.R.D. 22, 40 (D.D.C. 1984) (emphasis added).
We agree that the confidentiality rule was historically concerned
with disclosures, but we are also persuaded that the substantial
relationship test cannot be reduced to a confidentiality rule. See
Texas Rule 1.07. That is, because the substantial relationship
test is concerned with both a lawyer's duty of confidentiality and
his duty of loyalty, a lawyer who has given advice in a
substantially related matter must be disqualified, whether or not
he has gained confidences.
We agree with Northwest that the "appearance of impropriety"
has no relevance to our probe of ethical restraints. It does not
follow, however, that the focus of the substantial relationship
test now becomes the "actual fairness" of the trial. Such a shift
is premised on the view that eliminating the appearance of
impropriety reduces the substantial relationship test to a concern
for confidential information. We believe that such a reduction is
precluded by a lawyer's duty of loyalty. Because Canon 9 was
primarily interpreted by the court as a way to protect a client's
loyalty interests, we believe that our application of the
substantial relationship test under the Rules is the same as it was
under the Code.
We believe that disqualification of VE would be appropriate
even under the relaxed "actual prejudice" or "taint" standard
Northwest urges this court to adopt. As we explain below, the
relationship between the matters in which VE has represented
31
American and the instant litigation is so intimate that VE's
continued involvement does threaten to compromise the integrity of
the present trial. Our continued adherence to the substantial
relationship test rests on our belief that the ethical prohibition
against successive representation cannot be reduced to the
protection of clients' confidences, let alone protecting these
confidences only to the extent that their adverse use might "taint"
the trial, as Northwest's proposal would provide. Rather, a
lawyer's obligation of confidentiality must be seen as part of the
lawyer's primary duty of loyalty, a duty that is not exhausted by
the preservation of a former client's secrets. We believe that a
single inquiry into whether past and present representations are
substantially related provides the best means to protect these two
interests of clients.
Because it recognizes these two interests, the substantial
relationship test serves not only to ensure the fairness of
particular trials, but also to safeguard the integrity of the
attorney-client relationship. If the sole focus of the substantial
relationship test was the possible adverse use of confidences,
prior representations in which the attorney advised the client but
received no confidential information would not warrant
disqualification. Even if the subject matter of case one and case
two is identical, a former client's adversary is not inevitably
advantaged by virtue of his attorney's prior representation of the
client. And yet this court has held that the provision of legal
advice on a substantially related matter by itself requires
32
disqualification. See Corrugated, 659 F.2d at 1346-47; Brennan's,
590 F.2d at 171-72.
Disqualification rules not only preserve the purity of
particular trials but also unavoidably affect relationships among
attorneys and clients in general. This court bars attorneys from
appearing in substantially related matters not only to protect
individual parties against the adverse use of information but also
"to aid the frank exchange between attorney and client." Wilson P.
Abraham Const. Corp. v. Armco Steel Corp., 559 F.2d 250, 252 (5th
Cir. 1977); see also In re Yarn Processing Patent Validity
Litigation, 530 F.2d 83, 90 (5th Cir. 1976). A post hoc inquiry
into whether a particular attorney's involvement in a particular
suit might "taint" the case in no way provides the breadth and
"predictability of confidence [that] is central to the role of the
attorney." In re LTV Securities Litigation, 89 F.R.D. 595, 602
(N.D. Tex. 1981); cf. Upjohn Co. v. United States, 101 S. Ct. 677,
683-84 (1981) (recognizing that confidentiality is essential to
frank discussions between attorneys and clients or client's
employees). The trust a lawyer's duty of loyalty inspires in
clients encourages them freely to confide in the lawyer and freely
to rely on the advice provided by the lawyer. The substantial
relationship test aims to protect the adversary process but also,
or as part of this concern, seeks to provide conditions for the
attorney-client relationship. As such, our central concern remains
the application of the rule to the actual relationship of lawyers
and clients, but in the process we consider also what they might
33
have done. What credence, for example, might American have
attached to VE's December 1990 counsel that the airline's interests
would be better served by postponing the acquisition of Continental
for at least a year if it even suspected that VE itself might soon
be representing one of its competitors in a suit against American,
charging that it had abused its market power to the detriment of
competition in the airline passenger service markets?
These considerations preclude us from accepting Northwest's
final argument. Northwest claims that because VE relied primarily
on public, not confidential, information in advising American,
these prior matters cannot be considered substantially related to
the present case. It contends that "'[f]acts that are community
knowledge or that are not material to a determination of the issues
litigated do not constitute "matters involved" within the meaning
of the law' governing the substantial relationship test" (quoting
J.K. & Susie L. Wadley Research Inst. & Blood Bank v. Morris, 776
S.W.2d 271, 278 (Tex. App.--Dallas 1989, orig. proceeding)). The
record sharply contradicts Northwest's claim that all of the
material obtained by VE was publicly available. As we discuss
below, VE was privy to many of American's secrets. But Northwest's
argument would fail even if it could show that all of the
information provided by American was public knowledge. Our
precedents, the Texas Rules, and the ABA Rules all reject the
position Northwest advances. This court has held that
"[i]nformation [provided by a client] is sheltered from use by the
attorney against his client by virtue of the existence of the
34
attorney-client relationship. This is true without regard to
whether someone else may be privy to it." Brennan's, Inc. v.
Brennan's Restaurants, Inc., 590 F.2d 168, 172 (5th Cir. 1979).
"'This ethical precept . . . exists without regard to the nature
or source of information or the fact that others share the
knowledge.'" Id. (quoting Model Code EC 4-4); Doe v. A Corp., 709
F.2d 1043, 1046 (5th Cir. 1983) (same). See also Emle Industries,
Inc. v. Glen Raven Mills, Inc., 478 F.2d 562, 572-73 (2d Cir. 1973)
("[t]he client's privilege in confidential information disclosed to
his attorney `is not nullified by the fact that the circumstances
to be disclosed are part of a public record, or that there are
other available sources for such information'" quoting Henry S.
Drinker, Legal Ethics 135 (1953); NCK Organization Ltd. v. Bregman,
542 F.2d 128, 133 (2d Cir. 1976) (same).
The Texas and ABA Rules supply the same standard. The Rules
do contain an exception for public information, but in each case
this exception applies only to the provision prohibiting the use of
confidential information, not the rule prohibiting successive
representation in substantially related matters. Texas Rule 1.05
provides that "a lawyer shall not knowingly
(3) [u]se confidential information of a former client to
the disadvantage of the former client after the
representation is concluded unless the former client
consents after consultation or the confidential
information has become generally known."
Texas Rule 1.05 (b) (3) (emphasis added). This provision, however,
is incorporated by Rule 1.09(a) (2), not the substantial
relationship rule contained in Rule 1.09 (a) (3). The same
35
distinction exists between Rules 1.9 (a) and 1.9(c) of the ABA
Rules, as commentators have indicated. See, e.g., Charles W.
Wolfram, Modern Legal Ethics 360, 365 (1986).
We believe that our application of the substantial
relationship test under the Rules is the same as it was under the
Code. Thus, as in our past cases, our inquiry is limited to the
single question of whether VE's prior representations of American
are substantially related to the present case.
B.
VE represented American in several matters in recent years,
earning fees in excess of $676,000. Our review will be limited to
three of VE's prior representations. VE defended American in two
suits brought by Continental in Texas. The focus of each case, as
in the larger California litigation to which they were related, was
SABRE, American's computerized reservation system. The first case,
System One Direct Access, Inc v. American Airlines Inc., was an
antitrust suit brought by a Continental affiliate in Houston
federal court. VE served as counsel from November 1987 until
withdrawing in July 1988 when the case was transferred to Dallas.
VE also served as lead counsel in Continental Airlines, Inc.
v. American Airlines, Inc., a Texas state court case. Continental
alleged that American had breached contractual relationships and
committed other acts of misconduct in operating its CRS. VE
represented American from March 1989 until the case was settled as
part of the global settlement between Continental and American in
May 1990.
36
In late 1990, VE advised American concerning whether the
Antitrust Division of the Department of Justice would approve
"Project Armadillo," a proposed acquisition of Continental
Airlines. The primary question was whether a merger of the two
airlines would run afoul of the Department's merger guidelines.
The representation ended in January 1991, when American apparently
chose not to pursue the merger.
The two Texas cases were related and subsidiary to a larger
suit by Continental and Northwest, among others, against American
and United Airlines in California federal district court in 1985.
Continental and Northwest charged American and United with
monopolization of both computerized reservation systems and various
air transportation markets.3 In particular, they charged predatory
pricing of CRS systems and air transportation, closely related to
the claim advanced by Northwest and Continental here.
American asserts, and Northwest appears to concede, that the
California case is substantially related to the present case.
However, Gibson, Dunn & Crutcher, not VE, represented American in
California, so the similarities between the California case and the
present one are no basis for disqualification. American's argument
that VE's prior representations are substantially related to this
case rests largely then upon its claim that the Texas cases are
substantially related to the California case.
3
See In re Air Passenger Computer Reservations Systems
Antitrust Litigation, 694 F. Supp. 1443 (C.D. Cal. 1988); aff'd
Alaska Airlines, Inc. v. United Airlines, Inc., 948 F.2d 536 (9th
Cir. 1991), cert. denied, 112 S. Ct. 1603 (1992).
37
Northwest argues that the Texas cases are not substantially
related to this case because the allegations in these cases, unlike
in California, pertained only to CRS services, not air
transportation services. We disagree. While the focus was
certainly CRS systems, the plaintiffs also raised claims involving
air transportation markets. Moreover, as we will explain, the
Texas cases involved two particular matters at issue in the present
case.
(1) Fort Bend
Fort Bend involved the state-law claims over which the
California district court, upon American's motion to dismiss, had
declined to exercise pendent jurisdiction. Continental alleged
breach of contract, duress, tortious interference,
misrepresentation, and violation of the Texas Deceptive Trade
Practices Act. As in California, Continental's petition focused on
American's CRS operations. But also as in California, Continental
asserted that American's power in the CRS market could not be
considered apart from its position in the air transportation
market. Continental claimed that "American and United, by
leveraging their dominance as air carriers and the enormous secret
profits they received from bias-diverted revenues, established
themselves as the dominant CRS providers." Continental charged
that American, having achieved dominance in the CRS market, in turn
used SABRE to "exclude[] Continental in whole or in part from
specific airline passenger markets."
38
Continental's claims were stated in a similar manner.
Continental claimed that American had breached its contract by
"secretly accessing TXI's [a Continental affiliate] data base and
using it to study passenger traffic flow through the Dallas/Fort
Worth hub. Reports developed by American through the use of the
TXI data contributed to American's successful exclusion of TXI from
the Dallas/Fort Worth hub and elsewhere." In its tortious
interference claim Continental alleged that American had
"interfered with Continental's prospective contractual relations
with its travel agents and air passengers," causing damages in the
form of "lost airline bookings through bias diversions and total
exclusion from certain air passenger markets." Finally,
Continental noted that the California district court had cited
American President Robert Crandall's alleged 1982 price-fixing
solicitation of Braniff as "a textbook example of anticompetitive
conduct" in ruling that "Continental could proceed to trial on its
claim that American illegally attempted to monopolize the Dallas-
Fort Worth airport."
Continental's allegations and its reference to Crandall's
alleged price-fixing solicitation apparently supplied the basis for
the belief among VE and Gibson, Dunn lawyers that American's
alleged attempted monopolization of DFW would be at issue in the
case and that Continental might seek to introduce the price-fixing
incident as evidence on this score. As such, they believed that
Fort Bend was intimately related to the California case. For
example, a VE partner stated at the time that the California and
39
Fort Bend suits "involve the same parties, the same alleged acts,
and the same alleged damages." Another VE lawyer noted that the
two suits could be seen as "largely identical": "[The Fort Bend
petition] asserts that AA and UA used their purported CRS
monopolies to obtain monopoly power in certain air transportation
markets. This claim is intertwined with both the CRS
monopolization and DFW attempted monopolization claims pending in
California." The perceived similarities between Fort Bend and the
California case led VE and Gibson, Dunn to spend considerable time
exploring the possibility of an abatement of the Fort Bend case
until the California proceedings had concluded.
VE argues that Crandall's alleged price-fixing solicitation
and Continental's claim that American had used its CRS to exclude
it from the DFW market were not at issue in Fort Bend. This
contention is contradicted by the accounts of Gibson, Dunn lawyers
and by notes taken by a VE lawyer during one meeting between VE and
Gibson, Dunn. While it is difficult to reconstruct a conversation
from this distance, we are struck by the first two comments on the
first page of notes: 1) "There is no admissible evidence of the
Crandall telephone conversation on Braniff; may use it on a
consequential damages theory that Continental excluded from DFW
market." 2) "We should argue that the exclusion claim is being
litigated in California and should not be litigated in Texas."
Given the allegations in the complaint, the statements of VE's
lawyers at the time, and this evidence it is difficult to maintain
that these matters were not at issue in Fort Bend.
40
The charges of monopolization of DFW and Crandall's alleged
solicitation are prominently featured in Northwest's current
complaint. Northwest alleges that American has monopolized or
attempted to monopolize five different air transportation markets.
Dallas-Fort Worth is included as an "illustrative example" in three
of the five markets cited by Northwest: origin and destination
city pair markets, O & D airport-airport pair markets, and O & D-
based hub markets. It cannot be denied that one focus of the case
will be American's DFW operations, the very market at issue in Fort
Bend.
Similarly, Northwest contends in its complaint that "AA and
its current chief executive officer have previously engaged in
anticompetitive conduct with open contempt for the antitrust laws."
Northwest prominently cites Crandall's alleged price-fixing
solicitation, the same allegation that VE lawyers were charged with
excluding in the Fort Bend case. VE suggested at oral argument
that Crandall's alleged solicitation is not substantially related
to the present case because this ten-year old incident would not be
admitted as evidence. This is helpful but not dispositive. As the
Corrugated court stated, the subject matter "does not need to be
'relevant' in the evidentiary sense to be 'substantially related.'
It need only be akin to the present action in a way reasonable
persons would understand as important to the issues involved."
Corrugated, 659 F.2d at 1346. Northwest included the incident
under the heading "Conduct Giving Rise to Violations Alleged" in
its complaint. This is not easily explained away, especially given
41
Northwest's heavy reliance on the location of the Crandall
allegation in the Fort Bend petition's "procedural history" in
attempting to prove that the incident was not at issue in that
case.
We are persuaded that VE's representation of American in the
Fort Bend case is substantially related to the present case.
2) System One
In System One, Continental affiliate System One, a CRS vendor,
charged that American had violated antitrust laws in its provision
of CRS services. System One alleged that American had engaged in
a variety of acts designed to exclude it from the CRS market. But
as in Fort Bend, plaintiff presented the CRS and air transportation
markets as inextricably linked. The System One complaint alleged
that "AA has used its monopoly power in the provision of air
carrier services in various geographic markets to obtain, retain,
and enhance its power in the provision of CRS systems." Again, "AA
has achieved its dominant position in the market for CRS services,
and continues to enforce anticompetitive practices in an effort to
maintain that position, not only to reap monopoly profits from the
sale and use of CRS systems, but to enhance profits from the
provision of air transportation services."
The record reflects extensive discovery regarding SABRE's
effects on air transportation revenues. System One requested all
documents relating to the "incremental revenues," the general
effect of "airline ownership of a CRS on the airline's sale of air
transportation services," and "any actual or possible loss of
42
revenue or other detriment to any commercial air carrier as a
result of the operation or installation of SABRE." In response,
American agreed to produce all documents "that discuss, study, or
analyze whether, and the extent to which, any airline (including
American) which owns a CRS obtains incremental airline revenue as
a consequence of automating travel agencies with its CRS" as well
as "documents discussing whether American has a 'premium share' of
the traffic in a particular region or market and whether this is
attributable to the presence of SABRE in that region or market."
In the absence of this prior litigation, there is little doubt
that Northwest would seek to introduce evidence of the incremental
revenues generated by SABRE in support of the predatory pricing
claims it raises in this case. Northwest's General Counsel
recently asserted in congressional testimony that American's
ability
to restructure and reduce its fares dramatically is
directly related to American's long-term, advantageous
use of its CRS . . . . DOT studies repeatedly have
documented the flow of hundreds of millions of dollars of
incremental revenue diverted from other carriers to
American and United as a result of their CRS market power
. . . [I]n a very real sense, American has launched its
predatory attack on the industry using our own money.
It is the case that challenges by Northwest and Continental of
American's CRS use have been earlier terminated in ways restricting
their present assertion, Continental by settlement and Northwest by
a final judgment. Pointing to these outcomes, VE states that it
will not, because it cannot, raise any issues relating to CRS in
this case. Any attempts to redress perceived CRS abuses by
American will be confined, as the congressional testimony suggests,
43
to the legislature. Since American's CRS operation will not be at
issue, VE contends that its representation of American on this
matter cannot be substantially related to this case. Northwest in
particular claims that the issues of incremental revenue and costs
addressed in System One relate to CRS use and are quite different
from the general airline revenue and cost issues at the center of
this case.
We recognize that several possible claims relating to CRS
might be barred by res judicata and we do not question Northwest's
representations in this court and below that the present litigation
will involve no attacks on American's CRS use. We are not
persuaded, however, by Northwest's argument that a party's
representation that matters in which a lawyer represented a former
client cannot, or will not, be introduced in the present case
precludes a court from finding these matters substantially related
to the prior representations. The exact scope of categories such
as "CRS matters," especially at the early stage of the litigation
when motions to disqualify are often considered, is unclear, and
leaves much room for good faith dispute among the parties. The
party who either lost in the previous case or represented to the
court that certain matters will not be raised will attempt to
define the sphere of these issues narrowly, while the party who
prevailed in the earlier case or filed an unsuccessful
disqualification motion will naturally attempt to define the
precluded matters quite broadly. In the particular case of res
judicata, it places the former counsel in the position of
44
attempting to minimize the beneficial results of her prior
representations by limiting their effect in the present case.
The facts of this case disclose how such a dispute might
arise. Northwest claims that System One involved the particular
matter of incremental revenues obtained by American through
ownership of a CRS. Northwest states that the focus in this case
will be on wholly different matters such as American's marketing
strategy, ticket pricing, and general airline costs and revenues.
The line between incremental revenues and general revenues,
however, does not appear as distinct as VE suggests. Moreover,
American hotly disputes VE's contention that discovery in System
One was limited to the narrow issue of incremental revenues. To
the contrary, American asserts that the VE lawyers reviewed and
discussed documents relating to marketing strategy and general air
transportation revenues and costs, the very matters Northwest
identifies as the heart of the instant case.
There is another matter involved in System One that Northwest
has indicated will be at issue in this case. Northwest must focus
at trial upon barriers to entry into the relevant markets. In its
complaint, Northwest lists among these barriers "the role of travel
agents in the industry and incentive commissions paid by airlines
to travel agents and other marketing programs and devices."
Incentive or override commissions in particular were at the center
of the System One case.
System One charged that American used override commissions as
a means to exclude it from the CRS market: "AA conditioned the
45
payment to travel agents of commissions on AA ticket sales on their
agreement to use the SABRE system." As System One explained, this
arrangement worked especially well in those areas where American
was the dominant air carrier. In connection with this claim,
American agreed to produce and searched for "[d]ocuments that
describe or discuss American's policies and procedures regarding
participation by travel agencies in any override, special incentive
or 'soft dollar' commission program offered by American." American
asserts, and Northwest does not appear to contest, that VE lawyers
reviewed much of this material. A VE lawyer and several VE
paralegals spent more than ten weeks reviewing documents at
American's offices. Gibson, Dunn lawyers who were involved claim
that a VE lawyer personally reviewed documents relating to
marketing strategy and air transportation issues. The materials
submitted with the Gibson, Dunn affidavits provide additional
support for these claims. VE's description of its work on the case
does little to contradict these accounts. Its response is limited
to a statement by the lawyer that he has no specific recollection
of documents reviewed and that he does not believe, "given the
nature of the case," that he "reviewed any documents relating to
American's pricing of airline transportation."
Northwest contends that the presence of the issue of override
commissions in System One and the instant case does not make the
two representations substantially related. Northwest argues that
the two cases are not related because in System One the commissions
were alleged to be a barrier to entry into the CRS market, while
46
here they represent a barrier to entry into the air transportation
market. Regardless of the direction of the block the trial must
focus on the exclusionary force of CRS--its power to exclude
competition in CRS is the handmaiden of its exclusionary force on
airline passenger service.
We therefore find Northwest's purported distinction
unavailing. Corrugated and Duncan provide that two representations
need only involve the same "subject matter" in order to be
substantially related. See Corrugated, supra; Duncan, supra. As
the summary of the document request quoted above discloses, VE
lawyers reviewed documents relating to travel agency commissions in
general, not simply those documents referring to the alleged
practice of tying such commissions to CRS use. A substantial
relationship exists when the prior representation concerns "the
particular practices and procedures which are the subject matter of
[Northwest's] suit. Duncan, 646 F.2d at 1032. Both System One and
the present case involve American's travel agency commission
"practices and procedures." Given that the two cases sharing this
"subject matter" allege similar antitrust violations, we find VE's
representation of American in System One substantially related to
its present representation of Northwest.
3) Project Armadillo
VE represented American most recently in "Project Armadillo,"
an American proposal to acquire Continental. VE provided American
with antitrust analysis of the proposal, focusing on whether a
merger of the two airlines could avoid challenge under the
47
Department of Justice antitrust merger guidelines. VE's
representation began in late November 1990 and concluded in early
January 1991, when American chose not to pursue the acquisition.
As a memorandum prepared by American explained, the Department
of Justice merger guidelines' main concern is "whether the merger
will likely create, enhance or facilitate the exercise of market
power--the ability to raise prices to supracompetitive levels--by
the remaining participants in the relevant market." Market power
is more easily inferred under narrowly defined markets, and it was
therefore in American's interest to avoid "[a] market definition
that is improperly narrow," for this would "result in such a high
level of concentration that, inevitably, a court will conclude the
merger poses an incipient threat to competition."
These same issues are at the heart of the present case.
Northwest alleges that American has monopolized or attempted to
monopolize the national air transportation market as well as four
smaller geographic markets involving city pairs and regions.
Because American enjoys a greater share of particular regional
markets, Northwest will no doubt attempt to prove at trial that
these smaller markets are relevant. To this end, Northwest cites
four instances where American has allegedly indicated that O & D
and regional passenger markets are relevant markets.
VE asserts that its "narrow, limited, and brief" role in
Project Armadillo cannot serve as the basis for disqualification in
the present case. Northwest contends that some VE lawyers alleged
by American to have worked on Project Armadillo were not in fact
48
involved. A VE memorandum summarizing the initial meeting between
American and VE lawyers, however, includes a notation directing
that a copy of the memo be sent to these same lawyers whose
involvement in the matter VE denies. Similarly, VE attempts to
minimize the significance of the materials it received from
American by suggesting that the materials were not even read by
certain VE lawyers involved in the representation. The billing
statements submitted by VE to American, however, disclose that each
of the VE lawyers in question devoted time to "review[ing]
materials furnished by [the] client."
We have no reason to suggest that VE's misstatements are other
than oversights, and, because they pertain only to the degree of
its involvement in Project Armadillo, are secondary to the main
question of the subject matter of VE's representation. Northwest
contends that VE's representation of American does not warrant
disqualification for two related reasons. Northwest asserts that
VE was charged with a single "narrow, straightforward question" to
which the answer was "obvious": Would the Justice Department
oppose a complete merger of Continental and American on antitrust
grounds? Northwest claims that the problem posed to VE required
little detailed analysis and that all the information needed by VE
to reach its conclusion "was and is publicly available." Because
VE required no confidential information to determine that the
merger would not be approved by the Justice Department, Northwest
contends that VE's representation provides no basis for
disqualification.
49
The record sharply contradicts Northwest's claim that all of
the material supplied by American to VE was publicly available. But
Northwest's argument would fail even if it could show that all of
the information provided by American was a matter of public
knowledge. As we explained above, the substantial relationship
test, as set out in our precedents and the Rules, contains no
exception for prior representations in which an attorney's advice
was based on public information. Accordingly, the question is not
whether VE's representation of American in Project Armadillo
involved matters of public knowledge but whether the subject matter
of the prior representation is substantially related to the present
case.
American argues that the primary issue in Project Armadillo,
as in this case, was market definition. Not only did VE represent
American on this same issue, but VE was also in a position to
obtain information regarding American's views on the proper measure
of markets, views which Northwest's complaint suggests are relevant
to the present case. Northwest recognizes that market definition
will be crucial in this case, but argues that VE's treatment of
this issue in Project Armadillo was superficial and limited. While
conceding that "[m]ore difficult questions could have been raised
had American been interested in a partial acquisition," Northwest
contends that the "only issue with which American was concerned was
whether it would be challenged if it attempted to acquire all of
Continental's operations." According to Northwest, "[t]he answer
to American's question was obvious . . . Anyone familiar with
50
American's hub operations in Dallas and Continental's Houston hub
operations would realize that American and Continental are major
competitors in this region and that their combination would be
subject to challenge."
The record demonstrates, however, that the subject matter was
far more complex, and VE's analysis far more extensive, than
Northwest's account suggests. A VE partner's notes from the first
meeting between VE and American indicate that American was
interested in a partial acquisition from the very start: "AA would
be interested in the entire company but there are certain
operations that are particularly important . . . They would be
willing to divest some operations." VE's investigation could not
have "rested largely" on Continental's strong Houston presence, for
when this question was brought up in the first meeting, VE noted
that "AA could sell the Houston hub." Thus, sometime after the
meeting a VE partner sent a memo to American explaining that he had
"spoke[n] at some length" with American's economist and asked that
the market share data be rerun on the assumption that American
would not acquire Continental's Houston hub. While Northwest now
asserts that VE's advice was based largely on the Houston hub, a VE
partner at the time stated in yet another memo that even when
Houston is removed from consideration, "substantial problems are
created by Continental's other hubs--particularly New York City,
Chicago, Cleveland, and Denver," as well as by the "substantial
overlaps between Continental and American on flights to Mexico."
Northwest's contention that Project Armadillo involved the single
51
question of a complete merger and required study of only a few
markets is simply belied by the record.
Similarly, it does not appear that market definition and the
Justice Department's opposition to the merger were as "obvious" as
Northwest now asserts. Northwest argues that market definition
cannot be a common issue between this matter and the present case
because unlike in the present case, where market definition will be
hotly disputed, the Department of Justice merger guidelines left
little room for discussion. A VE lawyer's notes from the first
Project Armadillo meeting, however, disclose a different picture:
[American is] reluctant to take positions in connection
with a Continental merger that might be inconsistent with
the positions they are taking elsewhere. This issue came
up in connection with the discussions of markets.
Apparently they have developed a variety of different
views about what are relevant markets. (It appears to me
that maybe their argument is there are no relevant
markets). Evidently the material that they will be
sending us discusses relevant markets, discusses the
"city pair" analysis and competition among hubs. . . .
Apparently they have taken the position that hubs are not
markets . . . .
In addition, Northwest contends that the Department of Justice's
merger guidelines made the answer obvious. This is not the
position that VE took during the representation, however. Upon
receiving a memo prepared by American setting out the difficulties
to merger under the city-pair analysis, a VE partner responded that
the memo was "only the beginning of the analysis in my view." The
VE lawyer then went on to suggest that American might be able to
acquire Continental even though the merger might "violate" the
guidelines.
52
We are forced to the conclusion that the question of market
definition in Project Armadillo was more complex than Northwest now
asserts. VE's representation of American necessarily required a
detailed evaluation of American's operations in the various markets
that might be deemed relevant. The instant case will involve
similar issues.
VE was also privy to American's views of the relevant air
transportation markets, a related matter that will also be at issue
in the present case. American provided VE with materials
reflecting AA's position on antitrust issues in prior
merger/acquisition cases. Included in these materials were
confidential "white papers" filed by American with the Justice
Department.
In support of its claim that markets other than the national
market are relevant in the present case, Northwest's complaint
asserts that American "has repeatedly urged that O & D markets and
regional airline passenger markets are relevant economic markets."
Three of the examples cited by Northwest in support of this
allegation appear to be taken from public testimony. The fourth is
different: "AA argued to the Department of Justice in 1989 that
city pair markets to and from O'Hare Airport constitute relevant
markets." Northwest does not deny that this statement is contained
in the materials obtained by VE from American during Project
Armadillo. Nor does Northwest claim that this statement is a
matter of public knowledge. Rather, Northwest states that it
simply copied Continental's complaint in drafting its own. Since
53
Northwest's complaint did not involve any independent research by
VE, the argument seems to run, the allegation cannot possibly be
based on confidential information supplied by American. We would
first point out that Northwest's explanation remains plausible only
so long as the complaint remains the sole document involved in the
case. Northwest will eventually have to address the issues,
including American's alleged views on the relevant market, on its
own. More importantly, the answer given by Northwest is precisely
one the substantial relationship test forbids. Once a substantial
relationship has been established, former counsel is precluded from
attempting to prove that he did not receive confidences. See,
e.g., Corrugated, 659 F.2d at 1347. Northwest's response here--
that VE might have obtained the information, but did not use it--is
plainly barred by our precedents.
We appreciate Northwest's concern that an overly broad reading
of "subject matter" can leave antitrust counselors with one client
per industry--a result with little redemptive value. The nexus
here is far more than case one and case two both presenting claims
of attempted monopolization. Northwest contends that cases like
Laker Airways Ltd. v. Pan American World Airways, 103 F.R.D. 22
(D.D.C 1984), preclude us from disqualifying VE. But American's
showing in this case goes far beyond the same field, same party
"points of contact" found insufficient in that case. See id. at
40. Rather, American has succeeded in "delineat[ing] with
specificity the subject matters, issues and causes of action"
54
common to prior and present representations in the manner demanded
by our precedents. Duncan, 646 F.2d at 1029.
VI.
We hold that VE's prior representations of American in
substantially related matters require the disqualification of VE in
this case. We therefore issue a writ of mandamus directing the
district court to vacate its order denying American's motion and
enter an order disqualifying VE from representing Northwest.
55