Should Other Verein-Structured MegaFirms Worry after Dentons’ ITC Disqualification?

In May a U.S. International Trade Commission judge granted an order to disqualify Dentons U.S. LLP from representing the Ohio-based company RevoLaze against Gap in a patent suit. The case at issue began last August when Dentons partner Mark Hogge for RevoLaze filed a complaint with the U.S. International Trade Commission (“ITC”) accusing The Gap, Inc., along with Abercrombie & Fitch Co., Eddie Bauer LLC, Levi Strauss & Co. and nine other companies of importing products using that infringed RevoLaze’s patent. Specifically, the complaint alleged the accused products were made using patented “laser abraded denim having a worn or patterned appearance.” The case is In the Matter of Certain Abraded Denim Garments, Inv. No. 337-TA-930, before the ITC.

In response to being sued in federal court and investigated by the ITC, Gap filed a motion to disqualify Dentons, arguing that Gap had been a longtime client of Dentons Canada.

The disqualification motion ultimately turned on the structure of Dentons as a global law firm. Dentons has adopted a Swiss verein structure with over 6,600 lawyers worldwide, making it the world’s largest law firm by number of lawyers. A verein-organized law firm is a combination of law firms that share marketing and branding, but keep their profits and finances separate from one another. This structure has been used in several mergers of large multinational firms, and is currently employed by other firms today such as Baker & McKenzie, Norton Rose Fulbright, and Squire Patton Boggs.

In its motion to disqualify, Gap argued that Dentons had an ethical conflict and access to Gap’s confidential information through the firm’s verein portal.  Gap alleged that this portal would allow Dentons U.S. access to information relevant to the ongoing ITC case and prejudice Gap’s ability to defend against RevoLaze’s claims and negotiate a settlement. Additionally, Gap argued that Dentons did not inform Gap of this conflict or seek its waiver as required to continue its representation of RevoLaze.

Dentons opposed Gap’s motions to disqualify, arguing that the U.S. and Canada branches were independent of one another because of its verein structure. It explained that the two branches cannot access each other’s files, do not share confidential information, and are financially independent of one another. Dentons continued that Gap’s retainer agreement with Dentons Canada contained a provision waiving future conflicts. Lastly, Dentons argued that RevoLaze would be highly prejudiced if it was deprived of counsel in the midst of an ITC investigation.

Chief Administrative Law Judge Charles Bullock sided with Gap and granted its motion to disqualify Dentons. He began by concluding Dentons’ global verein structure fit within the ABA Model Rule’s 1.0(c) definition of law firm as either an “other association authorized to practice law,” or as an association made up of lawyers “employed in a legal services organization or the legal department of a corporation or other organization.” Because Dentons fit the definition, Judge Bullock continued that the Model Rules regarding conflicts with current clients and imputed conflicts among members of a law firm applied. Thus, Dentons Canada’s conflict with Gap was imputed to Dentons U.S. according to ABA Model Rules 1.10 and 1.7.

Judge Bullock then considered whether Dentons’ ethical violation tainted the investigation to require its disqualification. Finding Gap to be a current client, Judge Bullock concluded that Dentons owed Gap the duty of loyalty and criticized Dentons for “stand[ing] to benefit both in terms of legal fees and a share in certain proceeds by representing other clients who are seeking to bar Gap’s imports into the U.S.” Additionally, Judge Bullock found any prejudice to RevoLaze for having its counsel disqualified to be mitigated because Dentons had disclosed the ethical conflict to RevoLaze, who nevertheless conceded to Gap being named as a respondent.

This decision raises alarming issues for the other verein structured law firms. Judge Bullock concluded his opinion by explaining,

“Dentons holds itself out to the public as a unified global law firm in order to attract business, and Dentons’ continued representation in the face of a direct conflict would both contradict this public image and negatively impact the law profession as a whole.”

The fact that Judge Bullock relied on the marketing perception rather than the independently run legal entities of the various Dentons branches may give other verein structured law firms pause in how they continue their operations. As Dentons recently issued a statement that it has an “acute” interest in undoing this disqualification order, we can expect to see more of this issue in the near future.