DENNIS WORLEY, STERLING KOONCE, FLYING A LIMITED PARTNERSHIP L.P., JOSEPH W. FORBES JR., KENNETH CLARK, JAMES BOGGESS, JOEL WEBB, JAIMIE LIVINGSTON, JAMES E. BENNETT JR., DAVID MINER, RONALD ENGLISH, and MDF, LLC
ROY J. MOORE, PIERCE J. ROBERTS, DAVID BROWN, MICHAEL ADAMS, CHRISTOPHER BAKER, JAMES KERR, FRANK McCAMANT, NEIL KELLEN, GINI COYLE, JOSEPH MOWERY, TOSHIBA CORPORATION, ALAMO ACQUISITION CORP., and STEPHENS, INC.
in the Supreme Court on 29 August 2017.
pursuant to N.C. G.S. § 7A-27(a)(3) from an order dated
13 May 2016 by Judge Gregory P. McGuire, Special Superior
Court Judge for Complex Business Cases appointed by the Chief
Justice under N.C. G.S. § 7A-45.4, in Superior Court,
Pruet, PLLC, by R. Daniel Boyce and David S. Pokela; and
Ganzfried Law, by Jerrold J. Ganzfried, pro hac vice, for
Kilpatrick Townsend & Stockton LLP, by Adam H. Charnes
and John M. Moye, for defendant-appellants.
case we consider whether the trial court properly
disqualified defendants' counsel under North Carolina
Rule of Professional Conduct 1.9(a). This rule balances an
attorney's ethical duties of confidentiality and loyalty
to a former client with a party's right to its chosen
counsel. The rule permits disqualification of an attorney
from representing a new client if there is a substantial risk
that the attorney could use confidential information shared
by the client in the former matter against that same client
in the current matter. This analysis requires the trial court
to determine whether confidential information that would
normally have been shared in the former matter is also
material to the current matter. To do so, the trial court
must objectively assess the scope of the representation and
whether the matters are substantially related. Rather than
applying an objective test, here the trial court disqualified
defendants' counsel based on the former client's
subjective perception of the past representation as well as
the now replaced "appearance of impropriety" test.
As a result, we reverse the trial court's decision and
remand this matter to that court for application of the
appropriate legal standard.
factual background leading to the instant litigation involves
three other disputes, all relating to plaintiff Joseph W.
Forbes's former employer Consert, Inc. (Consert): a
patent dispute between Forbes and Consert (the patent
dispute), Forbes's 220 shareholder inspection rights
action against Consert (the 220 action), and a contract
dispute between Itron, Inc. (Itron) and Consert (the
Forbes is one of thirteen named plaintiffs in the present
action, all former shareholders of Consert. Beginning in
2008, Forbes was a shareholder and member of the Board of
Directors of Consert and served as Chief Operating Officer.
In the fall of 2011, Forbes was removed as an officer and
director but remained a significant shareholder. Soon after
his removal, Forbes and Consert disagreed about Forbes's
unpaid compensation and ownership of certain patents (the
patent dispute), but the dispute never resulted in direct
litigation even though Forbes was represented by counsel.
in 2012, Toshiba, a technology company, expressed interest in
purchasing Consert. Concerned about the proposed sale, Forbes
sued Consert in December 2012 under Section 220 of the
Delaware General Corporation statutes (the 220 action),
asserting his shareholder rights and requesting certain
corporate records regarding the sale. In the 220 action,
Forbes referenced, inter alia, the ongoing patent
dispute in his allegations concerning Consert's
same time, Consert was also defending a lawsuit filed by
Itron, a licensee and successor in interest to a development
agreement with Consert, over certain payment terms under that
agreement (the Itron litigation). Based on
Forbes's allegations in the 220 action, Itron amended its
complaint to include claims based on Consert's failure to
disclose the ongoing patent dispute with Forbes.
the Itron litigation, Toshiba acquired Consert on 5
February 2013 as a wholly owned subsidiary. Following the
Consert-Toshiba merger, Consert engaged Kilpatrick Townsend
& Stockton LLP (Kilpatrick) to represent it in the
Itron litigation. Itron sought to depose Forbes
regarding the Consert-Toshiba merger, the 220 action, and
primarily the patent dispute with Consert. By mid-February
2013, Forbes and Consert settled the 220 action, and by May
2013, Forbes and Consert resolved the patent dispute, leaving
only the Itron litigation unresolved.
October 2013, counsel from Winston & Strawn, LLP, who
represented Forbes at the time, communicated with Joe Bush of
Kilpatrick (Bush),  counsel to Consert, about Forbes's
deposition. Bush disclosed to Forbes's counsel that, in
addition to his primary representation of Consert, he also
represented former employees and shareholders of Consert in
the Itron litigation. Bush later offered limited
representation to Forbes at Consert's expense as long as
Forbes agreed to the proposed engagement terms. Forbes
eventually agreed that Bush would represent him in the
Itron litigation regarding his role as a former
Officer and Director of Consert.
January 2014, Forbes signed an engagement letter that
outlined the terms of Bush's limited representation of
Forbes (the engagement letter), which began by stating,
"As you are aware, this firm is outside litigation
counsel to [Consert] in connection with the [Itron
litigation]." The engagement letter then explained that
the representation of Forbes would "be limited to legal
services associated with discovery efforts (such as
depositions, witness statements, factual development, and
document analysis), [Forbes's] potential testimony at
trial, and specifically in connection with [Forbes's]
former role as Chief Operating Officer of Consert."
Forbes agreed that he would be "willing to permit
Kilpatrick Townsend to disclose to Consert, to any related
entities, and to the employees of these entities, any of the
information it learns in its communications with [him] if, in
[counsel's] discretion, it becomes necessary or
appropriate to the defense of this lawsuit." Forbes also
agreed that he would "not object to Kilpatrick Townsend
continuing to represent Consert and its related entities in
this lawsuit" should a conflict of interest arise.
Winston & Strawn negotiated the terms of the limited
representation on behalf of Forbes.
counsel from Winston & Strawn initially prepared him for
his deposition and communicated with Forbes via
teleconference two to three times for approximately an hour
on each occasion. In final preparation, Forbes met with Bush
once for approximately two to three hours the night before
the deposition. Forbes's privately retained counsel from
Winston & Strawn attended approximately an hour of that
the deposition the next day, Itron's counsel asked Forbes
about his relationship with Consert, the 220 action, the
Consert-Toshiba merger, and primarily the patent dispute.
Twice during the deposition, Forbes requested a break and
spoke with his privately retained counsel from Winston &
Strawn, even though Bush was present at the deposition. When
asked about the Consert-Toshiba merger, Forbes stated,
"I have not read the agreement of the merger between
[Toshiba] and ...