The opinion of the court was delivered by: LIFLAND
Defendants Hartford Accident and Indemnity Co., Twin City Fire Insurance Co., Century Indemnity Co., Westport Insurance Co., Lexington Insurance Co. and Northbrook Insurance Co. (hereinafter collectively the "defendants") appeal from the Magistrate Judge's Order of May 23, 1997 granting plaintiff's motion for disqualification of all defense counsel. The instant appeal requires the Court to consider the propriety of disqualifying all counsel for all members of a joint defense consortium where a firm representing one member has previously represented a now-adverse party in a substantially related matter. For the reasons set forth herein, the Magistrate Judge's disqualification order will be reversed and the matter remanded for further proceedings.
On August 3, 1993, plaintiffs Essex Chemical Corp. and Essex Specialty Products, Inc. (hereinafter "Essex" or the "plaintiff") commenced this litigation seeking a declaration of insurance coverage with respect to certain environmental claims arising from contamination at Essex facilities.
The following events form the basis of the instant dispute.
In May of 1988, a joint venture partner of Essex attempted a hostile takeover of Essex. From the time of the takeover attempt in May until October of that same year when Dow Chemical Company (hereinafter "Dow") acquired Essex, Essex was represented by Skadden, Arps, Slate, Meagher and Flom (hereinafter "Skadden") in all takeover and acquisition negotiations. Thereafter, Skadden also represented Essex in litigation arising from the takeover attempt (hereinafter the "1988 litigation"). During the course of its representation and to effectively carry it out, Skadden became knowledgeable in nearly every aspect of Essex's affairs and became fully familiar with the company, its assets, and its liabilities. Skadden participated in efforts aimed at attracting potential buyers and in "white knight shows" aimed at informing potential purchasers of the environmental status, including potential liabilities, at Essex sites. Skadden had access to numerous Essex documents relating to all aspects of Essex's business and worked closely with Essex personnel and advisors, including Essex's in-house counsel and investment banker.
In the instant declaratory judgment action, Skadden was retained as counsel by defendant The Home Insurance Company (hereinafter "Home"), one of Essex's primary insurers. In 1996, defendants executed an ECC Coverage Litigation Joint Defense and Cost Sharing Agreement (hereinafter the "Joint Defense Agreement") which, defendants maintain, was created for the purpose of managing and expediting the litigation in an orderly and cost effective manner through coordination of discovery and other activities of common concern. During the course of discovery, defendants deposed former Essex employees involved in the takeover attempt, in the white knight shows and in Dow's 1988 acquisition regarding those events as well as the environmental disclosures which were made during the course of the acquisition.
On January 24, 1997, during a deposition of Deirdre Farley, former Essex in-house counsel, Essex learned of Skadden's former representation of Essex in the takeover matter and in litigation stemming therefrom. Subsequently, Essex also learned that Timothy Reynolds, Esq., the Skadden partner in charge of Home's representation in the present matter, had personally represented Essex in a products liability action. On February 28, 1997, Essex filed a motion to disqualify Skadden based on an alleged conflict of interest. Essex also sought an order disqualifying the remaining five defense firms alleging that their representation was tainted by virtue of Skadden's participation in the joint defense arrangement. By letter to Essex dated April 8, 1997, Skadden voluntarily withdrew as counsel for Home. On May 23, 1997, without a hearing on the disqualification motion,
the Magistrate Judge filed a written Opinion and Order granting Essex's motion as to all defense counsel.
The Opinion of the Magistrate Judge
The Magistrate Judge granted Essex's motion to disqualify all defense counsel. The Magistrate Judge ruled that Skadden's disqualification was compelled by New Jersey Rule of Professional Conduct 1.9(a)(1) based on a finding that Skadden's prior representation of Essex concerned matters substantially similar to the present action.
The Magistrate Judge further found that disqualification of the remaining defense counsel was compelled by their participation in the joint defense group. Specifically, the Magistrate Judge found that Skadden's participation in the joint defense group created a risk that the confidential information acquired by Skadden during the former representation may be used to the detriment of Essex. The Magistrate Judge stated: "I presume that such confidential and privileged information has been shared between all participants to the Joint Defense Agreement, despite defense counsel's certifications to the contrary." The Magistrate Judge therefore concluded that allowing defense counsel to remain posed indirectly the same risk that Skadden's representation posed directly.
Lastly, the Magistrate Judge found that disqualification of all defense counsel was also mandated by the Rules of Professional Conduct forbidding representation which creates an appearance of impropriety. Specifically, the Magistrate Judge found that an ordinary and knowledgeable citizen acquainted with the facts of this case would conclude that continued representation by all defense counsel poses a substantial risk of disservice to either the public interest or to defendants. The Magistrate Judge further found that by virtue of the Joint Defense Agreement, defense counsel were in a position to have access to confidences regarding Essex, which relationship creates an appearance of impropriety and therefore compels disqualification of all defense counsel.
A district court may reverse a Magistrate Judge's order only where it finds the ruling clearly erroneous or contrary to law. See 28 U.S.C. § 636(b)(1)(A); Fed. R. Civ. P. 72(a); L. Civ. R. 72.1(c)(1)(A). A ruling is clearly erroneous where, although there is evidence to support it, the district court upon review of the entire evidence is left with the "definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 92 L. Ed. 746, 68 S. Ct. 525 (1948).
THE PARTIES' ARGUMENTS ON APPEAL
defendants argue that the Magistrate Judge's Order is contrary to law in that it: wrongly created an irrebuttable presumption that confidences acquired by Skadden were shared among the defense group; wrongly concluded that an implied attorney-client relationship existed between Essex and all defense counsel; applied the incorrect standard for determining whether an appearance of impropriety exists; and failed to weigh the need for disqualification against hardship to the clients and the clients' right to counsel of choice. Defendants also argue that the Magistrate Judge's order is clearly erroneous in that: the conclusion of shared confidences among defense counsel is wholly unsubstantiated by the record; the evidence in the record supports the conclusion that the defense counsel group holds no confidences of Essex; and the Magistrate Judge's failure to conduct a hearing to determine what, if any, confidential information was shared among Essex, Skadden and other defense counsel was based on a misinterpretation of defendants' assertion of the joint defense privilege.
Motions to disqualify are viewed with disfavor as disqualification is a drastic remedy with often far-reaching, sometimes devastating implications. Carlyle Towers, 944 F. Supp. at 345; Alexander v. Primerica Holdings, Inc., 822 F. Supp. 1099, 1114 (D.N.J. 1993). Although doubts are to be resolved in favor of disqualification, a party seeking to disqualify counsel carries a heavy burden and must satisfy a high standard of proof. Carlyle Towers, 944 F. Supp. at 345; Alexander, 822 F. Supp. at 1114.
Disqualification Under RPC 1.9(a)(1)
RPC 1.9(a)(1) governing successive representation provides:
(a) A lawyer who has represented a client in a matter shall not thereafter:
(1) represent another client in the same or a substantially related matter in which that client's interests are materially adverse to the interests of the former client unless the former client consents after a full disclosure of ...