Novo Terapeutisk Laboratorium A/S v. Baxter Travenol Laboratories, Inc.

• Decision Date: 16 August 1979
• Docket Number: No. 78-1180,78-1180
• Citation: 206 USPQ 769,607 F.2d 186
• Parties: NOVO TERAPEUTISK LABORATORIUM A/S, Plaintiff-Appellee, v. BAXTER TRAVENOL LABORATORIES, INC., Gist-Brocades Fermentation Industries, Inc., and Gist-Brocades N. V., Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 186

607 F.2d 186

201 U.S.P.Q. 642

NOVO TERAPEUTISK LABORATORIUM A/S, Plaintiff-Appellee, v. BAXTER TRAVENOL LABORATORIES, INC., Gist-Brocades Fermentation Industries, Inc., and Gist-Brocades N. V., Defendants-Appellants.

No. 78-1180.

United States Court of Appeals Seventh Circuit.

Argued Nov. 28, 1978.

Decided Feb. 27, 1979.

Reheard En Banc April 17, 1979.

On Rehearing En Banc Aug. 16, 1979.

Donald E. Egan, Chicago, Ill., for defendants-appellants.

Howard W. Clement, and Roy E. Hofer, Chicago, Ill., for plaintiff-appellee.

PANEL OPINIONS FILED FEBRUARY 27, 1979

Before FAIRCHILD and CUMMINGS, Circuit Judges, and GRANT, Senior District Judge. ^*

GRANT, Senior District Judge.

The questions presented in this appeal arise from the district court's denial of the defendant's motion to disqualify plaintiff's counsel.

A clarification of the counsel in this action is essential. The opposing attorneys in this present appeal were, at one time, members of the same firm, known as Hume, Clements, Brinks, Willian, Olds & Cook, Ltd., (the Hume firm). On 31 December 1976, Granger Cook, Jr., left the Hume firm, and Mr. Cook is presently representing the defendants-appellants while, at the same time, attorneys from the Hume firm are presently representing the plaintiff-appellee.

The corporations listed as defendants-appellants have the following relationship: The original corporation involved was Baxter Laboratories (Baxter). Baxter Travenol Laboratories is its successor in interest and Travenol Laboratories is a wholly-owned subsidiary. Baxter Travenol Laboratories had an operation called the Wallerstein Division. On 11 July 1977, Gist-Brocades Fermentation, Inc., and Gist-Brocades, N.V., acquired Wallerstein from Baxter and agreed to indemnify Baxter with respect to this patent litigation, because it was allegedly the Wallerstein Division that was infringing the patent owned by plaintiff-appellee (Novo).

The original dispute stems from two competing patent applications. Plaintiff (Novo) filed its patent application for a milk-coagulating enzyme on 21 November 1966, while defendants filed a similar patent application on 6 December 1967. In 1971 the U.S. Patent Office declared an interference proceeding between the parties, which was finally resolved in favor of the plaintiff on 23 February 1976 when the Supreme Court denied certiorari. The parties apparently agree that the old Hume firm did not represent Baxter in this interference litigation, although contemporaneously during 1975, the Hume firm was retained by Baxter for what the plaintiff characterizes as unrelated matters. Defendants claim that Attorney Granger Cook, Jr., was in charge of the Baxter account while he was with the Hume firm and that other present members of the Hume firm (including Mr. Ropski, who is now listed as counsel for plaintiff) rendered services to defendants. The key contention of defendants is that during 1976, Baxter anticipated a patent infringement action against them by Novo; and that during July of 1976, Cook, then a partner in the Hume firm, spent several hours reviewing legal authorities and conferring with Baxter attorneys in connection with a matter identified as "Microbial Rennet". It is suggested that the 2 1/4 hours were spent in consideration of initiating a declaratory judgment action against Novo (plaintiff in the present action), rather than wait for the patentee to bring an infringement action. However, no declaratory judgment action was brought and in December, 1976, Cook left the Hume firm, taking the Baxter account with him.

In February 1977, plaintiff filed the present patent infringement action against Baxter in the U.S. District Court for the District of South Carolina. On 1 August 1977, this case was transferred from South Carolina to the Northern District of Illinois. On 30 August 1977, the Hume firm filed motions to appear for plaintiff which were granted despite defendants' objections. Defendants thereafter filed motions to disqualify the Hume firm, but the district court denied the motions, holding that the "Canons of Ethics" have not been violated. The district court stated in part:

Assuming, Arguendo that the services rendered by Hume were related to the patents here in issue, these services constituted approximately two percent of the total representation of Travenol. Furthermore, those services were rendered primarily under the direction of Granger Cook. Travenol's current counsel who left Hume in 1976. Under these circumstances, this Court does not find that legal services by Hume were Substantially related to the subject matter of this suit.

The defendants have perfected this interlocutory appeal from the district court's denial of the disqualification motions.

The issues presented are: (1) What is the proper standard for appellate review of orders on disqualification motions; (2) whether the subject matters in the two representations in the case at bar are substantially related; and (3) whether the presumptions of access to confidential information should be given conclusive status.

I STANDARD FOR APPELLATE REVIEW

Plaintiff asserts that the proper standard for appellate review of a district court's decision on attorney disqualification is whether the appellant can establish an abuse of discretion by the trial court. Defendants argue that a strict abuse of discretion standard is inappropriate where the district court has applied the wrong rule of law.

The ends of the spectrum between a strict or liberal standard are represented by two cases the most stringent viewpoint is exemplified in Gas-A-Tron of Arizona v. Union Oil Company of California, 534 F.2d 1322, 1325 (9th Cir. 1976), where the court stated that it would not disturb the district court's exercise of its discretion in fulfilling the responsibility of controlling the conduct of lawyers practicing before it, if the record reveals any sound basis for its discretion in disqualifying or refusing to disqualify a lawyer. ¹

In Aetna Casualty and Surety Company et al. v. United States, 570 F.2d 1197 (4th Cir. 1978), the Fourth Circuit took a more lenient view of an appellate court's scope of review:

Turning to the merits of the appeal, the plaintiffs contend that the scope of our review is limited to a determination of whether the district court abused its permissible discretion. While some of the cases support the position of the plaintiffs on this point, more recently the courts have expressed serious reservations about whether the limited abuse of discretion standard is appropriate in disqualification cases where only a purely legal question is at issue. Woods v. Covington Cty. Bank, 537 F.2d 804 (5 Cir. 1976); Kroungold v. Triester, 521 F.2d 763, 765, n.2 (3 Cir. 1975); American Roller Company v. Budinger, 513 F.2d 982, 985, n.3 (3 Cir. 1975). We are inclined to agree with the Fifth Circuit that "(i)n disqualification cases such as this, where the facts are not in dispute, District Courts enjoy no particular functional advantage over appellate courts in their formulation and application of ethical norms," and that it is appropriate for us "to determine whether the District Court's disqualification order was predicated upon a proper understanding of applicable ethical principles." (Footnotes omitted.)

570 F.2d 1197, 1200.

In our own Circuit, there are four recent cases that have involved the disqualification question, Cannon v. U. S. Acoustics Corp., 398 F.Supp. 209 (N.D.Ill.1975) adopted and affirmed, 532 F.2d 1118 (7th Cir. 1976); Schloetter v. Railoc of Indiana, Inc., 546 F.2d 706 (7th Cir. 1976); Westinghouse Electric Corp. v. Kerr-McGee Corp., 580 F.2d 1311 (7th Cir. 1978); and Westinghouse Electric Corp. v. Gulf Oil Corp. and United Nuclear Corp., 588 F.2d 221 (7th Cir. 1978); but no case has clearly addressed the scope of appellate review. This court has relied on the broad discretion of the district court in refusing to disturb a disqualification order, e. g., Schloetter, supra, but we have not allowed a strict standard of review to prevent reversal when the district court predicated its disqualification ruling on a misunderstanding of the law, E. g., Gulf Oil, supra. This court agrees in general with the Fourth Circuit in Aetna Casualty, supra. In the case at bar, the district court did not hold an evidentiary hearing on the disqualification motions, and all testimony comes via affidavits. Under such circumstances, district courts enjoy no particular advantage over appellate courts in their formulation of ethical norms. See Thompson v. United States, 477 F.2d 164, 167 (7th Cir. 1973).

II SUBSTANTIAL RELATIONSHIP TEST

We find that the subject matter of the two representations are substantially related and that the district court erred in its holding that the prior services rendered by Cook (as a member of the Hume firm) must not only be related, but must also be substantial in a quantitative sense. The district court calculated that the services arguably related to the patents at issue constituted only two percent of the total representation of Baxter by the Hume firm, and therefore held that the services, even though arguably related, were not Substantially related.

This transformation of the substantial relationship test to merely a mathematical evaluation cannot be permitted. A confidence can be revealed on a related subject matter in a brief moment and without the client being charged a nickel. See Kerr-McGee, supra. It is true that the duration of time spent by an attorney on a particular matter may be a factor in considering disqualification, ² but it should not be given the weight allowed by the court below.

In Gulf Oil, Supra, this court recently restated the substantial relationship test:

The substantial relationship rule embodies the substance of Canons 4 and 9 of the A.B.A. Code of Professional Responsibility. Canon 4 provides that "a lawyer should preserve the confidences and secrets of a client," and Canon...