Analytica, Inc. v. NPD Research, Inc.

• Decision Date: 24 August 1983
• Docket Number: Nos. 81-2437,82-1273 and 82-1390,s. 81-2437
• Parties: 1983-1 Trade Cases 65,408 ANALYTICA, INCORPORATED, Plaintiff, v. NPD RESEARCH, INC., Defendant-Cross-Appellant-Cross-Appellee. Appeals of SCHWARTZ & FREEMAN and Pressman and Hartunian Chtd.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1263

708 F.2d 1263

1983-1 Trade Cases 65,408

ANALYTICA, INCORPORATED, Plaintiff, v. NPD RESEARCH, INC., Defendant-Cross-Appellant-Cross-Appellee Appeals of SCHWARTZ & FREEMAN and Pressman and Hartunian Chtd.

Nos. 81-2437, 82-1273 and 82-1390.

United States Court of Appeals Seventh Circuit.

Argued Sept. 17, 1982.

Decided May 31, 1983.

Rehearing and Rehearing En Banc Denied Aug. 24, 1983.

Alex Elson, Rosenthal & Schanfield, Chicago, Ill., for defendant-cross-appellant-cross-appellee.

John R. Fornaciari, Howrey & Simon, Washington, D.C., for plaintiff.

Before POSNER and COFFEY, Circuit Judges, and CAMPBELL, Senior District Judge. ^*

POSNER, Circuit Judge.

Two law firms, Schwartz & Freeman and Pressman and Hartunian, appeal from orders disqualifying them from representing Analytica, Inc. in an antitrust suit against NPD, Inc. Schwartz & Freeman also appeals from an order directing it to pay NPD some $25,000 in fees and expenses incurred in prosecuting the disqualification motion; and NPD cross-appeals from this order, contending it should have got more.

John Malec went to work for NPD, a closely held corporation engaged in market research, in 1972. His employment agreement allowed him to, and he did, buy two shares of NPD stock, which made him a 10 percent owner. It also gave him an option to buy two more shares. He allowed the option to expire in 1975, but his two co-owners, in recognition of Malec's substantial contributions to the firm (as executive vice-president and manager of the firm's Chicago office), decided to give him the two additional shares--another 10 percent of the company--anyway and they told Malec to find a lawyer who would structure the transaction in the least costly way. He turned to Richard Fine, a partner in Schwartz & Freeman. Fine devised a plan whereby the other co-owners would each transfer one share of stock back to the corporation, which would then issue the stock to Malec together with a cash bonus. Because the stock and the cash bonus were to be deemed compensation for Malec's services to the corporation, the value of the stock, plus the cash, would be taxable income to Malec (the purpose of the cash bonus was to help him pay the income tax that would be due on the value of the stock), and a deductible business expense to the corporation. A value had therefore to be put on the stock. NPD gave Fine the information he needed to estimate that value--information on NPD's financial condition, sales trends, and management--and Fine fixed a value which the corporation adopted. Fine billed NPD for his services and NPD paid the bill, which came to about $850, for 11 1/2 hours of Fine's time plus minor expenses.

While the negotiations over the stock transfer were proceeding, relations between Malec and his co-owners were deteriorating, and in May 1977 he left the company and sold his stock to them. His wife, who also had been working for NPD since 1972, left NPD at the same time and within a month had incorporated Analytica to compete with NPD in the market-research business. She has since left Analytica; Mr. Malec apparently never had a position with it.

In October 1977, several months after the Malecs had left NPD and Analytica had been formed, Analytica retained Schwartz & Freeman as its counsel. Schwartz & Freeman forthwith complained on Analytica's behalf to the Federal Trade Commission, charging that NPD was engaged in anticompetitive behavior that was preventing Analytica from establishing itself in the market. When the FTC would do nothing, Analytica decided to bring its own suit against NPD, and it authorized Schwartz & Freeman to engage Pressman and Hartunian as trial counsel. The suit was filed in June 1979 and charges NPD with various antitrust offenses, including abuse of a monopoly position that NPD is alleged to have obtained before June 1977.

In January 1980 NPD moved to disqualify both of Analytica's law firms. Evidentiary hearings on the motion were held intermittently between April 1980 and May 1981. At one stage the law firms voluntarily withdrew, but when the judge told them that he was minded to make them pay the fees and expenses that NPD had incurred in prosecuting the motion they moved to vacate the order granting their motion to withdraw. The motion to vacate was granted and the hearings resumed. In June 1981 the judge disqualified both firms and ordered Schwartz & Freeman to pay NPD's fees and expenses. Analytica has not appealed the orders of disqualification, having retained substitute counsel to prosecute its suit against NPD.

We first consider, on our own initiative as we must, whether Pressman and Hartunian has standing to appeal the order disqualifying it. Orders disqualifying counsel usually are appealed by clients upset by the prospect of losing the services of the lawyer of their choice and by the added expense of bringing substitute counsel up to speed. The client's standing to appeal is plain enough and an order disqualifying counsel, though interlocutory, is appealable, at least in this circuit. Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 717-20 (7th Cir.1982). If the client wants to keep the lawyer, the lawyer's standing also seems plain, since if the disqualification order stands he will lose the fees he would have made from the case. But in this case the client has not appealed. Analytica appears content with whatever substitute counsel it has procured. We therefore cannot see what tangible object Pressman and Hartunian has in seeking reversal of the order disqualifying it. It has presented no evidence that it will be rehired and we have no reason to assume it will be, since that would require Analytica to replace the trial counsel it has hired in place of Pressman and Hartunian.

Nor need we decide whether an interest in reputation alone could give a lawyer standing to appeal a disqualification. Pressman and Hartunian was disqualified not for anything it did or failed to do but simply because as Schwartz & Freeman's co-counsel it had access, actual or potential, to whatever confidential information Schwartz & Freeman had obtained while representing NPD. It appears that Pressman and Hartunian did not even know about that prior representation and so was innocent in thought as well as deed. That is why the district judge did not require it to pay any of the fees or expenses incurred by NPD in prosecuting the motion to disqualify. The judge thought Pressman and Hartunian had to be disqualified to protect NPD but since the firm's conduct was not blameworthy it need not fear for its reputation.

Although Schwartz & Freeman has a stronger argument that it has an interest in reputation at stake in this appeal, we need not decide whether that interest is enough to confer standing either. Since Schwartz & Freeman has standing to appeal from the order directing it to pay $25,000 to NPD for resisting the order of disqualification, and since the order to pay is invalid if Schwartz & Freeman should not have been disqualified, the appeal from that order requires us to consider the validity of the disqualification order in any event.

For rather obvious reasons a lawyer is prohibited from using confidential information that he has obtained from a client against that client on behalf of another one. But this prohibition has not seemed enough by itself to make clients feel secure about reposing confidences in lawyers, so a further prohibition has evolved: a lawyer may not represent an adversary of his former client if the subject matter of the two representations is "substantially related," which means: if the lawyer could have obtained confidential information in the first representation that would have been relevant in the second. It is irrelevant whether he actually obtained such information and used it against his former client, or whether--if the lawyer is a firm rather than an individual practitioner--different people in the firm handled the two matters and scrupulously avoided discussing them. See, e.g., Emle Industries, Inc. v. Patentex, Inc., 478 F.2d 562, 570-71 (2d Cir.1973); Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1386 (2d Cir.1976); Trone v. Smith, 621 F.2d 994, 998 (9th Cir.1980); Duncan v. Merrill Lynch, Pierce, Fenner & Smith, 646 F.2d 1020, 1028 (5th Cir.1981), and in this circuit Cannon v. U.S. Acoustics Corp., 532 F.2d 1118, 1119 (7th Cir.1976) (per curiam), aff'g 398 F.Supp. 209, 223-24 (N.D.Ill.1975); Schloetter v. Railoc of Indiana, Inc., 546 F.2d 706, 710 (7th Cir.1976); Westinghouse Elec. Corp. v. Gulf Oil Corp., 588 F.2d 221, 223-25 (7th Cir.1978).

There is an exception for the case where a member or associate of a law firm (or government legal department) changes jobs, and later he or his new firm is retained by an adversary of a client of his former firm. In such a case, even if there is a substantial relationship between the two matters, the lawyer can avoid disqualification by showing that effective measures were taken to prevent confidences from being received by whichever lawyers in the new firm are handling the new matter. See Novo Terapeutisk Laboratorium A/S v. Baxter Travenol Laboratories, Inc., 607 F.2d 186, 197 (7th Cir.1979) (en banc); Freeman v. Chicago Musical Instrument Co., supra, 689 F.2d at 722-23; LaSalle Nat'l Bank v. County of Lake, 703 F.2d 252 (7th Cir.1983). The exception is inapplicable here; the firm itself changed sides.

Schwartz & Freeman's Mr. Fine not only had access to but received confidential financial and operating data of NPD in 1976 and early 1977 when he was putting together the deal to transfer stock to Mr. Malec. Within a few months, Schwartz & Freeman popped up as counsel to an adversary of NPD's before the FTC, and in that proceeding and later in the antitrust lawsuit advanced contentions to which the data Fine received might have been relevant. Those data concerned NPD's profitability, sales prospects, and general market strength--all matters...