Rd. King Dev., Inc. v. JTH Tax LLC

• Court: U.S. District Court — Eastern District of Virginia
• Writing for the Court: Raymond A. Jackson, UNITED STATES DISTRICT JUDGE
• Citation: Rd. King Dev., Inc. v. JTH Tax LLC, 540 F.Supp.3d 554 (E.D. Va. 2021)
• Decision Date: 18 May 2021
• Docket Number: Civil Action No. 2:21-cv-55
• Parties: ROAD KING DEVELOPMENT, INC., et al., v. JTH TAX LLC d/b/a Liberty Tax Service, Defendant.

540 F.Supp.3d 554

ROAD KING DEVELOPMENT, INC., et al.,

v.JTH TAX LLC d/b/a Liberty Tax Service, Defendant.

Civil Action No. 2:21-cv-55

United States District Court, E.D. Virginia, Norfolk Division.

Signed May 18, 2021

Filed May 19, 2021

Brian Nelson Casey, Taylor Walker PC, Virginia Beach, VA, Christopher D. Davis, Destinee Blare Byers, Erin Christine McDaniel, Davis Law, PLC, Chesapeake, VA, for Road King Development, Inc., Zeedee, LLC.

Julia Kim Whitelock, Wesley David Allen, Gordon & Rees Scully Mansukhani, Alexandria, VA, Peter George Siachos, Pro Hac Vice, Gordon Rees Scully Mansukhani, Florham Park, NJ, for Defendant.

MEMORANDUM OPINION AND ORDER

Raymond A. Jackson, UNITED STATES DISTRICT JUDGE

Before the Court is JTH Tax's ("Defendant") Motion for Disqualification of Plaintiff's counsel. ECF No. 14. Road King Development Inc. and ZeeDee LLC ("Plaintiffs") responded in opposition and Defendant replied. ECF Nos. 19, 21. On May 11, 2021, the Court held a hearing on this matter. This matter is now ripe for judicial determination. For the reasons set forth below, the Motion is DENIED.

I. FACTUAL AND PROCEDURAL HISTORY

JTH Tax LLC, d/b/a/ Liberty Tax ("Defendant") sells franchises engaged in the preparation of tax returns as well as Area Development ("AD") territories that support the franchises within their prescribed geographic boundaries. ECF No. 6 at ¶ 8. Plaintiffs are parties to two separate AD agreements with Defendant whereby Plaintiffs obtained the exclusive right to sell and support tax preparation franchises for Liberty in counties in Texas. Id. at ¶ 9. Plaintiffs owned and operated respective area development territories on behalf of Liberty as area developers ("ADs"), having entered into respective area developer agreements ("AD Agreements") with Liberty. Id. ¶¶ 10-11, 19. After retaining Attorney Christopher Davis, who had worked for Liberty Tax, on February 25, 2021, Plaintiffs filed an amended complaint alleging four counts against Defendant. Id. Count I allege breach of contract because of wrongful termination of the agreement. Id. at ¶¶ 36-49. Count II alleges breach of contract for Defendant's failure to pay franchise royalties. Id. at ¶¶ 50-54. Count III alleges breach of contract for failure to provide renewal agreement under the same terms. Id. at ¶¶ 55-66. Count IV alleges declaratory judgment. Id. at ¶¶ 67-72.

On March 30, 2021, Defendant filed a motion to dismiss Plaintiffs’ amended complaint. ECF No. 9. On April 1, 2021, Defendant filed a motion to disqualify counsel for Plaintiffs. ECF No. 14. On April 13, 2021, the Court granted the parties joint motion to stay the motion to dismiss pending the motion to disqualify counsel. ECF Nos. 17, 18. On April 15, 2021, Plaintiffs responded in opposition to the motion to disqualify counsel. On April 21, 2021, Defendants responded. ECF No. 21.

II. LEGAL STANDARD

A. Governing Law

As an initial matter, the Court has jurisdiction over this action pursuant to 28 U.S.C. § 1332. Road King is a Texas Corporation with its principal place of in Texas. ECF No. 6 at ¶ 1. ZeeDee is a Texas Limited Liability Company with its principal place of business in Texas Id. at ¶ 2. Liberty Tax is a Delaware Limited Liability Company with its headquarters and principal place of business located at Virginia Beach, Virginia. Id. at ¶ 3. The amount in controversy exceeds $75,000. Id. at ¶ 5. In a diversity action, district courts apply federal procedural law and state substantive law. See Gasperini v. Ctr. for Humanities, Inc. , 518 U.S. 415, 427, 116 S.Ct. 2211, 135 L.Ed.2d 659 (1996). Federal courts sitting in diversity jurisdiction apply the choice of law rules in the state in which it sits. Klaxon v. Stentor Elec. Mfg. Co. , 313 U.S. 487, 496, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941) (noting that forum state's choice of law rules is substantive).

Accordingly, Virginia law governs the instant motion to disqualify counsel. See Atasi Corp. v. Seagate Tech. , 847 F.2d 826, 829 (Fed. Cir. 1988) (applying regional circuit law to the issue of attorney disqualification); see also In re Morrissey , 305 F.3d 211, 222 (4th Cir. 2002) (attorneys practicing in the Eastern District of Virginia are subject to Virginia's standards for ethical conduct). Furthermore, the ethical standard for the practice of law in civil cases in the Eastern District of Virginia is the Virginia Rules of Professional Conduct. See Local Civil Rule 83.1(1); see also, Sanford v. Commonwealth of Virginia , 687 F. Supp. 2d 591, 601 (E.D. Va. 2009).

B. Virginia Rules of Professional Conduct

There are two competing principles. On the one hand, a party should have the right to retain counsel of his choice. On the other hand, a party has the right to have his confidences preserved by his counsel both during and after the representation. In re Gordon Properties, LLC , 505 B.R. 703, 706 (Bankr. E.D. Va. 2013). A client is entitled to his or her lawyer's considered advice. To give full and fair advice, a lawyer needs her client to discuss the matter fully and freely with her to give her all the information that the client possesses. Without complete information, a lawyer cannot fully and properly evaluate a client's situation and offer competent advice. A client will be reluctant to fully discuss her case with her lawyer if she thinks that the information may be divulged to others or used against him later. Rules 1.6(a) and 1.9(c) of the Virginia Rules of Professional Conduct govern a lawyer’ use of clients’ confidential information.

The Virginia Rules of Professional Conduct provide three types of confidential information: privileged communication, secret information, and information relating to or gained by the lawyer during her representation of her current or former client. A client secret is "information gained in the professional relationship that the client has requested be held inviolate or the disclosure of which would be embarrassing or would be likely to be detrimental to the client, whatever its source." Rule 1.6, Comment 3. All other information obtained by a lawyer while representing a client is case-related information. A lawyer may not disclose privileged or secret information and may not use case-related information to the disadvantage of her current or past client unless it has become "generally known." Rule 1.9(c)(1). In all, the confidentiality rules assure the client that he or she "can confide in his lawyer without fear that his lawyer will divulge that information to others or use it to the client's disadvantage." In re Gordon at 707.

Most relevant to the instant matter, Rule 1.9(a) states that a "lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless both the present and former client consent after consultation." Rule 1.9(b) similarly states that "lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client: (1) whose interests are materially adverse to that person; and (2) about whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter; unless both the present and former client consent after consultation."

The rules of confidentiality limit a lawyer's ability to represent a new client in matters involving a former client. Critically, when confidentiality conflicts with the right to choose counsel, confidentiality prevails. Tessier v. Plastic Surgery Specialists, Inc. , 731 F.Supp. 724, 729 (E.D. Va. 1990) ("the right ... to retain counsel of his choosing is ‘secondary in importance to the Court's duty to maintain the highest ethical standards of professional conduct to insure and preserve trust in the integrity of the bar.’ "). The confidentiality rules protect both the former client from the obvious threats of divulging confidential information or using it to the former client's disadvantage, and the new client from the lawyer's inability or hesitancy to develop favorable information because of the lawyer's duty to protect the former client's confidential information. Id. at 728.

"[O]nce an attorney-client relationship has been established, an irrebuttable presumption arises that confidential information was conveyed to the attorney in the prior matter." Tessier , 731 F.Supp. at 734. This does not mean that a lawyer is forever barred from representing a new client against a former client. Rule 1.9(a) addresses this. A lawyer may represent a new client against a former client, so long as it is not "in the same or a substantially related matter" in which the lawyer represented a prior client. Rule 1.9. The determination of whether a new matter is substantially related to the prior matter is not always easily resolved as is illustrated by Tessier.

In resolving the representational issues, Tessier examined the prior and the present representations of the law firm. The court paid particular attention to the issues involved, the relation of the issues in the two cases, the facts in both cases, the time frames covered in each case, the causes of action, the legal theories and the parties involved. Id. at 730–731. It was not necessary for each factor to be identical in both cases for the two cases to be substantially related. Id. at 730. Most critically, with respect to the legal theory involved in both cases the Tessier Court stated that

While the legal theories employed in both cases are substantially different, the cases do arise from substantially similar facts. Confidential information conveyed in one case does not lose its confidential character because it was not utilized to develop a legal theory in a subsequent case. The information remains protected whether it is so used or not.

Id. at 731. Furthermore, with respect to determining a...