Opinion
Civil Action No. 19-cv-505
2020-01-29
ADVANCED TRAINING GROUP WORLDWIDE, INC., Plaintiff, v. PROACTIVE TECHNOLOGIES INC., Defendant.
Susan Anne Austin, Whitcomb, Selinsky PC, Herndon, VA, Seth James Bryan Obed, OBED Law Group, Alexandria, VA, for Plaintiff Jeffrey S. Poretz, Jeremy Lee Baker, Laura Lee Golden Liff, Miles & Stockbridge PC (McLean), Tysons Corner, VA, for Defendant
Susan Anne Austin, Whitcomb, Selinsky PC, Herndon, VA, Seth James Bryan Obed, OBED Law Group, Alexandria, VA, for Plaintiff
Jeffrey S. Poretz, Jeremy Lee Baker, Laura Lee Golden Liff, Miles & Stockbridge PC (McLean), Tysons Corner, VA, for Defendant
ORDER
T. S. Ellis, III, United States District Judge At issue in this breach of contract case is plaintiff Advanced Training Group Worldwide, Inc.'s ("ATG") Motion to Disqualify Miles & Stockbridge as defendant's counsel. This case involves a dispute between two former joint-venture partners, plaintiff and defendant, that formed a Virginia limited liability company, Raptor Training Services, LLC ("RTS" or the "JV"), to bid on a multi-million-dollar indefinite duration, indefinite quantity ("IDIQ") government contract with the United States Army. Plaintiff claims that defendant unlawfully terminated plaintiff from the JV in 2016, and that defendant therefore owes plaintiff damages, namely the profit earned by the JV under the IDIQ contract after the unlawful termination.
On January 3, 2020, ATG filed a motion to disqualify Miles & Stockbridge ("M&S") as defendant's counsel, arguing that M&S represented the JV in various legal tasks prior to this litigation, that M&S failed to secure a conflicts waiver from ATG prior to representing defendant in this litigation, and that M&S may have breached its fiduciary obligation to ATG through its current representation of defendant because M&S had access to ATG's confidential information from its prior representation of the JV. Defendant opposes ATG's motion to disqualify, arguing that ATG waived the disqualification issue by not raising it until seven months after this litigation began, and that ATG's motion fails on the merits because no attorney-client relationship ever existed between M&S and ATG.
A hearing on this matter was held on January 24, 2020, and thus the matter is ripe for disposition. ATG's motion to disqualify must be denied because ATG has waived the disqualification issue, ATG clearly brought the motion as a tactical maneuver, and ATG has not established that it ever had an attorney-client relationship with M&S.
I.
As an initial matter, it is necessary to set forth the factual background pertinent to the disposition of the motion to disqualify counsel. In July 2012, ATG and defendant, ProActive Technologies, Inc. ("ProActive"), entered into a Memorandum of Understanding ("MOU") to create a joint venture, RTS. The purpose of the JV was to bid and perform on a multi-million-dollar IDIQ contract with the United States Army. The MOU provided that initial membership interests and voting rights in the JV were allocated 67% to ProActive and 33% to ATG.
According to ProActive, M&S did not draft the MOU. Whether or not M&S drafted the MOU is immaterial because the text of the MOU makes clear that each party was to be represented by its separate counsel in connection with the MOU. Specifically, the MOU states that "[e]ach Member will be represented solely by its separate counsel in connection with this MOU...provided that counsel for [t]he Managing Member will provide drafts of this MOU at the appropriate stages, and such legal costs of drafting the MOU will be borne by the majority Member." Dkt. 143-3, at 3. ProActive was both the Managing Member and the majority Member, and therefore in the event that M&S was involved in the drafting of the MOU, M&S was acting as ProActive's independent counsel. The MOU further states that upon award of the IDIQ government contract, "the JV will retain separate legal counsel to draft and negotiate the JV Operating Agreement on behalf of the JV. The cost of such JV counsel will be shared equally by the Members." Id.
ProActive cites to the deposition of Richard Stockton, Chief Operating Officer ("COO") of ProActive, in which Mr. Stockton states: "I believe the MOU was drafted for another joint venture, so I didn't have a part in drafting it. I believe that we – it was modified from that other joint venture to – for this one." Dkt. 143-1, at 5. In essence, Mr. Stockton states in his deposition that the MOU was taken from another joint venture, and that ProActive changed the names in the MOU to reflect an agreement between ATG and ProActive. See id.
ATG, in its reply brief, cites to an October 28, 2016 email from Mr. Stockton to ATG, in which Mr. Stockton says that ProActive's counsel wrote the MOU. When asked about this email during his deposition, Mr. Stockton said the email was inaccurate in that M&S did not write the MOU.
In February 2014, the JV was awarded the IDIQ government contract. On February 29, 2016, Richard Stockton, COO of ProActive, and Robert Acevedo, CEO of ProActive, emailed Adam Newbold, CEO of ATG, regarding the drafting and preparation of the JV operating agreement. In that email, Mr. Stockton and Mr. Acevedo acknowledged that the JV MOU requires the JV to retain separate legal counsel to draft and negotiate the JV operating agreement. After acknowledging that provision in the MOU, the email stated:
In August 2012, articles of organization were filed in Virginia to create the JV. The articles of organization do not mention ATG or ProActive, the members of the JV at that point. See Dkt. 91-8.
We can either retain separate counsel to draft the JV Operating Agreement or we can get our counsel to draft an agreement and submit for your and Bob's review. [RFA] If the agreement is to have ProActive's counsel draw up the draft OA agreement, Adam can choose to have ATG's counsel review the draft agreement also. That would be up to him. This should be expeditious and minimize the cost of such.
Dkt. 143-4, at 3 (emphasis in original). In response to this email, Mr. Newbold, ATG's CEO, said he was "in agreement with, and appreciate[d], ProActive's counsel drafting the agreement. We will have our counsel review the document..." Id. at 2. M&S then prepared a draft JV operating agreement. The draft JV operating agreement contains an explicit waiver of any conflict of interest, which states that "[e]ach Member acknowledges and agrees that Miles & Stockbridge P.C. has only represented the interest of ProActive in the drafting and negotiation of this Agreement, and that each other Member has been represented by separate counsel of its choice." Dkt. 143-5, at 3. No JV operating agreement was ever executed by the parties.
It appears that this draft JV operating agreement is from March 2016 given the proposed date of execution on the first page was "March ___, 2016." See Dkt. 113-3, at 1.
On November 8, 2016, ProActive sent a written termination letter to ATG, which stated that ATG was terminated from the JV for breach of the MOU. On November 15, 2016, ATG received an invoice for reimbursement of RTS JV management expenses. See Dkt. 113-1. In this invoice, the JV requested ATG pay 33% of JV management costs from 2012 to 2016, which included charges from M&S for drafting articles of organization in November 2012 and March 2013 and from M&S for analysis of IDIQ subcontract issues in November 2015. See id. at 3, 4. On November 23, 2016, Alfred M. Wurglitz, an attorney with M&S, sent Mr. Newbold, ATG's CEO, a letter which stated that "this firm [M&S] represents Raptor Training Services, L.L.C. [the JV]" and went on to demand that ATG confirm it would refrain from contacting the government directly regarding the IDIQ contract. Dkt. 113-2, at 1.
ProActive previously sent ATG a notice of termination letter on November 1, 2016. Alfred Wurglitz, an attorney with M&S, was cc'd on the November 1st letter See Dkt. 143-8, at 3. Mr. Wurglitz was also cc'd on a follow-up letter from ProActive to ATG regarding ATG's termination from the JV on November 15, 2016. See Dkt. 113-4. All of these letters were sent on ProActive letterhead.
On April 24, 2019, ATG filed its complaint in this breach of contract action. On May 22, 2019, Jeffery Poretz, an attorney with M&S, filed notice of appearance on behalf of ProActive. The parties have undertaken discovery and participated in extensive motions practice over the past seven-plus months. On December 16, 2019, discovery in this case concluded pursuant to the Rule 16(b) Scheduling Order. On December 30, 2019, ATG filed a motion for partial summary judgment, and ProActive filed a cross-motion for summary judgment that same day. On January 3, 2020, ATG filed the motion at issue, which seeks to disqualify M&S from its representation of ProActive because of M&S's alleged conflict of interest.
II.
It is the nondelegable duty of the Court to ensure high standards of professional conduct in the management of cases before it and to prevent even the appearance of impropriety. Dacotah Mktg. & Research, L.L.C. v. Versatility, Inc. , 21 F. Supp. 2d 570, 582 (E.D. Va. 1998). Disqualification of counsel is warranted when the conflict of interest is not just conjectural, but is actual or likely. Tessier v. Plastic Surgery Specialists, Inc. , 731 F. Supp. 724, 729 (E.D. Va. 1990). The moving party bears a "high standard of proof" to show that disqualification is warranted. Id. (citing Government of India v. Cook Industries, Inc. , 569 F.2d 737, 739 (2d Cir. 1978) ). Nonetheless, the Fourth Circuit has made clear that "[i]n determining whether to disqualify counsel for conflict of interest, the trial court... with a view of preventing the appearance of impropriety, is to resolve all doubts in favor of disqualification." United States v. Clarkson , 567 F.2d 270, 273 n. 3 (4th Cir. 1977). Although all doubts must be resolved in favor of disqualification, the Fourth Circuit has also made clear that "the drastic nature of disqualification requires that courts... always remain mindful of the... possibility of misuse of disqualification motions for strategic reasons." Shaffer v. Farm Fresh, Inc. , 966 F.2d 142, 146 (4th Cir. 1992). In short, the evaluation of a disqualification motion requires balancing the client's free choice of counsel against the maintenance of the highest ethical and professional standards in the legal community. See Tessier v. Plastic Surgery Specialists, Inc. , 731 F. Supp. 724, 729 (E.D. Va. 1990).
Although the Virginia Rules of Professional Conduct establish appropriate guidelines for the professional conduct of attorneys, a violation of those Rules does not automatically result in disqualification of counsel. See Cent. Milk Producers Co-op. v. Sentry Food Stores, Inc. , 573 F.2d 988, 991 (8th Cir. 1978). Federal courts may disqualify an attorney due to a conflict of interest as an exercise of their inherent power. See In re Snyder , 472 U.S. 634, 645 n.6, 105 S.Ct. 2874, 86 L.Ed.2d 504 (1985).
III.
Here, ATG's motion to disqualify fails because ATG waived the disqualification issue by not raising its conflict allegations in a timely manner. Courts have sensibly held that a party's failure to file a motion to disqualify counsel in a timely manner may result in waiver of the issue. To determine whether delay constitutes a waiver, district courts have considered four factors: (i) when the movant learned of the conflict, (ii) whether the movant was represented by counsel during the delay, (iii) why the delay occurred, namely whether it was for tactical reasons, and (iv) whether disqualification would result in prejudice to the nonmoving party. See Reeves v. Town of Cottageville , No. 2:12-cv-2765, 2014 WL 4231235, at *2 (D.S.C. Aug. 26, 2014) ; Buckley v. Airshield Corp. , 908 F. Supp. 299, 307 (D. Md. 1995).
See, e.g., Trust Corporation of Montana v. Piper Aircraft Corp. , 701 F.2d 85, 88 (9th Cir. 1983) (movant's failure to object to opposing counsel's representation within 2 years and 6 months constituted a waiver of disqualification); Cent. Milk Producers Co-op. v. Sentry Food Stores, Inc. , 573 F.2d 988, 992 (8th Cir. 1978) (two-year delay waived disqualification); Gross v. SES Americom, Inc. , 307 F. Supp. 2d 719, 724 (D. Md. 2004) (11 month delay waived of disqualification); Fenzel v. Group2 Software, LLC , No. 13-0379, 2014 WL 7404575, at *3 (D. Md. Dec. 29, 2014) (two-and-a-half year delay waived disqualification); In re Modanlo , 342 B.R. 230, 236-38 (D. Md. 2006) (five-month delay waived disqualification); Reeves v. Town of Cottageville , No. 2:12-CV-02765-DCN, 2014 WL 4231235, at *3 (D.S.C. Aug. 26, 2014) (five-week delay waived disqualification).
All four factors weigh in favor of a waiver of disqualification in this case. First, ATG knew of M&S's alleged conflict since at least November 15, 2016, when ATG received the invoice that listed specific M&S expenses charged to the JV as management and start-up expenses. When M&S filed notice of appearance on behalf of ProActive in this case on May 22, 2019, ATG should have filed a motion to disqualify immediately, or shortly thereafter. Instead, ATG did not file their motion to disqualify until January 3, 2020, over seven months later and after the close of discovery and the filing of cross-motions for summary judgment. At the hearing on January 24, 2020, ATG's counsel represented that they did not know until recently that ATG had not signed a conflict waiver. This excuse is unpersuasive because ATG should have had the conflict waiver, if one existed, in its possession the entire time. Thus, with respect to the first factor, ATG has known of the alleged conflict for over three years, including the past seven-plus months while this litigation has been pending. Second, ATG has been represented by counsel throughout this litigation, and even added additional counsel to its team in December 2019.
Third, ATG's only explanation for the delay is that the motion was filed "after thorough contemplation and only after Plaintiff's counsel had done its due diligence and evaluated and interrogated all available discovery." Dkt. 109, at 4. This explanation for the delay is plainly inadequate. The documents ATG relies on as the basis for the allegation that M&S has a conflict of interest have been in ATG's possession since before the start of this litigation; there was no need to wait for discovery.
Moreover, ProActive alleges that the timing of the motion to disqualify is clearly tactical because of the upcoming oral argument on the parties' cross-motions for summary judgment, scheduled for February 7, 2020. At the hearing on January 24, 2020, ATG's counsel admitted that defendant's cross-motion for summary judgment triggered ATG's filing of its motion to disqualify. ATG claims that ProActive's cross-motion for summary judgment made the motion to disqualify necessary because ProActive raised an advice-of-counsel defense in its motion. ATG's argument is unpersuasive because ProActive did not raise an advice-of-counsel defense, but rather reliance on Virginia's business judgment rule. Moreover, there are remedies other than disqualification even if a M&S attorney becomes a witness at trial because of ProActive's reliance on Virginia's business judgment rule. Thus, the timing of ATG's motion to disqualify makes clear that it is being used as a tactical maneuver, and the Supreme Court and the Fourth Circuit have cautioned against such abusive misuse of disqualification motions.
On the current record, testimony from an M&S attorney at trial does not appear necessary. But if that changes, Rule 3.7 of the Virginia Rules of Professional Conduct does not mandate disqualification of the entire law firm in such circumstances. See infra , note 15.
At the hearing on January 24, 2020, ProActive's counsel submitted an email they received from ATG's counsel on January 22, 2020. In the email, ATG's counsel states that if its motion to amend the complaint and add M&S as a party to this litigation is denied, ATG will refile the complaint with M&S as a party, and as a result of the refiled complaint, M&S will be conflicted.
See Richardson-Merrell, Inc. v. Koller , 472 U.S. 424, 441, 105 S.Ct. 2757, 86 L.Ed.2d 340 (1985) (Brennan, J., concurring) ("the tactical use of attorney-misconduct disqualification motions is a deeply disturbing phenomenon in modem civil litigation"); Shaffer v. Farm Fresh, Inc. , 966 F.2d 142, 146 (4th Cir. 1992) ("The drastic nature of disqualification requires that courts avoid overly-mechanical adherence to disciplinary canons at the expense of litigants' rights freely to choose their counsel; and that they always remain mindful of the opposing possibility of misuse of disqualification motions for strategic reasons.").
Fourth, the upcoming oral argument on cross-motions for summary judgment makes clear that ProActive would suffer significant prejudice if M&S were disqualified now. As noted, this case has involved extensive motions practice and extensive discovery over the past seven-plus months, and the parties filed cross-motions for summary judgment before ATG filed its disqualification motion. If ProActive were forced to hire new counsel at this point, this case would be significantly delayed, and ProActive would have to pay for duplicative legal work for their new counsel to get up to speed on this case. See Fenzel v. Group2 Software, LLC , No. 13-0379, 2014 WL 7404575, at *5 (D. Md. Dec. 29, 2014).
In sum, all four factors weigh against disqualification. Accordingly, ATG's motion to disqualify must be denied because ATG has waived their objection to M&S's representation of ProActive in this matter.
IV.
Even assuming arguendo that ATG had not waived its right to raise the disqualification issue, the "conflict," which ATG alleges is prohibited by Rule 1.9 of the Virginia Rules of Professional Conduct, simply does not exist in this case. In short, ATG has not met its burden to establish that an attorney-client relationship existed between ATG and M&S.
Plaintiff argues that M&S should be disqualified because of the fundamental issue of fairness to ATG and that M&S has violated Rule 1.9 of the Virginia Rules of Professional Conduct by representing ProActive in this case. Rule 1.9 has a two-pronged test for disqualification—the moving party must establish (i) that an attorney-client relationship between the alleged client and attorney existed and (ii) that the former representation and the current controversy were substantially related. M-Cam, Inc. v. D'Agostino , No. 3:05 CV 00006, 2005 WL 2010166, at *1 (W.D. Va. Aug. 22, 2005). There is no question that this litigation, which involves a dispute over the termination of ATG from the JV, is substantially related to the legal documents forming the JV. And it is undisputed that M&S had at least some role in drafting some of the JV legal documents. Thus, the remaining issue is whether ATG has established that an attorney-client relationship existed between ATG and M&S during the negotiation and drafting of the JV legal documents, such that M&S should be disqualified from representing ProActive in order to avoid a substantial risk that M&S will use ATG's confidential information to materially advance ProActive's position in this case.
Rule 1.9(a) states: "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(a), Va. R. Prof'l Conduct.
The November 15, 2016 invoice states that M&S worked on drafting articles of organization for the JV in November 2012 and March 2013.
ATG has not met its burden in establishing that an attorney-client relationship existed during the drafting and negotiation of the JV legal documents. Importantly, ATG must show that it reasonably believed an attorney-client relationship existed with M&S, and provide evidence to support this belief. Fenzel v. Group2 Software, LLC , No. CIV.A. DKC 13-0379, 2014 WL 7404575, at *9 (D. Md. Dec. 29, 2014). Discovery in this case is complete, and yet ATG's evidence that an attorney-client relationship existed between it and M&S is "ambiguous at best." Id. ; see also Victors v. Kronmiller , 553 F. Supp. 2d 533, 553 (D.Md. 2008) (denying movant's motion to disqualify counsel under Rule 1.9 because the evidence that an attorney-client relationship existed was "dubious"). In fact, ATG has not provided evidence of a single communication between ATG and M&S while ATG was a member of the JV.
The party seeking disqualification bears the burden of proof regarding the existence of an attorney-client relationship. See In re Chantilly Const. Corp. , 39 B.R. 466, 469 (Bankr. E.D. Va. 1984).
As the basis for the formation of an attorney-client relationship, ATG first claims that M&S drafted the MOU for the JV. ProActive disputes this claim and asserts that M&S did not draft the MOU. Neither party has presented dispositive evidence regarding whether or not M&S drafted the MOU. Even assuming that M&S did draft the MOU, ignoring that ATG failed to carry its burden to establish that fact, the text of the MOU makes unmistakably clear that "[e]ach Member will be represented solely by its separate counsel in connection with this MOU." Dkt. 143-3, at 3. There is no evidence that ATG contacted M&S to represent ATG regarding the JV's MOU. Instead, the evidence suggests that M&S was ProActive's counsel at that time. Thus, the JV MOU did not establish an attorney-client relationship between ATG and M&S.
Second, ATG argues that M&S's drafting of the JV's articles of organization created an attorney-client relationship between ATG and M&S. Although M&S drafted the JV's articles of organization that were filed in August 2012, it does not appear that ATG became aware of this activity until ProActive sent ATG an invoice for 33% of the costs for such services on November 15, 2016, after ProActive had terminated ATG from the JV. In addition, there is no evidence that M&S acquired, or needed, any information from ATG in order to draft the JV's articles of organization. ProActive certainly violated best business practices by not billing ATG for these services until four years later, right after ProActive terminated ATG from the JV. But ProActive's poor business judgment with respect to the JV's expense reimbursement did not establish an attorney-client relationship between ATG and M&S.
The articles of organization submitted with ATG's motion for partial summary judgment is a one-page document that does not even mention either party to the RTS JV (ATG and ProActive). It appears to contain the absolute minimum amount of information necessary to qualify as articles of organization under Virginia law. See Dkt. 91-8.
Third, ATG argues that M&S's involvement in drafting the unexecuted JV operating agreement in 2016 further indicates that M&S was representing the JV, and therefore ATG. To the contrary, the communications between ProActive and ATG regarding the JV operating agreement indicate the opposite—namely, that ATG knew M&S was ProActive's counsel and authorized M&S to draft the JV operating agreement with the understanding that ATG's own counsel would review the draft. ATG's CEO specifically stated that he was "in agreement with, and appreciate[d], ProActive's counsel drafting the agreement. We will have our counsel review the document..." Dkt. 143-4, at 2. Any argument that M&S was representing the JV, not ProActive, with respect to the JV operating agreement is clearly belied by the record.
Lastly, ATG points to a November 26, 2016 letter sent from Alfred M. Wurglitz, an attorney with M&S, to Mr. Newbold, ATG's CEO, in which Mr. Wurglitz stated that "this firm [M&S] represents Raptor Training Services, L.L.C. [the JV]." Dkt. 113-2, at 1. This letter certainly establishes that M&S represented the JV as of November 26, 2016, but ATG had already been terminated from the JV at that point. That M&S represented the JV after ATG's termination is insufficient to establish that ATG and M&S had an attorney-client relationship.
This Order does not express any opinion as to whether ATG's termination from the JV was lawful or unlawful.
Because ATG has not carried its burden of establishing that an attorney-client relationship existed between ATG and M&S during the negotiation and drafting of the JV legal documents or that ATG communicated with M&S at all while a member of the JV, ATG's motion to disqualify must also be denied on the merits. ATG has presented zero evidence that M&S's representation of ProActive in this litigation is fundamentally unfair to ATG.
At the end of its brief, ATG argues that M&S has become a Potential witness in this case because ProActive has asserted an advice-of-counsel defense in its motion for summary judgement and that M&S should also be disqualified on those grounds. As noted ProActive has not asserted an advice-of-counsel defense, but rather reliance on Virginia's business judgment rule. Rule 3.7 of the Virginia Rules of Professional Conduct governs witness advocate problems, if any exist. Importantly, Rule 3.7(c) provides that "[a] lawyer may act as advocate in an adversarial proceeding in which another lawyer in the lawyer's firm is likely to be called as witness unless precluded from doing so by Rule 1.7 or 1.9." Va. R. Prof'l Conduct. Even if Mr. Wurglitz were called as a witness in this case with respect to ProActive's reliance on Virginia's business judgment rule, an event that is not clear will occur given the current record , Mr. Wurglitz is not counsel of record in this proceeding Thus, ProActive's litigation counsel from litigation counsel from M&S would not be disqualified even if Mr.Wurglitz, the M&S attorney involved in the drafting some of the JV legal documents, was called as a witness at trial.
Accordingly,
It is hereby ORDERED that ATG's motion to disqualify M&S as ProActive's counsel (Dkt. 108) is DENIED.