At the request of a non-party, the US Court of Appeals for the Second Circuit recently disqualified the law firm BakerHostetler LLP ("Baker") from representing its client Prevezon Holdings Ltd. ("Prevezon"). The extraordinary decision made clear that a lawyer's former client can successfully assert a disqualification motion even when the former client is not a party in the litigation. Because disqualification can have a huge impact on both law firms and clients alike, we pay special attention to any decisions on the subject.
What happened.
In 2013, the U.S. government brought a civil forfeiture action against Prevezon based on allegations that Prevezon benefitted from a scheme to defraud the Russian government in 2008 and laundered portions of the fraud proceeds through New York real estate holdings. Baker represented Prevezon in this action. One of the victims of the alleged fraud was an entity called Hermitage. In 2008, Hermitage hired Baker to investigate the fraud in Russia, help defend Hermitage from any liability in Russia, and reclaim any of the fraud proceeds. Baker's representation of Hermitage ended in 2009.
In the course of the proceedings in Prevezon, Hermitage, a non-party, moved to disqualify Baker based on Baker's previous representation of Hermitage. The District Court ultimately denied Hermitage's motion to disqualify Baker. The District Court held that Baker's representation of Prevezon was not "substantially related" to Baker's earlier representation of Hermitage because the Russian tax fraud issue related to Hermitage was an "ancillary issue." The Court also reasoned that Hermitage was not entitled to disqualification because it was a "mere spectator" in the case and not a party whose rights were directly at stake.
Unable to seek a direct appeal of the District Court's order, Prevezon instead sought a writ of mandamus --- an order from the appeals court to a lower court commanding the lower court to discharge a duty. Prevezon argued that the District Court abused its discretion in denying the motion to disqualify. The Second Circuit agreed, holding that the District Court "misapplied well-settled law." In its order, the Second Circuit held that Baker's previous representation of Hermitage and its current representation of Prevezon were "substantially related." The Court noted that in opposition to the government's summary judgment motion, Baker argued that one of Prevezon's "important [and] meritorious defense[s]" was that it was Hermitage and not Prevezon who committed the fraud at issue. The Court also held that Hermitage was not a "mere spectator" and instead had a legitimate interest in the outcome of the proceeding.
What the decision means.
The decision is important for two reasons. First, it serves as a cautionary tale to lawyers who represent a current client on a matter that implicates a former client. While both matters may not always be substantially related based on the allegations in the complaint, a lawyer can make the two matters substantially related by asserting positions that put confidential information in issue. Second, the decision makes clear that even if a former client is not a party to the current litigation and does not face liability, the former client may still have an interest that will warrant their participation in the lawsuit - at least for the purpose of moving for disqualification. This decision expands the scope of disqualification, at least in federal court, by making it easier for non-parties to use that remedy to protect their privileged information.
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