Conflict-based lawsuits are the latest in anti-takeover protection -- and are fraught with concerns for lawyers, clients and shareholders alike. Suits against Cravath and earlier, Wachtell, remind: while with conflicts, sometimes a cigar is just a cigar, sometimes it's a whole lot more. Recent allegations of conflicts against major M&A advisors signal either a cynical antitakeover tactic or a mark of outlandish dereliction of duty.

In particular, Air Products & Chemicals advisor Cravath, Swaine & Moore and Rohm & Haas advisor Wachtell, Lipton, Rosen & Katz are two law firms that have recently found themselves the targets of disqualification motions filed by former clients. State professional conduct codes are usually the foundation of disqualification suits, but motions and rules and the differing standards leave plenty of room for court legal room maneuvering.

As background, disqualification suits or motions often center on versions of the American Bar Association’s Model Rules of Professional Conduct’s. A version of these rules govern professional ethics in many states, including Delaware. Rule 1.7 states a concurrent conflict of interest exists if:

(1) the representation of one client will be directly adverse to another client; or

(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer's responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.

Rule 1.9 dictates law firms’ duties to former clients and prohibits:

“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.”

The rules are designed to protect all parties, but their potential for misuse should be troubling to shareholders, acquirers, and law firms.

M&A can pit a law firms’ current or former clients against one and other. For example, Air Products & Chemicals is in the midst of a hostile takeover bid for Airgas. According to Reuters, Cravath has represented Air Products and Chemicals for over 40 years and Airgas was a client from 2001 to as late as October 2009, at which point Cravath dropped Airgas like a “hot potato”.

Airgas v Cravath, Swaine & Moore, filed originally in Pennsylvania state court and later removed to the federal court for the Eastern District of Pennsylvania, alleges that Cravath started working on Air Products’ hostile takeover at the same time it was working for Airgas. Cravath’s work at Airgas, according to court documents, was confined to financial transactions. The suit, which has been temporarily stayed, sought to disqualify Cravath from the bid. The concurrent representation claim is key, because Airgas is alleging that the heightened scrutiny of Pennsylvania Rule of Professional Conduct 1.7 should apply (i.e. not the more lenient 1.9).

Needless to say there are number of legal issues at play in Airgas’ lawsuit. Jurisdictionally, the disqualification suit is asking a Pennsylvania court to bar a New York law firm from representing a Pennsylvania-headquartered Delaware corporation in Air Products and Chemicals v. Airgas, a Delaware Court of Chancery case, and perhaps from the entire deal. The temporary stay issued by the Eastern District of Pennsylvania punted the disqualification question to Delaware, as Cravath had requested. Air Products filed an amended complaint in Air Products and Chemicals v. Airgas and likened the disqualification motion an “arrow in [Airgas’ antitakeover] quiver” and according to an Airgas executive was, “just a tactic”. It remains to be seen how Judge William B. Chandler III will rule, but Delaware hasn’t looked kindly on past disqualification motions.

In another possible example of antitakeover conflict litigation, Dow Chemical attempted to disqualify Wachtell, Lipton, Rosen & Katz from its litigation with Rohm & Haas. As background, Wachtell worked for Dow on issues related to renegade executives attempting to sell the company prior to and possibly to some extent during merger negations with Rohm & Haas. Rohm & Haas v. Dow Chemical, sought to force Dow to close a stalled, but airtight, merger agreement. The court refused to remove Wachtell because Rule 1.7 and 1.9 violations face a very high bar, specifically:

“While the Court’s evaluation of these issues is guided by the Delaware Rules of Professional Conduct, the moving party is not entitled to disqualification merely by showing a violation of the ethical rules. [The] mere showing that a law firm violated the Rules of Professional Conduct is not sufficient to warrant disqualification. Instead, I must determine whether allowing Wachtell to continue its representation of Rohm and Haas will affect the fair and efficient administration of justice.”

The ruling went on to outline that, the court didn’t believe that Wachtell’s continued participation would “prejudice justice”, that Dow actually believed it was still a Wachtell client, or that confidential information Wachtell possessed was in anyway related to the underlying merger litigation. Dow finally closed the acquisition after lining up additional financing, which arguably colored the stalling and disqualification motion as a tactic. Delaware has applied similarly strict analysis to disqualification motions based on law firms and alleged conflicts of interest allegations in Appeal of Infotechnology, Inc and Express Scripts, Inc. v. Crawford.

Disqualification motions can be particularly troubling within an M&A context, but intellectual property (IP) is another forum where conflicts of interest, professional ethics, and litigation can quickly lead to law firm disqualification. Former client Openwave systems recently moved to have Fish & Richardson disqualified from representing 724 Solutions. Openwave has alleged in Openwave System v. 724 solutions, in Northern District California, that the defendant infringed on patents for eight of its most fundamental early technologies in the area of enabling mobile internet access. From 2000 to 2007, Fish represented Openwave in patent prosecution 12 and other IP-related matters. The case was filed on July 31, 2009, and Fish first formally appeared on behalf of 724 Solutions on January 19, 2010. The disqualification motion claims that the California Rule of Professional Conduct 3-31 O(E) provides as follows:

“A member shall not, without the informed written consent of the client or former client, accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment.”

The motion further claims that under California rules, the moving party need not establish that its former counsel actually obtained or presently possesses confidential information material to the present case and that the state uses "substantial relationship" test to determine whether confidential information has been imparted in the course of a prior representation.

Fish was the target of somewhat similar disqualification motion in Plantronics, Inc v. Aliph and Aliphcom, filed in the Eastern District of Texas. The basis for the disqualification motion was that Fish had been Aliph’s regulatory counsel and it dropped Aliph to represent Plantronics in a patent infringement case-filed the next-against its former client. The motion colorfully describes’ the situation as, “Fish’s attempt to dump Aliph ‘like a hot potato’” and maintains that move falls short under California, Texas, and District of Columbia law and doesn’t effectively avoid a breach of the duty of loyalty. Fish ultimately withdrew from the case.

In IP as in M&A, Delaware is generally unimpressed with disqualification motions based on conflicts of interests. In Boston Scientific Corporation v. Johnson & Johnson, Inc., the court didn’t disqualify Howrey from representing Boston Scientific during a patent dispute with Wyeth, despite finding a Delaware Rule of Professional Conduct 1.7 concurrent conflict existed. Howrey was simultanesouly representing a Wyeth entity in its opposition in the European patent office to a European patent owned by Lonza Biologics, while Howrey’s Washington, D.C. office was representing Boston Scientific in the patent litigation with Wyeth. After stimulating discussion of Wyeth’s corporate structure and name conventions, which muddied the legal issues at the heart of the case, the court ruled that:

“Howrey's violation of Model Rule 1.7 notwithstanding, the court concludes that disqualification is not the appropriate remedy under the circumstances…The instant suits are unrelated to the Lonza matter;…there is an ethical wall between the two matters - leads to the same conclusion.”

It’s now up to Delaware to decide if Cravath is conflicted or if Airgas is just using the latest in antitakeover tactics. In either event, the disqualification motion is most likely facing a rather high bar, even if the switch was actually a rather “hot potato”. The advent of antitakeover disqualification motions, if that is indeed what the Dow and Airgas motions are, represent a troubling addition to already entrenched board’s quivers.