To dodge conflicts, make waivers specific

Should law firms rethink their client engagement letters, and more specifically, the advance waiver clauses they include?

That’s the question emerging after a federal magistrate’s lengthy report recommending that Kirkland & Ellis LLP be disqualified from representing Teva Pharmaceutical Industries Ltd. in its attempt to acquire Mylan NV because of the work Kirkland had done for Mylan.

While the ruling is limited to the intricacies of the takeover battle, its repercussions could extend beyond the drugmakers. The issue is particularly fraught because of partners moving laterally and because of law firm consolidation as well as consolidation within industries.

“More firms are struggling with the balance between their ethical obligations to comply with conflicts rules and the practical realities of big firms that represent multiple parties in the same industry,” Nicole Hyland, a partner at Frankfurt Kurnit Klein & Selz P.C., said in an interview Wednesday. “There’s growth in these types of disqualifications and conflict situations.”

Mylan sued Kirkland claiming that work the firm had performed on several matters gave it access to confidential, strategic information that might, despite so-called ethical walls, be used against the company.

Although the report, which must still be adopted by the federal judge overseeing the case, is predicated on Pennsylvania law, ethical rules and retention agreements are sufficiently similar in other states to make the magistrate’s recommendation instructive.

Kirkland was already representing Teva when Mylan became a client. According to the magistrate’s report, Mylan was aware of Kirkland’s work for Teva, “including regulatory matters and products liability litigation with respect to certain drugs, some of which were matters in which Teva’s interests were directly adverse to Mylan.”

In addition, Mylan had agreed to a waiver agreement that allowed Kirkland to represent others, “including in litigation, arbitration or other dispute resolution” procedures that might be adverse.

Nonetheless, that agreement, known as an advance waiver, shouldn’t be read to permit Kirkland to represent Teva, the magistrate said.

Several years ago, Cravath, Swaine & Moore LLP, which represents Mylan in the takeover battle, although not in the conflict litigation, was embroiled in a similar suit.

Airgas Inc., in a Pennsylvania state court, claimed that Cravath was conflicted because it represented the company in financings from 2001 to 2009, when it said it could no longer continue in that role because of a conflict. That suit settled in 2011 on terms that remain confidential.

The conflicts issue in the Kirkland case will linger even though Teva has now retained Sullivan & Cromwell LLP as its adviser.

Kirkland, represented by Gibson, Dunn & Crutcher LLP, is planning on objecting to the magistrate’s report, the firm said in an emailed statement. Wilson Sonsini Goodrich & Rosati represented Mylan in the conflict litigation.

“We strongly disagree with the recommendation made by the magistrate judge, and we reject any suggestion that Kirkland & Ellis’s representation of Teva in its proposed acquisition of Mylan NV presents a conflict of interest,” Kirkland said.

Even if the judge overseeing the case ultimately rejects the magistrate’s report, the detailed analysis should offer firms “one tool in how to manage conflicts and draft waivers,” Hyland said.

“To the extent you can make a waiver specific and really identify the types of matters that you intend to include or exclude, the better the chances that a court will enforce it.”