Risk Update

Risk Waves — Is Coke It (for Advanced Conflicts Waivers)? OCGs v ELs

Continued bubbles surfacing on this one, starting with: “Coke’s Quest to Disqualify Paul Hastings Faces Big Hurdles” —

  • “Legal experts say they can understand why Coca-Cola would be unhappy with Paul Hastings’ representation of a company suing the beverage giant for $100 million, but they call the company’s efforts to disqualify the law firm an uphill battle.”
  • “Atlanta-based Coke asserts in its April 12 motion that Los Angeles-based Paul ‘abandoned its ethical obligations’ when it took on the case, even though Coke was a long-standing client.”
  • “But Paul Hastings characterizes the motion as baseless, given that Coke in April 2021 signed an engagement letter with the law firm on a human rights matter, giving it wide latitude to work with any client it wishes, so long as the subject is ‘not substantially related to a matter in which we have represented you.'”
  • “Attorneys not involved in the dispute say courts normally uphold such advance waivers, unless the party granting the waiver lacks the sophistication to understand its consequences.”
  • “‘It is in my view quite unfair for one of the largest, oldest, most successful and most sophisticated corporate entities in the world to induce a law firm’s reliance by agreeing to a waiver and a short time later say, ‘No, not so much, we really didn’t have enough information to inform our consent,’’ said Michael McCabe Jr., managing partner of McCabe & Ali in Washington, D.C.”
  • “‘Give me a break. If Coke can’t be held to an advance waiver, why would anyone honor an advance waiver?'[McCabe added]”
  • “After reviewing the language in Paul Hastings’ advance waiver with Coke for Law.com, University of Minnesota law professor Richard Painter said: ‘Is it a clear waiver? It appears to be.'”
  • “For its part, Coke argues that the advance waiver was ‘buried in a boilerplate attachment’ to the engagement letter and was so general as to be unenforceable. It noted that the waiver did not even include an expiration date.”
  • “Coke said courts have found that such ‘open-ended advance waivers, like the one at issue here, do not provide ‘informed’ consent because they do not provide the signer with adequate information to evaluate the conflict… Paul Hastings knew that Coca-Cola did not intend for every potential future conflict to be waived in perpetuity.'”
  • “Furthermore, Coke says its guidelines for outside counsel explicitly state that the company does not grant advance conflict waivers. It says those guidelines require full prior disclosure and written approval of potential conflicts.”
  • “But Paul Hastings counters that such guidelines are subordinate to the letter of engagement containing the waver, which was signed by Derek Gilliam, who at the time was a Coke senior counsel and now is chief of staff for the Office of General Counsel.”
  • “One case similar to Coke’s involved Texas-based Galderma Laboratories, which in 2012 filed a motion to disqualify one of its outside law firms, Vinson & Elkins. The law firm had been representing the company on employment matters but also represented a company that Galderma sued over an intellectual property dispute.”
  • “Galderma had asked V&E to withdraw, but it refused, citing a conflicts waiver that was part of the engagement letter Galderma had signed. Texas federal Judge Ed Kinkeade rejected the disqualification request, calling the waiver language unambiguous. ‘Galderma is a sophisticated client who has experience engaging multiple large law firms and has twice signed similar waiver provisions with at least one other law firm it has hired,’ the ruling said.”

For those curious to read the specific language of the engagement letter, see page 37 of Coke’s: “Motion to Disqualify“. Here’s a snapshot of that:

And for other interesting perspective, see this from Rob Chesnut (former GC at Airbnb, former Justice Department prosecutor): “Paul Hastings Burns Coca-Cola, Reputation in Conflict Fight” —

  • “No matter how the dispute shakes out, advance conflict-of-interest waivers are bad business. According to some courts, they’re also unenforceable.”
  • “The Paul Hastings-Coke saga isn’t terribly surprising. It highlights an inherent conflict between law firms and their clients. Firms want to cast their nets as widely as possible to bring in work. Clients, of course, want lawyers that are loyal to them above all.”
  • “Law firms, which have grown exponentially over the last three decades, face continued pressure to bring in new clients. Lawyers have jumped from one firm to the next more frequently over the same time, raising complicated questions about potential conflicts.”
  • “During my time leading legal departments at companies like Airbnb and eBay, my relationships with outside counsel boiled down to a few questions: Do we approach legal problems the same way? Is the lawyer smart, well-versed in the relevant area of the law, practical, solutions-oriented, highly responsive and invested in the success of my company?”
  • “If the answer to those questions is “yes,” we were likely to have long relationship. Even if the lawyer’s firm ticks up billing rates over the years. A total of seven outside lawyers—four men and three women—met this criteria for me. I trusted them completely to deliver what I wanted. If they moved law firms, I moved law firms. If I changed jobs, I retained them to advise my new company.”
  • “By the same token, my outside counsel wouldn’t want to do anything to hurt my company. They would never, for example, send me an annual letter with an advance conflict-of-interest waiver buried in small print.”
  • “Instead, I’d expect us to have a mature conversation about the issue up front. It usually would go something like this:
    • Outside counsel: Hey Rob, if we ever get approached for representation in a situation that might present a conflict of interest with your company, I’ll call you and we’ll discuss it. I know that you’ll be fair, and if there’s not a real conflict, you’ll waive it so that you can support my firm’s success. If the conflict is real, there won’t be much of a conversation…I’ll ensure that our firm turns down the work.
    • Me: Done.

“My advice to firms is to rip these waivers out of your terms of service, now. Don’t show up on the other side of a lawsuit, suing my company, without so much as an advance phone call and a discussion.”
“Paul Hastings might manage to get a court to enforce the waiver in this case. But, by allegedly failing to have the conversation with Coke—and later threatening to walk away from the company if it doesn’t agree to waive the conflict—the firm hurt its own brand.”