Justia Federal District Court Opinions

We are called upon today to decide a question of acute sensitivity and importance, touching upon vital concerns of the legal profession and the public's interest in the scrupulous administration of justice. At issue is the disqualification of David Rabin, Esq., on the ground that his representation of the plaintiffs in the underlying actions below constituted a breach of Canon 4 of the Code of Professional Responsibility, which governs the conduct of lawyers.¹

The complaints in these actions² sought declaratory judgments that patents held by Patentex, Inc., were invalid and unenforceable. The complaints alleged unlawful manipulation and control of Patentex by its part-owner, Burlington Industries, Inc., and charged Burlington with directing Patentex to improperly acquire and illegally use the patents in question to control prices in the yarn processing and knitting industry. Lead counsel for the plaintiffs, and self-acknowledged architect of all but one of the seven complaints in these actions, was David Rabin, a specialist in textile patent litigation. In the years between 1958 and 1962, however, Rabin had represented Burlington in another patent suit, referred to as the Supp-hose case,³ which also called into question the nature and scope of Burlington's control over Patentex. Patentex, therefore, moved for Rabin's disqualification, asserting that Rabin's present adversarial posture might result in disclosure or conscious or unintentional use of confidential information acquired by him during the Supp-hose litigation. Judge Motley, in the district court, granted the motion, and this appeal followed.

We approach our task as a reviewing court in this case conscious of our responsibility to preserve a balance, delicate though it may be, between an individual's right to his own freely chosen counsel and the need to maintain the highest ethical standards of professional responsibility. This balance is essential if the public's trust in the integrity of the Bar is to be preserved. Moreover, we are mindful that ethical problems cannot be resolved in a vacuum. To affirm the order below will, to be sure, deprive plaintiffs of highly qualified counsel of their own choosing and may foreclose Rabin's participation in future actions brought against Burlington and Patentex. There can be no doubt, however, that we may not allow Rabin to press these claims against Patentex if, in doing so, he might employ information disclosed to him in confidence during his prior defense of Burlington. Such a result would work a serious injustice upon Burlington and Patentex and would tend to undermine public confidence in the Bar. Thus, even an appearance of impropriety requires prompt remedial action by the court. After thorough consideration, we conclude that Rabin's earlier defense of Burlington against charges that it controlled Patentex for illegal purposes precludes him from pressing similar claims in the instant suits. Accordingly, we affirm.

At the outset, it is useful to identify the central characters in this litigation. Burlington Industries Inc., whose executive offices are located in Greensboro, North Carolina, is, we are told, the world's largest textile company. As such, it is a major force in the yarn processing and knitting industry. Chadbourn Gotham, Inc., headquartered in Charlotte, North Carolina, is also a primary competitor in this field. These two companies each own fifty percent of the voting stock of Patentex, Inc. According to a Dun & Bradstreet report, Burlington and Chadbourn created Patentex in 1955 "to acquire title [from them] to patents and methods of manufacturing women's stretch stockings and processing yarns used in their manufacture . . . . [Patentex] license[d] other hosiery manufacturers under their patents and in turn receive[d] royalties for their use." Thus, in return for royalty payments, Burlington and Chadbourn allowed their competitors to employ knitting technology which they had patented.

Lawrence Greenwald was president of Patentex at the time of the Supp-hose litigation, discussed in greater detail below, but is no longer employed by either Patentex or Burlington. Edward Kobos became Assistant to the President and Secretary of Patentex in 1957 and continues to hold these posts today. In 1957, Douglas Orr was assistant general counsel of Burlington and served as chief counsel to Patentex. From 1964 until his retirement in 1971, he was Burlington's general counsel. Finally, David Rabin is a patent attorney who specializes in textile patents. In addition to both a bachelor's and a master's degree in law, his professional background includes a degree in mechanical engineering from Duke University and a period of employment in the United States Patent Office, where he specialized in yarn and knitting technology. His present office is in Greensboro, an area correctly categorized as "the heart of the textile industry."

Since an understanding of Rabin's prior involvement with Burlington in the Supp-hose case is essential to consideration of Patentex's motion to disqualify him from serving as counsel in the pending actions, we now turn to a discussion of these two proceedings.

The Rabin-Burlington-Patentex nexus was first formed in the Supp-hose case. The origins of that dispute date back to at least January, 1958, when Claussner Hosiery Co., a licensee of Patentex, inquired of Patentex President Greenwald whether it could manufacture hosiery with the same construction as a stretch support stocking then being marketed by Kayser-Roth, Inc. under the trade name "Supp-hose." After several communications between Patentex and Claussner on this subject, Kobos, Greenwald's assistant, informed Claussner and certain other Patentex licensees that they could continue to manufacture stretch support stockings under several Patentex patents without infringing Kayser-Roth's patent. Patentex assured them that pursuant to its license agreement it would defend its licensees against any infringement actions brought against them by Kayser-Roth. Claussner's primary concern, however, was that Kayser-Roth would commence infringement actions throughout the country against Claussner's large retail customers, who in turn would threaten to withhold future retail orders unless Claussner defended them. When Claussner sought assurance from Patentex that the latter would defend such "third-party" actions as well, Kobos replied, on October 30, 1958, that "we would not be willing to undertake to defend you in the event one of your retail customers were sued, even though you were later voluntarily or involuntarily involved in the suit."

At this juncture, Claussner turned to Rabin for professional advice. Rabin suggested that the wisest course for Claussner to follow would be to initiate litigation in a forum of its own choosing seeking a declaratory judgment that Kayser-Roth's patent was invalid. At Claussner's request, Rabin prepared an appropriate complaint for Claussner and its affiliate, McCallum Hosiery Co. Claussner subsequently consented to joining two other Rabin clients, Triumph Hosiery Mills and Hudson Hosiery Co., as plaintiffs in the action.

After his retention by these four hosiery mills, Rabin met with Orr, at that time Burlington's assistant general counsel, to discuss Patentex's attitude toward the impending litigation. Although Orr again rebuffed a request to defend any actions that Kayser-Roth might bring against retail customers of Patentex's licensees, he indicated that Burlington would be interested in joining the contemplated declaratory judgment action against Kayser-Roth and, accordingly, requested Rabin to represent Burlington as well. According to Rabin, he responded by "explain[ing] to Mr. Orr that [he] was flattered with the invitation [to represent Burlington] but in view of the then pending actions against Burlington and [his] position of representing Claussner, McCallum, and Hudson, [he] would have to decline." The currently pending actions to which Rabin referred were two infringement actions-both unrelated to the Kayser-Roth matter-which Rabin was prosecuting against Burlington on behalf of Floyd Shoaf, an inventor, and Tight Pat, Inc., owner of an allegedly infringed patent. The conflict concerning Claussner, McCallum, and Hudson to which Rabin alluded was, of course, their potential claims against Patentex based on the indemnity clause in the license agreement. After discussing these matters with Orr, Rabin conferred with Shoaf and representatives of Claussner, McCallum, Hudson, and Tight Pat. Rabin then informed Orr that his clients had consented to his representation of Burlington and that Rabin would do so as long as he maintained "the right to protect and preserve any claims of my various clients with respect to Patentex, Inc."

Following this agreement, in December, 1958, Rabin filed a complaint against Kayser-Roth and its subsidiary, Alamance Industries, seeking a declaratory judgment that the Supp-hose patent was invalid. In February, 1959, Kayser-Roth served its answer, denying that its patent was invalid. In addition, Kayser-Roth asserted a counterclaim, alleging that

The Plaintiff, Burlington Industries, Inc., through its officers and agents, and through Patentex, Inc. . . . a company which the Plaintiff, Burlington Industries, Inc., actively controls, has individually and in Plaintiffs, actively induced infringement of the aforesaid patent-in-suit concert and cooperation with the other . . . by said Plaintiffs and others [the Patentex licensees] . . . for the purpose of unlawfully exploiting and destroying Defendants' property rights in said invention and destroying or adversely affecting Defendants' United States and foreign business in said invention.

Thus, for the first time, Burlington's alleged control of Patentex had become an issue in the Supp-hose case. Accordingly, Kayser-Roth took pre-trial depositions of Greenwald, Kobos, and Orr for the purpose of exploring the nature and degree of that control. The thrust of this inquiry is illustrated by the following testimony by Patentex President Greenwald:

Q. How does Patentex communicate with Burlington?

A. Usually by word of mouth, I guess.

Q. Do you have any written memos or inter-office communications?

A. I am not much of a writer. People are in the next office-I usually talk to them. I don't write them notes. I won't say I never have, but I don't make a general practice of it.

Q. Do you have any records of communications between Patentex and Burlington relative to the subject matter of this litigation?

A. Not that I know of.

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Q. How often does the board of directors of Patentex meet?

A. It's required by its by-laws to meet once a year and it meets possibly once or twice a year in between.

Q. In connection with the day-to-day operations of Patentex, who is in charge of that?

A. I am.

Q. With respect to the policy and decisions and judgments that are taken day-to-day, is that your responsibility?

A. Within limits. If they are policy matters, then I consult the directors.

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Q. Burlington is charged with the duty of managing Patentex, is it not?

A. I believe I elaborated on that once before. That is true but it's a trust. When I say "it's a trust", I mean I am entrusted with the management of it and the decisions and policy are arrived at jointly with Chadbourn-Gotham and Burlington and that I have never taken anything upon myself that I thought could be questioned.

While it is unclear whether Rabin participated in preparatory conferences with anyone other than Greenwald, it is undisputed that Rabin was present as counsel for Burlington at each deposition at which Burlington's relationship with Patentex was discussed.

Other events raised the issue of Burlington's control of Patentex in yet another way. Upon receipt of the counterclaim, Rabin sent notice to Patentex, on behalf of his clients, indicating that its licensees had been charged with infringement. In response to Rabin's letter, Greenwald, in correspondence dated August 18, 1959, called to Rabin's attention paragraph eleven of the license agreement, which provides that "If, after notification to Licensor by Licensee of . . . the institution of suit for alleged infringement, Licensor, upon advice of its counsel, shall inform Licensee that the claim of infringement appears to be valid, Licensor may advise Licensee to modify its methods or processes of manufacture to avoid such infringement. . . . ." Accordingly, Greenwald suggested that the licensees should alter their methods of manufacture "so as to avoid any infringement of [Kayser-Roth's patent]." Kayser-Roth discovered this letter during a deposition and sought at trial to characterize its contents as an admission by Patentex of the validity of Kayser-Roth's Supp-hose patent. Kayser-Roth argued, albeit unsuccessfully, that the admission could be imputed to Burlington because of its control of Patentex.

Thus, although the Supp-hose litigation ultimately concluded in 1962 with a declaration that Kayser-Roth's patent was invalid, the nature and extent of Burlington's control over Patentex was, beyond peradventure, a disputed matter in that case. That question was in sharp focus both because of Kayser-Roth's direct charge that Burlington caused Patentex to induce its licensees to infringe the Supp-hose patent, and because of Kayser-Roth's attempt to imput to Burlington the alleged admission of validity in Greenwald's August 18, 1959 letter.

With this background in mind, the question remains whether a substantially related issue is present in the instant actions, such as to require the disqualification of Mr. Rabin. To that question we now turn.

Our discussion of the instant controversy is, perforce, a limited one, since other than the submission of affidavits and depositions pertaining to the motion for disqualification, and the filing of the parties' complaints and answers, there has been little activity directed towards resolving the merits of the underlying dispute. Emle and three affiliated companies, represented by Rabin, filed their complaint in May 1968, naming as defendants both Patentex and Burlington. Of particular interest is paragraph 12 of the complaint, prepared entirely by Mr. Rabin, which alleges that

Defendant Patentex, Inc. is a patent holding and licensing company controlled by defendant Burlington Industries, Inc. and holds numerous patents pooled together from various sources for the purpose of controlling the manufacture and sale of stretchable knitted fabrics, including hosiery, the method of manufacture thereof, and the processing of yarns to impart torque characteristics, among other products. Defendant Burlington Industries, Inc., through management of Patentex, Inc., has acquired competing patents through the resolution of interference proceedings in the United States Patent Office, and otherwise, and has endeavored to license the entire yarn processing industry and knitting industry, of which Burlington Industries, Inc. is a major entity, through preferential and discriminatory agreements, with the resolution of such proceedings occurring without regard to the first and true inventor of the alleged inventions, and have misused such patents. [emphasis supplied]

The complaint sought "an adjudication that defendants have misused their patents . . . and that such patents are unenforceable." Patentex's answer, apart from admitting that it was a company holding title to patents acquired from various sources, denied all other allegations in paragraph 12. As indicated by that portion of paragraph 12 that we have underscored for emphasis, the issue of Burlington's control of Patentex was contested in the present action just as it was in the Supp-hose case.

Five additional complaints-those of Knit Products, Bossong Hosiery Mills, Alba-Waldensian, Tower Hosiery Mills, and Holt Hosiery Mills-which also are part of this consolidated action, though drafted by Rabin as well, were not filed until May, 1970. These suits by Patentex licensees, which did not name Burlington as a defendant, grew out of a demand made by Patentex that they sign a new license agreement more favorable to Patentex. According to Rabin,

I had been consulted by the various clients whom I had represented over a substantial number of years, conferred with them and the decision was made, in view of substantial unauthorized infringements by others, among other reasons, that these actions would be brought after the license agreements were repudiated, and it was not found necessary to bring Burlington into that lawsuit because there had been no threats made by Burlington, just solely against Patentex because Patentex was the licensor.

These complaints, however, differed from the Emle complaint only in the amount of specifics provided for the claim of misuse. After alleging that "Patentex is a patent holding and licensing company . . . owned by Burlington Industries, Inc. and Chadbourn, Inc. and . . . organized for the purpose, among others, of acquiring competing patents and patent applications in the yarn processing and knitting industry," the complaints detailed eleven ways in which Patentex's licensing program constitutes a misuse of its patents.⁴ In addition, the complaints specifically claimed that the licensing program violates the antitrust laws. The seventh complaint, filed by Glen Raven Mills in February, 1970, was not prepared by Rabin but Glen Raven's attorney, Frederic Houston, conceded that he referred to Rabin's Emle complaint while drafting it. Rabin undertook to represent Glen Raven in June, 1971.

Aside from a few requests for admissions and interrogatories served by Patentex and Burlington in the Emle action, these matters lay dormant until May, 1971. On May 25 of that year, however, Burlington moved to dismiss the Emle complaint under Rule 12(b)(6), F.R.Civ.P., for failure to allege the existence of an actual controversy between the Emle plaintiffs and Burlington. In order to prepare a defense to this motion, Rabin sought to depose Kobos, still Assistant to the President of Patentex and its Secretary. Rabin had only begun questioning Kobos on his duties at Patentex when counsel for Patentex instructed Kobos not to respond to any further questions. Subsequently, on September 27, 1971, Patentex filed a motion to disqualify Rabin from representing the plaintiff in each action on the ground that Rabin's involvement constituted a breach of professional ethics. As we have noted, the actions were consolidated for the purposes of deciding this motion and came before Judge Motley. She concluded that "the issues of the control of Patentex by Burlington and the business relationships between Patentex and Burlington were present in the Supp-Hose Case and are also present in the instant cases" and accordingly granted the motions to disqualify Rabin. This appeal followed.⁵

As previously indicated, Canon 4 of the Code of Professional Responsibility provides that "A lawyer should preserve the confidences and secrets of a client." We take as our guidepost in applying the language of Canon 4 to this case the standard articulated by Judge Weinfeld in T.C. Theatre Corp. v. Warner Bros. Pictures, 113 F.Supp. 265 (S.D.N.Y. 1953). There, the court said:

I hold that the former client need show no more than that the matters embraced within the pending suit wherein his former attorney appears on behalf of his adversary are substantially related to the matters or cause of action wherein the attorney previously represented him, the former client. The Court will assume that during the course of the former representation confidences were disclosed to the attorney bearing on the subject matter of the representation. It will not inquire into their nature and extent. Only in this manner can the lawyer's duty of absolute fidelity be enforced and the spirit of the rule relating to privileged communications be maintained.⁶

113 F.Supp. at 268-269 (emphasis supplied). The "substantially related" test has been approved and followed by subsequent decisions, see, e.g., Consolidated Theatres v. Warner Bros., 216 F.2d 920 (2d Cir. 1954); Doe v. A. Corp., 330 F. Supp. 1352 (S.D.N.Y.1971), aff'd, 453 F.2d 1375 (2d Cir. 1972) (per curiam); Empire Linotype School v. United States 143 F.Supp. 627 (S.D.N.Y.1956); United States v. Standard Oil Company, 136 F.Supp. 345 (S.D.N.Y.1955), and has been embraced by both sides in this proceeding.⁷