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ELAN TRANSDERMAL LTD. v. CYGNUS THERAPEUTIC SYS.

November 16, 1992

ELAN TRANSDERMAL LIMITED, Plaintiff,
v.
CYGNUS THERAPEUTIC SYSTEMS, a California corporation, Defendant.



The opinion of the court was delivered by: WILLIAM H. ORRICK

 Meinhard v. Salmon, 249 N.Y. 458, 464, 164 N.E. 545, 546 (1928).

 The standard of behavior for fiduciaries, articulated by Justice Cardozo (then Chief Judge), is the standard for the fiduciary relationship that exists between lawyer and client, and is the standard this Court upholds in granting plaintiff's motion to disqualify defendant's counsel.

 I.

 Elan Transdermal Limited ("Elan"), an Irish corporation, initiated this suit against rival Cygnus Therapeutic Systems ("Cygnus"), a California corporation, alleging infringement of its patent (United States patent No. 4,946,853 ("'853 patent")) for a patch that delivers nicotine transdermally. When Elan replaced its original counsel with the Los Angeles firm of Irell & Manella ("Irell"), the firm that had provided Cygnus with intellectual property advice for over four years during the development of Cygnus' nicotine patch, Cygnus brought this motion for disqualification of Irell. This motion has raised serious issues about the duties attorneys owe their former clients and the lingering aftereffects of the law firm merger boom, which the Court has considered carefully.

 The relevant facts are not in dispute.

 Elan received the '853 patent on August 7, 1990. On May 10, 1991, when Elan filed its complaint, both Elan and Cygnus had nicotine patches before the Food and Drug Administration ("FDA") for testing and eventual clearance for marketing. Elan claimed that the product for which Cygnus was seeking FDA clearance is within the scope of the '853 patent, and that Cygnus has already infringed its patent rights.

 Irell (and its predecessor firm, Ciotti & Murashige, Irell & Manella) *fn1" was intellectual property counsel to Cygnus from March 1, 1987, to August 31, 1991. Thomas Ciotti was the partner in charge of work for Cygnus, and both he and most of the other attorneys who worked on the Cygnus representation were based in the Menlo Park office of Irell. In September 1991, the Menlo Park office of Irell "de-merged," and almost all the personnel, including Ciotti, affiliated themselves with the firm of Morrison & Foerster. Cygnus has since used that firm to handle its patent work.

 As intellectual property counsel to Cygnus, Irell provided a range of services, including advice regarding patents and patent applications around the world that might affect Cygnus' business, determinations regarding the patentability of Cygnus' inventions, advice about protection of Cygnus' patentable inventions, and prosecution of Cygnus patents nationally and internationally. During its representation by Irell, Cygnus was developing its nicotine transdermal patch as its first commercial product. An Irell attorney represented Cygnus in several patent applications related to the patch. During this time, Irell attorneys had free access both to Cygnus personnel and to its business and scientific records.

 Irell's work for Cygnus included matters specifically related to this lawsuit. Irell lawyers provided written advice to Cygnus regarding previously asserted Elan patent claims, claims that are similar to those before the Court in this action, *fn2" oral and written advice regarding the '853 patent, the very patent-in-suit, and advice concerning a public offering prospectus, part of which Elan now alleges proves Cygnus' knowledge of its infringement.

 Cygnus submitted, in camera, parts of an opinion letter Ciotti wrote to Cygnus in the summer of 1990 regarding the '853 patent. Cygnus' chairman and chief technical officer, Gary Cleary, declares that Cygnus gave its corporate securities counsel Irell's advice, as expressed in that opinion letter and also in a November 1990 conversation with Ciotti, and that securities counsel relied exclusively upon that advice when drafting the portion of the public offering prospectus regarding the '853 patent, the same portion Elan is now asserting is proof of Cygnus' liability.

 According to Cygnus, which is relying on the billings it received, twenty-nine different Irell partners and employees worked on projects for Cygnus between March 1, 1987, and August 31, 1991. Cygnus has identified four of these people as current Irell lawyers -- Messrs. Cost, Rothman, Smith and Winslow. Irell admits that one other current partner, Mr. Dull, also did Cygnus-related work, according to its internal time records. *fn3"

 Cost and Rothman are corporate securities lawyers who reviewed an opinion letter written by Ciotti to underwriters of Cygnus' public offering, and the public offering prospectus itself. Cost reviewed the letter as a member of the firm opinion committee. Rothman was a corporate associate practicing in the Menlo Park office. Cost charged three-quarters of an hour and Rothman one and one-half hours. The letter, written after the ethics committee meeting, specifically disavows any opinion of Elan's patents. *fn5" The prospectus, as discussed above, mentions Elan's patents.

 Irell also offers information regarding four other current firm lawyers who, although they did not charge time to Cygnus, were mentioned in the time sheets of attorneys who were charging time to Cygnus as discussing Cygnus-related matters. *fn6" All these people, and all attorneys mentioned above, deny having any confidential information substantially related to the current representation.

 Although the bulk of the Menlo Park lawyers stayed in Menlo Park after the merger ended and affiliated with Morrison & Foerster, several current Irell partners worked at the Menlo Park office. Dull was listed in the Martindale-Hubbell Law Directory ("Martindale-Hubbell") as a partner in the Menlo Park office in 1989, 1990, and 1991. He does not offer exact dates of his time in Menlo Park in his declaration. Rothman is listed as an associate in Menlo Park in the 1991 edition of Martindale-Hubbell, and describes his time there as a "brief period." Chu, a current partner, who is on the opposition papers and argued on behalf of Elan before the Court, was listed in the 1989 and 1990 editions of Martindale-Hubbell as a "resident member" in the Menlo Park office. Although Irell submitted copies of the directory listings of the Menlo Park office for the years 1985-1991 in order to document the history of that office, Chu informed the Court at oral argument that these listings were mistaken and that, in fact, he was never based in Menlo Park office and visited there only for short periods when he was in Northern California for firm business.

 While recognizing the possibility of other errors in the directory listings, the Court notes that according to Martindale-Hubbell, the Menlo Park office, during the period of its merger with Irell, remained a small office, with eight partners and four associates listed in the 1988 edition, and eight partners and thirteen associates listed in the 1991 edition.

 II.


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