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Acacia Patent Acquisition, LLC v. Superior Court (Chitranjan N. Reddy)

California Court of Appeals, Fourth District, Third Division

February 27, 2015

ACACIA PATENT ACQUISITION, LLC et al., Petitioners,
v.
THE SUPERIOR COURT OF ORANGE COUNTY, Respondent CHITRANJAN N. REDDY, Real Party in Interest.

Original proceedings; petition for a writ of mandate and/or prohibition to challenge an order of the Superior Court of Orange County, No. 30-2013-00633328 Frederick P. Aguirre, Judge.

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COUNSEL

Corbett, Steelman & Specter, Richard B. Specter, Diane L. Ellis; Stradling Yocca Carlson & Rauth, Marc J. Schneider, and Douglas Q. Hahn for Petitioners.

AlvaradoSmith, Marc D. Alexander, William M. Hensley; Law Offices of Dawn Ceizler and Dawn Marie Ceizler for Real Party in Interest.

OPINION

IKOLA, J.

Petitioners seek the disqualification of the law firm of AlvaradoSmith, which: (1) previously represented another law firm in an attorney fee dispute; and (2) in this case, represents an expert seeking consulting fees arising out of the same underlying litigation as the attorney fee dispute. We issued a stay order and order to show cause. We now conclude AlvaradoSmith’s wide-ranging access to privileged information in the first representation and the substantial relationship between the two matters requires the disqualification of AlvaradoSmith. We therefore grant writ relief countermanding the respondent court’s contrary order.

FACTS

Matter No. 1: Petitioner Shared Memory Graphics LLC (SM Graphics) hired the law firm of Floyd & Buss in May 2009 to pursue patent infringement litigation against a list of leading electronics firms. Matter No. 1 commenced in July 2009 in Arkansas, but was subsequently transferred to the United States District Court for the Northern District of California. The SM Graphics retention agreement covered “litigation activities with respect to” 14 patents. The record is unclear, however, as to whether all 14 of these patents were actually at issue in Matter No. 1, or if only two of the 14 patents were the focus of Matter No. 1.[1] In March 2011, SM Graphics and related entities obtained a cash settlement (totaling approximately $45 million) from Samsung (one of the defendants in Matter No. 1) as part of a combined licensing and settlement agreement encompassing not only the patents at issue in Matter No. 1, but also numerous other patents owned by SM Graphics's affiliates. Floyd & Buss acted as counsel for SM Graphics until at least May 2011, logging more than 8, 000 billable hours. The record is silent as to what role, if any, Floyd & Buss actually played in the settlement negotiations with Samsung.

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Matter No. 2: Floyd & Buss hired AlvaradoSmith in 2012 to arbitrate its claim for attorney fees against SM Graphics. Floyd & Buss alleged that SM Graphics underestimated the importance of the patents at issue in Matter No. 1 to the $45 million settlement, thereby reducing the amount owed to Floyd & Buss pursuant to a contingency agreement. Floyd & Buss obtained a cash payment of $3, 501, 000 from SM Graphics to settle this dispute; the arbitration was dismissed on November 12, 2013.

Matter No. 3 (the instant action): Plaintiff (and real party in interest to this proceeding) Chitranjan N. Reddy sued defendants (and petitioners in this proceeding) SM Graphics and Acacia Patent Acquisition, LLC (Acacia Patent). Reddy claims defendants are alter egos of each other with regard to the allegations at issue. Reddy’s allegations are similar to those made by Floyd & Buss in Matter No. 2. Reddy was retained in March 2009 by Acacia Patent to perform expert consulting work relating to United States Patents Nos. 5, 712, 664 and 6, 081, 279, i.e., two of the patents owned by SM Graphics that were ultimately made the subject of the litigation in Matter No. 1.[2] The agreement (styled a “Consulting Expert and Common Interest Agreement”) stated Reddy was entitled to 11 percent of the “Net Proceeds” of the “licensing, enforcement or sale” of the two patents. Reddy claims Acacia Patent and SM Graphics manipulated the settlement from Samsung to allocate an artificially low amount to the patents upon which Reddy provided his services. This resulted in a lower proposed payout to Reddy pursuant to his contingency agreement. Specifically, defendants allotted $1.5 million out of the $45 million to SM Graphics, resulting in $93, 289.59 being offered as payment to Reddy after the deduction of alleged expenses.[3]

Reddy’s operative complaint includes causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, quantum meruit, an accounting, and violation of Business and Professions Code section 17200 et seq. Reddy asserts that defendants “acted with an intent to defraud Plaintiff when they entered into the contingency Consulting... Agreement. On information and belief, Defendants intended from the very beginning, but did not disclose to Plaintiff, that they would allocate the proceeds of any global settlement in a manner that favored Acacia [Patent’s] and its other affiliates’ interests to the detriment of Plaintiff by allocating settlement funds to multiple... related entities to avoid payment of the full

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contingency fees due.” Matter No. 3 was filed in San Luis Obispo County by Attorney Dawn Ceizler, a sole practitioner. But attorneys from AlvaradoSmith associated in as cocounsel after venue was transferred to Orange County and their successful representation of Floyd & Buss in Matter No. 2 ended.

Acacia Patent and SM Graphics promptly moved to disqualify AlvaradoSmith in Matter No. 3, citing AlvaradoSmith’s access in Matter No. 2 to large quantities of confidential documents that would ordinarily be protected by the attorney-client privilege and/or work product doctrine. Supporting declarations amply demonstrated that AlvaradoSmith had access to thousands of privileged documents produced during discovery in Matter No. 2. Indeed, defendants represent in their petition that “AlvaradoSmith obtained all of the [Floyd & Buss] files from” Matter No. 1. Work product prepared by Floyd & Buss in Matter No. 1 included a valuation of the claims against Samsung. Moreover, Reddy’s consulting agreement was drafted by Floyd & Buss, and privileged communications concerning Reddy’s consulting agreement were produced in discovery in Matter No. 2. A list of documents designated by Floyd & Buss for use at the arbitration included privileged communications and work product. Defendants’ moving papers, however, did not describe the precise contents of particular documents.

In opposing the motion, AlvaradoSmith Attorney Marc Alexander declared that AlvaradoSmith abided by three separate protective orders governing confidential documents to which it had access during the arbitration in Matter No. 2. At the conclusion of Matter No. 2, AlvaradoSmith returned or destroyed confidential documents in its possession.

The court denied the motion, reasoning: (1) AlvaradoSmith’s representation of Reddy was “not adverse, in the traditional sense, ” to its representation of Floyd & Buss; (2) no improper acquisition of confidential information occurred in Matter No. 2; (3) protective orders required the return of all confidential documents at the end of Matter No. 2; (4) there is no evidence suggesting AlvaradoSmith violated the protective orders; and (5) mere exposure to confidential documents is insufficient to disqualify counsel. The court commented at the hearing, “I just don’t see that the privileged information that they may have come into knowledge of, ... they no longer retained the files, so to retain that in their memory intact, [it would be] pretty difficult, I would imagine.”

DISCUSSION

“Generally, a trial court’s decision on a disqualification motion is reviewed for abuse of discretion. [Citations.] If the trial court resolved disputed factual issues, the reviewing ...


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