Netflix v. Winston & Strawn Spotlights Advance Conflict Waiver

Photographer: Chris Ratcliffe/Bloomberg

A July 6 order resolving a bitter disqualification fight between Netflix Inc. and its lawyers at Winston & Strawn LLP is the latest example of the acrimony that “advance conflict waivers” can engender between corporations and the law firms they hire.

The order disqualifying Winston—issued by a federal bankruptcy judge presiding over a high-stakes licensing dispute between Netflix and a financially troubled film studio—could emerge as a blueprint for a particularly contentious category of disqualification motions: those alleging law firms betrayed existing clients by bringing cases against them on behalf of newer clients.

Ethics rules expressly prohibit law firms from taking a case against a current client—unless the existing client, and the prospective new one, waive the conflicts created by the law firm’s concurrent representation. Advance conflict waivers purport to waive conflicts that will arise in the future, so they are oftentimes broadly worded and vague.

The dispute required the U.S. Bankruptcy Court for the Southern District of New York to grapple with the enforceability of advance conflict waivers, which have become a regular feature of retainer agreements that large law firms execute with corporate clients.

Conflict Over Conflicts

Advance conflict waivers are important tools for preserving a law firm’s ability to take on new business that will pit it against companies it currently represents or has represented in the past.

But the increased use of advance waivers has emerged as a significant point of conflict between large law firms and the corporations that are their most lucrative clients.

The increased prevalence of those provisions has also generated an uptick in satellite litigation over their enforceability. Though still sparse, the case law suggests that the failure to properly execute an advance waiver can have dire consequences for a law firm’s bottom line.

Those cases show that invalidation of an advance waiver may not just result in a law firm’s disqualification, but can also trigger a draconian financial penalty: disgorgement of any fees the firm earned from its conflicting representation of a client’s adversary.

The Netflix dispute with Winston—like other high-profile fights over advance waivers, including a pending, closely-watched case before the California Supreme Court—also highlights the danger of relying on a broadly worded advance conflict waiver when an actual conflict arises.

Netflix: ‘Indecorous’ and ‘Unseemly’

The order, issued by U.S. Bankruptcy Judge Michael E. Wiles, will sharply limit the services Winston & Strawn can perform in bankruptcy cases it is handling for Relativity Media LLM, a Hollywood-based film studio that filed for Chapter 11 reorganization in May.

The ruling was a victory for Netflix, which intervened in the bankruptcy proceedings to collect on an alleged contractual obligation—and immediately objected to Winston’s appearance as debtors counsel.

Netflix objected because Winston took on Relativity as a client while the firm was representing Netflix in a still-pending patent infringement suit in Delaware.

The disqualification fight began in late April, when an alleged mail-room snafu alerted Netflix to the possibility that Winston was contemplating an engagement with Relativity.

Netflix alleged that Relativity rushed to file for bankruptcy after receiving an April 4 letter that put the film studio on notice of Netflix’s intent to sue for breach of a licensing agreement. The letter accused Relativity of giving two Netflix rivals—Amazon and Starz—the rights to movies that Relativity purportedly promised to deliver to Netflix.

Relativity’s chief counsel responded to the letter with correspondence, sent April 25 with a return address of Winston’s Los Angeles office.

Hilary E. Ware, an associate general counsel at Netflix, then emailed a Winston & Strawn partner to express “surprise” that the firm was potentially involved in Relativity’s bankruptcy case while simultaneously representing Netflix in the Delaware patent infringement case.

Netflix said the Winston & Strawn partner, Kathi Vidal, gave a deceptive response to that email. “I confirmed that we do not represent Relativity adverse to Netflix,” Vidal wrote. “Instead, someone from Relativity was in our office and asked us to, as a favor, let them send something out.”

“Every part of this representation was false,” Netflix said in court papers. “Indeed, it was carefully crafted to suggest that [Relativity Chief Counsel Lori Sinanyan] was present in Winston’s offices not as a client, but as opposing counsel.”

“As Winston’s subsequent admissions make clear, Winston concealed its representation of Relativity for the express purpose of rushing forward with chapter 11 cases to foreclose Netflix’s ability to terminate the License Agreement on the basis of the exclusivity breaches,” Netflix said.

In a subsequent filing, Netflix said that Winston exacerbated its misconduct with a second betrayal: an “indecorous” attempt, on June 29, to withdraw from its representation of Netflix in the Delaware patent litigation. “There is an unseemliness to what is taking place here,” Netflix said.

Advance Waiver Doesn’t Exist

Winston didn’t dispute the “general principle” that in “the absence of an effective waiver, a lawyer is not permitted to sue a current client, even if the litigation against a client is on matters that are unrelated to the other work that the lawyer is doing for that client,” the judge said.

But the firm did argue that “Netflix waived conflicts generally in a series of engagement letters and emails,” the court said.

The firm didn’t prepare a customized retainer agreement for the work it performed for Netflix in the still-active patent litigation. A Netflix attorney had asked Winston to send a “standard retainer” for the new matter, but the firm partner who pitched Winston’s services didn’t do so. Instead, he said the firm already had “an engagement letter on file,” and promised to “make an addendum” consistent with a proposal the firm submitted.

The addendum never came. But in January 2018, Winston asked Netflix to confirm that the firm would represent a Netflix subsidiary on the same terms as it was representing the parent company. A Netflix lawyer responded, “confirmed and agreed.” (In his opinion, Judge Wiles erroneously indicated that Netflix, rather than Winston, had requested that confirmation).

Winston said those email exchanges—and advance waiver provisions in two prior retainer agreements it executed with Netflix for engagements that are now complete—were sufficient to establish that the parties agreed to an advance waiver in the Delaware patent litigation.

The judge disagreed. “I agree with Netflix that this correspondence is not effective to constitute an advance waiver of conflicts that binds Netflix today,” he wrote.

Be Specific, or Risk Disqualification

“Netflix is correct in pointing out that waivers of conflicts are only effective to the extent they are specific and are provided with informed consent,” Wiles wrote.

“I find that there is nothing in the 2012 and 2015 [engagement] letters and the 2017 and 2018 email correspondence about the new Delaware litigation that is sufficiently clear and specific to constitute a waiver of the conflicts that are raised by Winston & Strawn’s representation of the Relativity debtors in their present disputes with Netflix,” the judge said.

‘A Bit Reckless’

“I am painfully aware that if Winston & Strawn is disqualified from handling the litigation it could have devastating effects on the Relativity debtors,” Wiles said at the end of his order.

“But Netflix also has rights here, which it has diligently sought to protect,” Wiles wrote. “The debtors and Winston & Strawn, for their own reasons, proceeded with their eyes open and with full awareness of the risks of proceeding that way. To some extent, quite frankly, it was a bit reckless to do so.”

Winston’s Loss is Willkie’s Gain

In another July 6 order, the judge said Winston won’t be permitted to handle any aspect of the bankruptcy proceeding that relates to the Netflix-Relativity licensing dispute.

That same day, the Relativity debtors informed the court that they “have retained Willkie Farr & Gallagher LLP as proposed conflicts counsel,” to handle aspects of the bankruptcy proceedings that Winston & Strawn cannot handle.

Klee, Tuchin, Bogdanoff & Stern LLP represented Netflix. Patterson Belknap Webb & Tyler LLP represented Winston & Strawn. Department of Justice Trial Attorney Benjamin J. Higgins, New York, represented the Office of the United States Trustee.

The case is In re Relativity Media, LLC, 2018 BL 240491, Bankr. S.D.N.Y., No. 18-11358 (MEW) (Jointly Administered), 7/6/18.

To contact the reporter on this story: Samson Habte in Washington at shabte@bloomberglaw.com

To contact the editor responsible for this story: S. Ethan Bowers at sbowers@bloomberglaw.com