Lessons from Kirkland’s ‘unfortunate and unethical’ Mylan mess

June 10, 2015

(Reuters) – The Israeli pharmaceutical company Teva was quick to cut its losses yesterday after U.S. Magistrate Judge Lisa Lenihan of Pittsburgh recommended a preliminary injunction barring Kirkland & Ellis from continuing to advise Teva in its hostile bid for Mylan, an occasional Kirkland client since 2013. Kirkland announced that it will file an objection to Judge Lenihan’s recommendation, which will be reviewed by U.S. Chief District Judge Joy Conti, but in the meantime, Teva hired Sullivan & Cromwell to replace the firm in the Mylan takeover battle. A source told Reuters that Kirkland actually agreed to step aside because it did not want its longtime client Teva to face distractions in the hostile offer for Netherlands-based Mylan.

Every conflicts fight depends on specific facts, but there are nevertheless some general lessons to be drawn from what Lenihan called “these unfortunate and unethical circumstances.” As the judge noted in a footnote, these are challenging times in the legal business. Lawyers with specialized expertise quite sensibly want to sell their services to more than one company in an industry. Clients understand that because of law firm consolidations, conflicts are rife, and they’re often willing to sign waivers giving lawyers permission to represent rival companies in related cases.

What the Kirkland case shows, however, is that conflict waivers may not give lawyers broad rights to represent hostile bidders for current and former clients, even if the clients have said it’s okay for the law firm to pursue adverse litigation and even if the firm has set up ethical walls. Judge Lenihan’s 60-page report – which resoundingly rejects just about every element of Kirkland’s case, right down to the firm’s interpretation of individual precedent and its filing of expert reports under seal – is just a recommendation and Kirkland will have a chance to refute the magistrate’s findings. But every law firm that represents activist investors or works in a concentrated industry with relatively few corporate players should read Lenihan’s opinion as a cautionary tale.

In 2013, when Kirkland signed Mylan as a client in some regulatory cases, the firm was already closely associated with Teva and was, in fact, representing Teva in a few cases against Mylan. As part of the engagement agreement, the firm and Mylan negotiated conflict waiver language accounting for Kirkland’s ongoing relationship with Teva.

The clause said Mylan agreed that Kirkland “may, now or in the future, represent other entities or persons, including in litigation, arbitration or other dispute resolution procedure, adversely to you or any of your affiliates on matters that are not related to (i) the legal services that K&E LLP has rendered, is rendering or in the future will render to you under the engagement and (ii) other legal services that K&E LLP has rendered, is rendering or in the future will render to you or any of your affiliates under a separate engagement.”

Kirkland had originally wanted Mylan to waive conflicts on cases that were not “substantially related,” according to the magistrate’s report, but “substantially” fell out in negotiations over the wording of the waiver. In any event, Kirkland handled several cases for Mylan, providing advice on, among other things, pricing strategies for Mylan’s all-important EpiPen epinephrine injector.

Kirkland never asked Mylan for permission to represent Teva (or any other pharma corporation) in a hostile bid for the company, not in negotiations over the conflict waiver and not after Teva asked Kirkland to lead its deal team in an unsolicited offer for the Mylan parent company Mylan, N.V. According to the magistrate’s report, after Teva approached Kirkland, the firm ran a conflict check and confirmed that it had never represented the parent company, which had been formed only in February 2015 as part of a tax inversion deal. Kirkland’s in-house general counsel, Thomas Kuhns, set up an ethical screen between the lawyers who had worked on Mylan litigation and those slated to be part of the Teva takeover team. According to Kirkland, no confidential Mylan information passed to lawyers working for Teva.

Mylan sued Kirkland for breaching its duty in May. Its lawyers at Wilson Sonsini Goodrich & Rosati, Peacock Keller & Ecker and Pietragallo Gordon Alfano Bosick & Raspanti argued that Mylan’s conflict waiver in no way contemplated that the firm would represent a hostile bidder trying to take over the company. Kirkland, they contended, was violating the terms of its engagement agreement with Mylan by representing a Mylan adversary in a takeover bid necessarily related to the products at issue in Kirkland’s work for Mylan.

In an expert report for Mylan that Judge Lenihan ultimately considered very persuasive, Harvard Law professor John Coates argued that virtually all previous litigation could be considered related to an unsolicited bid because so many factors shape the hostile takeover process.

Kirkland’s lawyers at Gibson Dunn & Crutcher, advanced three defenses, broadly speaking: Kirkland had never technically represented Mylan, N.V., so there wasn’t any conflict, Teva’s above-market bid couldn’t be proved to be adverse to Mylan’s interest and Mylan had agreed in the conflict waiver to permit Kirkland to represent adversaries in matters that could decimate Mylan’s business.

Judge Lenihan did not use the word “sophistry” to describe Kirkland’s arguments but that pretty well describes what she thought of them. She found the firm’s technical argument that it hadn’t represented the recently formed parent company “disquieting,” cautioning that Kirkland could not so easily shuck “the sacrosanct duties that characterize an attorney’s faithfulness to his/her client.” The judge said Kirkland had a “crabbed” view of whether Teva’s hostile bid was adverse to Mylan’s interest that “ignores both the moral/ethical considerations and effects to a client of its counsel’s betrayal and the true spectrum of potential adverse business/economic effects flowing from abuse of client trust/misuse of information received in a fiduciary capacity.”

Much of her analysis involved the reach of the conflict waiver. Ultimately, Judge Lenihan read the agreement only to permit Kirkland to represent Mylan in the sorts of cases in which the firm was already working for Mylan competitors. “K&E never informed Mylan of any intent or understanding that under the terms of the engagement Letter K&E would be permitted to undertake representation in an adverse acquisition of the Mylan corporate affiliate group,” she wrote. “If K&E intended to retain a right to act as an advocate against the Mylan clients in such a fundamental way, it was incumbent upon it to make certain that the clients knew and agreed to such an arrangement.”

I could go on quoting the magistrate about Kirkland’s violation of its ethical obligations to Mylan, but you get the idea. Like I said above, her report and recommendation isn’t binding on the trial judge. Kirkland, which is still facing Mylan’s breach of duty claims even though it’s not representing Teva any more, said in a statement Tuesday that it continues to believe its conflict waiver permitted the firm to work on the hostile bid and that it has stringently protected Mylan’s confidentiality. “Bottom line, Mylan’s claims are without merit, and it is our contention that Mylan’s lawsuit is nothing more than a tactical ploy designed to impede a proposed transaction with Teva,” Kirkland said.

Maybe Mylan’s suit was a tactical ploy. But right now, it’s looking like a pretty effective one.

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