Wall orders

As Howrey’s European teams quit over IP conflicts of interest, a fault line between the US and Europe is emerging. Can Hogan Lovells and
Baker & McKenzie bridge the gap?

Conflicts of interest have always generated headaches for law firms, but US firm Howrey needed a family-sized pack of paracetamol last year when conflicts were cited by its European IP team as the reason for splitting off.

The 14-partner, four-office team – including Howrey’s European ­managing partner Willem Hoyng and Europe IP head Benoît Strowel – has set up an independent IP boutique, Hoyng Monegier, that has already made five lateral partner hires.

While the departures have made many in the market query Howrey’s long-term survival in Europe, ­questions are also being asked about the detrimental effect of US conflict of interest rules on international IP practices.

Hoyng sticks firmly to his view that the rules, and the way Howrey was applying them, prevented him and his team from building their ­practice in the way they wanted. He estimates that they were losing a third of all potential instructions as a result and says that, although the team was busy, it could have been busier.

US conflict of interest rules form part of the American Bar Association’s (ABA) Model Rules of Professional Conduct, established in 1983 and revised significantly in 2002.

Although these are national ­guidelines, individual states also have their own rules, which can make life even more complicated. Some, including those for New York, are stricter than the ABA rules.

The US rules require firms to gain written consent from clients to act in a number of situations where ­conflicts may arise. In 2009 the ABA relaxed its rules slightly in lateral hire situations, allowing firms to ’screen’ incoming lawyers – and effectively erect an information barrier around them – if they had a previous client whose interests could be adverse to a client at the new firm. Previously, written consent had to be obtained from both clients.

According to Hoyng, Howrey applied the rules with the strictest possible interpretation. That meant that, even if there was a small possibility of a conflict occurring in the future with a potential client, work was turned down, even if a European case did not affect the US side of the firm.

Double whammy

The application of the rules, says Hoyng, even precluded the European team from accepting work for European subsidiaries of US companies in potential conflict situations.

“If, in the end, that’s replaced by lots of [referral] work from the US arm I don’t mind, but it’s not necessarily the case that the client in the US will use the US firm also in Europe, so you lose out twice,” Hoyng says.

Cynical use of rules

Another source of frustration for Hoyng and other IP litigators across Europe is the aggressive attitude of some US firms and clients towards the use of conflict rules. Hoyng describes cases where a US firm on an IP case will begin a battle by trying to use the rules to get rid of the ­opponent’s firm. This, he says, has led to the rules being used as a “kind of tool for anticompetitive behaviour in the litigation arena”.

“The attitude of a US lawyer tends to be, ’can I conflict out the lawyer on the other side?’” Hoyng says. “This is not because there’s a true conflict, but because there are certain rules you can play with. Fortunately we don’t find that to the same extent in Europe. The normal European client is a bit more sophisticated.”

This is backed up by Michael Hart, head of Baker & McKenzie’s London IP team. “There are some companies that have a reputation for trying to instruct various law firms to use conflict rules,” Hart says of the US market.

Although Howrey’s European IP team worked with the rules for several years, eventually the loss of work became too much for a majority of the partners and they went to the firm’s management. But Howrey was unable or unwilling to make the changes the Europeans wanted and Hoyng and his colleagues threw in the towel.

“In the end we felt this doesn’t make sense,” explains Hoyng. “The world isn’t ready for a trans-ocean practice.”

Bitter pills

Howrey managing partner Robert Ruyak told The Lawyer (10 January) that for the firm as a whole conflicts had been “devastating”. Ruyak ­identified lost opportunities, ­particularly in the pharmaceutical industry. He said Howrey in the US would continue to refer work to its former partners in Europe.

According to Ruyak, the conflicts rules have discouraged other US ­litigation practices from trying to get into Europe. And it is true that
when it comes to the big IP players ­transatlantic practices are rare.

Now that Howrey has lost its European team, arguably the two firms left with strong IP teams in Europe and the US are Baker & McKenzie and Hogan Lovells. The other big European player, Bird & Bird, has yet to establish a US presence.

The secret of success

At Hogan Lovells, Europe IP head Andreas von Falck says the firm is still getting to grips with conflict rules on a transatlantic basis in the wake of the May 2010 merger between Hogan & Hartson and Lovells.

“I think the secret is to work with fewer clients and do more work for them, with a better geographical spread,” says von Falck.

He admits that the merged firm has had to turn down some cases, particularly in life sciences and ­telecoms, but thinks that Hogan Lovells has succeeded in managing the rules appropriately.

“It’s something that, although we’re aware of, we’re not too ­concerned about,” he says.

Hart believes Bakers takes a ­similar attitude.

“Historically, Baker & McKenzie has tended to approach conflict issues on the basis of the high standard that applies in the US,” he explains. “The thing about conflicts is that the more international you become, the more they come into focus.”

According to Hart, the key point is a willingness to talk to clients. Although European IP clients are generally considered to be more sophisticated and less risk-averse than their US counterparts, situations arise where there could be a conflict. European lawyers think those conflicts can be avoided through good communication, ­ensuring suitable waivers are in place when engagement letters are signed and by simply being pragmatic.

A hypothetical example given by Hoyng, of a situation where a ­beverage company client could veto a firm taking on work for an association representing vodka producers, is a case where the application of the rules outweighs common sense.

Although there could be an ­argument that the rules have ­prevented international firms from building market-leading IP practices, there is clearly no case for conflicts preventing the growth of full-service transatlantic firms. Hoyng agrees that the situation at Howrey was exacerbated because the firm is focused almost exclusively on litigation – ­commercial, competition and IP.

Litigation negation

He points out that litigation is more often affected adversely than non-contentious work by firms seeking to avoid conflicts of interest.

Naturally, there are exceptions to the rule. The case of Freshfields Bruckhaus Deringer and its work for British businessman Philip Green on his proposed takeover of Marks & Spencer, which caused many UK firms and the Law Society to review conflict procedures, is probably the best-known example of a corporate transaction where the establishment of a Chinese wall failed.

Bird & Bird co-head of IP ­Christian Harmsen queries just how powerful IP and litigation practices can be in taking decisions on ­conflicts in transatlantic firms.

In firms where IP is a minor practice, Harmsen points out, the interests of bigger practice areas may win out, either because of revenue streams or simply because the firm has no IP or litigation representation on its ­conflicts committee. Harmsen ­suggests that could lead to the IP practice losing several smaller pieces of work for the sake of safeguarding one large corporate client against something that might happen in the future.

“There’s a saying here in Germany that it’s better to have a little bird in the hand than a big bird on the roof,” says the Bird & Bird IP chief, expanding on his point. “I think that conflict is a topic because in IP you usually have many more clients but smaller matters.”
The issue is even more pronounced for patent practices, believes Hart.

“Conflicts tend to be more tricky in patents as major companies often find themselves in conflict with each other,” he notes.
In the case of Howrey, this is an important point. Several of the European team now at Hoyng Monegier specialise in patent law, including Strowel and Paris-based name partner Denis Monégier du Sorbier.

Even in patents, however, lawyers believe it is possible to work within the rules, for example by building a practice specialising in a niche area and becoming the acknowledged experts there.

The golden middle

In other situations Chinese walls can satisfy the opposing side. In 2009 DLA Piper instituted information barriers between teams acting for
T-Mobile and Motorola. The barriers were thrown up after BlackBerry maker Research in Motion (Rim) instructed Allen & Overy to seek an injunction against DLA Piper.

Rim wanted the walls in place because DLA Piper had previously represented T-Mobile in US ­litigation brought by InPro Licensing. The case also involved Rim, which in 2009 found itself facing patent litigation from Motorola.

Although it took the threat of an injunction to resolve the issue, the Chinese walls were sufficient for Rim to withdraw and DLA Piper was able to continue acting for Motorola.

Set against the use of common sense is the issue of how far the long arm of the US reaches and how ­applicable the ABA rules are beyond the borders of the US. Von Falck says Hogan Lovells “assumes they have to apply”, pointing out that it would be a brave firm that was first to test the rules’ applicability elsewhere.

“Howrey in the US isn’t going to risk their head because of a couple of Europeans. Can you blame them?” asks Hoyng, before answering his own question. “No, it’s a fact of life.”

But others disagree.

“I don’t think US conflict rules are a problem in principle, as long as you act as a single firm,” says von Falck.

Hart agrees. “I think if the firm’s reasonable and the client’s reasonable you can usually come to a reasonable ­outcome,” he says.

Harmsen is slightly more ­measured. To succeed, he believes “you need the right business and you need the right people. The question really is, where’s the golden middle?”

Hoyng is certain that he and his colleagues have found that golden middle by leaving Howrey.

“It’s nice to be on our own,” he reveals. “In our daily lives nothing much has changed in the sense that all our clients have stayed with us and we’ve got some interesting new ones. We’re less troubled by conflicts and certain clients were waiting for our liberation to be able to use us.”
He adds that it was important for Hoyng Monegier to be a European firm with offices in several countries.

“We strongly believe in an ­international IP firm because IP is inherently international,” he says. “That’s why I don’t want to be a niche in my own country.”

Currently the international nature of the firm does not extend to Germany or the UK. Howrey’s IP partners in those jurisdictions have, since the formation of Hoyng Monegier, gone to Field Fisher Waterhouse. Hoyng says Hoyng Monegier gets plenty of ­referral work from IP practices in both countries and is happy working on that basis for the time being.

Anything’s possible

While Hoyng Monegier’s competitors acknowledge that the team probably did struggle with conflicts at Howrey and that the US rules bring problems, they disagree with Hoyng’s premise that running a transatlantic IP team is impossible.

“We’ve basically seen the opportunities grow, and of course, where you see opportunities grow you have more conflict potential,” says von Falck, explaining that the merger with Hogan & Hartson brought both pluses and minuses.

There is no reason why Hoyng Monegier, as an independent European IP boutique, should not succeed. After all, the boutique IP model is tested and successful in many ­countries – including the US – and the founding lawyers have solid ­reputations in the market.

Hoyng is clearly happier to be speaking independently, free from the constraints involved with being part of a transatlantic practice.

While Howrey is unusual among the major global firms with its heavy emphasis on IP and competition, throwing the question of conflict into sharper focus than at some of its competitors, other firms are managing to grow their IP practices on both sides of the Atlantic despite the rules.

In future, IP lawyers anticipate that a gradual relaxation of conflict of interest rules in the US is more likely than them becoming more stringent. Nor do they expect the EU to try to ­harmonise conflict rules across its 27 member states.

Instead, most expect to be able to work with a combination of the US rules, those that apply in their home jurisdictions and good, old-fashioned common sense to build IP and patent teams on a global basis.