April 10, 2000, the new management of Rite Aid, through Gerson, instructed
Ballard Spahr to attempt to settle the shareholder litigation. As a result,
on April 20, 2000, Slaughter and Davis met with Sherrie Savett and David
Bershad, co-lead counsel for the shareholder class. At that meeting,
plaintiffs' counsel made clear that a condition of any settlement with Rite
Aid would be that plaintiffs preserve their rights against KPMG and Grass,
and in a later meeting plaintiffs' counsel also insisted that Messrs.
Bergonzi and Noonan be excluded from any settlement, because they, along
with Grass, constituted senior management during the period of the alleged
fraud. As noted earlier, these negotiations ultimately bore fruit in the
November 8, 2000 Memorandum of Understanding.
It is also important to understand that Grass in his testimony no
longer claims — as his lawyers without qualification did on his
behalf before the hearing — that he ever conveyed any confidential
information to Davis or anyone else at Ballard Spahr. Although Grass
stated that he participated in two brief telephone conversations
involving, among others, himself, Gerson, and Davis, we credit Davis's
testimony that it "would very much stand out in my mind if I spoke with
the CEO" of such an important company as Rite Aid, but he did not have
such a conversation, however brief. To the contrary, we credit Davis's
testimony that Gerson instructed him not to speak with Grass and,
indeed, Davis "never spoke to any defendants I represented"; instead,
Davis worked through Gerson. Davis's understanding was that he should
speak with Harry Weiss of Wilmer Cutler if he wanted to talk about Grass,
and we credit Davis's testimony that he at all times spoke with partners
at Wilmer Cutler and never with Grass.
A. Disqualification of Ballard Spahr Pursuant to Pa. R.P.C. 1.9
Federal courts have the inherent power to supervise the conduct of
attorneys practicing before them. E.g., Commonwealth Ins. Co. v. Graphix
Hot Line, Inc., 808 F. Supp. 1200, 1203 (E.D.Pa. 1992) (citing In re Corn
Derivatives Antitrust Litig., 748 F.2d 157, 161 (3d Cir. 1984)); see
also Local R. Civ. P. 83.6 (providing, inter alia, that practice before
courts of this district are governed by the Pennsylvania Rules of
Professional Conduct). In this regard, we have the power to disqualify
counsel appearing before us, e.g., United
States v. Miller, 624 F.2d 1198, 1201 (3d Cir.
1980) (discussing standards for attorney disqualification)*fn7.
The party seeking disqualification bears the burden to show that
the representation is impermissible, e.g., James v. Teleflex, Inc., No.
97-1206, 1999 WL 98559 at *3 (E.D.Pa. Feb. 24, 1999) (so holding in the
context of Rules 1.7 and 1.9), though doubts with respect to violations
of the rules of professional conduct should generally be resolved in
favor of disqualification, Int'l Bus. Mach., Inc. v. Levin, 579 F.2d 271,
283 (3d Cir. 1978); see also Brennan v. Independence Blue Cross,
949 F. Supp. 305, 307 (E.D.Pa. 1996) (citing Levin).
In seeking to disqualify Ballard Spahr, Grass relies on Pennsylvania
Rule of Professional Conduct 1.9(a)*fn8, which provides that:
A lawyer who has formerly represented a client in a matter shall
(a) represent another person in the same or a
substantially related matter in which that person's
interests are materially adverse to the interests of
the former client unless the former client consents
after a full disclosure of the circumstances and
Grass contends that the case against Ballard Spahr here is
straightforward. Ballard Spahr, who previously represented Grass in this
litigation, has now, by virtue of its representation of Rite Aid in the
negotiation of the partial settlement, taken a position adverse to him,
and Ballard Spahr did not obtain his consent for such representation.
Consequently, he argues, Ballard Spahr has clearly violated Rule 1.9(a)
and should be disqualified.