Douglass v. Priddy

2014 Ohio 2881

• Court: Ohio Court of Appeals
• Decided: June 30, 2014
• Docket: 2013-G-3172
• Status: Published

Opinion

[Cite as Douglass v. Priddy, 2014-Ohio-2881.]

IN THE COURT OF APPEALS

ELEVENTH APPELLATE DISTRICT

GEAUGA COUNTY, OHIO

DAVID D. DOUGLASS, : OPINION COURT APPOINTED RECEIVER FOR MYRIADHEALTH, LLC, : CASE NO. 2013-G-3172 Plaintiff-Appellee, :

- vs - :

PAMELA S. PRIDDY, et al., :

Defendants-Appellants. :

Civil Appeal from the Geauga County Court of Common Pleas, Case No. 12 M 000956.

Judgment: Affirmed.

Roy J. Schechter, 230 Bridge Building, 18500 Lake Road, Cleveland, OH 44116 (For Plaintiff-Appellee).

Daniel L. Bell, 1799 Akron-Peninsula Road, Suite 228, Akron, OH 44313 (For Defendants-Appellants).

TIMOTHY P. CANNON, P.J.

{¶1} Appellants, Pamela S. Priddy and Health Plan Administrators, LLC

(“HPA”), appeal the judgment of the Geauga County Court of Common Pleas granting

the motion to disqualify appellants’ counsel filed by appellee, David D. Douglass, as

court-appointed receiver for MyriadHealth, LLC (“Myriad”). The trial court disqualified

appellants’ counsel, Daniel L. Bell, due to his prior representation of Myriad. For the

reasons that follow, we affirm. {¶2} Myriad was incorporated in 2003 as a Delaware limited liability company.

According to its Ohio application for registration as a foreign limited liability company,

Myriad’s stated purpose was to “own and operate a health care payment system.”

{¶3} Prior to Priddy entering into an employment contract with Myriad, Priddy

inquired whether “the Myriad Operating Agreement would prevent any of the members

from participating in another business venture” that competed with Myriad. Bell, acting

in his role as Myriad’s outside counsel, advised Priddy on his understanding of Myriad’s

Operating Agreement in an August 22, 2007 email and of the need to take into account

“other contracts” and legal duties that restrict such activity.

{¶4} In 2008, Myriad retained Bell, who at the time was employed by the

Brouse McDowell law firm, to negotiate and draft an employment contract hiring Priddy

as company president. During the negotiation of her employment agreement, Priddy

was represented by her own legal counsel. On August 13, 2008, Priddy signed the

employment contract. The contract was effective retroactive to June 4, 2008. By this

time, Myriad was engaged primarily in the development of software that was to be

licensed for use by health care third-party administrators.

{¶5} In August 2008, Myriad received a $750,000 loan from the Ohio

Department of Development for the purpose of furthering Myriad’s software

development business. For reasons not contained in the record before this court, the

loan failed to spur growth of the business, and Myriad defaulted on the loan in January

2011. At the time of default, the entire $750,000 principle balance of the loan was

unpaid.

2 {¶6} Effective January 31, 2011, Priddy resigned from her position as Myriad’s

president. Myriad alleges that upon resigning, Priddy immediately directed her energies

to her own company, HPA. Like Myriad, HPA is engaged in the third-party

administration of employee health plans.

{¶7} On September 20, 2012, Myriad filed a six-count complaint against

appellants. Myriad sought damages for breach of contract; tortious interference with

contract/prospective business opportunity; conversion; unjust enrichment; breach of

fiduciary duties; and violation of Ohio Uniform Trade Secrets Act. Myriad argues,

among other things, that Priddy wrongly appropriated its customers in violation of the

non-competition/non-solicitation provisions in her employment contract.

{¶8} On November 21, 2012, appellants filed their answers. Priddy’s answer

included two counter-claims against Myriad for breach of contract and unjust

enrichment.

{¶9} On April 18, 2013, Myriad’s counsel sent a letter to Bell asking him to

terminate his representation of appellants on the grounds that he previously performed

legal services on matters directly at issue in the current litigation. Bell responded to the

letter on May 5, 2013, reiterating his position that he is not required to end his

representation of appellants. Bell also argued that Myriad’s failure to assert the issue

earlier may constitute a waiver.

{¶10} Thereafter, on June 28, 2013, Myriad filed a motion to disqualify Bell as

counsel for appellants. As the basis for its motion, Myriad argued that Bell had

previously represented Myriad in matters substantially related to the instant action.

3 Appellants responded to the motion to disqualify Bell on July 12, 2013. On July 31,

2013, Myriad filed a reply in support of its motion to disqualify.

{¶11} On October 24, 2013, a hearing was held on the motion to disqualify Bell.

The parties also filed a stipulation of the facts regarding Bell’s prior representation of

Myriad. On November 5, 2013, the trial court granted Myriad’s motion to disqualify Bell.

{¶12} Appellants timely appeal the trial court’s November 5, 2013 judgment

entry, disqualifying Bell, and assert two assignments of error.

{¶13} In their first assignment of error, appellants assert:

The Trial Court committed prejudicial error in granting [Myriad’s], motion to disqualify counsel because it improperly concluded that [Bell’s] former representation of Myriad and his current representation of [appellants] are “substantially related”, as that phrase is used in Ohio Rule of Professional Responsibility 1.9(a).

{¶14} Under their first assignment of error, appellants present the issue of

whether the trial court erred when it determined that the claims asserted in Myriad’s

complaint were “substantially related” to the subject matter of Bell’s prior representation

of Myriad. For the reasons that follow, we hold that the trial court did not abuse its

discretion when it ruled that Myriad’s claims were substantially related to Bell’s prior

representation of Myriad.

{¶15} Initially, we note that an order disqualifying an attorney from representing

a client in a civil case is a final, appealable order pursuant to R.C. 2505.02(B)(4).

Westfall v. Cross, 144 Ohio App.3d 211, 218-219 (7th Dist.2001).

{¶16} Furthermore, it is well accepted that disqualification of an attorney is a

drastic measure that should not be imposed unless necessary. Kala v. Aluminum

Smelting & Refining Co., Inc., 81 Ohio St.3d 1, 6 (1998), citing Freeman v. Chicago

4 Musical Instrument Co., 689 F.2d 715, 721 (7th Circ.1982). Despite a general policy

against attorney disqualification, a trial court has wide discretion when considering

motions to disqualify counsel. Maple Heights v. Redi Car Wash, 51 Ohio App.3d 60, 61

(8th Dist.1988). A trial court’s determination on whether to grant a motion to disqualify

will not be reversed upon review in the absence of an abuse of discretion. Carr v.

Acacia Country Club Co., 8th Dist. Cuyahoga No. 91292, 2009-Ohio-628, ¶18, citing

155 N. High, Ltd. v. Cincinnati Ins. Co., 72 Ohio St.3d 423, 426 (1995). An abuse of

discretion is the trial court’s “‘failure to exercise sound, reasonable, and legal decision-

making.’” State v. Beechler, 2d Dist. Clark No. 09-CA-54, 2010-Ohio-1900, ¶62,

quoting Black’s Law Dictionary 11 (8th Ed.2004).

{¶17} Rule 1.9(a) of the Ohio Rules of Professional Conduct sets forth an

attorney’s duties to former clients: “Unless the former client gives informed consent,

confirmed in writing, a lawyer who has formerly represented a client in a matter shall not

thereafter 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.”

A matter is deemed to be substantially related when it “involves the same transaction or

legal dispute or one in which there is a substantial risk that confidential factual

information that would normally have been obtained in the prior representation of a

client would materially advance the position of another client in a subsequent matter.”

Prof.Cond.R. 1.0.

{¶18} It is undisputed that Myriad did not give consent to Bell to represent

appellants in this matter. Therefore, to resolve Myriad’s motion to disqualify, the trial

court considered the three-part test articulated by the Sixth Circuit Court of Appeals in

5 Dana Corp. v. Blue Cross & Blue Shield Mut. Of N. Ohio, 900 F.2d 882, 889 (6th

Cir.1990). The Dana test has been applied throughout Ohio’s appellate districts. See,

e.g., Cargould v. Manning, 10th Dist. Franklin No. 09AP-194, 2009-Ohio-5853, ¶7;

Stanley v. Bobeck, 8th Dist. Cuyahoga No. 92630, 2009-Ohio-5696, ¶13; Youngstown

v. Joenub, Inc., 7th Dist. Mahoning No. 01-CA-01, 2001-Ohio-3401, ¶15.

{¶19} The Sixth Circuit stated that the appropriate test for attorney

disqualification requires consideration of whether “(1) a past attorney-client relationship

existed between the party seeking disqualification and the attorney it seeks to disqualify;

(2) the subject matter of those relationships was/is substantially related; and (3) the

attorney acquired confidential information from the party seeking disqualification.” Dana

at 889, citing Cleveland v. Cleveland Elec. Illum. Co., 440 F. Supp. 193, 207 (N.D.Ohio

1976). In this case, the trial court found all three prongs were satisfied and, as a result,

disqualified Bell.

{¶20} First, it is undisputed there was a past attorney-client relationship between

Bell and Myriad. Myriad retained Bell to represent it in the negotiation and drafting of

Priddy’s employment contract. As counsel for Myriad, Bell also advised Priddy on

sections of Myriad’s Operating Agreement. Indeed, Bell billed Myriad a significant

amount of money for representation related to the negotiation of Priddy’s employment

contract. As such, the first prong is clearly satisfied.

{¶21} Second, we cannot say that the trial court abused its discretion when it

found the subject matter of the past attorney-client relationship was substantially related

to the present case. Speaking through its judgment entry, the trial court found that

“Priddy’s obligations per her employment contract and as a fiduciary were the subjects

6 of Mr. Bell’s representation of MyriadHealth and are critical issues in the present case.”

Bell, on behalf of Myriad, drafted and negotiated Priddy’s employment contract. The

contract included detailed non-compete and non-solicitation provisions. In drafting the

employment contract, Bell received direction from Myriad’s board of managers. Myriad

alleges that Priddy violated provisions of the employment contract drafted by Bell.

While appellants argue that they are not challenging the validity of the employment

contract, they are challenging the applicability of certain provisions to the facts of the

case. Accordingly, the interpretation of the non-compete and non-solicitation issues will

be in dispute. Therefore, the subject matter of the past attorney-client relationship is

substantially related to the present case, satisfying the second prong.

{¶22} Finally, we cannot say that the trial court abused its discretion when it

made its finding that Bell acquired confidential information from his prior representation

of Myriad. The trial court stated, “[i]t is presumed that as counsel for MyriadHealth,

attorney Bell was privy to confidential information.” In making this conclusion, the trial

court directs the parties to the Eighth Appellate District’s decision in Litigation Mgt., Inc.

v. Bourgeois, 182 Ohio App.3d 742 (8th Dist.2009). While the facts in this case are not

as clear with respect to the third prong as they were in Litigation Mgt., Inc., they are

sufficient to demonstrate that Bell acquired confidential information from his prior

{¶23} In its judgment entry, the trial court properly considered Bell’s role in

advising Myriad regarding its employment contract with Priddy. According to the

stipulation of facts, Thomas Dolan, as the Chair of Myriad’s Board of Managers,

provided Bell with information and direction to use in negotiating the employment

7 agreement. The court considered the substantial amount of information and direction

Bell received from Myriad’s board of directors while negotiating Priddy’s employment

contract. The board of directors worked with Bell to determine the language of the

contract’s non-compete and non-solicitation clauses. The interpretation of these

clauses will likely be important to Myriad’s suit against appellants. The trial court

properly determined that this information possibly contained confidential information that

would be critical to the present case. For these reasons, the third prong of the Dana

test is satisfied.

{¶24} As the three prongs of the Dana test were sufficiently proven by Myriad,

including that Bell’s former representation of Myriad and his current representation of

appellants are substantially related, the trial court did not err in disqualifying Bell.

Accordingly, appellants’ first assignment of error is without merit.

{¶25} In their second assignment of error, appellants assert:

{¶26} “The Trial Court committed prejudicial error when it did not require

[Myriad] to present evidence sufficient to show that Myriad would be prejudiced by

Attorney Bell’s representation of [appellants] against Myriad’s current claims.”

{¶27} Appellants’ second assignment of error fails because Myriad, as a former

client, was not required to put forth evidence demonstrating that it would be prejudiced

by Bell’s representation of appellants. “A former client is not required to reveal the

confidential information learned by the lawyer in order to establish a substantial risk that

the lawyer has confidential information to use in the subsequent matter.” Prof.Cond.R.

1.9, cmt 3. Accordingly, a court can properly assume that confidences were disclosed

to the attorney on the subject matter of the representation during the course of the

8 former representation, so long as the former representation was substantially related.

Sarbey v. Natl. City Bank, 9th Dist. Summit No. 14094, 1990 Ohio App. LEXIS 368, *24

(Jan. 31, 1990), quoting T.C. Theatre Corp. v. Warner Bros. Pictures, Inc., 113 F. Supp.

265, 268 (1953). As discussed above, the trial court properly concluded that the former

representation was substantially related to the current dispute, rendering proof of

prejudice unnecessary.

{¶28} In arguing that Myriad should have been required to establish prejudice,

appellants direct this court to Morgan v. N. Coast Cable Co., 63 Ohio St.3d 156 (1992).

In that case, the plaintiff sought recovery against the defendants on the theory of unjust

enrichment and fraud. However, Morgan is readily distinguishable from the case at

hand.

{¶29} The plaintiff’s attorney in Morgan had previously represented a separate

client in litigation against the same defendant. Id. at 160. As a result of the previous

case’s settlement, the plaintiff’s attorney acquired a small interest in the defendant’s

limited partnership. Id. The defendant sought to have the plaintiff’s attorney disqualified

because his interest in defendant’s partnership created a conflict between the plaintiff’s

own interest and that of their attorney. Id. at 159. Affirming the decision of the Eighth

District Court of Appeals, the Ohio Supreme Court held that the defendants, as

strangers to the attorney-client relationship, lack the requisite standing to assert that a

conflict of interest exists. Id. at 161.

{¶30} The issue in Morgan was not whether the defendant was required to

present evidence that it would be prejudiced by having one of the firm’s limited partners

represent the plaintiff. Rather, the issue in that case was whether the defendant had

9 standing to complain of a conflict of interest between the plaintiff and its attorney. Id. at

159. That conflict was the plaintiff’s attorney’s ownership interest in the defendant’s

limited partnership. Id. at 160. In this case, Myriad clearly possesses the requisite

standing to challenge appellants’ counsel. Accordingly, appellants’ reliance on Morgan

is wholly unpersuasive.

{¶31} Appellants’ second assignment of error is without merit.

{¶32} The decision of the Geauga County Court of Common Pleas disqualifying

Bell is affirmed.

DIANE V. GRENDELL, J.,

CYNTHIA WESTCOTT RICE, J.,

concur.