09-3716-cv In re MetLife Demutualization Litigation
1 UNITED STATES COURT OF APPEALS 2 3 FOR THE SECOND CIRCUIT 4 5 6 August Term, 2009 7 8 (Argued: September 3, 2009 Decided: September 29, 2009) 9 10 Docket No. 09-3716-cv 11 12 - - - - - - - - - - - - - - - - - - - -x 13 14 DARREN F. MURRAY, MARY A. DEVITO, KEVIN L. HYMS, HARRY S. 15 PURNELL III, KATHY VANDERVEUR, and MICHAEL A. GIANNATTASIO, 16 17 Plaintiffs-Appellees, 18 19 - v.- 20 21 METROPOLITAN LIFE INSURANCE COMPANY and METLIFE, INC., 22 23 Defendants-Appellants. 24 25 - - - - - - - - - - - - - - - - - - - -x 26
27 Before: JACOBS, Chief Judge, WESLEY and HALL, 28 Circuit Judges. 29 30 Defendants-appellants Metropolitan Life Insurance
31 Company and MetLife, Inc. appeal an order of the United 32 States District Court for the Eastern District of New York 33 (Platt, J.), disqualifying its counsel Debevoise & Plimpton 34 LLP shortly before trial. On September 22, 2009, this Court 35 reversed the disqualification order, with opinion to follow. 36 This is that opinion.
1 TERESA WYNN ROSEBOROUGH, KEVIN 2 S. FINNEGAN, DUNCAN J. LOGAN, 3 Metropolitan Life Insurance 4 Company, New York, New York; 5 MICHAEL B. MUKASEY, MARY JO 6 WHITE, BRUCE E. YANNETT, MARK P. 7 GOODMAN, Debevoise & Plimpton 8 LLP, New York, New York, for 9 Appellants. 10 11 JARED B. STAMELL, Stamell & 12 Schager, LLP, New York, New York 13 (John C. Crow, David K. Bowles, 14 Robert A. Skirnick, and Samantha 15 H. Evans, on the brief), for 16 Appellees. 17 18 DENNIS JACOBS, Chief Judge: 19 20 Plaintiffs in this class action were policyholders of
21 Metropolitan Life Insurance Company when it was a mutual 22 insurance company. They complain that they were misled and 23 shortchanged in the transaction by which the company 24 demutualized in 2000. Nine years after the action was 25 commenced and five weeks before trial was scheduled to 26 begin, plaintiffs moved to disqualify the lead counsel for 27 Metropolitan Life Insurance Company and MetLife, Inc. 28 (“MetLife”), Debevoise & Plimpton LLP (“Debevoise”). The 29 grounds alleged related to that firm’s representation of 30 MetLife in the underlying demutualization. The United 31 States District Court for the Eastern District of New York 32 (Platt, J.) granted the motion to disqualify on September 1;
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1 the district court then stayed its order and immediately 2 certified the issue to this Court pursuant to 28 U.S.C. 3 § 1292(b). We accepted the certification on September 2, 4 and on September 3 we heard oral argument. After time 5 allotted for additional briefing, a short delay caused by 6 the recusal of two judges, and the observance of national 7 and religious holidays, we reversed the disqualification by 8 order dated September 22, with opinion to follow. This is 9 that opinion. 10 The district court disqualified Debevoise on the ground 11 that its representation of MetLife in the 2000 12 demutualization made it counsel to the policyholders as 13 well. On appeal, plaintiffs urge affirmance on that ground, 14 and also on the independent ground that the witness-advocate 15 rule requires disqualification because four Debevoise 16 lawyers who worked on the demutualization will give 17 testimony adverse to MetLife at trial. 18 We conclude that (i) Debevoise did not have an 19 attorney-client relationship with the policyholders by 20 virtue of its representation of MetLife; and (ii) plaintiffs 21 have failed to establish that the purported violation of the 22 witness-advocate rule in this case would warrant
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1 disqualification. Accordingly, we reverse. 2 I 3 In 1915, MetLife converted from a stock life insurance 4 company to a mutual insurance company. On April 7, 2000, 5 MetLife completed a months-long process of demutualization 6 back to a stock insurance company. Debevoise served as 7 MetLife’s corporate counsel in that transaction. 8 On April 18, 2000, plaintiffs filed this class action 9 lawsuit in the Eastern District of New York, alleging that 10 MetLife violated federal securities laws by misrepresenting 11 or altogether omitting certain information from the 12 materials provided to its policyholders during the 13 demutualization process. In June 2007, MetLife invoked the 14 attorney-client privilege to prevent plaintiffs’ discovery 15 of particular communications between MetLife and its in- 16 house and outside counsel. The district court denied a 17 protective order on the ground that the plaintiff 18 policyholders were the owners of the mutual company and were 19 therefore clients of Debevoise during the demutualization. 20 Following discovery and the usual preliminaries, the 21 trial was set to begin on September 8, 2009. When last- 22 minute settlement negotiations failed, plaintiffs moved to
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1 disqualify Debevoise on July 31, 2009--more than nine years 2 after the action was commenced, more than two years after 3 the court ruled that plaintiffs were clients of Debevoise, 4 and five weeks before trial. Plaintiffs argued that 5 disqualification was appropriate for the same reason 6 articulated by the district court to support its 2007 7 discovery ruling: Debevoise had been counsel to plaintiffs 8 in the demutualization and cannot now jump sides to become 9 adverse to plaintiffs at trial. Plaintiffs also argued that 10 disqualification was required by the witness-advocate rule, 11 because four Debevoise lawyers are scheduled to testify 12 about disclosures and documents related to the 13 demutualization. 14 MetLife’s response invoked the doctrine of laches; 15 argued that as a matter of law the policyholders of a mutual 16 insurance company are not a priori the clients of that 17 company’s corporate counsel; denied that the testimony of 18 the Debevoise lawyers would be adverse to MetLife (or even 19 significant); and charged that the motion was made for 20 improper tactical purposes. 21 On September 1, the district court granted plaintiffs’ 22 motion and disqualified Debevoise. The following colloquy
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1 explains the court’s decision:
2 [MetLife]: . . . [B]ut Debevoise represents in 3 this litigation MetLife Inc. and 4 Metropolitan Life Insurance Company, 5 and not the shareholders of MetLife 6 Inc. 7 8 The Court: I understand that and that’s the 9 result of the demutualization 10 process, and I fully understand 11 that. But the problem is whether 12 your representation of the 13 policyholders which turned into a 14 representation of the corporation is 15 tainted because of a conflict. 16 17 [MetLife]: And your Honor is aware that our 18 position is that Debevoise & 19 Plimpton never represented the 20 policyholders of Metropolitan Life 21 Insurance Company or--either before 22 this litigation began or presently. 23 24 The Court: You did represent the policyholders, 25 because there was--they were the 26 corporation. That’s the problem. 27 The problem was that all of the 28 former or the policyholders were the 29 owners of the corporation. So you 30 represented them and the track if 31 you will because there was no--they 32 were your clients. 33 34 Having granted the motion, the court immediately stayed
35 its order and certified the following question to this 36 Court: “Should Debevoise & Plimpton be disqualified from 37 representing MetLife in this case based on a conflict of 38 interest[?]” We accepted certification and now reverse.
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1 II 2 Plaintiffs argue that the district court’s 2007 3 discovery ruling (that plaintiffs are clients of Debevoise) 4 is now law of the case, which we lack jurisdiction to 5 review. We conclude, first, that we have jurisdiction to 6 consider the question; and second, that under New York law, 7 the policyholders of a mutual insurance company are not the 8 clients of that company’s outside counsel. New York law is 9 applicable to this case because Metropolitan Life Insurance 10 Company was a mutual life insurance company that was 11 reorganized into a stock insurance company under New York 12 law, with its principal place of business in New York, doing 13 business in all fifty states. 14 Under 28 U.S.C. § 1292(b), a district court can certify 15 a question for interlocutory appeal if the issue “involves a 16 controlling question of law as to which there is substantial 17 ground for difference of opinion and [if] an immediate 18 appeal from the order may materially advance the ultimate 19 termination of the litigation.” In ruling on a certified 20 question of law, “we have the discretion to entertain an 21 appeal of another ruling of the district court if the two 22 rulings were ‘inextricably intertwined’ or if ‘review of the
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1 [latter] decision was necessary to ensure meaningful review 2 of the former.’” Ross v. Am. Express Co., 547 F.3d 137, 142 3 (2d Cir. 2008) (quoting In re Methyl Tertiary Butyl Ether 4 (“MTBE”) Prods. Liab. Litig., 488 F.3d 112, 122 (2d Cir. 5 2007) (quoting Swint v. Chambers County Comm’n, 514 U.S. 35, 6 51 (1995))); see also Golino v. New Haven, 950 F.2d 864, 868 7 (2d Cir. 1991) (“[W]here we have jurisdiction to consider 8 some questions on appeal, we may exercise our discretion to 9 take pendent jurisdiction over related questions.”). 10 The district court’s 2007 and 2009 decisions are 11 clearly related. In 2007, the court determined that prior 12 to demutualization, “MetLife’s policyholders were the 13 clients for MetLife’s in-house and outside counsel, because 14 they were MetLife’s beneficiaries and the beneficiaries of 15 MetLife counsel’s advice.” In re MetLife Demutualization 16 Litig., 495 F. Supp. 2d 310, 314 (E.D.N.Y. 2007). The 2009 17 ruling explained similarly that “the problem, and 18 Debevoise’s problem, is they represented the policyholders 19 up until the day on the closing when they walked over across 20 the aisle and started representing the stockholders, if you 21 will, and [ ] the corporation more exactly . . . .” Because 22 these two rulings are “inextricably intertwined,” we have
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1 jurisdiction to decide whether plaintiffs were, in fact, 2 clients of Debevoise. 3 III 4 We conclude that plaintiffs were not clients of 5 Debevoise. It is well-settled that outside counsel to a 6 corporation represents the corporation, not its shareholders 7 or other constituents. Evans v. Artek Sys. Corp., 715 F.2d 8 788, 792 (2d Cir. 1983) (“A ‘corporate attorney’--whether an 9 in-house lawyer or a law firm that serves as counsel to the 10 company--owes a duty to act in accordance with the interests 11 of the corporate entity itself. [The] client is the 12 corporation.”). This rule is entirely consonant with Rule 13 1.13 of the New York Rules of Professional Conduct, N.Y. R. 14 Prof’l Conduct § 1.13(a) (“[A] lawyer employed or retained 15 by an organization . . . is the lawyer for the organization 16 and not for any of the constituents.”), and with the 17 Restatement (Third) of the Rule Governing Lawyers, § 96 cmt. 18 b (explaining that a lawyer retained by a corporation has an 19 attorney-client relationship with the corporation, but the 20 lawyer “does not thereby also form a client-lawyer 21 relationship with all or any individuals employed by it or 22 who direct its operations or who have an ownership or other
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1 beneficial interest in it, such as shareholders”). 2 These principles apply as well to a mutual insurance 3 company. Under New York law, “[a] mutual insurance company 4 is a cooperative enterprise in which the policyholders 5 constitute the members for whose benefit the company is 6 organized, maintained and operated.” Fid. & Cas. Co. of 7 N.Y. v. Metro. Life Ins. Co., 248 N.Y.S.2d 559, 565 (N.Y. 8 Sup. Ct. 1963). But a policyholder, “even in a mutual 9 company, [is] in no sense a partner of the corporation which 10 issued the policy, and . . . the relation between the 11 policy-holder and the company [is] one of contract, measured 12 by the terms of the policy.” Uhlman v. N.Y. Life Ins. Co., 13 17 N.E. 363, 365 (N.Y. 1888). 14 The district court’s 2007 decision reasoned that 15 plaintiffs were clients of Debevoise during the 16 demutualization “because they were MetLife’s beneficiaries 17 and the beneficiaries of MetLife counsel’s advice.” In re 18 MetLife Demutualization Litig., 495 F. Supp. 2d 310, 314 (2d 19 Cir. 2007). But this does not distinguish a mutual 20 insurance company from any other corporation. 21 Not every beneficiary of a lawyer’s advice is deemed a 22 client. See N.Y. R. Prof’l Conduct 2.3(a) (“A lawyer may
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1 provide an evaluation of a matter affecting a client for the 2 use of someone other than the client if the lawyer 3 reasonably believes that making the evaluation is compatible 4 with other aspects of the lawyer’s relationship with the 5 client.”) (emphasis added); see also Fiala v. Metro. Life 6 Ins. Co., 6 A.D.3d 320, 322, 776 N.Y.S.2d 29, 32 (1st Dep’t 7 2004) (“[A]n insurance company does not owe its policyholder 8 a common-law fiduciary duty except when it is called upon to 9 defend its insured.”); N.Y. State Bar Ass’n, Comm. on Prof’l 10 Ethics, Op. No. 477 (1977) (explaining that the lawyer for 11 the executor of an estate need not provide substantive legal 12 advice to potential beneficiaries because doing so would 13 violate the lawyer’s duty to provide undivided loyalty to 14 his client, the executor). 15 In light of these principles, and without any 16 extraordinary circumstances raised by the parties, we 17 conclude that the policyholders in this case were not 18 clients of Debevoise. 19 IV 20 Plaintiffs make the separate argument that 21 disqualification of Debevoise is proper by virtue of the 22 witness-advocate rule set out in Rule 3.7 of the New York
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1 Rules of Professional Conduct. Subsection (a) of the Rule 2 provides, with certain exceptions, that “[a] lawyer shall 3 not act as an advocate before a tribunal in a matter in 4 which the lawyer is likely to be a witness on a significant 5 issue of fact.” N.Y. R. Prof’l Conduct § 3.7(a). 6 Subsection (b) is broader, as it addresses imputation: “A 7 lawyer may not act as an advocate before a tribunal in a 8 matter if . . . another lawyer in the lawyer’s firm is 9 likely to be called as a witness on a significant issue 10 other than on behalf of the client, and it is apparent that 11 the testimony may be prejudicial to the client.” See N.Y. 12 R. Prof’l Conduct § 3.7(b)(1). 13 Rule 3.7 lends itself to opportunistic abuse. “Because 14 courts must guard against the tactical use of motions to 15 disqualify counsel, they are subject to fairly strict 16 scrutiny, particularly motions” under the witness-advocate 17 rule. Lamborn v. Dittmer, 873 F.2d 522, 531 (2d Cir. 1989). 18 The movant, therefore, “bears the burden of demonstrating 19 specifically how and as to what issues in the case the 20 prejudice may occur and that the likelihood of prejudice 21 occurring [to the witness-advocate’s client] is 22 substantial.” Id. “Prejudice” in this context means
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1 testimony that is “sufficiently adverse to the factual 2 assertions or account of events offered on behalf of the 3 client, such that the bar or the client might have an 4 interest in the lawyer’s independence in discrediting that 5 testimony.” Id. 6 As this definition suggests, the showing of prejudice 7 is required as means of proving the ultimate reason for 8 disqualification: harm to the integrity of the judicial 9 system. We have identified four risks that Rule 3.7(a) is 10 designed to alleviate: (1) the lawyer might appear to vouch 11 for his own credibility; (2) the lawyer’s testimony might 12 place opposing counsel in a difficult position when she has 13 to cross-examine her lawyer-adversary and attempt to impeach 14 his credibility; (3) some may fear that the testifying 15 attorney is distorting the truth as a result of bias in 16 favor of his client; and (4) when an individual assumes the 17 role of advocate and witness both, the line between argument 18 and evidence may be blurred, and the jury confused. Ramey 19 v. Dist. 141, Int’l Ass’n of Machinists & Aerospace Workers, 20 378 F.3d 269, 282-83 (2d Cir. 2004) (internal citations and 21 alterations omitted). These concerns matter because, if 22 they materialize, they could undermine the integrity of the
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1 judicial process. See Hempstead Video, Inc. v. Inc. Vill. 2 of Valley Stream, 409 F.3d 127, 132 (2d Cir. 2005) (“The 3 authority of federal courts to disqualify attorneys derives 4 from their inherent power to preserve the integrity of the 5 adversary process.”) (internal quotation marks omitted); see 6 also id. (emphasizing “the need to maintain the highest 7 standards of the profession”) (internal quotation marks 8 omitted). 9 In imputation cases (Rule 3.7(b)), the witness is not 10 acting as trial counsel; these concerns are therefore 11 “absent or, at least, greatly reduced.” Ramey, 378 F.3d at 12 283 (internal quotation marks omitted); see also A.B.A. 13 Model Rules of Prof’l Conduct § 3.7 cmt. 5 (“Because the 14 tribunal is not likely to be misled when a lawyer acts as 15 advocate in a trial in which another lawyer in the lawyer’s 16 firm will testify as a necessary witness, [Model Rule 17 3.7(b)] permits the lawyer to do so except in situations 18 involving a conflict of interest.”). Accordingly, 19 disqualification by imputation should be ordered sparingly, 20 see Kubin v. Miller, 801 F. Supp. 1101, 1114 (S.D.N.Y. 21 1992), and only when the concerns motivating the rule are at 22 their most acute.
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1 Therefore, we now hold that a law firm can be 2 disqualified by imputation only if the movant proves by 3 clear and convincing evidence that [A] the witness will 4 provide testimony prejudicial to the client, and [B] the 5 integrity of the judicial system will suffer as a result. 6 This new formulation is consistent with our prior efforts to 7 limit the tactical misuse of the witness-advocate rule. 8 See, e.g., Lamborn, 873 F.2d at 531. 9 A 10 In this case, four Debevoise lawyers are likely to be 11 called to testify at trial. Three of them are transactional 12 lawyers who are not and will not be trial advocates; the 13 fourth, a litigator, is a member of the trial team, but will 14 not act as an advocate before the jury. None of these 15 witnesses, then, is properly considered trial counsel for 16 purposes of Rule 3.7(a). See Ramey, 378 F.3d at 283 (“The 17 advocate-witness rule applies, first and foremost, where the 18 attorney representing the client before a jury seeks to 19 serve as a fact witness in that very proceeding.”) (first 20 emphasis added). If the rule applies here at all, 21 therefore, it will be subsection (b) (imputation), and 22 plaintiffs do not contend otherwise.
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1 B 2 The parties dispute whether the Debevoise lawyer- 3 witnesses will give testimony so prejudicial to MetLife that 4 the integrity of the judicial system may be threatened and 5 disqualification warranted. Our review of the record 6 suggests that the Debevoise witnesses will do little more 7 than authenticate documents and confirm facts that do not 8 appear to be in dispute. For example, plaintiffs state that 9 they intend to use the testimony of Wolcott Dunham, a 10 Debevoise transactional lawyer, to show that MetLife 11 “intentionally or recklessly omitted material facts from the 12 prospectus.” A review of the cited deposition excerpts, 13 however, reveals only that Dunham testified that it was 14 inaccurate to characterize a policyholder’s interest in the 15 company as “ownership.” MetLife argues that this testimony 16 is not adverse to its position in this litigation. 17 Plaintiffs assert that MetLife is wrong, but do not explain 18 why. 19 Plaintiffs contend that they will use the testimony of 20 James Scoville, another Debevoise transactional lawyer, to 21 establish that “MetLife revealed that a significant portion 22 of the value of the Demutualization that it had said was set
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1 aside for policyholders was in fact earmarked for new 2 stockholders.” A review of the cited deposition testimony, 3 however, shows that Scoville testified only to what various 4 written documents clearly state. It appears that at most 5 Scoville will be asked to authenticate those documents. And 6 the same is true for the remaining witnesses. 7 We doubt that, on this record, the testimony at issue 8 is sufficiently prejudicial to MetLife to warrant 9 disqualification. We recognize, however, that we are not in 10 a good position to answer this question; and there is no 11 finding by the district court on this issue of fact. 12 Even if we assume that some portion of the Debevoise 13 lawyers’ testimony will be adverse to MetLife (when 14 considered in a context that we cannot fully evaluate or 15 appreciate on this interlocutory appeal), plaintiffs have 16 failed to establish the clear and convincing evidence of 17 prejudice necessary to justify the extreme remedy of 18 disqualification by imputation. 19 First (as noted above), the concerns motivating Rule 20 3.7 are attenuated where, as here, the witness-“advocate” is 21 not someone who will be trying the case to the jury. 22 Therefore, plaintiffs seeking disqualification under Rule
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1 3.7(b) must make a considerably higher showing of prejudice 2 than would be required under Rule 3.7(a). From the outset, 3 then, we are inclined to conclude that disqualification is 4 inappropriate in this case. 5 Second, MetLife’s desire to keep Debevoise as its trial 6 counsel, plainly evidenced by MetLife’s position in this 7 appeal, militates strongly against a finding of prejudice. 8 This appeal has been prosecuted in large part by MetLife’s 9 in-house lawyers, who have argued to this Court that 10 disqualification was improper and that Debevoise should be 11 reinstated, notwithstanding that Debevoise non-advocate 12 lawyers are scheduled to testify as fact witnesses during 13 trial. We are reluctant to conclude that MetLife, a 14 sophisticated client with sophisticated in-house counsel, 15 has a radically defective understanding of the case after 16 nine years of litigation. 17 C 18 Even if plaintiffs could convince us that allowing 19 Debevoise to remain as MetLife’s trial counsel poses some 20 threat to the integrity of the judicial process, we must 21 also consider whether that vital interest may be harmed by 22 disqualification. Parties have a well-recognized and
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1 entirely reasonable interest in securing counsel of their 2 choice. Prospective jurors, who must leave their homes and 3 occupations to serve, have an interest in judicial 4 efficiency, an interest that we respect. Other litigants, 5 whose pending matters are affected or delayed by 6 developments in other cases, are also harmed by the 7 uncertainties caused by disqualification. And the public in 8 general has an interest in the swift and orderly 9 administration of justice. 10 In this case, disqualification would require MetLife to 11 retain new counsel. Appreciable time and money would be 12 spent to bring new counsel to the state of readiness that 13 Debevoise attained after more than nine years of work. And 14 other circumstances intensify the harm to MetLife: several 15 billions of dollars are at stake, the legal issues are 16 complex, pretrial litigation has been ongoing for more than 17 nine years, and disqualification occurred on the eve of 18 trial. 19 Finally, plaintiffs’ lengthy and unexcused delay in 20 bringing its motion to disqualify weighs against 21 disqualification. When plaintiffs filed this lawsuit in 22 2000, they knew that Debevoise had represented MetLife
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1 during demutualization and that it would continue to 2 represent MetLife in this litigation. But plaintiffs did 3 not move to disqualify even when, seven years later, the 4 district court ruled that plaintiffs were clients of 5 Debevoise. Instead, plaintiffs waited until after 6 settlement negotiations broke down, five weeks before trial 7 was scheduled to begin, to finally file their motion. 8 Plaintiffs’ delay, which suggests opportunistic and 9 tactical motives, magnify the harms to the judicial system 10 that already inhere in any disqualification by imputation, 11 abuse the expectations of jurors, and has the general 12 tendency to impair rather than promote confidence in the 13 integrity of the judicial system. 14 The foregoing reasons, which weigh against finding an 15 adverse impact on the integrity of the judicial system, 16 reinforce our conclusion that plaintiffs have failed to show 17 by clear and convincing evidence that any of the Debevoise 18 lawyers’ testimony would be so prejudicial to MetLife that 19 the integrity of the judicial system would be threatened. 20 Consequently, the witness-advocate rule does not justify 21 disqualification in this case.
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1 CONCLUSION 2 Based on the foregoing analysis, we reverse the 3 disqualification order and reinstate Debevoise as trial 4 counsel to MetLife in the underlying securities litigation.