Law360 (March 20, 2020, 7:09 PM EDT) — A “rational mind” could look at a set of uncontested facts in a suit filed by nanotechnology company Quantum Materials Corp. and infer that K&L Gates LLP used the company’s information against it when it sued Quantum, a onetime firm client, on behalf of lenders, a Texas appeals court said Friday.
Backing Quantum in the firm’s bid to fight a denied dismissal, a three-judge Court of Appeals panel said the company made a prima facie case that K&L Gates violated its fiduciary duty to Quantum and engaged in a conflict of interest.
The panel also sided with Quantum on whether K&L Gates’ alleged misconduct was “unconscionable” under the state Deceptive Trade Practices Act, allowing that claim to continue as well.
The court rejected K&L Gates’ argument that it was protected by attorney immunity, a doctrine that deals with third-party claims of negligent representation of clients. That defense can’t “shield an attorney from liability arising from misconduct toward his or her own client,” the opinion said.
“K&L Gates has identified no authority holding otherwise, and we are aware of none,” the court said.
Quantum, a “nanomaterial” manufacturer of components used in digital displays, filed the $100 million lawsuit against K&L Gates LLP two years ago. The suit accuses the firm of a blatant conflict in simultaneous representations of Quantum and a pair of lenders with it had a payment dispute with.
According to the suit, Quantum hired K&L Gates in 2016 for “non-adverse” corporate advice, which included helping the company go public and the drafting lending agreements with two investor entities. The engagement letter included an advance conflict waiver allowing K&L Gates to represent adverse parties in matters not substantially related to the corporate work, which included attendance by a K&L Gates attorney at Quantum board meetings.
In 2017, a dispute arose between Quantum and the lenders over payment issues, during which the lenders demanded equity in the corporation rather than cash.
Quantum ultimately sued a transfer agent involved in the dispute. During that case, K&L Gates lawyers filed an intervention petition on behalf of the lenders alleging Quantum Materials had breached its contracts with the lenders.
That spurred a Quantum Materials bid to disqualify the firm and accusations that the firm had used Quantum’s confidential information to benefit the lenders and itself. K&L Gates maintained that the advance waiver applied and that the matters were not substantially related.
In 2018, after K&L Gates sent Quantum a request for $300,000 in allegedly unpaid fees, the company sued the firm for malpractice, breach of fiduciary duty and DTPA violations. A Dallas trial court turned away the firm’s dismissal motion, teeing up the current interlocutory appeal.
In its Friday decision, the appeals court noted that K&L Gates didn’t deny representing Quantum for the better part of a year and prepared the company’s “go public” S-1 filing.
“It is reasonable to infer that over the course of preparing that document, K&L Gates would have become familiar with Quantum Materials’ financial outlook. It is undisputed that the lenders, after initially accepting cash payments toward the loan obligation, later began insisting on equity as reimbursement,” the panel said. “And it is equally uncontroverted that at some point K&L Gates began assisting the lenders to that end, ultimately suing Quantum Materials in an effort to obtain that equity.”
Quantum Materials counsel Michael Minns of Minns & Arnett told Law360 it made no sense that the lenders wanted company equity unless they received information from K&L Gates about why the stake in Quantum would be more valuable than the cash.
“The court of appeals found the claims have merit based just on the petitions and facts undenied” by K&L Gates, he said. He also dismissed the firm’s position regarding the waiver.
An advance waiver “cannot say you can just sue your own client representing other parties, known or unknown, at any point in the future,” he said. “You just can’t do that.”
Counsel for K&L Gates did not respond to a request for comment Friday. A firm spokesperson declined to comment.
The decision sends the case back to the trial court.
Justices Jeff Rose, Gisela D. Triana and Edward Smith sat on the panel for the Third District.
Quantum is represented by Michael Louis Minns and Ashley Blair Arnett of Minns & Arnett and by Seth Kretzer and Mark Murphy.
K&L Gates is represented by George M. Kryder, Matthew W. Moran and Jeremy Reichman of Vinson & Elkins LLP.
The case is Quantum Materials Corp. v. K&L Gates LLP, case number 18-2393, in the District Court of Hays County, Texas, and K&L Gates LLP v. Quantum Materials Corp., case number 03-19-00138-CV, in the Texas Court of Appeals for the Third District.
–Additional reporting by Michelle Casady. Editing by Amy Rowe.