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Watkins v. Trans Union, LLC

United States Court of Appeals, Seventh Circuit

August 22, 2017

Richard Watkins, Plaintiff-Appellee,
v.
Trans Union, LLC, Defendant-Appellant.

          Argued May 31, 2017

         Appeal from the United States District Court for the Southern District of Indiana, Terre Haute Division. No. 2:14-cv-135-WTL-DKL - William T. Lawrence, Judge.

          Before Kanne, Sykes, and Hamilton, Circuit Judges.

          HAMILTON, CIRCUIT JUDGE.

         Plaintiff Richard Watkins has sued Trans Union for violating the Fair Credit Reporting Act. The merits of his claims are not the subject of this appeal. The issue here is whether attorney John Cento should be disqualified from representing Watkins. That is because over ten years ago Cento earned a living defending Trans Union in hundreds of lawsuits alleging Fair Credit Reporting Act violations. Because the Southern District of Indiana makes use of Indiana's rules governing attorney conduct, Indiana Rule of Professional Conduct 1.9 (Duties to Former Clients) governs Trans Union's effort to have Cento disqualified.

         The district court found that Rule 1.9 does not require Cento's disqualification, but the court authorized an interlocutory appeal of that decision under 28 U.S.C. § 1292(b), which we accepted. Trans Union argues that the district court applied the wrong legal standard to decide disqualification and misapplied the standard that it did apply. We disagree and affirm the decision of the district court. Because this case turns on the trajectory of Cento's legal career, we begin there. We then review the facts and procedural history of Watkins's case before reviewing the district court's reasons for denying disqualification under Rule 1.9.

         I. Factual and Procedural History

         A. John Cento's Legal Career

         John Cento began his career as an attorney at the Indianapolis law firm of Katz & Korin, P.C., where he worked with Robert Schuckit. Trans Union was a client first of Schuckit, and then Katz & Korin when Schuckit joined the firm. Cento began representing Trans Union in 2001, and between 2003 and 2005 worked almost exclusively on Trans Union cases. Schuckit then left Katz & Korin in June 2005 to form his own law firm. Cento followed, but he stayed with Schuckit's new firm for just a month.

         Almost all of the cases in which Cento represented Trans Union involved the Fair Credit Reporting Act (FCRA). The FCRA imposes a duty to maintain reasonable procedures for accurate reporting. See 15 U.S.C. § 1681e(b). The Act authorizes a private cause of action for consumers against consumer reporting agencies such as Trans Union for willful, knowing, or negligent failures to comply with the law. 15 U.S.C. §§ 1681n-p. A defendant may avoid liability for violations that occur despite the defendant's good-faith effort to comply with the law See, e.g., 15 U.S.C. §§ 1681g(e)(5), (7).

         Cento defended Trans Union against those claims of FCRA violations for five years. Between 2001 and 2005, he represented Trans Union in over 250 cases and billed over 4, 000 hours of work for Trans Union. He worked with Trans Union's in-house counsel and employees, and he was given access to any information necessary for litigation. Today, twelve years after Cento last represented Trans Union, Schuckit and his firm continue to represent Trans Union. Some of the Trans Union employees with whom Cento worked remain with the company.

         In 2013, Cento formed Cento Law, which represents consumers bringing FCRA violation claims against credit reporting agencies. The law firm advertises the experience of its attorneys on its webpage: "Our credit report attorneys have litigated hundreds of Fair Credit Reporting Act cases across the country. Our experience in this area of law is derived not only from representing consumers, but from years of prior representation of two of the three national consumer reporting agencies, Trans Union and Equifax." Cento Law, http://www.centolaw.com (last visited Aug. 21, 2017). In 2012, and again in 2013, Cento was disqualified from cases in which he represented plaintiffs who brought claims against his former client, Trans Union. Childress v. Trans Union, LLC (Childress I), No. L12-CV-00184-TWP-DML, 2012 WL6728339 (S.D. Ind. Dec. 28, 2012); Hobson v. Trans Union, LLC, No. L13-CV-54, 2013 WL 2443917 (N.D. Ind. June 5, 2013).

         B. The Watkins Litigation

         In the present case, Richard Watkins selected Cento to represent him in his case alleging FCRA violations against Trans Union under 15 U.S.C. §§ 1681e, 1681g, and 1681L Watkins had applied for a loan in 2009 and discovered that his Trans Union credit file contained twenty "collection tradelines" that were not his. He disputed the accuracy of his credit file, and Trans Union removed the incorrectly attributed collections. But when Watkins applied for a mortgage in 2013, he learned that the collections had once again been placed in his credit file. The problem, Watkins alleges, is that Trans Union's algorithms have resulted in the merging or mixing of Watkins's credit file with that of another person to create a "mixed file, " and that Trans Union has failed to remedy the continued inclusion of collections not belonging to Watkins. The merits of Watkins' claims will turn on whether the procedures Trans Union used "reasonable procedures to assure maximum possible accuracy" of the information about Watkins, see 15 U.S.C. § 1681e(b), and whether Trans Union made good-faith efforts to comply with the law, § 1681g(e)(5) & (e)(7).

         Cento filed Watkins's complaint in May 2014. One month later, Trans Union filed a motion to order Cento to show cause why he should not be disqualified as Watkins' lawyer. Watkins v. Trans Union, LLC, No. 2:14-cv-135-WTL-DKL, 2016 WL 4919999, at *1 (S.D. Ind. Sept. 15, 2016). The district court granted that motion and permitted Cento to seek limited discovery to aid in showing cause. Id. This was an unusual procedural path for seeking attorney disqualification. Rather than file a motion to disqualify, Trans Union sought a show-cause order in reliance on the cases in which Trans Union had successfully sought disqualification against Cento in the past. Id.; see also Childress I, 2012 WL 6728339; Hobson, 2013 WL 2443917. The discovery process that followed the show-cause order resulted in a magistrate judge report with three alternate recommendations (to hold an evidentiary hearing; to decline to disqualify; or, alternatively to disqualify), but Judge Lawrence, to whom the case was reassigned after the magistrate proceedings, decided to "exercise [the court's] authority to begin with a clean slate." Watkins, 2016 WL 4919999, at *2. The parties briefed the attorney disqualification issue and the court held a hearing before issuing its decision. Id. at *1.

         In the district court, as on appeal, Trans Union relied on LaSalle National Bank v. Lake County, 703 F.2d 252 (7th Cir. 1983), and Analytica, Inc. v. NPD Research, Inc., 708 F.2d 1263 (7th Cir. 1983), to argue that federal common law governs the standard for disqualification. Both cases predate Indiana Rule of Professional Conduct 1.9, which, as the district court found here, governs the issue of disqualification. After analyzing the precedents and the history of the adoption of the Rules of Professional Conduct, Judge Lawrence followed the guidance of Rule 1.9 rather than LaSalle National Bank or Analytica and held that Cento should not be disqualified. Watkins, 2016 WL 4919999, at *6. The prior representations are not factually related such that the same matter is in dispute in Watkins. Nor, the judge found, is there a risk that confidential information from the prior matters would materially advance Watkins' present claims. Id. at ""4-6. Moreover, the judge noted, over a decade has passed since Cento represented Trans Union. Id. at *6. Accordingly, the judge held that the requirements for disqualification were not met. He permitted Cento to continue representing Watkins. Id.

         In this interlocutory appeal under 28 U.S.C. § 1292(b), Trans Union argues that the district court applied the wrong legal standard for attorney disqualification and misapplied the standard it chose. We affirm the decision of the district court.

         II. Analysis

         We review for abuse of discretion the district court decision rejecting disqualification. Owen v. Wangerin, 985 F.2d 312, 317 (7th Cir. 1993); Whiting Corp. v. White Machinery Corp., 567 F.2d 713, 715 (7th Cir. 1977) (The district court "possesses broad discretion in determining whether disqualification is required in a particular case ... ."), quoting Schoetter v. Railoc of Ind., Inc., 546 F.2d 706, 710 (7th Cir. 1976). An abuse of discretion can be shown when the district court based its decision on an erroneous view of the law or a clearly erroneous evaluation of evidence. See, e.g., Novo Terapeutisk Lab. AIS v. Baxter Travenol Lab., Inc., 607 F.2d 186, 188-89 (7th Cir. 1979) ("This court has relied on the broad discretion of the district court in refusing to disturb a disqualification order, but we have not allowed a strict standard of review to prevent reversal when the district court predicated its disqualification ruling on a misunderstanding of the law.") (citations omitted). This standard of review is consistent with other areas of law in which district judges have discretion but in exercising it must apply the correct rule of law. See, e.g., Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990) ("district court would necessarily abuse its discretion [in deciding Rule 11 sanctions motion] if it based its ruling on an erroneous view of the law"); Ervin v. OS Restaurant Services, Inc., 632 F.3d 971, 976 (7th Cir. 2011) (application of incorrect legal rule to decide class certification would amount to abuse of discretion).

         We have observed that granting a motion for disqualification has "immediate, severe, and often irreparable ... consequences" for the party and disqualified attorney. Freeman v. Chicago Musical Instrument Co., 689 F.2d 715, 719 (1982). Disqualifying a lawyer immediately deprives the losing party from the "representation of his choice" and disrupts the litigation. Id. In sum, "disqualification, as a prophylactic device for protecting the attorney-client relationship, is a drastic measure which courts should hesitate to impose except when absolutely necessary ... [because it] destroy[s] a relationship by depriving a party of representation of their own choosing." Id. at 721.

         However, the duty of confidentiality represented in the Rules of Professional Conduct, like the Code of Professional Responsibility that came before them, is fundamental to the profession and the relationship between lawyer and client. See id. Courts have a duty to safeguard the privacy of the attorney-client relationship and in doing so to "maintain public confidence in the legal profession" and to protect "the integrity of the judicial proceeding." Id.

         Whether disqualification is appropriate in this case is governed by the Indiana Rules of Professional Conduct. Lawyers representing clients in federal courts must follow federal rules, but most "federal courts use the ethical rules of the states in which they sit." Huusko v. Jenkins, 556 F.3d 633, 636 (7th Cir. 2009). Watkins filed suit in the Southern District of Indiana, which has adopted the Indiana Rules of Professional Conduct to govern attorneys' conduct. S.D. Ind. Local Rule 83-5(e). Indiana adopted the ABA Model Rules of Professional Conduct as its Rules of Professional Conduct in 1987. United States v. Goot, 894 F.2d 231, 234 (7th Cir. 1990). Rule 1.9 governs the duties lawyers owe to former clients and thus whether Cento should be disqualified from representing Watkins because of a duty he may owe to his former client, Trans Union.[1]

         A. Indiana Rule of Professional Conduct 1.9

         Indiana Rule of Professional Conduct 1.9 mirrors the A.B. A. Model Rule of the same number and reads, in relevant part:

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 unless the former client gives informed consent, confirmed in writing.

         In interpreting the Rules of Professional Conduct, federal courts may rely on the specific guidance offered in the commentary. See Nix v. Whiteside, 475 U.S. 157, 166 (1986); Strickland v. Washington, 466 U.S. 668, 688 (1984); United States v. Williams, 698 F.3d 374, 386 (7th Cir. 2012) (Hamilton, J., dissenting in part) (commentary to A.B. A. standards governing norms of legal practice can be "valuable guidance"). The commentary to Rule 1.9 defines two matters as "substantially related" when two matters "involve the same transaction or legal dispute, '' or when there is a "substantial risk that confidential factual information as would normally have been obtained in the prior representation would materially advance the client's position in the subsequent matter." Ind. R. Prof'1 Conduct 1.9, cmt. 3.

         Whether two matters "involve the same transaction" is determined by an inquiry into whether the matters are factually related. Comment 2 states: "The scope of a 'matter' for purposes of this Rule depends on the facts of a particular situation or transaction." It is the direct involvement "in a specific transaction, " that makes "subsequent representation of other clients with materially adverse interests in that transaction clearly ... prohibited." Id., cmt. 2.

         If the prior and present matters do not involve the same transaction or legal dispute, they may still be substantially related if there is a substantial risk that confidential information would materially advance the client's position in the present matter. The commentary tells us that information "disclosed to the public or to other parties adverse to the former client ordinary will not be disqualifying, " and that information "acquired in a prior representation may have been rendered obsolete by the passage of time." Id., cmt. 3.

         On the issue most pertinent to this case, the commentary explains that "a lawyer who recurrently handled a type of problem for a former client is not precluded from later representing another client in a factually distinct problem of that type even though the subsequent representation involves a position adverse to the prior client." Id., cmt. 2. "In the case of an organizational client, general knowledge of the client's policies and practices ordinarily will not preclude a subsequent representation." Id., cmt. 3.

         Rule 1.9 clarified and narrowed the contours of an older federal common-law rule for attorney disqualification referred to as the "substantial relationship test." The Model Rules of Professional Conduct, of which Rule 1.9 is a part, replaced the Model Code of Professional Conduct, which was based on canons first promulgated in 1908. Monroe Freed-man, The Kutak Model Rules v. The American Lawyer's Code of Conduct, 26 Vill. L. Rev. 1165 (1981); Kathleen Maher, Keeping Up Appearances, 16 Prof. Law. 1 (2005). The Rules were the product of the Kutak Commission, as it became known, formed in 1977 to assemble a set of governing rules for the profession. Freedman, Kutak Model Rules, at 1166. Some of the Model Rules, including Rule 1.9, explicitly rejected the old canons. Maher, Keeping Up Appearances (2002 revisions to Rule 1.9 deleted the lingering reference to "appearance of impropriety" originally housed in Canon 9 because it was "no longer helpful to the analysis of questions arising under this Rule"). The Kutak Commission's proposed Model Rules of Professional Conduct were issued in 1983 and then adopted by the states in the years that followed. Indiana adopted the Model Rules of Professional Conduct as its Rules of Professional Conduct in 1987. Goot, 894 F.2d at 234.

         B. Rule 1.9 Does Not Disqualify Cento from ...


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