ESC-Toy Ltd. v. Sony Interactive Entertainment LLC

Background

The underlying lawsuit concerns ESC-Toy’s claims that Sony Interactive Entertainment LLC breached contracts involving merchandise for the PlayStation brand. This order addresses only Sony’s motion to disqualify ESC-Toy’s counsel, Maschoff Brennan (MABR); it does not decide the underlying contract claims.

Shelly Gayner worked for Sony for approximately 16 years. From 1998 to 2007, she served as in-house counsel and Director of Legal and Business Affairs. From 2007 to 2014, she served as Director of Licensing, established Sony’s merchandise licensing program, negotiated licensing agreements, and negotiated and signed the 2014 merchandise licensing agreement between ESC-Toy and Sony. She also signed a nondisclosure agreement during her Sony employment.

Beginning in 2017, Gayner invoiced ESC-Toy for legal services. The record included documents describing her work as attorney notes about negotiation strategy for Sony’s pin program and an investigation into a potential dispute with Sony. In 2019, she sent a letter to Sony on ESC-Toy’s behalf. In 2020, she provided a declaration supporting ESC-Toy’s position about transferring the lawsuit. Gayner testified that MABR attorneys drafted the declaration, that she revised it through several drafts, and that she communicated with MABR about it.

Court’s analysis

The court applied California professional-conduct rules under the Northern District of California’s local rules. Under those rules, a lawyer who represented one client generally may not represent an opposing client in the same or a substantially related matter without the former client’s informed written consent. When the matters are substantially related, confidential information is presumed, and disqualification is generally required unless timely ethical screening was used.

The court found that Gayner had an attorney-client relationship with Sony and had obtained Sony’s confidential information. It also found that she later had an attorney-client relationship with ESC-Toy concerning its dispute with Sony. Because Gayner negotiated the 2014 agreement at issue and later assisted ESC-Toy regarding that relationship and dispute, the court found a substantial relationship between the representations and a conflict of interest.

The court held that Gayner’s conflict was imputed to MABR even though Gayner was not formally MABR’s co-counsel or a member of the firm. The court found that MABR worked directly with Gayner on the 2020 declaration and that confidential information was actually shared. In the court’s view, Gayner’s insider knowledge about Sony’s licensing agreements, acquired while she was Sony’s counsel, was privileged information that should not have been shared with ESC-Toy or MABR.

The court also concluded that MABR’s work with Gayner created an appearance of impropriety and that allowing MABR to continue would prejudice Sony by creating a risk that confidential information would affect the litigation. Separately, the court found that MABR and ESC-Toy breached their duty of candor by taking inconsistent positions about whether Gayner knew about the case, whether she represented ESC-Toy, and whether their communications with her were privileged.

Other arguments and ruling

The court rejected ESC-Toy’s argument that Sony waited too long to seek disqualification. The court found that Sony did not learn the extent of MABR’s involvement with Gayner until Gayner’s 2022 deposition and then pursued discovery and the disqualification issue with reasonable diligence. The court also found that Sony had standing because it had a legally cognizable interest in avoiding harm from its former lawyer’s involvement with its litigation adversary.

The court declined to apply judicial estoppel against Sony, reasoning that Sony changed its position in response to MABR and ESC-Toy’s changing descriptions of Gayner’s role and that the court’s decision rested on the facts rather than Sony’s characterization.

Disposition

The motion to disqualify was granted. MABR was disqualified from representing ESC-Toy after meeting with Sony to propose language for a protective order concerning the privileged and confidential information underlying the disqualification. MABR may represent ESC-Toy for that limited protective-order purpose. ESC-Toy has 90 days from the order to retain new counsel and have new counsel enter an appearance; after 90 days, the stay will be lifted.