ACCUSATIONS OF BAD faith, breach of loyalty and attorney activity "bordering on extortion" are flying in Fulton County Superior Court, where medical conglomerate McKesson Corp. wants to have the Duane Morris firm disqualified from representing two Georgians against a McKesson subsidiary.

At issue is whether Duane Morris’ representation of the Georgians against McKesson Information Solutions, while serving as local counsel for two other McKesson subsidiaries in Harrisburg, Pa, is a conflict of interest.

Documents in McKesson’s case against the firm show that Duane Morris lawyers are relying on an engagement letter McKesson officials in the Pennsylvania case signed that waived conflicts that are not "subantially related" to that matter.

The case highlights the ethical risks when a megafirm like Duane Morris, which has 600-plus lawyers in 18 offices around the world, works for a huge company such as McKesson, a supplier of medical and health-care technology, training and pharmaceuticals that claims more than $80 billion in annual revenue.

The problem started in April, when McKesson Medication Management and McKesson Automation contracted with Duane Morris’ office in Harrisburg, Pa., to serve as local outside counsel in a case being heard in U.S. Bankruptcy Court in which the two companies are among several creditors.

In July, Duane Morris’ Atlanta office was hired by Nan and Alex Smith to help in their claims against McKesson Information Systems, the name for the health-care business they sold in 1994 to a company that has since been acquired by McKesson.

The Smiths took McKesson Information to arbitration to settle their claims that McKesson breached a noncompete agreement and committed fraud, based on allegations that the company shipped empty boxes to inflate sales figures several years earlier.

The trouble is spelled out in communication, included in the Fulton case file, between the Atlanta firm of Morris Manning & Martin, which was lead counsel for the McKesson subsidiaries in the Pennsylvania bankruptcy case, and Duane Morris’ Atlanta office.

On Aug. 8, Duane Morris’ Sean R. Smith sent a letter to Lawrence H. Kunin of Morris Manning. (There was no response by press time to an inquiry as to whether Sean R. Smith is related to Alex and Nan Smith.)

Smith argued that Duane Morris’ engagement letter with McKesson clients in Pennsylvania expressly limited their attorney-client relationship to serving as local counsel to the two companies for the bankruptcy case.

"You recently stated that ‘McKesson’ believes that representation of one McKesson entity, under any circumstances, would automatically give rise to a conflict by representation against another McKesson company," wrote Smith. "We were very surprised to learn this, because the Engagement Letter was revised at the request of [McKesson], and the terms that specify that Duane Morris represents only McKesson Medical and McKesson Automation and not any affiliates and the waiver of conflicts were not identified as objectionable."

The agreement letter, signed by Duane Morris’ Harrisburg partner Brian Bisignani and included in the Fulton case file, contains this statement: "Given the scope of our business and the scope of our client representations … it is possible that some of our clients or future clients will have matters adverse to McKesson. ... We understand that McKesson has no objection to our representation of parties with interests adverse to McKesson and waive any actual or potential conflict of interest as long as those other engagements are not substantially related to our services to McKesson."

The next paragraph, however, contains a caveat that the waiver "shall not apply in any instance where … we have obtained proprietary or confidential information."

Duane Morris’ Smith wrote that that section "contemplates situations exactly like the current one," and conforms to the American Bar Association’s "preferred method for resolving potential conflicts in the corporate affiliate context before they arise."

Should McKesson insist upon its position, Smith concluded, Duane Morris would bow out of the bankruptcy proceedings entirely.

Three days later, Kunin and Morris Manning partner Joseph R. Manning filed McKesson’s Fulton case against Duane Morris. The complaint terms the firm’s threat of withdrawing as "bordering on extortion."

Pointing to the allegations of malfeasance the Smiths allege, Manning and Kunin wrote, "It is hard to imagine a more blatant breach of loyalty than to accuse your current client of fraud and then withdraw from the initial representation as pure punishment."

McKesson Information, the subject of the arbitration, and McKesson Automated are both part of a larger segment of the corporation, which has a single president and shares a legal department headquartered in Alpharetta, the complaint adds. . . .

Staff Reporter Greg Land can be reached at gland@alm.com.