IN A CASE reflecting problems that can occur when huge law firms represent huge clients, a Fulton County judge has ruled that legal giant Duane Morris violated conflict-of-interest rules by representing subsidiaries of McKesson Corp. in Pennsylvania and then working for a couple against an unrelated McKesson subsidiary in Atlanta.

Judge Thelma Wyatt Cummings Moore of Fulton County Superior Court on Wednesday disqualified Duane Morris from the Georgia proceedings. She wrote that she was not persuaded by the firm’s efforts to “explain away the apparent conflict of interest” by relying on an engagement letter between Duane Morris and two other McKesson subsidiaries in the Pennsylvania case.

The Duane Morris letter said, “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.” In such cases, according to the letter, the company agreed to “waive any actual or potential conflict of interest as long as those other engagements are not substantially related to our services to McKesson.”

While contract law might allow for such a cross-representation, Georgia ethics rules do not, Moore ruled, finding the Duane Morris waiver “inadequate and thus invalid.”

Duane Morris’ general counsel, Michael J. Silverman, expressed disappointment with the ruling.

“We believe that the firm’s conduct was appropriate and ethical. Our engagement letter, reviewed and approved by McKesson’s outside counsel, expressly provided that our clients were to be only [the two McKesson subsidiaries in the Pennsylvania matter], and not any other McKesson affiliates or related companies,” he said.

“We are disappointed that the court did not address this central point and feel that the result is at odds with the law in Georgia as well as the law in other jurisdictions.”

Silverman, who is based in Chicago, said the firm was considering an appeal.

“We’re very pleased, and we think the judge made the right decision,” said Joseph Manning of Morris Manning and Martin, which represented McKesson in the case, which spurred accusations of “extortion” in court filings and occasionally acrimonious assertions in a hearing last week.

The trouble stemmed from a bankruptcy case in Harrisburg, Pa. In May, two creditors, McKesson Automation Solutions and McKesson Medication Management, hired attorneys from Duane Morris’ Philadelphia office.

Two months later, lawyers Sean R. Smith and John C. Herman of Duane Morris’ Atlanta office agreed to represent Nan and Alex Smith (no relation to Sean), in an action against one of McKesson’s subsidiaries, McKesson Information Solutions. At issue was an intellectual property dispute stemming from McKesson Information’s purchase of a company which had bought out the couple years earlier.

When McKesson learned that Duane Morris was engaged by their opponents in the Atlanta case, they demanded that the firm withdraw, citing a conflict of interest.

In a written response, Duane Morris’s Smith refused, citing the firm’s engagement letter from Pennsylvania that waived conflicts in cases not substantially related to those two companies’ business.

Smith wrote that the company involved in the Georgia case is a different entity in separate litigation in a separate state, and that his firm’s involvement was not a conflict. Further, he said, should McKesson insist upon its position, his firm would withdraw from the Pennsylvania case.

McKesson sued, demanding that Duane Morris drop the Georgia case, claiming that the firm’s threat to withdraw from its Pennsylvania case amounted to “extortion” and “a gross violation of the duty of loyalty.”

During a hearing last week, Georgia State University law professor Clark D. Cunningham testified on behalf of McKesson that the waiver was impermissibly broad under Georgia legal rules, which are more stringent than those of many other states and the model rules of the American Bar Association.

In turn, Duane Morris produced its own expert, Steven C. Krane of New York’s Proskauer Rose and chairman of the ABA’s Ethics and Professional Responsibility Committee. He testified that Georgia rules had no bearing because the engagement letter was signed in Pennsylvania. He added that large, multi-pronged companies such as McKesson could not reasonably expect law firms to look upon a contract with one entity as an engagement with the whole corporate family.

In her 13-page opinion, Moore noted both viewpoints but came down squarely on the side of McKesson.

The legal ethics codes in both Pennsylvania and Georgia, she wrote, “indicate that a lawyer cannot represent a client if the representation involves a current conflict of interest and that a lawyer may represent such a client only after each affected client gives informed consent.” McKesson Information Solutions v. Duane Morris, No 2006CV121110.

Manning, the McKesson’s lawyer, said, “This is something these large multi-jurisdictional firms will have to take into consideration from now on.” He said that his own 165-lawyer firm, while small compared to 600-plus-lawyer Duane Morris, has a multi-state practice and “would never use such a waiver. We have a very intense conflict of interest policy here.”

Ironically, he noted, the Pennsylvania case settled on Thursday.

Duane Morris’ Smith and Herman were unavailable.

Krane could not be reached, but Cunningham said he was not surprised by the ruling.

“I think it’s legally sound and very thoroughly explained,” he said. “I also think it’s of significance to lawyers nationally as well as in Georgia. … They were, in my opinion, making an argument that is completely outside the mainstream of American law.”

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