Special Committee Counsel Prohibited from “Advocating” as Both Counsel and Witness in Shareholder Derivative Trial
The Delaware Court of Chancery in In re Straight Path recently applied the state’s professional conduct rules to prohibit Special Committee counsel from both appearing as a fact witness at trial and representing former Special Committee members in the same trial. In so doing, the Court offered its most recent consideration of Delaware Rules of Professional Conduct 3.7(a), which precludes a lawyer in most circumstances from “advocat[ing] at a trial in which the lawyer is likely to be a necessary witness.”
The pre-trial decision arose out of a shareholder derivative action brought by shareholders of Straight Path Communications. The shareholders claimed that IDT Corporation and Howard Jonas, who allegedly controlled IDT and Straight Path, had coerced Straight Path’s directors into giving up a valuable indemnification claim that would have required IDT to cover a $614 million FCC penalty that was levied on Straight Path. According to the shareholders, Jonas threatened to blow up the spinoff of Straight Path unless its Special Committee members agreed to the deal without including indemnification rights against IDT for losses arising out of future FCC penalties.
Although the Special Committee directors were dismissed by the shareholders as additional defendants, they were identified by the parties as trial witnesses and included in the Court’s pretrial order. Also included as a fact witness was counsel for the Special Committee, Jerome Fortinsky. He had been deposed in the matter and both parties said that they expected to call him at trial.
Just prior to trial, the Special Committee’s counsel sought a modification of the pretrial order that would allow him to represent the Special Committee directors at trial. The Special Committee explained that his role was anticipated to be limited to the assertion of privilege by the Special Committee.
Vice Chancellor Glasscock denied the modification. He found that none of the exceptions to Rule 3.7(a) — where the attorney’s testimony relates to an uncontested issue, relates to the nature and value of legal services rendered in the case, or the attorney’s disqualification would cause a substantial hardship — were applicable to the counsel’s anticipated roles as witness and lawyer. Thus, he held that the Special Committee’s counsel could not participate as counsel at trial if he intended to “act as advocate” under Rule 3.7(a).
The Court further held that, notwithstanding the fact that counsel believed his role would be limited to asserting privilege for Special Committee members, those assertions, “and arguing that the privilege should apply, must fall under the umbrella of litigation practice and, therefore, of advocacy.” The Court cited several cases in which Delaware courts found advocacy to exist in the Rule 3.7(a) context. In most cases, movants used the rule offensively to “disqualify opposing counsel based on an argument that the movant must call that counsel as a necessary witness.” Attorneys who were necessary witnesses were not permitted to serve as a party’s counsel in the courtroom or even have a presence in the courtroom distinct from that of other fact witnesses. See, e.g., Twin Spans Bus. Park, LLC v. Cincinnati Ins. Co. (D. Del. 2021); Princeton Digit. Image Corp. v. Off. Depot Inc. (D. Del. 2017). In a rare case when a fact testimony was allowed by a principal counsel for a party, the counsel in question had “definitively not acted as an advocate throughout the duration of the trial” (emphasis in original) and only proffered as a rebuttal fact witness rather than a case-in-chief witness. See In re Oxbow Carbon LLC Unitholder Litigation (Del. Ch. 2017).
The Court ultimately determined that the parties could decide for themselves whether the Special Committee’s counsel could represent the Special Committee members at trial or whether he could appear as a fact witness. But it held that “Special Committee’s counsel may not both act as a fact witness and act as an advocate for the Special Committee’s privilege at trial.” (Emphasis in original.)
The holding offers useful guidance to litigants who believe that their current or former counsel may need to offer evidence as a fact witness at trial. Parties should anticipate that Delaware courts will take a broad view of what actions by an attorney at trial would preclude the attorney from testifying as a witness at trial. The Court’s holding makes clear that even the simple assertion of privilege on behalf of a third-party witness, without more, may constitute “advocacy” under the Delaware Rules of Professional Conduct.