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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

THE NICHOLS AGENCY, INC. v. ENCHANTED CHILD CARE, INC.. d/b/a CELEBREE LEARNING CENTERS

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Civil No. CCB-07-1757

MEMORANDUM The Nichols Agency, Inc. ("Nichols") has sued Enchanted Child Care, Inc. d/b/a Celebree Learning Centers ("Celebree") for breach of contract, unfair competition and copyright infringement. Nichols alleges that Celebree was using Nichols-produced marketing works in violation of the terms of their agreement. Nichols has filed a motion to disqualify Celebree's attorneys for conflict of interest and Celebree has filed a motion to dismiss. For the reasons articulated below, Nichols's motion will be denied and Celebree's motion will be granted in part and denied in part.

BACKGROUND In October 2002, Nichols entered into an agreement ("the agreement") with Celebree to produce advertising and marketing products for Celebree, a string of day care centers. Under the agreement, Nichols was to serve as the "exclusive advertising/marketing consultant for all TV, Radio, Print, Magazine & Billboards, etc." (Compl. Ex. A.) Celebree was to pay a monthly "administrative/consulting fee" of $1,000, along with "15% of the gross monthly budget." The agreement noted that "[a]ll TV and Video production cost requires a minimum 50% deposit: 1

50% at completion" and that "[a]ll radio & print production cost may need to be paid in advance." The agreement provided that it could be cancelled by either party with thirty days' written notice. As to the ownership of the creative works, the agreement stated that: [Nichols] shall own all rights, title, interest, and copyright in and to ALL media & marketing campaigns, placement schedules, advertisement, scripts, copy, artwork, illustrations, graphic designs, and other products developed and created by us for you (hereinafter "Agency Works"). After termination of this agreement you shall have no further right to use, reproduce, distribute, display, or modify any Agency Works, except that you may distribute and display (without further reproduction) tangible copies of products, brochures, and posters you have paid for. (Compl. Ex. A.) During the course of their relationship, Nichols produced what it refers to as the "Nichols Works," which included a series of television commercials. In mid-to-late August 2004, Celebree notified Nichols that it intended to terminate the agreement. Nichols alleges that although the thirty-day termination notice was given in August 2004, that "the parties understood and agreed that advertisements placed in August 2004 required Nichols to continue to provide its services to Celebree in billing, collecting, and managing the invoicing for such advertisements through October 2004," and that the earliest date on which termination could have been effective was October 31st. Nichols alleges that after the agreement was terminated, Celebree continued to make unauthorized use of "the entirety of the Nichols Works" by "reproducing, publishing, and distributing [the Works] on its website, without permission or license." Nichols claims that it learned of the website's contents in November 2005 and attempted to extract payment from

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Celebree in exchange for the previous use of the commercials. Nichols continued in this vein until May 6, 2006, when Celebree "ceased its [allegedly] infringing use." Nichols also claims that Celebree never paid it for a corporate video which Nichols produced in late 2004, or for an advertising schedule which Celebree requested in early 2005. In July 2007, Nichols sued for breach of contract, unfair competition and copyright infringement; it is seeking $61,500, plus interest and attorneys' fees, in damages for the breach of contract and unfair competition claims; $13,000, plus interest and attorneys' fees, in damages for breach of the agreement regarding the video; and a series of remedies at law and equity under the Copyright Act. Shortly thereafter, Celebree filed a motion to dismiss or, in the alternative, for summary judgment. In August, Nichols filed a motion to disqualify Celebree's counsel. The facts supporting Nichols's motion for disqualification may be briefly stated. In February 2002, Nichols retained Donna M.D. Thomas ("Ms. Thomas" ) of Astrachan Gunst & Thomas, P.C. ("AGT") "for the purpose of legal advice and assistance in drafting agreements." (Pl's Mot. Disqualify 2.) According to Nichols, it gave Ms. Thomas the following tasks: redraft a form letter agreement which Nichols used with its customers; advise Nichols regarding "the misappropriation of advertisements by Nichols's customers"; and conduct settlement negotiations with one of Nichols's former customers. Nichols notes that the agreement, as redrafted by Ms. Thomas, provided the structure and much of the substance for the agreement it used with Celebree. Nichols learned in April 2006 that Celebree was represented by AGT, but did not file a motion for disqualification until approximately six weeks after filing suit. Nichols claims that the delay between its learning of Celebree's representation and the motion for disqualification is due to the fact that Celebree and Nichols were in settlement negotiations

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throughout that period. It was not until it became apparent there would be a lawsuit that Nichols raised the issue of a potential conflict of interest on the part of Ms. Thomas, and by extension, AGT.1 In support of its argument that no conflict exists, Celebree notes that AGT did not represent Nichols in any matters involving Celebree, that AGT did not gain any confidential information in the course of representing Nichols that could be adverse to Nichols in the current case, that the current dispute between Celebree and Nichols is factually distinct from the disputes involved in the previous representation, and that Nichols waited fifteen months to raise the issue of a potential conflict. Celebree has moved to dismiss Nichols's complaint, on the following grounds: this court lacks subject matter jurisdiction to hear a Copyright Act claim for a work that has not been registered; the claim for breach of contract is preempted by the Copyright Act; and the claim for unfair competition is similarly preempted.2 (Def's Mot. Dismiss 3.)

ANALYSIS Motion for Disqualification This court applies the Maryland Rules of Professional Conduct ("MRPC") as they have been adopted by the Maryland Court of Appeals. Local Rule 704. MRPC 1.9, which details a

Maryland Rule of Professional Conduct 1.10, the rule of imputed disqualification, states that none of the lawyers in a firm may represent a client if any of the lawyers in the firm is prohibited from such representation. Celebree concedes that if Ms. Thomas may not represent it, then all lawyers at AGT are similarly prohibited from doing so. (Def's Opp'n 2.) At the motions hearing on February 6, 2008, Nichols voluntarily dismissed the unfair competition claim. As such, it is not discussed in this memorandum. 4
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lawyer's duties to former clients, states that: (a) 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. (b) A lawyer shall not knowingly represent a person in the same or a substantially related matter in which a firm with which the lawyer formerly was associated had previously represented a client (1) whose interests are materially adverse to that person; and (2) from whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter; unless the former client gives informed consent, confirmed in writing. (c) A lawyer who has formerly represented a client in a matter or whose present or former firm has formerly represented a client in a matter shall not thereafter: (1) use information relating to the representation to the disadvantage of the former client except as these Rules would permit or require with respect to a client, or when the information has become generally known; or (2) reveal information relating to the representation except as these Rules would permit or require with respect to a client. MRPC 1.9. Disqualification of a party's attorney is "a drastic remedy since it deprives litigants of their right to freely choose their own counsel." Gross v. SES Americom, Inc., 307 F.Supp.2d 719, 722 (D.Md.2004) (citing Buckley v. Airshield Corp., 908 F.Supp. 299, 304 (D.Md.1995); Shaffer v. Farm Fresh, Inc., 966 F.2d 142, 146 (4th Cir.1992)). At the same time, courts have a responsibility to "preserve the public's confidence in the judicial system." Buckley, 908 F.Supp. at 304. As a result, courts must find a " `balance between the client's free choice of counsel and the maintenance of the highest ethical and professional standards in the legal community.' " Id. (quoting Tessier v. Plastic Surgery Specialists, Inc., 731 F.Supp. 724, 729 (E.D.Va.1990)). Finally, the defendants bear "a high standard of proof to show that disqualification is warranted" because it is such a drastic measure. Buckley, 908 F.Supp. at 304 (quoting Tessier, 731 F.Supp. at 729). Franklin v. Clark, 454 F.Supp.2d 356, 364 (D. Md. 2006). 5

Determining whether a conflict of interest exists requires a two-part analysis: first, "the moving party must establish that an attorney-client relationship existed with the former client," and second, "the matter at issue in the former representation [must be] the same or substantially related to that in the current action." Stratagene v. Invitrogen Corp., 225 F. Supp. 2d 608, 610 (D. Md. 2002). Here, there is no dispute that Ms. Thomas and Nichols formed an attorney-client relationship: in February 2002, after speaking with Brian Nichols on the phone and receiving two faxes from him, she had AGT run a conflict check on Nichols and the opposing party that he had mentioned; no conflict was revealed. Mr. Nichols signed an engagement letter, which he returned with a $400 retainer. Between February 2002 and August 2002, Ms. Thomas billed a total of 4.85 hours to the Nichols Agency on redrafting a form agreement and two small collection matters. (Def's Opp'n. Ex. M. at 4.) The second step of the analysis involves a closer question: whether the issues in which Ms. Thomas represented Nichols are "substantially related" to the issues involved in the Nichols-Celebree dispute. "Substantially related" has been interpreted to mean "identical" or "essentially the same," Tessier, 731 F.Supp. at 730 (quoting Gov't of India v. Cook Indus., 569 F.2d 737, 739-40 (2d Cir.1978)), or "factually related," Blumenthal Power Co. v. Browning-Ferris, Inc., 903 F.Supp. 901, 902 (D. Md. 1995) (quoting Trone v. Smith, 621 F.2d 994, 998 (9th Cir.1980)); see also Buckley, 908 F. Supp. at 305 (disqualifying the defendant's attorney on the ground that both the current and former representations involved the validity of the same patent). "[A] lawyer who recurrently handled a type of problem for a former client is not precluded for that reason alone from later representing another client in a factually distinct

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problem of that type even though the subsequent representation involves a position adverse to the prior client." MRPC 1.9 cmt. 2. "`[S]ubstantially related' embraces consideration of circumstances where the same issue is litigated, albeit for a different client, if there is a substantial risk that confidential communications between the attorney and his or her former client may be disclosed or utilized in a material manner prejudicial to the former client." Att'y Grievance Comm'n v. Siskind, 930 A.2d 328, 337 (Md. 2007) (quoting Gatewood v. State, 880 A.2d 322, 332-33 (Md. 2005)). Celebree argues that Ms. Thomas did not receive any confidential communications in the course of her representation; indeed, "[w]hatever information Mr. Nichols may have provided to Ms. Thomas about the terms of the form contract that he wanted her to draft for him would have been included in the terms of the contract." (Def's Opp'n 6.) Celebree notes Comment 3 to Rule 1.9, which states that "[i]n the case of an organizational client, general knowledge of the client's policies and practices ordinarily will not preclude a subsequent representation." (Def's Opp'n 8.) However, "[b]y operation of law, [Ms. Thomas] is assumed to possess confidential information pertaining to [Nichols]" because she served as Nichols's attorney. Siskind, 930 A.2d at 338. Once an attorney-client relationship has been established, "an irrebuttable presumption arises that confidential information was conveyed to the attorney in the prior matter." Id. at 337 (quoting Buckley, 908 F. Supp. at 306). Furthermore, "[n]o actual receipt of confidences must be shown [because] such a standard would place an unreasonable burden on the moving party." Stratagene, 225 F. Supp. 2d at 612 (quoting Rogers v. Pittston Co., 800 F. Supp. 350, 354 (W.D.Va. 1992)). The relevant question, therefore, is whether the confidential information

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which is assumed to have been shared in the previous representation could be used to the detriment of the former client in the current proceeding. Here, the prior representation involved the following requests: that AGT redraft the form letter agreement that Nichols used with its clients; that AGT advise Nichols regarding a possible misappropriation of its creative works by clients; and that AGT reach an acceptable settlement with former Nichols clients. These matters are reflected in Ms. Thomas's billing records. (Def's Opp'n Ex. M.) Ms. Thomas spent .6 hours in 2002 redrafting the form letter agreement;3 the original verison is included as defendant's exhibit D and the redlined copy is at exhibit E. The changes were not insubstantial. Ms. Thomas suggested the following edits: the addition of a clause

Nichols argues that AGT was aware, "both prior to and during" the attorney-client relationship, "that Nichols was in negotiations with Celebree," and that Nichols intended to use the redrafted form letter agreement with Celebree. (Pl's Reply 5.) This appears to contradict Mr. Nichols's statement in his affidavit that Celebree did not request marketing services from Nichols until after the form agreement was drafted. (Pl's Mot. Disqualify Ex. G, Nichols Aff.

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