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PREMIUM PRODS. SALES CORP. v. CHIPWICH

May 14, 1982

PREMIUM PRODUCTS SALES CORP., Plaintiff,
v.
CHIPWICH, INC., et al., Defendants



The opinion of the court was delivered by: SAND

This is an action for the breach of a distributorship contract which concerned the marketing of certain ice cream sandwiches called "Chipwiches." The defendant, Chipwich, Inc. ("Chipwich") now moves to disqualify plaintiff's counsel, the firm of Donovan Leisure Newton & Irvine ("Dono van Leisure"). The essence of the argument that Donovan Leisure should be disqualified is that Donovan Leisure drafted certain contracts and letters on behalf of Chipwich. The plaintiff, Premium Products Sales Corporation ("Premium") contends that Donovan Leisure at all times acted as counsel solely to Premium. The motion for disqualification is denied for reasons set forth herein.

Several key factual questions necessitated an evidentiary hearing which was held on May 6, 1982. The parties presented the evidence outlined below.

Background

 The relationship among Chipwich, Premium, and Donovan Leisure can best be explained by first detailing the roles of James M. Stevens ("Stevens") and Samuel Metzger ("Metzger") and then describing Donovan Leisure's role in drafting several agreements and letters.

 Stevens began his relationship with Donovan Leisure prior to the founding of either Chipwich or Premium. In 1977 Stevens was employed as senior vice-president in charge of sales for Great Waters of France ("Great Waters") and in this capacity he successfully marketed Perrier water in the United States. After a former business associate of his recommended Doris Shaw ("Shaw"), an associate with Donovan Leisure, Stevens began to refer Great Waters' legal matters to that firm. Between January 1977 and February 1981 Stevens worked closely with Shaw. In February 1981 Stevens left Great Waters to form his own marketing company, Premium. Stevens acquired a 50 percent stock interest in Premium and became its president. The other principal, Bruce Nevins, became chief executive officer. Stevens referred Premium legal matters to Donovan Leisure.

 One of Premium's first clients, soon to become its major client, is Chipwich. In March 1981, Donovan Leisure drafted a contract between Premium and Chipwich. Under the terms of this contract, Premium, in exchange for 14 percent of the gross receipts from the sale of Chipwiches, would serve as Chipwich's exclusive agent for marketing and selling.

 Chipwich was at this time a very young company. Its product was being made by hand in quantities too small to permit its entry into the conventional retail market. Chipwich's founders, Richard LaMotta (inventor of the chocolate chip cookie enclosed ice cream bar known as the Chipwich) and Metzger had thus planned a distribution system through the means of pushcart vendors. Premium, however, developed a plan for retail marketing which would require that Chipwich automate its production.

 Because Stevens was thought to possess the expertise needed to set up the factory, he became the acting president and chief operating officer of Chipwich in May 1981. Stevens testified that he worked full time as Chipwich's president; his role with Premium demanding little work because of Chipwich's production problems which barred the implementation of Premium's retail marketing plan for that product. During the period when Stevens was president of both companies, a merger of Premium and Chipwich was planned; but in late November 1981, after Metzger had become very critical of Stevens handling of the manufacturing aspect of Chipwich, the merger plan was abandoned. In January 1982, Metzger replaced Stevens as Chipwich's president, and Jason Smith replaced him as chief operating officer.

 It was during the period when Stevens served as president of both Chipwich and Premium that Donovan Leisure drafted three agreements and two letters which form the basis of the present disqualification controversy. Before describing these documents, Metzger's role should be clarified.

 Metzger has served as Chipwich's chief executive officer since its founding in January 1981, and as stated above, he now serves as its president as well. Metzger is an attorney who has been a member of the bar since 1966. In his work on behalf of Chipwich, he considers himself to be acting in the role of a businessman. Metzger characterizes himself as a specialist in labor law, and has performed legal work for Chipwich in that field. However, he has taken responsibility for the referral of all of Chipwich's other legal work to outside counsel. Pursuant to his referrals, Robert E. Porges has handled a private placement; Offner & Kuhn handled certain trademark litigation, and Paul, Weiss, Rifkind, Wharton & Garrison performed other legal work. I might say parenthetically that Metzger's plans to form a law firm with Porges and the extent to which these plans were carried out were the subject of much testimony at the hearing. Although the testimony was relevant to Metzger's credibility, it has little, if any, other relevance to the issues currently before the court. Metzger never referred a Chipwich legal matter to Donovan Leisure. Metzger instructed Stevens to refer all Chipwich legal matters to him. Metzger testified that Stevens never failed to follow those instructions.

 The instant motion to disqualify cites a conflict of interest arising from Donovan Leisure's drafting of three letter agreements. Premium had negotiated with Haagen-Dazs, Inc. in an effort to secure a means of retail distribution for Chipwich. In November 1981, Stevens consulted with Shaw about the preparation of writings which would reflect the arrangement with Haagen-Dazs. Although Stevens testified that he had originally thought that Premium and Haagen-Dazs should be the parties to the agreement, Shaw, after consultation with other Donovan Leisure attorneys, advised him that Chipwich rather than Premium should sign the agreement. Donovan Leisure recommended this form because only Chipwich could guarantee the supply of the product and because Premium planned, in any event, to merge with Chipwich. Donovan Leisure then prepared two letter agreements between Chipwich and Haagen-Dazs: (1) an agreement appointing Haagen-Dazs as a distributor of Chipwich's; and (2) a consulting agreement under which Haagen-Dazs would receive 5.5 percent of Chipwich's gross receipts within the territory of Haagen-Dazs' distributorship. A third agreement modified the preexisting arrangement between Premium and Chipwich so as to eliminate a possible conflict between the Haagen-Dazs consulting agreement and Premium's exclusive agency agreement. Under the terms of the third agreement Premium would receive 14 percent of gross receipts obtained through Haagen-Dazs. One of the issues in the present case is whether Stevens in entering these agreements violated his fiduciary duties as an officer of Chipwich.

 Chipwich asserts that Donovan Leisure entered into an attorney-client relationship with Chipwich when it drafted these agreements. It bases this assertion on the following evidence. Stevens was president and chief executive operating officer of Chipwich when he requested Donovan Leisure to draft the agreements. On December 23, 1982, Metzger met with Stevens in a Donovan Leisure conference room where he reviewed and signed the agreements. Metzger testified that no one had ever told him that Donovan Leisure was Premium's attorney and that he thought that Joel Siegal, an attorney who he asserts represented Stevens and Nevins with respect to the March 1981 contract, was Premium's attorney. Metzger spoke with Shaw briefly. (Shaw left Metzger and Stevens alone in the room for most of their meeting). Metzger knew that Donovan Leisure drafted the agreement to which Chipwich was a party, and he assumed that it did so on Chipwich's behalf. Metzger testified that he did not know why Chipwich rather than Premium was made a party to the Haagen-Dazs agreement. He testified that his signing on behalf of Chipwich instead of Stevens' signing did not lead him to think that Stevens acted solely on behalf of Premium because he knew Stevens would have to sign one of the agreements on behalf of Premium.

 Metzger testified, as I've indicated, no one ever told him that Donovan Leisure did not represent Chipwich and that no one ever asked him whether he was serving as Chipwich's counsel. He testified that he believed Stevens had hired the firm, that Stevens knew Metzger did not act as counsel to Chipwich unless the matter involved labor law, and that Metzger assumed Stevens as president of Chipwich would do what was best for Chipwich. Metzger, when asked whether he served as Chipwich's counsel in reviewing the three agreements, stated:

 
"Well, I didn't hire a specific attorney for it. If my implication is I am an attorney-I was conducting myself as a businessman. If it is interpreted, because of my degree, that I was acting as an attorney-but I was a businessman reviewing the agreement and doing what I thought best for the company."

 Transcript of April 28, 1981 hearing, at pages 23-24.

 Chipwich notes that it agreed to pay Donovan Leisure's bill for the drafting of the three agreements (In fact, Chipwich has never paid this bill, both because of this dispute and because of its lack of funds).

 Chipwich also argues that Donovan Leisure entered into an attorney-client relationship with Chipwich when it responded to a letter sent by Steven H. Thal, Esquire, on behalf of Martin Ice Cream Company, Inc. The letter, which charged Chipwich with antitrust violations in the distribution of its ice cream sandwiches, was addressed to "Mr. James S. Stevens, president/Chipwich Incorporated." Stevens had received the letter prior to the December 23, 1981 meeting. At the meeting Stevens and Metzger discussed the letter. According to Metzger, Stevens reassured him that Donovan Leisure was experienced in the antitrust field and that no antitrust violation had occurred, Stevens asked Metzger if he wanted Shaw to respond to the Thal letter, and Metzger said "Yes." Metzger testified that he did not remember whether Shaw was present when Stevens reassured him about the Martin Ice Cream problem, but he did recall that Shaw was present when he agreed that she should respond to the Thal letter. Thal also sent a second letter which drew a short response from Shaw. Again, Metzger testified, he assumed the firm would act on Chipwich's behalf, and, again, no one told him that the firm did not represent Chipwich.

 In addition, the billing for the work on the Thal letter appeared in the bill for the drafting of the letters of agreement with ...


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