Filed: Oct. 20, 2003
Latest Update: Mar. 02, 2020
Summary: United States Court of Appeals FOR THE EIGHTH CIRCUIT _ No. 01-2292 _ Midwest Motor Sports, doing * business as Elliott Power Sports, * Inc., a South Dakota corporation, * * Appellee, * * v. * * Arctic Cat Sales, Inc., a Minnesota * corporation, * * Appeals from the United States Appellant, * District Court for the * District of South Dakota. A-Tech Cycle Service, Inc., * * Appellee, * [PUBLISHED] * Roger W. Damgaard; Timothy R. * Shattuck, Attorneys for Arctic Cat * Sales, Inc., * * Appellants.
Summary: United States Court of Appeals FOR THE EIGHTH CIRCUIT _ No. 01-2292 _ Midwest Motor Sports, doing * business as Elliott Power Sports, * Inc., a South Dakota corporation, * * Appellee, * * v. * * Arctic Cat Sales, Inc., a Minnesota * corporation, * * Appeals from the United States Appellant, * District Court for the * District of South Dakota. A-Tech Cycle Service, Inc., * * Appellee, * [PUBLISHED] * Roger W. Damgaard; Timothy R. * Shattuck, Attorneys for Arctic Cat * Sales, Inc., * * Appellants. ..
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United States Court of Appeals
FOR THE EIGHTH CIRCUIT
________________
No. 01-2292
________________
Midwest Motor Sports, doing *
business as Elliott Power Sports, *
Inc., a South Dakota corporation, *
*
Appellee, *
*
v. *
*
Arctic Cat Sales, Inc., a Minnesota *
corporation, *
* Appeals from the United States
Appellant, * District Court for the
* District of South Dakota.
A-Tech Cycle Service, Inc., *
*
Appellee, * [PUBLISHED]
*
Roger W. Damgaard; Timothy R. *
Shattuck, Attorneys for Arctic Cat *
Sales, Inc., *
*
Appellants. *
________________
No. 01-2423
________________
Midwest Motor Sports, Inc., a *
South Dakota corporation doing *
business as Elliott Power Sports, *
*
Appellant, *
v. *
*
Arctic Cat Sales, Inc., a Minnesota *
corporation, *
*
Appellee. *
________________
No. 01-2424
________________
Arctic Cat Sales, Inc., a Minnesota *
corporation, *
*
Appellee *
*
v. *
*
A-Tech Cycle Service, Inc., *
*
Appellant. *
________________
Submitted: March 15, 2002
Filed: October 20, 2003
________________
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Before HANSEN,1 Chief Judge, JOHN R. GIBSON, Circuit Judge, and
GOLDBERG,2 Judge.
________________
HANSEN, Circuit Judge.
This case arose out of a dispute between Arctic Cat Sales, Inc. (Arctic Cat), a
snowmobile manufacturer, and two South Dakota Arctic Cat dealers, Midwest Motor
Sports, Inc., d/b/a/ Elliott Power Sports (Elliott), and A-Tech Cycle Service, Inc. (A-
Tech). Elliott sued Arctic Cat, asserting that Arctic Cat had violated South Dakota
franchise law when it terminated Elliott's Arctic Cat franchise and established A-Tech
as a new franchisee in the same city as Elliott. During discovery, Arctic Cat's counsel
hired a private investigator to visit the Elliott and A-Tech franchises and to
surreptitiously record conversations with each dealer's employees. Subsequently, the
district court3 entered an order sanctioning Arctic Cat's attorneys for unethically tape
recording parties represented by opposing counsel. As a sanction, the district court
excluded from evidence the tape recordings taken by the investigator, as well as any
evidence obtained as a result of the recordings. The parties settled the franchise
termination case prior to trial; however, they reserved the question of whether
additional sanctions should be imposed. The district court then entered a written
order denying further sanctions and explaining in detail the basis for its exclusionary
order. We affirm the imposition of the evidentiary sanctions, and we decline to hold
that monetary sanctions should have been imposed as well.
1
The author of the opinion stepped down as Chief Judge of the United States
Court of Appeals for the Eighth Circuit at the close of business on March 31, 2003.
He has been succeeded by the Honorable James B. Loken.
2
The Honorable Richard W. Goldberg, Judge of the United States Court of
International Trade, sitting by designation.
3
The Honorable Lawrence L. Piersol, Chief Judge, United States District Court
for the District of South Dakota.
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I.
During the pendency of the franchise litigation suit, the attorneys for Arctic
Cat, Roger Damgaard and Timothy Shattuck, retained the services of a private
investigator, Adrian Mohr. Mohr was formerly a special agent with the FBI for
nearly 30 years. The attorneys requested that Mohr visit the Elliott showroom to
determine what products Elliott's salespersons were promoting and what equipment
was on display in the showroom in order to ascertain which brand of snowmobile was
selling best, and to determine whether Elliott had been financially burdened by the
loss of the Arctic Cat franchise. Mohr wore a recording device to memorialize the
conversations. The Arctic Cat attorneys did not provide Mohr with a script of what
to ask during his showroom visits but indicated certain topics that they wanted Mohr
to cover in the conversations. Mohr had written in his notes of this meeting with the
attorneys the phrases "ADMIT SKIDOO & OR YAMAHA BEST" and "bad mouth
A-Tech" as possible subjects to elicit during his conversations. (Elliott's App. at
150.) He was also provided the name of "Jim LeTendre," who was identified by the
Arctic Cat attorneys as Elliott's sales manager. Mohr's deposition testimony reveals
that while he was not supposed to try to talk to LeTendre, if he encountered
LeTendre, he was supposed to ask LeTendre whether Elliott could service an Arctic
Cat snowmobile if Mohr bought one elsewhere. This evidence demonstrates that
Arctic Cat's attorneys were willing to let their investigator talk with one who had
managerial responsibility in the organization represented by opposing counsel and
substantially undercuts Arctic Cat's assertion that the investigator was instructed only
to talk to low-level employees. However, Mohr never encountered LeTendre during
his visits to the Elliott showroom.
Mohr visited the Elliott showroom on November 12, 1999, and again on
December 28, 1999, posing as a customer and intending to elicit admissions from an
Elliott salesman. Mohr asked the salesman, "Bill," why Elliott no longer carried the
Arctic Cat line of snowmobiles, if Elliott was allowed to sell a 1999 Arctic Cat that
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it had for sale, and if Elliott could obtain parts and provide service for an Arctic Cat.
On November 11, 1999, Mohr and his wife--who provided "companionship and
cover"--visited A-Tech's showroom and posed as customers. The Arctic Cat
attorneys instructed Mohr to record anything that an A-Tech representative might say
about the lawsuit. Upon entry into the dealership, Mohr was approached by Jon
Becker, the president and owner of A-Tech. Mohr knew that attorney Daniel Lias
then represented Becker as one interested in the Arctic Cat/Elliott litigation, but Mohr
was undeterred and proceeded to question Becker about the Arctic Cat snowmobile
line. Mohr's interviewing of the president and owner of A-Tech raises a reasonable
inference that he had not been instructed to avoid questioning management personnel.
Mohr provided Arctic Cat's attorneys with copies of his recordings and
snowmobile brochures obtained during his several showroom visits.
Contemporaneously with the time that Mohr was visiting Elliott and A-Tech, Arctic
Cat's attorneys made a Federal Rule of Civil Procedure 34 Request for Inspection to
Elliott's counsel, Steven Johnson, and to A-Tech's counsel, Daniel Lias, asking to
inspect, photograph, and videotape the Elliott and A-Tech dealerships.
In his deposition, Mohr acknowledged that he was aware that a lawsuit was
pending between Arctic Cat and Elliott, and that both Elliott and A-Tech were
represented by counsel. However, Mohr failed to disclose to either Elliott or A-Tech
that he was visiting both dealers' showrooms at the behest of Arctic Cat's attorneys
or that he was wearing a recording device. Mohr further admitted that his purpose in
visiting the snowmobile dealers was to "elicit evidence in a pending civil case on
behalf of the lawyers that hired" him. (Arctic Cat's App. at 9.) Mohr questioned the
Arctic Cat attorneys as to whether the tape recording of these conversations between
represented parties was legal. They assured him that his conduct was legal but did
not tell him whether his conduct was ethical, nor did they discuss with him the ethical
rules governing his conduct as their agent.
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Arctic Cat filed a motion to disqualify Elliott's counsel, Mr. Johnson, due to an
alleged conflict of interest under Rule 1.7 of the Rules of Professional Conduct.
Elliott and A-Tech filed motions for sanctions against Arctic Cat's attorneys for their
use of Mohr to secretly obtain information about the dealerships in anticipation of
trial. The district court denied Arctic Cat's motion to disqualify Mr. Johnson and
granted the motions for sanctions. As a sanction, the district court excluded Mohr's
audio recordings and any evidence gleaned from those recordings. Arctic Cat and its
counsel appeal the district court's imposition of the evidentiary sanctions and its
refusal to disqualify Mr. Johnson. Elliott and A-Tech appeal the district court's denial
of their motions for monetary sanctions against Arctic Cat's counsel.
II.
A. Communications with Represented Parties and the Use of Audio Recordings
Arctic Cat contends that the district court erred in imposing evidentiary
sanctions for its counsel's violation of the South Dakota Rules of Professional
Conduct. We review the district court's imposition of sanctions for violating the
ethical rules for an abuse of discretion. Cooter & Gell v. Hartmarx Corp., 496 U.S.
384, 405 (1990).
Acts or omissions by an attorney, individually or in concert with any
other person or persons, which violate the attorney's oath of office or the
Rules of Professional Conduct, as adopted by rule by the Supreme
Court, or any other disciplinary rules adopted by the Supreme Court,
shall constitute misconduct and shall be grounds for discipline, whether
or not the act or omission occurred in the course of an attorney-client
relationship.
S.D. Codified Laws ยง 16-19-32 (Michie 1995). South Dakota has adopted the
American Bar Association's Model Rules of Professional Conduct. See In re
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Discipline of Dorothy, 605 N.W.2d 493, 499 (S.D. 2000) (acknowledging the
adoption of the ABA's Model Rules of Professional Conduct). Therefore, we turn to
the Model Rules for guidance.
Rule 4.2 provides:
In representing a client, a lawyer shall not communicate about the
subject of the representation with a person the lawyer knows to be
represented by another lawyer in the matter, unless the lawyer has the
consent of the other lawyer or is authorized to do so by law or a court
order.
Under the test set out in the Model Rules, an organization's employee is considered
to be represented by the organization's lawyer, and is covered by the prohibition in
Rule 4.2, if the employee meets any one of the following three criteria: (1) he has
managerial responsibility in the represented organization, (2) his acts or omissions
can be imputed to the organization for purposes of civil or criminal liability, or (3) his
statements constitute admissions by the organization. Model Rules of Prof'l Conduct
R. 4.2 cmt. 7.
Investigator Mohr made personal contact with Jon Becker, A-Tech's president
and owner. Under the Rule, it clearly would have been unethical for Arctic Cat's
attorneys to communicate with Becker, a "critical" nonparty witness with ultimate
managerial responsibility for A-Tech, about A-Tech's sales volumes and practices
without first obtaining permission from A-Tech's attorney, Daniel Lias. The subject
of the representation was the Arctic Cat/Elliott litigation, of which a critical portion
was Elliott's expert's million-dollar damages estimate. Because every Arctic Cat
snowmobile sold by A-Tech was a machine not sold by Elliott, the damages estimate
could have been challenged in part by how much Arctic Cat business A-Tech was
actually doing.
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Arctic Cat's attorneys attempt to shield themselves from responsibility by
"passing the buck" to Mohr. They allege that they directed Mohr to speak only to
low-level salespeople for the purpose of becoming familiar with the Arctic Cat line.
Even if these factual assertions were true, lawyers cannot escape responsibility for the
wrongdoing they supervise by asserting that it was their agents, not themselves, who
committed the wrong. Although Arctic Cat's attorneys did not converse with Becker
themselves, the Rules also prohibit contact performed by an investigator acting as
counsel's agent. See Model Rules of Prof'l Conduct R. 5.3. "Since a lawyer is barred
under Rule 4.2 from communicating with a represented party about the subject matter
of the representation, she may not circumvent the Rule by sending an investigator to
do on her behalf that which she is herself forbidden to do." ABA Comm. on Ethic
and Prof'l Responsibility, Formal Op. 95-396 ("[I]f the investigator acts as the
lawyer's 'alter ego,' the lawyer is ethically responsible for the investigator's
conduct."). In other words, an attorney is responsible for the misconduct of his
nonlawyer employee or associate if the lawyer orders or ratifies the conduct. Model
Rules of Prof'l Conduct R. 5.3. Accordingly, we conclude that Arctic Cat's attorneys
are ethically responsible for Mohr's conduct in communicating with Becker as if they
had made the contact themselves.
Mohr also made personal contact with Elliott's salesman, "Bill." This contact
necessarily implicates the third criterion of Rule 4.2. We conclude, as the district
court did, that the discussions with "Bill" were intended to elicit admissions to be
used against Elliott at trial, the subject of both Arctic Cat's counsel's and Mr.
Johnson's representation. Indeed, it is apparent to us that Arctic Cat's counsel would
have attempted to present "Bill's" statement that Elliott made a business decision to
drop the Arctic Cat line under the party admission exception to the hearsay rule.4
4
The exception provides that a "statement is not hearsay if ... (2)[t]he statement
is offered against a party and is . . . a statement by the party's agent or servant
concerning a matter within the scope of the agency or employment, made during the
existence of the relationship." Fed. R. Evid. 801(d)(2)(D).
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While we recognize that some courts have been hesitant to equate the ethical rules'
use of "admissions" to the use of the same concept in Federal Rule of Evidence 801,
we note that those courts were applying different state evidentiary rules or ethical
rules than the ones that govern in South Dakota. Alternatively, the circumstances in
those cases did not invoke the same threat to the attorney-client relationship protected
by Rule 4.2 that exists in this case. Where, as here, attorneys elicit specific
admissions from an opponent's low-level employees that the attorneys know would
be advised against by the employer's counsel, we have no doubt that the ethical
considerations in Rule 4.2 apply.
Although the violations of Rule 4.2 alone would be sufficient to impose the
evidentiary sanctions at issue here, they are further justified by the specific
circumstances surrounding those violations. While there is no evidence that Arctic
Cat's counsel directly contacted Becker or "Bill," the Model Rules of Professional
Conduct prohibit a lawyer from violating the Rules "through the acts of another."
Model Rules of Prof'l Conduct R. 8.4(a). Mohr's interviews took place under false
and misleading pretenses, which Mohr made no effort to correct. Not only did Mohr
pose as a customer, he wore a hidden device that secretly recorded his conversations
with Becker and "Bill."
Model Rule 8.4(c) prohibits "conduct involving dishonesty, fraud, deceit or
misrepresentation." The district court found that Mohr's conduct in making secret
recordings of his conversations with Becker and "Bill" necessarily involved deceit or
misrepresentation. In reasoning that it is unethical for an attorney or investigator to
record conversations without the consent of the other party, the district court relied
on cases from other jurisdictions and on the ABA Committee on Ethics and
Professional Responsibility's Formal Opinion 337 (1974) ("[N]o lawyer should record
any conversation whether by tapes or other electronic device, without the consent or
prior knowledge of all parties to the conversation.").
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After the district court issued its opinion, the ABA published a new Formal
Opinion which reverses its position in Formal Opinion 337 and states that a lawyer
who electronically records a conversation without the knowledge of the other party
or parties to the conversation does not necessarily violate the Model Rules of
Professional Conduct. See ABA Comm. on Ethics and Prof'l Responsibility, Formal
Op. 422 (2001). The ABA advised that "[a] lawyer may not, however, record
conversations in violation of the law in a jurisdiction that forbids such conduct
without the consent of the parties, nor falsely represent that a conversation is not
being recorded." Id. The laws of South Dakota permit recording by one party to a
conversation without the knowledge or consent of the other party. South Dakota v.
Braddock,
452 N.W.2d 785, 788 (1990).
Nevertheless, conduct that is legal may not be ethical. The ABA suggests that
nonconsensual recordings be prohibited "where [the recording] is accompanied by
other circumstances that make it unethical." ABA Comm. on Ethic and Prof'l
Responsibility, Formal Op. 01-422. Mohr's unethical contact with Becker and "Bill"
combined with the nonconsensual recording presents the type of situation where even
the new Formal Opinion would authorize sanctions.
The duty to refrain from conduct that involves deceit or misrepresentation
should preclude any attorney from participating in the type of surreptitious conduct
that occurred here. As Mohr's deposition testimony makes clear, his covert
recordings were conducted with Arctic Cat's attorneys' knowledge and approval. In
addition, there is evidence in the record that the course of conduct by Mohr was not
only ratified by Arctic Cat's counsel, but that it was directed by them. Arctic Cat's
attorneys admit that the intent behind Mohr's retention was to determine whether
Elliott was continuing to sell and service Arctic Cat snowmobiles in order to rebut
Elliott's damages expert at trial. (Arctic Cat's Br. at 35.) Arctic Cat's counsel
contends that Mohr's visit to A-Tech was merely to become familiar with the Arctic
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Cat snowmobile line. The evidence does not support this assertion. The record
shows that while Mohr did indeed visit two other Arctic Cat dealers for purposes of
familiarization, only his visit to A-Tech was recorded. We conclude that Mohr's
purpose in visiting A-Tech was to elicit specific admissions from A-Tech's employees
about A-Tech's sales of Arctic Cat snowmobiles because Elliott's damages were
impacted by A-Tech's sales and service of the Arctic Cat line--information that could
have been obtained properly through the use of formal discovery techniques.
Arctic Cat was using Mohr's undercover ruse to elicit damaging admissions
from Elliott's employee and A-Tech's president to secure an advantage at trial. Such
tactics fall squarely within Model Rule 8.4(c)'s prohibition of "conduct involving
dishonesty, fraud, deceit or misrepresentation." Arctic Cat contends that it only
retained Mohr after traditional means of discovery had failed. Arctic Cat's attorneys
may have become frustrated with their opposing counsel's refusal to cooperate, but
that frustration does not justify a self-help remedy. It is for this very reason that our
system has in place formal procedures, such as a motion to compel, that counsel could
have used instead of resorting to self-help remedies that violate the ethical rules.
B. Conflict of Interest
Arctic Cat further argues that the district court abused its discretion by denying
its motion to disqualify Elliott's counsel, Steven Johnson, due to a conflict of interest.
Arctic Cat claims that Mr. Johnson should have been disqualified because an
associate in his law firm, Chad Swenson, was acting as general counsel for A-Tech
throughout Arctic Cat's litigation with Elliott. When one of A-Tech's owners, a Mr.
Smith, sold his interest in A-Tech pursuant to a stock redemption agreement, it was
Mr. Swenson who authored and transmitted a letter request signed by the selling
owner to Arctic Cat's floor plan financing agent, Deutsche Financial Services, asking
that the selling owner be removed as a personal guarantor of A-Tech's obligations.
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The transmittal letter's subject line over Mr. Swenson's signature and on the Johnson
law firm's stationery is "Arctic Cat Products." When Deutsche then put A-Tech's
Arctic Cat snowmobile order on hold, it was Mr. Swenson who assisted Mr. Becker
in furnishing Deutsche with Mr. and Mrs. Becker's additional personal guarantees to
support Deutsche's continued financing of A-Tech's inventory of Arctic Cat snow
machines. However, he submitted an affidavit stating that he never acted as A-Tech's
attorney in any matters related to Arctic Cat. Mr. Johnson's brief echos Mr.
Swenson's assertion that their law firm had never represented A-Tech on any matters
related to Arctic Cat.
Rule 1.7 of the Rules of Professional Conduct prohibits a lawyer from
representing a client if the representation of that client will be either directly adverse
to another client or materially limited by the lawyer's own interests.5 "The decision
to grant or deny a motion to disqualify an attorney rests in the discretion of the
[district] court, and we will reverse this determination only upon a showing of abuse
of that discretion." Petrovic v. Amoco Oil Co., 200 F.3d 1140, 1154 (8th Cir. 1999)
4
Rule 1.7 of the Model Rules provides:
(a) A lawyer shall not represent a client if the representation of that
client will be directly adverse to another client, unless: (1) the lawyer
reasonably believes the representation will not adversely affect the
relationship with the other client; and (2) each client consent[s] after
consultation.
(b) A lawyer shall not represent a client if the representation of that
client may be materially limited by the lawyer's responsibilities to
another client or to a third person, or by the lawyer's own interests,
unless: (1) the lawyer reasonably believes the representation will not be
adversely affected; and (2) the client consents after consultation. When
representation of multiple clients in a single matter is undertaken, the
consultation shall include explanation of the implications of the
common representation and the advantages and risks involved.
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(internal quotations omitted and alteration in original). "Because of the potential for
abuse by opposing counsel, disqualification motions should be subjected to
particularly strict judicial scrutiny." Harker v. Comm'r, 82 F.3d 806, 808 (8th Cir.
1996) (internal quotations omitted). The district court determined that both Don
Elliott, president of Midwest Motor Sports, and Jon Becker, president of A-Tech,
voluntarily waived any conflict of interest that may have existed. While the evidence
indicates that A-Tech did not consult with attorneys from the Johnson law firm
specifically about Arctic Cat franchise matters, it appears to us from the record that
Mr. Swenson did serve A-Tech's interests when he assisted both Mr. Smith and Mr.
Becker, A-Tech's principals, in their dealings with Arctic Cat's financier, certainly an
Arctic Cat related matter--contrary to his affidavit and Mr. Johnson's brief. Counsel's
failure to recognize the inconsistency between Mr. Swenson's action and his sworn
statement is troubling to us. That being said, we cannot say that the district court
abused its discretion in failing to disqualify Mr. Johnson given that both clients
consented to the representation.
C. Fees and Costs
Having determined that the district court properly disallowed Mohr's
recordings or any evidence gleaned from those recordings to be introduced into
evidence, we now turn to Elliott and A-Tech's argument advanced in their appeals
that the district court abused its discretion by failing to award monetary sanctions.
Prior to this case, the law in South Dakota was unsettled on the question of whether
using an investigator to elicit admissions from opposing parties' employees was
unethical. Furthermore, as demonstrated by the ABA's change in position, the ethical
rules related to secret recording by lawyers and investigators were evolving. Thus,
we conclude that the district court's imposition of solely evidentiary sanctions was
appropriate and adequate. We remind all members of the Bar that the obligations and
duties of lawyers in our society demand conduct of the highest moral character. We
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believe, as did the district court, that because South Dakota law was not fully
developed, Arctic Cat's lawyers' error in determining what their investigator could do
should not result in a monetary sanction against them or their client.
III.
The judgment of the district court is affirmed.
______________________________
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