The Law for Lawyers Today

The Law for Lawyers Today

Ethics, Professional Responsibility and More

Can you copyright your legal brief? District court says “yes,” and finds infringement

Posted in How Not to Practice, In-house Counsel, Law Practice Management

Copyright stampUnder deadline pressure to produce a brief?  You’ve found one online in a public database that fits your case to a T?  If you’ve always thought that  you can make free use of another lawyer’s brief, think again.  You just might get sued for copyright infringement — successfully.

In Newegg Inc. v. Ezra Sutton, P.A., a California U.S. district court made that point earlier this month, when it granted partial summary judgment to plaintiff Newegg on its infringement claim — but Newegg has come in for some criticism for pushing the case.

Here’s the background:  In an IP case before the Federal Circuit Court of Appeals, on-line retailer Newegg was one of several co-appellants in a cross-appeal on the issue of attorneys’ fees.  Newegg’s lawyers had taken the precaution of copyrighting the draft brief they planned to file.  Newegg offered to prepare a joint brief if its co-cross-appellant, Sakar International, would share part of the cost.  Instead, lawyers for Sakar filed a brief that copied substantial portions of Newegg’s draft brief without  permission.  Newegg sued Sakar’s lawyers and their law firm for copyright infringement.  The district court rejected the lawyers’ fair-use defense, and held that they were infringers.

Copyright — or wrong?

First, can you copyright a brief?  If you don’t practice in the IP area, you might not know that you can copyright an original work by filing a simple form with the United States Copyright Office.  That’s apparently what Newegg ‘s lawyers for had done, before providing the draft to Sakar.

Further, the protection of federal copyright law has been held to extend over legal briefs.  In White v. West Publishing Corp., the district court for the Southern District of New York considered whether West and LEXIS were infringing when they put briefs in their database without permission.  In 2014, the court assumed without separate analysis that legal briefs were copyrightable, but held that the mega-publishers had a right of fair use — partly because the lawyers had filed the briefs, making them publically available, before registering them with the copyright office.

In the most recent case, the lawyers had apparently protected the work and then shared it.  That was an implicit factor for the California district court in finding infringement.

No fair use

Even if a work is copyrighted, a  party’s “fair use” of the material is a complete affirmative defense to a claim of infringement.  There is a four-factor test, which is to be applied flexibly on a case-by-case basis, with the factors being weighed against each other:

  • Is the infringing work “transformative,” in altering the copyrighted work to create “new expression, meaning or message”?  Or has the work simply been taken and used for the same “intrinsic purpose” as originally?
  • Is the infringing work a presentation of facts?  Priority is given to expanding the dissemination of factual works, so they receive more fair-use protection.
  • How much of the copyrighted work was copied?  If all of it, the copier has probably not made anything new or “transformative.”
  • Is there a market for the copyrighted work that might be harmed by an infringing work?  If not, then fair use is more likely to apply.

The balance of the factors weighed in favor of Newegg, and thus Sakar’s lawyers failed to meet their burden of establishing fair use, said the court.

Behind the scenes

Over at Techdirt, they do a nice job of deconstructing this opinion — and the bottom line is that you probably shouldn’t go out and register all your briefs with the copyright office.

Blogger Mike Masnic explains that although they originally discussed sharing the cost of producing a joint brief, Sakar’s lawyers and Newegg decided not to go that route.  Newegg sent over a draft of its brief so that Sakar’s lawyers could make their brief “complementary.”  Instead, the day before Newegg’s brief was due, Sakar’s lawyers filed on behalf of their client, using large portions of the Newegg draft.  When Newegg complained, Sakar’s lawyers withdrew the brief and substituted a shorter one.

Newegg’s infringement suit, said the company’s GC, in an interview with Masnic, was not primarily about damages, but about “send[ing] a message, strictly directed at unethical and lazy lawyers, to do what they learned in the first year of law school in terms of properly crediting others’ work, and to do what anyone with common decency would do.”

Maybe not what the copyright statute is meant for?  Masnic thinks not.  We agree.

First Amendment protects Avvo advertising shakedown, district court holds

Posted in Advertising and Solicitation, Social Media and Internet

Avvo has a First Amendment right to use a lawyer’s publically-available information to generate advertising revenue for itself, the district court for the Northern District of Illinois held on September 12.

As we’ve explained before, Avvo’s business model works like this:

  • Avvo creates “profile pages” of individual lawyers using publically-available data;
  • then, Avvo collects a fee from lawyers to allow them to put ads for their practices on the profile pages of lawyers who don’t pay the fee — and the lawyer profiles where the paid ads appear are those of head-to-head competitors;
  • then, if you are the target of this shake-down tactic, you can pay a fee to keep Avvo from putting ads for your competitors on your profile page.

Nice, right?

“Non-commercial” speech

And it’s all protected by strict constitutional scrutiny as non-commercial free speech, said the district court, in dismissing the putative class action of an Illinois lawyer who said that Avvo’s gambit violated state law by using his identity for commercial purposes without his permission.

In granting Avvo’s motion to dismiss, the district court said that

[T]o hold otherwise would lead to the unintended result that any entity that publishes truthful newsworthy information about individuals such as teachers, directors and other professionals, such as a newspaper or yellow page directory, would risk civil liability simply because it generated revenue from advertisements placed by others in the same field.

The court viewed the Avvo site as a mere directory, and analogized it to Sports Illustrated magazine:  just like the magazine has editorial content plus ads, the Avvo site has non-commercial speech consisting of the lawyer profiles — plus ads.  The court reasoned that just as ads do not convert the entire magazine into commercial speech, Avvo’s ads do not “turn the entire attorney directory into commercial speech.”

Money train

So the Avvo juggernaut rolls on.  In August, reports Bob Ambrogi’s Law Sites, “a California lawyer dropped his putative class action against Avvo after Avvo brought a motion to strike the complaint under California’s anti-SLAPP law.”  Avvo has also successfully torpedoed a 2007 federal class action complaint in Washington and a suit filed in Florida that was later transferred to Washington.

Ambrogi quotes Avvo’s chief legal officer on the company’s win:  “This is further validation that publishers like Avvo needn’t obtain the consent of their subjects prior to exercising their First Amendment rights,” said Josh King.

As I reported in February, Avvo has taken my Ohio bar information, found a picture of me (though it is a gorgeous one, I must say), and put up my profile, all without my permission.  And there are still four ads  for other lawyers on my profile page– so Avvo continues to use my data to make money for itself.   No phone book or lawyer directory that I know of has Avvo’s rapacious business model.  But as long as courts continue to see Avvo as a mere phone book — or worse, a magazine — it will continue to expand its empire at the expense of lawyers who won’t play along.

Emergency lawyering: giving advice in extreme situations

Posted in Competence

Close up photo of red large letters spelling emergencyWhat happens when your ethical duty of competence meets up with an emergency situation where you are called on to give legal advice — immediately?  I was thinking about this question because of a ruling that the Ohio Supreme Court handed down late last month, holding that the state’s Good Samaritan law applies to any person administering aid at the scene of an emergency, and not just health care professionals.  I wondered whether a Good Samaritan concept applies to “emergency legal services.”

Duty of competence — even in an emergency?

Model Rule 1.1 of course requires you to bring to each situation the “legal knowledge, skill, thoroughness and preparation reasonably necessary.”  It turns out that Comment [3] addresses emergency situations — and it takes a somewhat wary approach.  The comment says that “In an emergency a lawyer may give advice or assistance in a matter in which the lawyer does not have the skill ordinarily required where referral to or consultation or association with another lawyer would be impractical.”

But, caution is called for:  “Even in an emergency, however, assistance should be limited to that reasonably necessary in the circumstances, for ill-considered action under emergency conditions can jeopardize the client’s interest.”

You might think of several kinds of extreme situations that could call for emergency lawyering.  One hypothetical that has cropped up in various permutations on the Multistate Professional Responsibility Examination, for instance, is a tax lawyer who stops at the scene of a car accident and the dying accident victim begs the lawyer to write down the victim’s last will and testament.  The correct answer is that the lawyer would not be subject to discipline for helping out, even if the lawyer doesn’t know how to write a valid will.

How about malpractice liability if the will is invalidated?  Well, there would certainly be issues about whether that tax lawyer had any duty to the third parties bringing suit.  But in addition, courts routinely look to the Rules of Professional Conduct to supply the standard of care, even though the Rules themselves do not provide an independent basis for tort liability.  (See Model Rules Preamble, cmt. [20].)  So, on a showing that the lawyer’s help was urgently required, that no referral or consultation was practical, and that the legal assistance was limited to what was necessary under the circumstances, I’d say that the lawyer should get out of a malpractice case on summary judgment.

Hurricane Katrina and its lessons

The issues regarding emergency lawyering got a real-life workout in the aftermath of Hurricane Katrina in 2005.  Many lawyers were displaced; and many lawyers from outside the crisis areas volunteered their legal services.  The situation raised multiple ethics questions, including regarding competence, multi-jurisdictional practice, conflicts of interest and client solicitation.  In an interesting 2009 article for the ABA’s Professional Lawyer magazine, two Louisiana attorneys discussed how these issues were addressed on the ground, and how they might be addressed in future natural disaster situations.

On the competence issue, the Louisiana State Bar Association’s ethics committee quickly issued a September 2005 opinion applicable to that state’s licensed lawyers.  While giving approval to working an advice hotline, or providing on-the-spot legal services at a booth, the opinion took a conservative approach:  “The Committee warned that hotline callers are desperate for help and likely more vulnerable than average clients; thus the Committee discouraged lawyers who lacked the competence  in the specific, relevant area of law from volunteering, as doing so could cause more harm than good.”  The opinion advised that lawyers should decline to provide advice in areas unfamiliar to them, and should refer clients, instead.

Put your own oxygen mask on first

So there’s no unqualified Good Samaritan protection under the Model Rules for lawyers giving emergency advice.  As in other situations, your home jurisdiction may have its own rule and/or ethics opinion, and they could certainly provide helpful guidance in case of a natural disaster situation, such as a hurricane.

But what if you find someone injured on the side of the road, and they need emergency lawyering?  I know that I’d help write that last will and testament and think about the consequences later.

Don’t help your client hide assets: clear case leads to lawyer’s disbarment

Posted in How Not to Practice

Bag full of MoneyThe prohibition against aiding clients in carrying out crimes and frauds has been in the news lately, in connection with the quandary that lawyers find themselves in when attempting to help clients in the marijuana industry — whose conduct may be legal under state law, while remaining illegal under federal law.  (We’ve blogged about it previously, here and here.)  In this environment, it is useful to consider just what constitutes assisting a client’s crime or fraud, as the Ohio Supreme Court did last week in disbarring a lawyer who helped a divorce client hide assets from her spouse.

Anatomy of a fraud

The charge of violating Ohio’s version of Model Rule 1.2(d) arose out of the lawyer’s participation in a scheme to conceal  his client’s marital assets from the client’s husband.  Over a three-year period, before and during the divorce proceedings, the client paid the lawyer over $850,000 — not for legal services,  but to hide the money from her husband.  The client would withdraw cash from her business or personal accounts, and then write a new check, typically for less than $10,000, that she made payable to the lawyer.  The lawyer deposited the funds into two client trust accounts.

Eventually, the lawyer wire-transferred more than $800,000 to a Swiss bank account in which the client had the entire beneficial interest.   A portion of the funds were also transferred to another account in the Turks and Caicos Islands during the divorce proceedings.

Clear and convincing evidence

The disciplinary panel found that the client’s practice of transferring the funds in small increments was evidence that the client purposely structured the transactions to fly under the radar of banking laws aimed at catching larger illicit money schemes.

Based on requests for admissions that the lawyer failed to respond to, the disciplinary panel also found that the lawyer had agreed to put the money in his client trust account in order to hide the client’s marital assets.

The panel found that the relator had established a violation of Rule 1.2(d) by clear and convincing evidence.

In addition, in a separate count, the panel considered the lawyer’s alleged neglect of another legal matter, in which he accepted $750 to file two civil complaints on behalf of a condo association, but failed to do so.  The panel found a violation of Ohio’s version of Model Rule 1.3, requiring a lawyer to act with reasonable diligence in representing a client.

Based on the rule violations, the panel recommended permanent disbarment, the full Board of Professional Conduct adopted the recommendation, and the state supreme court agreed.

Clear cut cases

The lawyer in this case answered the disciplinary complaint against him, but failed to participate further in the administrative proceedings, including failing to respond to requests for admission.  That certainly doomed his case and paved the way for the professional death sentence that the supreme court confirmed.  But the facts here appeared clear-cut.  Unlike the grey area that lawyers are in when they want to represent their medical marijuana clients, the lawyer here was in a situation that was starkly black-and-white .

Discerning the boundaries of Rule 1.2(d)’s prohibition is sometimes hard — but sometimes, it is easy.

Hiring student law clerks and avoiding disqualification — two states weigh in

Posted in Conflicts, Ethical screens

Business Acronym COI as CONFLICT OF INTERESTIt’s common for law students to clerk for a couple different firms during their law-school years.  When a law clerk or a law school graduate you hire has clerked for a firm representing a party adverse to your client, what happens?  Is the student or newly-minted lawyer disqualified from working on your matter? Is your whole firm disqualified?  Can you screen the clerk/former clerk and solve the problem?  Two recent ethics opinions out of Texas and Ohio clarify the rules.

Lone Star ethics opinion

The issue, of course, is centered on state versions of Model Rules 1.7, 1.9 and 1.10.  Firms have a justifiable concern that they may be precluded from taking on work — or worse, be disqualified from an ongoing matter — if a law clerk or new lawyer joins the firm after having worked for opposing counsel.  Acquiring confidential client information can disqualify the clerk from working on the adverse matter at the new firm and the conflict can be imputed to the whole firm.

In March 2016, the Texas Supreme Court amended Texas Disciplinary Rule of Professional Conduct 1.06, its unique version of the Model Rule on conflicts, to add a comment addressing how conflict imputation works for non-lawyer employees and lawyers who were formerly involved in a matter in a non-lawyer role.   Comment [19] provides that with proper screening, the conflict of interest of a non-lawyer, or the conflict of a lawyer that arose before the person became a lawyer, is not imputed:

A law firm is not prohibited from representing a client … merely because a nonlawyer employee of the firm, such as a paralegal or legal secretary, has a conflict of interest arising from prior employment or some other source…. [or] … merely because [of] … a conflict of interest arising from events that occurred before the person became a lawyer, such as work that the person did as a law clerk or intern. But the firm must ordinarily screen the person with the conflict from any personal participation in the matter to prevent the person’s communicating to others in the firm confidential information that the person and the firm have a legal duty to protect.

The new Texas ethics opinion applied the new comment and ruled that when a firm hires a new associate who worked as a clerk for the firm representing the opposing party, the former clerk is disqualified from working on the case at the new firm, but that the new firm can screen the clerk and avoid imputation of the clerk’s conflict.  That sensible approach is good news for Texas firms and law clerks, and the comment is broadly aimed at other incoming non-lawyer employees, such as secretaries, too.

Buckeye ethics opinion

Over in my bailiwick, Ohio’s Board of Professional Conduct issued similar advice earlier this summer.  Based on Ohio’s rules of practice governing certified legal interns, who effectively function as lawyers under clinical supervision even while in law school, the Board said that:

The conflicts of a former legal intern, newly employed as a lawyer, are not imputed to the lawyers in a law firm, but necessitate the screening of the lawyer from any matter [for which] he or she had substantial responsibility.

On the other hand, the Board said, the conflicts of current legal interns are imputed to the firms they simultaneously clerk for.  That seems fair, because by being certified under the state’s legal intern rules, the students working at their school legal clinics are more like lawyers, and should be treated as such for conflicts purposes, while striking a balance in favor of their post-law school employability.

Check your rules

As always, these principles come in lots of flavors, and you must know your own jurisdiction’s approach.  Texas and Ohio have gotten it right, protecting clients’ legitimate confidentiality interests, and maximizing the ability of law firms to bring on new lawyers, which of course benefits the firms and the lawyers.

Too good to be true: dissecting the workings of an internet scam

Posted in Competence, How Not to Practice, Social Media and Internet

scam alertYou know those e-mails out of the blue that start “We would like to engage you to handle our $1 million legal matter”?  From our friends over at Lawyerist.com comes a description of what happened when Steven Chung, an L.A. tax attorney, actually took the bait and pursued one of those invitations.

Chung’s story is headlined, “Dear Lawyers, if a client you never met sends you $350,000, it’s probably a scam” — and of course it was a scam, although the tale ends happily, and Chung avoided getting ripped off.

Set-up for a scam

Here’s how it unfolded: The “client,” supposedly located in an Asian country, asked for representation to file a visa application for an executive who needed to work in the U.S.  Chung asked for a retainer in advance; the potential client asked for an engagement letter.

In the meantime, Chung started digging around, and several things didn’t check out:

  • although the company was apparently real, its purported e-mail address was a Gmail account that anyone can open for free;
  • the “executive” had a LinkedIn profile, but had only four connections, none of whom were connected to the company;
  • other websites did associate the executive with the company, but again, the potential client could have set those up.

With his Spidey sense tingling, Chung turned down the work and thought that would be the end of the matter.  Instead, the client dangled some more bait:  $350,000 that Chung would receive from one of the company’s customers “from an unpaid invoice,” and from which Chung would be able to deduct his fee.  At that point, Chung writes, he “shifted from wariness to the full-fledged realization that this was a scam.”  Chung decided to ignore the communication.

Then, a check for $350,000 arrived in the mail.  It certainly didn’t check out:

  • The return address was from California — but the envelope bore non-U.S. postage.
  • The check was drawn on the Bank of Nova Scotia, though the business had no presence there (and many check scams seem to use Nova Scotia banks).

Temptation…

Chung writes that it was “hard to ignore my name attached to the receiving end of a $350,000 check,” but if he had cashed it, it “could immediately be returned for insufficient funds, at which point either the sender would make an excuse, or possibly accuse me of stealing money and try to blackmail me.  Or the check would be placed on hold by the bank and in the meantime, either the sender or the potential client would ask that I repay them immediately before the check cleared.  Assuming I had a spare $350,000, that money would be transferred and likely never be seen again after the check bounced.  Worst of all, I could have transferred existing money in my trust account, which can result in ethics violations.”

Chung didn’t fall for it, but he kept the check as a memento.

How to avoid the peril

Last year, we wrote about an ethics opinion from the Association of the Bar of the City of New York, which identified an ethical duty to exercise “reasonable diligence” in avoiding internet-based scams like this.  That is certainly an opinion to take to heart, because of the potential for client harm, as well as the obvious downside to you and your firm.

Chung did well to unmask the scam.  You, too, can avoid being a victim.  We agree with Chung’s advice:

  • Just say no, and don’t respond to unsolicited requests for legal representation.
  • If you do respond, “make sure that their documents match their stories.”
  • “Don’t be afraid to ask the tough questions.”
  • “Finally, and most importantly, do not send any money until all checks clear.  Don’t be afraid to wait for an extended period.”

Although Chung did not opt to report the scam, you should consider doing so if you find yourself faced with one.  You can report suspicious e-mails to the FBI’s Internet Crime Complaint Center (www.ic3.gov).

Opinion that OH lawyers can’t aid medical marijuana businesses leads to possible rule change

Posted in Marijuana

Medical Marijuana Cannabis CaduceusThe smoke might eventually clear for Ohio lawyers who hope to help clients engage in the medical marijuana industry after it becomes legal in the state on September 8.  On August 17, the state supreme court said  that it had “directed its staff to prepare a draft amendment to the Ohio Rules of Professional Conduct that would clarify the services attorneys can offer clients seeking to comply with the state’s new medical marijuana law.”  The announcement follows the non-binding ruling 12 days earlier by the state’s Board of Professional Conduct that Ohio lawyers can’t provide any legal services to help clients in connection with a medical marijuana enterprise.

Board:  Medical marijuana “Yes,” legal services, “No.”

In contrast to Ohio’s upcoming state law, federal law designates marijuana as a Schedule I controlled substance, making its use for any purpose, including medical applications, a crime.  Coincidentally, on the same day that the Ohio board issued its ethics opinion, the U.S. Drug Enforcement Agency declined to revisit the Schedule I designation.  Since 2013, however, the U.S. Department of Justice has had the general policy of not interfering when marijuana is used medically under state law.

The disconnect between the federal and state law on marijuana is what creates the ethics problem for Ohio lawyers, said the Board.

Ohio Professional Conduct Rule 1.2(d) prohibits assisting a client who engages or seeks to engage in conduct the lawyer knows to be illegal.  And according to the Board, the rule “does not distinguish between illegal client conduct that will, or will not, be enforced by the federal government.”  If the legal services to be provided can be construed as assisting the client in violating federal or state law, the lawyer is barred from providing them to the client.

The Board was “mindful that the current state of the law creates a unique conflict for Ohio lawyers,” and makes it impossible for some clients to get legal services in an area deemed lawful by the Ohio legislature.  But any remedy, the Board said, must come via amendment of Rule 1.2 by the state supreme court.

Now, just 12 days later, the court will launch a process that will possibly result in such an amendment.

Paths of other jurisdictions

Unlike Ohio, some other bars and states have used ethics opinions to hew a path for their lawyers to help clients who want to work in the marijuana space.  As we wrote last summer, the San Francisco bar association gave the green light to lawyers to advise marijuana businesses — precisely because of the divergence between state and federal law.  “Assisting the client who wants to comply with state and local laws is not the same as advising the client to violate federal laws,” said the S.F. bar ethics committee.  (Importantly, California’s Rule 1.2(d) differs slightly from the analogous Model Rule.)

Other states have taken the approach that Ohio will now consider, by amending their rules.  In 2014, the Nevada Supreme Court amended its Rule 1.2 to add a comment expressly permitting lawyers to counsel a client “regarding the validity, scope, and meaning of” the state’s medical marijuana statute, and to “assist a client in conduct that the lawyer reasonably believes is permitted.”  Public comment and hearings on further proposals to amend the black letter rule are scheduled for later this year.

Other state ethics boards, like Ohio’s, have expressed a desire to have the state supreme court clarify the ethics murk with an express rule amendment; but unlike Ohio, some have given lawyers a qualified go-ahead in the meantime.  The Illinois State Bar Association’s 2014 advisory opinion said that “the provision of legal advice to those engaged in nascent medical marijuana business is far better than forcing such businesses to proceed by guesswork,” and that providing legal services to such clients is “consistent with the Rules of Professional Conduct.”

As always, stay tuned — more developments are sure to follow.

ABA amends model ethics rules to prohibit discrimination, harassment

Posted in In-house Counsel, Law Practice Management

scales of justice 3On Monday, the ABA House of Delegates amended the Model Rules of Professional Conduct to add a provision barring harassment and discrimination in all conduct related to a lawyer’s practice of law.  After months of debate, comment and revision, the revised Resolution 109 passed on a voice vote, without dissenting comment from the floor.  The version adopted reflects an amendment introduced last month, which changed the requirement for a finding of misconduct from strict liability to a “knows or reasonably should know” standard.

Amended Model Rule 8.4(g)

As amended, Model Rule 8.4(g) makes it professional misconduct to:

(g) engage in conduct that the lawyer knows or reasonably should know is harassment or discrimination on the basis of race, sex, religion, national origin, ethnicity, disability, age, sexual orientation, gender identity, marital status or socioeconomic status in conduct related to the practice of law. This  paragraph does not limit the ability of a lawyer to accept, decline or withdraw from a representation in accordance with Rule 1.16. This paragraph does not preclude legitimate advice or advocacy consistent with these Rules.

The revised rule retains in new Comment [5] existing language that some have called “The Batson Sentence.”  The sentence clarifies that a “trial judge’s finding that peremptory challenges were exercised on a discriminatory basis does not alone establish a violation of this rule.”

Twenty states already have varying provisions in their lawyer conduct rules addressing the subject of Rule 8.4(g) in some manner.  For instance, in my home state of Ohio, Rule 8.4(g) bars conduct “in a professional capacity” involving “discrimination prohibited by law,” but does not expressly touch on harassment.  It also omits mention of gender identity, ethnicity and socioeconomic status.

Will the states follow?

The Model Rules, of course, are just that — they do not apply in any jurisdiction, and states are free to adopt, revise or ignore them.  It will be interesting to see how the states without any express ethics rule against discrimination or harassment treat the new amendment.  My friend Brian Faughnan, who blogs from Memphis TN, expressed skepticism about how quickly his own state “and the various bright red states around” him “will move to revise a version of RPC 8.4 not already prohibiting harassment and discrimination,” although he hopes to be proved wrong.

The anti-discrimination/harassment amendment drew opposition on its path to adoption, including from those who raised concerns that the language went too far in restricting attorneys on matters of personal preference, conscience and religious belief.

As it moved through the year-long adoption process, the proposed amendment also drew a long list of co-sponsors, including national affinity bars and many past ABA presidents, and numerous comments on the various drafts.

4th Circuit to decide whether forfeiture clause in partnership agreement violates D.C. ethics rules

Posted in Law firm break-ups, Law Practice Management

parnership documents

The opening brief has been filed in a Fourth Circuit appeal that’s sure to be closely watched by the 100,000 members of the D.C. bar, as well as others.  A key issue in Moskowitz v. Jacobson Holman PLLC is whether a law firm partnership agreement can reduce a partner’s equity payout if the partner walks out the door with clients. The district court said that the provision violates ethics rules, and is therefore unenforceable as against public policy.

Forfeiture and right to practice

Many law firms attempt to protect their interests with partnership or operating agreement provisions that penalize equity holders who take clients with them when they depart the firm. The validity of such provisions has been litigated elsewhere, with the same result as the district court’s ruling in Moskowitz.  A notable example is Cohen v. Lord Day & Lord, the decision that also contributed to the New York Court of Appeals’ rejection of the “unfinished business” rule in 2014.

Lord Day and its progeny have been generally decided under state versions of Model Rule 5.6 (and its predecessor, DR 2-108), which prohibits lawyers from making or offering an “operating … agreement that restricts the right of a lawyer to practice after termination of the relationship,” except for retirement provisions.

In opinions similar to Lord Day and the district court’s ruling in Moskowitz, courts have refused to enforce agreements that require forfeiture of earned compensation when a departing lawyer competes with the lawyer’s former firm.  (There are many factual permutations to those holdings, however, and a number of jurisdictions reject any bright line approach.)

In Moskowitz, an amendment to the Jacobson firm’s operating agreement provided that a member who “withdraws from the Company … and takes client(s) of the Company” would forfeit 50 percent of the member’s equity interest that would otherwise be payable.

When Moskowitz left the firm in 2013, he apparently took the business of almost 50 prior clients (who paid more than $1 million in fees over the next two years).  He sued the Jacobson firm in 2015, asserting that Rule 5.6(a) of the D.C. Rules of Professional Conduct barred enforcement of the amendment, a position that the trial court accepted.

Firm argues for “non-substantial” exception

On appeal to the Fourth Circuit, the Jacobson firm is advancing an interesting argument in favor of reversal.

Reducing the payout of an equity interest, it says, is not by itself sufficient to violate Rule 5.6. While the rule proscribes an agreement if it “restricts the rights of a lawyer to practice after termination of the relationship,” the firm says that comments to D.C. Rule 5.6 recognize that a financial penalty may not be prohibited if it is not “substantial.”  In evaluating the substantiality of a forfeiture, it argues, the amount of the penalty should be compared to the lawyer’s post-withdrawal practice income at his or her new firm.

Using that measure, the firm says, Moskowitz’s penalty for competing against his former firm (about $63,000) is a small fraction of his annual earnings as a highly-compensated lawyer before and after he left Jacobson.

Firms in D.C. and elsewhere will be interested to see if the Fourth Circuit buys this approach.

What’s in a word? No arbitration for lawyer accused of breaches in deal with client

Posted in Malpractice

Dictionary Englisch - Dutch*Updated on 7/29 to insert missing url links. 

Closely parsing the language in an arbitration clause, the California state court of appeals recently reversed an order compelling arbitration of a dispute between a lawyer and his client-turned-business-partner.  The lawyer must now defend against a $1.5 million claim based on malpractice and breach of the operating agreement that the lawyer had drafted in connection with his real estate venture with the former client.  With arbitration provisions becoming a common feature of lawyer-client retainer agreements, this ruling is worth attention.

Arbitration of malpractice case

The client’s 2013 malpractice complaint in Rice v. Downs alleged that while serving as counsel to the client and the companies he was affiliated with, the lawyer and the client decided that they would form a company together to develop properties in the affordable housing market.  The lawyer prepared the operating agreement for the LLC, which provided that “any controversy between the parties arising out of this Agreement shall be submitted” to arbitration in Los Angeles.

The malpractice complaint alleged a variety of misconduct against the lawyer, including secretly billing the LLC for his time, overcharging, conflicts of interest and providing bad advice.

The lawyer moved to compel arbitration of all the causes of action, based on the arbitration provision in the operating agreement.  The trial court granted the motion, and the lawyer won the arbitration, with the arbitrator dismissing the client’s claims with prejudice and declaring that the lawyer had not breached the operating agreement or any other obligation.  The trial court almost entirely confirmed the award (although it made dismissal of the client’s complaint without prejudice).  Both parties appealed.

“Arising out of” “arising in connection with”

In a reversal of the lawyer’s fortune, the court of appeals determined that the arbitration provision in the operating agreement did not apply to the malpractice case.

Under California law, the decision as to whether a contractual arbitration clause covers a particular dispute rests on whether the clause is “broad” or “narrow,” the court of appeals said.  “Broad” clauses use language such as “any claim arising from or related to this agreement,” or any claim “arising in connection with” the agreement.  With broad language, the court will command arbitration where the fact allegations even “touch matters covered by the contract.”

Not so where the parties choose to provide for arbitration only of controversies “arising from” or “arising out of” an agreement, ruled the court.  Those are “narrow” clauses, and the more limited language may not extend to tort claims.

Here, the court framed the issue as whether the particular claims the client asserted were controversies “arising out of” the operating agreements.  The court found very significant the fact that the parties broadly consented to jurisdiction in California courts of actions “arising out of, under or in connection with this Agreement or the transactions contemplated by this Agreement” — but they agreed to arbitrate only controversies “arising out of this Agreement.”

Thus, said the court, a tort claim based on violation of an independent duty originating outside of the agreement would not “arise from” the agreement, and would be outside the scope of the arbitration provision.  That exactly characterized the claims for malpractice and breach of fiduciary duty, the court held, which were not based on failing to perform under the operating contract, but rather violating duties created by the lawyer-client relationship.

Words matter; so do state rules

Of course, it is no news that a case can turn on contract interpretation.  But this one emphasizes the small drafting choices that can send a case to a full-blown jury trial or keep it in arbitration.  That’s of special concern to lawyers and their clients at the front end of a relationship — pre-dispute agreements to arbitrate are increasingly included in retainer agreements.

As always, be aware of your jurisdiction’s ethics opinions and rules governing arbitrating malpractice claims.  Most opinions on the subject indicate that the client’s informed consent is necessary; ethics opinions in a minority of states require consulting with independent counsel regarding the advisability of agreeing to arbitrate such claims.  (Ohio mandates independent consultation by Rule 1.8(h)(1) of its Rules of Professional Conduct.)

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