The Law for Lawyers Today

The Law for Lawyers Today

Ethics, Professional Responsibility and More

Privilege for communications with PR firms: recent case spotlights risk

Posted in Privilege, Work-product
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Thinking of using a public relations firm to help manage a corporate crisis?  Divergent interpretations of the privilege rules have led to differing legal opinions on whether communications between a PR firm and the company or defense counsel are privileged.  A California state court of appeals decided last month that such communications were not privileged, illustrating the privilege risk that can arise in communications with PR firms.

No California exception available

Behunin v. Superior Court involved an unsuccessful real estate investment deal.  “As part of a plan to induce the Schwabs to settle” the resulting lawsuit, Behunin’s lawyers hired a public relations firm to create a website linking the Schwabs and their Indonesian investments to the family of former Indonesian dictator Suharto.

In Schwab’s suit against Behunin for libel and slander, he sought to discover communications among Behunin, his counsel and the PR firm about the creation of the website.

The court of appeals, denying a writ of mandamus, concluded that although California law may extend privilege to some communications with a PR consultant, privilege did not apply here:  Behunin failed to prove that communications with the PR firm were reasonably necessary for his lawyer to represent him in the underlying case.

Section 952 of California’s evidence code codifies exceptions to the usual rule that disclosing a lawyer-client communication to a third person destroys the privilege. But the Behunin court bluntly said in this case that “There is no ‘public relations privilege’ in California,” and that no exception to the general rule applied to the PR firm’s involvement in generating negative publicity that “would help get the Schwabs to the settlement table.”

  • Behunin did not provide evidence proving that the communications among the lawyer, the PR consultant and himself were reasonably necessary to assist the lawyer in representing him, the court ruled.  Rather than being able to show that the lawyer and consultant were involved together in “developing, discussing, or assisting in executing a legal strategy,” it appeared that the lawyer only acted as a liaison in hiring the PR firm.
  • Nor, said the court, was the PR consultant the functional equivalent of the client’s employee (a status which could potentially raise the privilege shield).  There was no detailed factual showing that the consultant was responsible for a key corporate job, had a close working relationship with the company’s principals on critical matters, and had information that no one else at the company possessed.

Differing opinions on PR firms

The application of privilege and work-product principles has generated opinions that have extended the privilege to communications among lawyers, clients and PR firms.  See King Drug Co. v. Cephalon, Inc. (E.D. Pa. 2013) (privilege applied; consultants preparing business and marketing plans were the client’s “functional equivalent”).  Other opinions are to the contrary.  See Kirby Pemberton v. Republic Services, Inc. (E.D. Mo. 2015) (no privilege; no Missouri authority extends privilege to public relations consultants, and privilege should be narrowly construed); McNamee v. Clemens (E.D.N.Y. 2013) (no privilege; PR firm only provided standard services not necessary in order to provide legal advice, and therefore disclosing documents to firm resulted in waiver).

Takeaway – caution required

Managing the media can be an important part of managing a corporate crisis.  Creating and preserving privilege in this setting demands caution, and involves a nuanced analysis that can be both fact-specific and jurisdiction-specific.

  • Stephen Williger, of Thompson Hine’s Cleveland office,  will present the keynote address, “Legal Aspects of Corporate Crisis Management,” at the 2017 Continuity Insights Management Conference in Denver, April 24-26.  He will speak on the legal aspects of pre-crisis planning, mitigation, remediation, and recovery.  Conference program   Registration

Corporate ethics compliance – challenges and benefits for both U.S. and global companies

Posted in In-house Counsel, Law Practice Management

Business Ethics Concept with icons* Our guest blogger is a Certified Compliance & Ethics Professional (CCEP)® in Thompson Hine’s Dayton, Ohio office.

A growing list of businesses are eager to promote a strong culture of ethical corporate compliance, and lawyers should be ready to get on board by developing knowledge and skills to address this need.

Companies devoting resources to ethics

I recently participated as the Ethicist in Residence  for Xavier University’s International Business Ethics Program.  In addition to being a guest panelist regarding international trade compliance issues at the University Cergy-Pontoise’s School of Law in France,  I traveled in London and Paris to learn more about how corporate giants like L’Oreal and BP tackle compliance and ethics on a daily basis.

My trip was eye-opening.  I visited the London-based Institute of Business Ethics,  had dinner with Michael Woodford, the former CEO/President of Olympus (and whistleblower exposing corruption at the company in 2011).  I also spoke with Robert Bond, a legal expert on data privacy in the UK.

Bottom line from all of these events?  Ethics and compliance are increasingly important to today’s businesses, as evidenced by the growing number of programs and resources that companies are putting in place.  As a result, lawyers need to be prepared to weigh not only compliance concerns but also ethical considerations in doing business.

Legislative pressure

First, companies are focusing more on compliance and ethics because of increasing legislation and pressures.  France recently enacted the Sapin II Law, which aligns French anticorruption law with aspects of U.S. and UK corruption enforcement.  Sapin II was prompted by  concerns of political leaders who believed that increased trade globalization was contributing to corruption and undermining economic interests.

The Organization for Economic Co-operation and Development has criticized France in the past for lagging behind other countries in its corruption enforcement efforts.  Unlike the U.S., France has never convicted a company for bribing foreign officials, despite the fact that those same companies often found themselves subject to investigation or prosecution abroad for such conduct.  Now, French companies are looking to U.S. companies and legal counsel for tips on how to comply with the new law.

Globalization shines a light on ethics

Second, companies are increasing resources for compliance and ethics due to expanding multi-jurisdictional cooperation on a global basis to enforce anti-corruption efforts and hold wrong-doers accountable.  Examples include Operation Car Wash in Brazil, as well as the VimpelCom enforcement action, which coordinated efforts among the United States, Sweden, Switzerland, Norway, the British Virgin Islands, Caymans, Bermuda, Ireland, Estonia, Spain, Latvia, the United Arab Emirates and others.  Thus, not only are companies faced with more legislation, there is also increased international cooperation to coordinate investigations and to detect wrongdoing across national boundaries.

Attracting and retaining talent

Third, companies see value in increasing their compliance and ethics programs to attract and retain talent.  During a briefing to the Xavier University International Business Ethics Program participants, BP expressed that by refusing to bow to  cultural pressures of corruption, the company has been able to attract employees who would prefer to work for a fair and ethical organization.

L’Oreal representatives also commented that they are able to retain talent through efforts such as their Ethics Day, Ethics Café, and other ethics-focused programs throughout the year.  L’Oreal was recently named 2017’s Most Ethical Company by the Ethisphere Institute, winning the annual honor for the eighth time.  Unlike companies that lump compliance and ethics together, L’Oreal created a separate Ethics Department.  It was one of the first companies to appoint a Chief Ethics Officer, in 2007.

Takeaways

It is important for lawyers to understand that compliance is not just obeying this or that specific regulation.  Helping clients to create  a Code of Conduct or overall compliance program requires more than knowledge of certain regulations.  Further, ethical considerations must be built-in.  Just because something is legal does not make it ethical (and vice versa).  It is becoming vital for lawyers – both law departments and outside counsel — to understand not only the law, but also the ethical considerations involved.

Whatever an organization’s goals in creating a culture of ethical responsibility, lawyers must be able to respond, based on our own responsibilities under the Rules of Professional Conduct and with our  clients’ business perspectives in mind.

Client choice, communication are “paramount” when firm dissolves, says D.C. ethics opinion

Posted in Law firm break-ups

With teamwork, anything is possibleDissolving a law firm is a process, not an event, the D.C. Bar Legal Ethics Committee said in a new opinion released earlier this month, and some ethical obligations continue even after dissolution.  “The paramount” principle, said the committee, is to “continue to competently, zealously and diligently represent and communicate with the clients during the dissolution process.”

Answering the three W’s

The opinion addresses the situation where the firm dissolves or will do so in the reasonably foreseeable future, and it answers many of the “who,” “what” and “when” questions that can arise.  Here are some of them:

  • Who should get notice of the upcoming dissolution?  All clients, even those with inactive matters and files that have  been closed less than five years.  If the firm is holding intrinsically valuable client property (wills, stock certificates), the client should be notified no matter how long the file has been closed.  Relevant third parties, such as opposing counsel and tribunals, should also get notice.
  • Who should give the notice?  Joint notice by all firm members is “preferred.”  But if the firm’s lawyers cannot agree on the form or the terms of that notice, the lawyer with the most significant contact should give notice.  Only if this is not practicable should lawyers give unilateral notice to the clients.
  • When should notice be issued?  There is no bright line.  Notice must be timely, and at least give time for the clients to make an informed decision about their future representation, to hire other counsel, and for papers and property to be returned (including any refunds owed).
  • What should be communicated?  The notice can’t contain false or misleading statements, and should provide the clients with options:   to choose representation by any member of the dissolving firm; by any other lawyer; or by any other firm.  The notice may not restrict any lawyer’s right to practice, which is barred by D.C.’s adoption of Model Rule 5.6.
  • What if the client doesn’t respond?  The notice should provide that if the client fails to respond by choosing one of the options, the client is deemed to remain a client of the lawyer who has been primarily responsible for providing legal services to the client.  The D.C. Committee recognized that identifying that lawyer can be difficult; it did not deal with the issue of the potentially open-ended time-frame for the “responsible” lawyer’s duties to the unresponsive client, or what happens if the lawyer is headed to a firm where she would have a conflict in continuing to represent the unresponsive client.
  • What files must the firm return to the client?  D.C. law permits lawyers to assert and enforce retaining liens for unpaid fees against client property — but they are “strongly disfavored” under a 1994 ethics opinion.  Rather, even when asserting such a lien, the lawyer can retain only the lawyer’s own work that the client hasn’t paid for, and then only if the client can pay and if withholding that portion of the file will not irreparably harm the client’s interests.  For files in electronic form, the lawyer must comply with a client’s reasonable request to convert electronic records to paper form, absent some agreement to the contrary.  The client ordinarily must bear conversion costs.

Dissolving a firm that includes non-lawyers

Unique to D.C. practice is the issue of dissolving a firm that includes lawyers and non-lawyers in partnership — a form of practice permitted there under D.C. Rule 5.4(b).  The rule permits lawyers to practice in firms where non-lawyers hold a financial interest or managerial authority, and carry out “professional services which assist the organization in providing legal services to clients.”  Because the rule says that the non-lawyers in such a firm have the same ethical duties as the lawyers, the duties as to the dissolving firm would apply equally to the non-lawyer partners of such a firm, said the D.C. Committee.

Former Uber program to “greyball” riders draws attention to ethics rules

Posted in In-house Counsel, Social Media and Internet

Taxi Ride Share Transportation AppThis is a good one for the law school legal ethics class I’m teaching this semester:  If a company’s lawyer approves a policy that may be legal in itself, but the lawyer knows that the company will use it to evade the law, has the lawyer violated ethics rules?

An analogous question arose last week when the New York Times reported that Uber Technologies Inc. used specially-developed software in order to avoid law enforcement stings in cities where Uber’s ride-sharing operation was facing local government opposition.

Within a few days of the report, Uber announced that it had halted the practice, called “greyballing,” which had been used in the U.S. and overseas.  Uber said that the practice was part of its broader efforts to halt all rider conduct that violates its terms of use.

However, the situation still provides a setting in which to consider Model Rule 1.2(d) and your ethics obligations if a client seeks your help in conduct that may be deemed to be pushing the legal envelope.

“Greyballing” a potential rider

As reported by the Times, starting in 2014, Uber apparently put policies in place in cities like Boston, Portland, Oregon and Las Vegas to identify users Uber thought might be city investigators or inspectors who were arranging for rides in order to conduct stings on operations that law enforcement officials questioned as violating city regulations.

After facing initial opposition in many cities where gaps in local regulations made it easy to launch its services, Uber eventually reached agreements with cities so that it could operate lawfully.

But before that point, as the Times described it, “law enforcement officials in some cities … impounded vehicles or issued tickets to UberX drivers, with Uber generally picking up those costs on the drivers’ behalf.  The company has estimated thousands of dollars in lost revenue for every vehicle impounded and ticket received,” the Times said.

To avoid these costs, Uber would try to identify law enforcement officers and keep them out of its drivers’ cars — “greyballing” them.  The digital techniques Uber used to do that included reviewing credit card information to see whether the card was linked to some official institution (e.g., a police credit union), drawing a “geofence” around government offices, and not picking up anyone seeking a ride from there, and searching social media profiles to identify people who seemed to be linked to law enforcement.

When someone who had been “greyballed” did successfully hail an Uber, the company could call the driver in order to end the ride.

What should counsel consider?

Model Rule 1.2(d) bars counseling a client to engage in criminal or fraudulent conduct, or assisting the client in doing so.  But was Uber’s “greyballing” program used for unlawful ends?  If not, there is no legal ethics issue to discuss.  And we certainly do not know what Uber’s legal team considered in advising Uber about the program.

Rule 1.2(d) of course permits discussing with the client “the legal consequences of any proposed course of conduct” and assisting the client in making “a good faith effort to determine the validity, scope, meaning or application of the law.”  A lawyer who conforms to that standard is on good ground.

Likewise, comment [9] notes the difference between opining about consequences and “assisting” in unlawful conduct.  And the “fact that a client uses advice in a course of action that is criminal or fraudulent” does not of itself “make a lawyer a party to the course of action.”  “Presenting an analysis of legal aspects of questionable conduct” is OK; but “recommending the means by which a crime or fraud might be committed with impunity” is not.

Be careful out there…

If you are in a grey area (no pun intended!), where it may be unclear whether you are counseling your client about the bounds of the law or whether you are possibly assisting with improper conduct, it pays to be careful, and to consider getting an outside view about your possible actions.  Check your jurisdiction’s version of Model Rule 1.6(b)(4), which permits you to disclose a client’s confidential information as reasonably necessary in order to obtain legal advice about your compliance with the ethics rules.

NY high court enforces fee-sharing agreement, although client didn’t consent

Posted in Fees

Money SliceFollowing an $8 million settlement in a personal injury suit, the New York Court of Appeals held that a fee-sharing agreement between two lawyers was enforceable, even though it violated ethics requirements.  The court said that counsel’s failure to inform her client and obtain consent to the fee split was a “serious ethical violation,” but it did not allow her to sidestep the otherwise-enforceable contract.  The unanimous February 9 opinion in Marin v. Constitution Realty, LLC seems to go against a developing trend toward voiding unethical fee-sharing agreements.

Failure to disclose to client

The case involved serious injuries to a construction worker who fell from a Manhattan building.  Counsel of record hired co-counsel and agreed to pay him 20 percent  of the attorneys’ fees if the case settled before trial.  However, no one informed the client of the agreement or obtained his consent, although there was evidence that counsel of record had led her co-counsel to believe that the client had been informed.  Just six months later, counsel fired the co-counsel and advised him that his portion of any fee would be based on quantum meruit.  Three years later, the case settled for $8 million.  Co-counsel moved to enforce the fee-sharing agreement.

Fee-splitting requires client disclosure

Every jurisdiction in the country has some form of Model Rule 1.5(e), which permits fee sharing between lawyers who are not in the same firm,  but requires that the client agree to the arrangement in writing, including the share that each lawyer will receive.

Affirming the trial court and the intermediate court of appeals, the New York high court held that the failure to disclose to the client and get his consent did not void the fee-sharing agreement, as counsel of record had argued.

Quoting from its 2009 opinion under the former Code, the court said “it ill becomes defendant … to seek to avoid on ‘ethical’ grounds the obligations of an agreement to which [she] freely assented and from which [she] reaped the benefits.”  The court said that having benefitted, counsel could not “use the ethical rules as a sword” to invalidate the fee-sharing agreement.

Not the majority view?

Although the Marin court did not consider the Restatement (Third) of the Law Governing Lawyers, the opinion likely accords with the view set out in § 47, which says that “a lawyer who has violated a regulatory rule or statute by entering into an improper fee-splitting arrangement should not obtain a tribunal’s aid to enforce that arrangement, unless the other lawyer is the one responsible for the impropriety.”  Here, as the court noted, co-counsel, who was trying to enforce the agreement, thought that counsel of record had informed the client, which under the Restatement analysis might suggest that the “other lawyer” was responsible for the ethics breach.

But more broadly, there seems to be an emerging majority view that fee-sharing arrangements that don’t comply with Rule 1.5(e) are simply invalid.  See Benjamin C. Cooper, Taking Rules Seriously, 35 Cardozo L. Rev. 267 (Oct. 2013) (a “significant majority of the courts [that] have looked at the issue conclude that such agreements are unenforceable,” citing cases).  The justification for that position is that it would be against public policy if a lawyer could enforce an unethical fee agreement through court action, even though the lawyer would be subject to discipline for entering into the agreement.  However, as Marin illustrates, there are opinions that come out the other way.

Take care before you share

It seems self-evident that the best way to stay out of trouble is to comply with the client-disclosure-and-consent requirement of your jurisdiction’s version of Rule 1.5(e).  But if you are involved either in trying to enforce or to invalidate a fee agreement that does not comply with the rule, you will need to weigh the relevant case authorities carefully, in light of the divergent approaches that courts have taken.

Cautionary tales, ethical woe: don’t let these happen to you

Posted in How Not to Practice

Caution text and sign.There should be a word that’s the opposite of “schadenfreude” — you know, that evocative German term that means “secret pleasure at another’s misfortune.”  Maybe there is such a word, but the one I’m searching for would convey the sense of “Please, let me not fall into the same error” as some other person did, because under the right (or wrong) circumstances we can all make ethical mistakes.  Here are three cautionary tales. You may read them and wonder how the lawyers involved came to such grief — or you may just be thankful that it wasn’t you, or that the demons these lawyers struggled with aren’t yours.

If you’re carrying meth, don’t forget your briefcase.

A Colorado lawyer left his briefcase in a courtroom overnight.  The judge’s law clerk found it and identified the lawyer by looking at the documents in the briefcase.  Unfortunately, as the disciplinary opinion describes, “a vial of white power and a syringe were also in the briefcase; a field test by courthouse deputies identified the power as methamphetamine.”  The lawyer retrieved the briefcase later and identified it as his.

A month later, police responded to a domestic violence call at the lawyer’s home.  His spouse told police that after the spouse found meth in the home and confronted the lawyer, the lawyer assaulted the spouse.

The lawyer also neglected clients in six cases, including leaving a client at trial without counsel, and failed to refund at least $7,000 in unearned fees, constituting conversion of client funds.

The court ordered disbarment for among other things, violating the state’s version of Model Rule 8.4(b), which makes some types of criminal conduct into ethical violations.  The court said that it could not consider any mitigating factors, despite the circumstantial evidence of the lawyer’s difficulties, because the lawyer failed to participate in the disciplinary case.

If you’re driving, wear a seatbelt. 

A California deputy district attorney and her co-worker got pulled over and received citations for the D.A.’s failure to wear a seatbelt.  The D.A. called a family friend, a sergeant in the police department’s traffic division, who agreed to dismiss the citations without talking to the traffic officer.  The D.A. then told her co-worker to destroy co-worker’s own citation, but co-worker refused.

The D.A. was tried and found guilty of conspiracy to obstruct justice, and two counts of altering a traffic citation — all misdemeanors.  The appeals court affirmed the conviction.  And in an order that took effect in November 2016, the D.A. was suspended for 60 days, ordered to take the Multistate Professional Responsibility Examination, and placed on two years’ probation.  In aggravation, the court found that the D.A.’s conduct damaged the integrity and credibility of the criminal justice system and the legal profession.

If you work at a firm, hand over the client fees.

A former partner in a Utah law firm worked on two client matters and directed that firm personnel write off some or all of the fees.  The client in each matter did construction work at the partner’s home:  one built a shed worth more than $15,000 and had all his legal fees written off and his retainer refunded; one built a railing for the partner, received $3,500 in cash from the lawyer for the work, and had more than $7,000 in legal fees written off, with the firm receiving just $700.

Each client testified that he had a deal with the lawyer to provide construction work in exchange for the lawyer’s legal services.

The district court concluded that the lawyer had violated the state’s version of Model Rule 8.4(c), barring dishonesty, fraud, deceit and misrepresentation.

As a sanction, bar counsel argued for disbarment, which is the presumptive sanction for misappropriating funds.  The lawyer argued that misappropriating funds from his law firm didn’t rate the same sanction as stealing from clients, and on its review, the state supreme court agreed, in an opinion suspending the lawyer for 150 days.

The court wrote that “that not all misappropriation is created equal. Misappropriation of firm funds does not ‘undermine the foundations of the profession and the public confidence’ in the same way that misusing client funds does,” and does not merit the same presumptive sanction.

Be careful out there

Takeaways?  (1) If your friend, associate or law partner is grappling with addiction or any other brain disease or mental health issue, reach out to your state’s lawyer assistance program.  It just might save their life, in addition to their license.  A list of every state’s program is here.  (2) Keep your moral compass in front of you at all times.  And, oh yes:  (3) Buckle up when you’re behind the wheel.

Former GC wins $8 million; SOX pre-empted state ethics rule on client confidentiality

Posted in Confidentiality, In-house Counsel, Privilege

Whistle BlowerA whistle-blowing general counsel won an $8 million federal jury verdict earlier this month, in a case that might encourage other GC’s to call out corporate wrongdoing.

Compensatory and punitive damages

After deliberating only three hours, the jury in Wadler v. Bio-Rad found that the GC had a reasonable basis for reporting his suspicions about the company’s Chinese sales operations to the organization’s audit team.

The GC’s allegations prompted an internal investigation by outside counsel, which concluded that the sales team had not violated the Foreign Corrupt Practices Act.

But the jury found that the company had retaliated against the GC by firing him after the report, in violation of the Sarbanes-Oxley Act, and that absent the report, he would not have been terminated for legitimate reasons.

The award to the GC included $5 million in punitive damages.  Speaking to Law360 (subs. req.), the GC’s lawyer attributed the punitive damages to the company  CEO’s creation of a back-dated negative performance review; computer metadata proved that the review hadn’t been created until after the GC had been fired.

Does SOX protection trump company’s privilege?

Judgment on the jury verdict was entered on February 10.  It will almost certainly be the subject of post-trial motions and possibly an appeal.

But the verdict stands out as a rare trial win for a GC in a whistle-blower case based on retaliatory firing.  Such suits have often been foreclosed before trial because of restrictions on a company lawyer’s ability to use confidential information of the employer in proving the GC’s case.

For example, in 2013, the Second Circuit affirmed dismissal of a GC’s whistle-blower suit brought under the federal False Claims Act, holding that the allegations relied on privileged information that could not be disclosed, and that the FCA did not preempt New York state ethics rules on confidentiality.

In the Bio-Rad case, however, the federal magistrate judge found at the end of 2016 that the whistle-blower protections of SOX trumped the company’s attorney-client privilege, and turned back the company’s motion to preclude use of privileged information at trial.

The GC’s ability to use this information as evidence arguably spelled the difference here.

Key factors in the magistrate judge’s ruling:

  • as a federal claim asserted under SOX,  the federal common law of privilege applied; that took the case outside the scope of the California Supreme Court’s 1994 ruling in General Dynamics Corp. v. Superior Court, which had limited retaliatory discharge claims to those that could be established without breaching the attorney-client privilege;
  • the text and structure of SOX doesn’t indicate that in-house lawyers aren’t protected from retaliation, and SOX § 1514(A)(b) and particularly the SEC’s final rule (17 C.F.R. § 205) preempts the California state ethics rule on client confidentiality;
  • Model Rule 1.6 is the guiding standard, which — unlike the California state rule — permits a lawyer to reveal information relating to the representation of a client to the extent the lawyer reasonably believes necessary to establish the lawyer’s claim in a controversy between the lawyer and the client; and
  • Bio-Rad made so many disclosures to the SEC, the DOJ and the DOL during the course of previous investigations and administrative proceedings, and to the court in the pre-trial phase of the case, that the company waived the privilege as to many communications.

The SEC had filed an amicus brief during the briefing on the company’s motion to exclude, supporting the position that the magistrate judge took — that SOX trumps state legal ethics rules regarding client confidentiality.

Trend or outlier?

Whether the Bio-Rad case will be upheld, and whether it is a trend or an outlier, remain to be seen.  But in the short run, it may encourage other GC’s to blow the whistle.

How far does DQ extend? NY appeals court says not that far, reinstating co-counsel

Posted in Conflicts, Disqualification

Viral marketing conceptWhen a conflict of interest crops up during a case, Ethics 101 tells us that the “taint” of that conflict can spread, and potentially disqualify all the lawyers of the affected firm.  Model Rule 1.10, “Imputation of Conflicts” explains the rule.  But how far does that disqualification go?  A New York appeals court examined this question in December, and reversed a DQ order in a personal injury suit.

“Associated in a firm”?

In Kelly v. Paulsen, the firm (“HHK”) represented two plaintiffs who had been injured in a motorcycle accident allegedly caused by the defendant.  HHK filed suit on plaintiffs’ behalf in 2009.  Four years later, a sole practitioner joined the plaintiffs’ team as co-counsel.  Very shortly before trial in 2015, the defendant learned — allegedly for the first time — that HHK was representing plaintiffs.  On the first day of trial, the defendant moved to disqualify HHK because the firm had also represented the defendant in “personal and business matters” for the previous 30 years.  (The court didn’t explain these somewhat singular facts, particularly how a party doesn’t learn the identity of opposing counsel’s firm for six years while a suit is pending.)

Based on the conflict, HHK withdrew, leaving the solo as plaintiffs’ only lawyer.  Defendant then moved to disqualify the solo as well, and the trial court granted the motion.  On appeal, the Third Department reversed.

The court of appeals said that New York’s Rule 1.10(a) (like the Model Rule), bars lawyers who are “associated in a firm” from representing a client when a conflict of interest would preclude any one of them from doing so if the lawyer were practicing alone.

This imputation rule thus has the potential for spreading the “taint” (a word courts often use) of the primarily-disqualified lawyer to others.

Although the Rules don’t define the phrase “associated in a firm,” the court in Kelly found that the well-established meaning extends beyond partners and associates who are employed in the same firm — it also can include “of counsel” relationships, for instance.

Nonetheless, the court wrote, “not every lawyer who has any connection or relationship with a firm is considered to be ‘associated’ with that firm” for conflicts and imputation purposes.  The question requires a factual analysis, and turns on whether the lawyer’s relationship with the firm is “sufficiently close, regular and personal.”

More like a contract lawyer

Here, the facts showed that the solo had his own separate office, didn’t receive any support services from HHK, and HHK didn’t “supervise” his work.  The key factor, however, was that the solo averred that he never had access to any HHK files except plaintiffs’, never represented the defendant, was not aware of him or his business affairs before the motorcycle case, and never got any confidential information about the defendant from HHK or had access to such information.

The defendant argued that HHK had “undeniably shared” his confidential information with the solo practitioner, based on plaintiffs’ demand for a high settlement figure.  Defendant said the demand indicated that the solo had received confidential information about his finances.  But the court viewed that argument as mere speculation.

The solo’s role here, said the court, is “more akin to that of a contract lawyer” who gets a case referral and works from his or her own office as co-counsel.  The court noted a 1999 New York ethics opinion that such a contract lawyer is not “associated” with the employing firm for conflicts purposes, and analogized that principle to the solo lawyer.

Key:  sharing confidential information

There are a number of courts that, like Kelly, have held that taint doesn’t affect co-counsel, at least where there is no showing that co-counsel received confidential information about the party moving to disqualify.  The always-excellent Freivogel on Conflicts collects the cases.  But there are still decisions that go the other way, too.  See, e.g., j2 Global Communications Inc. v. Captaris Inc., (C.D. Cal. 2012) (imputing “outside in-house counsel’s” disqualification to firm).  Bottom line:  while information-sharing remains key, this is a fact-specific area, and it pays to be aware of nuances that can vary the outcome.

For the first time, court requires “litigation funders” to be disclosed — but only in class actions

Posted in Fees

Money and gavelOn January 26, the U.S. District Court for the Northern District of California became the first court to mandate disclosure of litigation funding that parties in class actions receive from outside sources, under a revision to the court’s standing order applicable to all cases.  The rule provides that “in any proposed class, collective or representative action, the required disclosure includes any person or entity that is funding the prosecution of any claim or counterclaim.”

Final rule — more “funder friendly”

The final rule is more limited than an earlier draft, which would have expressly mentioned “litigation funders,” and required their identification in the first appearance in all civil proceedings.

The court’s request for comments on the earlier draft, during summer 2016, drew input from two large litigation funders.  The CEO of Burford Capital, which calls itself “the largest provider of strategic capital to the legal market,” criticized the earlier draft proposal as “unnecessary and discriminatory” in a comment he filed in July.  He told Law360 (subs. req.) that Burford was happy with the district court’s “incremental approach” to disclosure reflected in the final rule.

Another litigation funder, Bentham IMF, based in Australia, also commented this past summer on the earlier draft rule, expressing concern that it would open up wasteful “discovery sideshows,” intrude on attorney-client privilege and “give defendants in all cases the unprecedented and unintended advantage of knowing which claimants lack the resources to weather a lengthy litigation campaign.”

The U.S. Chamber of Commerce has supported disclosure of litigation funding, and told Law360 that the rule would force law suit investors out of the shadows, where they shouldn’t be allowed to control litigation, especially in class actions.

A growing segment — but is it champerty?

In its comments, Burford said that commercial litigation funding is in its infancy in the U.S., and that fewer than 75 cases in federal district court involve such funders each year.  That limited figure would appear to exclude the many other forms of third-party funding available to plaintiffs and investors.   And the market for litigation investing is lucrative and growing, according to Forbes, which headlined a story last year “The next great investment idea:  Somebody else’s lawsuit?”

Which raises the question — do law schools need to start teaching the law of champerty and maintenance again?  If you’ve never heard of the doctrines, here’s a 2003 explanation from the Ohio Supreme Court:

The doctrines of champerty and maintenance were developed at common law to prevent officious intermeddlers from stirring up strife and contention by vexatious and speculative litigation which would disturb the peace of society, lead to corrupt practices, and prevent the remedial process of the law.

The modern trend has been away from applying these old doctrines (which some jurisdictions codify by statute) to third-party funding agreements, as exemplified by a Delaware trial court decision last summer, involving Burford Capital.  And the 2003 Ohio ruling, which voided a contract as champerty and maintenance, was later abrogated by statute.

Some courts, however, are sticking to the champerty analysis.  For instance, a recent decision of the Pennsylvania court of appeals held that “champerty remains a viable defense in Pennsylvania,” invalidating a third-party funding agreement between plaintiff’s lawyer and the funder.  New York’s highest court this fall likewise interpreted a litigation funding transaction to be a sham attempt to evade the state’s champerty statute.

Trendline to watch

It will be interesting to watch the trend toward a growing litigation funding marketplace as it meets up with a possible push for more disclosure and a potential resurgence in champerty jurisprudence.  Stay tuned.

Digital dilemma: Who owns litigation database when partners leave a firm?

Posted in Law firm break-ups, Law Practice Management

digital archiveA high-profile duel over rights to legal databases is playing out in state court in Boston.  The warring parties are six former partners and the asbestos defense firm they left, allegedly taking with them high-value file-management and other databases.  The firm’s suit, filed in November, raises the question:  When partners leave, does a database that includes client information belong to the clients they take with them?  Or to the old firm, which says it has invested heavily in developing the proprietary database?

Digital age departures

Model Rule 5.6(a), adopted by Massachusetts and most other jurisdictions, makes client choice the paramount concern when lawyers move from firm to firm, prohibiting any agreement that restricts the right of the migrating lawyers to practice.  Model Rule 1.16 also protects a client’s right to their file when the representation terminates, thus limiting the right of the old firm to “lock up” the file, and protecting the right of the departing lawyers to take files and service clients at their new firm.   And Massachusetts’ version of Rule 1.16 enlarges on that concept, with an expansive and detailed list of file items that “belong” to the client.

But where does a custom-developed digital database fall under an ethics rule analysis?  Firms can invest heavily in developing such specialty management tools.  Does the principle of client choice mean that departing lawyers can walk away with such a valuable asset and use it to service those clients in their new practice?

Database dispute

As reported in the ABA Journal, the Boston Globe and the Boston Business Journal, the Governo Law Firm asserts in a  complaint filed in Suffolk County Superior Court that the six former partners had been negotiating to buy the firm.  Included in the discussions were the databases, which Governo alleges it developed as a proprietary system, and which it says contains information about billing, expert witnesses, client correspondence, court rulings and asbestos litigation literature.

The Boston Business Journal describes the Governo firm as “a small firm that has built a national profile defending companies accused of exposing workers and consumers to asbestos.”

According to the complaint, before abruptly ending the sale discussions and leaving, one of the former partners had copies of the databases downloaded to her own computer.  The six partners allegedly took more than half of Governo’s business with them; the complaint asserts claims for misappropriation of trade secrets, interference with contractual relationships and civil conspiracy.

The former partners opened their new firm on December 1, and are asserting that the database information belongs to the clients who came with them, and who were billed for the work connected to the databases.

On January 11, the Suffolk County Superior Court in Boston denied the Governo firm’s motion for preliminary injunction, ruling that the record was too undeveloped to determine whether the databases belong to the Governo firm, or to the clients who moved their business to the new firm.  A scheduling conference is set for Feb. 14.

The Boston Globe reported that the case is being carefully watched, for its potential to make law on “leaving a law firm in the digital age.”

Watch your P’s and Q’s

In denying injunctive relief, the judge reportedly assessed evidence from both sides on the ownership of the database material, but found it insufficient to decide.  That would appear to be a sound call, since determinations in this area can be very fact-specific.  Key factors might be whether the firm used its own funds to develop the data base, or if those development costs were passed on to clients.  In the latter case, an argument could be made that the clients charged for  creation of the database should have a continuing right to have the lawyers use it at their new firm.

Whether you are a firm manager or a lawyer thinking about leaving your firm for greener pastures, this is an area where it pays to check your jurisdiction’s rules and ethics opinions before acting.  As we’ve noted before, some states regulate the departure process by rule, and others have guidance on notice, client files and more, in their ethics opinions.  The law also continues to develop on law partnership agreements that try to bring some certainty to this potentially contentious aspect of legal practice.  We’ll continue to keep you posted.

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