Risk Update

IP Risk Week (Part 1) — Denim IP Malpractice Move Victorious Versus Verein ($32m Verdict)

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Ohio jury hits Dentons with ‘record’ $32m legal malpractice verdict” —

  • “An Ohio jury has ordered law firm Dentons to pay $32.3 million to laser technology company RevoLaze, after the firm was disqualified in a patent suit over a conflict of interest.”
    “RevoLaze sued Dentons and the chair of its patent litigation practice after the firm had been disqualified from the dispute at the US International Trade Commission (ITC).
  • “The Gap filed a motion to disqualify Dentons, arguing that the law firm’s Canadian arm had previously acted for the company in litigation.”
    “Dentons US denied that it had a conflict of interest, arguing that while Dentons US and Dentons Canada are both members of the Swiss verein Dentons Group, they are separate law firms. A verein-organised firm is a combination of law firms that share marketing and branding, but keep their profits and finances separate from one another. But, in May 2015, the ITC granted The Gap’s motion to disqualify.”
  • “In a legal malpractice suit filed subsequently against Dentons US, RevoLaze said: ‘As a result of defendants’ failures, RevoLaze was required to retain alternate counsel to replace defendants. Despite the fact that defendants had billed RevoLaze for over 81% of the agreed budget for all of the ITC litigation [and district court litigation] RevoLaze was required to duplicate many of these expenses with its alternate counsel.”
  • “Sarah Dunkley, senior associate at Patterson, added that the case is important because it shows that a ‘law firm cannot evade its duty of loyalty by organising itself as a Swiss verein.'”
  • “Dentons said: ‘We will appeal. The verdict was simply wrong. Just as our position was vindicated on appeal by the ITC, we will be vindicated on appeal in this matter. We acted properly, ethically, and consistent with our duties to our clients.'”

Dentons Suffer $32 Million Lawsuit Loss For Malpractice” —

  • “‘The verdict did not surprise me,’ said Kristi Browne [counsel for RevoLaze], ‘but it was gratifying. The jury was particularly attentive throughout the trial, asked good questions, and thoroughly deliberated.'”
  • “RevoLaze, a small Cleveland, Ohio technology company, owns patents that have revolutionized the denim industry. In 2015, Dentons and Mr. Hogge were disqualified from representing RevoLaze in a patent enforcement case in the International Trade Commission. The disqualification occurred after a defendant in that case, The Gap, raised a conflict of interest. ‘The case is important because it shows that a law firm cannot evade its duty of loyalty by organizing itself as a Swiss verein,’ said Sarah Dunkley [counsel for RevoLaze].”
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Risk Update

Outside Counsel Guidelines in Focus — Inside WilmerHale’s OCG Journey & Strategy

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OCGs are a hot topic, no doubt. A longtime reader brought this story to my attention. What’s most interesting is the creation of a specific OCG-focused operational risk role to help manage things: “Technology Alone Is Not the Answer’: Wilmer Revisits Outside Counsel Guidelines” —

  • In total, the firm is sitting on approximately 1,000 documents, after receiving, in 2019 alone, roughly 260 new retainer agreements or updates to existing guidelines that stipulate what clients expect from the attorneys they are hiring.
  • “‘There are a lot of process failures out there,’ said Kyle Liepelt, who was named Wilmer’s first dedicated outside counsel guidelines administrator in February 2018. ‘Technology alone is not the answer.'”
  • “When Wilmer began the process of reevaluating how it dealt with these guidelines in 2017, leaders found that—unlike the majority of the firms… it was over-complying with guidelines. Instead of losing money through rejected bills, convoluted appeals and write-downs, attorneys were being overly cautious in their billing.
  • “‘We couldn’t arm our partners to the nuances of these client differences,” said Steve Smith, the firm’s director of matter management services, describing a problem of ‘excessive diligence.’ That impact, both in time and money, to communicate the complexity around outside counsel guidelines, that’s time that we should have been spending adding real value to our clients,’ he continued.”
  • “Following an initial workshop, one of Wilmer’s first steps was to create the centralized administrator position held by Liepelt, who spent the previous five years as a conflicts specialist in the firm’s new business department. Each set of new guidelines goes directly to him, and he’s responsible for reviewing their terms, looping in the relationship partner and the billing partners on a given matter.”
  • “If these conversations illustrate the human side of the process, the technical side takes the forefront once any negotiations are finished. The Wilmer team looked to a database to help solve the problem of scale, teaming with a vendor that had its own outside counsel guidelines solution and using the underlying workflow and source code to built their own unique design. Each client’s guidelines are broken down into a data record with component terms highlighted, and attorneys and staff can search for terms and easily access the source documents.”
  • “When updated versions of guidelines roll in, Liepelt can turn to the database to identify what’s changed, then rapidly point out the differences to the partners involved. When looking at intranet profiles for the firm’s attorneys, he and others can follow links to see what outside counsel guidelines apply to each matter they’re working on, guiding conversations about matter efficiency.”
  • “One year into the new system, the feedback, from both inside and outside the firm, has been overwhelmingly positive, according to Smith and Liepelt. Partners appreciate having an internal point person to whom they can direct their inquiries and concerns, while staff have the information at their disposal to do pre-bill auditing. Turnaround time with clients has decreased by 25%.”
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Risk Update

Lawyer Lateral Hiring Week+ (Part 5) — Lateral Lessons from the Recent Past

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Last week’s look at laterals was definitely a hit. Never one to live within artificial constraints, I felt it worthwhile to extend things, thanks to an update sent by Chuck Lundberg. This analysis from 2017 reminds us that these issues are not new, with links to several relevant stories and examples: “Quandaries and Quagmires: Carefully vetting lateral partner candidates” —

  • “It’s the end of July 2017 — the bar exam was last week — and the hottest trending topic in legal ethics and risk management right now is this: How badly some law firms have screwed up in vetting new lateral partners. Here’s just a sampling of the most recent headlines in the legal press about lateral hire disasters:
  • “And the cost of a bad lateral hire can be substantial — two to four times the lateral’s annual compensation. And that doesn’t even account for some intangible costs that could be far more expensive to the firm:
    • Like the expense of an unforeseen motion to disqualify your firm from a big case based on an undetected imputed conflict triggered when the lateral walked in the front door.
    • Like losing one or more clients who choose to retain new counsel rather than stay with you and fight the DQ motion.
    • Like the fact that your malpractice insurance carrier may perceive an increased underwriting risk in your firm’s lateral hiring practices (translation: higher premiums).
    • Like the incalculable internal cost to the firm from bringing in a culturally incompatible partner.
    • Like the unexpected telephone call from the respected judge who has always been a friend of your firm, who quietly asks why in the world you would hire that lawyer as a lateral.
  • “And trust me about this: When a lateral does flop spectacularly, you do not want to be the subject of this angry question among your partners: ‘Who was the genius who wanted to bring that lawyer into the firm?'”
  • “All of which is not to say that firms should not engage in lateral hiring. A carefully chosen lateral partner can be worth his or her weight in gold… But the decision to hire a lateral must be done with great care, with a full understanding of how badly it could go wrong. The vetting process is neither easy nor quick.”
  • “Treat lateral due diligence as seriously you would an M&A transaction for a client; many firms spend hundreds or thousands of hours vetting such a transaction, and lateral vetting should be no different.”
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Risk Update

Lawyer Lateral Hiring Week (Part 4) — Data Advice to Lawyers Leaving (Systems & Signals)

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Data Security And Your Lateral Job Search (What you need to know)” —

  • “To combat these [external data] breaches, law firms have several contingencies and programs in place. Among the oldest and most widely used is email monitoring. Nothing that you type from your work email is truly 100% confidential. Law firms can access your emails at any time. So should you be wary of your firm discovering your emailed plans for making a lateral move?”
  • “According to a former high-level IT employee at two Am Law 200 firms, the answer is, not really. According to them, email inspection is not passive. To review an attorney’s emails, the firm would have to go through HR and would only do so when there was ample evidence of a crime or wrongdoing.”
  • “Does this mean that your inbox is 100% completely safe from prying eyes? In short, no. The former employee mused that a firm that was hemorrhaging laterals and was in danger of collapsing might forego their established policy to try to stem the flow of lateral movement.”
  • “Additionally, the proliferation of employee monitoring software has made it easier for firms to identify suspicious activity. The caveat here is the same tools that can detect potential data security threats, can also be used to monitor an employee’s likelihood of leaving. New employee monitoring tools can monitor everything you do on your computer. If you’re not responding to your coworker’s IM’s, or are taking longer than usual, this (in tandem with other key indicators) may tip them off that you’re looking to move. Other indicators can include things like regularly updating your LinkedIn profile.”
  • “The most telling pattern of behavior is when attorneys check out an unusually large amount of documents (usually in excess of 50) in one day that were marked as read-only, with no edits. In this case, the firm is painfully aware that the attorney is copying their library in preparation for a lateral move.”

 

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Risk Update

Lawyer Lateral Hiring Week (Part 3) — On Managing Matter Mobility, Lawyer Transitions and “Non-compete” Ethical Rules

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Wise counsel when moving between firms” —

  • “Law firm managers have long known they can’t require attorneys to sign noncompete agreements when they join a firm. Even so, there have still been instances where firms have made it challenging for a lawyer trying to make a lateral move.”
  • “But a recent opinion from the American Bar Association Standing Committee on Ethics and Professional Responsibility makes it clear that any provision of an employment agreement that interferes with a client’s autonomy is never acceptable.”
  • “‘Firms may require some period of advance notice of an intended departure,’ Formal Opinion 489, handed down last month, reads. ‘…Firm notification requirements, however, cannot be so rigid that they restrict or interfere with a client’s choice of counsel or the client’s choice of when to transition a matter.'”
  • “One of the main points of the ethics opinion is the notice requirement a firm can impose on a lawyer who wishes to move to another firm. ‘The period of time should be the minimum necessary, under the circumstances, for clients to make decisions about who will represent them, assemble files, adjust staffing at the firm if the firm is to continue as counsel on matters previously handled by the departing attorney, and secure firm property in the departing lawyer’s possession,’ the ethics committee wrote.”
  • “The opinion also advises firm leadership that they cannot withhold resources, such as email or staff, from a departing attorney during the transition period if doing so would prevent leaving lawyers from adequately representing their clients. Lawyers and their firms are encouraged to coordinate during a transition period in the best interests of any affected clients.”
  • “To that end, firms should have procedures in place that explain the process of transitioning a lawyer out of the practice and to another firm, the opinion advises. Most sophisticated firms have established such procedures, said Bruce Lithgow, a managing director of the Partner Practice Group of Major Lindsey & Africa.”
  • “A ‘race to the phone’ is not uncommon, Lithgow said, as both departing attorneys and their former firms will likely want to keep the client on their rolls. But Lithgow said he would advise leaving lawyers to come to their firm management with a prepared statement that can then be negotiated into a joint statement.”
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Risk Update

Lawyer Lateral Hiring Week (Part 2) — On Industry Data

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US Firms Mostly Hire From Other US Firms in London, 2019 Data Shows” —

  • “U.S.-headquartered law firms in London hired nearly twice as many partners from other U.S. law firms as they did from their U.K. competitors in 2019, Legal Week analysis of lateral hire data has found. In total, nearly 30% of all lateral partner hires in London involved U.S partners defecting to other U.S rivals.”
  • “The data, which was compiled using ALM’s intelligence arm, Legal Compass, and reporting by Legal Week across the year, identified nearly 340 lateral partner hires in London by Am Law 100 and UK Top 50 firms.”
  • “Moves from U.K firms to U.S firms were only marginally higher than the other way round – the former accounting for 13% of moves compared to the latter on 11%. The U.S. threat was still potent however. The Magic Circle lost eleven partners in lateral moves this year, ten of whom moved to U.S firms.”

For more data on industry lateral trends, see a previous summary posted on the risk blog.

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Risk Update

Lawyer Lateral Hiring Week (Part 1) — On Prudent Due Diligence

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I’m fascinated by the vetting (or lack thereof) that goes on in evaluating lateral hires. So this article naturally caught my eye. Here are some key highlights from: “INSIGHT: Do You Really Know Everything About That Lateral Hire?” —

  • “When it comes to lateral hiring, no process, no matter how thorough and strictly employed, can guarantee complete safety against malpractice actions or impenetrable defenses to a suit arising from a pre-hire error, write Hinshaw & Culbertson attorneys. They recommend both pre- and post-hire actions to reduce risks.”
    “Among the most harmful threats to the fledgling relationship is a claim against the hiring firm arising from the lateral’s alleged pre-hire negligence.”
  • “At a minimum, due diligence before inking the deal is critical. Inquire whether the candidate has been a party to prior claims, lawsuits, or disciplinary matters. Verify the answers with docket searches and other on-line investigation. A simple internet search can uncover issues that might later blossom into costly claims.”
  • “Of course, conflicts must be investigated. Note that Model Rule 1.6(b)(7) contains a limited exception to client confidentiality for the purposes of assessing conflicts of interest arising from a lawyer’s change of employment… The hiring firm should also review and assess the clients and matters that the lateral attorney is bringing to the firm. This includes determining whether any errors might have occurred.”
  • “Firms can take advantage of other loss-control measures even after satisfactory completion of due diligence and the actual hiring of the lateral candidate… The firm’s client intake process also provides loss-control opportunities. For instance, the hiring firm should enter into new engagement agreements with the incoming clients. In addition to mapping out the new firm’s unique terms and conditions, the agreements could more precisely limit the scope of the firm’s representation, carve out specific services that the firm will not provide, or identify a default event that signals the end of the attorney-client relationship… Before doing so, Model Rule 1.8(h), which limits lawyers’ ability to make an agreement prospectively limiting malpractice liability, should be carefully reviewed.”
  • “Finally, during the lateral assessment and hiring process, consider seeking guidance from your professional liability insurance broker or carrier. Both brokers and carriers will have knowledge of and insight into the available insurance products and what coverage issues might exist.”

 

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Risk Update

Client Conflicts and Clashes — “Betrayed” Client and Side-switcher Stunned

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Flynn’s new legal team unleashes on his old lawyers in bid to withdraw guilty plea” —

  • “The new legal team for former national security adviser Michael Flynn unleashed a withering assault Wednesday on Flynn’s old lawyers, accusing them of a conflict of interest so severe that it merits allowing the ex-Trump aide to withdraw the guilty plea he entered more than two years ago.”
  • “Flynn’s current squad of attorneys contend that Flynn’s original legal counsel with the prominent Washington law firm Covington & Burling was too enmeshed in the early stages of Flynn’s legal troubles to give him detached advice about what to do once prosecutors from special counsel Robert Mueller’s office began threatening to prosecute the retired Army lieutenant general.”
  • “‘Mr. Flynn’s guilty plea (and later failure to withdraw it) was the result of the ineffective assistance of counsel provided by his former lawyers, who were in the grip of intractable conflicts of interest, and severely prejudiced him,’ Flynn’s current lead counsel, Sidney Powell, and her colleagues wrote in the 49-page motion filed on Wednesday afternoon. ‘That pernicious conflict infected and prejudiced his defense until he retained new counsel in 2019.'”

Law firm A&O told to drop client over conflict of interest” —

  • “Luxembourg’s bar association ordered Allen & Overy to stop working on behalf of fund services firm Alter Domus after a complaint the mandate constituted a conflict of interest for the magic circle UK law firm.”
    “A&O’s work for LFP I’s opponent showed the law firm had switched sides, LFP I argued, because it had represented the fund itself in a related case.”
  • “Alter Domus bought Luxembourg Fund Partners, the management company of LFP I, in December 2017, putting it in charge of financial and risk management, compliance and other administrative tasks at LFP I. But shareholders appointed new directors late in 2018, when they found millions of euros had gone missing from LFP I, an umbrella structure that allowed other managers to set up sub-funds within it.”
  • “The new directors sacked Alter Domus as the fund’s management company, and have since filed several lawsuits against it. Alter Domus had hired Allen & Overy to defend it against LFP I in one case concerning Columna, one of the several sub-funds under the umbrella structure. But the law firm had earlier been working for LFP I itself to defend it against a shareholder claim in a related case, which had to do with the Aventor sub-fund, according to the ruling of the bar association.”
  • “Allen & Overy argued the two cases were separate because they involved different sub-funds within LFP I, but the bar association said that sensitive information could have been compromised regardless.”
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Risk Update

Conflicts Cases & Updates — Fiduciary Duty Discussion

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I always find interesting updates (and the comments are worth reading) through Bill Freivogel’s web site. Here are some recent highlights involving conflicts and law firm fiduciary duty:

Malpractice Liability (posted January 15, 2020) Amer. E Group PLLC v. Livewire Ergonomics Inc., 2020 WL 209903 (S.D.N.Y. Jan. 14, 2020).

  • “AEG is suing Livewire on a note. Livewire brought a third-party complaint against the Barkats law firm because Barkats represented Livewire in obtaining the financing and preparing the note. Livewire is claiming that that the terms of the note were unfavorable to Livewire and that Barkats had a conflict of interest, thus breaching its fiduciary duty to Livewire. Livewire has also joined Elana Hirsch, a principal at AEG, as a third-party defendant, claiming she aided and abetted Barkats’ breach. Hirsch moved to dismiss the third-party complaint against her. In this opinion the court denied the motion.”
  • “The problem is that AEG is related to the Barkats law firm, including the fact that Hirsch is married to Sunny Barkats, the firm’s named partner. The engagement agreement between Barkats and Livewire said that Livewire was waiving any conflict that might arise out of the financing being with an entity related to Barkats. However, the court said that this reference to a possible future, “hypothetical,” conflict falls far short of Rule 1.7’s requirement for an informed consent (see, especially, footnote 4). [Our note: The opinion contains a helpful discussion of lawyers’ breach of fiduciary duty and of a third party’s aiding and abetting such a breach. The opinion also discusses the applicability of New York’s versions of Rules 1.7 and 1.8(a).]”

 

Commercial Negotiations; Both Sides of Deal (posted January 10, 2020) Doyle v. Otto, 2020 WL 105089 (Ia. App. Jan. 9, 2020).

  • “Geri Doyle and Caren De Voe were partners in a real estate brokerage business. Lawyer Mark Otto had represented both of them in various business contexts. When Doyle and De Voe agreed to part, they hired Otto to prepare the needed documents. Otto asked them to sign a conflicts waiver. De Voe insisted on a ten year non-compete clause. When Doyle asked Otto about the length, Otto opined that he did not think a court would enforce it for more than ‘two to three years.’ Doyle signed the contract Otto prepared, which included the ten-year non-compete provision.”
  • “Later, in a new business, Doyle started listing property in a county named in the non-compete. De Voe reminded Doyle about the non-compete. Doyle responded by filing this action seeking a declaration that the non-compete was not enforceable and seeking malpractice damages against Otto. We will focus on the claims against Otto. The trial court granted Otto summary judgment. In this opinion the appellate court affirmed. It was clear that De Voe and Doyle agreed on all the separation terms without Otto’s involvement and that Doyle was sophisticated about the real estate business. The court found that Otto’s prediction about the excessiveness of the ten-year term was good advice. Thus, the court held that Otto had not been negligent, and that he had not breached his fiduciary duty to Doyle.”
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Risk Update

Risk Roundup — Escrow Agent Risk & Ex-client Claims Extortion of $1M in Fees

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Serving as Escrow Agent Can Be Risky” —

  • “Firms often serve as escrow agent for clients, and sometimes the adversary as well — real estate closings, corporate transaction down payments, environmental clean-up and settlement agreements in litigation are just a few examples. But is your firm protected? Do you have a detailed escrow agreement that explicitly sets forth your obligations and spells out under what circumstances exactly you can disburse the funds and to whom? If all you do is put the money in your attorney trust account and follow your client’s instruction, what happens when the adversary disputes the release of funds?”
  • “That is the situation that was recently addressed by the Supreme Court of New Jersey in Meisels v. Fox Rothschild LLP, 2020 WL 97718. In that case, an intermediary entity wired funds to Fox Rothschild’s trust account in connection with a real estate deal the firm was handling. The wire transfer did not include any instructions as to how the money should be disbursed. The Supreme Court focused on two facts, (1) the funds were sent with no reference that they were on behalf of the Plaintiff and contained with no limiting instructions or conditions, and (2) plaintiff did not object to the disbursement of funds in a timely manner, and thereby dismissed the case against Fox Rothschild.”

Ex-White & Case Client Says Firm Tried To Extort $1M Fees” —

  • “A San Francisco-based cosmetics company has hit White & Case LLP with a lawsuit in New York state court, accusing its former legal counsel of pursuing a ‘campaign of extortion’ against it and repeatedly threatening to disclose its confidential client information to extract nearly $1 million in exorbitant legal fees.”
  • “…Shipman Associates LLC, which does business as theBalm, claims that the law firm breached its ethical and fiduciary duties by repeatedly and unnecessarily disclosing Shipman’s privileged information, and threatening to continue to do so, in an effort to recover legal fees.”
  • “White & Case allegedly represented Shipman during the early stages of a proposed transaction from February 2016 through March 2017. At the time, the firm allegedly refused to continue representing Shipman unless it entered a new agreement under which the firm received more than double it was charging in attorney fees, according to the suit.”
  • “After two failed rounds of mediation in the fee dispute, Shipman claims that a White & Case attorney began a ‘campaign of harassment and coercion.’ The attorney allegedly sent emails to Shipman’s owners ‘boasting’ about how eager he was to examine the company’s witnesses about its proprietary information before a jury.”
  • “Then, during a hearing, when a judge asked the White & Case attorney how it could be possible the firm never sent its client an invoice, he allegedly responded that it was because the firm was summarily fired,’ even though the firm actually quit, the suit claims. He also repeated Shipman’s confidential information in open court for a second time, the suit says.”
  • “The complaint claims that the firm violated New York Rules of Professional Conduct and emphasizes that Shipman never waived and does not intend to waive its attorney-client privilege with White & Case.”

 

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