Outside Inhouse Lawyer Blog : New York & Seattle Corporate Dispute Lawyer & Attorney : Grace M. Healy : Outside counsel : King County, Tacoma, Bellevue

Last week the New York Law Journal featured two decisions regarding attorney-client and work product disputes in litigation between Gucci America and Guess?.

In the first decision, the protection of the attorney-client privilege was denied because Gucci’s in-house lawyer was not an active member of any bar – he only maintained inactive status in California.

Active bar membership is necessary for the benefit of the attorney client privilege. There is an exception to this rule where: the lawyer fraudulently held himself out to the client as an attorney; the clients genuinely and reasonably believe that the person is an attorney; and if, pursuant to this belief, the client made confidential communications to the person. Here, Gucci’s belief that the in-house counsel was a lawyer was unreasonable – it never tried to confirm the extent of the counsel’s qualifications.

This decision has implications for everyone: clients must take steps to confirm that their lawyers maintain active bar membership; litigators, in disputes where attorney client privilege is asserted, should confirm that the communications involved a licensed attorney as well as substance protected by the privilege. The information regarding bar status is usually available on-line.

The second decision involves work product privilege and choice of law issues between United States and Italian law. Gucci was instructed to revise its privilege log, and to meet and confer with opposing counsel before returning to the court for decision.
 

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I was taught to expressly include costs and attorneys’ fees in any release or settlement agreement because – if I didn’t -- the opposing party would come back and demand that the client pay those claims on top of the settlement amount. I always did it but, frankly, I thought this was an urban legend. I was wrong -- this issue made it all the way to the Washington Supreme Court. The dispute in McGuire v Bates illustrates the wisdom of using belts and suspenders when drafting agreements.

After a settlement of $2,180 plaintiff asserted that the settlement of “all claims” did not include statutory attorneys fees, which are awarded to a prevailing party in Washington in certain situations. An arbitrator denied this claim; the Superior Court decided plaintiff was the prevailing party and awarded attorneys' fees, costs and interest on the settlement amount.  The Court of Appeals affirmed.  The Washington Supreme Court, in a unanimous decision, reversed and ruled that a settlement of “all claims” includes a claim for attorney fees.

Despite this decision, it seems like a good idea to always expressly include costs and attorney fees in any settlement and release, since one superior court judge and an appellate panel saw this the other way. 
 

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This week’s Ninth Circuit decision in Hyundai Motor V. National Union Fire Ins. reminded me that advertising injury insurance coverage should be considered when a claim – that doesn’t seem to fit under any other coverage -- comes in to a business.

The court ruled that the insurer had a duty to defend Hynudai in a patent litigation because the patent infringement claim involved method of advertising used on Hyundai’s web site. Although the court referred to many other cases where advertising injury coverage had been rejected in patent violation claims, it examined the context of the claim and determined that it was implicated in this case. (A jury had found against Hyundai in the underlying case and awarded the patent holder $34,000,000 in damages. This suggests a pretty large defense bill.)

This claim was decided using California law, but the court noted that California law was essentially the same as that of Washington on this point.

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Responding to discovery requests is expensive, but – in all likelihood -- will cost less than the $8,000,000 default judgment sanction that the Washington Supreme Court reinstated today in Magana v. Hyundai.

This decision is a must-cite for anyone moving for or opposing discovery sanctions. There is a two-judge dissent.

The case – which the court said involves “unique facts and circumstances” -- was commenced in 2000 and arises from an auto accident that took place in 1998. An  $8,000,000 jury verdict was set aside by the Court of Appeals in 2005. Upon remand, plaintiffs requested that defendant update discovery responses prepared in 2000. A motion to compel was filed about three months before the second trial was scheduled to begin.  Documents involving similar problems came to light.

The  trial court determined that the additional documents should have been produced long before the motion to compel. Defendant, apparently, had only reviewed law department files for complaint documents; there were others in defendant’s consumer affairs department. Plaintiffs argued that they were prejudiced in trial preparation; the court agreed, and the sanction was imposed because of false responses, spoliation and substantial prejudice to plaintiffs.

That is a gross simplification of the facts in the opinion.

The bottom line for businesses is: when responding to discovery requests, you must search outside your legal department for responsive documents. In addition, when you think that discovery requests are over-broad (not really a “unique fact or circumstance” in my experience) consider the pros and cons of moving for a protective order instead of simply objecting in your responses and waiting for a motion to compel.

The irony here is that defendant won the appeal of the $8,000,000 jury verdict but has now been assessed with the same judgment, plus an obligation to pay plaintiffs’ attorneys fees and expenses, and, just a guess, there are going to be some insurance issues. Of course, with the additional disclosures, plaintiffs probably think they could have done much better if they had time to get ready for a second trial. 

Whatever, it is crystal clear that Washington courts will not tolerate incomplete discovery responses.
 

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At one time or another, almost every lawyer presented with a claim says: “I think that might be champerty!” Then, research shows, it isn’t. Champerty is elusive, to say the least.

Last week, the NY Court of Appeals affirmed the narrow definition of champerty. In answering certified questions from the Second Circuit, the court ruled that indemnity claims – obtained in a settlement where there was a pre-existing interest -- were not barred by champerty. Trust for the Certificate Holders of the Merrill Lynch Mortgage Investors, Inc. Mortgage Pass-Through Certificates, Series 1999-C1, by and through Orix Capital Markets, LLC as Master Servicer and Special Servicer v. Love Funding Corporation.

The facts – which involve the sale, transfer and litigation related to mortgages – cover several years and parties. However, the holding is clear.

• First, the court defined champerty very narrowly as: the purchase of claims for the purpose of bringing an action in order to involve parties in costs and annoyance, where such claims would not be prosecuted absent that purpose.

• Second, it is not champerty to acquire the right to bring a claim as part of a settlement. The court was not aware of any New York case holding that it is champerty to acquire -- as part of a settlement -- indemnification rights for reasonable costs and fees incurred in past legal actions.

• Third, the rights transferred may be for an amount greater than the amount demanded in the underlying action. The court noted that it was not aware of any New York case standing for the proposition that it is champerty to settle a dispute by accepting a transfer of rights having the potential for a recovery that is larger than one demanded as a cash settlement.

This should reassure anyone who has ever taken a claim as part of a settlement.

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Many corporations have accident reporting policies which require their employees to draw conclusions about the cause of an accident or whether it could have been avoided. The goal is improved safety, but the result is often heartburn for in-house counsel because documents prepared in the ordinary course of business generally must be produced in litigation. With the goal of improved safety, reports are often -- rightly or wrongly -- very self-critical.

Corporate counsel who hope to keep conclusions in confidence will often promptly hire outside counsel to assist in an accident investigation when litigation is anticipated.  They should be encouraged by last week’s decision of Magistrate Smith in Byrd v Wal-Mart Transportation, LLC, in the US District Court, Southern District of Georgia, which found the conclusions in a report were privileged even if the report was prepared pursuant to a corporate policy.

 Following a fatal truck accident, Wal-Mart’s in-house lawyers immediately hired outside local counsel because litigation was anticipated. Counsel was involved in the investigation of the accident. In the ordinary course of business, Wal-Mart has its safety personnel perform an investigation, which is then reviewed by a “Serious Accident Committee.” The committee issues an opinion as to whether the accident was “preventable” or “non-preventable.”

 During Wal-Mart’s corporate deposition plaintiff inquired about the conclusions of the Serious Accident Committee. Wal-Mart claimed privilege; plaintiff argued that the conclusions were reached in the ordinary course of business, rather than in anticipation of litigation, and had to be disclosed. The court granted Wal-Mart a protective order noting that this line of inquiry involved mental impressions that are privileged. Plaintiffs’ lawyers might take heart from a foot note that suggests that the deponent would have had to have been privy to counsel’s deliberations in order for the privilege to apply.

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In-house lawyers only tell clients if they “can” do something, but not if they “should.” Compliance departments take care of advising about the “should.” I came across that distinction today in an article on Law.com about Pfizer. I have no personal knowledge about the Pfizer situation, but, generally speaking, this distinction simply amazed (infuriated) me. How can: whether or not something may violate a regulation, put your client at risk of litigation or a claim, or in any way violate a legal standard not be part of a law department’s analysis for its in-house clients?  

Last I heard, staying out of trouble with corporate constituents (including regulators) was good long term business strategy. If management needs a compliance nanny to tell it the right thing to do the problem isn’t with the law department. If management doesn’t trust  -- or believe -- its lawyers’ counsel, maybe it has the wrong lawyers.  I still think that lawyers are supposed to be "trusted advisers" but not deciders of business strategy. 

The can/should distinction reflects the opinion held by some lawyers who have never been in-house that somehow in-house lawyers don’t really functioning as counsel to their in-house clients, or are ethically deficient.

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I am not a big fan of joint representation of employers and employees in civil matters no matter how clear the signed waiver or how sophisticated the client.  A number of years ago, I was involved in the defense of a breach of restrictive covenant/trade secret matter and represented both the current employer and new employee.  When the employer learned that the employee was, um, less than straightforward about what he had taken from his former employer, the new employer called me and told me to tell the new employee he was “fired”.  I declined and, fortunately, was able to point to the waiver letter and discussions that clearly explained my refusal. No matter, it took some effort to get the bill paid.

I know joint representation can save a client fees, or avoid having another lawyer at the table debating strategy or asking questions at a hearing that completely undercut a defense.  But, as a recent case, Trautenberg v. Paul Weiss, et al., shows, joint defense can spawn malpractice litigation and bad publicity (assuming you agree that exists).

Paul Weiss had represented Citibank and Trautenberg in connection with the defense of some claims arising out of the WorldCom debacle.   Paul Weiss also advised Citibank regarding Trautenberg’s severance agreement.  Two years after a severance agreement was negotiated and signed, Trautenberg sued Paul Weiss alleging breach of fiduciary duty and attorney misconduct relating to the firm's role in the severance discussions.

The case was dismissed for failure to state a claim on the pleadings, which generally is a pretty difficult motion to win.  The decision carefully analyzes the complaint and law, but, let's face it, in August 2009, a plaintiff who already received a five million dollar severance hardly tugs at the heartstrings.

Whatever, this is grief that both lawyers and clients can do without.

 

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Failure to fully respond to a non-party subpoena may now create a risk greater than sanctions in New York -- it might create tort liability.  In IDT Corporation v. Morgan Stanley Dean Witter & Co., the First Department has ruled that claims for fraudulent misrepresentation and fraudulent concealment may be based upon intentional spoliation of evidence.

The spoliation claim arises from defendant, Morgan Stanley’s purported failure to fully respond to a subpoena in an arbitration between two of its clients (Morgan Stanley was not a party to the arbitration).  Morgan Stanley had represented in writing that its production of approximately 2,000 pages of documents fully complied with the subpoena.

In this action, the remainder of which was dismissed by the Court of Appeals in March,  plaintiff asserts that it learned that only a small number of responsive documents had been produced by Morgan Stanley in response to the subpoena.  Allegedly, 500,000 pages were not produced, and the omitted documents included some “smoking guns” -- which would have resulted in an increased arbitration award if plaintiff had known of them at the time.

The trial court had dismissed the claims for fraud and fraudulent concealment because of an earlier Court of Appeals case, Ortega v. City of New York, which did not allow a claim of negligent spoliation against a third party.

The Appellate Division distinguished Ortega and ruled that claims for fraud and fraudulent concealment had been sufficiently alleged – a material misrepresentation of fact was made when Morgan Stanley represented that it had fully complied with the subpoena; the misrepresentation had been intentionally made to mislead plaintiff; that plaintiff had reasonably relied on the misrepresentation, and had suffered damages as a result (more would have been awarded in the arbitration).  Because plaintiff stated a claim under existing tort principles, there was no reason to dismiss it because it involved spoliation of evidence in an action in which the defendant was a non-party.   

There are a number of facts in this case that arguably present unusual (or, distinguishable) circumstances, including whether this is limited to third-parties who have fiduciary relationships with the other parties.   But, the fact is that this is one more reason to pay close attention to those non-party subpoenas.
 

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For me, a big part of a discussion regarding whether or not to litigate is figuring out whether there will be anything to collect.  Today, in Koheler v. The Bank of Bermuda, Ltd,  the New York Court of Appeals answered a certified question that might make you lean toward litigation. The decision extends the reach of a judgment creditor.  Provided that a judgment garnishee is subject to New York personal jurisdiction, the garnishee can be ordered to turn over property of a judgment debtor that the garnishee controls even though the property is outside of the state, or the country.  Since New York is a banking center, this could have a long reach.

The case was filed in the Southern District of New York in 1993 by an out of state judgment creditor who sought stock certificates or assets of a judgment debtor.  The certificates were held in Bermuda by the Bank of Bermuda Limited, which was served through the Bank of Bermuda (New York) Ltd., allegedly a subsidiary or agent.

The District Court ordered the Bank to turn the certificates, or money sufficient to pay the judgment, over to the judgment creditor in 1993. Personal jurisdiction was litigated for ten years. Finally, in 2003, Bank of Bermuda, Ltd consented to personal jurisdiction.

This case appears to have a life span reminiscent of Jarndyce v. Jarndyce, and today’s opinion most probably won’t end it -- there is a three judge dissent that asserts that the majority holding may be unconstitutional.  Meanwhile, if a judgment debtor or even a potential defendant has assets in a bank that is related to a bank located in New York, it bears consideration.

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In the last two days, I have seen two interesting decisions regarding attorneys’ fee awards for in-house counsel litigation work. The first, AMX Enterprises, L.L.P. v. Masters Realty Corp.,  decided by the Texas Court of Appeals, has a comprehensive discussion of the appropriate measure of attorneys’ fees – should they be based upon market value or cost-plus value.  After surveying various jurisdictions, the court determined that market value is the appropriate measure.  The opinion also discusses the proof that should be submitted for an award.  Ultimately, the case was sent back for a new trial on the fee issue.

The second case, Wordtech Systems, Inc. v. Integrated Network Solutions, Inc.  decided by Judge England of the USDC for the Eastern District of California, also discusses the proof necessary for an in-house counsel fee award.  Even while noting the “glaring lack of support” the court awarded $67,500 for the in-house services.

 While it is very nice to have your employer compensated for your work – and certainly provides strong evidence of an in-house litigator’s value to his or her employer, as well as, a basis for a nice bonus for a good result – these cases support the wisdom of keeping time records if there is the potential for an attorneys fee award.

Unfortunately, I was only able to find the Westlaw opinion for each of these cases.  If that is a problem, contact me.

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Two big lessons can be learned from an interesting decision by Magistrate Payson in Tailored Lighting, Inc. v. Osram Sylvania Products, Inc., decided last week in the US District Court for the Northern District Court of New York.  First, an in-house lawyer can anticipate a deposition notice if he or she verifies interrogatories, and second, make sure that the witnesses produced in response to a Rule 30(b)(6) notice of deposition can answer all questions asked.

As for the in-house counsel's deposition, the opinion discusses the factors that should be present before a lawyer will be deposed, and, after deciding that the deposition should go forward, states that the questions are to be limited to:

(1) identifying the information provided to and relied upon by [the in-house lawyer], whether through communications with individuals or review of documents, in answering the interrogatories; (2) identifying the particular source (person or record) of that information; (3) non-privileged communications between [the in-house counsel] and his human sources about that information that occurred in the course of investigating and answering the interrogatories.

In other words, there is a good chance – as anyone who has ever attended a deposition knows – that there will be a lot of going back and forth about privilege with threats to call the judge the day that the deposition takes place. It seems easier to have someone outside of the legal department sign the verification.

Second, the decision addresses the scope of Rule 30(b)(6) witnesses – and orders that two of the identified witnesses to be re-deposed to answer certain questions that they could not answer in their initial testimony. 

In no way am I critical of the parties in this case because I know from experience that you pretty much have to be in a case to understand the how and why that litigation unfolds, and when I unsuccessfully looked for a free copy of this opinion on-line, I could see that this case has been a siege for the parties. 

But, I see literally dozens of articles each week about concern regarding outside counsel fees in these days of financial sturm und drang.  Avoiding motions to compel by anticipating arguments like those made on this motion seems like a good way to go.




 

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Until yesterday, I was under the mistaken impression that a lawyer could be terminated without collecting damages – other than for work already performed.  I was wrong -- at least in Oklahoma.  In McQueen, Rains, & Tresh, LLP v. Citgo Petroleum Corporation,  the Supreme Court of Oklahoma ruled that – under certain circumstances – a liquidated damages provision may be enforced; it is not per se unenforceable. 

The court was careful to limit its holding to the facts presented – a fixed term agreement, a large sophisticated corporate client who was represented by a skilled negotiator, an unambiguous liquidated damages provision, detrimental reliance by the law firm, and a recognition in the contract that there would be additional costs incurred by the law firm to meet the terms of the contract. On remand, the District Court found that a question of fact was present regarding the reasonableness of the liquidated damages.

I doubt that advocates of alternative billing arrangements really give much thought to this sort of a problem or event.  In the long run, bringing a case like this probably has a more negative impact on the outside lawyer – win or lose.






 

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Last week, the Washington Supreme Court ruled in St. Paul Fire and Marine Ins. Co. v. Onvia, Inc.  that an insured may have bad faith and Washington Consumer Protection Act claims against its insurance carrier even though the carrier did not have to defend or indemnify -- if the carrier made procedural missteps in deciding that there was no coverage. 

That is correct – the insurer did not have an obligation to defend or indemnify, and the insured still may have a claim for damages.  But, harm and damages must be proven. 

Here, it appears that there was a delay of almost nine months between tender and denial of coverage, during which time the insured defended itself in the litigation and entered settlement negotiations.  Because the duty of good faith toward an insured applies to the handling of the claim, if the claim was handled badly, there may be a claim for procedural bad faith. As for the Consumer Protection Act cause of action, a violation of the investigative requirements of the Washington Administrative Code automatically establishes the first element of a claim under the Consumer Protection Act.  Under the Washington Administrative Code, an insurer has a duty to act promptly in communication and investigation after a claim is tendered.

The message for insureds is to keep track of the efforts made in connection with tender of a claim so that you can prove damages, if necessary.  For carriers, the clock is ticking on handling that tender of claim.
 

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I’ve always been a bit of a news junky, but since I started this blog I have been reading much more than before – especially, about the possible effects of the financial crisis on law firms.  I have seen articles saying that:

•    law firms will suffer;
•    litigation will prosper; 
•    disaster, the increase in litigation hasn’t appeared;  (This less than two months into the most obvious symptoms of the downturn.)
•    general counsel are afraid that law firm rates will increase;
•    rates will not increase, they will decrease;
•    the hourly rate as a method of billing is dead;
•    In-house legal departments are shrinking;
•    In-house legal departments are keeping more work in-house.


I guess everyone is entitled to a point of view, but a lot of this stuff defies common sense.  Having lived through the market crash of 1987 and a law firm implosion in 1991, I can say with some confidence that none of this is new.  The only people whose opinions I really want to hear right now are those who moved out of equities into fixed income assets in January of this year.  Obviously, their recent track record on predicting the future is better than most everyone else's.

However, today, I read two pieces that made sense.  The first, a blog posting by Max Kennerly, pointed out that the assertion that law firms shouldn’t pay associate bonuses because they will offend clients, is baloney.  Amen.  Partners care about giving money to associates if they don’t have to do so, since it could go into the partners’ pockets instead.  Clients care – or should only care -- about getting value for the fees that they pay. 

That said, I do remember walking into an ostentatious marble and mahogany waiting room and thinking ruefully – I believe we paid for this.  Anyway, my rule of thumb is:  plaintiff’s lawyers – who only get paid for success – should have fancy offices, not lawyers who get paid by invoice.  If you think your legal bills are too high because associates make too much money speak up, or find someone who offers good service with lower rates.

The second posting, Cravath Partner Offers Tips on Cost Cutting  by Caroline Elefant, discusses a Business Week article, which also – in large part -- made sense. But, I don’t know if it is really advice on cost cutting, or sensible management.  The first two tips are to hire the right lawyer for the job, and to  hire an efficient lawyer.  If you haven’t been doing this, well, you probably just don’t know it – otherwise, why would you be doing so? 

However, the article goes on to recommend alternative billing arrangements, rather than billing by the hour.  It posits that in litigation, hourly billing creates the wrong incentives – sometimes losing a case could be more profitable to a firm than winning it.  Frankly, this may be true, but what ever happened to the concept that lawyers owe the highest duty of loyalty to their clients – not to themselves or their firm?  It presents a compelling argument for having a lawyer who you trust and who understands litigation review and is able discuss and monitor the work of outside counsel. 


 

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A recent opinion of Judge Pechman of the Western District of Washington in Aecon Buildings, Inc. v. Zurich North America, illustrates the importance of good in-house litigation management, complying with discovery, and supplying a detailed privilege log on time.  Defendant appears to have failed on all counts and the result is that defendant must pay into the court the amount that it was billed by its attorneys from the time its initial disclosures were filed through the date that defendant produced a relevant file – a period of more than eight months – as a discovery sanction.

The underlying case set forth a claim of bad faith refusal to defend and indemnify by a plaintiff who had been named as an additional insured on a policy.  At the time the insurance claim initially was tendered, it was rejected by an adjuster and the file was closed.  About one year later, and one month after the suit was started, a second adjuster reviewed the claim and noted that coverage had been triggered.  That adjuster was instructed not to continue work on the claim, and was not named in defendant’s initial disclosures as an individual who might have discoverable information. The second adjuster’s work came to light when her deposition was noted – she had signed declarations authenticating documents.  It seems that no one could state with certainty who ordered the second review, or why it was performed.

The court stated that defendant’s “failure to include in its responses to requests for production any documentation of [the second adjuster’s] work on the claim file, and its failure to produce, until the eleventh hour, a privilege log documenting those portions of the claim file attributable to her that it withheld on the basis of privilege, are clear violations of the discovery rules.”  That is a summary – the details run to almost eight pages.

This decision is must reading for anyone who believes that work done on a matter after a lawsuit has been started is privileged. 

 

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Today’s New York Times reveals that plaintiffs who reject settlement offers and go to trial often recover less than the offer at trial.  This is based upon a study of cases that will be published in the September issue of the Journal of Empirical Legal Studies.  The Times article says that the findings “raise provocative questions about how lawyers and clients make decisions, the quality of legal advice and lawyers’ motives.”  “The study found that factors like the years of experience, rank of a lawyer’s law school and the size of a law firm were less helpful in predicting the decision to go to trial. More significant was the type of case.”

What the Times article doesn’t suggest -- and statistics probably can't show --  is that parties often have legitimate differences of opinion about the merits of a case, and those differences play out at a trial.  Or, that  possibly, plaintiffs’ lawyers – who are willing to be paid by contingency fee – are intrinsically less adverse to risks than defendants’ lawyers – who choose to live by the hourly rate.  Or, that plaintiffs may be seeking to vindicate what they see as personal wrongs as opposed to defendants who generally view litigation as a cost of doing business.  Or, that defendants are paying more in settlement than they would lose if the cases were taken to trial.

Decisions to go to trial are often incorrect in hindsight, but saying that a decision to go to trial is a mistake that can be remedied in advance of trial ignores the enormous number of variables that occur during trial – such as, who turns up for jury duty that day, or whether that jury thinks your witness is not truthful because he or she begins to perspire while testifying.  Where you go to law school isn’t a big help at that time.

Certainly, each party wants the best result – if they agreed on what that was, there would never be a need for a lawsuit or a trial.  It doesn’t mean that the decision to reject a settlement offer to go to trial is a “mistake”.

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A few years ago, a general counsel told me that the worst possible litigation outcome for a defendant company is a settlement that is less than the defense fees incurred.  I opted for diplomacy and agreed, but thought, no, the worst possible outcome is settling a case and having the same opposing counsel sue your company on a similar matter a few weeks after the first check is received. A really big problem is developing – you are becoming a target, and, in all likelihood, you overpaid on the first case.

Recently, this came to mind when I read an article by Steven Hantler discussing core competencies for litigation managers.   The article observed that litigation managers generally focus too closely on managing a case after a complaint has been filed, but, preferably, in addition to managing the litigation, managers had to formulate communications strategies, understand the company’s regulatory and legal environment, and understand how the case could affect various constituencies. 

That got me thinking that my earlier opinion was too narrowly focused on the litigation, itself.  In fact, litigation may have more far reaching effects on your business -- your reputation and relationships with your core constituencies could be in danger.  To formulate a litigation strategy that works in the context of a business, an in-house litigation counsel must see and analyze the matter from a variety of perspectives.  The effects, if any, on how you do business, your customers, your employees, your shareholders, your contractors – including your accountants, your community, the community where the claim either arose or is pending, the potential for future litigation, the effect on other pending litigation, the law, the judge, his or her clerk, the risk of loss, the continued expense, precedent, and your outside counsel -- just to name a few – should be considered.  

Not considering all of this can result in a really surprising worst possible litigation outcome – such as loss of business, increased costs and an unhappy work force. A judgment might be the least of your problems.

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