Conflict of Interest Leads to Sanctions

Risks have always been a part of a law firm’s business.  Clients rely on an attorney’s expertise in complex matters the client has no power in.  When those clients feel wronged, or when errors were made – they bring a lawsuit.  Intellectual property work, real estate work and plaintiff work have long been known to be higher risk engagements.  However, there is a type of risk that is present in each engagement and that firms should be aware of – conflicts of interest.

Boies, Schiller & Flexner has been in a lawsuit stemming from a conflict of interest claim first made over a year ago.  The conflict of interest arose because the law firm represented a plaintiff in an antitrust suit against a hotel chain that the law firm previously had as a client.  The judge ordered over $250K in sanctions against the law firm for what the judge said was a “blatant conflict of interest.”  The underlying antitrust case was dismissed previously.  Both the lawsuit and the sanctions are going to be appealed, according to the parties involved.

The sanctions went to cover attorney’s fees and the cost to search the databases of Boies, Schiller to prove that the conflict of interest was known and ignored.

This case highlights the need for firms to carefully document, research and act on each conflict of interest – real or perceived.  While it may be profitable to represent clients through a “Chinese wall” or other means, it may cost the firm tens or even hundreds of thousands of dollars to do so.  Having robust and strict internal policies will help.

Law firms vary greatly in the composition of their practice.  Many firms purposefully stay away from higher risk areas of practice to reduce their risks.  However, there are risks that are systematic in all engagements – conflicts of interest being one.  Contact us to discuss ways to protect your firm from systematic risk through lawyer’s professional liability insurance and strong internal risk management techniques.

IL Supreme Court Set for Major Decision

In an error stemming from 1991, the Illinois Supreme Court is set to rule on the amount a law firm owes to a client for their wrong-doing.  The outcome of this case will have repercussions on insurance companies, law firms and client engagement decisions.

The matter stems when Morton Goldfine engaged the law firm of Barack Ferrazzano in 1991 to help him recover a $5M investment in a stock that lost value amid fraud allegations.  The firm declined to work on a contingency fee basis, but agreed to work on an hourly basis.  Mr. Goldfine asked the firm to preserve his claims under the applicable “blue sky laws”.  The blue sky law sets up a remedy for the situation like Goldfine encountered – but the law firm missed the deadline and recovery of the investment was unable to proceed.  Goldfine sued the firm and won.

The case sounds simple, but over 20 years later, it is still in the courts.  The reason for this is that Goldfine sued the investment brokerage that sold him and stock as well.  In 1996, Goldfine and the law firm Barack Ferrazzano agreed to stay the malpractice proceedings until the investment case was settled.  That case was finally settled in 2007.  At that time, the malpractice suit proceeded until 2010 when a verdict was awarded.  It has been in appeal until now.

The Supreme Court is being asked to decide wither the statutory 10% interest should be awarded on the settlement starting in 1991 when the error occurred.  The exact matter has more issues, but for discussion purposes on this website, this is the meat of the matter.

Lawyers should care about this case for a number of reasons.

  • Limits.  The case could drastically impact pricing and limits a firm chooses to carry in the presence of high-risk activities.  It could also impact the limits insurance companies are willing to offer law firms and would make the need to shop the insurance greater.  Complicating this decision is the fact that lawyer’s professional liability insurance is on a claims-made form.  Meaning that the limits the firm has in place at the time of the lawsuit is what matters.
  • Client Acquisition.  Should the courts decide in the plaintiff’s favor and view interest accruing from the beginning, it could impact the willingness with which a firm will accept securities cases.  Taking on these types of clients may also bring higher insurance prices as underwriters will view the potential severity of a claim as higher than previously contemplated.
  • Liability Carry-Over.  The firm was sued, but so were the 24 partners of the firm from 1991.  Many of these partners are now moved on to other jobs, firms or even retired.  However, they will be on the hook for nearly $1M each should the verdict go against them.  Making sure that firms an attorney previously worked at maintains lawyer’s malpractice insurance is vital as an attorney transitions elsewhere.

Transferring risk is an important part of law firms.  Maintaining good insurance and having a broker who looks out for your best interest is a vital aspect of any law firm’s risk management program.  Contact us to discuss how we help protect your law firm.

Firm Sued For Working Too Much

The Texas law firm of Scheef & Stone, along with two attorneys, have been sued for $400,000 by a former client.  The suit, Doores v. Crutcher, was filed in July of 2014 and alleges that the firm worked on a case they knew they could not win – earning close to $400,000 in fees for themselves to the detriment of Doores.

Steven Doores was a former plastic surgeon when he was approached by an investment company to buy property near Celina, Texas.  The investment firm stated that the land was near a planned Walt Disney theme park and would skyrocket in value.  The theme park never happened and the $1,000,000 investment of Doores was left in various real estate properties that had no value to him.  He engaged attorney Jay Crutcher of the firm Scheef & Stone to sue the investment firm for his money back.  However, Doores explained that he only wanted to spend $200,000 and only wanted to pursue the matter if it was viable that his money would be returned.

After billing the nearly $400,000 in fees, the lawyers told Doores that there were no assets in the investment company that were unprotected and they would have little chances of collecting anything.  Doores sued for breach of fiduciary duty and negligence.

This case highlights an important aspect of client satisfaction – communication.  Whether Crutcher knew of the investment firm’s lack of assets or not is secondary to the fact that the client felt he was misled.

Firms should have a clear engagement letter at the start of each project, outlining the fees and milestones.  Firms should also communicate regularly with the firm to keep expectations in check.  A firm should never be surprised by outcomes, as surprises can lead to lawsuits.

Contact us to learn more about how to mitigate the risks of your law firm.

Mergers Settle Into Post-Recession Rythm

As a part of their regular reporting, Altman Weil has released their culmination of law firm mergers for the second quarter of 2014.  They report that 17 law firm mergers have taken place in the months of April, May and June of 2014.  It is worth noting that one of these is the Squire Sanders – Patton Boggs merger which is still ongoing.

Most all of these mergers occurred as larger firms bought smaller firms.  There was also a concentration in the Western half of the United states of activity.  According to the analysis on Altman Weil’s website, mergers have fallen into a norm since the recession hit.  It appears that two large firm acquisitions followed by a number of smaller acquisitions is now to be expected.

While mergers and acquisitions have many benefits, it is worth noting that they are not without their risks.  This is especially true for the smaller firms being acquired.  A large concern these firms face is securing coverage for work the firm has done before the merger.  This is most commonly done by purchasing a “tail” or “Extended Claim Reporting Period” on their current insurance policy.  This one time expense allows firms to report claims that might be filed against them in the future for work that was done prior to the merger.  This allows a firm to remain protected without having to purchase insurance on an inactive law firm.

The cost of a “tail” can vary and should be considered in any merger or acquisition negotiations.  The premium for this option can range in price form 100% to 250% of the underlying annual premium.  Given the increasing cost of insurance, this amount is material for most firms.

If your firm is contemplating a sale, merger or acquisition, it is important to discuss the insurance implications of such a transaction.  Contact us today to learn more.


Statutes of Repose – A Date to Know

The Tennessee General Assembly just signed into law a legislation that changed the statute of repose for malpractice claims.  The new rules apply to lawsuits filed against both accountants and lawyers.

The newly enacted law states that a five year statute of repose shall be in effect after July 1st, 2014.  More specifically, the law mentions that “if a plaintiff discovers that a cause of action exists after five years from the date on which the act or omission giving rising to the claim occurred, the plaintiff will be barred from bringing her cause of action. The statute of repose, however, will not apply in situations where the defendant engages in fraudulent concealment. Id.  When a plaintiff establishes fraudulent concealment, the suit shall commence “within one (1) year after discovery that the cause of action exists.” 2014 Tenn. Pub. Ch. No. 618. 

Besides being useful for knowing when a retired lawyer can finally sleep soundly at night, this date is important for insurance considerations.  If a lawyer of a law firm merges, gets acquired, leaves the practice, retires, or drops their insurance coverage, this date is important to know.  Some firms decide to drop their insurance once it becomes too costly or they begin to wind down the practice.  This is dangerous, since lawsuits based upon work done years ago can still surface – even if only benign engagements have been completed recently.

It is also important to know how long of a “tail” needs to be purchased by a firm shuttering its doors.  A “tail” is a one-time option exercised on an insurance policy that allows a firm to report claims in the future for acts done in the past – even when no insurance is purchased in the future.  A “tail” is more expensive the longer you have to report claims.  The duration of the tail should match the statute of repose for malpractice claims.

Each state has their own ability to set the statute of repose time frame.  It is recommended that a thorough investigation of the law be conducted in each of the jurisdictions a firm practices in.  This will give the firm clarity on the dates which that firm may need to be aware.

As you consider risks, and how to best protect your firm, it is important to have a comprehensive risk management plan in place.  This plan should include a broker who is able to work with you exact needs.  Contact us to learn more about how we accomplish this for our clients.

Working with Incubators – Risks for Law Firms

The American Bar Association Journal recently released its findings that a number of law firms are targeting the start-up space. Start-ups tend to be energetic, growth oriented and relational.  They also tend to be founded by persons inexperienced with running a company.  This means that the new company is need of legal services and there is not a law firm to unseat.

Some law firms are taking this to the next level by founding incubators and accelerators themselves, offering free advice and legal services at a reduced cost.  The Chicago firm of Foley & Lardner helped start “Catapult Chicago” which offers office space among other perks.  The California firm Wilson Sonsini Goodrich & Rosati took office space in a building with many start-ups already in it.  Other firms from around the country are starting similar programs and even forming pools of firm capital to invest in some of their start-up clients.

While good for exposure and for gaining traction in this space, pursuing incubators as described above is not without its risk.  There are three main topics a law firm should consider when aligning itself with an incubator:

1) Pro-Bono Services.  It is important to verify that pro-bono services are covered by the firm’s professional liability policy.  No lawyer’s professional liability insurance policy is the same.  Each insurance company writes their own policy form which means there is no standardization.  While most malpractice policies include coverage for pro-bono work, it is important to verify that there are no caveats or restrictions.

2) Ownership/Management Interests.  Because an insured cannot sue itself, most carriers take the stance that a company partially owned by a law firm cannot sue the law firm and expect insurance to pay for mistakes.  Most policies begin excluding coverage when the ownership percentage climbs to a mere 10% .  Most policies also exclude coverage if an attorney is a manger, officer or director of another entity.  Before investing in clients or sitting on their boards, a firm needs to understand these thresholds.

3) Claims by the Incubator.  A specific implication of #2 above, if a firm owns the incubator, insurance would not cover claims brought by that incubator.  The danger arises if a start-up sues the incubator for an error.  If the insurance company that insures the incubator decides to subrogate against the law firm that controls and owns and works through the incubator, coverage may not be available and the partners of the firm would have to pay.

While gaining new clients takes creativity and tenacity, it is important to do so with an eye to risk management.  Contact us to discuss ways to better protect your firm.

Conflict of Interest Leads to $51M Lawsuit

Houston-based law firm Baker Botts has been sued for legal malpractice over an alleged failure to disclose a conflict of interest when servicing two clients.  The lawsuit states that the firm was engaged simultaneously with two clients for the same service – but these services were in direct conflict and could not have been done adequately to both clients.

The suit was levied by Axcess International, Inc., a wireless intelligence and business monitoring company.  They engaged Baker Botts to assist in the filing of patents for radio frequency identification (RFID) products.  These services began in 1998 and by 1999 various patents had been filed for Axcess.  However, in 1999 Baker Botts engaged with Savi Technologies, Inc. who also wanted help filing patents for RFID technology.  This conflict created tensions, according to Axcess and even when concerns were raised in 2002 by Axcess, the company claims that Baker Botts deflected the questioning and never told Axcess of the conflict.

Currently in jury deliberations, the $51M ask amount highlights the dangers of client conflicts.  The importance of maintaining proper client conflict procedures cannot be understated.  This is especially true when dealing with technology clients or with services around products and services with high dollar amounts attached.  Open and honest communications with clients can help prevent disagreements from rising to the level of a lawsuit.

Proper risk mitigation techniques, good internal controls and procedures and a strong lawyers professional liability insurance program should be in place at every law firm.  Contact us to discuss ways to improve your insurance program or implement risk management techniques.

Patent Attorney Wins Dismissal of Malpractice Suit

A Texas patent attorney recently won a summary judgement ruling that there was no lawyers malpractice committed in the engagement in question.  The Texas Attorney, Harold Flanders, was engaged to file a patent application for Eric Sanders of Georgia.  Although multiple applications were filed on behalf of Sanders, the lawsuit alleged that Flanders failed to notify Sanders of the numerous office action rejections that were received.  Instead, Flanders allowed the application to be abandoned.

The fifth Circuit Court ruled in summary judgement that any errors possibly made were only part of the issue at hand.  The court explained that they had to be proof that the attorney’s actions were also the direct cause of damages.  Because Sanders could not prove that his applications would have been accepted or the outcome any different had the objections been addressed, the court ruled that no lawyer’s malpractice liability existed.

This case highlights that the practice of patent law remains high risk.  Even in the absence of identifiable damages, the lawyer spent time in court and money in defense of the matter to get the case resolved.  Most insurance companies will not offer professional liability insurance terms on patent lawyers because of the high risk and unique nature of the work.  It is important to work with a broker who understands which carriers will offer these terms so that a firm has multiple options to compare.  Contact us to discuss ways to make sure that your firm is well protected in the years to come.

VA Case Shows Importance to Reporting Claims

Washington DC based Paulson & Nace is stuck paying a $4M verdict (that has been reduced to $1.75M) after not reporting the incident to their carrier before switching coverage. The firm had been retained by the family of a minor who had been rendered a quadriplegic after failed spinal surgery.

Attorneys of the firm was accused of missing the statute of limitations on the medical malpractice case due to a filing error. Their first action, days before the statute was set to expire, failed to properly identify the injured parties’ parents as her “next friends” on the complaint. When a revised complaint was filed the court dismissed the case as untimely. The plaintiff sued Paulson  for legal Malpractice and ultimately won.

The underlying medical malpractice case was dismissed in 2007, when the firm switched malpractice carriers later that year they did not report to their new carrier that they were aware of any incidents that could result in a claim. When the claim eventually came in 2012 the firm’s insurer, Fireman’s Fund, denied coverage based on prior knowledge of the event. Fireman’s Fund won the case, which is available here.

The case highlights the fickle nature of claims made policies and the need to report any known incidents to insurance carriers to avoid jeopardizing coverage. If the firm had reported the incident to their carrier in 2007 before switching coverage they would have likely provided coverage for the claim when it was brought in 2012. Firms (justifiably) worry about reporting incidents because underwriters can be punitive in renewal terms and pricing. However, by not reporting future coverage is risked.

Contact an expert broker today to discuss better protecting your firm.

Failure to Correct Misstatement Leads to Discipline Action

An Illinois lawyer was given a possible 90 day suspension due to a failure to act.  John Argoudelis was engaged for an estate matter by his client Paul Volgar.  Mr. Volgar approached Argoudelis to perform this work and Volgar stated and attested that he was the sole heir.  Soon after filing the affidavit testifying that there was only a sinlge heir, it was discovered by Argoudelis that Volgar was lying and there were additional heirs.  Argoudelis failed to amend the affidavit.

The panel’s opinion explained that Argoudelis’ action of mildly warning his client that the affidavit should be amended did not go far enough to address the misrepresentation of which Argoudelis was now a part of.  The panel also found that the attorney’s failure to amend the affidavit and take corrective action himself was improper.  The panel recommended a 90 day suspension for Argoudelis’ actions.

This matter points out an important aspect of practicing law – the danger of regulatory investigations.  While a lawyer’s malpractice claim may not develop from the facts of this matter, an investigation did.  Responding to a regulatory investigations can be time consuming, costly and a drain on company resources.  It is important for firms to review their lawyer’s professional liability insurance policy to see how and when such coverage may be triggered.  Each policy is written differently and each provision contains varying clauses which triggers coverage.  Having an broker experienced in the nuances is important to building a sustainable risk management program for any law firm.

Contact us today to discuss whether your firm has the adequate coverage you firm needs