Wrong Word in Contract Leads to $2M Malpractice Suit

Legal Malpractice Taylor EnglishWrong Word in Contract Leads to $2M Malpractice Suit

Daily Report Online reported that Taylor English Duma, a 133-lawyer firm based in Atlanta, and one of its partners, have been sued for malpractice for allegedly mis-drafting a purchase agreement.

Background

Alpharetta, GA-based Opsolve, LLC provides support services to energy companies.

It agreed to purchase all of the stock of software company Enercom, in 2013. Taylor English partner Jeff Woodward represented OpSolve in the acquisition.

OpSolve claims that the agreed purchase price was Enercom’s 2013 revenue minus a guaranteed payment of $275,000, with the total payment capped at $730,000.

Enercom’s 2013 revenue was about $513,000, so under the agreed-upon formula, the purchase price should have been about $238,000.

However, OpSolve alleges that the agreement drafted by Woodward called for a purchase price of Enercom’s 2013 revenue plus $275,000, again capped at $730,000.

As a result, Enercom’s shareholders demanded $455,000 plus the guaranteed payment—a difference of $217,000. (It’s unclear where the $455,000 figure comes from: $513,000 + $275,000 =$788,000, which would be reduced to $730,000, per the cap. This is the amount Enercom should’ve demanded, if the contract was for revenues plus $275,000, adjusted for the cap).

Litigation

OpSolve alleges that “rather than admitting his negligence and mistake, (Woodward) instead chose to influence his client OpSolve in a manner which required OpSolve to pursue litigation,” against Enercom.

Enercom presented OpSolve with a demand letter, which was rejected, and then sued OpSolve in May 2014, in Fulton County Superior Court.

OpSolve’s defense strategies included that a “mutual mistake” was made by both parties in drafting the agreement, and that it contained “ambiguities” that should allow it to be reformed under Georgia law.

“Predictably, however, the litigation strategy was disastrous,” OpSolve claimed, and cost it “substantial and completely unnecessary legal fees on top of the additional amounts it already owed to Enercom under the clear and unambiguous terms” of the agreement.

OpSolve alleges that two other Taylor English partners, Patton and Weber, reviewed the agreement and Enercom’s demand letter at Woodward’s request; Woodward then advised OpSolve to reject it.

Three months later, Weber sent a memo to Patton, warning that Enercom’s court filings provided “ample support for their legal argument” that the purchase agreement was “unambiguous on its face.”

She also asked whether Enercom had “raised the issue” of Georgia’s frivolous litigation statute. “I think we need to be cautious of how we proceed given the arguments we are
attempting to raise potentially lack both legal and actual authority.”

A  few days later, Patton advised OpSolve’s managing partner via email, that “absent clear evidence” that Enercom “understood the deal the same way we did, we will not win” on the issue.

Patton also advised Woodward in a private email that, “At this point, my opinion is that we are throwing good money after bad” defending the case, and “allowing opposing counsel to run up their legal fees.”

OpSolve claims that Woodward never told it that his colleague Patton had recommended that OpSolve honor the agreement as written and get out of the suit, and that “Woodward persisted in the position that his work was correct and that OpSolve could prevail in the litigation, contrary to the advice” of his colleagues.

In October 2014, Enercom issued a settlement demand for $600,000: $455,000 owed under the contract plus $150,000 in attorney fees and expenses.

OpSolve rejected the demand on the advice of its counsel.

In September 2015, the Court granted Enercom summary judgment on all of its claims.

The parties then agreed to a mediation, at which the matter was settled.

OpSolve alleges that Woodward’s “disastrous” advice to litigate the matter threatened to drive it into bankruptcy.

Aftermath

OpSolve claims that Woodward emailed its managing partner Carr after the settlement, offering to “touch base tomorrow on how [Taylor English] can help with the costs.”

OpSolve then “communicated with [Taylor English] in an attempt to recoup their damages…However, despite Woodward’s tacit admission to committing malpractice and causing harm to OpSolve”, no assistance was forthcoming.

OpSolve’s malpractice counsel said that Taylor English neither offered assistance nor responded to his efforts to discuss the case. “They in essence forced this issue…They never offered anything. They never responded to the demand letter” that he sent in December, 2015.

Malpractice Claim

OpSolve sued Taylor English and Woodward in January, 2017 in Fulton County Superior Court, for legal malpractice, breach of fiduciary duty, breach of contract, and punitive damages, as well as a claim under a Georgia statute that permits the recovery of fees from a party that has been “stubbornly litigious”, and acted in bad faith.

OpSolve seeks more than $600,000 in damages on each of three counts, litigation expenses of at least $150,000, the disgorgement of more than $182,000 in fees it paid Taylor English, and punitive damages of more than $500,000.

Firm’s Response

Taylor English’s general counsel, John Gross said “We are confident that the legal work we provided to OpSolve far surpassed what it has alleged, and we intend to defend this baseless claim vigorously on behalf of our firm and our lawyers.”

Analysis

Assuming OpSolve’s allegations are correct, then there was an obvious risk management failure on Atty. Woodward’s part in not catching the error in the contract.

This wasn’t a misspelling, etc., so it’s not something that a proofreader would likely have caught. It was thus incumbent on Woodward, as the contract drafter, to review the document, and ensure that it reflected his intent.

Further, if he did make the mistake as alleged, he should’ve admitted it. Instead, he apparently compounded his error by not admitting it, and instead encouraging OpSolve to litigate Enercom’s lawsuit, and raise meritless defenses, i.e., “mutual mistake” and “ambiguities” in the contract.

On the other hand, Enercom’s attorney presumably reviewed the contract before Enercom signed it, and discovered the error. If so, wasn’t he or she ethically obligated to point it out? And if not obligated, how about doing it anyway, as a matter of honesty? Instead, Enercom appears to have played “gotcha” with OpSolve.

Also, Woodward’s colleague Patton emailed OpSolve’s managing partner that “absent clear evidence” that Enercom “understood the deal the same way we did, we will not win” on the issue. However, Enercom must have understood the deal the same way OpSolve did, i.e., the agreed-upon price was “revenues minus” , not “revenues plus”, otherwise, Woodward didn’t make a mistake, and there’d be no grounds to sue him for malpractice.

There presumably was a paper trail of emails, letters, phone call notes, contract drafts, etc., stating that the terms were ‘minus’, not ‘plus’. Why not use that to seek rescission of the contract, i.e., present it to the court in response to Enercom’s suit, as proof that the wording in the contract was due to a unilateral error by OpSolve’s counsel, and didn’t reflect the parties’ intent?

If the answer to that is that the courts are reluctant to void a contract due to one party’s mistake, especially when that party was represented by counsel, then Woodward and Taylor English should’ve advised OpSolve to pay Enercom before Enercom filed suit.

The firm should also have considered paying for its mistake, including involving its legal malpractice insurer, many of which offer pre-claim assistance to head off the possibility of a malpractice claim being filed.

By not doing those things, Taylor English invited a malpractice claim, and it got one.

50 Cent Raps Reed Smith With $35M Malpractice Claim

Curtis Jackson Legal Malpractice ClaimLaw.com reported that rapper 50 Cent, fresh off of a $14.5 million settlement of a legal malpractice claim against Garvey Schubert Barer, has filed a $35 million claim against Am Law 100 firm Reed Smith LLP.

The rapper, whose legal name is Curtis Jackson III, alleges that Reed Smith and its attorney, Peter Raymond, mishandled his defense against a lawsuit filed by Lastonia Leviston, the mother of his rival rap artist Rick Ross’ children, who alleged that Jackson violated her privacy by posting a sex tape of her and her then-boyfriend on his website in 2009.

A jury awarded Leviston $5 million in damages, which grew to $7 million after punitive damages were added. The judgment led Jackson to file for Chapter 11 bankruptcy in July, 2015.

Jackson’s malpractice claim accuses Reed Smith of:

  • Not calling prospective witnesses who could’ve swayed the jury or mitigated the damages that were awarded to Leviston;
  • Not adequately preparing for trial;
  • Charging excessive fees.

The main allegation regarding witness testimony is that the Reed Smith and attorney Raymond failed to locate and depose or produce for trial the other party in the sex tape,  Maurice Murray, and then “attempted to hide their negligence by misrepresenting that they made a good faith effort to locate Murray … when, in fact, Murray was easily locatable and available to be interviewed and called as a pre-trial and trial witness.”

Jackson alleges that Murray gave him the sex-tape, and that Murray had the “authority and right” to share and publish it.

Jackson also claims that Reed Smith failed to depose William Ross, who first published the sex video on his music website, and Ross’ Internet Service Provider. “Ross and the Internet provider should also have been deposed to establish Jackson’s defenses [that he did not initially post the video] and, at the very least, would have severely mitigated both the actual and punitive damages against Jackson as found by the jury.”

Jackson also alleges that “Reed Smith and Raymond, without consulting Jackson and without his consent, stipulated with attorneys for Leviston … that Reed Smith would not examine…[Murray and Ross] in pre-trial discovery proceedings and that no witness would be called at trial unless the identity of the witness was disclosed pursuant to the [binding, pretrial] stipulation.”

Regarding the legal fees, Jackson alleges that that Reed Smith and Raymond didn’t notify him before increasing the hourly billing rate that was specified in the retainer agreement. He claims to have paid the firm $1.5 million in legal fees and expenses for its representation in the sex tape matter.

Jackson also alleges that Reed Smith handled his case so poorly, that he had to obtain new counsel on the eve of trial. However, the firm “failed and refused to cooperate with new trial counsel, which caused Jackson to be subject to an unfavorable jury verdict.”

He demands that Reed Smith, which had represented him for 12 years, reimburse him for the $7 million verdict, and pay him an additional $25 million in damages.

IP Firm’s Appeal of $9M Malpractice Verdict is Denied, Part III of III

Editor’s note: this post was originally published on 10/26/2015. It has been updated to reflect recent developments, and divided into three parts for easier reading. This is part III. Part I  Part II  

Further Activity
2015

July: ATS&K filed a Notice of Appeal.

October 13th: The Court approved Protostorm’s motion to register the Amended Judg-ment in federal district courts, state courts in California, Florida, Texas, etc., “and in such other jurisdictions as Protostorm may determine…that the judgment debtors’ assets have been or may be found”. It subsequently registered the judgment in Minnesota.

October 14th: The court granted Protostorm’s motion to hold ATS&K, its managing part-ner Schiavelli, and its equity partners in contempt for violating the Court’s December, 2014 order, which limited “ATS&K’s ability to transfer monies.” Those limitations were imposed “to provide additional security to Protostorm regarding its ability to recover on the judgment”, and were in lieu of ATS&K posting a bond to stay enforcement of the judgment while its post-trial motion was pending.

The Court Order prohibited ATS&K from “paying expenses beyond ‘operating expenses incurred in the ordinary course of business[.]’” However:

“…it is undisputed that, after informing Protostorm that it had ceased providing legal   services as of April 30, 2015, ATS&K made payments to firm members and various      third parties totaling $118,033 in May 2015.

 (Further), ATS&K unreasonably failed to inform the Court that it had ceased perform-  ing legal services in April or seek guidance from the Court on whether it was permitted to make payments for expenses that logically could be deemed non-operating.”

As a remedy, the Court ruled that the “surplus in ATS&K’s accounts at the close of April 2015 ($60,209.00), plus ATS&K’s total revenues in May 2015 ($163,970.00) compensates Protostorm for ATS&K’s contempt of the December 24 Order…”

The total sanction against ATS&K and Schiavelli was thus $224,179.00, which “shall be enforceable against ATS&K’s assets and Schiavelli’s personal assets.”

October 20th: In a letter (PACER reg. req’d.; document #725) to Judge Chen, ATS&K’s counsel foretold its appeal strategy, stating that since the briefing on the post-trial motions in June:

“there have been numerous additional decisions demonstrating that (i) Protostorm’s   invention is unpatentable under Alice…; (ii) patentability under Alice is to be decided  as a matter of law and thus not waived; (iii) patentability of that alleged invention is  judged under the Alice standard, which applies retroactively; and (iv) a patent prose-  cution malpractice claim fails in the absence of a patentable invention.”

The attorney cited Encyclopedia Britannica v. Dickstein Shapiro LLP, in which “the Court rejected the exact arguments that Protostorm has made here”, Kroy IP Holdings, LLC v. Safeway, Inc., and OIP Technologies v. Amazon.com, Inc.

The attorney concluded “there are significant questions whether (Protostorm) will be able to prevail on appeal.”

October 27th: ATS&K appealed the Contempt Order.

November, 2015 – ATS&K filed its opening brief with the Second Circuit appellate court, reiterating its claim that Protostorm’s invention isn’t patentable under Alice, and without a patentable invention, Protostorm LLC can’t sustain a claim for malpractice. “Because Protostorm had no patentable invention, any alleged malpractice by ATSK did not result in a cognizable harm.”

The firm argued that Alice and similar decisions have held that abstract computerized ideas like Protostorm’s method for providing advertising in the context of Internet video games, cannot be patented under Section 101 of the Patent Act. “Rarely has there been such an abundance of directly applicable, uniformly-decided precedent on the critical question at issue.”

ATS&K also contested District Court Judge Chen’s refusal to set aside the jury verdict, because it didn’t raise these defenses until after the trial, when it filed its 50(a) motion. The firm argued that it “preserved its Section 101 argument by raising it in its post-trial motion…(Further), even if ATSK had not asserted the defense in its post-trial motion…a party can raise a pure question of law such as ATSK’s Section 101 argument for the first time on appeal.”

ATS&K also argued that even if Protostorm’s invention wasn’t fatally flawed, it failed to prove damages, which is an essential part of a New York legal malpractice case. Finally, it claimed that Judge Chen’s order that it pay nearly $225,000 in sanctions was “plainly contrary to law…The order must have been ‘specific and unambiguous,’” the firm said, contending it was not.

2016

March – Protostorm filed a cross-appeal challenging Judge Chen’s ruling that the damages apportioned to ATS&K attorneys Brundidge (15%) and Bailey (6%) should be assigned to ATS&K.

June – former ATS&K attorney Carl Brundidge urged the Second Circuit to deny Protostorm’s cross-appeal, arguing that it agreed to let Judge Chen determine the apportionment of compensatory damages among the defendants, but after final judgment was entered holding ATS&K solely responsible, it tried to change its theory on the apportionment of damages and have Brundidge held jointly and severally liable.

Brundidge argued that Judge Chen was correct to deny Protostorm’s attempt to change the damages apportionment. Further, “Mr. Brundidge would be substantially prejudiced by now applying joint and several liability to hold him liable for $6.696 million in compensatory damages, plus over $1 million in prejudgment interest. It is necessary and appropriate to find waiver here because Mr. Brundidge was deprived of an opportunity to offer evidence relevant to the issue of joint and several liability at trial.”

He concluded that Protostorm must be held to its decisions, and since the apportionment of damages was consistent with Protostorm’s trial strategy, the Second Circuit should affirm the district court’s apportionment decision.

August – ATS&K filed a brief with the Second Circuit reiterating its earlier argument that Protostorm’s patent would be considered an abstract computer idea under Alice, and a patent prosecution malpractice claim can’t be sustained with regard to an unpatentable invention. “When the law is properly applied, Protostorm’s claim crumbles and the judgment against ATSK must be set aside.” It also argued that Protostorm misstated the law when it claimed that Alice cannot be applied retroactively, and wrongly claimed that its invention was more than an abstract computer idea.

Protostorm also filed a brief, which opposed the argument of ATS&K attorneys Brundidge and Bailey that Judge Chen correctly absolved them of individual liability. The company said as agents of ATS&K at the time the patent application was allegedly mishandled, the attorneys are “jointly and severally liable” for the damages and interest awarded to Protostorm. “Under the case law cited in Protostorm’s opening brief, nothing could be clearer than the applicable tort law principles that a principal is liable for the negligent actions of its agent under the doctrine of respondeat superior and the agent, in this case Brundidge and Bailey, remains liable for the agent’s negligent acts,”

Brundidge also filed a brief, which sought to revive the Statute of Limitations defense that had been rejected by the lower court in 2011, via denial of defendants’ MSJ. He claimed that “there is no dispute” that Protostorm filed its malpractice claims against him “many years” after New York’s three-year statute of limitations for such claims had expired.

He also sought to have the $100,000 judgment against him for punitive damages overturned, arguing that Protostorm failed to show that his alleged errors in handling the patent application “were intentional, wanton or malicious”, and that the record demonstrated that he warned Protostorm that its patent would be abandoned by the firm unless it took further action, according to his brief.

November – Oral argument took place before a panel of Second Circuit court judges.

ATS&K, Bailey, Schiavelli, and Brundidge urged the panel to reverse the judgment for Protostorm LLC, because its invention wasn’t patentable, even though they failed to raise the patentability defense at trial.

They relied primarily on Encyclopedia Britannica v. Dickstein Shapiro LLP, (see Part II), which their attorney argued “is on all fours with this present case”.

Protostorm’s counsel countered that the defendants were trying to “undermine” the jury’s findings by making the appeal about patent law instead of legal malpractice. “This is not a patent-law case…We can’t pretend that there was not an actual trial here.”

The sides also argued over what portion of damages each defendant could be held responsible for, and over whether a Judge Chen’s contempt order and sanctions against ATS&K and attorney Schiavelli were proper.

The judges raised the possibility that defendants had waived their Alice defense by not bringing it up before trial, and asked if there weren’t also factual issues to consider, which would preclude a ruling on patentability based solely on the law.

December – The Second Circuit upheld the District Court’s judgment against ATS&K.

The panel ruled that defendants couldn’t raise the argument that Protostorm’s invention was unpatentable on appeal based on Alice, because they failed to preserve the argument in their motions for judgment as a matter of law during trial.

The panel also found that the jury’s verdict was supported by Protostorm’s damages model offered at trial.

Wrapping up the other outstanding issues, the panel:

  • Rejected attorney Brundidge’s arguments that Protostorm’s suit against him was time-barred as a matter of law, ruling “the jury’s verdict on the statute of limitations was legally proper and was supported by sufficient evidence.” Brundidge is thus responsible for the judgment against him of $100,000 in punitive damages, as awarded to Protostorm by the District Court.
  • Reversed Judge Chen’s contempt ruling against former ATS&K Managing Partner Alan Schiavelli for violating the terms of a December 2014 court order barring the firm from making payments outside of normal operating expenses, because he was no longer the managing partner when those payments were made.However, the panel upheld Judge Chen’s contempt ruling against ATS&K itself (and presumably, the sanctions of $224,179.00).
  • Denied Protostorm’s cross-appeal seeking to hold attorneys Brundidge and Bailey jointly and severally liable with ATS&K for the judgment, ruling that its counsel had waived the issue at trial.

III. Next Steps

A. Defendants can request that the Second Circuit rehear the panel’s decision en banc, but this case doesn’t appear to be complex or important enough for the request to be granted.

B. It’s bitterly ironic that the seeming conclusion of this nearly nine year-old legal malpractice claim may spawn further legal malpractice claims:

    • ATS&K may have a viable malpractice claim against its trial counsel for failing to preserve during the trial the argument that Protostorm’s invention was unpatentable, based on Alice. As noted, the appeals court ruled that this omission prevented defendants from raising that argument on appeal.
    • Protostorm may have viable malpractice claim against its trial counsel for waiving its right to seek to hold attorneys Brundidge and Bailey jointly and severally liable with ATS&K for the judgment.

      As mentioned above, Protostorm moved to register the judgment in other jurisdictions where defendants may have assets, a clear sign that it was concerned about its ability to collect. As mentioned in Part II, ATS&K essentially shut down in April, 2015, so it doesn’t have ongoing cash flow. Further, its assets have likely been removed, and Protostorm has no recourse against its former equity partners. Therefore, having Brundidge and Bailey declared jointly liable for the verdict would’ve given Protostorm additional leverage, although it’s unclear if they have sufficient assets to satisfy the balance of the judgment, after ATS&K’s malpractice insurance policy is exhausted.

IV. Lessons

A. Law Practice Risk Management

This case stemmed from the simplest of errors – the failure to check a box on a patent application.

A logical way to prevent such errors is to have a second set of eyes review every patent application before it’s filed; a competent paralegal would’ve easily caught the error.

ATS&K was also undone by failing to utilize two essential law practice risk management techniques:

  1. Engagement letter – one of its main purposes is to specify the scope of services that a firm will provide. If ATS&K and Protostorm had signed an engagement letter stating that the firm would only file the patent application, i.e., not prosecute it, then the court may well have granted its motion for summary judgment. And if the engagement letter stated that the firm would both file and prosecute the patent, then perhaps it would’ve felt compelled to do so, rather than ceasing work on it.

Further, a well-drafted engagement letter includes a fee agreement that specifies the rate the firm will be paid, and the billing and payment cycle, and provides that the firm may withdraw from representation for non-payment of fees.

Having this in writing may have motivated Protostorm to pay ATS&K’s bill, which in turn would’ve motivated the firm to continue handling the matter after 2001. Conversely, it would’ve given the firm solid grounds to withdraw, if Protostorm didn’t pay its bill.

  1. Termination letter – ATS&K’s failure to send one to Protostorm in late 2001 for non-payment of fees (assuming they were still owed), tolled the Statute of Limitations, which in turn led the court to deny the firm’s Motion for Summary Judgment based on the SOL having expired before the complaint was filed.

Instead, the court found that there was a question of fact as to whether or not the attorney-client relationship was terminated before June, 2007, when the firm told Peter Faulisi that the patent application had been abandoned.

Another error that was made didn’t affect the outcome of the case, but is a ‘red flag’ for IP practitioners: ATS&K didn’t object to attorney Worthington, a non-IP practitioner, filing a second provisional patent application that covered new features of Protostorm’s invention.

IP litigator Paul Swanson states:

“The involvement of unsupervised, non-patent practitioners in the preparation and filing of the second provisional patent application cast a large dark cloud of legal uncertainty over Protostorm’s PCT patent application…According to ATS&K’s ethics expert witness…(that) unauthorized filing ‘by itself, would have severely reduced if not eliminated the likelihood that any patent would have ever been enforced in litigation or otherwise.’” 

That in turn would’ve likely led to a malpractice claim.

V. Conclusion

After nine years of litigation, a trial, and an appeal, this case still isn’t over: the parties are involved in ongoing litigation with Minnesota Lawyers Mutual, ATSK’s malpractice insurer.

We’ve covered that in this post.

IP Firm’s Appeal of $9M Malpractice Verdict is Denied, Part II of III

Editor’s note: this post was originally published on 10/26/2015. It has been updated to reflect recent developments, and divided into three parts for easier reading. This is part II. Part I  Part III

Trial

After almost three more years of litigation, a jury trial was held in July and August, 2014.

Two days before the trial ended, ATS&K dropped its third-party claims against Kathy Worthington, and D&S and John Ginley.

On August 14, the jury awarded Protostorm $6,975,000 in compensatory damages, apportioning the fault among ATS&K (75%), Brundidge (15%), Bailey (6%), and Protostorm (4%). It also awarded Protostorm $900,000 in punitive damages against ATS&K, and $100,000 against Brundidge. 

Post-Trial Activity
2014

October: ATS&K, Bailey, and Brundidge notified the Court that they intended to file a motion to set aside the jury verdict, pursuant to Federal Rule of Civil Procedure 50(b).

Oct. 8: Following motions on whether or not the damages apportioned to ATS&K attorneys Brundidge (15%) and Bailey (6%) should be assigned to ATS&K, the Court ruled that they should be.

Oct. 29: with Protostorm concerned about its ability to collect its jury award, the Court issued an order prohibiting ATS&K from paying expenses beyond “operating expenses incurred in the ordinary course of business…as well as a draw for each equity partner in the amount of $12,000.00 per month.”

2015

February 5th: the Court entered an amended judgment for Protostorm against ATS&K, for $6,696,000 in compensatory damages, $900,000 in punitive damages, $1,050,720.60 in pre-judgment interest, and post-judgment interest as applicable, and against Brundidge for $100,000 in punitive damages. The compensatory damages award was 4% less than the amount awarded at trial, because the jury had found Protostorm 4% at fault.

The Court stayed enforcement of the judgment, pending its ruling on defendants’ 50(b) motion.

June 1st: ATS&K informed Protostorm that it had “ceased performing legal services as of April 30, 2015”, although it maintained limited operations.

 Post-Trial Motion to Set Aside the Verdict

Defendants 50(b) motion argued that Protostorm couldn’t show patentability under 35 U.S.C. §§ 101 and 103, which it had to do to establish proximate cause, and it failed to prove its damages.

Under Section 101 “[w]hoever invents or discovers any new and useful process, machine”, etc., “may obtain a patent therefore…” However, defendants claimed that Protostorm’s invention – selecting advertising based on a customer’s interaction with an advertiser’s content – was an abstract concept that was unpatentable, because the U.S. Supreme Court had ruled in Alice Corp. Pty, Ltd. v. CLS Bank International, 134 S.Ct. 2347 (2014), that “an abstract idea…that merely (requires) generic computer implementation” wasn’t a patent-eligible invention.

Defendants also contended that Protostorm failed to establish that its invention wasn’t “obvious”, as required under § 103.

Ruling on Motion

The Court ruled on defendants’ 50(b) motion on June 5, 2015.

Judge Chen ruled that ATS&K was “procedurally barred” from arguing that Protostorm couldn’t show patentability under 35 U.S.C. §§ 101 and 103, and that it failed to prove its damages, because the firm didn’t raise those arguments in its Rule 50(a) motion.

“Although Defendants’ oral Rule 50(a) motions at trial challenged the patentability of   the Protostorm invention, the grounds stated by their trial counsel were altogether dif-  ferent from the Section 101 and 103 arguments raised in the Rule 50(b) motion…Accordingly, the Court holds that Defendants’ Rule 50(a) motions…did not supply a   sufficient predicate for (their) Rule 50(b) motions”.

She also ruled that “Defendants (forfeited) the arguments” that they failed to raise in their Rule 50(a) motions:

Their Section 101 Non−Patentability Argument

Defendants claim that Protostorm’s invention “is directed at an ‘unpatentable market-ing concept’ under post-Alice case law”, but fail to explain why they didn’t raise the Alice argument before or during trial.

“Furthermore, Alice did not, as ATS&K (claims), announce a previously unknown   framework for analyzing patent eligibility under Section 101. The Supreme Court’s   analysis in Alice builds on prior (cases), including Bilski… in which the Court held that  a method for hedging the risk of changing energy prices was too abstract a concept to   be patentable, and Mayo… in which the Court decided that a patent claim to a method   of medical diagnosis was directed at ‘natural law’ and that a step that merely said   ‘apply it’ was, without ‘significantly more’, ineligible for a patent…Bilski and Mayo were decided in 2010 and 2012, respectively, and Alice was decided a month before trial, (so) there was no reason that Defendants could not have raised its Section 101 argument before the case was submitted to the jury.”

ATS&K also argued that “because patent eligibility is a pure question of law”, i.e., it can be decided by referring to the language of the hypothetical claims alone, “there were no additional facts that Protostorm could have presented at trial to remedy deficiencies in its proof on causation and patent eligibility, and therefore Protostorm is not prejudiced” by ATS&K raising it for the first time in its Rule 50(b) motion.

The judge rejected that argument, ruling that:

“While the question of whether a claim is directed at patent−eligible subject matter is   one of law, that determination will often entail the resolution of underlying factual questions…Here, the parties disputed (via experts) how Protostorm’s claims should have been formulated in its patent application and how (they) might have evolved during the patent examination process…(Further), because the jury returned a verdict in Protostorm’s favor, the Court assumes that at least one valid and enforceable patent would have been issued based on the hypothetical claims drafted by Protostorm’s expert…Thus, the question (now) is whether the Court can decide, as a matter of law based on the evidence adduced at trial, that none of Protostorm’s hypothetical claims would survive the Mayo/Alice patentability test…”

She stated that the trial record was insufficient for the Court to decide the issue, and expert testimony was needed to determine if “the computer interactions described in the Protostorm claims were considered ‘well−understood, routine, conventional activity’” from 2001 – 2006, when the PTO would’ve examined them. “Protostorm would be prejudiced by not having had the opportunity to adduce additional evidence in response to Defendants’ belated patent eligibility argument.” Since patent eligibility isn’t “a purely legal matter, Defendants’ failure to raise it in a pre−trial motion prevents them from raising it in this Rule 50(b) motion.”

In a footnote, she added that even if the Court ruled that Defendants didn’t forfeit their patent-eligibility argument, applying Alice “to the time of the patent examination, i.e., 2001-2006, is problematic”. ATS&K cited cases noting that judicial interpretations of federal law must be applied retroactively, and thus contended that Alice would have applied during that time period, but:

“…the Court reiterates…that patentability is assessed with the criteria applied during    examination…Indeed, the Federal Circuit has recognized that prior to Mayo and Alice,  ‘a computer−implemented invention was considered patent−eligible (if) it produced a   useful, concrete and tangible result.’…Unlike a patent infringement case, in which an   alleged infringer may challenge the patent as now ineligible under Alice… Protostorm   claimed that but for Defendants’ malpractice, (its) invention would have been examined by a PTO patent examiner between 2001 and 2006, and that one patent would have issued by June 2006well before Bilski, Mayo, Alice… were decided… Even if the patent (was) invalidated in a later infringement action under Alice…Protostorm would still be entitled to any royalty income (it) earned until then…”

Their Section 103 Non−Patentability Argument

“Defendants’ oral Rule 50(a) motions failed to specifically raise, and therefore preserve, (their) Rule 50(b) argument” that Protostorm failed to establish patentability, because its expert’s testimony concerning non-obviousness under Section 103 was “conclusory and without detail”, i.e., insufficient.

“Although ATS&K contends that its Rule 50(a) motion raised the issue, (it) only argued  that prior art anticipated the hypothetical claims… (However) anticipation and obviousness are distinct issues that require separate analyses, and raising one issue in a pre−verdict Rule 50 motion is insufficient to preserve the other for a post−trial motion.”

If ATS&K had presented the “obviousness” argument at trial, Protostorm would’ve had a chance to rebut it. “ATS&K’s failure to do so thus prejudiced Protostorm. Accordingly, the Court cannot consider” the argument.

These aspects of ATS&K’s 50(b) motion weren’t procedurally barred:

  • Protostorm failed to meet its burden to show patentability under Section 102, because its expert’s testimony failed to rebut the testimony of Defendants’ expert that Protostorm’s invention was anticipated by prior art.
  • The evidence didn’t prove that ATS&K was responsible for drafting the final patent application, i.e., it had no duty to draft the hypothetical claims put forth by plaintiff’s expert, the firm filed the patent application, but wasn’t responsible for prosecuting it, and its attorney-client relationship with Protostorm ended in late 2001.
  • It was entitled to judgment as a matter of law on the statute of limitations defense, because there was no evidence that Protostorm had a reasonable expectation of representation after 2001, i.e., there was no continuous representation.
  • The award of punitive damages was improper, because there was no showing of malicious or willful intent.

Judge Chen ruled:

“…the Court is compelled to deny the motions unless, when viewing all of the evidence in the light most favorable to the plaintiff, there is ‘such a complete absence of evidence   supporting the verdict,…or the evidence in favor of the movant is so overwhelming that reasonable and fair−minded persons could not arrive at a verdict against it.’ This stringent standard has not been met here.”

She thus denied ATS&K’s request to set aside the verdict, and refused to hear any mo-tion to reconsider her order.

Shortly thereafter, the Court also vacated its stay on enforcing the judgment.

Further Activity
2015

July: ATS&K filed a Notice of Appeal.

Continued in Part III.

IP Firm’s Appeal of $9M Malpractice Verdict is Denied, Part I of III

Patent MalpracticeEditor’s note: this post was originally published on 10/26/2015. It has been updated to reflect recent developments, and divided into three parts for easier reading. This is part I. Part II  Part III

In what may be the final chapter in a saga that has spanned more than 16 years and courts from New York to Minnesota, a Second Circuit appellate panel upheld a start-up’s $9 million legal malpractice verdict against an IP law firm, for failing to obtain a patent for the start-up’s ad-targeting technology.

I. Background

A. The Inventors

Peter Faulisi and Courtland Shakespeare, co-founders and principals of Protostorm, LLC, in New York City.

B. The Invention

An online game that required players to interact with simulated pages of advertisers’ websites that were placed in the game, in order to advance in game play. Players had to complete tasks, i.e., use tools to uncover hidden messages and “clean up” the pages, in return for which the advertiser would send them coupons or gifts.

The game enabled dynamic tracking of player activity, real-time delivery of targeted ads based on a player’s interaction with an advertiser’s simulated web pages, and tracking and reporting of those ads’ effectiveness.

By having players interact with sponsor content during game play, the game sought to overcome banner and static ads’ low click-through rates, and the fact that when players did click on ads, they left the host site.

C. The Attorneys 

  • Duval & Stachenfeld (D&S) LLP, and John Ginley, corporate counsel to Protostorm.
  • Kathy Worthington, a non-patent attorney said to be knowledgeable about IP matters.
  • Antonelli, Terry, Stout & Krauss, LLP (ATS&K), an Arlington, VA IP law firm.
  • Dale Hogue, Of Counsel to ATS&K, and later, a solo practitioner.

 D.  The Patent Application

Timeline

2000

February-March: Protostorm’s principals told D&S that they wanted to obtain a patent for their invention. John Ginley advised them to retain patent counsel, and referred them to Worthington, who they retained.

May: following an introduction by Worthington, the principals retained ATS&K and Dale Hogue. According to Peter Faulisi, “[n]o specific limits” on their roles were discussed. “We understood that…we would be relying primarily on Mr. Hogue and…ATS&K to prepare and file any patent applications and to oversee the process to completion”.

June 27th: Fred Bailey, associate at ATS&K, submitted the first provisional patent ap-plication to the USPTO. This enabled the principals to secure their priority as inventors, and gave them until 6/27/01 to submit a final application.

2001

April: attorney Worthington filed a second provisional patent application that covered new features of the invention.

May 8: she advised the principals and D&S that the final application was due on 6/27/01, and they would lose their 6/27/00 priority date if they missed it.

May 17: Hogue, who was no longer ‘of counsel’ to ATS&K, and had opened a solo prac-tice, signed a retainer with Protostorm stating that he would “perform the work necessary to prepare and file the application”, but “the application may be physically filed by” ATS&K.

Peter Faulisi testified that the retainer “simply reaffirmed (Protostorm’s) prior working relationship with Hogue and ATS&K”, with no change in ATS&K’s role.

June 20: Hogue emailed ATS&K the documents necessary to prepare the final patent application, and stated that Worthington would instruct ATS&K “separately on foreign filing”. He testified that he expected ATS&K to “prepare and file the application and prosecute it”, and believed that he had no further responsibilities.

June 21-22, 25: Worthington, upon instruction from D&S, told ATS&K to file an inter-national patent application under the Patent Cooperation Treaty (PCT), instead of a do-mestic application, and to designate every PCT signatory country for patent protection.

June 25: Attorney Bailey of ATS&K filed the final PCT patent application. The box next to every signatory country was checked, i.e., designated for patent protection, except for Mongolia, Zimbabwe, and the United States.

Bailey testified that he knew the US was meant to be included as one of the designated PCT jurisdictions, but didn’t recall whether he had checked if that had been done.

June 27: Bailey sent a copy of the completed PCT application “as filed” to attorneys Worthington, Hogue, and Ginley, and wrote “if any amendments are necessary, we’ll make them”. (Plaintiffs, Worthington, and D&S all stated that the application was missing the page that showed that the box for the United States had not been checked.)

July 2: Worthington emailed Protostorm’s principals that a filing for patent protection in Europe was due on 2/27/02, so they should decide which countries they want protection in.

July 23: the US Receiving Office, to which the patent application had been sent, notified ATS&K of two defects in it. One involved page numbers, which Bailey fixed. The other was that Protostorm hadn’t submitted a Power of Attorney (POA) form, appointing Fred Bailey or partner Carl Brundidge of ATS&K as its representative. Bailey obtained a 30-day extension for it to do so.

August 21-22: ATS&K sent the POA to Kathy Worthington, and she advised Protostorm’s principals and D&S of it, but said she wouldn’t do any more work on the matter until they paid her bill.

August 27: one of Protostorm’s principals signed the POA, and returned it to ATS&K, although the firm claimed that it never received it.

September 25: attorney Brundidge of ATS&K emailed Worthington “we can not perform any further work for Protostorm” until it pays its bill.

October 1: Brundidge wrote to Protostorm’s principals and D&S that the POA was “now due”, and if it wasn’t provided, the “application will become ABANDONED”. Further, be-cause ATS&K hadn’t received the POA and hadn’t been paid, “no further action will be taken” on the matter. Peter Faulisi testified that he didn’t see the letter until June, 2007.

December 11-12: Protostorm’s principals called Brundidge and Hogue, and sent a second POA to ATS&K. They testified that they were told their application was fine otherwise, and the attorneys would handle any further administrative details that arose. ATS&K later claimed that it never received the POA.

Late December: the principals ceased operations and closed Protostorm’s office, pend-ing further developments with their patent application, which their attorneys had said would take several years to process. However, they didn’t disband the company, and continued to seek capital.

2006
Early in the year, Faulisi learned that Google was beginning to test ads targeted to Gmail users based on the content of their messages, and thought that infringed on Protostorm’s invention.

He tried to contact the attorneys several times during the year, but couldn’t find Hogue, and never got a reply from ATS&K.

2007
June: Faulisi was told by Schiavelli, ATS&K’s managing partner, that the patent appli-cation had been deemed “withdrawn”, because no POA or “national stage” submissions had been filed.

He then hired attorney Jonathan Moskin to investigate.

Moskin exchanged emails and letters with Schiavelli, who eventually stated that ATS&K  had abandoned Protostorm’s application in September, 2001. 

2008
January 25: Schiavelli wrote to Moskin, revealing for the first time that the ATS&K had failed to designate the United States in the application.

II. Litigation
Complaint

On March 4th, 2008, Protostorm and Faulisi filed a complaint (PACER reg. req’d.; document #1) in US District Court, Eastern District of NY, alleging legal malpractice, breach of contract, and breach of fiduciary duty against ATS&K, its attorneys Bailey, Brundidge, and Schiavelli, and Hogue, the solo.

ATS&K filed a third-party complaint for indemnification and contribution against attorney Worthington, and D&S and its attorney, John Ginley. Worthington and Hogue then each filed a cross-claim against D&S and Ginley, seeking indemnification and contribution.

Protostorm’s claim against Hogue was stayed, due to an arbitration clause in their re-tainer agreement, and Hogue dismissed his cross-claim against D&S and Ginley.

Motion for Summary Judgment

All parties except Hogue filed for summary judgment.

US District Court Judge Garaufis issued his ruling in November, 2011.

He dismissed plaintiffs’ breach of fiduciary duty claim, because it was “duplicative of the) claim for legal malpractice”, and their breach of contract claim, because they didn’t argue for it in their briefs or refer to it in their motion, and thus “abandoned” it.

The primary remaining issues were:

Statute of Limitations (SOL)

ATS&K asserted that the SOL had expired before the complaint was filed, which was more than six years after the final patent application was filed.

The applicable SOL in New York State is three years, and starts to run on “the day an actionable injury occurs”, not the date the plaintiff discovers it; however, under the “continuous representation doctrine,” the SOL is tolled as long as “there is a mutual understanding” between attorney and client “of the need for further representation on the specific subject matter underlying the malpractice claim.”

The court denied the MSJ on SOL grounds, because there was a question of fact as to whether ATS&K was retained to both file and prosecute Protostorm’s patent application, and whether or not the attorney-client relationship was ever terminated.

“A jury could find (it) reasonable”, the court ruled, that Protostorm “relied on ATS&K to shepherd the application to its conclusion”, i.e., continuously represent it, until June, 2007, when the firm told Faulisi that the patent application had been abandoned. The complaint was filed nine months later.

The Merits of the Malpractice Claim

The Court ruled that if a jury were to resolve in Protostorm’s favor the questions of fact regarding whether ATS&K was retained to prosecute the patent application to completion, and whether the attorney-client relationship persisted after September 2001, then

“it would necessarily find that ATS&K failed to exercise ‘ordinary skill’…Plaintiffs’ motion  for summary  judgment on this limited point…insufficient by itself to establish Defendants’ liability—is therefore granted.

 (However), under New York law, ‘it is for the finder of fact to determine’ the existence   of proximate cause, ‘once the court has been satisfied that a prima facie case has been established’…(Further,) the parties…have also created a question of fact as to whether the application would have led to a valid, and valuable, patent.”

Trial

After almost three more years of litigation, a jury trial was held in July and August, 2014.

Continued in Part II

50 Cent Scores $14.5M Settlement of Legal Malpractice Claim

E50 Cent Legal Malpractice Claimditor’s note: this post was originally published on 10/23/2015. It has been updated to reflect recent developments.

Rapper 50 Cent, best known for the 2003 album “Get Rich or Die Tryin’”, scored a $14.5 million malpractice claim settlement from Seattle-based law firm Garvey Schubert Barer (GSB), according to documents filed in U.S. bankruptcy court in Connecticut.

However, he won’t get to spend any of it, as he owes his share after legal fees to creditors, per the terms of plan he filed to emerge from bankruptcy, which he filed last year (see below).

Background

Business Insider reported that 50 cent, whose legal name is Curtis James Jackson III, sued his former law firm for $75 million in 2015, alleging malpractice and inadequate representation in a licensing deal and other matters.

Headphones Venture

According to the court filings, Garvey Schubert Barer represented Jackson from 2010 through 2014, including in various matters involving Bradenton, Florida-based Sleek Audio LLC, which develops audio headphones.

Jackson reached an agreement with Sleek Audio to develop and market a wireless headphone called “Sleek by 50”, and invested a total of $2 million in the company. He likely hoped to duplicate the success of rapper Andre Young (a/k/a Dr. Dre), who co-founded Beats Electronics, which Apple purchased for $3 billion in 2014.

However, Jackson alleges that Sleek Audio never marketed or sold the Sleek by 50 headphones, so he created SMS Audio, LLC in 2011 to develop and market headphones under his own brands, “Street by 50” and “Sync by 50.”

Jackson appeared on QVC television in 2012 to promote his headphones, and sold over $175,000 worth in nine minutes.

Jackson claims that Garvey Schubert Barer and its attorneys told him that his headphones didn’t infringe on Sleek Audio’s intellectual property rights.

Arbitration

Sleek Audio filed an arbitration claim against Jackson for lost profits and revenues, due to the similarities between the “Sleek by 50” headphones and Jackson’s SMS headphones. Garvey Schubert defended him.

The Bradenton Herald reported that the arbitrator ruled that Jackson breached confidentiality, misappropriated trade secrets and violated a non-disclosure agreement with Sleek Audio in taking the headphone designs, and ordered him to pay Sleek $16.2 million in damages and attorneys fees.

The U.S. District court in Miami affirmed the award in March, 2014.

Legal Malpractice Claim

50 Cent’s malpractice suit alleges that in defending him in the arbitration matter, “GSB and attorneys Beckner, Moon and Trinchero failed to employ the requisite knowledge and skill necessary to confront the circumstances of the case.” Further, “among GSB’s numerous failures was its inexplicable decision not to call technical and damages experts to rebut expert testimony offered by Sleek — failures relied upon by the arbitrator in crediting Sleek’s experts and entering an eight-figure award in Sleek’s favor.”

Law Firm Response

Business Insider reported that the law firm issued this statement in response to Jackson’s lawsuit: “… Mr. Jackson’s complaint against GSB omits a number of relevant facts and misstates a number of others…Our attorneys properly counseled Mr. Jackson and his sophisticated team of financial and operational advisors about the transactions and the arbitrations with Sleek…We look forward to demonstrating that our attorneys handled the Sleek matters appropriately in all aspects.”

Bankruptcy Filing

Jackson filed for bankruptcy in July, 2015, after a jury ruled that he must pay $5M to a woman for posting her sex tape online without her permission. Punitive damages were later tacked on, which brought the total award to $7M.

His bankruptcy filing listed both his total assets and liabilities as being in the range of $10M – $50M.

According to his attorneys, the filing “permits Mr. Jackson to continue his involvement with various business interests and continue his work as an entertainer, while he pursues an orderly reorganization of his financial affairs.”

In May, 2016, a bankruptcy court judge approved a plan that would enable him to emerge from bankruptcy by paying “up to $23.4 million in future earnings to his creditors.”

In addition to the $7M he owed for the defamation suit, and the arbitration award, which had grown to over $18M with interest, Jackson owed “$4 million to mortgage lender SunTrust Banks Inc. and $1.2 million to ASCAP for advance payments on song royalties. All told, his debts total $32.6 million.”

Under the plan approved by the judge, Jackson “will repay between 74% and 92% of his debts over the next five years”. His assets included “a 21-bedroom Connecticut mansion once owned by boxer Mike Tyson, valued at $8.25 million, which will be sold; about $10.6 million in cash and securities; and a Bentley valued at $167,000. He also included 70% of whatever he wins from a pending malpractice lawsuit.” (emphasis added)

After the malpractice claim settled, Jackson’s attorney stated “We are informed that these proceeds, together with other funds contributed by Mr. Jackson should position the estate to provide for the remaining obligations to be satisfied in connection with this successful Chapter 11 reorganization plan,” and he expected Jackson to emerge from bankruptcy “very shortly.”

 Settlement

According to the terms of the malpractice claim settlement, neither party admitted to wrongdoing and both agreed not to disparage each other. That could be why the rapper revised an Instagram post dissing his former lawyers. The post shows a photoshopped image of Jackson sitting on a wallet full of money.

A Garvey Schubert spokesman said that it’s common for parties to settle in the face of uncertain costs.

“In this case, through mediation, we reached an agreement that resolves our differences of opinion and enables both parties to move on,” the firm said.

Further, “GSB maintains sufficient insurance to cover a settlement of this type.”

Legal Malpractice: Parties Settle Claim Against John Fahy Following His Suicide

Legal Malpractice John FaheyA legal malpractice claim filed against late attorney John Fahy and his former firm, and a lawsuit filed against them by their malpractice insurer, which sought to deny coverage for the claim, were resolved via mediation on February 26th.[1]

Underlying Claim

Vivien Thorsen was an insurance agent for Secaucus, NJ-based The MacCormack Agency from 2003 until January, 2010, when she was terminated. Her lawsuit alleged that company president Frank MacCormack, Jr., began sexually harassing her soon after her employment began. She claimed that she didn’t tell him to stop until 2006, because she feared she might lose her job, but he continued to harass her even after she told him to stop.[2]

 Fahy Representation

Thorsen retained John Fahy, then senior partner of Fahy Choi, LLC, to represent her shortly after she was terminated.

Her complaint alleges:

• In May, 2010, Fahy told her that he had filed suit on her behalf.
• During the next three years, Fahy repeatedly asked her for help in drafting interrogatories, told her about pending depositions that he said were continuously postponed, and advised her of settlement conferences.
• In January, 2013, he stated that the defendants had agreed to a $1.2 million settlement.
• During the following months, Fahey claimed to be arranging to obtain payment, and on July 11, 2013, advised her that a check was en route to his office.
•On July 12, 2013, the last time she heard from Fahy, he left her a voicemail that said he had “good news”.[3]

Death

On July 17, 2013, Fahey was found dead under a railroad trestle in East Rutherford, NJ, with “a single gunshot wound to the head, fired with a handgun.” [4] It was ruled a suicide.

It’s unclear why Fahey took his own life, but shortly before he died, the NJ Supreme Court ordered that he be temporarily suspended and pay a $500 sanction for failing to comply with a fee arbitration award. It vacated the order after his death.[5]

 Malpractice Claim

Thorsen claims that after learning of Fahey’s death, she requested her settlement check from his firm, but was told by Managing Partner Benjamin Choi that there was no check, and Fahey hadn’t filed suit on her behalf. Further, the statute of limitations on her claim had expired in January, 2012, denying her the opportunity to sue her former employer.

Thorsen alleged that Fahy didn’t do any of the work he claimed to have done, and covered it up with “lies, fabrications and misrepresentations”. [6]

She sued his estate, Fahy Choi, LLC, attorney Choi, and several firm employees for malpractice on November 4, 2013.

A Fahy family spokesman called the lawsuit “opportunistic” and “despicable”. An attorney representing Thorsen’s former employer said Thorsen’s claim was “baseless, meritless and desperate.”[7]

Thorsen’s lawyer replied “it hurt me to file this lawsuit…Mr. Fahy was an icon in Bergen County, and I feel deeply sorry for his widow. But we have a client with serious complaints.”[8]

He said that he filed suit only after settlement discussions held over several months proved unsuccessful.

Thorsen also sued Totowa, NJ solo practitioner James Perconti, who represented The MacCormack Agency, and met with Fahy about Thorsen’s claim in May, 2010. She alleged fraudulent concealment, spoliation and civil conspiracy, because he failed to obtain her employment records, and told her new lawyer that none existed, although they had previously been promised.

Perconti, who is also a municipal court judge, said that he never heard from Fahy after their meeting in 2010, and called the allegations against him “absurd, ludicrous, unprofessional and without merit.”[9]

Thorsen claimed that experts valued her claims against her former employer at about $7 million – $10 million, including punitive damages.

Legal Malpractice Insurer Sues To Deny Coverage

Darwin National Assurance Co. was Fahey Choi’s legal malpractice insurer from August 1, 2012 – August 1, 2013, and was notified by the firm of Thorsen’s claim on July 31, 2013.

Darwin filed a declaratory judgment action in Newark federal court on November 27, 2013, seeking a ruling that it didn’t have to defend or indemnify Fahey Choi, et al, for Thorsen’s claim, because of its policy’s Prior Knowledge Condition. That Condition disallows coverage if any Insured knew about the wrongful act on which the claim is based, or could foresee that it might result in a claim, prior to the inception date of its first policy with Darwin.[10]

Darwin asked the court to rule only that the Condition was valid and enforceable, not on what John Fahy knew or when he knew it.

Defendant Thorsen filed a counterclaim, and Darwin and all defendants filed cross-motions for summary judgment.

U.S. District Judge Esther Salas granted Darwin’s motion for partial summary judgment, and denied defendants’ motion, rejecting all of their arguments:

Defendants’ contended that the court should abstain from hearing the case, because the U.S. Supreme Court ruled in Burford v. Sun Oil Co., that abstention is proper when federal court review would interfere with a state’s policy-making.

However, Salas ruled that abstention “is appropriate only in…exceptional and limited circumstances… This case involves insurance contract interpretation… (which) Federal courts in this Circuit routinely engage in…”[11]

II. Defendants’ argued that the Prior Knowledge Condition of Darwin’s policy was ambiguous, and should thus be construed in their favor, because it applied only if a firm knew of a potential claim “prior to the inception date of the first policy issued by the Insurer if continuously renewed”, which Fahy Choi’s policy wasn’t: Darwin insured the firm for just one year.[12] (emphasis added)

However, Salas ruled that “Defendants’ proposed interpretation…leads to an absurd result: a claim arising from a known prior wrongful act would be covered where the policy was not continuously renewed, but would not be covered where the policy was continuously renewed.”[13]

III. The judge rejected defendants’ arguments that public policy mandated that Darwin cover Thorsen’s claim to protect “innocent” insureds: 14]

  • She refused to expand the New Jersey Supreme Court’s 2003 decision in Lawson v First American Title Ins. Co., in which it ruled that the insurer must cover an “innocent” partner, even though another partner’s misrepresentations were sufficient to rescind the policy, because Darwin wasn’t seeking rescission, a “remedy (that) engenders an extreme result.”

Instead, Darwin sought only to deny coverage for Thorsen’s claim, so “the potential for harm to the public…and…innocent insureds envisioned by the Lawson court is simply not present here.”

  • She noted that no New Jersey case was directly on point, but predicted that a state court would deem the Prior Knowledge Condition in Darwin’s policy applicable to Thorsen’s claim, despite the public policy concerns raised by defendants, because “Courts in this district have enforced prior knowledge provisions that exclude coverage as to all insureds, including innocent ones”.
  • She stated that Darwin’s policy wasn’t improperly narrow, noting that it offered coverage to “innocent” insureds.

IV. Salas declined to mandate coverage based on the Appellate Division’s 2014 ruling in DeMarco v. Stoddard, which prohibited voiding coverage for an innocent party, because the state Supreme Court reversed DeMarco, and even if it hadn’t, that decision concerned policy rescission, whereas Darwin, as noted, sought only to deny coverage for Thorsen’s claim.

“…Taken to its logical end, the rule advocated by defendants Thorsen and the estate …would (prohibit) most contract-based denials of coverage… (because) almost all legal malpractice victims are ‘innocent’ in the sense that they have nothing to do with the wrongful rendering of legal services giving rise to the legal malpractice action… (The) effect would be a requirement that legal malpractice insurers cover all claims, despite the presence of express language excluding particular claims, which would make insuring the risk of malpractice economically impossible.”[15]

Settlement

The settlement reached at the mediation held on February 26th resolved all claims.

The settlement terms and the identity of the contributors weren’t disclosed, but Thorsen’s lawyer called Darwin National “the heavy lifter.”[16]

He added: “It was a tragic case…You just can’t fathom what was going through Mr. Fahy’s mind at the time.”[17]

Malpractice Insurance Coverage Analysis

The Prior Knowledge Condition is in the Insuring Agreement of Darwin’s policy:

“…It is a condition precedent to coverage that the Wrongful Act upon which the Claim is based occurred…
1. during the Policy Period; or
2. on or after the Retroactive Date and prior to the Policy Period, provided that…prior to the inception date of the first policy issued by the Insurer if continuously renewed, no Insured had any basis (1) to believe that any Insured had breached a professional duty; or (2) to foresee that any such Wrongful Act or Related Act or Omission might reasonably be expected to be the basis of a Claim against any Insured;” [18] (emphasis added).

As noted, Darwin argued that the Prior Knowledge Condition applied to Thorsen’s claim, because John Fahy knew he had breached his professional duty to her prior to 8/1/12, the inception date of Fahy Choi’s first policy with Darwin. Defendants countered that the Condition didn’t apply, because Fahy Choi’s policy wasn’t “continuously renewed”. The judge ruled that Darwin’s was the only “reasonable interpretation”, and the Condition thus applied.

The larger point is that every claims-made policy has a Prior Knowledge Condition, because no insurer intends to cover a claim arising out of a known prior wrongful act, i.e., one that a firm was aware of prior to the inception date of the first policy the insurer issued to it. Otherwise, attorneys could remain uninsured until they committed a wrongful act, and then rush to buy a policy before their client filed a claim.

To prevent that, every malpractice insurer’s application requires a firm to disclose any known claim, or any known wrongful act that could lead to a claim. If the firm discloses a known claim or wrongful act, and later seeks coverage for it, the insurer can deny cover-age under its policy’s Prior Knowledge Condition. If the firm doesn’t disclose it – as Fahy Choi failed to do with Thorsen – and later seeks coverage for it, as Fahy Choi did, then the insurer can either deny coverage under the Prior Knowledge Condition, as Darwin did, or seek to rescind the policy, due to material misrepresentation.

Darwin didn’t seek to rescind Fahy Choi’s policy, presumably because of the NJ Supreme Court’s ruling in Lawson v. First American Title Ins. Co., mentioned above. In that case, Wheeler, Lawson’s partner in a three-lawyer firm, made material misrepresen-tations in the malpractice insurance application he submitted on the firm’s behalf, which helped it obtain coverage. The court granted the insurer’s request to void the policy for Lawson, Wheeler, and the firm, but not for Snyder, the third lawyer, who was an “innocent insured”. [19]

If Darwin had sought rescission, it would’ve had to show that Fahy Choi’s failure to disclose Thorsen’s potential claim on its application was material to Darwin’s offer of coverage, i.e., if it had been disclosed, Darwin would’ve declined to offer coverage, or offered different terms, such as a policy endorsement that excluded coverage for any claim made by Thorsen.

If Darwin had sought rescission and succeeded, then it wouldn’t have had to cover John Fahy’s estate for Thorsen’s claim, but it would’ve had to cover any other Fahy Choi defendant that the court deemed an “innocent insured”, i.e., one who didn’t and shouldn’t have known about John Fahy’s representation of Thorsen.

Darwin avoided that outcome by seeking only to deny coverage for Thorsen’s claim, a strategy that succeeded because of its policy’s Prior Knowledge Condition.

That gave Darwin leverage in negotiating a settlement with Thorsen and the Fahy Choi defendants, which it apparently decided was more cost-effective than continued litigation.

End Notes

[1] Gialanella, David , “Malpractice Litigation That Followed Fahy Suicide Settles”, New Jersey Law Journal March 1, 2016, http://www.njlawjournal.com/id=1202751085564/Malpractice-Litigation-That-Followed-Fahy-Suicide-Settles

2 Markos, Kibret and Akin, Stephanie, “Client’s lawsuit claims Fahy, former Bergen prosecutor, misled her about legal action”, The Record, November 5, 2013 http://www.northjersey.com/news/client-s-lawsuit-claims-fahy-former-bergen-prosecutor-misled-her-about-legal-action-1.581175

3 See note 1 above.

4 DeMarco, Jerry, “Former Prosecutor Fahy Suicide Victim”, Daily Pilot, 07/17/2013

http://rutherford.dailyvoice.com/police-fire/former-prosecutor-fahy-suicide-victim/637354/

5 See note 1 above.

6 See note 2 above.

7 Ibid.

8 Ibid.

9 See note 1 above.

10 See “DARWIN NATIONAL ASSURANCE COMPANY, Plaintiff, v FAHY CHOI, LLC, et al., Defendants. United States District Court District of New Jersey. Civil Action No. 13-7197 (ES) (JAD) OPINION”, https://ecf.njd.uscourts.gov/doc1/119110490994 (subscription required).

11 Ibid.

12 Ibid.

13 Ibid.

14 Ibid.

15 Ibid.

16 See note 1 above.

17 Ibid.

18  Darwin National Assurance Company, “Lawyers Professional Liability Insurance Policy” September, 2008,

http://lawyersinsurer.com/wp-content/uploads/2016/04/LPL-Policy-Form-Darwin-National.pdf

19 See note 10 above.

Legal Malpractice: Gordon & Rees Settles Claim For “Fatally Negligent” Settlement Agreement

Legal Malpractice Gordon & ReesTexas Lawyer reported that three weeks before trial, AmLaw 200 mem-ber Gordon Rees Scully Mansukhani, LLP settled a malpractice lawsuit filed by a physicians’ group that alleged it drafted a “woefully inadequate” settle-ment agreement in a business dis-pute.

Background
The underlying case involved a dis-pute among the six physician-partners of Medical Anesthesia Associates (MAA), of Houston, TX, which provided anesthesia and pain management at medical facilities.

According to plaintiffs’ malpractice complaint, in June 2007, MAA entered into an “ex-clusive and lucrative” contract to provide anesthesia and other services to Sugar Land Surgical Hospital.

In the fall of 2011, the hospital informed MAA that physician-partners Thomson and Linde “were trying to secure MAA’s exclusive provider agreements for themselves in violation of their duties to MAA.”

MAA fired Thomsen and Linde, and MAA and three of the other partners – Chang, Sickler, and Wong – hired Gordon Rees to represent them in the dispute with Thomson and Linde.

On Oct. 10, 2011, Thomson and Linde sued MAA and Chang, Sickler, Wong, and Lai (the other physician-partner) for tortious interference and breach of fiduciary duty, among other allegations.

The defendants referred the lawsuit to Gordon Rees, and filed a counterclaim that al-leged tortious interference, breach of contract, breach of fiduciary duty, etc.

On Oct. 14, 2011, the hospital notified MAA that it was terminating its contract as of Jan. 15, 2012, which cost MAA millions of dollars in revenue.

The lawsuit between the four MAA physicians and Thomson/Linde was mediated on Dec 8, 2011. However, in the roughly six weeks leading up to it, Gordon Rees allegedly “churn(ed) fees in excess of $250,000” to draft and file motions and pleadings.

At mediation, Gordon Rees advised the four MAA physicians to enter into a settlement agreement with Thomson and Linde that provided for the six physicians to form a new company called Sugar Land Anesthesia, which would be 75%-owned by Thomson and Linde.

The agreement was finalized, but Gordon Rees allegedly failed “to include definitive language in the settlement agreement concerning the new company…to bind the parties (which) was fatally negligent and caused a clearly foreseeable onslaught of subsequent, yet entirely avoidable, litigation.”

On Oct. 5, 2012, Chang, Sickler, Wong, and Lai – the four MAA physicians – sued Thomson, Linde, and related companies for breach of the settlement agreement, and other causes of action.

They claim that they spent more than $1.3 million on attorney and expert fees on the matter, “arguing about the vague terms contained within the settlement agreement and its overall incompleteness.”

The case was settled on April 1, 2015, when Thomson and Linde agreed to pay them $2,125,000.

Malpractice Claim
Chang, Sickler, and Wong filed suit on behalf of MAA in the 269th District Court in Harris County, against Gordon Rees, Houston office managing partner Joseph DiCecco, part-ner Glenn LeMay, and senior counsel Christopher Raney, alleging negligence and breach of fiduciary duty in drafting the settlement agreement that created Sugar Land Anesthesia.

“Rather than ending the dispute among the parties, the deficiencies in the settlement agreement—which was the product of over $250,000 in unreasonable attorney fees— caused an onslaught of continuing yet completely avoidable litigation amongst these same parties concerning the terms in the agreement and what the agreement was sup-posed to contemplate. Even worse, due to the lack of specificity and protections in the agreement, the legal document was used as a proverbial license to steal, ultimately damaging plaintiffs over $1,800,000”.

The plaintiffs sought $1.8 million in actual damages, plus punitive damages and fee forfeiture for “knowing and intentional breach of fiduciary duty.”

Gordon Rees attorney DiCecco said “we vehemently disagree with the assertions made in the pleadings, and look forward to the opportunity for the truth to prevail on the re-cord.”

Litigation
In March, 2016, the court granted Gordon Rees’ motion for summary judgment on the negligence claim.

Settlement
On August 8, 2016, the plaintiffs’ filed a motion to dismiss their lawsuit with prejudice.

The judge granted the motion, and the case was concluded.

DiCecco of Gordon Rees said that the negligence claims that were dismissed via sum-mary judgment were the “most significant aspect of the case”, and that summary judg-ment “speaks volumes” about the suit.

He added, “subsequently, the parties were able to amicably resolve the remaining port-ion of the dispute in a confidential settlement”.

Plaintiff’s attorney Lance Kassab confirmed the settlement, but wouldn’t discuss the terms, due to the confidentiality agreement.

Legal Malpractice: Womble Carlyle Resolves $33M Claim

Legal Malpractice Womble CarlyleA legal malpractice suit seeking over $33 million in damages from Am Law 200 member Womble Carlyle Sandridge & Rice, LLP, whose work on a business sale contract allegedly left the founder with a “shell of a company”, after the buyer defaulted, has been resolved.

Underlying Case

According to the malpractice complaint, in the mid-1990s, Philip Loy founded American Viatical Services (AVS) and a related entity, AVS Underwriting. His wife, Sharon Loy, be-came co-owner of the company, which engaged in viatical settlements, the purchase of life insurance policies from their owner for less than what the policyholder’s estate would receive upon his/her death. The seller, usually a person who’s terminally ill, receives cash to pay medical bills, etc., while the buyer, often an investor like AVS, earns the dif-ference between the cash it paid to the buyer and the death benefit it receives after the policyholder dies.

In 2009, Womble Carlyle lawyers Coleman and Smith— who had advised Philip Loy in the formation of AVS Underwriting—helped put together a deal to sell AVS and AVS Un-derwriting for $40 million to Portsmith Securities Limited Malaysia.

The contract called for Portsmouth to form a new company, which was ultimately named Longevity Partners, to buy the Loys’ stock in the AVS companies for $7 million cash, plus a promissory note for $12 million, secured by the stock, which the Loys would re-gain, if Longevity/Portsmith defaulted on the note.

The balance of the sale price was to be paid based on the AVS companies’ working cap-ital and annual earnings, plus post-sale employment agreements for the Loys.

After the deal was finalized, the Loys received their initial payment of $7M, but then Longevity defaulted.

The Loys entered into a forbearance agreement in 2011, but Longevity defaulted on that, also.

In 2012, the Loys executed their right to have the collateral reassigned to them, but the sales contract allegedly failed to delineate that AVS and AVS Underwriting were legally distinct entities, and the Loys’ equity interests included AVS Underwriting.

As a result, the Loys received only AVS when Longevity defaulted, but by then Longevity had shifted many of AVS’ operations to AVS Underwriting, and AVS was “effectively a shell” of a company.

The Loys were told that Longevity still owned AVS Underwriting and all of its contracts and receivables, and they were “banned from the office and unable to participate in the operation of the companies they had founded.”

Two other Womble Carlyle attorneys, Ambler and Connelly, sued Longevity in 2012 on the Loys’ behalf. Connelly allegedly claimed “he could get both companies back,” for an estimated $160,000 in fees.

AVS Underwriting and Longevity responded by suing Philip Loy and AVS.

Those suits, and a federal suit against AVS filed by insurer Lloyd’s of London in 2013, were derailed when AVS declared bankruptcy. During the bankruptcy, the Loys were forced to relinquish their interest in AVS.

Malpractice Claim

The Loys sued Womble Carlyle and its partners Robert Ambler and James Connelly, and former partners Bernard Coleman, Jr. and John “Sandy” Smith in November, 2014 for legal malpractice, breach of fiduciary duty, and breach of contract.

The Loys sought more than $33 million – the portion of the sales price that Longevity defaulted on – plus over $450,000 in fees and costs that they had paid Womble Carlyle since 2009, and punitive damages of $15 million or more.

Settlement

“The litigation was resolved amicably,” said plaintiffs attorney John Stivarius Jr.

Terms weren’t disclosed.

Legal Malpractice: Cadwalader Gets $17M Verdict Overturned

Legal Malpractice CadwaladerBloomberg BNA reported that the New York Court of Appeals, that state’s highest court, overturned a $17.2 million legal malpractice verdict that a private equity fund run by Washington Redskins owner Daniel Snyder won against Am Law 200 member Cadwala-der, Wickersham & Taft LLP.

The Court of Appeals ruled that the lower courts’ ruling “should be modified…by deny-ing plaintiff’s motion for summary judgment and reinstating defendant’s affirmative de-fenses of the statute of limitations and comparative negligence.”

Underlying Case

Snyder owns private equity firm Red Zone, LLC, which in 2005 owned 12% of theme park operator Six Flags Inc., and undertook a proxy battle to gain control of a majority of the stock.

Red Zone retained investment banker UBS Securities to act as its financial advisor for the proxy battle, and claims that it retained Cadwalader to execute an agreement be-tween Red Zone and UBS that would limit the bank’s fee to $2 million, unless Red Zone acquired a majority of Six Flags’ voting stock.

Red Zone eventually gained control of a majority of the seats on Six Flags’ board of di-rectors, but it refused to pay UBS more than $2M, because it didn’t acquire a majority of Six Flags’ stock.

UBS maintained that its agreement with Red Zone called for it to be paid $10M, if Red Zone gained control of Six Flags, and it sued Red Zone in 2007 for the unpaid balance of $8M, plus damages and interest.

It succeeded at trial, and its victory was upheld unanimously by the New York Court of Appeals. It was awarded a final judgment of $11.6M in 2011.

Malpractice Claim

After Red Zone lost the UBS litigation, it sued Cadwalader for malpractice, claiming that it mishandled the contract between Red Zone and UBS.

Its complaint alleged breach of contract and professional negligence, and sought $8 mil-lion for the fee it had to pay to UBS, roughly $3.5 million in court costs and interest, and an anticipated $1.5 million in additional litigation costs.

Defense and Rebuttal

Cadwalader argued that it’s representation of Red Zone in the matter ended in 2005, after the contract between Red Zone and UBS was executed, and the complaint should thus be dismissed, because the Statute of Limitations – which is three years in New York –  expired in 2008.

However, Red Zone countered that when UBS demanded payment of the $8 million un-paid balance in 2007 for its work on the Six Flags deal, Red Zone retained Cadwalader to remedy the problem, and Cadwalader continued to advise Red Zone on the matter through November, 2010.

Ruling

The trial judge and Appellate Division ruled that the continuous representation doctrine applied, which tolled the three-year statute of limitations. The appellate panel stated:

“Although defendant drafted the [contract] in 2005, it provided legal advice throughout the UBS litigation from 2007 through late 2010…Although plaintiff was represented by other counsel in the UBS litigation, plaintiff and its trial counsel continued to confer with defendant and share privileged documents regarding its defense strategy.”

However, the high court ruled that the lower courts analyzed the continuous represent-ation doctrine improperly:

 “Triable questions of fact exist regarding whether the statute of limitations was tolled by the continuous representation doctrine in light of: the significant gap in time between the alleged malpractice and the later communications between the parties; the changed nature of the alleged legal representation of plaintiff by defendant; the absence of any clear delineation of the period of such representation; and defendant’s submission of affidavits disclaiming any mutual understanding of legal representation after 2005.”

The high court also ruled that the evidence suggested that “material triable questions of fact exist regarding whether (Cadwalader) failed to exercise the ordinary reasonable skill and knowledge commonly possessed by members of the legal profession.”

For example, an affidavit by Block, the former Cadwalader lawyer who advised Red Zone during its negotiations with UBS, claimed that he repeatedly warned Snyder about flaws in the contract that sought to limit the fees Red Zone would pay UBS, while in his own affidavit, Snyder called Block’s claim an “outright lie”.

Finally, Snyder and Red Zone claimed that Block’s affidavit contradicted his deposition testimony in the fee litigation between Red Zone and UBS.

The Appellate Division agreed, finding that Block’s affidavit in the malpractice case “flatly contradict(ed) his…deposition testimony” in the UBS litigation. However, the Court of Ap-peals ruled that Block’s affidavit “did not flatly contradict his prior deposition testimony”, and thus “should have been considered in opposition to (Red Zone’s) motion” for sum-mary judgment in the malpractice case.