It's the Economy, Stupid

Posted on July 8, 2011 05:00 by Chris Little

According to Wikipedia, "It's the economy, stupid" was a phrase made popular by campaign strategist James Carville during Bill Clinton’s bid to become president in 1992.  According to Carville, Bill Clinton was the proper presidential choice because the economy was going in the tank.  In 2011, the economy is still, stupid.  What are lawyers doing to avoid claims created by the failing real estate market and the stupid economy?

On July 5, 2011, The AmLaw Daily reported on a survey by Ames & Gough that legal malpractice claims are rising because of the sputtering economy and sagging real estate market.  So, for the lawyer in the private practice, “it’s the economy, stupid”.  According to the pundits, the lawyer’s chances of getting sued are increasing.

There is a distinct increase in claims against very good attorneys for work that is fair or good but not great.  The rise in claims appears to emanate from legal work that eventually resulted in the client losing money in a failed real estate deal or commercial transaction. In each of several recent matters involving claims by clients against lawyers, the deal would have had a good result in a decent commercial real estate market but the market is sour and there are LPL claims. A recurring theme in several cases is (a) assuming too much about the client's expertise, in the case of a new client, and (b) not spelling out, in writing, possible negative outcomes to a deal or a certain strategy.  From the complaints of recently filed lawsuits allegations and expert opinions accuse the good attorney of:

1. The lawyer did not advise his clients of the real likelihood that a good faith dispute could arise over the enforceability of the contract language;
2. The attorney, as a reasonably prudent attorney, should have foreseen that the option, as drafted, was likely to result in litigation and a reasonably prudent attorney, in similar circumstances, would have taken steps to prevent such a result;
3. The attorney is liable because they cannot adequately demonstrate that they told their clients they were signing an agreement that may subject them to litigation the future;
4. The attorney failed to advise the client to postpone certain actions required by statute until “better evidence” could be collected.  Had the attorney counseled the clients about the importance of obtaining the “better evidence” the clients made critical decisions without informed consent;
5. The lawyer failed to ensure that the client would not be subjected to further liability after the partnership was dissolved; and
6. In reliance upon the counsel of the managing member, the clients made payments for capital contributions which were not accounted for in the LLC and the lawyer’s failure to draft an “air tight” operating agreementjustifies the lawsuit.

These are just bits of lawsuits recently filed.  Some of the accusations sound stupid but, it is the fault of the economy, not sub-standard lawyering.
The practical lawyer should be careful to challenge his client and the client’s understanding about the transaction.  Do not assume the client is sophisticated but take the time to advise on the potential issues that could be encountered. If the client is responsible for adhering to future responsibilities provide her with a checklist or a calendaring system.  Avoid conflicts, and be careful out there.

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Categories: Legal Malpractice

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Ronald Regan once quipped “the nine most terrifying words in the English language are: ‘I’m from the government and I’m here to help.’”  Recent headlines suggest some law firms have made good business working in cooperation with the federal government in the area of corporate self-policing.  Some attention has been given to federal investigations conducted by private law firms and the money collected by the federal government from international corporations.

Simply stated, in order to avoid the threat of tremendous negative publicity and possibly devastating fines, mega-corporations are hiring counsel to perform “investigations” for nefarious activity and counsel then shares its finding with governmental agencies.  For the sports oriented, this is akin to your alma-mater self-reporting NCAA recruiting violations ala USC recently learning that, despite the post-Bush honesty, the NCAA will still impose penalties ruling Heisman Trophy winner Reggie Bush received improper benefits. USC was also cited for a lack of institutional control.

Like the NCAA, the federal government claims it cannot not afford the expense of constant investigation and oversight.  Both institutions are therefore requesting that the members (read international conglomerates) perform internal investigations and report the misbehaviors in the hopes of leniency.  This is not a bad idea.  The corporation enjoys the autonomy and control by hiring its own investigative unit to search for federal law violations including transgressions like the bribery of foreign officials.  The investigating lawyer, however, must pay great attention to the dichotomy of the obligations to the client and to the third parties encountered in the investigation. 

A major genesis of the legal work is the Foreign Corrupt Practices Act (FCPA) of 1977.  The FCPA is something that companies doing business internationally have to watch carefully.  Before the self-policing investigation begins there must be in place corporate procedures and processes to ensure proper awareness, training, audit, and compliance.  It should be assumed that company general counsel, accounting, and audit teams must be working together carefully and diligently.  If the assumption is improper, the newly hired private law firm performing the investigation may be in a difficult position.

It is the elephant in the room discussion that begins the process.  Some international companies rationalize that "this is the way to do business in (insert your favorite country).  That is, paying foreign officials in countries to get things done is the only way to get things done."  Of course, the Justice Department disagrees.  But, what are the best practices to be utilized by the investigating attorney?

Examples of what could go wrong are prolific.  On May 10, 2011, the U.S. District Court for the District of Maryland May 10 dismissed all counts leveled against the former vice president and associate general counsel of GlaxoSmithKline.  The attorney was charged with obstruction and making false statements related to a Food and Drug Administration investigation into drug promotions (United States v. Stevens, D. Md., Crim. No. RWT-10-694, 5/10/11).  The Honorable Judge Roger W. Titus dismissed the charges against the attorney concluding “There is an enormous potential for abuse in allowing prosecution of an attorney for the giving of legal advice. I conclude that the defendant in this case should never have been prosecuted and she should be permitted to resume her career.”  The indictment of the attorney suggests the pitfalls of complying with the federal request for assistance.  The in-house attorney complied with the federal government’s request for investigation and still found her name on an indictment.  Query, was she ever advised that her participation and assistance could lead to criminal charges against her?  Was she counseled about potential conflicts of interest and what form of informed consent did she give to the investigating attorneys, if any?

Companies often hire counsel to conduct internal investigations such as pharmaceutical promotions and alleged bribes in foreign countries.  The internal investigation process necessarily involves interviewing company employees, some here, and others in foreign countries.  Such interviews may produce evidence that potentially exposes the employees and company to criminal prosecution.  Counsel must be careful to ensure that those being interviewed understand that the company and not the interviewee are the client.  In other words, counsel must diligently ensure that all concerned know who they represent.  Who is the client? In that regard, those being interviewed may need separate counsel. Applicable law and company organizational documents will determine whether the company may foot the legal bill for the interviewees.  

Before journeying down the road of aiding the federal government when it claims it wants some help, an investigating lawyer must understand international implications like the impact on attorney-client privilege or domestic problems like the attempts to broaden liability of lawyers to third-parties. 

Be careful out there. . .


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The Pennsylvania Supreme Court will probably soon adopt new discovery and disclosure rules pertaining to Electronically Stored Information.  The Court has been presented with Proposed Recommendation No. 249 which modified Civil Procedure Rules 4009.1, 4009.11, 4009.12, 4009.21, 4009.23, and 4011 Governing Discovery of Electronically Stored Information with Explanatory Comment.  The Rule explains:

Though the term “electronically stored information” is used in these rules, there is no intent to incorporate the federal jurisprudence surrounding the discovery of electronically stored information. The treatment of such issues is to be determined by traditional principles of proportionality under Pennsylvania law as discussed in further detail below.

Sitting in Denver, I’m in no position to guess how the Pennsylvania Supreme Court determines “traditional principles of proportionality.”  But, when changes like this come, the defense bar should take advantage by understanding the rule change and how it can be used to aid in the representation of the client.  Sometimes, my best lessons in life come from living with a growing teenager.  The story, briefly, my daughter was told no e-mails, texts, etc.  She disobeyed the edict and trashed her communications thinking they would not be discovered.  Not very savy, but the retrieval of information from the recycle bin was simple.  She has now lost the ability for electronic communications for an “unfair” period of time. 

For the defense litigator, the story may have two lessons.  Foremost, you do not want your client to trash information that could be linked to the litigation where you are retained.  A reasonable computer forensic search will uncover the information and, if lost or corrupted, the spoliation instruction is damaging.  On the other hand, understanding that your opponent probably does not appreciate the rule change gives you an advantage.  You will know how you want to receive the information, you will be given the choice to “specify the format in which it is to be produced and a responding party or person not a party may object. If no format is specified by the requesting party, electronically stored information may be produced in the form in which it is ordinarily maintained or in a reasonably usable form.”  Rule 4009.1(b).  This gives you an advantage.  Use it to the benefit of the client’s case. 

These lessons, come, in part, from Judge Scheindlin’s sequel to Zubulake in Pension Committee of the Univ. of Montreal Pension Plan v. Banc of Am. Secs., LLC, 685 F. Supp. 2d 456, 463 (S.D.N.Y. 2010) where she made clear that the duty to preserve electronically stored information is practically absolute.  A litigation lawyer, must know that it is “abundantly clear that the duty to preserve means what it says and that a failure to preserve records—paper or electronic—and to search in the right places for those records, will inevitably result in the spoliation of evidence.

This case does not present any egregious examples of litigants purposefully destroying evidence. This is a case where plaintiffs failed to timely institute written litigation holds and engaged in careless and indifferent collection efforts after the duty to preserve arose. As a result, there can be little doubt that some documents were lost or destroyed.

The Pennsylvania litigation defense lawyer (and the rest of the DRIers) must now take the lead and upon retention and advise the client to suspend routine retention and destruction policies and warn the that the client must also preserve any information that could be considered evidence in the case.  Despite its efforts to distance itself from the federal court mandates, the Pennsylvania court now imposes on litigation attorneys, an affirmative obligation to gain a decent understanding of the client’s computer systems.  The same as in the federal arena.  It is no longer sufficient to suggest that litigation counsel be knowledgeable about their clients’ active and stored electronic data systems.  Upon the notice of litigation, the client must be told to immediately prepare an electronic storage log of the information related to the litigation.  This list is not inclusive but includes correspondence, motions, pleadings, original documents in pdf form, emails, zip drives, cd’s, or anything that could be remotely linked to storage of electronic information. 

Be careful out there.


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Categories: Electronic Discovery

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