North Carolina Discovery Sanctions Order Leads to $107 Million Malpractice Action

An Order granting discovery sanctions in the Western District of North Carolina is the basis for a $107 million malpractice lawsuit against a New York law firm.

The discovery Order was entered two years ago in a multidistrict proceeding formerly pending in Charlotte.  The case, just recently settled, involved the alleged price fixing of polyester staple fiber. 

The law firm of Kaye Scholer represented CNA Holdings, Inc. and Celanese Americas in that litigation.  Judge Vorhees sanctioned Celanese for failing to produce a significant quantity of responsive documents. 

According to the Amended Complaint filed on June 25th against Kaye Scholer, Judge Vorhees ruled from the bench that:

[T]he efficient disposition of a case like this one depends on full and candid discovery and [Celanese has] withheld that compliance with their obligations . . . . The efforts by [Celanese] do not meet the requirements of the discovery rules or the court’s directives . . . . The court is not unmindful of the positions urged by [Celanese], but in the context of the trove of documents it held in the wings just out of sight of the non-class plaintiffs, these positions can’t be seen as coherent or compelling. And they don’t encourage the court to rely on the good faith of [Celanese]. . . . The efforts by [Celanese] to play cat and mouse with the court and with the non-class plaintiffs since at least 2004 is unbecoming . . . to say the least.

The sanction entered by the Court in the antitrust litigation was that Celanese had to pay opposing counsel's attorneys' fees in pursuing the discovery motion, which were more than $100,000, and that the Court would consider further sanctions.  Shortly after that, Celanese fired Kaye Scholer.

New counsel then conducted a comprehensive review of Celanese's records which resulted in the production of hundreds of thousands of additional documents.  The Plaintiffs in the North Carolina case responded by asking for an array of additional sanctions, including (a) a default judgment against Celanese, (b) a finding of fact that Celanese had engaged in “bad faith, willful and deliberate discovery misconduct,” (c) instructions to the jury that this misconduct reflected consciousness of guilt, and (d) adverse inferences against Celanese on claims that it engaged in an illegal price-fixing conspiracy.

Judge Vorhees withheld ruling on the sanctions requested by Plaintiffs, but stated that he "did not take lightly the allegation that material false written and oral misrepresentations were knowingly and intentionally made" to the Court and the Plaintiffs. 

Celanese settled the antitrust claims in May 2008 for $107 million.  In the new lawsuit, Celanese says it was forced to pay this substantial settlement because "[t]he North Carolina Federal Court's sanctions rulings and the threat of additional severe sanctions at trial resulting from Kaye Scholer's conduct materially changed Celanese's likelihood of success at trial."  As Celanese put it, "the inflated $107 million settlement forced by Kaye Scholer's misconduct was essential to avoid the potentially devestating impact of sanctions that would have undermined Celanese's defense on the merits and would have exposed Celanese to catastrophic treble antitrust damages."

Celanese is seeking from Kaye Scholer a return of the legal fees it paid the firm, plus the difference between the $107 million settlement and what it claims would have been a "nominal settlement" in the absence of the discovery issues.  Celanese bases its claim that the antitrust claims had minimal value on memoranda in which Kaye Scholer opined that the case presented little risk.

The lawsuit is pending in federal court in Texas.  Kaye Scholer has filed its own lawsuit in the Southern District of New York seeking the recovery from Celanese of unpaid legal fees, and a declaration that its legal work was properly performed. 

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