These Class Action Lawyers Made Their Fees The Old-Fashioned Way. They Earned Them!

It's not very often that I see a fee application in a settled class action in the Business Court that doesn't strike me as requesting approval of an overpayment for a less than successful result.  Those are most often in the settlement of merger class action in which the only benefit for the class was the extraction of additional disclosures in a proxy statement.

But last week, looking at the Order approving a class action settlement and a fee petition in Elliott v. KB Home North Carolina, Inc., 2017 NCBC 37, I had exactly the opposite reaction.  It was an excellent result for the class members, and the nearly $2 million in attorneys' fees approved by the Business Court were well earned.

I've written about the Elliott case three times: The class was certified by Judge Jolly in 2012.  Judge Jolly ruled later that KB Home had waived its right to compel arbitration of the claims.  After Judge Jolly's retirement, Judge McGuire ruled that he could modify the membership of the previously certified class due to a change in circumstances.  The class members are homeowners in North Carolina living in houses built by KB Home.  The houses were constructed with siding manufactured by HardiePlank that did not have a weather restrictive barrier (a WRB) behind the siding.  The houses were then damaged by water infiltration.

This is not a settlement where the class members receive something like coupons towards a future home purchase.  Instead, there is real and substantial money being paid to them.  Depending on the square footage of their homes, class members who are current homeowners can be paid between $6500 and $17,000.  In the alternative, these class members can have their existing siding and replaced with new HardiePlank, this time with the missing WRB.

There is also a subclass of class members who have already sold their homes.  These subclass members are entitled to receive either a lump sum payment of $3250 or to prove that the selling price of their home decreased due to the lack of a WRB.  This type of recovery is capped at $12,000.

There is no doubt that the lawyers worked hard to achieve this result, as detailed in the Affidavit of lead counsel in support of the fee petition.  They filed or responded to twenty-seven briefs in the trial court and eight briefs in the appellate courts.  They reviewed 46,000 pages of documents produced, and they took or defended or attended forty-four depositions in five states.  Fee Affidavit ¶41.

Judge McGuire wrote in glowing terms of the qualifications of class counsel.  He said that they had "decades of experience litigating construction product defect cases on an individual, multi-family, and class basis."  He called one of the lawyers "one of the nation's most respected and experienced attorneys in these areas."  Order ¶37.

As a part of the settlement agreement, the Defendants agreed that they would not oppose a request for fees and expenses not to exceed $1,925,00.  That is exactly the amount requested by Plaintiffs' counsel: including $148,493.61 in out-of-pocket expenses and $1,776,506.39 in attorneys' fees.

That fee amounted yielded an "implied hourly rate" of $337.28 (based on 5,267 hours of work), which was approved as reasonable by Judge McGuire. Order ¶¶40-41.  That hourly rate is within the ranges previously approved as reasonable by the Business Court -- like $325.04 per hour in Corwin v. British Am. Tobacco PLC, 2016 NCBC 14 at *15 and between $300 and $500 per hour in Nakatsukasa v. Furiex Pharms., Inc., 2015 NCBC 71 at *24.

I have a hard time reconciling this fee petition to the one from the lawyers representing the class in the Ehrenhaus case (which challenged the merger years ago between Wachovia and Wells Fargo).  The Ehrenhaus lawyers asked for $1,975,00, almost the same as the request by the Elliott lawyers ($1,925,000).  But the Ehrenhaus lawyers obtained nothing of value for that class.  Also, they did not bother to submit any records regarding the hours worked on the case, other than to claim having spent 2300 hours on the case (less than half of the 5267 hours spent by the Elliott lawyers).  They took four depositions (the Elliott lawyers took forty-four) and reviewed 9,500 pages of documents (far less than the 46,000 obtained by the Elliott lawyers).  The Ehrenhaus settlement, moreover, came just a couple of months after the lawsuit was filed.  The Elliott lawyers worked their case for eight years.

The Ehrenhaus fee petition of $1,975,000 ended up getting chopped down by Judge Diaz of the Business Court by nearly half (to $1 million).

Your "Limited Appearance" in the Business Court May Not Be As Limited As You Think

The attorney for the Plaintiff in Foster Biodevice, LLC v. Cantrell. 2016 NCBC 51 said that he was only making a limited appearance, but the Business Court (through new Business Court Judge Robinson, in his first Opinion for the Court) wasn't buying the limited nature of the appearance.

Plaintiff's counsel had previously obtained an Order from Judge Bledsoe permitting him to withdraw as counsel for Foster Biodevice.  He then appeared in the case and filed a Voluntary Dismissal of the case Without Prejudice after his withdrawal.  He stated in the Voluntary Dismissal that he was "making a limited appearance . . . for the sole purpose of filing this Notice of Limited Appearance and Voluntary Dismissal Without Prejudice."

Limited Appearances Are Allowed Under The Revised Rules Of Professional Responsibility

The Revised Rules of Professional Conduct of the North Carolina State Bar permit limited appearances.  Rule 1.2(c) says that “[a] lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances.” in a "Formal Ethics Opinion," the State Bar said that the ability of an attorney, in a litigated matter, to make a “limited appearance” is subject to the "rules of the tribunal."  99 FEO 12, Inquiry No. 3.

Judge Robinson rejected the "limited appearance," saying that he "deem[ed] Plaintiff's counsel to be . . . counsel of record for Plaintiff in this matter, at least with regard to proceedings in this Court, subject to all of the responsibilities of counsel of record."  Op. ¶25.

Judge Robinson pointed out that there was no Rule (either in the Business Court Rules, the Rules of Civil Procedure, or the Rules of General Practice) "that would permit a limitation of responsibility under these circumstances."  Op. ¶25.

Judge Robinson also looked to Rule 16 of the General Rules of Practice, which says that "[n]o attorney who has entered an appearance in any civil action shall withdraw his appearance, or have it stricken from the record, except on order of the court."  Op. ¶25

Was This Plaintiff Entitled To Take A Voluntary Dismissal?

Beyond the issue of the attempted "limited appearance," Judge Robinson dealt with the issue of whether the Plaintiff was entitled to file a voluntary dismissal of its case.  The answer ordinarily depends on whether the party taking the dismissal has "rested its case."  The Business Court explored that question recently.

In the case before Judge Robinson, the question was slightly different.  Another restraint on taking a voluntary dismissal applies when the opposing party has made a claim for affirmative relief arising out of the same transaction which is the subject of the attempted dismissal.  The Defendant here had asked in its prayer for relief (though not in a counterclaim) for a declaratory judgment  that it was the owner of the intellectual property which was at issue in the Complaint.

That prayer for relief wasn't enough for Judge Robinson to deny the Plaintiff the right to take a voluntary dismissal.  He said that it was nothing "but a standard request that the Court deny Plaintiff's requested relief."  Op. ¶25.

Since Judge Robinson allowed the voluntary dismissal without prejudice, does it make any difference that Plaintiff''s counsel must remain as Plaintiff's counsel of record?  Probably not, since there is no longer a case in which that lawyer is required to appear.

Though it might make no difference to the attorney for Foster Biodevice, the ruling should cause all lawyers to consider whether they can limit the scope of their responsibility in a particular case and state that they are making a limited appearance.  They may find themselves committed more deeply than they had anticipated.

Coincidentally, yesterday I saw lawyers file Notices of Appearances in the Business Court in three related cases on a limited basis, in which they said they are appearing solely to deal with one particular Motion.  That limitation may not work for them, although that case is not before Judge Robinson.

Judge Robinson Finally Joins The Court

You've known for a long time that Governor McCrory nominated Michael Robinson to be a Business Court Judge.  That happened over a year ago, back in March of 2015.  He was confirmed by the NC General Assembly on June 16th, and was sworn in as the newest Judge on the Business Court on July 1st.

Judge Gale has reassigned a number of the cases previously pending in the Business Court to Judge Robinson.  If you've got a case in the Business Court, you might want to check to see if your case has been reassigned to Judge Robinson.

Judge Robinson will be holding court in a new courtroom (which is not yet ready) at Wake Forest Law School in Winston--Salem.  For the time being, he will be sharing a courtroom and chambers  with Chief Judge Gale, in Greensboro.


NC Business Court Revokes Pro Hac Vice Admission Of Out Of State Lawyer

Judge McGuire came down pretty hard on a Florida attorney admitted pro hac vice (meaning "for this one particular occasion") by another Superior Court Judge, in McCarthy v. Hampton, 2016NCBC 4.  He revoked the lawyer's admission and barred him from practicing law in North Carolina for the next two years.

What had this attorney done to warrant his expulsion from the North Carolina courts?  Judge McGuire said that:

Attorney McCarthy has not only engaged in a course of conduct that does not meet the standard expected of attorneys practicing in North Carolina courts, but that conduct has also delayed this action, caused unnecessary additional expense, and has generally frustrated this Court''s efforts to resolve the dispute.

Op. 16.

You might remember the McCarthy case from a post here in July, which involved the Plaintiff''s effort to squirm out a settlement reached during a mediation.  Judge McGuire rejected those efforts, saying:

"[t]he fact that plaintiff later changed [his] mind does not render the settlement agreement unenforceable."  Order ¶29 (quoting Smith v. Young Moving & Storage, Inc., 167 N.C. App. 487, 494 (2004)). 

He also said "that Plaintiff now seems dissatisfied with the agreement reached does not render the [agreement] unenforceable."  Order ¶30 (emphasis added).

If you want more specifics on what led to the revocation, last week's ruling was prompted by actions by Plaintiff's attorney which frustrated the conclusion of the settlement.  Those included:

  • Not telling Defendant''s counsel that the Plaintiff did not have the $155,000 necessary to fund his settlement obligation until five days after the due date for the payment had passed.
  • Not informing the Court of his client's inability to pay the $155,000 until the Court had set a hearing on a Motion to Show Cause why the Plaintiff should not be held in contempt for not making the payment.
  • Refusing to participate in the appraisal process required by the Settlement Agreement mandating the valuation of real property owned by an LLC in which the parties shared an interest. That required a Motion by the Defendants, resulting in a further unpublished ruling directing the appraisal to proceed.
  • "Misrepresenting and obfuscating" that his client had filed a bankruptcy petition.  The attorney informed the Court that his client had filed for bankruptcy when the petition had not yet been filed.

You might be wondering whether Judge McGuire had the power to revoke McCarthy's pro hac admission.  The Order admitting the attorney to appear in the NC case was granted by another Superior Court Judge, before the case was designated to the Business Court.

That is not one Superior Court Judge overruling another, because G.S. §84-4.2 says that a pro hac admission can be "summarily revoked" by the Court in its discretion. The NC COA has ruled explicitly that a state court judge may withdraw the pro hac privileges granted by another judge.  Smith v. Beaufort County Hospital Association, Inc., 540 S.E.2d 775 (N.C. App. 2000).

As for the two year ban on the attorney's right to be admitted pro hac vice in North Carolina, it is likely to be far longer than that.  The statute setting forth the requirements for a pro hac admission (G.S. §84-4.1) says that the applicant must disclose a record of "all that attorney's disciplinary history."  Discipline is defined to include any "revocation of any pro hac vice admission."  §84-4.1(6). There is no time limit on the disclosure of a revocation, so any Superior court Judge considering granting pro hac admission by this attorney will likely be hesitant to do so given this decision.

 If you've noticed that haven't written about the first three 2016 Opinions from the Business Court before this one that I haven't  written about, you can attribute it to my not finding them interesting enough to write about plus a dose of laziness on my part.



Be Very Careful If You Are Instructing Your Clients Not To Answer Questions At A Deposition

In an (unpublished) Order last week in Griggs v. Bittersweet Farms, LLC, Judge McGuire ruled that Plaintiffs' counsel's instruction to his client not to answer certain deposition questions was improper.  He granted a Motion to Compel responses to the unanswered questions, denied a Motion for Protective Order to excuse the Plaintiffs from having to respond, and ordered the Plaintiffs to pay Defendants' attorneys' fees for the cost of Making the Motion to Compel.

Instructing a witness not to answer a deposition question is pretty much forbidden unless a privilege is at issue.  There are rules in almost all courts about this practice.

The Rules On Instructing A Witness Not To Answer

Rule 30 of the North Carolina Rules of Civil Procedure says that: "[s]ubject to any limitations imposed by orders entered pursuant to Rule 26(c) or 30(d), evidence objected to shall be taken subject to the objections."  NCRCP 30(c).  The italicized portion of the Rule has been interpreted to mean that counsel is prohibited "from instructing a witness not to answer where only an objection is proper."  Order ¶4

The federal rule is more specific.  It says that:

A person may instruct a deponent not to answer only when necessary to preserve a privilege, to enforce a limitation ordered by the court, or to present a motion under Rule 30(d)(3).

FRCP 30(c).  It also says that: "An objection must be stated concisely in a nonargumentative and nonsuggestive manner."

The Business Court has a Rule dealing specifically with when you may instruct a witness not to answer a question.  That is Business Court Rule 18.3:

Counsel shall not direct or request that a witness not answer a question, unless that counsel has objected to the question on the ground that the answer is protected by a privilege or a limitation on evidence directed by the Court.

Business Court Rule 18.3(a).  The Business Court Rule also deals with "speaking objections," saying that "[c]ounsel shall not make objections or statements which might suggest an answer to a witness." BCR 18.3(b).  Objections are to "be succinct, stating briefly the basis of the objection and nothing more."  Id.

The Griggs' Depositions

The questions which the witnesses in the Griggs case refused to answer fell into two categories.  The first was questions concerning the Plaintiffs' net worth, which the Defendants said were relevant to the Plaintiffs' ability to pay punitive damages if the Defendants succeeded on their counterclaims.  The basis for the refusal to answer those questions was that they were intended to "annoy, embarrass or oppress" the witnesses.  The second category of questions concerned a criminal proceeding pending against one of the Plaintiffs.

Judge McGuire said that he understood the Plaintiffs' desire to avoid disclosing their personal financial information in what he said was "an acrimonious family lawsuit,"  (Order ¶4), but he said that the protective order protecting that information should have been sought "prior to, or at the very latest during, the depositions."  Order ¶4.

The NC Rules of Civil Procedure expressly permit counsel to seek a protective order in the midst of a deposition (it's in Rule 30(d)), but I can't imagine a Judge being instantly available to resolve such a dispute.  As far as seeking a protective order "prior to" a deposition, how can a lawyer prophesize in advance of a deposition what opposing counsel might ask that she would want to prohibit?

The effort of Plaintiff's counsel to obtain a Protective Order was hurt by him waiting nearly seven months after the depositions to request it.  Given that the Motion to Compel involved depositions occurring on several different days, Plaintiff's counsel could have moved for a Protective Order after the first deposition.

Attorneys' Fees

In addition to granting the Motion to Compel, Judge McGuire ordered the Plaintiffs to pay more than $3,000 in attorneys' fees for their misconduct..  Rule 37(a)(4) says that the Court shall award attorneys' fees if it grants a Motion to Compel "unless the Court finds that the opposition to the motion was substantially justified or that other circumstances make an award of expenses unjust."

After finding that the opposition to the Motion to Compel was not "substantially justified, Judge McGuire awarded $3,312.50  in fees.  The individual Plaintiffs are responsible for half of the sanctioned amount, and their counsel is responsible for the other half.


NC Business Court Gives Full Faith And Credit To LegalZoom's California Class Action Settlement

There are probably some of you who lie awake at night wondering whether Leagalzoom's offering of do it yourself lawyering products will be found to be the unauthorized practice of law (UPL) in North Carolina.

For those few of you, that uncertainty will continue.  At the end of last week, Judge Gale issued an opinion in Bergenstock v., Inc., 2015 NCBC 49, dismissing a putative class action by Plaintiffs seeking to represent all North Carolina residents who purchased Legalzoom products or services.  The claims were for UPL, unjust enrichment, and violations of the North Carolina Unfair and Deceptive Trade Practices Act.  Op. ¶28.

The Judge dismissed the complaint, but he did not make a ruling as to Legalzoom's business model, nor did he address the question whether its services constitute UPL.  The resolution of that issue will have to come in the still pending case brought by LegalZoom against the NC State Bar:, Inc. v. North Carolina State Bar.  See here for my last update on that case.

The reason for the dismissal in the Bergenstock case was the full faith and credit given to the settlement of a similar class action in 2012 in California (known as the Webster case).  Webster had sued Legalzoom on behalf of a nationwide class.

The Webster Settlement

The Webster settlement covered all claims:

asserted or that could have been asserted [in that case] arising out of the LegalZoom website, any materials available on or through the LegalZoom website . . . the unauthorized practice of law, or the purchase or use of documents prepared through LegalZoom.

Op. ¶17.

In consideration for the settlement, LegalZoom agreed to provide sixty days of free enrollment in its prepaid legal services Programs.  As Judge Gale described those Programs (known as the LegalZoom Legal Advantage Plus Program [for individuals] and the Business Advantage Pro Program [for businesses]), they involve:

services provided by licensed attorneys, including telephone consultations; review and written summary of legal documents; an annual legal checkup (which would be provided to Webster class members in the free sixty-day period), including a written summary and recommendations for legal documents and strategies; a ten percent discount on all LegalZoom products; access to the LegalZoom form library; electronic document storage; and a twenty-five percent discount on legal services not included under the Programs, but provided by a participating firm.

Op. ¶18.

The challenge presented by the Bergenstock putative class was that those Programs were not available in North Carolina.  (That is true, as the NC State Bar has refused to approve the Programs.  That refusal is the subject of litigation between the State Bar and LegalZoom.  Op. ¶20).  The Settlement dealt with members who did not live in states where those Programs were available by providing them with the lesser of (i) $75.00, or (ii) half of the current base price of the document that the class member had purchased from LegalZoom.  Op. ¶19.

The Bergenstock Plaintiffs said that they had not received due process in the Webster settlement because there was no counsel representing their interests and there was no named class representative who had interests in common with them.  They further argued that the California Court approving the settlement had not considered the adequacy of the alternative payment to the class members who did not have the LegalZoom payments available to them.  They asserted that the settlement was not entitled to full faith and credit as to them.

Full Faith And Credit To Class Action Settlements

The main road block faced by the Plaintiffs challenging the effect of the Webster settlement lies in a U.S. Supreme Court decision holding that:

a judgment entered in a class action, like any other judgment entered in a state judicial proceeding, is presumptively entitled to full faith and credit.

Matsushita Elec. Indus. Co. v. Epstein, 516 U.S. 367, 374 (1996), under 28 U.S.C. § 1738 (2014).

The North Carolina appellate courts have accordingly held that courts should:

apply only a “very limited” scope of review when determining whether a foreign judgment is entitled to full faith and credit, with the inquiry limited to whether jurisdictional and due process considerations were “fully and fairly litigated and finally decided” by the court rendering judgment.

Op. Par. 32 (citing Boyles v. Boyles, 308 N.C. 488, 491, 302 S.E.2d 790, 793 (1983); Moody v. Sears Roebuck & Co., 191 N.C. App. 256, 275–76, 664 S.E.2d 569, 581–82 (2008).

If the out-of-state court found  jurisdiction and due process to have been "fully and fairly litigated" and they were finally decided, a "North Carolina court extends full faith and credit without further inquiry."  Op. ¶32.

The Bergenstock Plaintiffs argued that the California court had not specifically considered the adequacy of the settlement amount paid to persons living in states where LegalZoom's programs were not offered and that they therefore had not been afforded due process.

Judge Gale refused to accept that argument, holding that:

the record does not allow for this parsing of the settlement consideration. The full settlement consideration, including the consideration provided to the Alternative Payment Plaintiffs, was before Judge Highberger [the California Judge approving the settlement] for his review. The Court cannot infer that Judge Highberger failed to consider the adequacy of representation of or the adequacy of consideration for the Alternative Payment Plaintiffs merely because he did not make express findings in that regard. He made findings that the overall settlement was fair and reasonable and that the Settlement Class had been adequately represented. The Court then must conclude that the issues Plaintiffs now seek to litigate in this Court were fully and fairly litigated and finally decided by Judge Highberger.

Op. ¶41.

NC Business Court: What Part Of Disqualification Do You Not Understand?

You will all recall the Business Court's disqualification of a law firm from representing its longtime client, in Kingsdown Inc. v. Hinshaw, 2015 NCBC 27.  Now there is a second chapter to the disqualification, which came in an Opinion last week, in Kingsdown Inc. v. Hinshaw, 2015 NCBC 35.

The disqualified law firm had asked Judge Bledsoe to clarify his Order disqualifying it from representing the Plaintiff Kingsdown.  That was due to the firm's past representation of Defendant Hinshaw (the corporation's CEO) on a personal basis in the transactions which were the heart of the lawsuit.

The law firm was not giving up its representation of its corporate client easily.  The Court's disqualification Order said that the law firm was disqualified from "further representation of Kingsdown in this matter against the Hinshaws."  Op. ¶56.  How far did the prohibition of that Order really go?

The law firm argued that it should be allowed to continue in its role as Kingsdown's regular corporate counsel and to advise Kingsdown on the litigation against Hinshaw without appearing as counsel of record, so long as it did not disclose any of the confidential information it had obtained in the course of its representation of Mr. Hinshaw.

Judge Bledsoe shot that argument down quickly.  He said:

To the contrary, the Court intended that the Firm would cease all representation of Kingsdown adverse to the Hinshaws in this matter, whether as litigation counsel or otherwise. The Firm’s failure to satisfy Rule 10(b) of the Rules of Professional Conduct and the appearance of impropriety created by the Firm’s representation of Kingsdown do not disappear simply because the Firm is no longer counsel of record – as corporate counsel, the Firm is still representing a current client (Kingsdown) adverse to a former client (the Hinshaws) in a substantially related matter, and the ethical concerns attendant to that representation, including the appearance of impropriety, remain.

Op. ¶15.

In other words, once a law firm is disqualified from representing a client in a litigation matter, it may not work "behind the scenes" or consult with, or give advice to that client regarding the matter.  Op. ¶16.

There was one last piece of its representation with respect to the lawsuit which the law firm tried to keep.  That was its representation of its corporate client in the claims it had brought against its former officer, Ray.  The firm argued that it had never represented Ray, that it had none of her confidential information, and that it should be allowed to be adverse to Ray.

Wrong, said Judge Bledsoe, who said that:

because the Firm’s representation of Kingsdown on its claims against Ray will require Kingsdown to take positions directly adverse to the Hinshaws on claims that are substantially related to the Firm’s prior representation of the Hinshaws, the Court concludes that the same considerations requiring disqualification of Tuggle Duggins in this matter adverse to the Hinshaws likewise require disqualification of the Firm in connection with Kingsdown’s claims against Ray.

Op. ¶20.

So it looks like this entire lawsuit is radioactive to the law firm, despite the law firm's protestations that its client is being deprived of the counsel of its choice.  The Court responded to that point by saying that:

the right of one to retain counsel of his choosing is secondary in importance to the Court’s duty to maintain the highest ethical standards of professional conduct to insure and preserve trust in the integrity of the bar. Avoiding a conflict and the appearance of impropriety are the best solutions.

Opinion ¶21.

While you might think that the issue of the law firm's involvement in this case is now over, this may not be the end of the disqualification saga.  The law firm, which was successful before its disqualification on its Motion to Dismiss the counterclaims made by Defendant Ray, has moved for sanctions against Ray.  That motion is pending.  I will report back on this when there is a ruling.  [Update:  New counsel for Kingsdown withdrew the Motion for Sanctions on April 30, 2015]

Dead Partner And Disqualification

The Business Court on Wednesday disqualified  a law firm from representing its longtime corporate client in a lawsuit against the corporation's former CEO and Chairman of its Board of Directors.

The basis for the ruling in Kingsdown Inc. v. Hinshaw, 2015 NCBC 27 was that a partner in the law firm (now deceased) had represented the former CEO/Chairman of the corporate plaintiff (Hinshaw) on a personal basis in some of the transactions that were at issue in the lawsuit.

Hinshaw moved to disqualify the law firm over its protestations that its representation was permitted by Rule 1.10 of the Revised Rules of Professional Conduct.  If that Rule isn't uppermost in your mind, it says that:

When a lawyer has terminated an association with a firm, the firm is not prohibited from thereafter representing a person with interests materially adverse to those of a client represented by the formerly associated lawyer and not currently represented by the firm, unless:

(1) the matter is the same or substantially related to that in which the formerly associated lawyer represented the client; and

(2) any lawyer remaining in the firm has information protected by Rules 1.6 and 1.9(c) that is material to the matter. 

So, to succeed on his disqualification motion, Hinshaw had to show that he had an attorney-client relationship with a former lawyer at the firm, and that the matters on which he had been represented were the "same or substantially related to" the matters involved in the lawsuit  before the Business Court, and the law firm had the burden to show that it did not have access to material confidential information protected by Rules 1.6 and 1.9(c).

Attorney-Client Relationship?

Kingsdown contended that the law firm had never opened a client matter for Hinshaw, had never sent him an engagement letter, and had never been paid any money by Hinshaw.  Hinshaw, from his side, presented affidavit testimony that the law firm's senior partner, since deceased, had often advised him personally. 

Some of the advice concerned his compensation from Kingdown and a transaction regarding a beach house owned by Hinshaw which he traded to Kingsdown for an undeveloped beach property owned by Kingsdown which Hinshaw then leased back to Kingsdown. 

Both of those matters -- Hinshaw's compensation from Kingsdown and the curious beach house deal -- were at the front and center of Kingsdown's lawsuit against Hinshaw for breach of his fiduciary duty.

Judge Bledsoe didn't waste much of his opinion in finding "ample evidence" that Hinshaw could have "reasonably inferred" that he had an attorney-client relationship with the deceased partner, and therefore the law firm. Op. par. 30.

Confidential Information?

The law firm fought hard to show that none of its current attorneys had any of Hinshaw's confidential information.  That was the lawyers' burden to carry, per Ferguson v. DDP Pharmacy, 174 N.C. App. 532, 539, 621 S.E.2d 323. 328 (2005)(“The burden rests upon the law firm to prove the former attorney did not share any information about the former client with the remaining attorneys in the firm.”).  Op. ¶37.

The argument of the lawyers rested partly on an affidavit from a lawyer representing Kingsdown as to his review of his firm's billing records.  The affiant stated that the records showed that none of the lawyers still at the firm had represented Hinshaw on the matters at issue in the lawsuit.  Other lawyers at the firm who had worked on Kingsdown matters presented affidavits stating that they were "not aware" of any of Hinshaw's confidential information.

Judge Bledsoe found that insufficient.  He noted that the situation before the Court was not the usual paradigm presented by Rule 1.10 of an attorney leaving a law firm and taking a client's files and records containing confidential information with her.  Here, the attorney who had personally represented Hinshaw had passed away and the law firm had continued in existence.  The Court held that:

the client’s files and confidential documents presumably remain at the Firm and are available to the other attorneys in the firm. As such, the Court concludes that the failure of the Firm to provide competent and persuasive evidence of the existence and whereabouts of these files, and the clients’ confidential documents and information that may be contained therein, is a significant factor in determining whether Kingsdown and the Firm have met their burden under Rule [1.]10(b).

Op. ¶46.

What could the law firm have done to persuade Judge Bledsoe that its lawyers did not have access to or knowledge of Hinshaw's confidential information?  He didn't say specifically, but wrote that Kingsdown had:

not brought forward competent evidence that the Firm has conducted a sufficient investigation of the Firm’s attorneys and files to ascertain whether the Firm has knowledge of [Hinshaw's] material confidential information, or if such an investigation has been conducted, provided evidence of what the investigation involved, who and what was consulted, and what the investigation found.

Op. ¶44.

So, if you ever find yourself in the unenviable position of representing a corporate client against a former officer/director on transactions where a deceased partner was personally advising that individual, you now have somewhat of a road map to avoiding disqualification.

Appearance of Impropriety

The "overarching consideration" in considering a motion to disqualify is to "prevent even the appearance of impropriety and thus resolve any and all doubts in favor of disqualification."  Op.  ¶48.

While  Hinshaw obviously had angst at being sued by the same law firm that he said had given him the advice that he claimed to have followed, the Court pointed out another significant concern that might create the "appearance of impropriety."

The law firm's attorneys were likely to be witnesses in the lawsuit.  Judge Bledsoe pointed out that:

those attorney-witnesses may potentially face divided loyalties between their allegiance to the Firm and the defense of the Firm’s advice, on the one hand, and their duty of loyalty to, and zealous advocacy for, their clients, on the other, as that advice, and the parties’ actions in alleged reliance on that advice, comes under intense scrutiny.

Op. ¶52.

This Opinion was issued at the same time as another published opinion in the case, Kingsdown Inc. v. Hinshaw, 2015 NCBC 28  That decision -- which I may write about tomorrow -- concerns a motion to dismiss one of the Defendant's counterclaims and third party claims.


If You Are Proceeding Pro Se In The Business Court It Is Best Not To Be Defiant

It's probably never a good idea to proceed without a lawyer in any Court, but if you are a non-lawyer and insist on proceeding pro se in the Business Court, don't be defiant and obnoxious.  You will not like the result.

Two of the Defendants (JW Ray and Digi-Plus LLC) in a case called London Leasing LLC v. Arcus  terminated the counsel representing them and decided to proceed on their own.

They did that in a high-handed and arrogant way. When Plaintiff's counsel called Ray to try to arrange a mediation, Defendant Ray told him that:

(1) neither Ray nor DigiPlus would attend any mediation in person, and would only attend by teleconference 'so that the mediator could explain to Plaintiff how absurd or ridiculous Plaintiff’s claims are in this lawsuit;'

(2) neither Ray nor DigiPlus would offer any payment towards a settlement;

(3) neither Ray nor DigiPlus would hire replacement counsel;

(4) neither Ray nor DigiPlus would respond to any discovery requests;

(5) neither Ray nor DigiPlus would pay any judgment levied against them in the lawsuit; and

(6) neither Ray nor DigiPlus would participate in the lawsuit unless they were “arrested for criminal conduct.”

Order ¶6.

As you can imagine, the (unpublished) Order entered by Judge McGuire was not complimentary of this discourtesy.  He stated that these two Defendants had "openly flouted this Court's [case management] order and the applicable North Carolina rules."  ¶14.

The relief granted by the Court in light of this rude behavior -- after ruling that lesser sanctions would be inadequate given the "seriousness of the misconduct" (Order ¶15)  -- was to strike the Answer of these Defendants and to enter default against them.

The only punishment not delivered by Judge McGuire was not noting that Ray was engaging in the unauthorized practice of law if he was also speaking on behalf of DigiPlus LLC.


Eighty Five Thousand Reasons Not To Represent An LLC Without The Approval Of A Majority Of The Members (and one Other Thing)

Be sure that an LLC member has the authority to hire you before accepting the representation of the LLC in a suit by or against another LLC member.  That authorization generally requires a majority of the interest of the members, at least under the default provisions of the LLC Act, which apply in the absence of an Operating Agreement providing to the contrary.

But what if a 50% owner goes ahead and retains counsel to represent the LLC against her 50% co-owner, who does not consent to the representation?  That can only turn out badly, even if there is a written fee agreement signed by the 50% owner.

In Judge Bledsoe's decision last week in Battles v. Bywater, LLC, 2014 NCBC 52, the Court found that one of the 50% owners of two LLCs which were defendants did not have the power to hire counsel for the LLCs, either under the default provisions of the LLC Act or the terms of the Operating Agreement of one of the LLCs.

There is nothing new in holding that one 50% member does not have the power to retain counsel for the LLC in a lawsuit against the other 50% member.   The Court of Appeals held seven years ago, in Crouse v. Mineo, 189 N.C. App. 232, 658 S.E.2d 33 (2007) that:

a fifty percent LLC member 'lacked authority to cause [the LLC] to institute [an]  . . . action on its own behalf' against the other fifty percent LLC member).

Id. at 239, 658 S.E.2d 37-38.

The Business Court rejected the Plaintiff's argument that he, as a 50% owner of the LLCs, had the authority under the new LLC Act to hire counsel without the consent of his adversarial member. 

Judge Bledsoe struck all of the filings made in the case by the lawyers for the LLC, though "without prejudice to Defendants' right to refile these or other legally supportable and permissible documents after retention of new counsel." Op. ¶52.

That's an expensive ruling for the lawyers who had been retained without proper authorization to represent the LLCs.  They had represented to the Court that they were owed $85,000 in legal fees by the LLCs that they were disqualified from representing.

Apart from guidance from the Bywater case of the necessary approval of the LLC members for an LLC representation, the case also makes clear that a management deadlock is a valid basis for dissolving an LLC per G.S. §57D-6-02(2).

Deadlock was formerly mentioned specifically in the dissolution statute (in the former G.S. §57C-6-02(2)), but the revised act deleted any reference to "deadlock" as a basis for dissolution in G.S. §57D-6-02.

Judge Bledsoe found that since the statute now allows dissolution where "it is not practicable to conduct the LLC's business," that this embraces deadlock.  He supported that conclusion with reference to the similar language of the Delaware LLC Act.  The Delaware Court of Chancery held in Fisk Ventures, LLC v. Segal, 2009 Del. Ch. LEXIS 7 (Del. Ch. 2009) that if:

a board deadlock prevents the limited liability company from operating or from furthering its stated business purpose, it is not reasonably practicable for the company to carry on its business.

Op. ¶19 (quoting Fisk Ventures at *12)




A Few Things To Avoid When Filing A Brief In The Middle District Of North Carolina

United States District Court Judge Catherine Eagles of the Middle District of North Carolina delivered an admonition last week to all of the lawyers with cases in her Court.

You can read the "text order" here, but she said it was prompted by a recent "rash of briefs"  that were out of compliance with the M.D.N.C.'s Local Rules.  The Order was entered in "most of the Court's pending civil cases,"  even those in which offending briefs had not been filed.

She said that the Order was being entered "to assist counsel in avoiding future problems."

Examples of Local Rule requirements that she indicated are mandatory were:

spacing, margin, and font constraints [and] excessive or inappropriate use of footnotes designed to avoid page limits will not be allowed.

If you are not familiar with the Court's "spacing, margin, and font constraints," they are contained in Local Rule 7.1:

The margin at the top of each page shall not be less than one and one-quarter inches, and bottom, left and right margins shall be set at not less than one inch. Typewritten documents shall be double spaced.

All pleadings, motions and other original papers filed with the Clerk shall be in a
fixed-pitch type size no smaller than ten characters per inch or in a proportional font size no smaller than 13 point. There shall be no more than 27 lines of regularly spaced text on a page.

But there's more to this message than font size and page layout.  Judge Eagles continued by making the obvious points that:

legal arguments require citation to legal authority, and factual assertions unsupported by citations pointing to specific, authenticated facts existing in the record will be disregarded.

She warned that of "particular concern":

are summary judgment briefs which fail to provide cites to the record for factual assertions. L.R. 56.1(d); see also L.R. 7.2(a)(2). Litigants must include such citations, and the citations must be specific. It is not sufficient, for example, to cite a fifty-page exhibit for a particular point, but yet to fail to identify where within that fifty-page document the evidence for that point is located. As a reminder, the Court is under no duty to scour the record to find support for a party's factual assertions.

The Court, said Judge Eagles, is not under the obligation to "do legal research for parties who make perfunctory arguments without citation to legal authority. "

And this is not the first time that lawyers have been chided by the Court for not providing pinpoint citations to the evidence before the Court and support for the positions being taken.  Judge Eagles cited some of these cases in her text order.

For example, Judge Schroeder said in Stephenson v. Pfizer, Inc., 2014 U.S. Dist. LEXIS 124737 (M.D.N.C. 2014)  that:

Throughout her briefing, [the plaintiff] fails to provide any pinpoint citation to a particular page or paragraph, providing instead only cites to whole documents generally. This practice violates Local Rule 7.2(a)(2), substantially burdens the court with the obligation of investigating the basis of claimed facts — a task the court need not do, and renders a party’s position subject to rejection on this basis alone.

*1 at n.1.

And how about failing to cite authority to support your argument?  Also a bad thing, as observed by Judge Eagles in Hayes v. Self Help Credit Union, 2014 U.S. Dist. LEXIS 116888 (M.D.N.C. 2014):

the plaintiff has made numerous arguments as to which she has cited no legal authority of any kind.  It is not the role or the responsibility of the Court to undertake the legal research needed to support or rebut a perfunctory argument.


 And to the same effect is Judge Schroeder's statement in Hughes v. B/E Aerospace:

A substantial portion of Hughes' factual briefing fails to cite to the record, in violation of Local Rule 7.2(a)(2). A party should not expect a court to do the work that it elected not to do.

2014 WL 906220,  *1 & n.1 (M.D.N.C. 2014),

Consider yourself on notice of how to file a proper brief in the Middle District, even if you were not one of the many lawyers who received this text order.

[Disclosure: I am one of the members of the Local Rules Committee in the Middle District]


Don't Throw The Kitchen Sink Of Defenses Into Your Answer

Say you are filing an Answer to a Complaint.  NC Rule of Civil Procedure 8(c)  lists a host of affirmative defenses you might raise.  They are:

accord and satisfaction, arbitration and award, assumption of risk, contributory negligence, discharge in bankruptcy, duress, estoppel, failure of consideration, fraud, illegality, injury by fellow servant, laches, license, payment, release, res judicata, statute of frauds, statute of limitations, truth in actions for defamation, usury, waiver, and any other matter constituting an avoidance or affirmative defense.

Do you want to plead all of those, even though you don't currently have a basis to support them, hoping that you will find some facts in discovery to support them?

That's pretty much what the Plaintiffs did when responding to a crossclaim in National Financial Partners Corp. v. Ray, 2014 NCBC 49, decided on Wednesday by Judge Bledsoe.  The Plaintiffs raised nearly fifty affirmative defenses, hoping that they would generate facts later on to support their myriad defenses.

Many of their defenses were not supported by any facts pertinent to the lawsuit, although the Plaintiffs argued that it was too premature in the litigation for their affirmative defenses to be dismissed and that discovery might yield facts to support their defenses.

The Defendants moved to strike per NCRCP 12(f).  Judge Bledsoe wrote that:

'[T]o survive a motion to strike, a defendant must offer more than a "bare-bones conclusory allegation which simply names a legal theory but does not indicate how the theory is connected to the case at hand."'

Op. ¶34 (quoting Villa v. Ally Fin., Inc., 2014 U.S. Dist. LEXIS 25624, at *6 (M.D.N.C. Feb. 28, 2014)(citation omitted).

It didn't make a difference that the Plaintiffs had a good faith belief that discovery might provide a basis for the defenses stricken by Judge Bledsoe. He said that:

Plaintiffs’ professed good faith belief that their presently unsupported defenses will acquire the requisite factual support through the discovery stage of these proceedings does not alter the reality that these defenses were speculative at the time Plaintiffs asserted them in their responsive pleading.

 Op. ¶35.

Some of the arguments raised by the Plaintiffs in support of the defenses they had stated revealed their speculative nature on their face.  For example, on their defense of accord and satisfaction, Plaintiffs said that:

'[i]t is . . .far from certain that I[] Plaintiffs did not receive full and complete return of whatever funds they provided to Mr. Stokes'.

And the defense of "another action pending" was also quite imaginary.  The Plaintiffs said that:

'[n]o action is pending of which Plaintiffs are currently aware' but noted that '[s]uit may have been filed against Defendants somewhere else or against Plaintiffs in some other jurisdiction.'

Op. ¶¶35(iv) and (ix).

If you are, like me, too critical to be an even-tempered Judge and are wondering if there are sanctions available against a party pleading a horde of defenses without any factual support for them, the answer is that there might be.  Judge Bledsoe observed in a footnote that "Plaintiffs’ assertion of numerous affirmative defenses with little or no factual support can also raise concerns under Rule 11 of the North Carolina Rules of Civil Procedure."  Op. ¶36 & n.7.

He also quoted a Third Circuit case for the proposition that: “the practice of ‘throwing in the kitchen
sink’ at times may be so abusive as to merit Rule 11 condemnation.”)  Id. (quoting  Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 97 (3d Cir. 1988)).

But no sanctions were entered.  Judge Bledsoe struck fifteen of the speculative defenses with leave to the Plaintiffs to plead them again in the event that they were able to develop evidence through discovery that the defenses could be properly asserted.  Op. ¶36.


You Win Some, You Lose Some: How Should A Request For Attorneys' Fees Be Ruled Upon?

Let's say that you've tried a case, you have lost on a few of your claims, but you won a couple of claims and have gotten a judgment for damages against the defendant for $25,000.  You've billed your client $1,162,895 for your services and your mixed success. And you have a statutory basis for recovering your attorneys' fees.

What do you think the result of a motion to the Court for more than a million dollars in fees would be on those bare facts?  Astonishment from the Judge to whom you've made the fee request?  Maybe a lecture?

Judge Gale was not astonished at the more than a million dollars in fees sought on similar facts in his ruling last week following a trial in Out of the Box Developers, LLC v. Doan Law, LLP, 2014 NCBC 39 , and he did not lecture on the amount of the fees, except maybe once (see below).  In making his ruling he made a number of valuable observations on fee awards in cases of mixed success, like Out of the Box.  The basis for attorneys' fees?  Two of the jury's answers to the issues supported a finding of unfair and deceptive practices, allowing for fees under G.S. §75-16.1.

First, he said that"[i]f a plaintiff brings multiple claims arising from a common nucleus of facts, and succeeds on some claims but not others, the court is not necessarily required to allocate fees between the successful and unsuccessful claims."  Op. ¶51

Second, even so, "where the fee requested and the success achieved are incongruous, an adjustment must be made to assure that the fee awarded is reasonable."  Id.

Third, in determining the amount of an appropriate adjustment, the Court may apply a "percentage reduction method."  Judge Gale applied a 50% reduction to the invoices presented by Plaintiff's counsel.

And finally, as far as a lecture, Judge Gale delivered a mild rebuke to Plaintiff's counsel for overlawyering the case.  He said:

the invoices  [presented by Plaintiff's counsel] demonstrate that [Plaintiff's] counsel engaged in what has become the all-too-common practice in today's litigation environment of having multiple lawyers attend a task where a single attorney might suffice.

Op. ¶60 (emphasis added).

He dampened that criticism by continuing:

particularly in complex cases, there are certain occasions where it is necessary, and indeed efficient, for multiple attorneys to participate, for example, in client or attorney conferences where core theories or strategies are developed.


After that observation, the Court eliminated the time billed at trial for a third attorney, ruling that the two more senior attorneys (a partner and an associate) could have handled the trial on their own.  He took pains to note that his elimination of that attorney's fees was "no reflection on the quality of her participation, as she contributed well."  Id.

Judge Gale also eliminated a fair amount of associate time from the fee request due to changes in the associates working on the case, which he attributed to the long duration of the case (it ran for four years).  In some instances, he reduced the associate time by 75%.

For those who are looking for a barometer of the reasonableness of their hourly rates, Judge Gale found the partner's rate of $495 an hour to be "reasonable and appropriate," as he did for the lead associate's hourly rate of $260 an hour.  Other associate rates of $180 to $250 per hour were found similarly reasonable.  So were legal assistant rates of $130 an hour.

All that discussion and the accompanying reductions led to an award of $467,827.63 against a fee request of $1,162,895, after Judge Gale parsed through more than 40 monthly invoices, invoice by invoice.  That award bears interest at the legal rate until it is paid.  Order ¶70 (4).

Will the Defendant pay it?  I doubt it, based on the facts their own counsel moved to withdraw before trial because his bills had not been paid and he did not expect them to be paid going forward (see Order ¶19), and because the Defendant's pretrial settlement offers were negligible and they did not include an offer to pay the sanctions of approximately $35,000 which had been previously ordered against it for discovery non-compliance.  Plus, who has half a million dollars sitting around to pay the opposing party's attorneys' fees?

You might be wondering about the daily interest on that fee award.  My calculation is $102.54 per day at an 8% interest rate (the rate allowed by G.S. §24-1).

If you remember the name Out of the Box, that's probably because I have written about decisions in the case several times: about sanctions for violations of a Protective Order; the Business Court's dismissal of an appeal of those sanctions; sanctions for violation of a discovery order; and the proper way top serve a non-party with a subpoena.

Business Court Refuses To Admit University Of Maryland's Lawyers On A Pro Hac Basis

The lawsuit filed by the Atlantic Coast Conference against the University of Maryland continues to percolate in the North Carolina Business Court.  But the University will have to proceed without its chosen attorneys, as the Court last week refused to admit them on a pro hac vice basis.  The decision came in an Order in Atlantic Coast Conference v. University of Maryland.

If you have forgotten about the ACC's lawsuit against the University of Maryland, it was filed by the ACC to recover the $50 million exit fee it says is due from the University upon its departure from the ACC to join the Big Ten Conference.  The University disputes the validity of the exit fee, and has counterclaimed in very detailed claims for violation of antitrust laws and unfair competition.

The Maryland University was represented by a lawyer from the Maryland Attorney General's office, and two lawyers from the Milwaukee firm Foley & Lardner.  When these lawyers moved to be admitted pro hac, the ACC objected.  It argued that the counsel from Foley & Lardner were in violation of Rule 1.7 of the North Carolina Rules of Professional Conduct due to their representation in other matters of Florida State, Virginia Tech, and the University of Virginia, members of the ACC, and the University of Louisville, which officially joined the ACC on July 1st.

Rule 1.7 says that "[a] lawyer shall not represent a client if the representation involves a concurrent conflict of interest."   There is a concurrent conflict of interest if:

(1) the representation of one client will be directly adverse to another client; or

(2) the representation of one or more clients may be materially limited by the lawyer's responsibilities to another client, a former client, or a third person, or by a personal interest of the lawyer. 

The ACC lawyers argued that the University of Maryland's lawyers were acting adversely to the interests of their other University clients.  One of the comments to Rule 1.7 is favorable to the University's position.  Comment 34 says that "[a] lawyer who represents a corporation or other organization does not, by virtue of that representation, necessarily represent any constituent or affiliated organization."

But Comment 34 ends on a bad note for the University's argument.  It says that this qualification does not apply if "the lawyer's obligations to either the organizational client or the new client are likely to limit materially the lawyer's representation of the other client."

The University's (former) counsel argued that they could ameliorate any conflict by hiring independent counsel to take the depositions of any institution which was a member of the ACC and represented by them.  There is an ABA Opinion that supports this position, ABA Standing Committee on Ethics and Professional Responsibility, Formal Opinion 92-367, but it also says that if the "conflict is clearly forseeable, then the solution, absent client consent, is clear enough: the prospective engagement must be declined."

The Court refused to admit the University's attorneys on a pro hac basis, noting the lack of any conflict waiver, and stating that:

[w]hile it is true that a party's right to choose its own counsel is generally considered fundamental, 'an out-of-state attorney has no absolute right to practice law in another forum.'

Order ¶6.

Judge Jolly did admit pro hac an attorney from the Maryland Attorney General's office to represent the University, observing "the public policy behind permitting the attorney general of another state to practice in North Carolina, combined with the absence of direct legal authority preventing" his appearance in the case.  Order ¶11.

Is the resolution of this pro hac admission issue a victory for the ACC?  My general philosophy on efforts to preclude opposing counsel from representing a client is that you face a risk that they will be replaced by better lawyers.  In the University's situation, that seems to be unlikely.  Their now unadmitted counsel looked like a powerhouse in the area of sports law.  So score this as a win for the ACC.  But it's early in the first quarter.


Business Court Makes North Carolina Safe For Construction Lawyers

Construction lawyers in North Carolina can breathe a sigh of relief.  On Friday of last week, the Business Court ruled that the service of on-line service provider Lienguard in preparing claims of lien constitutes the unauthorized practice of law. 

You most likely have never heard of Lienguard.  It says on its website that it files throughout the country: "commercial mechanics liens, notices, public and federal bond claims as well as municipal liens." It does this on a fixed price basis.  It charges $495 for the preparation and filing of a mechanics lien.

A committee of the North Carolina State Bar sent Lienguard a cease and desist letter in 2010 informing Lienguard that it had concluded that Lienguard's conduct constituted the unauthorized practice of law.  Lienguard, notwithstanding the letter, continued offering its services in North Carolina.

The Order in North Carolina State Bar v. Lienguard, Inc., 2014 NCBC 11, followed in the State Bar's lawsuit.  Lienguard raised a litany of defenses against what it termed the State Bar's "monopolistic crusade" against the UPL.

Lienguard's Services Are The Unauthorized Practice Of Law

The Business Court didn't agree with any of Lienguard's defenses.  Lienguard argued, for example, that a claim of lien wasn't a "legal document" and its assistance in preparing those documents was therefore not within the statutory definition of the "practice of law."  Section 84-2.1 of the General Statutes bars non-lawyers from "preparing or aiding in the preparation of "deeds, mortgages, wills, trust instruments, inventories, accounts or reports of guardians, trustees, administrators or executors. . . ." 

Given the absence of "claims of liens" from the language of the statute,  Lienguard said it was not engaged in the practice of law.  Judge Gale looked to G.S. §84-4, which prohibits non-lawyers from preparing "any other legal document."  It took him just twenty words to conclude that a claim of lien is a "legal document":

Clearly, a claim of lien is prepared to enforce the claimant’s statutory lien rights.  It is,
therefore, a “legal document.”

Op. 55.

The Court also ruled that Lienguard's statements about its expertise in the construction industry, its commitment to compliance with the law,  and its qualifications to prepare claims of lien constituted Lienguard "holding out" that it was licensed to practice law.  There are  administrative regulations in North Carolina that direct that a lawyer who is not admitted to practice in this jurisdiction "shall not. . .  hold out to the public or otherwise represent that the lawyer is admitted to practice law in this jurisdiction.” 27 N.C. Admin. Code 02, Rule 5.5(b).

Lienguard's services also constitute impermissible "legal advice" in violation of Chapter 84.  It provides definitions of lien law terms, gives warnings regarding time requirements, and reminders about sending out preliminary notices.  Those things are "legal advice," when combined with the preparation of legal documents.  Op. 72.

You might remember the "scrivener's exception" to charges of UPL, which recognizes that merely typing or “scrivening” a petition or legal document does not constitute the practice of law, so long as the non-attorney does not create the document, or advise on how the document should be prepared." Op. 59.  Lienguard wasn't entitled to this exception because "it performs services beyond that of a scrivener."  Op. 65.

Lienguard's Constitutional Claims Were Rejected

Lienguard also argued that Chapter 84 is so vague due to its lack of definitions that it cannot be constitutionally applied to it.  The Court rejected that argument, ruling that "there is no vagueness involved in concluding that a claim of lien is a legal document."  Op. 82.  Besides, the NC Supreme Court held almost a century ago that G.S. §84-4 is constitutional and valid. Seawell v. Carolina Motor Club, Inc., 209 N.C. 624, 632, 631 S.E.2d 540, 544 (1936).  And Lienguard hadn't taken the necessary procedural steps to attack the constitutionality of a statute anyway.  G.S. §1-260 requires service on the Attorney General if the constitutionality of a statute is in question, and he has an opportunity to be heard.

If you are not exhausted from reading this by now, you might be wondering how the Court resolved Lienguard's argument that the State Bar was in violation of the monopoly clause of the North Carolina Constitution.  That clause says that: "monopolies are contrary to the genius of a free state and shall not be allowed."  N.C. Const. §34.  The State Bar, which is a state agency, has the power to exclude persons from practicing in the legal profession "to protect the public against incompetents and imposters."  Op. 86.  (There was no finding that Lienguard was "incompetent.").  Judge Gale rejected the monopoly claim.

There's More To Come

The Court's ruling is not the final round for Lienguard.  The State Bar was directed to prepare a proposed form of permanent injunction for the Court to enter.  It was given twenty days to present it to Lienguard for "comments as to form."  You all know that this type of instruction from a Court can lead to endless back and forth between counsel for the parties.

A couple more things:

The Supreme Court of Ohio, bin 2010,also found Lienguard to be engaged in UPL. 

Also, I was surprised to discover that there are multiple companies in the business of providing DIY lien preparation services in North Carolina.  Companies named zlien, CRM Lien Services, and the Lien Professor all do that.  If the State Bar is truly concerned about stamping out UPL in this area, it has a lot more work to do. 


Maybe We Are Getting Closer To A Decision in North Carolina On Whether LegalZoom Is Engaged In The Unauthorized Practice Of Law

Legalzoom may be a step closer to overcoming the NC State Bar's assertion that its online legal document service constitutes the unauthorized practice of law (UPL), following yesterday's ruling in LegalZoom, Inc. v. North Carolina State Bar, 2014 NCBC 9.  Or it may be only a few questions away from a ruling that would impact its ability to conduct business in North Carolina, depending on how you read the decision.

If you need some background on LegalZoom, you probably don't own a television or you haven't read my two previous posts on this long simmering dispute, from January 2012 and August 2012.  The company is constantly advertising its legal document generation service which it says on its website "strive(s) to be the best legal document service on the web."  It prepares incorporation papers, wills, trademark applications, and divorce documents and other things for its customers, who want a "do it yourself" approach to law.   LegalZoom has been battling with the NC State Bar in the Business Court since 2010 over whether its service constitutes the UPL.

Yesterday, Judge Gale denied the State Bar's motion for judgment on the pleadings, ruling that he needed a "more developed record" to make a decision, in 2014 NCBC 9.  Op. 50.

Exceptions To The Unauthorized Practice Of Law and Judge Gale's Questions

The definition of the "practice of law" is contained in G.S. §84-2.1.  LegalZoom argues that it falls within recognized exceptions to states' prohibitions on the UPL.  One is known as the “self-help” or the “self-representation” exception, which means "that one can legally undertake activities in his own interests that would be UPL if undertaken for another, or to “practice law” to represent oneself." Op. 58.

The NC Supreme Court weighed in on the "self-help" exception fifty years ago, in State v. Pledger, 257 N.C. 634, 127 S.E.2d 337 (1962), in which it held that a non-lawyer employee of a company in the business of constructing and selling of homes did not engage in the UPL by preparing deeds of trust for homes that his employer sold.  The Court said that:

[a] person, firm or corporation having a primary interest, not merely an incidental interest, in a transaction, may prepare legal documents necessary to the furtherance and completion of the transaction without violating [the law].” Id. at 637, 127 S.E.2d at 339.

Op. ¶61.  Since LegalZoom doesn't have a "primary interest" in its customers' business, it wasn't able to successfully avail itself of the "self-help" exception.

The second exception, relied on more heavily by LegalZoom has been referred to as a “scrivener’s exception,” which essentially means "that unlicensed individuals may record information that another provides without engaging in UPL as long as they do not also provide advice or express legal judgments." Id.

Judge Gale had a number of questions whether the operation of LegalZoom's online software fit within the scrivener's exception.  Those questions could not be answered on the existing record.  He posed the following:

if a customer makes one choice presented to him by the [LegalZoom] software, are there portions of the template that are then never shown to the customer? If so, what is the reasoning behind and the legal significance of the software’s determination not to present that portion of the form?  [Does the premise of the Pledger decision] require that only the unlicensed individual make choices in drafting a legal document, and that the choice or risk of an incorrect choice about which portions of a form to include must belong exclusively to the individual? Is there then a legally significant difference between how one engaging in self-representation uses a form book versus LegalZoom’s interactive . . . software? A form book presents the customer with the entire form, often accompanied by opinions or directions on how to use the form, but any choice and its implications are solely the customer’s. Does the LegalZoom software effectively make choices for its customer? Do responses depend in any part on the effects of statements embodied in the software, either those that promote the program or those that disclaim legal advice being given?

Op. ¶66.  Although the Judge was careful to say that these were not the "controlling or only relevant questions,"  Op.¶67, they certainly provide a road map for future resolution of the case via a motion for summary judgment.  

LegalZoom's Prepaid Legal Services Plan

There's another aspect to the case, which involves Legaloom's prepaid legal services plans. The State Bar, which is responsible for registering such plans, refused to register LegalZoom's plans.  The online vendor said this refusal violated the equal protection clauses of the U.S. and North Carolina Constitutions.

Judge Gale dismissed that claim, because LegalZoom had not exhausted its remedies by failing to request a hearing before the State Bar.  The Administrative Procedure Act, to which the State Bar is subject, requires a final agency decision before judicial review is allowed. 

LegalZoom had taken the position that requesting a hearing was only optional, and that a hearing would have been futile.  Judge Gale observed that both arguments were foreclosed by NC appellate decisions.  Op.  46, 47.

LegalZoom's Claim that it has been Defamed by the NC State Bar was Dismissed

LegalZoom had made a claim against the State Bar that the Bar's statements that it was engaging in the UPL were "false and untrue" and that those statements disparaged its product.

Judge Gale found those statements to be barred by the doctrine of sovereign immunity.



Never Give Up? Never Surrender? Probably Bad Advice In The Business Court

Section 6-21.5 of the North Carolina General Statutes is the closest thing the State has to "loser pays." It allows for the award of attorneys' fees to a prevailing party "if the court finds that there was a complete absence of a justiciable issue of either law or fact raised by the losing party in any pleading."

The plaintiff in Jacobson v. Walsh, 2014 NCBC 2, decided by Judge Murphy this week, didn't ever give up on his claims for breach of fiduciary duty and fraudulent concealment (which depended on there being a fiduciary duty) even though he had virtually conceded those claims at his deposition. As a result, the Judge awarded fees in an amount to be determined to one of the Defendants.

Why?  The Plaintiff based his fiduciary duty claim against one of the Defendants on his "past investment experiences" with that Defendant (Walsh), as he had alleged in the Complaint.  But at his deposition, the Plaintiff said that he had no prior dealings at all with Defendant Walsh, and that his contrary allegation in the Complaint was "an oversight."  He even conceded at his deposition that there was no fiduciary relationship between him and Walsh.

Notwithstanding those concessions, the Plaintiff did not dismiss his fiduciary duty claim. Judge Murphy concluded that "the losing party persisted in litigating the case after a point where he should reasonably become aware that the pleading he filed no longer contained a justiciable issue." Op. ¶94 (quoting Sunamerica Fin. Corp. v. Bonham, 328 N.C. 254, 258, 400 S.E.2d 435, 438 (1991)).

So how much will Walsh recover in attorneys' fees?  That remains to be determined.  Walsh was directed to submit an accounting of the the fees "reasonably incurred in defending against" the fiduciary duty and fraudulent concealment claims.  Op. ¶97.  Since there were multiple claims in the Complaint which were dismissed in the Order, the fees attributable to the fiduciary duty claim and the fraudulent concealment claim will be only a portion of the fees charged by Walsh's lawyers.

If you are wondering, this isn't the first time that the Business Court has socked an unduly persistent plaintiff with attorneys' fees per Section 6-21.5.  Judge Gale did that in an Order in McKinnon v. CV Industries, Inc., which I wrote about in June 2012.

Don't Rely On Your Expert's Speculation To Save You From Summary Judgment

Just because an expert says something is so doesn't mean that it is.  That's the lesson of Judge Gale's ruling last week in Carter v. Clements Walker, 2014 NCBC 1.  He rejected the evidentiary value of an expert's report stating that Plaintiff's damages were $33 million, saying that it was insufficient to create a genuine issue of material fact on whether Plaintiff had suffered any damages at all.

Some background will help.  The case is for legal malpractice.  Plaintiff, an inventor, alleged that the Defendant law firm committed malpractice by allowing a domestic patent application to be published before it filed an application for international patent rights.  Since some foreign countries require "absolute patent novelty" before granting a patent, Plaintiff couldn't obtain a patent in those countries given the filing of the U.S. application.

The case has been up and down from the Court of Appeals.  The COA reversed the previous dismissal of the case.  It's been the subject of blog posts here twice before, in 2010 and last year.

So now that the COA had breathed new life into the case, how was Plaintiff damaged by the alleged malpractice?  By the loss of the opportunity to sell or license his invention in those foreign countries in which he couldn't secure a patent. What was the value of those potential revenues? If Plaintiff had had revenues in the U.S. from his invention, those might have served as a benchmark, but the invention had never been manufactured or licensed in this country.

Plaintiff relied on the report of an expert witness, which concluded that he had "lost total gross profits of approximately $33 million between the years of 2010 and 2020" as a result of not obtaining foreign patent rights.

Think that was enough to get to a jury as evidence of damages?  it wasn't.  Judge Gale ruled that:

In light of the overwhelming evidence that [the Plaintiff]  had [not], at the time of [the expert's] opinion, ever realized or reasonably projected any commercial value from the invention (even though it had domestic patent protection), [the expert's] speculative, bare-bones conclusion is insufficient to create a genuine issue of material fact on whether [Plaintiff] suffered damages.

Op. ¶22 (emphasis added).

This isn't the first time in the Business Court that an expert's inadequate report has resulted in the dismissal of a case.  Judge Tennille dismissed a malpractice claim in Inland American Winston Hotels, Inc. v. Winston, 2010 NCBC 19 because the expert wasn't qualified to testify.

And in Blythe v. Bell, 2013 NCBC 8, Judge Gale said in refusing to consider an expert's report, saying that:

[w]hile the courts do not demand mathematical certitude in calculating lost profits, they do not countenance conjecture or speculation, and conjecture or speculation does not become admissible simply because it is presented by an expert. 

Op. ¶19 (emphasis added).

The Plaintiff didn't rely solely on the expert's report.  He also offered documents from the internet which he said showed that other products similar to the invention were being offered in foreign markets.  That didn't provide admissible evidence in opposition to the motion for summary judgment.  Relying on an opinion from the COA, Judge Gale held that:

Unauthenticated “internet printouts . . . do not constitute admissible evidence for purpose of the analysis required in connection with . . . [a] summary judgment motion[.]”

Op. ¶25 (quoting Rankin v. Food Lion, 706 S.E.2d 310, 316 (N.C. App. 2011).


"Common Interest" Privilege Considered By The NC Business Court

How much of an ownership interest does a parent have to have in a subsidiary for the attorney-client  privilege to extend to communications between the susidiary and the lawyer for the parent company?

Judge Gale pondered that question in SCR-Tech v. Evonik Energy Services LLC, 2013 NCBC 42, and wrote on a clean slate, given that he found no applicable North Carolina precedent.  Op. 8.

The Plaintiff, SCR-Tech, had been owned by a holding company in which Ebinger had a minority (37.5%) interest.  The communications withheld on the basis of privilege covered a three year period during which SCR-Tech, Ebinger, and counsel were negotiating the sale of SCR-Tech.

Defendants said that to be considered SCR-Tech's "parent," Ebinger needed to be a majority owner with a greater than 50% interest.

That argument launched Judge Gale into distinguishing the "joint client" aspect of the attorney-client privilege from the "common interest" doctrine.  He said:

The “joint client” privilege focuses on client identity as defined by the extent of corporate relationship between two entities. The “common-interest” doctrine depends more on common legal interests between the separate entities, although the fact of corporate affiliation between them can factor into the analysis of that common legal interest.  The common-interest doctrine has arisen by expanding the joint-defense doctrine in criminal law, which was not controlled by any ownership relationship.

Op. 12.

The extent of Ebinger's interest in SCT-Tech really didn't make much difference to the analysis, given the two companies' common legal interest in the matters discussed in the withheld communications.

The Court held that the documents in question were privileged and denied the Defendants' motion to compel their production.

Judge Gale cautioned that "the court here does not intend to set rigid parameters for applying the common-interest doctrine, and this Order must be read in the context of the particular facts of this case."  Op. 12 & n.1.

There's No Attorney-Client Privilege For The Communication Of Facts

It's been nearly ten years since the North Carolina Supreme Court decided a case involving the attorney-client privilege.  That case was In re Miller, 357 N.C. 316, 584 S.E.2d 772 (2003), which raised the question whether the privilege survives the death of the client.  (It does.)

That case, which involved a criminal investigation, raised some esoteric issues.  Those are probably unlikely to come up in a business litigation practice, but Judge Jolly's Order last week in Meir v. Meir is likely to have more of a day-to-day impact on your practice.

Let's say your client is questioned about the facts underlying the Complaint that you drafted based on those facts as told to you by her.  Are those facts privileged because they were told to you, her attorney?  Of course not.  We all should know that.

But what if you, lawyer, tell her, client, the facts you have learned about her claim from other sources.  Is that privileged?  Can you instruct her not to answer questions about those facts at her deposition?

Not so sure about that situation?  The Meir Order has the answer: you may not instruct your client not to answer those questions.  Judge Jolly ruled as follows:

The attorney-client privilege does not protect against the disclosure of facts. Rather, it only protects against the disclosure of certain confidential communications between an attorney and client. See Upjohn Co. v. United States, 449 U.S. 383, 396-97 (1981); In re Miller, 357 N.C. 316, 336 (2003). The fact that Violet Meir and her counsel may have discussed certain facts related to this case does not trigger the application of any protection as to those facts. The court concludes that the
attorney-client privilege does not attach to specific facts simply because Violet Meir is aware of those facts only because of conversations with her attorney. In addition, the attorney-client privilege does not protect against the disclosure of Violet Meir's personal opinions, feelings or knowledge.

Op. Par. 10.

The attorney-client privilege isn't like a "cone of silence" that extends to the exchange of facts between attorney and client.

And if you are too young to remember the TV show Get Smart, which occasionally referred to the Cone of Silence, click here.  This might be the most valuable thing that you learn from this post.

Claims For Legal Malpractice Aren't Assignable In North Carolina

Maybe you've wondered whether a claim for legal malpractice can be assigned. Maybe you haven't. But yesterday, the North Carolina Court of Appeals answered that question.  In Revolutionary Concepts, Inc. v. Clements Walker PLLC, the Court held that "malpractice claims are not assignable in North Carolina."  Op. at 10.

Why not?  A cascade of horribles might result if they were assignable.  The concerns noted by the COA were:

the potential for a conflict of interest, the compromise of confidentiality, and the negative effect assignment would have on the integrity of the legal profession and the administration of justice.

Op. at 9.

Malpractice claims now fit in a broad category of personal injury claims which are not assignable, like "claims for defamation, abuse of process, malicious prosecution or conspiracy to injure another's business, unfair and deceptive trade practices and conspiracy to commit fraud."  Op. at 8.

If the name of the case sounds familiar, that's because it was a Business Court case which you've read about before on this blog.

And don't think that this result represents a win for the law firm involved.  The COA reversed a 2010 Order from the Business Court holding that the firm's individual client had assigned away his malpractice claim to a corporate Plaintiff and that he therefore had no standing to bring the malpractice claim.

When Law Firms Dissolve: Dividing Up The Proceeds From Contingent Fee Cases

The Court of Appeals in February 2011 ordered Judge Jolly to dissolve Mitchell, Brewer, Richardson, Adams, Burge & Boughman, a law firm organized as a member-managed professional limited liability company.  The dissolution was ordered per N.C. Gen. Stat. §57C-6-02, which authorizes judicial dissolution when the managers of the LLC are deadlocked "in the management of the affairs of the limited liability company."

The deadlock, which had existed since June of 2005, concerned how  the profits from contingent fee engagements, concluded after several partners withdrew from the PLLC, should be divided among the partners.  Carrying out the directive of the Court of Appeals, Judge Jolly  last week in Mitchell v. Brewer, 2013 NCBC 14 resolved the issue of how those profits should be shared.

These former partners have been at war for seven years over the division of these fees.  I've written several times about the case, including in May 2007April 2008, and March 2009.

In this latest round in their war, the former partners (the Plaintiffs) and the remaining Partners (the Defendants, who did all the work after the dissolution to resolve the outstanding contingent fee matters) had different approaches as to how the fees should be allocated among them.

Plaintiffs said they were entitled to their share in the profits from the engagements regardless when and by whom they were realized.  There is some support for this view in the LLC Act, which 

provides that upon dissolution, unless otherwise agreed, an LLC such as [the Company] continues in existence while its managers, or others charged with winding up the affairs of the LLC, have a statutory duty to (a) obtain '[a]s promptly as reasonably possible . . . the fair market value for the [LLC's] assets,' and (b) distribute the net balance of those assets to the LLC's Members, and others.
G.S. 57C-6-04(b), 05(3).

Op. 7.  Plaintiffs said that the statute placed a duty on the managers of the LLC "to carry on the firm's unfinished business in order to realize fair market value for its assets."  Op.  8.

The Defendants, who had done the work to pursue the contingent fee engagements to resolution, had a different point of view.  They said that the only interest that the former partners had in the contingent fee engagements was the value that they had before dissolution.  Since the value that actually materialized thereafter was due solely to the Defendants' efforts after the dissolution, they said that

they should be required to remit to the Company only the value of net profits ultimately derived from the Contingent Fee Engagements less those profits that are attributable exclusively to Defendants' post-dissolution efforts.

Op. 12.

Judge Jolly, as the decider, disagreed with both positions.  He observed that contingent-fee engagements "cannot be 'liquidated' in the conventional sense of the term.  The only way to realize a tangible value in a contingent fee case is "by ultimately reaching a favorable settlement or verdict in the matter."  Op. 19.

Therefore, he said, "dissolution should end the right of members to share in the future profits of their fellow members' personal-service engagements."  Op. 22.  So profits attributable to "post-dissolution personal services by individual former members should not accrue to the LLC."  Op. 22.

The valuation protocol which Judge Jolly dictated was to look to the "percentage of pre-dissolution Time expended relative to the net profit ultimately realized on that matter."  Op. 25.  He gave this example:

if a total of 100 attorney hours were expended on a particular Contingent Fee Engagement and 50 of those hours were performed prior to dissolution, the net fee ultimately received by Defendants should be shared 50/50 with Plaintiffs.


It seems doubtful that the contingent fee engagements will fall that neatly into boxes.  That may be the reason that the Judge appointed an accountant as a Special Master to conduct an accounting of the contingent fee engagements. 



Another Disqualification Motion In The Business Court

The efforts to disqualify Defendants' counsel were unsuccessful in Atkinson v. Lackey.  In denying the motion to disqualify this week, Judge Murphy gave some insight on Rule 1.9 of the Revised Rules of Professional Conduct.

Rule 1.9 is titled "Duties to Former Clients."  It says that:

A lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing.

Rule 1.9(a).

The law firm in question had consulted with one of the Plaintiffs about a lawsuit he later filed against other defendants who were connected to the defendants in the current action.  The disqualification issue distilled to whether the two lawsuits were "substantially related" per Rule 1.9.

Judge Murphy, relying on comments to the Rule, held that:

two cases will be deemed “substantially related” when they involve (1) the same transaction, (2) the same legal dispute, or (3) 'if there otherwise is a substantial risk that information as would normally have been obtained in the prior representation would materially advance the client’s position in the subsequent matter.' N.C. R. Prof’l Conduct R. 1.9, Cmt. 3. “Furthermore, ‘[t]he substantially related test requires a virtual congruence of issues, and the relationship between the issues in the prior
[representation] must be patently clear.’”Classic Coffee Concepts, Inc. v. Anderson,
2006 NCBC 21 ¶ 45 (N.C. Super. Ct., Dec. 1, 2006)(citation and internal quotations omitted).

 Op.  20.

He moved on to debunk the notion that the two cases were "substantially related," ruling that they "each arose from separate and distinct transactions surrounding potential fraud within different organizations."  The fact that there were three overlapping parties in the two actions did "not mandate a finding that the two actions are related."  Op.  21.

The Plaintiffs didn't give up there.  They said that one of them, during consultations with Defendants' law firm about the previous lawsuit, had disclosed information that would advance the Defendants' position in the new litigation. That's a basis for disqualification under Rule 1.9, but lawyers shouldn't be disqualified from representing another client for using "generally known information."  Op.  ¶22.

Judge Murphy concluded that the information pointed to by the Plaintiffs -- the corporate structure of the Defendants -- would have been within the knowledge of the Defendants and that it therefore was "generally known."  Op.  22.

He also examined the information contained in the notes of Defendants' counsel's meeting with one of the Plaintiffs regarding the earlier lawsuit, and said that "what little information" was provided "was of a general nature that would be of little or no assistance" to the Defendants.  Op. Par. 23.

This is the second time in three months that Judge Murpy has denied a Motion to Disqualify.  The last one was in McKee v. James.  If you keep the stats of the Business Court on this type of motion, it has disqualified counsel  four  times (in Flick Mortgage Investors, Inc. v. The Epiphany Mortgage, Inc., 2006 NCBC 3 (N.C. Super. Ct. Feb. 1, 2006)(Diaz); Chemcraft Holdings Corp. v. Shayban, 2006 NCBC 13 (N.C. Super. Ct. Oct. 5, 2006)(Tennille); The Cottages of Stonehenge Condominium Homeowners Association, Inc. v. Dominion Mid-Atlantic Properties II, LLC (Jolly);  Ferguson Fibers, Inc. v. Foster (Tennille)  and denied disqualification five times (in Classic Coffee Concepts, Inc. v. Anderson, 2006 NCBC 21 (N.C. Super. Ct. Dec. 1, 2006)(Diaz), Wachovia Insurance Services, Inc. v. McGuirt, 2007 NCBC 3 (N.C. Super. Ct. Feb. 13, 2007)(Diaz); International Forest Products Corp. v. Jackson Paper Mfg. Co. (Murphy), McKee v. James (Murphy), and this week's case.


Ethics And Email, From The NC State Bar

The intersection of technology and the rules of ethics continues to develop.  The NC State Bar has proposed a new FEO (2012 Formal Ethics Opinion 5), which deals with the interesting question of the attorney-client privilege of an employee's emails to her personal lawyer that are on her employer's email system.

If Your Client Is The Employee

The Opinion contains a caution: If you are a lawyer representing an employee in any matter, whether related to her employment or not, you probably shouldn't communicate with her at her office email address.  The opinion recommends that the lawyer "explore with the client alternative methods of communicating including use of the employee’s personal email system, telephone, and texting. "

If Your Client Is The Employer

If you are a lawyer representing the company, can you access the employee's emails with her lawyer on the corporate system?  Only if you can conclude "confidently" and "in good faith" that any privilege has been waived.

How can you arrive at that "confident" determination?  It depends on whether the employee "had a reasonable expectation of privacy in the email communications."  That requires taking into account a hodgepodge of factors, including:

whether the employer has a clear, unambiguous policy regarding email usage and monitoring; whether that policy is effectively communicated to employees; whether the policy is adhered to by the employer; whether third parties have access to the employee’s email account on the employer’s system; when/where the communication occurred (at home or the office; during work or leisure hours); and whether the employee took affirmative steps to preserve the privacy of the communication.

Since the opinion recommends that the attorney seeking to view or use the emails "should err on the side of recognizing the privilege whenever an analysis of the facts and case law is inconclusive," it seems that the necessary "confidence" might not often be found. 

But let's say that you are in the rare situation where the employee could not be said to have a "reasonable expectation of privacy" in the emails.  Do you have to notify the employee's personal counsel that you are going to read them?  There is a bright line answer here: No.  The reason is that the fact that the employer has copies of the emails is confidential client information, which the employer's attorney may not disclose without his client's consent or unless an exception to confidentiality (like a need to disclose to comply with the law, a court order, or the rules governing discovery) applies.

Employee's Personal Email Account

The opinion isn't really different when it's a personal email account involved (like a gmail account which the employee accesses at work).  The lawyer for the employer can't advise his client to invade the account by changing the password.  I didn't realize that was possible, but it would violate RPC 1.2(d), which prohibits a lawyer from counseling a client "to engage in criminal or fraudulent conduct,"  Nor can the lawyer reap the benefit of the client undertaking that action on its own.  That would be assisting the client in fraudulent conduct.

But what if you don't need to change a password to access the account, or you can recover the emails from the employee's hard drive?  No clear answer.  Given that the Opinion is fiercely protective of the privilege, I would say you can't.  It says that the privilege "is fundamental to the client-lawyer relationship and the trust that underpins that relationship. As such, the bar must protect the privilege and seek to limit incursions upon the privilege that are not warranted by law."

This isn't the only foray of the State Bar into the intersection of ethics and email.  2012 FEO 7, proposed at the same time, says that a lawyer sending an email to a lawyer representing an adverse party cannot copy the other lawyer's client on the email.

The Opinion says that "[c]opying the opposing party on a communication—whether email or conventional mail—with opposing counsel is a communication under Rule 4.2(a) and prohibited unless there is consent. "  "Consent" means "express consent from opposing counsel."

The Opinion sets out the same rule even if the opposing client was copied on the email to which the response is being made.

Note that these Opinions are only proposed.  The Bar is inviting and accepting comments.

Thanks to my friend Molly Whitlatch for suggesting that I write about 2012 FEO 5.


Legalzoom Strikes Out In Declaratory Judgment Action Against NC State Bar

Sometimes you have a hard time telling who won and who lost a motion ruling.  That's true of Judge Gale's ruling on Monday in Legalzoom, Inc. v. The North Carolina State Bar, 2012 NCBC 47.

You are all undoubtedly familiar with Legalzoom, an on-line purveyor of do it yourself legal documents. This isn't the first time that I've written about Legalzoom. The NC State Bar has been making noise for several years that the vending of Legalzoom's documents is the unauthorized practice of law, and therefore illegal. 

This irked Legalzoom, so it hauled off and sued the Bar for a declaratory judgment in September 2011 seeking a ruling that it isn't engaged in the unauthorized practice of law.   It also made affirmative claims for "commercial disparagement" and for the Bar violating the Monopoly Clause of the state Constitution.  The State Bar made a motion to dismiss, arguing that all of Legalzoom's claims depended on it not being involved in the unauthorized practice of law.

So who won?  No one.  Judge Gale denied the motion to dismiss Legalzoom's claim for declaratory relief, and deferred ruling on the other claims.

The principal reason for the ruling was the Bar had not put the unauthorized practice issue in play by presenting a claim for unauthorized practice.  The Bar can do that by making a claim for injunctive relief to a Superior Court (per N.C. Gen Stat. §84-37), or a District Attorney can initiate misdemeanor proceedings against an unauthorized offender (per G.S. §§84-7, and 84-8).

Judge Gale said that "[a] declaratory judgment action is not generally envisioned as a proceeding to force a State agency or criminal authority to undertake an enforcement proceeding it has in its discretion to date elected not to take."  Op. 44.

Judge Gale said that a motion to dismiss "is seldom an appropriate pleading in actions for declaratory judgments."  Op. 28.

He invited the Bar to make a counterclaim raising the unauthorized practice of law issue.  I expect that will be coming soon, unless the Bar and Legalzoom patch up their differences.

Lawyer Who Might Be Called As Witness Not Disqualified

If you are making a motion to disqualify opposing counsel before Judge Murphy in the Business Court, his decision yesterday in McKee v. James is likely to be of concern.  He not only denied the Motion, but he dropped a few nuggets along the way which the party opposing the motion in your case may want to quote:

He said that disqualification motions should be "carefully scrutinized" because they "have a potential for abuse as litigation tactics," and that "disqualification is viewed by courts as a 'drastic measure' to be imposed only when 'absolutely necessary.'"  Op. 10.

The burden on the party moving for disqualification is "high."  Op.11.  It's also important to note that "a party’s right to counsel of its choosing is a fundamental tenet of American jurisprudence, and that, therefore, a court may not lightly deprive a party of its chosen counsel." (citing United States v. Smith, 653 F.2d 126 (4th Cir. 1981)). Id.

It was against this backdrop of skepticism that Judge Murphy turned to Rule 3.7, the Rule of Professional Conduct on which the Motion was based.  Rule 3.7 deals with a lawyer's ability to continue as litigation counsel if he may be called as a witness.  It says: 

A lawyer shall not act as an advocate at a trial in which the lawyer is likely to be a necessary witness unless: (1) the testimony relates to an uncontested issue, (2) the testimony relates to the nature and value of services rendered in the case, or (3) disqualification of the lawyer would work a substantial hardship on the client. . . . [Moreover, a] lawyer may act as advocate in a trial in which another lawyer in the lawyer’s firm is likely to be called as a witness unless precluded from doing so by Rule 1.7 or Rule 1.9.

Defendant James was saying that he would be calling Plaintiff's counsel as witnesses to testify about the circumstances under which they had asked another witness to sign an affidavit.  That witness later disavowed his affidavit, which was highly supportive of Plaintiff's case, and it turned out that he had been unable to read it before signing it.

If you are thinking that these affidavit issues can't be central to the issues of the case, Judge Murphy agreed. 

But if Plaintiff's counsel really found it important to present evidence at trial about the affidavit shenanigans, then Defendant's counsel were not "necessary" witnesses.  Judge Murphy said that "[a] necessary witness is not the best witness, but the only witness that can testify to information that is relevant and material to the dispute."  Op. 16.  A lawyer's testimony is “necessary” when it is "relevant, material, and unobtainable by other means."  Op.17.

Since there were other persons who had been present at the signing of the affidavit, that testimony was "obtainable through other means," so the Defendant's lawyers were not required to step aside.

So, disqualification based on RPC 3.7 is pretty narrow.

If you are interested in other Business Court rulings involving Motions to Disqualify, you can click here, or type "disqualify" into the search box on the left side of the main blog page.



What NOT To Do When Your Witness Goes South At Trial

If you've tried cases, you've probably had your own witnesses -- who you thought were solid -- disintegrate in front of you at trial.  They start acting quirky, begin conceding important points on direct examination they had held on to at their depositions, and are still facing cross-examination.

What do you do?  I can tell you what not to do.  Don't do what the lawyers did at the trial of Brockington v. Jacobs Engineering Group, Inc.  These lawyers, Gill and Wright, were from Virginia and appearing pro hac in a trial in Johnston County.  The case involved an explosion at a ConAgra plant that had resulted in death and injury to several workers.

Their witness, Pottner, testified that he probably knew that gas lines were being installed across the roof of the ConAgra plant while he and Jacobs Engineering were working there.  This was apparently a significant concession, because Pottner had testified at his deposition that he didn't recall knowing about the gas lines.

Gill and Wright seemed to have concluded that Pottner had lost his mind.  Gill took him to an Urgent Care after Court on March 20th, and Wright reported the next day that Pottner had an alarmingly high blood pressure and that he might have an aneurysm.  Gill stated that one of Pottner's pupils had not been sensitive to light, a sign of a neurologic disorder.  They were also concerned that he had had a stroke.

Gill and Wright sent Pottner home to Wisconsin after several days of treatment even though he was still under a subpoena to appear at trial.  Judge Hobgood, relying on the representations of Gill and Wright, said that Pottner had been reported to have had a stroke and a loss of partial use of one side of his body.  He declared Pottner "unavailable" to testify per Rule 804(a)(4) of the Rules of Evidence.  Pottner never finished his testimony.

The Judge learned a little bit later, after medical records were subpoenaed, that the lawyers had misstated Pottner's condition.  He had not had a stroke, had not lost the use of his body, his blood pressure had not been as high as stated by counsel, and he was under no restrictions when he left Wake Medical Hospital in North Carolina.  Judge Hobgood observed that Pottner could have returned to testify without any danger to his health.

In his Order sanctioning the parties represented by the lawyers, the Judge outlined a number of violations of the NC Rules of Professional Conduct by Gill and Wright.  Those were of:

  • Rule 3.3, which requires candor toward the Court.  A lawyer is obligated to "inform the trial tribunal of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse."  Pottner's counsel had known that Judge Hobgood had not accurately stated Pottner's condition when he was declared to be unavailable.
  • Rule 3.4, which requires attorneys to conduct themselves with fairness to the opposing party and counsel.  You can't encourage a witness to leave the jurisdiction and make himself unavailable as a witness.
  • Rule 8.4(d), which prohibits conduct prejudicial to the administration of justice.

Since Pottner had been under subpoena, the defendants were open to a variety of sanctions per Rule 45 of the NC Rules of Civil Procedure.  Rule 45(e)(1) says that the Court can impose upon a party who fails to comply with a subpoena without cause any sanction allowed by Rule 37(d),  Judge Hobgood chose to strike the Defendants' Answer, saying that "no less a sanction" would provide an adequate remedy to the Plaintiffs.

The Order was entered on April 4, 2012.  Nine days later, the jury, unencumbered by any of the stricken defenses, returned a $14.6 million verdict for the Plaintiffs

There is still a punitive damages phase of the case to be tried.  I wonder if the Virginia lawyers will have the nerve to come back.

I wouldn't have known about this cautionary and very interesting trial court Order but for one of my partners circulating it at Brooks Pierce.  He asked me to keep him anonymous.  If any of you receive Orders that deserve wider circulation, I would be glad to write about them and even to disclose your identity and generosity.





NC Court of Appeals Rules in Law Firms' Fight Over Contingent Fees

There's invariably a fight between lawyers over the division of a fee when a lawyer who left the firm generates a fee at his new firm from a preexisting contingent fee relationship.  There's at least one case of that type in the Business Court (Mitchell, Brewer, Richards, Adams, Burge & Boughman, PLLC v. Brewer), and the Court of Appeals tangled with one last Tuesday, in Crumley & Associates, P.C. v. Charles Peed & Associates.

The Crumley Firm had an employment agreement with Snyder, an associate who left the firm.  The agreement said that Snyder would pay it 70% of the fees he realized from clients who followed him from the Firm.  He was also required to reimburse the Crumley Firm for any funds it had advanced to the clients.

Approximately 30 clients followed Snyder with their workers' compensation claims to his new firm, Peed & Associates, and substantial fees (more than $300,000) were generated.  After the Crumley Firm sought its 70% cut, Snyder went to the NC State Bar, asking for an opinion on the enforceability of the agreement.  In a Formal Ethics Opinion, 2008 FEO 8, the Bar ruled the agreement unenforceable, and said it was in violation of Rule 5.6 of the Rules of Professional Conduct.

That wasn't the end of the matter.  The Crumley Firm then sought recovery on a quantum meruit basis.  The trial court awarded the Crumley Firm $147,946.53 as its reasonable share of the fees.  Both sides appealed.  Crumley wanted more from Peed's hide, but Peed wanted to pay less, including getting out from under a $1.00 judgment against it for constructive fraud.  That must have hurt Peed's pride more than its pocket.

Note that the opinion gives no guidance on how the fees should have been allocated.  The two firms stipulated to the amount due the Crumley Firm.

I haven't read the appellate briefs, but they were apparently sharply worded.  Chief Judge Martin of the Court of Appeals admonished both sides for their tone.  He said that in both their briefs and their oral arguments, they:

freely trade suggestions and outright allegations that the other has engaged in unprofessional and even unethical conduct, perhaps hoping thereby to persuade the Court toward deciding for the party engaging in the least egregious conduct. Those questions are better left to the State Bar and the parties’ peers, and we reject their attempts, in exchanging affronts, to obfuscate the purely legal issues their dispute has presented, first to the trial court, and now to this Court.

Op. at 6.

There are very few people in this world around whom I have to struggle to be civil, but none of them are on our Court of Appeals.  Be on good behavior in Raleigh, even if it is against your nature.

After that admonishment, Judge Martin considered Peed's argument that the Crumley Firm had unclean hands because the employment agreement violated the Rules of Professional Conduct, and that this barred any recovery of fees whatsoever.

He rejected that argument, saying that it was of "no consequence."  He said that the law "is settled in North Carolina" that:

counsel, who has provided legal services pursuant to a contingency fee contract and is terminated prior to a resolution of the case and the occurrence of the contingency upon which the fee is based, has a claim in quantum meruit to recover the reasonable value of those services from the former client, or, where the entire contingent fee is received by the former client’s subsequent counsel, from the subsequent counsel

Op. at 7-8.

Judge Martin held that the doctrine of unclean hands "is only available to a party who was injured by the alleged wrongful conduct."  Op. at 9.  Since the Crumley Firm had contingent fee agreements with its former clients, it was entitled to the reasonable value of its fees regardless of the supposed dirtiness of its hands with regard to Snyder and Peed.

The Court shot down the Crumley Firm's argument that Peed had a fiduciary duty to hold the fees owed to the Crumley Firm in trust.  Peed had spent the fees in the course of its ordinary operations, and the Crumley Firm said that this amounted to constructive fraud.  The primary basis for the claimed fiduciary obligation was RPC 1.15-2(g), which says that “if [a] lawyer’s entitlement [to fees] is disputed, the disputed amounts shall remain in the trust account or fiduciary account until the dispute is resolved.”

But the ethical rule didn't create a fiduciary obligation.  The Court said that a violation of a Rule of Professional Conduct "does not give rise to civil liability in North Carolina."  Op. at 12, and it reversed the one dollar judgment finding Peed liable for constructive fraud.

There's obviously no love lost between these two PI firms.  They have been fighting over these fees for the past five years.



We're Gonna Zoom A Zoom A Zoom in North Carolina

You probably know that there is a fight afoot between the North Carolina State Bar and the do-it-yourself vendor of legal documents, LegalZoom. The simmering dispute has been covered in the Wall Street Journal, the ABA Journal, and the case is now in the Business Court over Legalzooom's vitriolic objections.  The issue is whether LegalZoom's offerings constitute the unauthorized practice of law.

LegalZoom bills itself as “transform[ing] the way people think about and fulfill common legal needs.” It says that it has made its mission “to simplify the process and to set new standards for convenience and service in an industry not typically known for great customer care.” The company basically sells legal forms to non-lawyers (and helps its customers to fill them out by computer) which enable them to form their own corporations, write their own wills, and get their own divorces, while at the same time avoiding what LegalZoom condemns as the high cost of attorneys’ fees.

It’s said pretty often that “you get what you pay for,” so it’s not surprising that LegalZoom has taken some heat (like from Consumer Reports) for the quality of its services, even though it advertises that 94% of its customers "recommend LegalZoom to friends and family." The lawyers who provide the same services as those offered by LegalZoom, such as estate planning lawyers, and lawyers filing trademark applications, aren’t keen on the service. 

Not much has happened in the Business Court so far, except for LegalZoom’s strident efforts to stay out of the Business Court. Those began with the filing of the case by LegalZoom against the State Bar. LegalZoom immediately asked the Chief Justice of the NC Supreme Court for an exceptional case designation to Superior Court Judge Paul Gessner. That was granted back in October, apparently without notice to the NC Bar.  The Bar then designated the case to the Business Court as a mandatory complex business case, which LegalZoom opposed, saying its case was not a " complex business case" within the mandatory jurisdiction of the Business Court.

LegalZoom has lost Round 1.  Judge Jolly (who decides all designation motions as the Chief Judge of the Business Court) ruled that the claims made by LegalZoom in its Complaint are squarely within the jurisdiction of the Business Court. Count 1 of the Complaint is for a violation of the Monopoly Clause of the North Carolina Constitution, saying that the State Bar has interfered with LegalZoom’s constitutional right to freely do business in North Carolina. Count 2 says that the State Bar has also violated the state Constitution by excluding LegalZoom from “register[ing] its legally compliant prepaid legal services plan.” (That's a whole different LegalZoom service).  The third count is for “commercial disparagement,” alleging that the State Bar has made false statements to the public which caused the public “to regard [LegalZoom’s] product as legally unauthorized, and imputing illegal conduct to [LegalZoom].”

 In opposing the Bar’s designation as a mandatory business case, LegalZoom argued that its case was “exceptional,” but not a “complex business case.”  Judge Jolly didn’t spill much ink in denying the Opposition in an Order on January 9th. He said:

Plaintiff's Complaint specifically alleges that "this case includes claims that involve a material issue relating to . . . [a] anti-monopoly, anti-competition, and antitrust law claims that are not based solely on N.C. Gen. Stat. § 75-1.1; [b] unfair competition law claims that are not based solely on N.C. Gen. Stat. § 75-1.1; and [c] the Internet and electronic commerce." These allegations are substantially identical with three separate statutory grounds for designation of a civil action as a mandatory complex business case under the Removal Statute.

Order ¶3.  So that's that.  The case has been assigned to Judge Gale and will be resolved in the Business Court.

Where was the vitriol?

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Company Waives Attorney-Client And Work Product Privileges Through Advice Of Counsel Defense

A broadly worded defense in a case challenging the sale of a company resulted in a waiver of the attorney-client and work product privileges last week, in Richardson v. Frontier Spinning Mills, Inc.

Richardson claimed that the company had improperly structured its sale so that non-employee shareholders like him were paid less for their stock than the shareholders who were employed by Frontier and that the company had failed to disclose material facts regarding the transaction.  The company defended by asserting that it had relied on the advice of its corporate counsel in how the sale was structured.

It is not unusual for counsel defending corporate directors to raise an "advice of counsel" defense because G.S. §55-8-30 says that directors may rely upon information provided by "[l]egal counsel, public accountants, or other persons as to matters the director reasonably believes are within their professional or expert competence" in discharging their duties as directors.

According to the Business Court, there is "ample authority" that the raising of such a defense results in a waiver of the attorney-client privilege.  Given that the scope of waiver is often a "thorny issue" (Op. Par. 9), a defense relying on Section 55-8-30 should be carefully worded.  The defense before Judge Jolly in the Richardson case stated that

if it is determined there was illegal disparate treatment of the "Outside Shareholder[s]" and the "Inside Shareholders" or insufficient material disclosure in the Stock Purchase Agreement and otherwise, which the Defendants specifically deny, then Defendants assert that in the discharge of any legal responsibilities with respect to these allegations, they relied on the advice of counsel.

In his ruling, the Judge said that the word "otherwise" was "so broad as to be elusive of clear and reasonable definition." Op. at Par. 8. He said also that "[s]uch broad language makes it extremely difficult for the court to define fairly and reasonably where any resulting waiver of the attorney-client privilege begins and ends." Op. ¶10.

He held that the waiver covered any communications between the defendants and their counsel that took place before the closing of the sale and which reasonably related to a broad range of matters involving the sale.

The waiver extended to the work-product of counsel, because the statutory defense applies only if the director reasonably relies on the legal advice.  Judge Jolly relied on cases outside of North Carolina for the proposition that:

fairness dictates the necessity for an examination of the underlying good faith and reasonableness of the advice itself, including the circumstances surrounding issuance of the legal opinion, and that relevant work product therefore loses its privilege protections.

That exposed the lawyers to having to produce all documents reflecting communications between the law firm's primary counsel to the company and other lawyers at the law firm.

Judge Jolly said that "it would not have been difficult" to limit the scope of the waiver by limiting the wording of the defense. Op. 10.  That might be easier said than done.  Waiver is a slippery slope once you start heading down it.  There's no telling where you might end up.


Business Court Denies Motion For Disqualification Of Counsel

in an Order yesterday in International Forest Products Corp. v. Jackson Paper Mfg. Co., the Business Court denied a motion to disqualify defense counsel from representing Jackson Paper.  The lawyers who were challenged were from the Atlanta firm of McKenna Long & Aldridge. 

The basis for disqualification was that McKenna had previously represented a Jackson Paper subsidiary, Stonewall, in matters substantially related to the Business Court case and in matters on which the lawyers'  testimony would be required. The Plaintiff  International had acquired the claims it was pursuing against Jackson Paper by assignment from Stonewall in a receivership proceeding.

If it were Stonewall suing Jackson, it seems likely that McKenna Long could not have been jackson's counsel due to McKenna's previous representation of stonewall.  That's because Rule 1.9 of the Revised Rules of Professional Conduct says that

a lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related matter in which that person's interests are materially adverse to the interests of the former client.

But International Forest didn't acquire the attorney-client relationship between McKenna Long and Stonewall.  It only acquired the claims that Stonewall had against Jackson.  Judge Murphy said that this made all the difference and that the Rule did not apply:

Rule 1.9 and its commentary. . .make clear that a duty of loyalty attaches to a client, and not to a claim or transaction. The lawyer-client relationship is a personal one and cannot be assigned. In the present matter, a lawyer-client relationship existed between McKennaLong and [Stonewall]. Thus, McKenna Long’s duty of loyalty and confidentiality are owed to Stonewall, not to Stonewall’s claims or interests. This personal duty, therefore, did not transfer to Plaintiff International Forest Products Corporation (“International Forest”) when it acquired certain of Stonewall’s claims. As an assignee, International Forest cannot claim protection under the duty of loyalty because it is not a former client of McKenna Long itself. Therefore, Rule[] 1.9 [is] inapplicable.

Another ground for disqualification was International's stated intention to call McKenna Long lawyers (other than Jackson's litigation counsel) as witnesses.  RPC 3.7(a) says that a lawyer cannot be an advocate at a trial in which the lawyer is likely to be a necessary witness.  But RPC 3.7(b) says that other lawyers in a lawyer-witness’s firm may continue to act as advocate unless the lawyer-witness’s testimony would be adverse to the client’s interests.  The Defendants didn't claim that the lawyer testimony would be adverse, so Judge Murphy denied that aspect of the disqualification motion as well.

Malpractice Is Malpractice: State Court Jurisdiction for Patent Attorney Professional Negligence Claims

What's the difference between a patent holder who suffers harm from third-party infringement and a patent holder who suffers harm from his own attorney's malpractice?  The latter can pursue his claim in state court, according to a March 9 Business Court decision.

In Revolutionary Concepts, Inc. v. Clements Walker PLLC, the inventor of an "automated audio video messaging and answering system" and the current holder of the patent sued a patent agent, three patent attorneys, and a law firm for malpractice in failing to take certain actions before the United States Patent & Trademark Office ("USPTO").  Specifically, Plaintiffs alleged that Defendants failed to file certain paperwork that cost Plaintiffs their ability to patent their invention in foreign jurisdictions, including Japan and the European Union.  Defendants moved to dismiss for lack of subject matter jurisdiction, arguing that the claims lay within the exclusive jurisdiction of the federal courts. 

Further complicating matters, shortly after filing the Business Court lawsuit, Plaintiffs filed a separate lawsuit in the Western District of North Carolina, Carter v. Ozoeneh (W.D.N.C. No. 3:09-CV-614), to determine the ownership of the patent at issue.  The defendant in the federal lawsuit is an individual who was listed as a co-inventor on a prior patent application for the technology at issue.  Plaintiffs sought to amend the federal complaint to add one of the attorney defendants from the Business Court lawsuit along with Lawyers Mutual for claims of racketeering, maintenance, unfair competition, and tortious interference.  On September 16, 2009, Magistrate Judge David Cayer denied the motion to amend and recommended that the District Judge dismiss other claims against John Doe defendants, but the ownership claims remain in the federal lawsuit.

As for the jurisdictional issue in the Business Court lawsuit, Judge Tennille held that Plaintiffs' malpractice claim was not within the exclusive jurisdiction of the federal courts.  The Court examined cases from several jurisdictions, some of which permitted malpractice claims to proceed in state court and others of which held them to be exclusively federal claims.  The distinction depended on whether federal patent law was an essential element of the Plaintiffs' claims.  In Revolutionary Concepts, it was not:

In this Court’s view, the case sub judice is different.  The Complaint in this case does not raise an issue which requires the determination of the validity, scope or infringement of a United States patent.  Furthermore, the Complaint does not raise an issue requiring determination of what the USPTO would do under certain circumstances, nor does it involve regulation of the conduct of counsel appearing before the patent office.  The Complaint clearly raises issues of what the validity and scope of potential foreign patents would have been and perhaps issues of infringement of potential foreign patents that were allegedly lost.

The loss of the foreign patent rights is based upon a breach of the standard of care, quintessentially a state law claim.  Every malpractice action will require determination of a standard of care.  It is unlikely that any standard of care can be assessed without some reference to compliance with the proper procedures in the USPTO.  This Court does not read the Federal Circuit decisions to hold that any case by a patent owner against its patent counsel will fall within the exclusive jurisdiction of the federal courts.  Where federal jurisdiction will promote uniformity of claim construction, consistency in validity, scope and infringement of U.S. patents, or promote uniform regulation of patent counsel conduct before the USPTO, federal jurisdiction is mandated.  Where the issues involve foreign patent rights and issues of whether a lawyer complied with a standard of care, federal jurisdiction is not mandated.

The Court also noted that Plaintiffs voluntarily dismissed a claim for breach of contract in the prosecution of the patent before the USPTO.  In contrast to the foreign registrability issues of the malpractice claim, the breach of contract claim would have implicated federal law enough to confer exclusive federal jurisdiction over the lawsuit.  After the dismissal of that claim, however, whatever exclusivity may have existed previously no longer did.


Business Court Grants Motion To Disqualify Counsel

The Business Court granted a Motion to Disqualify counsel today in Ferguson Fibers, Inc. v. Foster, and sent a cautionary word to lawyers who represent the employees of their corporate clients in what they might believe to be unrelated matters.

The issue was whether the attorney for Plaintiff Ferguson Fibers should be disqualified because he had previously represented Foster in a child support matter and in a lawsuit involving the sale of the business of Foster's wife. The new lawsuit appeared to be completely unrelated to those past representations. It involved claims by Ferguson Fibers that Foster had engaged in inappropriate conduct while employed by Ferguson Fibers.

Rule 1.9 of the North Carolina Rules of Professional Conduct provides that "a lawyer who has formerly represented a client in a matter shall not thereafter represent another person in the same or a substantially related mater in which that person's interests are materially adverse to the interests of the former client unless the former client gives informed consent, confirmed in writing."

The test for whether matters are "substantially related" is "if they involve the same transaction or legal dispute or if there otherwise is a substantial risk that information as would normally have been obtained in the prior representation would materially advance the client's position in the subsequent matter."

Foster asserted that he had discussed with his former lawyer during the past representations his employment and business dealings with Ferguson Fibers, his role in helping his employer move part of its business to Mexico, and his "strained relationship" with his boss. He said that disqualification was warranted because this information might be relevant to the lawyer in his representation of his former employer.

The attorney disputed that he had ever discussed such matters with his former client, but Judge Tennille held that this made no difference. He observed that a court should "prevent even the appearance of impropriety and thus resolve any and all doubts in favor of disqualification." He said "[t]he Court need not resolve this factual dispute. Its existence is sufficient to require disqualification," and that "Foster's perception of events, as the client, is of 'paramount importance' in preventing the appearance of impropriety."

The Court also provided a quick word of advice to lawyers who represent organizations as well as their employees: "Attorneys who represent various constituents of an organization, be they investors, employees, suppliers, or customers, are in a better position than lay persons to protect against potential conflicts of interest. Where counsel represents both a company and its employees, it is the duty of the lawyer to inform the client about the implications of the dual relationship."

Other decisions by the Business Court involving Motions to Disqualify are The Cottages of Stonehenge Condominium Homeowners Association, Inc. v. Dominion Mid-Atlantic Properties II, LLC, Chemcraft Holdings Corp. v. Shayban, and Flick Mortgage Investors, Inc. v. The Epiphany Mortgage, Inc.

Brief in Support of Motion to Disqualify

Brief in Opposition to Motion to Disqualify

Reply Brief in Support of Motion to Disqualify

Out Of State Counsel, Depositions, And Pro Hac Vice Admissions In North Carolina

I had an out of state lawyer call me, concerned, a few weeks ago. He was defending a client in his home state in a case in which the plaintiff's counsel had obtained commissions to take depositions in North Carolina. The depositions were scheduled to begin in just a few days, and he was concerned that he needed to admitted pro hac vice, in a hurry.

My reaction was that this was unnecessary. It was an out of state case. Rule 5.5(c)(2)(B) of North Carolina's Revised Rules of Professional Practice says that it's not the unauthorized practice of law to take a deposition in North Carolina if the "matter . . .  arises out of or is otherwise reasonably related to the lawyer's representation of a client in a jurisdiction in which the lawyer is admitted to practice." Moreover, it was the other side that had gotten the necessary commission and subpoena to take the deposition. The lawyer who called just planned on attending and possibly asking some questions after the other lawyer finished with his questions.

But after I looked at the situation a little bit I wasn't so sure. One of the North Carolina depositions was to be taken in Wake County, where there is a specific Local Rule on point. Wake County Local Rule 13.1 says that "out-of-state attorneys seeking to take depositions of Wake County residents to be used in actions pending in other jurisdictions must be admitted pro hac vice unless local counsel has been associated."

That's pretty broad. It might even cover an out of state lawyer taking the deposition of someone who agreed to appear voluntarily, without a subpoena. And are you "seeking to take depositions" if you are not the lawyer who compels the appearance of the witness, but you simply show up and ask some questions? And what about "unless local counsel has been associated?" Does that mean that NC counsel has to take the deposition or at least attend it, or is it enough if NC counsel simply obtains the issuance of the commission?

Given all these questions, we went ahead and got the lawyer admitted out of an abundance of caution.

I did a quick spot check of Local Rules for similar provisions. The only other county I'm aware of with an applicable rule is Mecklenburg County. The local rule there, 18.2(f),says "[i]f the out-of-state attorney intends to make an appearance in North Carolina in connection with this matter (such as attending the deposition)," the lawyer must be admitted pro hac.

There are occasional quirky local requirements of a different nature regarding pro hac admissions, like including a statement in the motion confirming payment of the $225 admission fee, which Guilford County Local Rule 5.12 requires. (All of the local rules for North Carolina's counties are available here, it's worth checking the pertinent rules if you are seeking or considering a pro hac admission).

Don't forget that when a lawyer is admitted pro hac here, the NC attorney responsible for the admission has to obtain a completed Pro Hac Vice Registration Statement, and file that with the state bar within thirty days of the admission. Failure to do so is grounds for administrative suspension of the NC attorney from the practice of law.  27 NCAC Subchapter H, Section .0101(b).

The North Carolina Bar has has an FAQ page on pro hac admissions which has a lot of useful information. The statute governing pro hac admissions is N.C. Gen. Stat. §84-4.1.

Mining For Metadata In Communications From Opposing Counsel Would Be Prohibited Under Proposed Ethics Opinion From North Carolina State Bar

The North Carolina State Bar has proposed an Ethics Opinion on whether a lawyer can look for and use metadata contained in a electronic communication from another party or that party's lawyer. Proposed 2009 Formal Ethics Opinion 1, if approved, would place affirmative obligations on not only the recipient of the data, but also its sender.

[Note: On October 22, 2009, the State Bar Ethics Committee voted to withdraw this opinion and to send it to a subcommittee for further study.]

Metadata is "data contained within electronic materials that is not ordinarily visible to those viewing the information."  Metadata might show information that a lawyer chose to delete, or a private comment that the lawyer didn't mean the reader to see.

Obligations On Sending Lawyers

Those sending an email or electronic version of a document to an opposing counsel or party will be obligated to "use reasonable care to prevent the disclosure of confidential client information." That means being careful about using word processing software that tracks changes, allows the insertion of comments, or permits the saving of multiple versions of a document. The Opinion says that lawyers should use scrubbing applications that delete metadata, or avoid metadata altogether by sending fax transmissions or hard copies of documents.

Obligations On Receiving Lawyers

On the recipient side, the Proposed Opinion would prohibit a lawyer receiving electronic communications from searching for or using confidential information contained in the metadata in the document. And not only that, if the recipient unintentionally views hidden data, he or she must notify the sender of that fact.

The Proposed Opinion doesn't apply, of course, to documents produced in response to a subpoena or a discovery request.

Other States

The issue of metadata has been confounding state bar ethicists for years. The Proposed Opinion references a number of other state bars which have issued ethics opinions on the subject, including Alabama, Arizona, Colorado, the District of Columbia, Florida, Maine, Maryland, New York, and Pennsylvania.

North Carolina, if it adopts the Proposed Opinion, will be lining up with Alabama, Arizona, Florida, Maine, and New York. Each of those states takes the position that a lawyer should not search metadata for confidential information belonging to an opposing party. There are a few with a contrary view or which don't take a position on the subject, including the American Bar Association, Colorado, Maryland, and Pennsylvania.

The ABA has a good one page summary of the rules on metadata in these various jurisdictions, including a few additional jurisdictions not referenced by the NC State Bar in the Proposed Opinion.

If you have thoughts on this subject, you can address comments on the Proposed Opinion by September 30, 2009, to the NC State Bar Ethics Committee at P.O. Box 25908, Raleigh, North Carolina 27611.

The full text of the Proposed Opinion is below.

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Business Court Grants Motion For Disqualification Of Counsel

The Business Court today granted a motion to disqualify counsel for Plaintiffs, finding their prior representation of the Defendants involved a matter "substantially related" to the matters at issue in the lawsuit. 

The law firm representing the Plaintiffs in The Cottages of Stonehenge Condominium Homeowners Association, Inc. v. Dominion Mid-Atlantic Properties II, LLC had been longstanding counsel for the Plaintiff homeowners association.  They had first been retained when Defendant Dominion, the former owner of the property, converted it to a condominium and incorporated the HOA.

The Board of the HOA at that time consisted of representatives appointed by Dominion.  In 2006, the Dominion-controlled Board sought the law firm's advice about maintenance issues.  The advice was sought on behalf of both the HOA and Dominion.  The lawyers delivered a written opinion letter on "the maintenance responsibilities between the Unit Owners and the Association."

Over a year later, an owner-controlled Board of the HOA was elected.  Issues arose regarding the adequacy of maintenance reserves.  The law firm filed a lawsuit for the HOA against Dominion and the former board members for breaching their fiduciary duty by failing to set adequate reserves for common area and maintenance expenses.

After sifting through the positions of the parties, the Court held:

[h]ere, Defendants find themselves in a position in which the very lawyer who advised one or more of them with respect to duties and obligations relating to budgeting for and maintaining Stonehenge common areas now seeks damages against them for breaching their duty to adequately set aside fiscal reserves for the repair and maintenance of those same common areas.  The court is forced to conclude that the two are inextricably and substantially related.

Judge Jolly granted the Motion to Disqualify, stating that the prior representation presented the "substantial risks contemplated under Rule 1.9" of the North Carolina Rules of Professional Conduct, and that "it is the court's duty to resolve any and all such risks in favor of disqualification."

The Dairy Queen sign is from tboard's photostream on Flickr.

Brief in Support of Motion to Disqualify

Brief in Opposition to Motion to Disqualify

Funds Stolen By Lawyer At Closing: NC Court Of Appeals Rules On Whether Buyer Or Seller Bears The Loss