In many state, privity is required in order to maintain a legal malpractice claim. In other words, the claim must be client v. former attorney “absent special circumstances.” But under what special circumstances would a court be inclined to find legal malpractice in a non-privity situation?  A case this past week shed some light on what one of those situations may look like.

For example, in Deep Woods Holdings LLC v Pryor Cashman LLP, Defendant Law Firm represented a non-party individual (Buyer) in a transaction in which Buyer was to purchase $10 million worth of stock in a non-party bank. Due to complications in the transaction, Buyer reached an agreement that he had the right to exercise a call option to buy shares of stock in the bank for a specified sum, provided the right was exercised within 45 days after delivery of the shares.  However, Law Firm failed to timely exercise the call option in question on behalf of Buyer.

Thereafter, Law Firm recommended that Buyer form a holding company, so that he could assign the call option and allow the new holding company to sue to exercise the call option. Law Firm helped to organize the new holding company (which was the Plaintiff instant action) and drafted the assignment, proceeding to act as counsel for the Plaintiff holding company in the subsequent litigation.  The holding company won $25.3 million in damages in their lawsuit against the fund but the Second Circuit reversed, finding that the call option had not been not exercised in a timely manner.

The holding company then brought an instant action against Law Firm, alleging malpractice based on the firm’s failure to exercise the call option in a timely manner.  But, the initial motion court granted Law Firm’s motion to dismiss the malpractice claim, because the assignment the Law Firm drafted did not specifically assign Buyer’s tort claims to the holding company, and because the malpractice allegedly occurred while Buyer owned the call option, the holding company, as assignee, did not have standing to sue Law Firm. The holding company appealed.

The appellate division unanimously reversed and reinstated the Complaint, finding that, while the motion court correctly found that the assignment did not explicitly assign Buyer’s tort claims, the Plaintiff had sufficiently pled equitable estoppel as against Law Firm.  Indeed, the court held that where an attorney drafts an assignment at a time when it represents both the individual and the holding company, “interpreting [such an] assignment to exclude tort claims would mean that neither the assignor nor plaintiff, the assignee, would be able to sue [the law firm] defendants for malpractice for failing to exercise the call option in a timely manner.”  Therefore, the court found, a “special circumstances” exception to the privity requirement existed, because “[t]o do otherwise might insulate defendants from liability for their alleged wrongdoing.”

Privity remains a key issue in malpractice claims. All professionals must be cognizant of who has standing to sue and to be aware of who may be relying on the professional’s work-product, even non-clients. This decision should be instructive to all professionals.

The engagement letter is a critical tool for setting expectations, managing risks, and deterring malpractice.  Unfortunately, in a recent case out of New York, the court found the engagement letter did not sufficiently limit the risk to the professional in order to avoid the malpractice claim.

In the case, a bank retained its accountants to submit a request with the appropriate taxing authorities for an extension to file its 2010 year-end tax returns.  The bank alleged that its accountants advised that an extension had been filed extending the due date by six months.  Approximately five months later the bank entered into a written agreement with accountants to prepare and file the bank’s 2010 tax returns. The agreement was limited to the preparation and filing of the 2010 tax returns for an agreed upon fee.

The agreement contained a limitation of liability clause in relevant part as follows:

[the Bank] agrees, to the fullest extent permitted by law, to limit the liability of [Accountants to the Bank] for any and all claims, losses, costs, and damages of any nature whatsoever, so that the total aggregate liability of [Accountants to the Bank] shall not exceed [Accountant’s] total fee for Services rendered pursuant to this agreement.

The accountants proceeded to file the bank’s tax returns which were rejected by the IRS as untimely because it did not have any record of the extension being filed.  As a result of the late filing, the IRS disallowed the bank’s right to carry back over $2 million in net operating losses (the Tax Benefit).  The bank subsequently filed suit against the accountants alleging claims for negligence, professional malpractice and gross negligence for failure to file the extension forms.  The bank sought to recover losses flowing from the disallowance of the Tax Benefit.  The accountants moved to dismiss arguing the claims were barred by the Agreement’s limitation of liability clause.

The court found that the limitation of liability clause did not apply because the bank did not assert a claim for the negligent preparation of its tax returns.  The Tax Benefit was not disallowed because of a negligent return, but rather an untimely filing.  Therefore, the bank’s claim did not arise from the engagement outlined in the Agreement.

The Agreement strictly limited the engagement to the preparation of the tax returns, and the bank’s claim arose from the Accountant’s alleged negligence committed five months prior to the engagement.  Importantly, the court noted that nowhere in the agreement did the parties agree to release all known or unknown claims, matters beyond the scope of the retention for preparation of the returns or for any wrongdoing which already occurred.   As a result, the accountants were not shielded by the limitation on liability clause.

The professional-client relationship often begins with a retainer agreement/engagement letter: a contract that defines the terms and scope of professional services. Accordingly, when a client files suit alleging professional malpractice, the claims will generally sound in both contract and tort.  Whether a claim is asserted as a breach of contract or tort can have important implications with regard to the statute of limitations and other potential defenses. For instance, depending on the state, a tort claim may be time-barred where a breach of contract claim is not.

Certain jurisdictions, however, have questioned whether a breach of contract claim may proceed where the alleged malpractice does not directly relate to a violation of a specific term of the professional-client engagement. For instance, in a recent case from Philadelphia, a judge ruled that a plaintiff could not recover in a suit against her divorce attorneys because the lawsuit was filed after the statute of limitations for a tort claim. Importantly, the court concluded that the plaintiff did not adequately plead breach of contract, notwithstanding that the statute of limitations for breach of contract had not yet run. The judge rejected the plaintiff’s argument that the claim could proceed as a breach of contract, finding that the defendant’s failure to file a motion on behalf of the plaintiff in the underlying proceedings sounded in tort only.

Attorneys should not simply assume that breach of contract applies in all PL circumstances.  Thus, while a malpractice lawsuit may include a claim for breach of contract, counsel should never delay in filing suit where the statute of limitations on tort claims could expire and defense counsel should be wary of potential defenses.

Unfortunately, there is no simple way to predict if your client will sue you for malpractice. In order to prepare for the likelihood of malpractice claims, it is necessary to actively engage in risk management. Risk management involves the use of a comprehensive risk management policy.

New Clients

Risk management begins as soon as a person becomes a potential client. Every lawyer approached by a potential client must first ascertain if they have the necessary expertise for the matter. An eager lawyer may be tempted to take on every client, expecting to learn the area of law. This is dangerous behavior in most cases.

Having identified the matter as one in which you have expertise, the attorney must then assess available resources. If the attorney’s calendar is full or if the matter will take too much time, it is best to not take on the client. By taking on the client when you are too busy, you would expose yourself to double the risk, from the client you are short-changing to take on the new matter and from the new client.

Check for Conflicts

Lawyers must have stringent conflict checks. This is not only a risk management consideration, but also a major factor in ethics rules. Conflicts checking involves not only knowing and applying ethics rules, but also setting up a formal system. Ideally, a computerized system should be used to maintain client and matter lists.  There are various off-the-shelf software programs that are appropriate for conflicts checks. While the expense may seem needless in the outset of your practice, in this area it is far better to be overly-cautious.

Engagement Letter

Once a person has passed the conflicts check and you are ready to take them on as a client, the engagement letter and/or fee agreement may also serve as a risk management tool. In addition to clearly setting out the terms of service, the agreement can potentially include fee arbitration and mediation clauses.

In addition, as clients are often emotional and full of expectations, a law firm should use both dis-engagement and non-engagement letters. It is very important that the client know and understand when you refuse or conclude service.

Insurance Policies

While every lawyer in the firm should read the policy and be familiar with its general provisions, one person should be tasked with maintaining it. This person should know the policy extremely well and he or she should handle all purchase decisions. This person should be the main point of contact with the insurance company. It might be advisable for this person to receive additional training in identifying risks and advising on a recommended course of action.

Many professionals are bound by a code of professional conduct.  Sure, we have to play by the rules but those rules may require that we ensure others do as well. In a recent opinion, the Supreme Court of Ohio Board of Professional Conduct considered the circumstances in which an attorney is required to report rule violations by others.  The Board addresses two specific questions in its opinion: (a) whether a lawyer prosecuting a malpractice case is obligated to report the defendant lawyer to the disciplinary authority and (b) whether the information acquired form the client regarding their prior lawyer’s conduct is privileged, thereby eliminating any duty to report.

The board noted that a lawyer is only obligated to report misconduct when the knowledge is unprivileged and it raises a question as to another lawyer’s honesty, trustworthiness, or fitness as a lawyer in other respects.  The board added that in order to invoke the reporting requirement, the attorney must have actual knowledge that another lawyer has violated a rule of professional conduct.  However, a lawyer is not required to report misconduct where it would involve disclosure of privileged information, and may be prohibited from revealing confidential information related to the representation, including information protected by the attorney-client privilege without client consent.

Based on these standards, the board concluded that a lawyer who represents a client against the client’s prior lawyer has an ethical obligation under the rules of professional conduct to report the prior lawyer’s misconduct to the appropriate disciplinary authority if the knowledge is unprivileged and relates to honesty, trustworthiness, or fitness.  If a lawyer determines that he has a duty to report unprivileged knowledge of another lawyer’s misconduct, failure to report is itself a violation of the rules of professional conduct.

Professionals are expected to uphold a standard of ethical conduct both for themselves and others in their profession.  This expectation imposes an affirmative duty on professionals to report certain ethical violations by others.  Professionals who knowingly disregard another’s misconduct could expose themselves to liability through their own inaction.

Attorneys depend on third-party email services to operate their business.  As a result, they may assume vendors are safeguarding their electronic information and therefore the professional is not exposed. False. Consider an attorney sued recently for malpractice arising from an e-mail hacking scam.

A New York real estate attorney‘s e-mail account was hacked recently. The attorney was hired to represent wealthy clients in the purchase of a multi-million dollar condo.  When the hackers gained access to the attorney’s email account, they identified the attorney’s clients as targets for a wire fraud scam.  The hackers e-mailed the attorney posing as attorneys for the sellers of the condominium.  The attorney forwarded these emails to her clients, who were tricked into wiring nearly $2 million to the hackers.

The clients learned they were defrauded the following day from their bank, but by that time it was too late to recover the funds.  The clients later filed suit against the attorney for malpractice, alleging that she failed to take basic steps to secure her computer and to protect the clients from wire fraud.  The clients alleged that the email service used by the attorney was notoriously vulnerable to hacking, but the attorney nevertheless relied on the email for sensitive communications involving the clients’ purchase of the multi-million dollar condominium.  The clients further alleged that the poor security practices allowed the hackers to impersonate the seller’s attorney, which enabled them to persuade the clients to wire the funds.

Professionals must remain vigilant of cyber security threats.  Simply relying on third-party platforms for email and other electronic communication may not relieve a professional of her duty to keep client information safe.  If the professional ignores red flags, or fails to take basic safety precautions, she may be held liable if a client becomes the victim of a scam.

If you’re a good lawyer, you won’t get sued for malpractice, right?  This belief may be comforting, but it’s a myth. Good (and bad) lawyers get sued. There is no simple way to predict if your client will sue you for malpractice. In order to prepare for the likelihood of malpractice claims, it is necessary to actively engage in risk management.

“Hiring” Clients

Every lawyer approached by a potential client must first ascertain if they have the necessary expertise for the matter. An eager lawyer may be tempted to take on every client, expecting to learn the area of law. This is dangerous behavior in most cases. While it is acceptable for a family lawyer to take on a trust and estates matter that is new to them, it would be foolish to take on a securities matter. Every attorney must identify areas of expertise and interest and “hire” clients in these areas.

Having identified the matter as one in which you have expertise, the attorney must then assess available resources. If the attorney’s calendar is full or if the matter will take too much time, it is best to not take on the client. By taking on the client when you are too busy, you would expose yourself to double the risk, from the client you are short-changing to take on the new matter and from the new client.

Assuming the matter is within your area of expertise and you have the time to take on the client, you must engage in formal checking for potential conflicts of interest. Lawyers must have stringent conflict checks. This is not only a risk management consideration, but also a major factor in ethics rules. Conflicts checking involves not only knowing and applying ethics rules, but also setting up a formal system. Ideally, a computerized system should be used to maintain client and matter lists. Even if the lawyer is a solo practitioner, it is important to set up these systems, not only in anticipation of future growth, but also in realization that your memory will fail you in this crucial area of risk management.

Once a person has passed the conflicts check and you are ready to take them on as a client, the engagement letter and/or fee agreement may also serve as a risk management tool. In addition to clearly setting out the terms of service, the agreement can potentially include fee arbitration and mediation clauses. It is very important to check with your state bar to determine whether these clauses are permissible and the limits on the use of each clause. However, if permitted, lawyers should use these clauses to manage risk. In addition, as clients are often emotional and full of expectations, a law firm should use both dis-engagement and non-engagement letters. It is very important that the client know and understand when you refuse or conclude service.

Handling Cases

Studies consistently show that missed deadlines are a major cause of malpractice claims. Considering the ready availability of electronic tools, caseload management is much easier today. Research the automated docket and calendaring systems available and invest in one that will grow with your practice. In using the system, one person should have specialized knowledge of the available tools.

Insurance Policies

While every lawyer in the firm should read the policy and be familiar with its general provisions, one person should be tasked with maintaining it. This person should know the policy extremely well and he or she should handle all purchase decisions. This person should be the main point of contact with the insurance company. It might be advisable for this person to receive additional training in identifying risks and advising on a recommended course of action.

Finances

Every jurisdiction has clear rules regarding the handling of client finances. The mishandling of client finances is one of the primary causes of malpractice claims. Learn the rules, but make sure you have someone who has specific expertise in this matter. Often, different types of cases allow for different types of financial handling.

Attorneys are often approached by friends and family for advice.   At times, the particular issue might not fall squarely within their area of expertise or may involve a matter outside of the jurisdiction in which they are licensed to practice.

In a recent decision, the Minnesota Supreme Court took a Colorado attorney to task for the unauthorized practice of law.  The attorney was licensed to practice law in Colorado where he maintained an environmental and personal injury practice.  The attorney’s practice also included debt collection, which he had done for several years.

The attorney was approached by his in-laws for assistance regarding a $2,368 judgment entered against them in Minnesota in favor of their condominium association.  The in-laws explained to the Colorado attorney that they had been harassed by an attorney for the condominium association, who was attempting to collect the debt.

The Colorado attorney sent an email to the association’s attorney in Minnesota informing the attorney that he would be representing the in-laws and to direct all future correspondence to him.  Thereafter, the attorneys exchanged approximately two dozen emails.  The Colorado attorney assumed that he was not required to hire local counsel if he could settle the matter without filing a lawsuit. The association’s attorney, however, asserted that the Colorado attorney’s emails constituted the unauthorized practice of law and filed an ethics complaint.

In addressing the ethics issue, the Minnesota Supreme Court noted that out-of-state attorneys may provide legal advice only on a temporary basis if the matter arises in a state in which the attorney is authorized to practice and the attorney reasonably expects to be admitted to practice in the particular proceeding as pro hac vice counsel.  The Court concluded that the attorney’s representation of his in-laws did not relate to his practice in Colorado and did not involve a body of uniform law, and that he was therefore engaged in the unauthorized practice of law.  Accordingly, the attorney was issued a reprimand.

Professionals must be cautious that in their attempt to help close friends and family, they do not unwittingly violate rules of professional conduct.  Even having a small role in handling simple matters out of state could be deemed the unauthorized practice of law, and lead to liability for counsel and jeopardize the client’s interests.

Over the past few years law firms have seen a dramatic rise in employee lawsuits against their firm for claims like harassment, age discrimination, failure to promote, unlawful termination, and racial discrimination.

In fact, according to the EEOC, almost 100,000 discrimination claims were filed by employees last year.

Before a claimant can press a discrimination claim in federal court, they need to bring an action before the EEOC. But even if the claims wind up being ruled unfounded, EPL cases can be a drain on time and monetary resources for a small or mid-sized law firms. The average tally for a discrimination case exceeded $235,000, according to the EEOC.

What can a law firm do to protect itself against EPL lawsuits? The following guide will show how businesses can take out special insurance, called EPL insurance, to protect against employee claims, the types of claims covered under EPL insurance, and other steps legal experts recommend businesses take to protect against EPL claims. 

What Is EPL Insurance?

EPL insurance policies protect businesses from the financial costs incurred from employment-related lawsuits filed for a range of reasons, from wrongful termination to harassment to discrimination and so on.  While every EPL policy is different, a company with $1 million in sales and 50 employees can likely get a policy for about $7,000 per year.

Leading Causes of EPL Claims

The leading charge filed in discrimination cases is an allegation of racial discrimination, at 36 percent of cases, according to EEOC figures. Gender-based discrimination was alleged in 30 percent of cases. Age-based claims made up 24 percent, and allegations from the disabled tallied 23 percent. In many cases, multiple allegations are made. One of the growing charges, according to the EEOC, is retaliation against employees for making discrimination claims, which can involve a job switch that the employee views as a demotion related to the initial claim.

Protections Against EPL Lawsuits

In general, the more protections a small business puts in place against EPL claims and the better internal policies and procedures that are implemented, the lower the business’s premiums will be for EPL coverage and the more likely the business will be considered a candidate for coverage. It’s essential that businesses have a written employee handbook with strong anti-harassment and anti-discrimination policies, but other efforts can also pay off.

The following steps are important for businesses to take in order to protect themselves against EPL claims.

  • Distribute an employee handbook. Generally speaking, it’s not as important how long or detailed it is as what topics are in there. The handbook should contain the business’s equal employment opportunity policy. It should also provide employees with an internal mechanism to complain about discrimination or harassment ‘so maybe you can head off a lawsuit at the pass.. If the employee doesn’t use that procedure, your business may be able to use that as part of its defense, saying that the employee didn’t exhaust internal channels for seeking resolution to the problem.
  • Develop a code of ethics policy. This policy tells employees that they shouldn’t do certain things, like giving kickbacks and engaging in other ethical violations. This reduces the employer’s exposure to punitive damages, which may not be covered by EPL insurance policies anyway, if the business is sued over the actions of an employee.
  • Include an anti-retaliation provision. In light of the new rise in claims of retaliation, it is recommended that you include a statement saying that it’s the policy of the business not to retaliate against employees over accusations of discrimination or harassment.
  • Institute handbook auditing procedures. Having an audit procedure in place under which the handbook is periodically updated to keep up with changes in the law is also important and can help in the defense of a business.

Missed deadlines and time management-related errors are the second biggest cause of malpractice claims at all sizes of firms.  Over the last decade, they have represented over 17 percent of all malpractice claims.

The most common time-related error is a failure to know or ascertain a deadline – missing a limitation period because you didn’t know it. The good news is that this specific error has declined by almost 50 percent over the last ten years. The bad news is that the other time and deadline-related errors are holding stable or increasing slightly.

While in the longer term we expect that the new Limitations Act will result in fewer limitations period claims, at this stage it does not appear to have had any impact. Indeed, over the last year it may have resulted in more claims due to confusion over transition provisions.

A failure to calendar is the second most common time-related error (a limitation period was known, but it was not properly entered in a calendar or tickler system). The fourth most common time-related error is the failure to react to calendar error. In this case the limitation period was known and entered into a tickler system, but was missed due to a failure to use or respond to the tickler reminder.

Lawyers at firms of all sizes seem to have a dusty file or two that sits on the corner of their desks for far too long, and this makes procrastination-related errors the third most common time related error. By count and costs, procrastination-related errors are on an upwards trend.

These deadline and time management errors are easily preventable with better time management skills and the proper use of tickler systems. Practice management software programs such as Amicus Attorney and Time Matters are excellent tools for helping lawyers manage deadlines and tasks, and for helping them better manage client communications and relationships.