In the last 30 years of my practice, I have seen a recurring and troubling pattern in the way legal malpractice cases are litigated. I recently represented a medical corporation in a suit against its former outside law firm for damages stemming from a verdict rendered in excess of its liability coverage in a medical malpractice lawsuit. We alleged that the defense firm, retained by the insurance company, preferred the interests of the insurance company over the interests of the medical corporation, proximately causing a significant excess verdict.
In response to the complaint, the defendant law firm filed a third-party action against the corporation’s president for contribution, alleging that the president’s actions substantially contributed to the plaintiff corporation’s injuries. Despite the fact that the president was a licensed attorney, the president had been out of practice for years while working for the medical corporation. Furthermore, the president had only practiced in the realms of corporate and M&A work, never practicing litigation and certainly never defending medical malpractice lawsuits. Thus, she relied on the litigation expertise of outside defense counsel. Nonetheless, the second it became clear mistakes were made, former defense counsel was quick to blame her for their own ineptitude.
These increasingly common situations often involve the complexities of the “tripartite relationship” between the law firm, the insurer and the insured. When interests diverge in the underlying matter, the conduct of the parties later becomes an issue in malpractice actions, at which juncture fingers are pointed and the blame game ensues. Inevitably, as in the example above, the defendant law firm will file third-party actions for contribution against the general counsel or other high-level corporate officers. These actions, however, are improper and are used both to embarrass the general counsel in their professional roles and as a litigation tactic to apply pressure to the plaintiff.
These forms of third-party contribution actions are improper for many reasons. One, the general counsel (or any corporate officer) is not a third party at all, but rather an agent of the plaintiff. The basic principles of agency render these third-party actions inappropriate, given the general counsel’s acts or omissions in the scope of their employment are imputed to the employer. There is simply no need for the defendants to bring a third-party action seeking contribution by plaintiff’s individual agents for their “share” of plaintiff’s damages, because the affirmative defenses and doctrine of comparative fault already apportion any fault attributable to the plaintiffs themselves.
In Gabriel Capital v. Natwest Finance, an investment company that had invested in a steel mill sued the underwriters for fraud in violation of Sec. 10(b)(5) of the Securities Exchange Act of 1934. The defendant underwriters in turn filed a third-party action against certain executives in the investment company for contribution, alleging that the executives were negligent in exercising their due diligence, and therefore partially at fault for the fraud. The court dismissed the third-party action against plaintiffs, finding that “no authority has been found or cited permitting a contribution claim against a plaintiff’s agent where that claim is identical to defendant’s affirmative defense.” In further support, the court cited New York Islanders Hockey Club, LLP v. Comerica Bank-Texas andConnell v. Breed, Abbott & Morgan. Other progeny demonstrates that courts have repeatedly thrown out claims for contribution based on negligent conduct of agents in which the counterclaim is identical to the defendant’s affirmative defenses.
These third-party contribution claims also cause unnecessary juror confusion and essentially give defendants a chance to argue their comparative fault defense twice: once as comparative fault and again as a claim for contribution. When contribution claims and affirmative defenses are premised on the same arguments, laws and facts, it follows that requiring a jury to consider these arguments separately would cause confusion, complicate presentation of evidence and muddle the jury instructions. See Gibson v. Hickman. Applying an analogous doctrine, courts have previously dismissed various claims as duplicative because they “simply recast contractual claims as negligence counts.” For these reasons alone, these types of third-party actions are improper and highly prejudicial to the plaintiff’s case.
Finally, the general counsel role is unique in that it requires its practitioners to straddle the business and legal worlds. Outsourcing matters to outside counsel is a central and essential aspect of their jobs. The knowledge of general counsel is broad but shallow; this is precisely why they hire outside counsel who have knowledge that is narrow but deep. Therefore, when they hire outside counsel specifically for their superior expert knowledge on a particular legal matter, they are entitled to rely on that expertise. In Cicorelli v. Capobianco, the court found that the plaintiffs, who were sophisticated real estate developers were not contributorily negligent in a real estate transaction, because they hired the defendant to represent them based specifically on his superior knowledge of the legal issues involved.
Relying in part on Cicorelli, another court held in TCW. v. Fox Horan & Camerini that a sophisticated lawyer, but one who had no expertise in the area in question, was not contributorily negligent in relying on a hired lawyer’s expertise in that particular area. Therefore, in situations where general counsel rely on the specific expertise of their outside counsel in the strategic analysis of litigation, they are entitled to rely on that expertise. When something later goes awry, third-party actions against the general counsel for contribution are improper for this reason as well.
The defendants know these basic legal concepts that I’ve discussed, but often they proceed with these actions to embarrass the general counsel in their professional roles, and to harass the party at the corporation with whom they had a previous relationship. These actions must immediately be moved for dismissal to prevent such tactics from taking hold in complex litigation.
George W. Spellmire is a professional liability trial lawyer with over 35 years of experience in representing both corporations and individuals. He has been recognized by The National Law Journal as one of the most prominent professional malpractice lawyers in the United States, and is a Fellow of the American College of Trial Lawyers
The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010. Yet, one of its key provisions, Section 954, which deals with clawbacks of incentive-based executive compensation, has yet to be fully clarified by the U.S. Securities and Exchange Commission.
A recent advisory [PDF] from AlixPartners explains that just because some of the details of theDodd-Frank clawback rules [PDF] are not yet known doesn’t mean that there aren’t plenty of companies proactively creating and disclosing their policies already.
Why worry about complying with a regulation that hasn’t been fully explained? Susan Markel, a managing director in the financial advisory services group at AlixPartners, told CorpCounsel.com that there are benefits to having company clawback policies ahead of SEC rules. “They put the executive officers on notice that this could happen to them,” said Markel. “The thought would be that greater attention is paid to getting it right the first time.” Getting to policy specifics before the SEC does also can show that a company places a premium on corporate governance.
Dodd-Frank requires incentive-based compensation policies be included in financial disclosures, and many companies have already started doing just that. The AlixPartners advisory cites statistics from Equilar Inc., which provides executive compensation data, and found in 2006 only 18 percent of Fortune 100 companies publicly disclosed their clawback policies; by 2013, this number had jumped to 89 percent.
Although clawback requirements were originally promulgated more than a decade ago in the Sarbanes-Oxley Act, Dodd-Frank expands on SOX rules substantially. The advisory explains that under SOX, clawbacks must only happen in relation to financial restatements brought about “as a result of misconduct.” Dodd-Frank drops the misconduct requirement. The look-back period for the clawbacks will also be expanded from the 12 months required under SOX to three years under Dodd-Frank. Under Section 954 of the new law, companies that don’t comply with clawback rules will be barred from national securities exchange listings.
There’s plenty that isn’t clear yet, though. For example, rules for clawbacks under SOX only applied to CEOs and CFOs, but now under Dodd-Frank may apply to more residents of the C-suite. “The language is ‘current and former executive officers,'" said Markel. “So just what does that mean?”
It’s also still unclear, the advisory noted, exactly how Dodd-Frank defines a financial restatement and whether every restatement issued will be considered, for the purposes of the law, a result of “material noncompliance” with financial reporting requirements.
Markel said that—final rules or not—some companies are preemptively expanding the ways they can take back executive compensation. “We’re seeing policies that cover a broader range of triggers for the potential recoupment of funds,” she said, citing financial restatement and ethical misconduct as examples.
Other companies are clawing back more types of incentive-based compensation, mandating that clawback policies cover not just cash bonuses, but awards such as deferred compensation and perquisite accounts, too. “In some cases, companies that already have such policies in place are modifying them in response to shareholder resolutions,” Markel said.
She added that the financial industry has been particularly keen to expand clawbacks. “Still, some companies continue to take a wait-and-see approach in making changes to their existing clawback policies or crafting new ones until the SEC clarifies its view on what the rule under Dodd-Frank will look like,” she said.
The “Mad Clientist” over at BTI Consulting may not be so mad after all. Through his work, Michael Rynowecer says he “hears succinct and hard-hitting views on all aspects of client thinking” and he has been gathering up intel on what corporate counsel want from their GCs as the daffodils start to poke their little heads out through the snow and we jump ahead into the new season. “As the year unfolds, we are seeing clients’ expectations of law firms changing,” he says. “Demanding you look back, plan ahead and spring into action … all without the client asking.”
He spoke with a corporate counsel from a large, publicly traded real estate investment trust, who said he/she expects, “our outside law firm to understand our business and follow the direction we are going with it.” This includes seeing the growth in how the firm handles similar projects.
A GC at a Fortune 50 retailer is looking “for a firm able to anticipate future issues, and not just deal with what’s happening in the here and now.” This means managing future risk and understanding current needs as well. “Additionally, they need to be able to address my issues not only from a legal standpoint, but also with an eye toward government regulations as well as an overall understanding of our place in the market.”
Last year, we celebrated (well, some of us did), the 500th anniversary of "The Prince," Niccolò Machiavelli's work of enduring genius. Contrary to his bad rap, Machiavelli is not a Dr. Evil, and "The Prince" is not a version of "Evil for Dummies." Its lessons for GCs and for the executives they counsel are timeless.
No. 1: Heed selected advice from selected advisers. While the prince is the boss, he still needs advisers. But he drives the agenda, not them. So, Machiavelli writes that the prince decides from whom and about what he wants counsel, plus when he wants the advisers to offer it.
The group of advisers should be small; if not, the surfeit of advice amounts to no advice at all, with the good counsel lost in the cacophony.
Finally, the prince's demeanor must encourage truth telling. This creates a virtuous circle from which "everyone may see that the more freely he speaks, the more he will be accepted."
No. 2: Niccolò is not Tony. Machiavelli is no Tony Soprano. The mob boss from the HBO series lives in a universe that is self-contained and self-justifying. Its inhabitants brag that "I did XYZ because I could do XYZ," which is a truly evil rationale.
Not so Machiavelli. Yes, he writes that parties can break a treaty but only "when the reasons for the original undertaking no longer pertain." And because people are generally bad and conniving, they will, sooner or later, break their word and the prince will have "legitimate" reasons to abandon his promises in the treaty. As law professor Philip Bobbitt observes in "The Garments of Court and Palace: Machiavelli and the World He Made," this reasoning undergirds international law, allowing the aggrieved party to disavow its obligations because the reasons for entering into the agreement initially have evaporated.
No. 3: If you treat others well, they will treat you well. Machiavelli invented human resources. Listen to his words from 500 years ago: "A prince must … show himself a lover of merit, give preferment to the able, and those who excel in every act." That's today's Human Resources 101.
Who invented the suggestion box (aka incentivized ideas)? That's right: Niccolò. "The prince should offer rewards to whoever … seeks in any way to improve his city or state."
Is the company thinking of conducting a reduction-in-force after a merger? Follow Machiavelli's advice on what a prince should do after taking over a city or a state: "[C]ommit all … cruelties at once, so as not to have them recur … whoever acts otherwise, either through timidity, or bad counsels, is always obliged to stand with knife in hand, and can never depend on the subjects, because they, owing to continually fresh injuries are unable to depend upon him." Today's translation: lawsuit after lawsuit.
Finally, he understood—just as today's psychologists—that money is a weak and unreliable relative, resulting in temporary loyalty when times are good, but no loyalty when times turn bad. That's Machiavelli, vice president of people development.
No 4: People are bad. Work with it. Not only are they bad but they "are ungrateful, fickle, desolators, apt to flee peril, covetous of gain."
Today's translation: Seek principled resolution of a lawsuit, but be willing to go to trial; work toward common ground on a deal, but never shy away from saying "no" to a proposal that is tempting but harmful in the long term.
And, here is Machiavelli's bonus room: Creating the illusion that people perceive you in the way you desire is just as effective as if they actually perceived you that way.
Is it legal to fire an employee for being “too cute"? According to court documents, that’s exactly what allegedly happened to yoga instructor and massage therapist Dilek Edwards, who was fired from her job at Wall Street Chiropractic and Wellness in New York City because, she claims, she may have simply been too good-looking for her boss and his jealous wife.
Edwards filed her claim against the husband and wife co-owners of Wall Street Chiropractic and Wellness, Charles Nicolai and Stephanie Adams, citing sexual harassment, gender discrimination and unlawful termination of employment—violations under New York State and New York City Human Rights Law. Nicolai and Adams fired back, asserting that “allegations of spousal jealousy do not give rise to gender discrimination claims.”
According to the account in Edwards’ filing, she began work at the office in April 2012, and the rapport between her and Nicolai was “strictly professional,” although Nicolai once told her that his wife might become jealous of her because Edwards was “too cute.” Adams, who Edwards claims she only met in person once, apparently sent her an angry text message in October 2013 asking her to stay away from Nicolai and from the office.
Edwards was fired soon after.
Keisha-Ann Gray, a partner at Proskauer Rose and cohead of the firm’s Employment Litigation and Arbitration Group, told CorpCounsel.com that she doesn’t see a case like this getting too far. “Being attractive is not going to fall under the umbrella of gender discrimination,” said Gray.
She said that calling Edwards “too cute” was an evaluation based not on her gender, but on her level of physical attractiveness. Unlike gender, race and other traits, physical attractiveness is not a protected characteristic under Title VII of the Civil Rights Act of 1964.
“This concept of whether attractiveness should become a protected characteristic is constantly coming up every couple of years,” said Gray, but she doesn’t see it gaining legally protected status anytime soon, since beauty is both subjective in the eye of the beholder as well as mutable. Other protected characteristics, she noted, are for the most part objective and unchangeable.
The case is reminiscent of a well-publicized employment case that was decided in Iowa in 2013, where the state’s supreme court struck down sexual harassment and discrimination claims filed by a dental assistant whose boss fired her because he found her to be “irresistible” and was afraid he would cheat on his wife with her if they continued working together.
Maria Greco Danaher, shareholder at Ogletree Deakins, told CorpCounsel.com that the Iowa case was also about attractiveness, but it was different in that the case contained specific allegations about how the relationship between the dentist and his assistant was having an “adverse effect” on the dentist’s marriage.
“Then the court extrapolated from that and said because it was based on emotion, not on gender, it didn’t violate that statute,” said Danaher.
According to Gray, the best way for in-house attorneys to lessen the volume of hiring and firing related suits like the ones in New York and Iowa is to keep careful track of employee behaviors and performance. “Document it in real time, don’t document it after you get the lawsuit,” she said. “Document your reasons for taking any employment action, positive or negative.”
While it’s hard to prevent disgruntled employees from taking initial legal action, she added, good solid documentation will help stop actions from proceeding very far, as opposing attorneys will realize that they don’t have much of a case.
