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Managing Ethical Risks Part 7

Familiarity and complacency cause lawyers to assume, often incorrectly, how the client wants them to handle a case.


By the time a lawyer gets his tenth in a series of similar cases from his client, he may take for granted that he knows how the client wants the case defended and just proceed according to his assumptions. Lawyers should not allow inertia to determine how they are going to handle a case. Even in the context of a "typical" matter for a client with whom the lawyer has a close, lengthy relationship, the lawyer should find out the client’s objectives and how they want the case defended, and then set about implementing the client's wishes.


Doing so is not only good practice; it is required by the following ethical rules. Although a close and familiar relationship with the client may allow the lawyer to address these matters in an abbreviated and less formal manner than he may have done in his first case for the client, the lawyer must do these things in some manner in each case.


Rule 1.2 Scope Of Representation And Allocation Of Authority Between Client And Lawyer


(a) Subject to paragraphs (c) and (d), a lawyer shall abide by a client's decisions concerning the objectives of representation and, as required by Rule 1.4, shall consult with the client as to the means by which they are to be pursued.


Rule 1.4 Communication


(a) A lawyer shall:


(1) promptly inform the client of any decision or circumstance with respect to which the client's informed consent, as defined in Rule 1.0(e), is required by these Rules;


(2) reasonably consult with the client about the means by which the client's objectives are to be accomplished;


(3) keep the client reasonably informed about the status of the matter;


(4) promptly comply with reasonable requests for information; and


(5) consult with the client about any relevant limitation on the lawyer's conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional Conduct or other law.


(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.


Without regard to how close the lawyer's relationship is with the client, lawyers sometimes find themselves in trouble because they adopt the attitude that the case is "my case" rather than the client's case.  This attitude may manifest itself in arrogance, with the lawyer taking an Al Haig "I'm in charge here" approach. More often the lawyer may have the perception that he should not trouble the client with certain decisions, or may fear being regarded as indecisive or afraid to make a tough call if he goes to the client to make important decisions.


Lawyers should avoid these ways of looking at their relationships with their clients. The case is the client's case, not the lawyer's. The lawyer's job is to give the client good advice about the pros and cons of different alternatives, make a recommendation, and allow the client to make an informed decision. To the extent there are risks associated with given choices, those risks are the client’s, and the client – not the lawyer – should choose which risks they want to take and which ones they do not. Lawyers who make these decisions for their clients without consulting them may find themselves insuring against losses resulting from those risks.


Next: Withholding Bad News, Not Withdrawing

Brinker-Wage and Hour Litigation Alive and Well in California

Falkinbury v. Boyd & Associates [cite] demonstrates that the seminal Brinker decision has not put an end to wage and hour class actions in California.  Josie Falkinbury and William Levene were security guards employed by Boyd & Associates.  They filed suit against Boyd on behalf of themselves and 4,000 similarly situated guards claiming that Boyd’s policies precluded them from taking their meal and rest breaks on an uninterrupted basis.  (The suit included other claims not germane to this article.) 


          The trial court denied the plaintiffs’ motion for class certification on the basis that the proposed classes of employees were not ascertainable because individual questions of fact predominated.


          The Court of Appeal reversed.  It distinguished the proposed classes from those in Brinker on the basis that the Brinker employer’s written policies properly provided for meal and rest breaks that complied with the law, and the question of whether a particular individual had been denied the breaks would have to be resolved on a case by case basis.


          By contrast, the Falkinbury plaintiffs alleged that Boyd’s policy required that all guards meal periods be taken at their posts, albeit on a paid basis.  They asserted that the policy itself violated California law requiring meal breaks for all employees be taken within the first five hours of their shifts, and that they be relieved of all duty during that meal break.


 The appellate court ruled that the question of whether Boyd’s policy satisfied California law was common to all of the potential class members and could be decided on a class basis.


The Court also reversed as to rest breaks because Boyd had a policy of requiring the guards to remain at their posts during their rest periods.  Because this policy applied to all guards, it too could be decided on a class basis.


What can employers learn from this case?  It behooves all employers to formulate policies which comply with the law.  Brinker protects employers who maintain lawful practices and encourage their employees to take their meal and rest breaks.  It does not protect employers who do not.  Employers should examine their meal and rest break policies for compliance and would be well advised to confirm the propriety of those policies with legal counsel.

Managing Ethical Risks Part 6

Familiarity and complacency cause lawyers to not memorialize important developments, discussions, and decisions (for fear they will be perceived as “CYA”). 

Lawyers in close relationships with clients often do not confirm things in writing that they would confirm in writing with a new or unfamiliar client, typically out of fear that the client will perceive a lawyer to be unnecessarily "covering their ass." Lawyers and clients need to get past this idea and instead welcome written confirmation of important developments, discussions, and decisions. The risks associated with not confirming such things in writing are well demonstrated by considering them in juxtaposition with the benefits of doing so. 

The most basic benefit of confirming things in writing is to make it unnecessary to depend on one's memory to know what happened. If a lawyer or client does not remember what they discussed about the case, what the client decided, or why, all sorts of bad things may happen. Additionally, not having important events and decisions reduced to writing can lead to disagreement and conflict as a result of differing memories, whether genuine or fabricated.  Confirming matters in a written communication to a client (as opposed to a memo to the file that the client does not see) avoids these potential problems. 

Another benefit of reducing developments and verbal communications to a writing that is sent to the client is that the process gives the reader the opportunity to address promptly any errors or misunderstandings in the writer's rendition of what happened. If the client and the lawyer leave a conversation with different understandings of what was said or decided, it is much better to find that out early, through this process, than later, after the misunderstanding or miscommunication may have produced a harmful result. 

A related idea is that things often look much different in writing then they may have sounded in a conversation. A client that makes a decision after a conversation with a lawyer may want to revisit that decision when he receives a confirming letter that says, "This will confirm that, although I advised you not to do so, you instructed me to…" The client may not have perceived the lawyer's comments to have been of this nature, or may rethink the decision merely by being confronted with its presentation in this form. Many undesirable outcomes that produced malpractice claims could have been avoided by achieving a level of greater clarity in attorney-client communications; confirming letters allow lawyers and clients to communicate with clarity. 

Another benefit of sending confirming communications is that, although some cases may seem like they will last forever, neither you nor your client contact will. Confirming letters allow your successors (as well as contemporaries working on a matter with you or the client) to understand what happened, what the lawyer and client decided, and why. This allows the matter to proceed smoothly in real time, and also precludes later players from inaccurately portraying the situation to the lawyer's disadvantage. 

Lawyers and clients should think of their files not as warehouses, but as toolboxes. Confirming letters are not something that a lawyer should just plan to pull out later to defend herself against accusation of malpractice. They are written records of important developments, discussions, and decisions that good lawyers use to do good work in real time, as well as to avoid making errors.

 Next: Handling Cases by Inertia

State law tort claims preempted by FDCA

Drager v PLIVA, Inc., --- F.3d --- (2014) (not yet published) 

Plaintiff was the personal representative of the Estate of Shirley Gross, who alleged significant injuries as a result of her extended use of the generic gastroesophegeal reflux disease drug Reglan, manufactured by PLIVA.  Plaintiff filed suit against both PLIVA and the name-brand manufacturers of Reglan, alleging various theories of state law tort liability arising out of the drug’s hazard from chronic use.  After Plaintiff confirmed that the deceased, who had passed away during the pendency of the action, had only used the generic form of Reglan, the brand manufacturers were dismissed.  The case was then stayed pending the determination of the Supreme Court case of PLIVA, Inc. v. Mensing, 131 S. Ct. 2567 (2011).  After the opinion in Mensing was issued by the Supreme Court, holding that state law failure-to-warn claims were preempted by the Federal Food, Drug, and Cosmetics Act, 21 U.S.C. §§301, et seq. (“FDCA”), PLIVA moved for a motion for judgment on the pleadings on the basis that the claims brought by Plaintiff in this action were by necessity state law failure-to-warn claims.  The Court granted the motion, denied Plaintiff leave to amend the complaint to add, and Plaintiff appealed.

The 4th Circuit Court of Appeals reviewed the trial court’s decision de novo.  The Court initially disposed of Plaintiff’s argument that the amendment should have been permitted, noting that Plaintiff had never filed a motion for leave to amend the complaint, and therefore, the trial court did not abuse its discretion to “declin[e] to grant a motion that was never properly made.”  The Court then addressed the more substantive arguments that the Plaintiff’s claims were not preempted.  The Court observed that Mensing established that generic drug manufacturers, like PLIVA, were “not entitled to unilaterally change their labeling and therefore any state law tort premised on the failure of a generic to alter its labeling was preempted.”  Plaintiff’s state law claims included: 1) negligent testing, inspection and post-market surveillance, 2) defective design, 3) breach of implied and express warranties of merchantability or fitness for a particular purpose, and 4) negligent misrepresentation and fraudulent concealment about the safety of the product.  The Court observed that since the generic drug manufacturer cannot change its warning, or its formula, absent preemption protection its only options would be to withdraw from the market, or accept state tort liability.  As such, the Court held that regardless of the independent viability of the state law claims, the Plaintiff’s causes of action were preempted by the FDCA.

Submitted by:  Marisa A. Trasatti & Gregory S. Emrick, Semmes, Bowen & Semmes (Baltimore, MD)

Another Case on Computer-Related Coverage Issues

  Just last week I blogged about coverage issues arising from cybercrime.  But, this morning I found another new and interesting case.  Transtar Electic, Inc. v. Charter Oak Fire Ins. Co., No. 3: 13CV1837, 2014 U.S. Dist. LEXIS 8000 (W.D. Ohio Jan. 22, 2014).

 Much like the Metro Brokers case that I wrote about last week, in Transtar a thief used online access to steal from a bank account.  A Transtar employee stole $120,000 from a related company, Eagle Creek.  After Transtar discovered the theft, Transcar reimbursed Eagle Creek.  Transtar then submitted a claim under its “Commercial Crimes Coverage.” 

 The insurer disclaimed on two grounds.

 First, the insurer said this was not a covered theft because the thief did not steal from the insured, Transcar.  The court rejected the insurer’s argument.  The court noted that the policy defined theft as “the unlawful taking of money.”  The policy did not limit theft to the taking of the insured’s money.

 Second, the insurer said that the claim did not fit within the policy’s causation limitations.  That is, the policy only covered losses “resulting directly from ‘theft,’”  What’s more, the policy reinforced this point with an exclusion that barred coverage for a “loss that is an indirect result” of a theft.

 The court interpreted the causation language as a single concept; the exclusion simply reinforced the coverage agreement.  The question became, what is the meaning of “direct”?

 The court recognized two points of view on direct.  Some courts find that “direct is direct”; meaning the loss must be an immediate result, with “no intervening medium, agency, or instrumentality.”  Other courts define “direct” more broadly, and consider direct to include anything “reasonably foreseeable.”

 The court applied the broader, more policyholder-favorable view.  The court found that there was a sufficient link between the theft and the insured’s loss.

 The case is interesting on many levels, but one point stands out.  In pollution and other heavily contested issues, disputes often centered on exclusions.  But for cyber claims, such as Transtar and the Metro Brokers case that I addressed last week, the dispute focused on the coverage agreement.

Generic Manufacturers preempted by federal law

Title:  United States Court of Appeals for Fifth Circuit holds that plaintiffs’ failure to warn claims against generic manufacturers preempted by federal law.

In Lashley v. Pfizer, Inc., ___ Fed.Appx.___, 2014 WL 661058 (5th Cir. Feb. 21, 2014), the United States Court of Appeals for the Fifth Circuit held that two (2) plaintiffs’ failure to warn claims against generic drug manufacturers were preempted by state law.  In both instances, the Court followed Supreme Court precedent to find that a generic manufacturer has no duty to label its products in a manner that is different from their brandname counterparts.  In fact, federal law required that generic manufacturers’ labels match their brandname counterparts.  Therefore, the plaintiffs’ claims against the generic drug manufacturers were preempted by federal law.  While the plaintiffs also brought claims against the generic manufacturer’s brandname counterparts, state law prevented the plaintiffs’ recovery as a matter of law.  Therefore, the Court entered summary judgment in favor of the brandname manufacturers. 

 This case was the result of two (2) cases that the Court consolidated, both of which dealt with claims against the generic and brandname manufacturers of the drug metoclopramide (brandname Reglan).  The plaintiffs ingested the generic form of Reglan.  The plaintiffs late developed tardive dyskinesia and akathisia.  Both conditions are central nervous system diseases, and cause involuntary movement.  The plaintiffs sued the generic manufacturers, alleging that the defendants were liable for damages as a result of the plaintiffs’ ingestion of Reglan because the generic manufacturers’ labels failed to warn of the drug’s dangers.  The plaintiffs also filed claims against the brandname manufacturers, and alleged that they were liable as a result of misrepresentations made to the medical community.  Both of the federal district courts in which the two (2) cases were brought dismissed the plaintiffs’ claims against the generic manufacturers, and granted summary judgment in favor of the brandname manufacturers.]\

 The Court of Appeals for the Fifth Circuit affirmed the district courts’ decisions.  As to claims made against the generic manufacturers, the Court was presented with the question of whether plaintiffs’ claims were preempted under PLIVA, Inc. v. Mensing, ___ U.S. ___, 131 S.Ct. 2567 (2011).  In Mensing, the Supreme Court held that federal law required that generic manufacturers’ labels must mirror the brandname labels.  The Court held that the plaintiffs’ arguments in this case were almost identical to those at issue in Mensing.  The Court explained that the Mensing decision preempted any state law duties requiring generic manufacturers to publish any materials other than the same labels found on the brandname counterpart.  Similarly, the plaintiffs’ strict liability and breach of warranty were preempted under federal law because of the Supreme Court’s decision in Mutual Pham., Co, Inc.v . Bartlett, ___ U.S. ___, 133 S.Ct. 2466 (2013), which held that design defect claims were tantamount to failure to warn claims.  In the instant case, the plaintiffs’ claims were all rooted in a failure to warn theory.  Given that the generic defendants’ labels matched their brandname counterparts, the plaintiffs’ claims were preempted under federal law.  Therefore, the plaintiffs’ claims against the generic manufacturers were dismissed.  The Court entered summary judgment in favor of the brandname manufacturers in the plaintiffs’ misrepresentation claims.  The Court’s reasoning was premised on the law of the individual plaintiff’s forum state, which included Mississippi and Texas law.  In both states, the law shielded companies from liability for products they did not create.  The brandname manufacturers could not be held liable because the plaintiffs did not take the brandname manufacturers’ products.  Therefore, summary judgment in favor of the brandname manufacturers was appropriate. 

Submitted by: Marisa A. Trasatti & Wayne Heavener, Semmes, Bowen & Semmes (Baltimore, MD)

Cyber-crime Coverage Issues

I just came across an interesting recent case addressing coverage issues in a growing area, cyber-crime.  Metro Brokers v. Transportation Insurance Co., 2013 U.S. Dist. LEXIS 184638 (N.D. Ga. Nov. 21, 2013).

Thieves put a virus into the insured’s computers.  Then, they logged into the insured’s bank account and stole almost $200,000.  The insured demanded coverage.  The insurer disclaimed, and the court upheld the disclaimer.

The policyholder argued that a forgery endorsement covered the loss.  This endorsement covered the “forgery” of any check, draft, promissory note, bill of exchange or similar promise….”  The policy defined “forgery” as “signing the name of another person … with the intent to deceive.” 

The court seemed to accept that logging into computers was effectively a “signing.”  But, the court found that the forgery coverage applied to negotiable instruments, and electronic transfers are not negotiable instruments.

The court also held that coverage was barred by exclusions for malicious code and system penetration. 

Cyber-crime is a relatively new type of loss.  And as sure as the night follows the day, when a new loss emerges, new coverage issues emerge.   We’ll be seeing more coverage cases on cyber-crime.

Managing Ethical Risks Part 5

Familiarity and complacency also cause lawyers to take a casual approach to written communications. 

One of the nice things about having a long-standing, friendly relationship with a client is that the lawyer can let his guard down, be more relaxed, and not be such a lawyer, right? This is a natural part of the process of developing and maintaining close relationships. 

While that may be true from an interpersonal relations perspective, it becomes dangerous ground when viewed from a risk management perspective, especially with respect to written communications. Any written communication, whether a letter, e-mail, or text message, that will become part of your file or the client's file about that matter (and you should assume that all of them will) should be lawyerly and professional. Each should also be unambiguous with respect to whether the information being communicated is to be interpreted literally, to be taken in jest, or regarded as hyperbole.

Written communications that were perfectly appropriate when they were composed may appear inappropriate later when circumstances change, friends have become enemies, or a client representative with a different set of standards or sense of humor is reading the communication. Make communications "bulletproof" regardless of who is reading them, or under what circumstances. 

In that regard, you should assume that your written communications with a client will someday be read by a larger, non-client audience.  Although a client can count on his lawyer to keep attorney-client privileged communications confidential, a lawyer should not count on his client to do so. A client can waive the privilege and publicize lawyer communications for any reason or no reason at all. In legal malpractice claims, all relevant attorney-client communications can become public. Even absent litigation, a client may choose to publicize harmful communications from an attorney after a falling out.


Next: Failing to Memorialize


Federal Tax Proposal Would Adversely Affect Many Law Firms

Title: Federal Tax Proposal Would Adversely Affect Many Law Firms

Section 212 of the U.S. House of Representative’s Ways and Means Committee’s (“Committee”) discussion draft “Tax Reform Act of 2013” will require all law firms and other personal service businesses with annual gross receipts over $10 million to use the accrual method of accounting (“accrual method”) rather than the traditional cash receipts and disbursement method of accounting (“cash method”).  According to correspondence from the American Bar Association (“ABA”) President to the House Ways and Means Committee Chairman, this would result in negative unintended consequences and cause substantial cash flow hardships to, among others, many law firms and other personal service businesses by requiring them to pay taxes on income accrued, i.e. income that they have not yet received and may never receive, due to write-offs, etc.  The ABA has urged the Committee to remove this provision from the overall draft legislation. 

Under current law, businesses are permitted to use the simple, straightforward cash method of accounting—in which income is not recognized until cash or other payment is actually received and expenses are not taken into account until they are actually paid—if they are individuals or pass-through entities (e.g., professional corporations, partnerships or subchapter S corporations), or their average annual gross receipts for a three year period are $5 million or less.  In addition, all personal service businesses—including those engaged in the fields of law, accounting, engineering, architecture, health, actuarial science, performing arts, or consulting—whether organized as sole proprietorships, partnerships, limited liability companies, or S corporations, are exempt from the revenue cap and can use the cash method of accounting irrespective of their annual revenues, unless they have inventory.

Section 212 of the draft legislation would dramatically change current law by raising the gross annual receipts cap to $10 million while eliminating the existing exemption for personal service businesses, other partnerships and S corporations, and farmers.  Therefore, if this proposal is enacted into law, all law firms and other personal service businesses with annual gross receipts over $10 million would be required to use the accrual method of accounting, in which income is recognized when the right to receive the income accrues and expenses are recorded when they are fixed, determinable, and economically performed — both aspects of which present complications, given the often significant lag between billing and collections.

Although Section 212 would allow certain small business taxpayers with annual gross receipts in the $5 million to $10 million range to switch to — and thereby enjoy the benefits of—the cash method of accounting, the proposal would significantly complicate tax compliance for a far greater number of small business taxpayers, including many law firms and other personal service businesses, by forcing them to use the accrual method.  Partnerships, S corporations, personal service corporations and other pass-through entities favor the cash method because it is simple and generally correlates with the manner in which these business owners operate their businesses—i.e, on a cash basis.  The increased complexity associated with the accrual method will raise compliance costs for many law firms and other personal service businesses—as separate sets of records will be needed to reflect the accrual accounting—while greatly increasing the risk of noncompliance with the Code.

In addition to creating unnecessary complexity and compliance costs, Section 212 would lead to economic distortions that would adversely affect all personal service businesses that currently use the cash method of accounting and those who retain them, including many law firms and their clients, in several ways.  The proposal would place a new financial burden on millions of personal service businesses throughout the country—including many law firms—by requiring them to pay tax on income not yet received and which may never be received.

The existing cash method of accounting produces a sound and fair result because it properly recognizes that the cash a business actually receives in return for the services it provides—not the business’ accounts receivable—is the proper reflection of its true income and its ability to pay taxes on that income. While accounts receivable clearly are important to determining the overall financial condition of a business and assessing its future prospects, they do not accurately reflect its current disposable income or its present cash flow ability to pay taxes on that income.

The mandatory accrual accounting provisions in Section 212 of the draft bill would create unnecessary complexity in the tax law, increased compliance costs, and impose significant and unnecessary new financial burdens and hardships for many law firms and other personal service businesses throughout the country by requiring them to pay taxes on income not yet received, and that may never be received.

To avoid these harmful unintended consequences, the ABA has urged the Committee to remove  Section 212 from the draft bill or from any tax reform bill that may be approved by the Committee.  The ABA has recently asked state and local bar associations to join in the opposition of the proposal.  DRI, the Voice of the Defense Bar, also plans to oppose this legislation.  Law firms should monitor this legislation closely. 

Submitted By: Marisa A. Trasatti and Colleen K. O’Brien, Semmes, Bowen & Semmes (Baltimore, Maryland)

Managing Ethical Risks -Part 4

Familiarity and complacency also cause lawyers to take a casual approach to checking and clearing conflicts associated with multiparty representations.

How many times do you suppose this has happened:

Voicemail: "Jane? Bob here. I'm sending you over a new case. They sued the retailer in this one to avoid diversity, so we will need you to represent that company, too. Please run conflicts and let me know."

            Email response: "Bob, no conflicts. Send the file, and thanks again for        engaging us."

Jane sends engagement letter to Bob, receives and reviews the file, and files answer for company and retailer.

In my experience, this happens a lot, and it creates a lot of problems. Here are some of them, along with suggestions about how to avoid them.

Running the names of the plaintiff and your prospective clients through your conflict system does not tell you everything you need to know to determine whether you have a conflict that would preclude you from representing both defendants in a lawsuit.  Whether you can represent multiple defendants depends on a variety of factors that are listed in Model Rule 1.7 and its comments. In order to develop the information needed to make all these determinations, the lawyer has to have conversations with the client that asked her to undertake the representations and the other individual or entity she is being asked to defend. Only after the lawyer determines that the facts and her potential clients' positions allow her to do so may she agree to represent both of them.

As the Rule and common sense require, the lawyer must also talk to the other party she has been asked to represent to determine whether that party wants her to represent it at all, before ever getting to the question of whether conflicts would preclude her from doing so. A lawyer cannot simply make an appearance on a party’s behalf just because someone else has agreed to pay the lawyer to represent it, without first obtaining the party’s consent to be represented in this manner.

Finally, just as the lawyer should with respect to her "regular" client, the lawyer should send her other, new client an engagement letter, and otherwise treat that client in the very same way she treats her "regular" client. To even think of this client as a "secondary" client (and the regular client as the "primary" client) as some lawyers do is to invite breaches of duty to the “secondary” client that can result in malpractice claims.

The failure to correctly navigate the opportunity to undertake a multiparty representation may result in the lawyer finding herself in a conflicting representation from which she, at best, will have to withdraw from both representations or, at worst, may face a malpractice claim. Even the act of withdrawing will cause the lawyer's "regular" client to incur the additional expense of getting new counsel up to speed, which could be an expensive proposition. If this risk is not made part of the conversation going in, the lawyer's "regular" client may not remain such a client in the future. The circumstance of having represented clients with conflicting interests, however briefly, may also later lead to allegations that the lawyer placed one of those client’s conflicting interests ahead of the other, and harmed the other in doing so.

Next: Written Communications

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