Lawyers Suing Lawyers: The Unthinkable Is Happening More Often

It is not hard to understand why.

For one, pressure for billings in a tough economy is growing. According to Hildebrandt International's MergerWatch, during the first three quarters of this year, the number of completed mergers is 44, up from a total of 35 in all of last year. Among the largest mergers are DLA's combination with Piper Rudnick and Gray Cary (establishing a firm of nearly 3,000 lawyers) and the merger of Pillsbury Winthrop with Shaw Pittman (creating a firm of almost 900), the N.J.-based consultancy reported.

By no means, however, are mergers limited to larger firms. In fact, the average size of the smaller firm has decreased, from 41 for the first three quarters of last year to an average size of 30 lawyers this year.

Any major staff changes, whether they are the result of a merger or the departure of a single partner or practice, translate into lost revenue. With firms of all sizes competing fiercely for business, the pressure can easily create staff resentment and inspire second-guessing.

One of the most colorful recent examples involves the Charleston, S.C., law firm of Ness, Motley, Loadholt, Richardson & Poole, who won millions in the asbestos litigation in the early 1990s, then won more during the tobacco litigation.

In February 2002, four of the six share-owning partners left the firm to create a new one, Richardson, Patrick, Westbrook & Brickman, which took both staff and clients. The two litigators left at the prior firm were those who had played the biggest role in the tobacco wars–Ronald L. Motley and Joseph F. Rice.

The two sides have since filed a series of arbitration claims. The defecting partners are seeking more than $100 million for back pay and their share of the old firm's assets. Mr. Rice and Mr. Motley countersued to gain access to records and client files that their ex-partners took with them.

Just as important as lost revenue, mergers and departures may create exposure in the form of missing critical filing dates in pending cases. This may result in lost fact or expert witness testimony, or foreclose the addition of parties and/or damages. A failure to file appropriately to protect a statute of limitations will bar an action altogether.

Not new are lawyers suing lawyers over compensation. In one example, one attorney (the claimant) had referred a number of Fen-Phen clients to another attorney for inclusion in a Fen-Phen class action filed by the latter. (Fen-Phen, a combination of diet drugs, was linked to heart valve disease in the late 1990s, fueling class action lawsuits.)

After class-action settlements were concluded, the referring claimant attorney sued the other attorney (now the insured defendant), alleging that the defendant fraudulently manipulated allocation of settlement monies to the various class members in a deliberate effort to minimize the claimant's fees.

Another case involved one attorney who sued another attorney alleging the latter had committed malpractice in the representation of the client. The latter lawyer successfully defended that action and subsequently sued the first attorney for malicious prosecution.

In addition, we have seen a rise in suits from banks and title companies. Often the client institution sues its attorney for failure to protect the bank's financial interest. These suits are often the result of relegating title searches to less qualified personnel in an attempt to manage expenses. The problem is that a paralegal's work, when billed by retained counsel, is expected to meet the same professional standards as that of a licensed practicing attorney.

What are the danger signals that suggest a lawsuit is in the making?

A legal malpractice suit is, essentially, a suit within a suit. For example, an attorney who fails to file a suit within a statute of limitations has lost a revenue opportunity for his client. The firm's exposure in the resulting lawsuit will be equivalent to the value of the damages the client had expected to receive.

Unfortunately, attorneys usually set very high expectations for themselves and for clients. If the expectation of an eventual award was $5 million in damages, and if the case had merit, and if the attorney indeed failed to file in time, the firm's exposure may be $5 million plus defense costs.

What steps can law firms take to help prevent lawsuits from taking place?

Competent IT support will help avoid the problem of missing deadlines, through electronic calendarization coupled with careful checks and balances for quality control.

Two items our company looks at when evaluating exposure are the ratio of case load to professional staff and previous insurance claims.

The financial pressure is enormous on today's law firms. Permitting non-professionals to handle cases, filings and searches is a danger signal that a firm could attract claims in the future–or has them pending currently without the firm's knowledge.

Susan Portnoy is a senior claims specialist in lawyers and architects & engineers E&O coverage for Shand, Morahan & Company Inc. Shand Morahan is a wholesale-dedicated surplus lines insurer serving nonstandard and niche markets, including professional and product liability coverages.

Art caption:

After successfully defending a malpractice action brought by another attorney, the defendant turned around and sued the accuser for malicious prosecution.