Ch. 8 Vicarious Liability

1. Ch. 8 Vicarious Liability Firms, Employers, and Partners

2. 1. Development & Structure of Law Firms Fortney article, Galanter & Thomas book: focus on large firms. • Initial formation & institutional growth based on interpersonal relationships, partners’ complementary skills & assets. • Monitoring of $ matters among partners to prevent (or oust) free-riders. • Very close monitoring of work, profitability of associates until achieve partnership. Today: equity & non-equity partners.

3. Your experiences with legal employers 1. Identify what monitoring you saw within firm; personally experienced? Assess value & effectiveness. Impact of law firm size? • What formal or informal controls did you observe? • As you evaluate prospective employers, are you influenced by what they say about training & mentoring? • Do Cs hire firm based on individual Ls or firm affiliation? What monitoring do Cs expect from firm?

4. 2. Agency Principles Rstmt LGL §58(1) Firm civilly liable for injuries caused by wrongful acts/omissions of any principal or employee “acting in the ord. course of firm’s busn or w/ actual or apparent authority” **Difference between ACTUAL and APPARENT AUTHORITY

5. ACTUAL and APPARENT AUTHORITY Actual: arises from communications between the principal and agent Apparent: arises when principal’s conduct, statement or circumstances make it reasonable for a THIRD PERSON to believe that agent has authority.

6. What conduct is w/in scope of employment? s/ Female associate engaged in sexual relations w/ married client represented by firm, associate is primary lawyer working on the matter. Is firm vicariously liable for her tortious conduct? Compare Rstmt Agency (2d) §228 and (3d) §7.07(2) Compare expansive Cal. View and narrow N.J. view. See text at pp. 258-61.

7. Vicarious liability: w/in scope of employment? S/ Associate driving somewhere on law firm business, talking on cell phone or texting on business matters & causes accident. Uniform Partnership Act: each partner is liable for all partnership debts & obligations, including those arising from wrongful acts or omissions. Accord, Rstmt LGL §58 and cmts.

8. Procedural Matters re Partners’ Liability In order to hold individual partners personally liable and subject their personal assets to risk of execution, they must be individually named in suit and personally served as parties. If judgment, partnership assets must be exhausted first, before seeking recovery of personal assets. Personal liability attaches for liabilities that arose while individual was a partner (not for those that pre-existed, or arose after departure). Withdrawal d/n terminate personal liability for such claims.

9. Problem 8-1The Wanted Partner • Lott: lateral hire as full equity partner; brought with her many faithful & lucrative clients. • While at firm, billed > 250 hrs/mo. (62.5/wk) while spending most time working as Gen’lPtnr of Soho (liquor distributor) • Persuaded H&W partners, staff & others to invest in Soho, deposited proceeds in firm trust account. • Illegal Ponzi scheme, Lott disappeared.

10. Investors sued H&W and all partners for LM. • What must Ps allege to w/stand motion to dismiss for failure to state claim? (any acts w/in scope of Lott’s employment? Any legal advice given about the investments?) • Do any facts support holding firm & partners liable to investors? (use of trust account, introduced investors to Lott, promissory note; clients reasonable expectations)

11. Additional information needed to assess liability? Evidence re use of trust accounts; All documents re investors’ dealings w/ firm & Lott, including retainer agreement, billing records; Involvement of outside counsel for investors? Soho corporate docs; H&W internal procedures to monitor conduct, whether actively used re Lott’s activities; Apparent authority?

12. 4. Supervisory Responsibility & Liability • Rstmt LGL §11, cmts. a., b.: general responsibility of partners. Risk personal liability for negligent hiring, training or supervision. • See also, Model Rule of Prof’l Conduct 5.1; OK adopted w/o change. (text summarized at p. 265) • State ex rel. OBA v. Martin, 2010 WL 3637018 (Okla., 9/21/10, Opala, not yet published)(public reprimand, failure to supervise non-L; m/b also civil liability)

13. B. Limited Liability Law Firms • Advent & Characteristics of Organizational Structures (Robert Hillman: leading authority, practitioner treatises on this & firm dissolution) • Traditional view: corps., as artificial entities, inherently unsuitable for legal profession (L/C conflicts, beyond reach of discipline, liability shield unacceptable). 3 Musketeers: all for one & one for all”

14. B. Limited Liability Law Firms • Winds of change (1960s: LLCs; 1990s LLPs) N.B. Generalizations dangerous b/c so many subtle variations among state laws & decisions, unanswered questions. • Limited Liability Corporation, a/k/a Prof’l Corp. (LLC or PC). Besides ltd liability, offers unlimited duration of corp. life & centralized management. Carved out so not double taxation; Okla. allows SubChapter S election. Traditional firms reluctant to swap “partner” for “shareholder” status, although that reluctance is eroding.

15. B. Limited Liability Law Firms: LLCs 3. See 18 O.S. §§801 et. seq., Professional Entity Act, extends to lawyers and other specified professionals. Key restrictions discussed in 3A Vernon’s Okla. Forms 2d. §§8.03, 8.16 (2009). a. While statute allows for management by persons not holding interest in entity, that is prohibited by “form of practice restrictions,” Model Rules and Okla. Rules of Prof’l Conduct R. 5.4(c). b. Open question: whether & to extent participants have limited liability for entity’s obligations; no definitive answer by Okla. courts.

16. B. Limited Liability Law Firms 4. LLPs (movement since late 80s) a. First LLP statute (1991): Texas origins, S&L collapses from collapse of real estate & energy markets. Ten years later: every state enacted, tho again w/ significant variations. b. Common traits: partnership statute includes election as LLP, w/ either “full shield” or shield only of lawyers not involved in representation of matter subject to LM claim.

17. B. Limited Liability Law Firms: 4. LLPs • *Observe local “niceties”: must comply with registration requirements (annual renewal, minimum malpractice insurance or security for liability). Noncompliance > loss of limited liability. • See Okla. Limited Liability Partnership, 54 O.S. 1-1001 et seq., 1-309. Registration, renewal, name must reflect status. Partnership liable for actionable conduct (but not personal liability ….unless? Again, unanswered question). $500K minimum total aggregate security for claims. See also, 3A Vernon’s Okla. Forms 2d, Bus. Org. §8.20, Kane, 70 Okla. B.J. (3/99)(should Ok. attys convert to LLPs?) • Contrast, Colo. Rule 265 (2009): $100K/L or $500K, whichever less, provided aggregate annual limit of $300K.

18. B. Limited Liability Law Firms: 4. LLPs Problem 8-2: The Hot Potato Client • What did PC firm do wrong, in violation of prevailing law governing lawyers? Why did it w/d from representing C in $$ comm’larb? Duties breached? (both negl. & fiduciary) • What must P allege to maintain c/a v. all SH? (are claims for vicarious or personal liability)

19. Problem 8-2: The Hot Potato Client • What discovery and fact investigation should P conduct? Overall: look for personal involvement of each SH. Requests for production: internal communications & docs. re representation & termination , notes/minutes SH mtgs internal billing records Interrog., Depos: develop indiv. partic’n & ratification of dcns re repre’n

20. Problem 8-2: The Hot Potato Client Assess liability of individual SH?

21. Problem 8-2: The Hot Potato Client • Sanders, Bruin, Coll & Worley v. McKay Oil Corp., 943 P.2d 104 (N.M. 1997) Held, SH status in PC d/n “confer protection from individual liability for [L’s] own negligence or personal breach of duty. . . [under facts in record, each] participated in decision subst’ly affecting” the repre’n; indiv. SH not shielded from pot’lliab for own actions.

22. Rstmt §58 Vicarious Liability • Law FIRM subj. to civ. liab. for injury caused by wrongful act/omission of principal or employee acting in ord. crse of firm’s busn. w/ actual or apparent authority. • Each of principals of FIRM organized as GEN’L PTNSHP w/o ltd liab. is liable jointly & severally w/ firm.

23. Tit. 54 O.S.LimitedLiab. Partnerships Some portions held unconstitutional in 2008 for violating “single subject rule” of Okla. Const’n. New provisions enacted, go into effect 1/1/11. NOT affected, still good law: Art. 3 §1-305 (parallels Rstmt §58 (1),(2) and §1-309(b)(1), requiring security for payment of claims malpractice ins. where “total aggregate limit of liability” at least $500K.

24. THE LOOSE CANNON • Identify Client owed duties of loyalty? • Identify strongest claims against Cannon AND ABCD (as firm, as individuals) • How would “innocent partner” provision in OAMIC affect the litigation? What DISCOVERY could maximize likelihood of recovery v. Cannon & Firm? • Change in analysis if ABCD registered as LLC or LLP?

25. Problem 8-4 Am I My Partner’s Keeper? • Firm structure: Partnership when C retained then converted to LLP • Larson (rainmaker) introduced to Payne (sr. ptnr est. planning), assigned work to Associate Andrew • P persuaded C of tax savings from irrevocable trust; drafting done badly > $5M unexpected tax liability; only $3M liability malpractice coverage • “You”: jr. ptnr who handled LLP paperwork, now asked to evaluate psnl liability of individual lawyers

26. Stop & think: risk if “you” so advise • Some cases find that attorney client privilege does not extend to internal communications w/in firm about firm’s potential exposure. • N.B. RPC 5.1: firms expected to have appropriate internal ethical infrastructure to anticipate and avoid predictable pitfalls • How does your assignment differ from that expectation? What should a well-counseled firm do in this situation?

27. How to proceed? • Notify carrier who will retain defense counsel for claim to extent of coverage • Facts suggest advisability of separate counsel for excess liability and potential personal liability

28. Potential claims & risk of exposure • Firm, regardless of form of practice, for negligence; perhaps Br. of fiduciary duty (fail. to advise C of entity change) • Will LLC stature shield L, P, A & others involved from personal liability? • Compliance w/ statutory “niceties”? (if not, all partners at risk) • L & P: failure to supervise A

29. Relevant evidence • Firm policies & procedures, e.g., supervision of associates’ work • Retainer letter, correspondence, billing records: who was involved in representation? • Firm brochures, web sites, other publicity: how does firm hold self out to public • Info. relating to conversion to LLP status, external & internal communications about

30. Caution • LLP structure is no substitute for risk management & quality control measures. • Firms “may adopt the LLP form of organization but should continue to function – especially in important risk management areas – as if they were traditional partnerships.” Mark Harrison, 39 So. Tex. L. Rev. 633, 638 (1997)

31. C. Other Associations that may risk exposure for conduct of other lawyers • Referral fee arrangements (a/k/a fee splitting) among lawyers not in same firm. a. Traditional prohibition: treats clients as commodity • Modern view permits, w/ restrictions. Rstmt § 57 permits if (1)(a) dvn in proportion to services perf’d by ea OR (b) by agmt w/ C, Ls assume JOINT RESPONSIBILITY; [and] (2) C inf’d of & d/n object to fact or terms of dvn & Ls’ part’n; and (3) TOTAL FEE is REASONABLE. C. RPC 1.5(c) accord.

32. 1. Referral Fee LM Potential Problems • “joint responsibility”: both disciplinary & civil liability • Negligent referral (not current info about handling L’s competence, present ability) • Failure to monitor

33. Preventing Liability for Referral Gone Bad (text @ 283) Good knowledge about L to whom you refer re: *sufficient expertise, resources, current fitness to handle; *carries own malpractice insurance Client on board: full disclosure, in writing, including on actual fee dvn, what’s in it for you & how will be calculated Maintain communications w/ C as matter proceeds N.B. State RPC vary

34. Preventing Liability for Referral Gone Bad (text @ 283) Martyn, (avoiding) Accidental C’s: “treat referral C’s as real C’s”, i.e., Enter C in conflicts checking data base for both referring & handling L If C contacts referring L about matter, FOLLOW UP, monitor that work being handled properly Confirm handling L gave proper written notice abt fee dvn, MAKE SURE IT’S NOT ILLEGAL FEE.

35. 2. Negligent Referral • Failure to refer to specialist when needed. Horne v. Peckham (generalist civilly liable for failing to refer C, or associate w/ “specialist” if under “circumstances a reasonably careful & skillful pract’r wd do so.” i.e., d/n get in over head! • Liability for referring to incompetent L. Tormo v. Yormark (unusual circum. put L on notice to inquire further; knew/shd have known of risks)

36. 3. Co-Counsel Arrangements (among L’s in different firms); many possibilities S/ Firm associates w/ outside counsel b/c matter beyond its expertise (RPC 1.1, alt. to referral) S/ “Joint defense” arrangements (?) Risk management: clear division of responsibilities; C’s informed consent; associated L carries adequate malpractice ins.

37. 4. “Of Counsel” Arrangements • Open-ended possibilities. See, e.g., p. 286 • ABA F. Op. 90-357: OK where relationship “close, regular, personal relationship” & of counsel title not false or misleading • Risk management: clear understanding between firm & “Of Counsel” [OC]; clear & careful communication to current & prospective C’s (stationery, letterhead, monitor OC’s dealings w/ firm C’s; verify malpractice coverage (Firm’s v. OC’s)

38. 5. Office Sharing Arrangements Risk: de facto partnership, or partnership by estoppel (“if looks like, acts like a duck, it is a duck”)

39. 5. Office Sharing Arrangements: Risk Prevention In general: vigilantly avoid any appearance to Cs & third parties of having shared practice. Perception is everything. Specifics: Office design, computers, printers, copiers, shredders, file access Support staff Phone, fax, email accounts Written & oral communications