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Archive for the ‘Professional Liability and MPL’ Category

The Ethical Duty of Technology Competence – The Day is Coming in California

Posted on: December 5th, 2019

By: Renata Hoddinott

Recognizing the emergence of technology, its impact on the practice of law, and the importance of lawyers understanding technology, the American Bar Association modified its Model Rules in 2012 to make clear a lawyer’s duty of competence includes both a substantive knowledge of the law and the competent use of technology. ABA Model Rule 1.1 Comment 8 provides, in part, that, “to maintain the requisite knowledge and skill, a lawyer should keep abreast of changes in the law and its practice including the benefits and risks associated with relevant technology.”

Since then, 38 states* have now adopted some version of Comment 8. In 2016, Florida went even further and became the first state to require lawyers to complete three hours of continuing legal education on technology every three years. In 2019, North Carolina followed suit and requires lawyers to complete one hour of continuing education devoted to technology training every year.

But where California normally leads the nation in many areas, in this it is in the minority of hold-out states which have not adopted a version of Comment 8. While the State Bar of California’s Standing Committee on Professional Responsibility and Conduct has issued several opinions involving technology to date, California has not yet expressly referred to a technology component of a lawyer’s duty of competence in its Rules of Professional Conduct.

There are constantly emerging technologies to assist lawyers in delivering legal services to their clients. In the past, lawyers were deemed competent based on their experience and knowledge of a substantive area of law. As technology evolved, so too did the concept of competence. Types of  technology used  by today’s lawyers include the technology used to run a law firm and practice, case management software, billing software, and email, as well as data security to protect client confidentiality, technology used to present information to the court, electronic discovery, saving client information in the cloud and other third-party service platforms, and the use of social media such as Facebook, LinkedIn, and blogs. There is also the growing area of artificial intelligence or AI which is transforming the way lawyers and law firms perform legal research, due diligence, document review, and even more.

While these technologies offer many benefits to help increase efficiency, minimize mistakes, and decrease labor costs, there are also associated risks and pitfalls. Technology competence includes an understanding of the technology a lawyer currently utilizes in his or her practice, the additional technology available, and the technology that a client or prospective client uses or owns. Lawyers who are not technologically competent may be putting their clients and themselves at a disadvantage, as well as potentially risking a malpractice action in certain cases.

Attorneys must recognize the ways in which technology influences the practice of law in California. While it is not yet mandated as in many other states, that day is coming soon. And while technology continues to advance faster than developments in California law, lawyers should consider their duties of competence, diligence, supervision, and maintaining confidentiality when implementing and using technology.

*The states which have adopted some version of Comment 8 are: Alaska, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Hampshire, New Mexico, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin, and Wyoming.

If you have any questions or would like more information, please contact Renata Hoddinott at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

KPMG Owes No Damages to College For Not Detecting Student Loan Fraud Scheme

Posted on: November 22nd, 2019

By: Nancy Reimer

After a three-week trial, a Massachusetts jury held on November 19, 2019 that “big four” accounting firm, KPMG LLC, owed no damages to Merrimack College even though it was negligent and did not detect a former Merrimack employee’s student loan fraud during the years it audited the College’s financial statements. The employee did not personally benefit from the fraud but treated student aid given in the form of grants as loans and billed and collected from students for money they did not owe.

After discovery of the fraud, Merrimack’s then-Director of Financial Aid, Christine Mordach, plead guilty to mail and wire fraud.  Mordach began a one-year prison term in August 2014 and was ordered to pay $1.5 million in restitution to the victims of her fraud. The College filed suit against KPMG for failing to detect the major irregularities in the College’s financial statements between 1998 and 2004 arising from Mordach’s fraud.

The case is notable as it is the first known to go to verdict with a jury applying M.G.L. c. 112, § 87 ¾, a statute applicable only to licensed Massachusetts accountants and enacted by the Massachusetts Legislature in 2002. That statute provides in cases of fraud and an accountant’s attest services:

the trier of fact shall determine (a) the total amount of the plaintiff’s damages, (b) the percentage of fault attributable to the fraudulent conduct of the plaintiff or other party, individual or entity contributing to the plaintiff’s damages, and (c) the percentage of fault of the individual or firm in the practice of public accountancy in contributing to the plaintiff’s damages. Under these circumstances set forth in this section, individuals or firms in the practice of accountancy shall not be required to pay damages in an amount greater than the percentage of fault attributable only to their services as so determined.

Before the trial, KPMG had been awarded summary judgment when a trial judge ruled the in pari delicto doctrine barred recovery for the College. In pari delicto (latin for “in equal fault”) is an equitable doctrine which provides when a plaintiff is engaged in wrongdoing, and certainly fraud, a plaintiff cannot benefit by recovering damages from another alleged wrongdoer. The College appealed, and in May 2018, the Supreme Judicial Court of Massachusetts (“SJC”) reversed, ruling for the first time that in pari delicto could succeed as a defense only if the fraud was attributable to “senior management” and, most surprisingly, ruled that Mordach, even though she was the College’s Director of Financial Aid, was not a member of the school’s senior management.  Earlier this year SJC addressed in pari delicto again, overturning summary judgment for an accounting firm in Chelsea Housing Authority v. Michael E. McLaughlin, et al.  and ruling that M.G.L. c. 112, § 87 ¾ superseded the in pari delicto doctrine for Massachusetts licensed accountants for events after its enactment in 2002. After the Chelsea Housing Authority decision, in pari delicto is no longer available as an absolute defense to an accountant where a fraud is committed, and instead, an accountant’s liability is limited to his/her percentage of fault in contributing to the plaintiff’s damages.

The jury deliberated for one and one-half days before returning a verdict for KPMG.  The verdict slip provided a roadmap for how the trial judge interpreted M.G.L. c. 112, § 87 ¾ and its interplay with KPMG’s comparative negligence defense. In answering special questions, the jury found KPMG’s auditors had been negligent when conducting the College’s audits, but that the College was as well.  After being instructed Mordach’s fraud was not to be considered is assessing the College’s contributory negligence, the jury found KPMG’s negligence was only fifteen percent (15%) compared to the College’s eighty-five percent (85%). Although the College asked for damages exceeding $4 million, the jury found the College’s damages were only $100,000. The jury also answered questions under M.G.L. c. 112, § 87 ¾, finding the College suffered a total of $50,000 attributable to any negligence of KPMG for the two years when the statute applied, but that the percentage of fault attributable to KPMG was only seven and one-half (7.5) percent compared to  nine two and one-half (92.5) percent for Mordach. The result was a verdict in favor of KPMG, because under Massachusetts law of comparative negligence, a plaintiff whose own negligence is greater than fifty percent is barred from recovery.

If you have any questions or would like more information, please contact Nancy Reimer at [email protected].

One if by land, . . . ZERO if by sea? (Apologies to Paul Revere) The Trapdoor of COGSA

Posted on: November 18th, 2019

By: Jon Tisdale

Lawyers who represent businesses who ship goods around the world need to protect their clients (and themselves) from the congressionally-mandated trapdoor of the Carriage of Goods By Sea Act (COGSA).  We now live in a world where brick-and-mortar stores are increasingly a thing of the past and the majority of goods sold are purchased online.  And then they have to be delivered.  Until someone invents the Transporter from Star Trek to “beam” products across the globe, our businesses and lives would grind to a screeching halt without the ability to ship products and goods.

So critical is the shipping industry to our economy, the United States Congress has acted to protect the integrity of this industry.  The legislative history tells us that congress reasoned (probably correctly) that if every time a shipper of goods was held responsible when a third party acted negligently and damaged the goods the shipper was entrusted to transport, negligence actions and damage awards would cause the cost of shipping anything to skyrocket and completely paralyze the shipping industry.  Congress reasoned further that the sophisticated players engaged in international shipping should be free to negotiate their own terms and conditions for indemnification, rather than be at the mercy of 50 different tort law systems nationwide.  Hence, the Carriage of Goods by Sea Act was born.

COGSA establishes an indemnity protocol governing reimbursement for the damage or destruction of goods that are shipped by sea.  Importantly, it does not matter whether the damage is occasioned by an intervening negligent third party or the shipping company’s own employee, agent or subcontractor.  If a ship filled with Bentleys and Rolexes is (a) hijacked by terrorists or (b) sunk by a negligent sea captain, the COGSA-mandated damages for the loss or destruction of whatever is shipped is limited to actual market value of the goods up to a maximum of $500 per item shipped.  This is fine if you are shipping inexpensive items; not so fine if you are shipping cars, heavy equipment or more expensive products or goods.

Under COGSA, the person or entity that contracts with the shipper has the option of (a) accepting the risk of the $500 COGSA limitation of indemnity, or (b) declaring the true value of the item being shipped and paying a non-trivial fee to increase the coverage.

The takeaway:  If your clients are shipping expensive products across country by truck, they are protected by state law systems of subrogation recovery.  But if your clients ship by sea, be sure they are cognizant of COGSA limitations and negotiate around them.

If you have any questions or would like more information, please contact Jon Tisdale at [email protected].

When is Enough Enough? A Claim of Legal Malpractice in the Course of Settlement Negotiations

Posted on: November 15th, 2019

By: Jake Loken

The Georgia Court of Appeals confirmed in Smiley v. Blasingame, Burch, Garrard & Ashley, P.C., decided on October 30, 2019, that when a claim of malpractice occurs regarding settlement negotiations, an alleged breach is immaterial if a plaintiff cannot prove that the breach resulted in damages to the plaintiff. Said another way, even if a breach can be proven, a plaintiff must still prove that the plaintiff could have received a greater settlement but for the breach.

The Smiley plaintiffs claimed their attorneys committed legal malpractice in the course of settling the plaintiffs’ underlying lawsuit which involved claims related to an implanted medical device. In negotiating potential settlements, the attorneys allegedly settled with the medical device manufacturer on terms different than those posed to plaintiffs.

At the trial court level, the court noted that although the plaintiffs “‘presented enough evidence for a question of fact as to whether the actions of [the attorneys], if taken as true, violated a legal standard of care,’ their claim still did not survive . . . because the plaintiffs have not shown any damages proximately caused by the breach.”

In discussing this point further, the Court of Appeals found that the plaintiffs had “not cited to any issue of fact indicating that they would have received a larger settlement if their attorneys had not breached their duty towards them. Further, the [plaintiffs’] assertions that they should have received additional compensation are merely speculative.” And, as we know, “[a] legal malpractice claim cannot be based upon speculation and conjecture.”

Notably, the Court of Appeals found that “damages cannot be proven by comparing the [plaintiffs] settlement with the settlement received by the other . . . plaintiffs [also allegedly injured by the same medical device].” In reaching this conclusion, the Court of Appeals used the words of the plaintiffs’ expert to state that in the case of multiple settlements regarding the same underlying medical device, “every case has its own facts . . . [and] that other considerations played into each plaintiff’s settlement, including venue, judgment collectability, and potential appeal rounds.”

If you have any questions or would like more information, please contact Jake Loken at [email protected].

California Lawyers Cannot Churn Files

Posted on: November 7th, 2019

By: Greg Fayard

Under the Rules of Professional Conduct applicable to California lawyers, attorneys are not supposed to do things where the substantial purpose is to delay, prolong, or cause needless expense. Under Rule 3.2, lawyers can be disciplined for churning a file for the substantial purpose of increasing legal fees. Examples of needless work would be lawyers spending time researching irrelevant issues, working on a case just to increase the legal fees, and seeking to continue a case for no valid reason, such as to extend a billing opportunity or delay a case simply to aggravate the opposing party.

Of course, the California State Bar might have trouble proving a violation of Rule 3.2, as most legal work has a motivation that is not based substantially on delay or increasing expenses.

That said, the best practice for all lawyers is to do what is necessary but which potentially advances the client’s interests.

If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.