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By Samson Habte
Jan. 19 — The attorney immunity defense shields a law firm from possible liability to a litigation opponent that accused the firm of helping its client steal the plaintiff's trade secrets, the Texas Court of Appeals, Fifth District, held Jan. 14.
The court said a hedge fund that sued a former executive for allegedly misappropriating trade secrets can't pursue a second action accusing the executive's lawyers of trying “to extort a settlement” by threatening to disclose the allegedly pilfered information.
The ruling is one of the first appellate opinions to apply a 2015 decision in which the Texas Supreme Court emphasized the broad scope of the attorney immunity defense—a common law affirmative defense, similar to the litigation privilege, that insulates attorneys from civil liability to nonclients for supposedly tortious actions taken in course of representing a client.
“An attorney is given latitude to ‘pursue legal rights that he deems necessary and proper' precisely to avoid the inevitable conflict that would arise if he were ‘forced constantly to balance his own potential exposure against his client's best interest,'” the Texas Supreme Court said in that 2015 case, Cantey Hanger, LLP v. Byrd, 2015 BL 204594, 467 S.W.3d 477, 31 Law. Man. Prof. Conduct 363 (Tex. 2015).
Applying Byrd, the appellate panel held that attorney immunity protected Looper Reed & McGraw P.C. (now known as Gray Reed & McGraw P.C.) from a lawsuit that accused the firm of committing “a series of criminal acts” in an attempt “to extort a settlement” for a former hedge fund executive who was sued for allegedly stealing trade secrets from Highland Capital Management.
Highland claimed Looper Reed aided fiduciary breaches of its client, former Highland executive Patrick Daugherty, and committed extortion, theft and commercial torts when it refused to return confidential materials Daugherty allegedly stole and “threatened to use the material to publicly slander and disparage Highland unless Highland agreed to pay their client more than a million dollars.”
Justice Michael J. O'Neill said that although “Highland characterized Looper Reed's actions as ‘criminal, tortious, and malicious,'” the firm was protected from liability under the attorney immunity defense.
Looper Reed's conduct was not actionable, O'Neill wrote, because
the actions themselves—acquiring documents from a client that are the subject of litigation against the client, reviewing the documents, copying the documents, retaining custody of the documents, analyzing the documents, making demands on the client's behalf, advising a client to reject counter-demands, speaking about an opposing party in a negative light, advising a client on a course of action, and even threatening particular consequences such as disclosure of confidential information if demands are not met—are the kinds of actions that are part of the discharge of an attorney's duties in representing a party in hard-fought litigation.
O'Neill's opinion emphasizes the Byrd court's statements regarding the breadth of the immunity defense. “If an attorney proves that his conduct is ‘part of the discharge of his duties to his client,' immunity applies,” he wrote, quoting Byrd. “The court explained that even wrongful or fraudulent conduct may fall within the scope of client representation.”
Some Texas appeals courts had held before Byrd that attorney immunity didn't extend to an attorney's knowing participation in fraudulent activities on his client's behalf. But Byrd rejected a “general fraud exception,” saying it “would significantly undercut the defense.”
Instead, the supreme court made clear in Byrd that lawyers lose the protection of the immunity defense only when they participate in “independently fraudulent activities” that are considered “foreign to the duties of an attorney.”
“This is not to say, as the court recognized in Byrd, that attorneys are not otherwise answerable for misconduct in the course of representing a client in litigation,” O'Neill said. “‘[O]ther mechanisms are in place to discourage and remedy such conduct, such as sanctions, contempt, and attorney disciplinary proceedings,'” he added. “But ‘the remedy is public, not private.'”
Highland also argued that Byrd is limited to conduct occurring “in litigation.” Looper Reed's “pre-litigation” conduct—such as “assist[ing] Daugherty in his efforts to extort” a settlement—isn't protected because it occurred “contemporaneous with [Daugherty's] departure” and “before Highland filed suit,” the hedge fund asserted.
The court wasn't convinced. “[The] reasoning in Byrd focuses on whether the conduct is ‘outside the scope of an attorney's representation of his client,'” O'Neill wrote. “Even though Highland had not yet filed suit, negotiations and legal advice regarding Daugherty's departure from Highland were within the scope of Looper Reed's representation of Daugherty.”
Michael Aigen, Paul Lackey, Jamie Welton and Lee Budner of Lackey Hershman LLP represented Highland. Charles Baruch of The Law Office of Chad Baruch and Robert Tobey and Coyt Johnston of Johnston Tobey P.C. represented Gray Reed & McGraw.
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The Texas appellate panel's conclusion in Highland Capital that law firm Looper Reed's conduct was protected by the attorney immunity defense because it occurred “in litigation” relieved the court from having to decide a question Byrd left open: whether attorney immunity applies to conduct that occurs outside of litigation.
That question is at issue in Troice v. Proskauer Rose LLP, No. 15-10500 (5th Cir., appeal filed May 29, 2015), which is pending in the U.S. Court of Appeals for the Fifth Circuit.
The appeal involves a class action filed by investors who have accused the law firms Chadbourne & Parke LLP and Proskauer Rose LLP of aiding and abetting the alleged fraud of an investment bank controlled by convicted financier Allen Stanford. See 30 Law. Man. Prof. Conduct 162.
The claims center on services the firms provided Stanford when his bank issued certificates of deposit that were falsely represented as being backed by safe liquid assets.
Proskauer Rose argued in a brief that attorney immunity protects it from liability because the defense “is not limited to an attorney's conduct in litigation,” and thus applies to services the firm provided to Stanford in proceedings before the Securities and Exchange Commission.
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