INSIGHT: Legal Malpractice—The Rise of Claims By Non-Clients

In recent years, there’s been an explosion in legal malpractice lawsuits by non-clients. These days it seems that every failed investment produces disgruntled investors looking for deep-pocket professionals to blame, and almost every corporate bankruptcy ends with the formation of a litigation trust to pursue claims against the lawyers.

These claims pose challenges for large law firms. What can firms do to mitigate the risk?

• Teach your transactional lawyers to take affirmative steps to avoid creating duties to non-clients. For example, if your firm is asked to set up an LLC in connection with a transaction, the engagement letter and perhaps the LLC agreement itself should make it clear that the entity is the lawyer’s only client; and the firm owes no duties, fiduciary or otherwise, to the members or managers individually.
• Put systems in place to insure that your clients actually sign and return engagement letters and conflict waivers. Sending a carefully drafted engagement letter to a corporate client that clearly states who the firm does and doesn’t represent won’t be very helpful in a malpractice case if the CEO doesn’t countersign and return the letter, and later claims he never saw it and that the firm represented him or her individually.
• As the transaction evolves, make sure the deal lawyers act in accordance with the terms of the engagement letter and don’t start giving legal advice to the constituents of the client organization or to third parties who become involved in the transaction. Make sure any documents the law firm reviews which are provided to third party investors, such as offering memoranda or powerpoint slide decks, contain appropriate disclaimers.
• Encourage your lawyers to give corporate “Miranda warnings” if they suspect a non-client believes the firm is representing them individually.
• Train lawyers to become sensitive to potential conflicts that may arise as the deal unfolds. It is not uncommon to think about conflicts and the scope of the engagement at the outset of a matter, and then forget about those issues. When a new party gets involved in a matter that is already underway, a new conflicts check has to be done. When the ownership of the client entity changes, you need to reevaluate what your firm’s role is and have an express discussion with the constituents involved about who is and is not the client.
• Be careful whenever other clients of the firm, or others with whom the firm’s lawyers have strong relationships, are involved as non-clients in a matter. Even where conflicts of interest are properly addressed and waivers obtained, the relationships remain, and they increase the risk that someone who is not a client in the matter might rely on the firm’s work. They also increase the likelihood that the client will later claim that the firm pulled its punches in order to favor the other client or relationship.

Non-clients can and regularly do assert non duty-based claims against law firms, on theories like aiding and abetting fraud, aiding and abetting breach of fiduciary duty and conspiracy. Those claims have very specific elements that can be hard to prove, and are often subject to dismissal on early motion. But as long as the law firm is the only solvent party left standing, you can expect plaintiffs’ lawyers to keep trying.

Consider Settling Early

And, finally, while this may be hard to hear, consider settling claims brought by clients or non-clients at the earliest opportunity, especially claims that fall within the firm’s self-insured retention.

Most of the time when a claim is made the firm and the involved lawyer feel they haven’t done anything wrong, and their instincts are to defend the case to the death. They’re also concerned about getting a reputation as an easy target for plaintiffs’ counsel. The hard fact is most cases, including legal malpractice cases, will settle at some point. If you know that going in, why shouldn’t you consider settling sooner rather than later before the firm’s retention is exhausted on defense costs?

Many firms also overlook the hidden costs that litigating a legal malpractice case impose on the firm and especially the involved lawyers. Very capable lawyers can become consumed by the distraction and stress of being sued, taking them away from more productive activities.

Of course, each case will depend on the specific facts—but an early settlement should not be rejected based purely on subjective predilections. Law firms are in the business of strategically and impassively evaluating risk. It should be no different when your firm and your lawyers are the ones requiring an unemotional risk assessment.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Richard M. Zielinski is a director at Goulston & Storrs in Boston and New York, where he is a nationally known trial lawyer who handles a wide range of complex, bet-the-company commercial litigation. He is sought out by AmLaw 100 and 200 firms for his specific expertise in legal malpractice defense, partnership disputes and attorney discipline cases.