A lawsuit against Reed Smith has been allowed to go forward after a Lawrence County, Pa., judge overruled four out of the firm's five preliminary objections to the suit.
The suit by former client Bair Foundation, Bair Foundation Inc. v. Reed Smith, alleges the high demands on partners in large law firms to increase profits ultimately led to the nonprofit being excessively charged by Reed Smith for its representation of the foundation in a routine employment discrimination case.
The foundation said in the complaint that it was originally told the case would cost them $50,000. That was then upped to $112,000 during the case.
The final price tag in legal fees and costs for the litigation, which the foundation ultimately lost, was $960,409, according to the complaint.
Lawrence County Common Pleas Court President Judge Dominick Motto let move forward the foundation's claims of breach of contract, breach of fiduciary duty, fraud and legal negligence. He granted Reed Smith's preliminary objection to the unjust enrichment claim, given the basis of the claim was founded upon a contract. He denied a preliminary objection to that claim and the breach of contract claim on the basis of waiver and estoppel, ruling the court cannot conclude that the payment of monthly legal bills operates as waiver and estoppel.
In his two-page order from July 29, Motto said the court could not strike the breach of fiduciary duty or fraud claims over an alleged lack of specificity.
"The complaint has specifically alleged billing fraud, excessive billing, and billing for unnecessary services (fee-churning) and secretly elevating billing rates without the consent of the plaintiff and related allegedly improper billing practices," Motto said.
The judge denied preliminary objections to the breach of contract, breach of fiduciary duty and legal negligence claims over allegations by Reed Smith that the alleged damages were speculative.
He said the complaint alleges specific legal negligence for failure to raise two allegedly available defenses. He also said the court found that the ability of the Bair Foundation to prove damages should be resolved after discovery.
Motto also denied Reed Smith's preliminary objection raising a lack of capacity of the Bair Foundation to sue.
Reed Smith has 20 days from the date the order was docketed to answer the complaint.
Bair Foundation attorney Bruce C. Fox of Obermayer Rebmann Maxwell & Hippel in Pittsburgh said in a statement that the case would probably go to trial at some point next year.
He said the unjust enrichment claim that was dismissed was the "least significant" of his client's claims and would have no effect on their ability to pursue the "core claims" for "fee-churning."
"The unjust enrichment count was a nonessential count," Fox said in an interview. "It was not a surprise that it was thrown out."
Fox said he would move ahead aggressively with discovery in the case now that preliminary objections are over.
William Pietragallo II of Pietragallo Gordon Alfano Bosick & Raspanti in Pittsburgh represents Reed Smith in the case. He said the judge ruled in favor of one of the firm's five preliminary objections to the suit and left open an opportunity for the firm to prove the factual bases of their other defenses.
"With preliminary objections, the facts are as the plaintiff gave them to him, so often a judge feels handcuffed in making a ruling [in favor of the plaintiff, and] would rather allow the discovery to make those facts crystal clear," he said.
In its complaint, the Bair Foundation said Reed Smith shouldn't have represented the "smaller" client given the firm's focus on high revenues and profits.
"In implementing its ambitious strategy of capturing global clients, which Reed Smith boasts results in 'a constant increase in revenue per partner,' it has acknowledged that comparatively small regional or local law firms can or perhaps should service smaller clients," the complaint stated. "This is so because such firms typically charge much lower fees than 'white shoe' international law firms like Reed Smith and are therefore more affordable to these smaller clients.
"However, Reed Smith has inexplicably continued to represent certain much smaller clients which lack substantial financial resources, such as Bair, a not-for-profit charitable foundation."
At the time the complaint was filed, Fox said he didn't think large, international firms should represent clients like the Bair Foundation because of global law firms' economic models.
The complaint alleges that Reed Smith took advantage of Bair's lack of legal sophistication by engaging in "inappropriate billing practices." These allegations included overstaffing of the case, failure to describe billing entries by subject matter or activity, secretly raising the rates of the lawyers billing Bair and billing at rates that exceeded what was promised, according to the complaint.
The complaint also alleges that Reed Smith failed to advise Bair to notify its insurance carrier of the discrimination suit. The carrier originally rejected any claims by Bair because of the failure to notify but ultimately agreed to pay a portion of the defense costs and indemnification.
According to the complaint, Reed Smith charged Bair an additional $26,660 to negotiate with the insurance carrier.
The complaint further alleges that Reed Smith failed to raise certain defenses to the discrimination suit.
Reed Smith had done work for Bair in the past and had built a trusting relationship, the foundation said in the complaint, but then the firm took advantage of the trust.
"Circumstances were ideal for churning because there were two check writers splitting the cost of Reed Smith's legal fees," according to the complaint. "Because the cost of defense was shared between Bair and AIG, neither had especially strong incentives to carefully monitor Reed Smith's legal bills, to question or criticize Reed Smith's opaque and unspecific time entries, or to otherwise manage and control Reed Smith's overstaffing of the case and excessive billing."
The Bair Foundation is based in Lawrence County on the Pennsylvania-Ohio border and has a location in Ohio, where Reed Smith represented the organization in the discrimination suit.
The underlying suit was brought by two employees of the foundation in the U.S. District Court for the Northern District of Ohio. They claimed religious discrimination and Bair hired Reed Smith to defend the claims because the firm had represented the foundation in similar matters before, according to the complaint. Reed Smith has also represented Bair in small matters involving Bair's status as a charitable foundation.
