A Collin County, Texas, district judge has dismissed most of the claims in a civil suit McAfee Inc. filed against Wilmer, Cutler, Pickering, Hale and Dorr, but he has allowed a fraud claim in the suit to proceed. In the suit McAfee alleges the Boston-based firm overbilled the computer security company by charging $12 million to represent McAfee's former chief financial officer in a criminal case.
Ruling from the bench at an Oct. 2 hearing, 401st District Judge Mark Rusch dismissed the breach of fiduciary duty, gross negligence and assumpsit causes of action against WilmerHale, but the fraud cause of action remains, says Marty Rose, a partner in Dallas-based Rose • Walker who represents McAfee. McAfee is based in Santa Clara, Calif., but some of its corporate officers work in Plano., Texas.
WilmerHale represents former McAfee CEO Prabhat Goyal, who was convicted last year by a federal jury in San Francisco on 15 securities-related fraud counts for overstating the company's profits from 1998 through January 2001. Prosecutors alleged Goyal improperly recorded more than $470 million in revenue and understated McAfee's losses by more than $330 million, according to a 2007 article in The Recorder, a San Francisco affiliate of Texas Lawyer.
Goyal signed an indemnity agreement drafted by McAfee in 1996 that recognized that indemnifying executives against the "enormous costs of litigation" was essential for McAfee to retain talented and experienced executives and that Goyal promised to repay amounts "determined ultimately" not to be subject to indemnification, according to WilmerHale's motion to dismiss in state court.
In 2002, the U.S. Department of Justice launched a sweeping grand jury investigation into McAfee's corporate accounting practices over a three-year period, prompting Goyal to hire WilmerHale. Goyal was indicted in 2004, according WilmerHale's motion to dismiss.
In 2008, after McAfee questioned WilmerHale about the legal bills and didn't receive a satisfactory answer, the company sued the firm in Collin County district court, Rose says. In April, McAfee filed McAfee Inc. v. Wilmer, Cutler, Pickering, Hale and Dorr in Collin County state court, but WilmerHale removed the case to a U.S. District Court in the Eastern District of Texas.
According to McAfee's June 26 federal court third amended complaint, Goyal's legal bills "reflect at least 16 partners, 34 associate attorneys, 10 legal assistants and 49 staff personnel -- how else would they amass this enormous trove of cash? Defendant's expenses include almost $200,000 in expenses for luxury hotel rooms, limousines and charges for room service and bar tabs."
"We didn't hire the firm. Goyal is entitled to hire his own counsel. This is the perfect setup to abuse the system," Rose says. "They [Wilmer Hale] can do whatever they want [to run up costs], and we can't challenge them."
But Gerson Zweifach, a partner in Washington, D.C.'s Williams & Connelly who represents WilmerHale, denies that the firm overbilled McAfee for Goyal's defense.
WilmerHale also responded that McAfee had no standing to complain about the legal bills, stating in a June 9 federal court motion to dismiss, "This lawsuit was brought at the wrong time and in the wrong forum, by a plaintiff who has no standing to sue the defendant, and who seeks to prejudice the interests of an absent party" -- Goyal, who is not a defendant in the civil case.
As reported in a July Recorder article, Goyal filed a complaint in Delaware state court against McAfee in May, alleging that WilmerHale hadn't been paid for his defense since September 2007. After that filing, McAfee paid the firm and filed a motion to dismiss that suit. Goyal's lawyers at Delaware firm Abrams & Laster filed a response, contending that there was more to the suit than unpaid bills, the Recorder noted.
Meanwhile, back in Texas, at an hour-and-a-half scheduling conference on July 24, U.S. District Judge Michael Schneider sided with WilmerHale, dismissing the case under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. In the alternative, he found the matter was not ripe, the forum selection clause applied, venue was improper, and Goyal was an indispensable party. In August, Schneider issued an opinion finding that he did not have subject matter jurisdiction over the case and remanded it to state court.
On Oct. 2, the same day Rusch allowed the suit to proceed in state court, U.S. District Judge Susan Illston of the Northern District of California sentenced Goyal to one year and one day in prison. Goyal is free pending appeal, in which WilmerHale is representing him.
Rose says he's glad Rusch allowed the fraud claim to survive, because "frankly, that's all we care about." A Collin County "jury is going to hear that these East Coast lawyers spent $12 million of McAfee's money to defend a criminal in a case that should have taken a tenth of that," Rose says, based on conversations with other criminal defense lawyers.
But Zweifach notes that Goyal's criminal case so far has involved "1.2 million documents, 73 potential witnesses, three years of financial statements, and the docket sheet for the case is 29 pages longs. It's a massive case. They complained about the bills, but 82 percent of the time was billed by the seven-member trial team and the paralegal assistants." The remaining time was billed by lawyers who are not on the trial team, he says.
Zweifach says he will file a mandamus action in the case with Dallas' 5th Court of Appeals, seeking to overturn Rusch's ruling. Meanwhile, Rusch stayed discovery in the suit pending the 5th Court's decision on the mandamus, Zweifach says.
Zweifach says he's confident WilmerHale will defeat McAfee's fraud claim.
"I can tell you we asked them" about the fraud in federal court, Zweifach says. "Judge Schneider said, 'Tell me what the fraud is,' and they couldn't tell him. And we'll see how that goes."
Rose believes discovery in the case will prove otherwise.
In the third amended federal complaint, McAfee claims WilmerHale took advantage of the deep pockets of McAfee, knowing that the company would pay the bill of its former CFO, and then engaged in a billing "free for all."
The fee dispute puts WilmerHale in a difficult position, Zweifach says.
"We've been put in this position to justify why we did the work we did, and we'd be delighted to tell them but for the fact we're in the middle of representing this man, and they [McAfee] are cooperating with the government," Zweifach says.