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Michael W. Shore's client has upped the ante in its federal court software licensing suit in which it is seeking sanctions against Susman Godfrey and two of its partners -- and the chips come courtesy of the Susman lawyers' former client, New Century Mortgage.

On Aug. 18, Shore's client, software developer Positive Software Solutions, believes it strengthened its request for sanctions by filing a document in the licensing suit, Positive Software Solutions Inc. v. New Century Mortgage, et al. -- a pleading that includes once-privileged attorney-client communications between New Century and Susman as well as some of the company's internal documents about the licensing litigation.

Positive Software got its hands on that information, because on Feb. 19 it hammered out a settlement in bankruptcy court with its longtime adversary, New Century. The settlement dismissed New Century as a defendant in a separate fraud suit Positive Software had filed against it related to the licensing dispute. As part of the settlement, New Century had to turn over the privileged and internal information, so Positive Software could continue to go after Susman Godfrey and Dallas partners Barry C. Barnett and Ophelia F. Camina -- lead counsel who represented New Century in the licensing suit.

"They wanted the cases  over with," Shore, a partner in Dallas' Shore Chan Bragalone, says of New Century. "And if they had to waive immunities, they were willing to do that."

But the strategy troubles some professional responsibility lawyers, because it gives an opposing party access to attorney-client information for use in ongoing litigation against attorneys. Also concerned is David Beck, a partner in Houston's Beck Redden & Secrest who represents Susman Godfrey, Camina and Barnett.

"The client [New Century] is certainly entitled to do what's in its best interest, and they did that. As a practical matter documents that were thought to be privileged are in the other side's hands," Beck says. "So, basically, what they did was bought the privilege. And that, in my experience, is unprecedented."

That kind of maneuver could have serious consequences in the future, Beck says. "If the attorney-client privilege becomes a marketable commodity, it's going to very seriously affect the attorney-client relationship," Beck says.

LONG HISTORY

Positive Software and New Century have been at battle for the past five years. In its 2003 complaint in Positive Software Solutions Inc. v. New Century Mortgage, et al., the software licensing suit, Positive Software alleged New Century engaged in copyright infringement, theft of trade secrets and breach of contract by using Positive Software's mortgage lending database without permission, allegations New Century denied. After issuing a protective order forbidding New Century from using Positive Software's database and from destroying evidence, U.S. District Judge David Godbey of Dallas sent the case to arbitration in 2003.

In 2004, an arbitrator sided with New Century -- a decision Godbey vacated that same year, because the arbitrator did not disclose that he had been co-counsel with Camina in prior unrelated litigation. In his order Godbey also expressed concern that one of New Century's lawyers, whom he did not name, allegedly failed to produce evidence in the case that likely had an effect on the arbitrator's decision.

New Century appealed, but in 2006 a 5th U.S. Circuit Court of Appeals panel affirmed Godbey's ruling. New Century sought an en banc rehearing, and in 2007 it persuaded the full 5th Circuit to reverse the panel's decision. The en banc court found that the "mere appearance" of bias on the part of an arbitrator was not enough to vacate an arbitration award, and it sent the case back to Godbey for rulings consistent with the opinion.

Godbey subsequently issued a show-cause order as to why Camina and Barnett should not be disciplined for alleged actions they took in New Century Mortgage.

In 2007, Positive Software sought sanctions against Susman Godfrey, Barnett and Camina, accusing them of fraud and misconduct that ultimately resulted in Positive Software's loss in the arbitration. That's according to Shore and Murray Fogler, another partner in Houston's Beck Redden & Secrest who represents Susman Godfrey and the partners.

Among other things, Positive Software alleges in its Aug. 18 pleading that in the New Century Mortgage licensing case Camina instructed an expert witness to destroy discoverable evidence and Camina and Barnett made false statements during the litigation.

Barnett and Camina deny any wrongdoing in declarations they filed before Godbey in November.

"I am not aware of any commercial use made by New Century of Loanforce [Positive Software's product] or the allegedly infringing software," Camina wrote in her November 2007 declaration to Godbey in New Century Mortgage. "The only use of these materials made by New Century was solely in the lawsuit to respond to discovery requests and orders and to defend itself."

"I want the court to conclude that I am an honest and ethical lawyer, and that my conduct in this difficult case, though imperfect, was reasonable under the circumstances and always in good faith," Barnett wrote in his November 2007 declaration to Godbey. "I never intended to mislead the court or opposing counsel," Barnett wrote in his conclusion.

Positive Software filed a separate suit last year in Godbey's court, Positive Software Solutions Inc., et al. v. Susman Godfrey, et al., accusing the defendants -- Susman Godfrey, Camina, Barnett and New Century -- of "intentionally concealing documents, willfully withholding material evidence, offering perjured testimony, and fraudulently misrepresenting facts to obtain a favorable ruling in the arbitration." Godbey recused himself from that case, and it is now pending before U.S. District Judge Reed O'Connor of Dallas.

Shore says he plans to amend the complaint in Susman Godfrey with the evidence he gained from New Century.

After Positive Software filed Susman Godfrey, California-based New Century -- once the second largest subprime mortgage lender in the nation -- filed Chapter 11 bankruptcy in a U.S. Bankruptcy Court in Delaware. Positive Software filed as a creditor in the bankruptcy action and on Feb. 19 agreed to settle Susman Godfrey with New Century before the Delaware Court.

In the settlement, New Century agreed to pay Positive Software $2 million and waive its attorney-client privilege with Susman Godfrey in exchange for Positive Software dismissing it as a defendant in Susman Godfrey.

Russell Silberglied, a director in Wilmington, Del.'s Richards Layton & Finger who represents New Century in the bankruptcy, did not return a telephone call seeking comment before press time on Aug. 28.

NEW INFORMATION

Now Positive Software is using those attorney-client communications and New Century's internal documents as ammunition to go after Camina and Barnett.

In its Aug. 18 pleading seeking sanctions against Susman Godfrey, Camina and Barnett in the New Century Mortgage software licensing suit, Positive Software alleges it has a prima facie showing of fraud and misconduct by the lawyers, citing the new information it received from New Century.

Attached to the pleading is an April 8, 2003, e-mail from New Century's then-general counsel Monika McCarthy to another officer in the company that states: "I also think our attorneys have done a good job of covering up the fact that we are continuing to use their database."

McCarthy, who now works as a consultant in California, says she and her colleagues at New Century did nothing wrong.

"New Century, its employees and counsel acted ethically and in good faith at all times related to the Positive Software litigation," McCarthy writes in an e-mail in a response to an interview request. "Mr. Shore's motivations to gain privileged documents in order to twist words and make erroneous assumptions are misguided.

"I am not an intellectual property specialist, nor a software application or database expert," McCarthy adds. "My e-mails at issue expressed my premature opinion, early in the case, which investigations by intellectual property experts and counsel subsequently revealed were incorrect."

Shore says he now wants Susman Godfrey to turn over its internal work-product connected to the New Century Mortgage licensing suit, urging Godbey in the Aug. 18 pleading that Positive Software should be allowed to see that information, because it is discoverable under the crime-fraud exception. A third party must prove fraud to gain access to an attorney's privileged documents. Godbey is reviewing thousands of documents the firm turned over to him in camera to determine if they can be released, Shore says.

"There's enough to prevail," Shore says of the evidence in the licensing suit. "But we want the whole story. Our client wants to see exactly what was done and who did it."

Fogler says his clients strongly oppose the release of attorney work-product during discovery in the licensing suit. He adds that his clients have committed no crime and no fraud.

"It's really the principle of the thing. A lawyer's internal thoughts and impressions on how they handle a case is not intended to be disclosed to the other side," Fogler says. "It would set a horrible litigation precedent if an opponent was allowed to obtain your internal work-product by obtaining a motion for sanctions."

Fogler says he plans to file a response disputing all of the allegations in Positive Software's recent filing in New Century Mortgage. He says some of the allegations -- namely McCarthy's e-mail -- have been taken out of context in Positive Software's recent pleading. He points out that the e-mail was dated before Godbey issued an order en-joining New Century from using Positive Software's database.

In 2003, Positive Software was seeking to enjoin New Century from using the database, Fogler says. "And that was the issue that was before Godbey. You really have to be careful about how Positive Software jumps back and forth in time. It is really misleading."

Fogler adds that his clients weren't aware McCarthy's e-mail existed.

"We never saw these until last week, when Positive Software filed this pleading," Fogler says.

WORK-PRODUCT

Two professional responsibility lawyers who are not involved in New Century Mortgage believe it's likely Godbey will allow Positive Software to see Susman Godfrey's work-product in discovery, because that information belongs to Susman Godfrey's former client, too.

Daniel Sheehan of Dallas' Daniel Sheehan & Associates is troubled by the prospect of a client bargaining away the attorney-client privilege through settlement.

"I've never heard of it. It potentially puts the lawyer between the cross-hairs, because the client agrees to produce confidential information as part of a settlement," Sheehan says. "I think that's a dangerous misuse of the attorney-client privilege. I know that the privilege belongs to the client."

Sheehan also believes that Positive Software likely will get access to Susman Godfrey's work-product, which concerns him as well.

"The attorneys' entire file belongs to the client. And I think that consideration will probably override any argument that prepared memoranda that are in that file should be protected by work-product," Sheehan says. "But I have some real concerns about the affect that will have on the ability of lawyers to be completely candid. We don't want lawyers practicing law defensively."

Marshall Searcy, a partner in the Fort Worth office of Kelly Hart & Hallman, also believes Positive Software likely will get access to Susman Godfrey's work-product. He's troubled by that, as well.

"If you prepare materials and several iterations that are in draft forms that everyone knows are not for public consumption and you are dealing on a candid basis with your client, you may say things in a litigation context you would never say," Searcy says. "And when they are no longer privileged that is a troubling situation. And it will certainly cause me to think twice about what I say."

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