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The state Supreme Court on Wednesday once again injected itself into the rapidly growing world of online law by accepting a case that will determine whether Internet businesses such as eBay Inc. can be held liable for defamatory Web site postings. The vote was unanimous. In a closer vote, the court decided 4-2, with one justice abstaining, to let proceed a malpractice suit against a San Francisco law firm by clients who weren’t satisfied with an award of more than $90 million. The court’s decision was even more galling to Rudy, Exelrod & Zieff because the firm last month reached a settlement in the underlying overtime pay case that’s expected to top $200 million. “Our clients won a ground-breaking result in this case — the largest unpaid overtime class action award in U.S. history,” Keker & Van Nest partner Steven Hirsch, who represents the firm, said Wednesday. “And we’re quite sure they are going to be vindicated. “It’s just a shame that they will have to spend the time, money and effort to fight the case when it should have been concluded on demurrer.” The Internet case, Grace v. eBay Inc., S127338, arose after Roger Grace, editor and co-publisher of Los Angeles’ Metropolitan News-Enterprise, purchased vintage magazines on eBay and then criticized their delivery and condition. The seller responded with postings that called Grace “dishonest all the way!!!!” and demanding that he be banned from the Web site. L.A.’s Second District Court of Appeal ruled in July that eBay had protected itself with a release provision in its user agreement that relieved the company of liability for comments by one user against another. But the court said that the California Decency Act of 1996 doesn’t immunize eBay against liability for distributing information it knows or had reason to believe was false. Michael Rhodes, a partner in Cooley Godward’s San Diego office who represents eBay, said he was pleased that the court granted review. Grace, who is representing himself, also welcomed a chance to take his case to the high court, but felt that the justices had limited the issue too narrowly. “The seminal issue has been avoided,” he said, “whether the statute even applies to Web sites.” Grace said he expects that the high court will consolidate his case with Barrett v. Rosenthal, S122953, already taken up by the court. The appeal court in that case held that the law does not grant absolute immunity to someone who publishes defamatory material from a third party. In the case denied review Wednesday, Rudy, Exelrod & Zieff won a jury verdict of more than $90 million in 2001 for more than 2,400 insurance adjusters who claimed that Farmers Insurance Exchange had cheated them out of overtime pay. The firm relied on arguments that the company had violated overtime rights laid out in state labor laws. But in 2002, insurance adjuster Stanley Janik sued the Rudy firm for malpractice, claiming that a larger recovery would have been possible if Farmers had been sued for violating the state’s unfair competition law. That law allows a recovery of wages for four years, while the labor laws limit claims to three years. In June, San Francisco’s First District Court of Appeal reluctantly agreed. “While we may share the attorneys’ dismay that their efforts have been rewarded with this lawsuit rather than with the kudos they no doubt expected, and perhaps deserve,” Justice Stuart Pollak wrote, “we are nonetheless constrained to hold that plaintiff’s claim cannot be rejected out of hand.” On Wednesday, the high court denied review and depublication by a 4-2 vote. Justices Joyce Kennard and Carlos Moreno voted to grant review, while Justice Kathryn Mickle Werdegar recused herself. In petitioning for review, Rudy, Exelrod & Zieff’s lawyers accused the appellate court of issuing a ruling “that imposed potentially staggering new tort liabilities on class action counsel.” For the first time, they argued, the court ruled that class members “can sue class counsel for failing to investigate, discuss with the class, and if appropriate pursue any uncertified claim that could benefit any individual class member or group.” Keker lawyer Hirsch said Wednesday that he was disappointed with the court’s decision to deny review and said the lower court ruling will cause huge problems. “It’s almost hard to assess what the full impact will be,” he said, “because, as we argued to the Supreme Court, the decision doesn’t really tell lawyers what they can or should do to avoid liability under this novel duty the court of appeal recognized.” Jeffrey Wilens, who represented Janik, said class action lawyers had exaggerated the impact of the appeal court ruling, and that the Supreme Court must have realized there was nothing earthshaking. Wilens, of the Lakeshore Law Center in Yorba Linda, said he would ask the Rudy firm one thing: “Why didn’t you include the claim under the unfair competition law? The court of appeal makes it very clear that should have been included.” The case is Janik v. Rudy, Exelrod & Zieff, S126854.

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