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New York’s highest court said Thursday that two New Jersey patent attorneys who claim they are owed a share of the income from a medical device are barred from litigating the issue because it was resolved against a third party — their former law partner — at a prior trial. By a 6-1 margin, the New York Court of Appeals held that attorneys John N. Bain and John Gilfillan III of Roseland, N.J., are collaterally estopped from relitigating the validity of a fee agreement that was addressed in a suit brought earlier by former partner R. Gale Rhodes Jr. A spirited dissent accused the majority of tacitly adopting a “virtual representation doctrine” that flies in the face of traditional privity concepts and ignores fundamental collateral estoppel precepts. Buechel v. Bain, 134, involves two biomedical inventors who brought suit to rescind their long-standing arrangement with the patent lawyers. Under a fee agreement, orthopedic surgeon Dr. Frederick F. Buechel and mechanical engineer Michael J. Pappas promised Bain, Gilfillan and Rhodes one-third of the income from their newly invented prosthetic shoulder joint in exchange for legal services. For several years, the attorneys obtained and defended patents on behalf of Buechel and Pappas in return for one-third of the profits. Rhodes left the firm of Bain, Gilfillan & Rhodes in 1981 and sued the inventors in a fee dispute in 1987. Following a bench trial in 1998, the state supreme court found the fee arrangement invalid for lack of full disclosure to the inventors of the possibility of the law firm’s conflict of interest. The court cited numerous ethical violations on the part of Rhodes, found the fee agreements unethical and unenforceable and rescinded the trust agreements that provided income to all three lawyers. Bain and Gilfillan continued to represent the inventors until 1995, when they were fired. In the matter decided Thursday, where the inventors sought to nullify the fee agreements, Bain and Gilfillan appealed to overturn an Appellate Division, First Department, decision that said they could not relitigate the validity of the arrangement. The attorneys contended that they are not bound by Rhodes case since they were not active litigants. They also argued that jurisdiction over fee disputes involving patent services resides in federal court. TACTICAL MANEUVER Thursday, the Court of Appeals affirmed the unanimous First Department in an opinion by Judge George Bundy Smith. “In the Rhodes action, the Supreme Court determined … that the original fee agreement was unlawful as it was procured in violation of the canons of ethics,” Judge Smith wrote. “This is the very issue that defendants seek to relitigate in the present action hoping that the second time around a court will reach a contrary determination.” The majority observed that Bain and Gilfillan were well aware that the fee arrangement was under challenge in the Rhodes case and “had an obligation to take an active role in that litigation — which went on for nearly a decade — or accept the consequences.” Judge Smith said Thursday’s ruling “makes plain that the law will not sanction such tactical maneuvering at the price of efficiency and consistent judgments where parties have not shown that they lacked a full and fair opportunity to be heard.” Like the First Department, the Court of Appeals found that Bain and Gilfillan should be deemed in privity with Rhodes. It adopted the First Department’s reasoning that as a matter of policy a “party to a lawsuit cannot sit by idly while a contract, to which he is also a party, is judicially construed without being precluded by the result.” Judge Howard A. Levine strongly dissented, saying the “umbrage against defendants taken by the majority and the Appellate Division for ‘sit[ting] idly by’ … is better directed at this Court’s abandonment of the mutuality of estoppel doctrine, not the defendants for taking advantage of that abandonment.” He said the standard applied here “is contrary to our precedents, is of highly dubious constitutionality and will create uncertainty of application destructive to the litigation-limiting purposes of collateral estoppel.” Further, Judge Levine accused the majority of embracing a “virtual representation” concept, “which had been in vogue in some federal circuits for a period of time” but has since been largely abandoned. In response, Judge Smith said the dissent misconstrues the privity test employed by the majority. “We do not adopt the so called ‘virtual representation doctrine,’” the majority insisted. Appearing were: Robert F. Cusumano of Simpson Thacher & Bartlett in Manhattan for Bain; Thomas W. Hyland of Wilson Elser Moskowitz Edelman & Dicker in Manhattan for Gilfillan; and David N. Ellenhorn of Solomon Zauderer Ellenhorn Frischer & Sharp in Manhattan for Buechel and Pappas.

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