A Southern District judge has narrowed a malpractice action against Brown Rudnick while denying the law firm’s attempt to seek damages against its former client for past litigation expenses.
In a lawsuit filed in Manhattan federal court, Brown Rudnick claimed ex-client Surgical Orthomedics Inc. breached the firm’s engagement letter by filing two malpractice suits against the firm in courts outside New York, even though the letter specified New York as the proper forum for disputes. The firm said it incurred more than $120,000 in legal expenses to defend those suits.
But Judge Jesse Furman (See Profile) found the former client should not have to pay for those costs.
“Brown Rudnick—a well-respected law firm that presumably knows how to draft a contract—has only itself to blame for not drafting its engagement letter to provide for the damages it now seeks,” Furman said in Brown Rudnick v. Surgical Orthomedics, 13-cv-4348.
From 2006 to 2008, Surgical Orthomedics, a medical supplies company, was a distributor in the Dallas-Forth Worth region for Stryker Spine, which develops and sells spinal products.
An agreement between Surgical and Stryker contained noncompete clauses in which Surgical and its directors—brothers Andrew and Steven Hewes—agreed not to make or sell any product in competition with any product made or sold by Stryker.
The agreement expired at the end of 2008.
In 2009, Stryker filed a demand for arbitration, claiming that Surgical and the brothers had been violating the agreement’s noncompete clause. Surgical and the brothers retained Brown Rudnick and partner Emilio Galvan, who is now deceased, as well as Texas attorney Teresa Ford for the arbitration.
In October 2011, the arbitration panel sided with Stryker, finding that Brown Rudnick’s former clients had violated the noncompete provision in several ways and they were liable for about $3.3 million in damages. The arbitration award was later confirmed in New Jersey federal court.
Meanwhile, the brothers and Surgical terminated Brown Rudnick as counsel and asked the firm to provide its files to its new counsel. The law firm refused, asserting it hadn’t been paid for its work in the arbitration.
Surgical filed lawsuits against the firmin Texas state court and New Jersey federal court. Both were dismissed based on the forum selection clause in the firm’s engagement letter, which specifies that disputes relating to representation are to be brought in New York state or federal court.
Brown Rudnick then filed suit against Surgical in the Southern District for breach of contract. The law firm claimed Surgical hadn’t paid about $300,000 in attorney fees and expenses, had failed to object to the firm’s invoices and had breached the engagement letter by filing suit outside New York, where it incurred $121,565 in legal costs to dismiss the suits.
Surgical asserted counterclaims against Brown Rudnick and Galvan, claiming legal malpractice, among other things. The Hewes brothers intervened and also claimed legal malpractice against the firm and Galvan.
Brown Rudnick and Celia Galvan, Galvan’s mother and administrator of his estate, sought to dismiss the counterclaimsand the intervention complaint. They also sought summary judgment on the firm’s claim that Surgical breached the engagement letter by filing suit outside New York.
In his July 15 decision, Furman upheld Surgical’s malpractice claim alleging that Brown Rudnick, during the arbitration, failed to offer testimony from doctors, which would have been relevant for a damages analysis.
Brown Rudnick has not “articulated any strategic basis for their failure to present this testimony,” Furman said. Discovery may reveal that the law firm made a reasonable strategic decision not to call the doctors, he said, but there is no basis to dismiss the claim at this stage.
Furman also upheld Surgical’s malpractice claim alleging that Brown Rudnick failed to present a damages expert. Although the law firm said it would have been wasteful to pay an expert to perform simple math, “the award itself makes clear that arriving at the damages figure involved more than pure arithmetic,” the judge said.
Furman declined to dismiss Surgical’s claim that Brown Rudnick improperly asserted a retaining lien against its litigation files.
The ex-clients also alleged that Brown Rudnick was negligent by failing to disclose and obtain waivers for conflicts of interest among Surgical and the brothers. They argued that, laboring under such conflicts, the firm failed to assert certain defenses and cross-claims in the arbitration.
But Furman said the conflict allegations fail. Surgical’s interpretation was “nonsensical on its own terms,” Furman said about one of Surgical’s arguments.
Furman dismissed other Surgical claims such as breach of contract and unjust enrichment.
On Brown Rudnick’s claim against Surgical, Furman said the New York Court of Appeals has not definitively ruled on whether a party may recover fees as damages for breach of a forum selection clause.
But Furman said he agreed with Southern District Judge Kenneth Karas’ 2011 decision in Versatile v. Thill, 819 F. Supp. 2d 230, and said “there is persuasive data” suggesting the Court of Appeals would preclude the recovery of attorney fees and expenses as damages.
Surgical maintained that the law firm’s claim should fail under the so-called American Rule, where fees are incidents of litigation and the prevailing party may not collect them unless it is authorized by statute, agreement or court rule.
Furman said, “Allowing Brown Rudnick to collect attorney fees as damages simply by characterizing them as damages based on a breach of contract would create an exception that would swallow the American Rule.”
As Judge Karas noted, the parties to an agreement can easily avoid the problem by expressly providing that a party can recover attorney fees if the forum clause is breached, Furman said.
“The American Rule serves only as a default rule,” Furman said, adding that the firm could have drafted the engagement letter to provide for such damages.
Diamond McCarthy partner Andrew Ryan, who represented Brown Rudnick, declined to comment, as did a Brown Rudnick spokeswoman.
Jennifer Spencer, an attorney at Farrow-Gillespie & Heath in Dallas representing the Hewes brothers, and Lawrence McNamara, a FordHarrison partner in Dallas representing Surgical, did not return messages seeking comment.