One of the few grounds on which an arbitration award may be challenged in Superior Court is that the arbitrator exceeded his authority by denying a litigant a fair hearing.  In a recent unpublished decision, Hansalik v. Wells Fargo Advisors, 2012 Cal.App. Unpub. LEXIS 3145, the California Court of Appeal, Second Appellate District, Division Two, cited these grounds as a basis for overturning a default award entered in favor of Wells Fargo and against an individual respondent.

Under FINRA Rule 13301(a), the FINRA director serves “the initial statement of claim on an associated person directly at the person’s residential address or usual place of abode.”  Alternatively, the director is to serve the statement of claim “at the person’s business address.”  Although the respondent was living in Switzerland at the time of the commencement of arbitration, FINRA served the statement of claim on what was the respondent’s former residential address in California.  The Post Office notified FINRA that the respondent’s forwarding address was in Switzerland, as did Wells Fargo.  Nevertheless, FINRA pro ceded to send various notices to the respondent’s former address in California.

FINRA then issued a default award against the respondent for $1.3 million, and the award stated that the “Arbitrator determined that [the respondent] was properly served notice of the Statement of Claim and Notification of the Arbitrator.”  Wells Fargo then arranged for a Swiss attorney to contact the respondent in Switzerland to demand payment.  The respondent then promptly filed a petition with the Superior Court to vacate the arbitration ward.  The trial court granted the petition on the ground that the respondent was not properly served and denied due process.  The Court of Appeal affirmed, rejecting Wells Fargo’s argument that the arbitrator’s finding of valid service was not reviewable under Moncharsh v. Heily and Blase(1992) 3 Cal.4th 1.  The court concluded, “Based on the unique facts of this case, FINRA’s procedure was unfair.”

The Federal Circuit has issued a decision addressing the application of the California doctrine of equitable tolling in the context of a legal malpractice case.

The client, Landmark, invented an electronic billboard and asked the law firm, Morgan Lewis, to prepare and file a patent application.  The application was allegedly mishandled, resulting in the loss of the patent claim.  The client alleged that when the firm advised it of the problem it actively misled the client by telling it there was a possibility of fixing the problem.

On November 30, 2005, the client filed a legal malpractice claim against the firm in California state court.  However, on May 21, 2008, the state court dismissed the claims for lack of subject matter jurisdiction, citing Immunocept, LLC v. Fulbright & Jaworski, LLP, 504 F.3d 1281 (Fed. Cir. 2007), and Air Measurement Technologies, Inc. v. Akin Gump Strauss Hauer & Feld, L.L.P., 504 F.3d 1262 (Fed. Cir. 2007).  The state court reasoned that the federal courts had exclusive jurisdiction over the case as its resolution depended on a substantial question of patent law.

The client re-filed in the United States District Court for the Northern District of California, and included in its complaint a claim for fraud based on the alleged concealment of facts relating to the patent application process.  The District Court dismissed the non-fraud claims as barred by the one-year statute of limitations, and dismissed the fraud claim as barred by the three-year statute of limitations.

The Federal Circuit appeal concerned the dismissal of the fraud claim.  After discussing California’s equitable tolling doctrine, including cases describing the circumstances in which courts “will[] toll the limitation period of a second action during the pendency of a first action later found to be defective,” the Federal Circuit held that equitable tolling should apply and that the fraud claim should go forward.  The court found that the client had “reasonably and in good faith pursued a remedy in the state courts, only to learn that the state courts lacked jurisdiction over its legal remedy.”

The decision is Landmark Screens, LLC v. Morgan, Lewis & Bockius, LLP (Fed. Cir., 2011-1297) and it is dated April 23, 2012.

 The California Court of Appeal recently handed down a significant published decision pertaining to the duty of an insurance broker who procures a policy for the the developer of a construction project.  The Fourth Appellate District, Division One, wrote:

In this case we are presented with an issue of first impression in California: Does an insurance broker, after procuring a policy of insurance for a developer on a construction project, owe a duty to apprise a subcontractor that was later added as an insured under that policy of the insurance company’s subsequent insolvency?  We conclude that, absent the assumption of a contractual duty to do so, insurance brokers owe no such duty.

The decision is Pacific Rim Mechanical Contractors, Inc. v. Aon Risk Insurance Services West, Inc.,  203 Cal. App. 4th 1278.

A California District Court recently wrestled with motions dealing with issues of disqualification of counsel and application of the McDermott, Will & Emery v. Superior Court doctrine.

In a derivative action, the United States District Court for the Central District of California determined a motion seeking the disqualification of an attonrey on the grounds that the attorney improperly accessed privileged documents and used the documents to his client’s advantage.  This may be a valid reason for disqualification under California law.  However, the facts did not warrant disqualification here, because the privileged nature of the key document had been waived.  Nevertheless, the decision contains a good discussion of relevant case law and principles.

The District Court also ruled on a motion to dismiss the derivative suit under the doctrine of McDermott, Will & Emery v. Superior Court, 83 Cal.App.4th 378.  In McDermott, shareholders sued their corporation’s outside counsel in a derivative action for legal malpractice arising out of advice given in connection with a shareholder vote to effect an affiliation agreement with another corporation.  The California Court of Appeal entered judgment on the pleadings in favor of the firm, reasoning that a shareholder derivative action does not waive the privilege; thus, “in the absence of a waiver by the corporate client, the third party attorney is effectively foreclosed from mounting any meaningful defense to the shareholder  derivative action.”  Adopting a strict position, the court explained

We simply cannot conceive how an attorney is to mount a defense in a shareholder derivative action alleging a breach of duty to the corporate client, where, by the very nature of such an action, the attorney is foreclosed, in the absence of any waiver by the corporation, from disclosing the very communications which are alleged to constitute a breach of that duty.

Here, the District Court ruled that dismissal was not warranted under McDermott because the crime-fraud exception to the attorney-client privilege applied.  Since there was no privilege, the attorney would not, in effect, be required to defend himself with one hand tied behind his back.  The case could go forward.

The decision is Defrees v. Kirkland (2012 U.S. Dist. LEXIS 52780) and is dated April 11, 2012.

In a published decision, the Court of Appeal (Fourth Appellate District, Division Three) has held that a law firm which prevailed in mandatory fee arbitration against a former client was entitled to an award of attorney’s fees incurred in the course of the arbitration notwithstanding the fact that it was represented at arbitration by an attorney who was “of counsel” to the firm.  Dzwonkowski v. Spinella, 2011 Cal.App.LEXIS 1408.

InTrope v. Katz(1995) 11 Cal.4th 274, the court held that an attorney litigating in propria persona does not pay or become liable to pay consideration in exchange for legal representation, and therefore cannot recover reasonable attorney’s fees under Civil Code section 1717.  Section 1717 provides for an award of reasonable attorney’s fees when a contract allows for the recovery of fees to enforce the contract.  In the Dzwonkowskidecision, the losing client argued that the firm could not recover attorneys fees for services provided at arbitration by its “of counsel” attorney because, like the pro-per law firm in Trope, the of-counsel attorney did not actually “incur” fees.

The Court of Appeal disagreed.  The court ruled that the of-counsel attorney had, in fact, incurred fees because the evidence showed that there had been: (1) an obligation to pay attorney fees; (2) the existence of an attorney-client relationship; and (3) distinct interests between the attorney and the client.

The United States Ninth Circuit Court of Appeals has issued an important decision underscoring how serious an obstacle the element of lack of probable cause can be in trying to establish a claim of malicious prosecuton.  Roberts v. McAfee, Inc., 2011 U.S. App. LEXIS 22521.  Kent Roberts, the former General Counsel of McAfee, Inc., was charged with backdating stock options.  McAfee conducted an internal review.  Roberts and the board of directors gave very different accounts of what transpired.  Lawyers for McAfee presented the results of their investigation to government lawyers.  Roberts was indicted and the SEC filed a civil complaint against him.

Deposition testimony led the prosecutors to dismiss some of the charges.  During trial, McAfee produced a series of exculpatory emails it had not previously disclosed.  Additional evidence came to light which McAfee’s attorneys had not provided to the government.  The jury acquitted Roberts of two charges and deadlocked on another.  Prosecutors dismissed with prejudice the outstanding counts after the verdict issued and the SEC subsequently dismissed its civil case pursuant to a stipulation by which Roberts waived anyclaim to attorney’s fees.

Roberts then filed an action against McAfee for malicious prosecution, defamation and false light. The district court denied McAfee’s anti-SLAPP motion to dismiss the malicious prosecution claim on the ground there was conflicting evidence regarding what information McAfee had provided to the government.

The anti-SLAPP analysis has two components: first, whether the conduct complained of involved the defendant’s right of petition or free speech; and, second, if the defendant has made such a showing, whether the plaintiff has shown he has a probability of prevailing.  The Ninth Circuit concluded that Roberts failed to carry his burden on the second component.

The Court focused on the probable cause element of the malicious prosecution claim. It concluded that if McAfee had indeed failed to disclose all evidence to government agencies or had skewed the evidence against Roberts, its conduct was inexcusable.  However, the Court declared, under California law, lying about the facts is not enough to destroy probable cause.  Even if a defendant were to fabricate evidence, the defendant may still have probable cause based on other, true, facts.  “[A] defendant who fabricates evidence still acts with probable cause if the defendant is aware of other evidence which would make it objectively reasonable to suspect the plaintiff’s guilt.”

The Court went on to note that, under California law, the indictment itself created a prima facie presumption ”that probable cause existed for the underlying prosecution.”  The Court concluded that Roberts had  failed to rebut that presumption. In short, because McAfee had reason to suspect that Roberts had participated in wrongful backdating, its motion to strike the malicious prosecution claim should have been granted.

This opinion undescores just how high a bar malicious prosecution plaintiffs in California have to overcome in trying to establish lack of probable cause.

The U.S. District Court for the Northern District of California recently ruled that a patent legal malpractice plaintiff was not judicially estopped from re-filing its lawsuit in federal court after initially filing it in state court.  In E-Pass Technologies v. Moses & Singer, LLP, the plaintiff patent-holder sued its attorneys for malpractice after they lost multiple patent-infringement lawsuits and thereby subjected the company to substantial attorney-fee awards.  The company initially filed its malpractice suit in California state court and litigated the issue of whether the court had jurisdiction.  Based on narrow construction of the claims proffered by the company’s attorneys, the California Court of Appeal ruled that the claims did not raise substantial issues of patent law.

Later, while the state court action remained pending, the company filed a similar action for malpractice against the same attorneys in U.S. District Court.  The company did this because it felt that the state court decision upholding jurisdiction was unduly restrictive.  The company averred that it would dismiss the state court action once the federal court ruled that it had jurisdiction over the claims.

The attorney defendants moved to dismiss the federal action on the ground that the company was judicially estopped from pursuing it based on representations the company made to the California Court of Appeal concerning the scope of the claims.  In ruling on the motion, the District Court said that although it was sympathetic to the defendants’ allegations of forum shopping, the company was not judicially estopped from pursuing its claims in federal court.  In this context, a necessary element of judicial estoppel was that the first court (here the state court) must have relied on an earlier representation from which the plaintiff later retreated.  That had not occurred.  Accordingly, the claims were allowed to proceed in District Court.

The unpublished decision can be found at 2011 U.S. Dist LEXIS 128018.

The California Court of Appeal (Second Appellate District, Division Seven),  in an unpublished decision, recently upheld a trial court order sustaining a demurrer to a cause of action for financial elder abuse.  The complaint alleged that the administrator of an estate incurred attorney fees in removing an elderly person’s conservator for having breached of fiduciary duties in providing physical care for the elderly person.  The complaint asserted that the conservator’s physical neglect, which precipitated the removal, constituted elder financial abuse.

The trial court and Court of Appeal disagreed.  The Court of Appeal explained that “the plaintiff must show the defendant took, secreted, appropriated or retained the elder’s property, not simply that the defendant’s misconduct caused financial harm or economic loss.”  The court suggested that the fees incurred in removing a conservator might be recoverable in an action for neglect or breach of fiduciary duty under the tort-of-another doctrine, “but the loss of those sums, on its own, does not constitute elder financial abuse.”      

The case is Jeffrey Seigel v. Sonsino, 2011 Cal. App. Unpub. LEXIS 7061.

In Fremont Reorganizing Corporation v. Faigin, (2011) 198 Cal. App. 4th 1153, the Third Division of the Second Appellate District held in a published decision that the litigation privilege may not be used to protect an attorney from liability to a former client for the breach of professional duties.  The plaintiff, a former in-house counsel, filed suit against his company for wrongful termination.  His former client and employer filed a cross-complaint alleging breach of confidence, fiduciary duty and ethical obligations.  The former client alleged that after the attorney was discharged, he informed the California Insurance Commissioner that his former client was improperly selling artwork belonging to a subsidiary, which was in liquidation.

The attorney moved to strike the cross-complaint under the anti-SLAPP statute which the trial court granted.  On appeal, the court reversed (in part) the holding and found that the attorney’s statements to the Commissioner in connection with the liquidation proceeding were not protected by the litigation privilege.  The court reasoned that if the litigation privilege were to apply, it “would preclude essentially any action by a former client against an attorney” and “would undermine the attorney-client relationship.” 

The court relied on Oasis West Realty, LLC v. Goldman (2011) 51 Cal.4th 811, regarding injuries to a former client from the use of confidential information obtained during the attorney-client relationship.

In Robinson v. Isaacs, 2011 U.S Dist. LEXIS 118070, the U.S. District Court for the Southern District of California granted a petition to compel arbitration filed an investment advisor who was not a signatory to the advisory services contract containing the arbitration clause.  The plaintiff, an investor, sued a broker dealer and one of its investment advisory representatives for negligence and breach of fiduciary duty in connection with certain investments.  The investments were made in 2005 and the Advisory Services Contract between the plaintiff and the broker-dealer was signed a year later, in 2006.

In ruling that the non-signatory representative was entitled to enforce the arbitration agreement, the court cited the “business relationship” between the plaintiff and the representative which had commenced in 2005.  It also cited the close relationship between, and similarity of claims against, the representative and the individual who signed the agreement on behalf of the broker-dealer.  In light of these considerations, equitable principles applied to allow the representative to enforce the arbitration agreement despite not being a signature to that agreement.

Further, the court ruled that the dispute arising out the of the 2005 investments was within the scope of the arbitration clause in the 2006 Advisory Service Contract because that agreement said that it pertained to “existing investments.”