Ch. 8 Vicarious Liability
A. Firms, Employers, and Partners
1. Development & Structure of Law
Firms
Fortney article, Galanter & Thomas book: focus on
large firms.
1. Initial formation & institutional growth based on
interpersonal relationships, partners’
complementary skills & assets.
2. Monitoring of $ matters among partners to
prevent (or oust) free-riders.
3. Very close monitoring of work, profitability of
associates until achieve partnership. Today:
equity & non-equity partners.
Your experiences with legal employers
1. Identify what monitoring you saw within firm;
personally experienced? Assess value &
effectiveness. Impact of law firm size?
2. What formal or informal controls did you
observe?
3. As you evaluate prospective employers, are you
influenced by what they say about training &
mentoring?
4. Do Cs hire firm based on individual Ls or firm
affiliation? What monitoring do Cs expect from
firm?
2. Agency Principles
Rstmt LGL §58(1) Firm civilly liable for injuries
caused by wrongful acts/omissions of any
principal or employee “acting in the ord.
course of firm’s busn or w/ actual or apparent
authority”
**Difference between ACTUAL and APPARENT
AUTHORITY
ACTUAL and APPARENT AUTHORITY
Actual: arises from communications
between the principal and agent
Apparent: arises when principal’s conduct,
statement or circumstances make it
reasonable for a THIRD PERSON to
believe that agent has authority.
What conduct is w/in scope of
employment?
s/ Female associate engaged in sexual relations
w/ married client represented by firm,
associate is primary lawyer working on the
matter. Is firm vicariously liable for her
tortious conduct?
Compare Rstmt Agency (2d) §228 and (3d)
§7.07(2)
Compare expansive Cal. View and narrow N.J.
view.
See text at pp. 258-61.
Vicarious liability: w/in scope of
employment?
S/ Associate driving somewhere on law firm
business, talking on cell phone or texting on
business matters & causes accident.
Uniform Partnership Act: each partner is liable
for all partnership debts & obligations,
including those arising from wrongful acts or
omissions.
Accord, Rstmt LGL §58 and cmts.
Procedural Matters re Partners’
Liability
In order to hold individual partners personally liable
and subject their personal assets to risk of
execution, they must be individually named in
suit and personally served as parties.
If judgment, partnership assets must be exhausted
first, before seeking recovery of personal assets.
Personal liability attaches for liabilities that arose
while individual was a partner (not for those that
pre-existed, or arose after departure).
Withdrawal d/n terminate personal liability for
such claims.
Problem 8-1
The Wanted Partner
• Lott: lateral hire as full equity partner; brought
with her many faithful & lucrative clients.
• While at firm, billed > 250 hrs/mo. (62.5/wk)
while spending most time working as Gen’l Ptnr
of Soho (liquor distributor)
• Persuaded H&W partners, staff & others to invest
in Soho, deposited proceeds in firm trust account.
• Illegal Ponzi scheme, Lott disappeared.
Investors sued H&W and all partners
for LM.
1. What must Ps allege to w/stand motion to
dismiss for failure to state claim?
(any acts w/in scope of Lott’s employment? Any
legal advice given about the investments?)
2. Do any facts support holding firm & partners
liable to investors?
(use of trust account, introduced investors to Lott,
promissory note; clients reasonable
expectations)
Additional information needed to
assess liability?
Evidence re use of trust accounts;
All documents re investors’ dealings w/ firm & Lott,
including retainer agreement, billing records;
Involvement of outside counsel for investors?
Soho corporate docs;
H&W internal procedures to monitor conduct,
whether actively used re Lott’s activities;
Apparent authority?
4. Supervisory Responsibility &
Liability
• Rstmt LGL §11, cmts. a., b.: general responsibility
of partners. Risk personal liability for negligent
hiring, training or supervision.
• See also, Model Rule of Prof’l Conduct 5.1; OK
adopted w/o change. (text summarized at p. 265)
• State ex rel. OBA v. Martin, 2010 WL 3637018
(Okla., 9/21/10, Opala, not yet published)(public
reprimand, failure to supervise non-L; m/b also
civil liability)
B. Limited Liability Law Firms
1. Advent & Characteristics of Organizational
Structures (Robert Hillman: leading
authority, practitioner treatises on this & firm
dissolution)
a. Traditional view: corps., as artificial entities,
inherently unsuitable for legal profession (L/C
conflicts, beyond reach of discipline, liability
shield unacceptable). 3 Musketeers: all for one
& one for all”
B. Limited Liability Law Firms
2. Winds of change (1960s: LLCs; 1990s LLPs) N.B.
Generalizations dangerous b/c so many subtle
variations among state laws & decisions, unanswered
questions.
3. Limited Liability Corporation, a/k/a Prof’l Corp. (LLC
or PC). Besides ltd liability, offers unlimited duration
of corp. life & centralized management. Carved out
so not double taxation; Okla. allows SubChapter S
election. Traditional firms reluctant to swap
“partner” for “shareholder” status, although that
reluctance is eroding.
B. Limited Liability Law Firms: LLCs
3. See 18 O.S. §§801 et. seq., Professional Entity Act,
extends to lawyers and other specified professionals.
Key restrictions discussed in 3A Vernon’s Okla. Forms
2d. §§8.03, 8.16 (2009).
a. While statute allows for management by persons
not holding interest in entity, that is prohibited by
“form of practice restrictions,” Model Rules and Okla.
Rules of Prof’l Conduct R. 5.4(c).
b. Open question: whether & to extent participants
have limited liability for entity’s obligations; no
definitive answer by Okla. courts.
B. Limited Liability Law Firms
4. LLPs (movement since late 80s)
a. First LLP statute (1991): Texas origins, S&L
collapses from collapse of real estate & energy
markets. Ten years later: every state enacted,
tho again w/ significant variations.
b. Common traits: partnership statute includes
election as LLP, w/ either “full shield” or shield
only of lawyers not involved in representation of
matter subject to LM claim.
B. Limited Liability Law Firms:
4. LLPs
c. *Observe local “niceties”: must comply with registration
requirements (annual renewal, minimum malpractice
insurance or security for liability). Noncompliance > loss
of limited liability.
d. See Okla. Limited Liability Partnership, 54 O.S. 1-1001 et
seq., 1-309. Registration, renewal, name must reflect
status. Partnership liable for actionable conduct (but not
personal liability ….unless? Again, unanswered question).
$500K minimum total aggregate security for claims. See
also, 3A Vernon’s Okla. Forms 2d, Bus. Org. §8.20, Kane,
70 Okla. B.J. (3/99)(should Ok. attys convert to LLPs?)
e. Contrast, Colo. Rule 265 (2009): $100K/L or $500K,
whichever less, provided aggregate annual limit of $300K.
B. Limited Liability Law Firms:
4. LLPs
Problem 8-2: The Hot Potato Client
1. What did PC firm do wrong, in violation of
prevailing law governing lawyers? Why did it
w/d from representing C in $$ comm’l arb?
Duties breached? (both negl. & fiduciary)
2. What must P allege to maintain c/a v. all SH?
(are claims for vicarious or personal liability)
Problem 8-2: The Hot Potato Client
3. What discovery and fact investigation should P
conduct?
Overall: look for personal involvement of each SH.
Requests for production: internal communications
& docs. re representation & termination ,
notes/minutes SH mtgs internal billing records
Interrog., Depos: develop indiv. partic’n &
ratification of dcns re repre’n
Problem 8-2: The Hot Potato Client
Assess liability of individual SH?
Problem 8-2: The Hot Potato Client
• Sanders, Bruin, Coll & Worley v. McKay Oil
Corp., 943 P.2d 104 (N.M. 1997) Held, SH
status in PC d/n “confer protection from
individual liability for [L’s] own negligence or
personal breach of duty. . . [under facts in
record, each] participated in decision subst’ly
affecting” the repre’n; indiv. SH not shielded
from pot’l liab for own actions.
Rstmt §58 Vicarious Liability
(1) Law FIRM subj. to civ. liab. for injury caused
by wrongful act/omission of principal or
employee acting in ord. crse of firm’s busn.
w/ actual or apparent authority.
(2) Each of principals of FIRM organized as GEN’L
PTNSHP w/o ltd liab. is liable jointly &
severally w/ firm.
Tit. 54 O.S.Limited Liab. Partnerships
Some portions held unconstitutional in 2008 for
violating “single subject rule” of Okla. Const’n.
New provisions enacted, go into effect 1/1/11.
NOT affected, still good law: Art. 3 §1-305
(parallels Rstmt §58 (1),(2) and §1-309(b)(1),
requiring security for payment of claims
malpractice ins. where “total aggregate limit
of liability” at least $500K.
THE LOOSE CANNON
1. Identify Client owed duties of loyalty?
2. Identify strongest claims against Cannon AND
ABCD (as firm, as individuals)
3. How would “innocent partner” provision in
OAMIC affect the litigation? What
DISCOVERY could maximize likelihood of
recovery v. Cannon & Firm?
4. Change in analysis if ABCD registered as LLC
or LLP?
Problem 8-4 Am I My Partner’s
Keeper?
• Firm structure: Partnership when C retained then
converted to LLP
– Larson (rainmaker) introduced to Payne (sr. ptnr est.
planning), assigned work to Associate Andrew
• P persuaded C of tax savings from irrevocable
trust; drafting done badly > $5M unexpected tax
liability; only $3M liability malpractice coverage
• “You”: jr. ptnr who handled LLP paperwork, now
asked to evaluate psnl liability of individual
lawyers
Stop & think: risk if “you” so advise
• Some cases find that attorney client privilege
does not extend to internal communications
w/in firm about firm’s potential exposure.
• N.B. RPC 5.1: firms expected to have
appropriate internal ethical infrastructure to
anticipate and avoid predictable pitfalls
• How does your assignment differ from that
expectation? What should a well-counseled
firm do in this situation?
How to proceed?
• Notify carrier who will retain defense counsel
for claim to extent of coverage
• Facts suggest advisability of separate counsel
for excess liability and potential personal
liability
Potential claims & risk of exposure
• Firm, regardless of form of practice, for
negligence; perhaps Br. of fiduciary duty (fail.
to advise C of entity change)
• Will LLC stature shield L, P, A & others involved
from personal liability?
– Compliance w/ statutory “niceties”? (if not, all
partners at risk)
– L & P: failure to supervise A
Relevant evidence
• Firm policies & procedures, e.g., supervision
of associates’ work
• Retainer letter, correspondence, billing
records: who was involved in representation?
• Firm brochures, web sites, other publicity:
how does firm hold self out to public
• Info. relating to conversion to LLP status,
external & internal communications about
Caution
• LLP structure is no substitute for risk
management & quality control measures.
• Firms “may adopt the LLP form of organization
but should continue to function – especially in
important risk management areas – as if they
were traditional partnerships.” Mark
Harrison, 39 So. Tex. L. Rev. 633, 638 (1997)
C. Other Associations that may risk
exposure for conduct of other lawyers
1. Referral fee arrangements (a/k/a fee splitting)
among lawyers not in same firm.
a. Traditional prohibition: treats clients as commodity
b. Modern view permits, w/ restrictions. Rstmt § 57
permits if
(1)(a) dvn in proportion to services perf’d by ea OR (b) by agmt
w/ C, Ls assume JOINT RESPONSIBILITY; [and]
(2) C inf’d of & d/n object to fact or terms of dvn & Ls’ part’n;
and
(3) TOTAL FEE is REASONABLE.
C. RPC 1.5(c) accord.
1. Referral Fee LM Potential Problems
• “joint responsibility”: both disciplinary & civil
liability
• Negligent referral (not current info about
handling L’s competence, present ability)
• Failure to monitor
Preventing Liability for Referral Gone
Bad (text @ 283)
Good knowledge about L to whom you refer re:
*sufficient expertise, resources, current fitness to
handle;
*carries own malpractice insurance
Client on board: full disclosure, in writing, including on
actual fee dvn, what’s in it for you & how will be
calculated
Maintain communications w/ C as matter proceeds
N.B. State RPC vary
Preventing Liability for Referral Gone
Bad (text @ 283)
Martyn, (avoiding) Accidental C’s: “treat referral
C’s as real C’s”, i.e.,
Enter C in conflicts checking data base for both
referring & handling L
If C contacts referring L about matter, FOLLOW
UP, monitor that work being handled properly
Confirm handling L gave proper written notice
abt fee dvn, MAKE SURE IT’S NOT ILLEGAL FEE.
2. Negligent Referral
a. Failure to refer to specialist when needed.
Horne v. Peckham (generalist civilly liable for
failing to refer C, or associate w/ “specialist” if
under “circumstances a reasonably careful &
skillful pract’r wd do so.” i.e., d/n get in over
head!
b. Liability for referring to incompetent L. Tormo v.
Yormark (unusual circum. put L on notice to
inquire further; knew/shd have known of risks)
3. Co-Counsel Arrangements (among
L’s in different firms); many
possibilities
S/ Firm associates w/ outside counsel b/c matter
beyond its expertise (RPC 1.1, alt. to referral)
S/ “Joint defense” arrangements (?)
Risk management: clear division of
responsibilities; C’s informed consent;
associated L carries adequate malpractice ins.
4. “Of Counsel” Arrangements
• Open-ended possibilities. See, e.g., p. 286
• ABA F. Op. 90-357: OK where relationship “close,
regular, personal relationship” & of counsel title
not false or misleading
• Risk management: clear understanding between
firm & “Of Counsel” [OC]; clear & careful
communication to current & prospective C’s
(stationery, letterhead, monitor OC’s dealings w/
firm C’s; verify malpractice coverage (Firm’s v.
OC’s)
5. Office Sharing Arrangements
Risk: de facto partnership, or
partnership by estoppel (“if looks
like, acts like a duck, it is a duck”)
5. Office Sharing Arrangements: Risk
Prevention
In general: vigilantly avoid any appearance to Cs &
third parties of having shared practice.
Perception is everything.
Specifics:
Office design, computers, printers, copiers,
shredders, file access
Support staff
Phone, fax, email accounts
Written & oral communications