Client Bait and Switch is Breach of Fiduciary Duty - U.S. Second Circuit
U.S. Second Circuit - The FindLaw 2nd Circuit Court of Appeals Opinion Summaries Blog

Client Bait and Switch is Breach of Fiduciary Duty

Class action lawsuits involve too much uncertainty to make the average, risk-adverse attorney comfortable. Discovery, alone, could continue for years, and the plaintiffs' attorney may never see a dime.

A far more profitable, albeit unethical, law firm model? Hang out a shingle as a plaintiff's attorney, and then work out a deal with the defendants your clients want to sue so that the defendants pay you to persuade the plaintiffs to drop the case.

Maybe we've been influenced by watching too many episodes of Damages, (which, if you haven't seen it, is completely amazing), but this seems like a good idea. Unless you get caught.

This week, the Second Circuit Court of Appeals decided a case in which attorneys were tangled in a similar scheme.

The appellants, former clients of Leeds, Morelli & Brown, P.C. (LMB), executed a retainer agreement with LMB to bring class action employment discrimination claims against Nextel. Shortly thereafter, LMB and Nextel met and signed an agreement that they called the Dispute Resolution and Settlement Agreement (DRSA). The DSRA provided that Nextel would pay LMB:

  • $2 million for successfully persuading the claimants to waive rights to a jury trial, drop all pending lawsuits and administrative proceedings, and accept an expedited mediation/arbitratation procedure.
  • $3.5 million on a sliding scale as the claims were resolved through mediation/arbitration.
  • $2 million for a consulting contract when the clients' claims had been resolved.

After LMB signed the DSRA, it approached the clients to obtain signed Individual Agreements and Pledges of Good Faith (Individual Agreements), stating that the clients had reviewed and agreed to the terms of the DSRA.

When the clients caught on and sued LMB and Nextel, the district judge dismissed the case, finding that the appellants had failed to state a claim for breach of fiduciary duty or fraud because both claims rested on allegations that LMB failed to disclose the compensation agreement.

The Second Circuit Court of Appeals disagreed.

The appellate court found that the opportunity for the claimants to give informed consent to the DSRA was so burdened that the Individual Agreement was not consentable. While the court noted that the clients were allowed to consult with another attorney before signing the DSRA, the court said that an "initial attorney hired to bring a discrimination action does not fulfill his or her representational obligations by presenting a client with a proposal that can be considered in an informed manner only by hiring a second attorney."

The Second Circuit Court of Appeals, finding that there was a duty, a breach, and resulting damages, reinstated the claim against LMB. The court also found that the clients had sufficiently alleged that Nextel engaged in shenanigans, and reinstated the clients' claim against Nextel for aiding and abetting LMB's breach of fiduciary duty.

In light of this opinion, perhaps our aforementioned law firm business model isn't a good idea for Second Circuit practitioners.

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