In SEC v. Covington & Burling, LLP, the U.S. District Court for the District of Columbia recently ordered a large multinational law firm to disclose the names of its clients to the Securities and Exchange Commission, opening the door for regulators and potentially law enforcement agencies to get otherwise protected information from private law firms.  Despite vigorous opposition from the law firm, and an Amicus Brief signed by more than 80 other law firms, including Cozen O’Connor, supporting Covington, on July 24, 2023, Judge Amit Mehta ordered the firm to provide the SEC with the names of seven publicly traded corporate clients of the firm whose information was potentially accessed in 2020 when the law firm’s computer files were hacked.  The SEC asserted that it needed the information to determine if the hackers had used any stolen information to engage in illicit trading. Initially, the SEC requested the names of almost 300 public company clients of the firm, but Judge Mehta found that request was “too broad”[1] and instead ordered the firm to reveal the names of its seven clients whose material, nonpublic information may have been accessed by the hackers. 

Covington used Microsoft’s Exchange Server software, which was the subject of a 2020 cyberattack by Hafnium, a group of attackers alleged to be associated with the Chinese government. Covington “launched an investigation to determine whether unauthorized parties had gained access to its network”[2] during the Hafnium Cyberattack and “ultimately determined that a threat actor had been able to compromise Covington’s Exchange environment.”[3] Covington began cooperating with the FBI as part of the firm’s investigation of the cyberattack.

Roughly a year after Microsoft disclosed the attack, the SEC “opened an investigation into possible violations of the federal securities laws”[4] connected to the Hafnium Cyberattack. The SEC sought to determine whether threat actors “accessed and traded on the basis of material, non-public information,”[5] and whether public companies “made materially false or misleading statements, or omitted to state material facts, concerning the impact of the Cyberattack in violation of federal securities laws.”[6]  The SEC then issued a subpoena to Covington asking for, amongst other things, the identity of any public company clients whose files may have been accessed as part of the Cyberattack.  Covington raised objections to the request, determining that it applied to 298 of its clients, on the grounds that it “could not identify its affected clients or produce the requested communications consistent with the attorney-client privilege and the firm’s fiduciary duties, duty of loyalty, and duty of confidentiality it owes its clients, including under D.C. Rule of Professional Conduct 1.6.”[7]

While the parties tried to negotiate a narrowing of the subpoena, Covington also further investigated the scope of the hackers’ access to material nonpublic information, and determined that only seven of the 298 clients had been affected.  The SEC was not satisfied by Covington’s investigation and pursued enforcement of the Subpoena.  Covington objected to producing the names of the seven clients as it could lead to the SEC seeking other work product and privileged information, including information concerning the scope of the client’s privileged communications with the law firm, communications concerning the Cyberattack, disclosures to investors, etc.

The Court, in entering its ruling in favor of the SEC to order to disclose the seven company/client names, noted that “[f]ederal courts have found that, absent special circumstances, client-identity is not protected by the attorney-client privilege.”[8] Judge Mehta held that the fact of a communication is not privileged, although the content of the communication is privileged, stating that “Covington’s disclosure of a client name would tell the SEC nothing about what, if any, legal advice the client sought, or how the firm responded, with respect to the cyberattack. Only through guesswork and speculation could the SEC discern from the name of the client alone any communication’s contents.”[9]

While Covington and 83 other law firms argued in response that “the requested compelled disclosure would harshly penalize blameless clients, back attorneys into a corner, and discourage law firms … from cooperating with law enforcement in the future,”[10] the Court found those policy concerns to be unfounded, and instead narrowed the scope of the SEC’s demand by requiring  Covington to only produce the names of the seven clients whom the law firm had not been able to rule out that a threat actor may have accessed their material nonpublic information.  

As a practical matter, as the Amici firms argued, a negative impact of the Court’s ruling is that law firms may be more hesitant to disclose the existence of cyberattacks or cooperate with law enforcement agencies, for fear that their clients’ information and privileged communications with the law firm will be compromised and subject to disclosure.  Moreover, law firms, especially those who represent publicly traded companies, may now be compelled to double down on their already significant and expensive efforts to beef up their protective measures against cyberattacks as a marketing measure to assure clients that their information is adequately protected.   Cybersecurity measures have become a growing factor for companies in selecting service providers at all levels and the arms race to ensure protection from hackers is only further encouraged by the Court’s ruling in this matter. In either event, the SEC/Covington case has law firms and corporate clients paying close attention to these issues.

[1] Memorandum Opinion, SEC v Covington & Burling, LLP, Case No. 23-mc-00002 (APM), at 2.

[2] Id, at 3.

[3] Id, at 4.

[4] Id.

[5] Id.

[6] Id.

[7] Id.at 5.

[8] Id, at 7.

[9] Id, at 9.

[10] Id, at 18.

Contrary to a recent decision by a Pennsylvania trial court, to borrow from the Bard — all that is redlined is not accepted — as is evidenced by the recent appellate decision reversing the lower Court’s Order.

Under Pennsylvania state law, a lawyer cannot, under any circumstance, settle a client’s case without the client’s express authority to do so. Reutzel v Douglas, 870 A.2d 787, 788 (Pa 2005).  Moreover, to do so would be an ethical violation of Rule 1.2 of the Pennsylvania Rules of Professional Conduct.

As set forth in the Rule, the client has the final say about whether to settle a case or go to trial. It is the lawyer’s responsibility to present the client with both options – and any relevant others — and provide clarity, legal interpretations, and recommendations to help the client make an informed decision.

It is critical that counsel fully understand and clearly communicate to one another and their clients what their respective clients desire, and provide timely, appropriate and comprehensible responses — most advisably in writing — to opposing counsel in order to obtain the necessary “meeting of the minds” between the legal and client participants and to avoid results such as occurred in the lower court in this action.

Seems simple enough, doesn’t it?  But, the best laid plans often go awry, as can be seen below.

Recently, the Superior Court of Pennsylvania, in John G. King v. Christopher P. Driscoll, 2023 PA Superior 95, reversed the decision of the Court of Common Pleas of Allegheny County granting King’s petition to enforce the parties’ alleged settlement, based on the lower court’s erroneous conclusion that the “the parties reached an enforceable agreement for Driscoll to sell King his shares …because King’s attorney accepted a ‘redlined’ version of the agreement sent by Driscoll’s attorney.”  However, in reading the appellate Opinion, it seems clear that at the end of the day the appellate outcome was dictated solely – and most importantly – by the fact that King’s attorney apparently did not have the express authority of his client to settle the dispute on the terms that had been put before the lower court – a condition overlooked by the lower court, as well as opposing counsel, but certainly a fundamental element of any settlement between the parties.

During their negotiations, Driscoll’s Attorney (Conlon) emailed King’s Attorney (Fuchs) a term sheet summarizing their negotiations and inquired “if we are in agreement on all terms.” Fuchs responded by adding handwritten notes to the term sheet, and Conlon incorporated those notes into another draft that he sent to Fuchs a few days later. Fuchs emailed him back with a “redlined” copy of the agreement “with mostly clarifications and a few details”.  Conlon replied that he accepted most of the changes and had sent the agreement to Driscoll for his review, highlighting those changes in the draft that he did not accept.  Fuchs responded that same day: “Client has approved your redline. Please get your client’s signature and send me a clean copy for my client to sign.”   

Thereafter, Fuchs made a second request of Conlon for sign off on the agreement, with no response from Conlon.  Finally, when Fuchs then made an additional request a few weeks later, Conlon responded by email stating that “the parties have neither negotiated nor reached a settlement agreement”, noting that in his last email he had advised Fuchs that he was sending the document to his client for review.  He also reminded Fuchs of Conlon’s prior request for a copy of the RRF Application before Driscoll could sign off on the Agreement.

During this exchange, King filed a Complaint against Driscoll seeking monetary damages for breach of contract and fiduciary duties, as well as declaratory relief. 

Attorney Fuchs argued that he believed that they had an agreement, but when Attorney Conlon did not send him back a clean copy for King to sign, Attorney Fuchs followed up with another email asking him to send a “clean version so we can get this done.” Again, however, there was no response. Finally, when Attorney Fuchs tried again a few weeks later, Attorney Conlon emailed him a letter in which he asserted that “the parties have neither negotiated nor reached a settlement agreement.” Attorney Conlon emphasized that he never represented that they had reached a settlement agreement, noting that in his last email, he wrote that he was sending the agreement to Driscoll for his review. Attorney Conlon also claimed that during a May 21st phone call, he told Attorney Fuchs that Driscoll needed a copy of the restaurant’s RRF application before he would sign off on the agreement.

Based upon these facts, the trial Court found for King and enforced the settlement as contained in the redlined agreement.  In its Opinion, the trial Court did not address whether – based upon the above contested facts — Attorney Colton had his client’s express authority to finalize the proposed agreement without obtaining the RRF application, or his client’s acceptance of the terms of the agreement, concluding that even though the agreement was never signed, “[t]he accepted redline version in connection with the term sheet established the essential terms of the parties’ agreement”, ignoring the absence of any evidence of Fuch’s consent thereto or to the authority of his counsel to accept/enter into any settlement agreement.

As recited in the appellate opinion, Driscoll raised two arguments: (a) that the attorneys’ negotiations did not result in a binding, enforceable agreement and (b) Attorney Conlon never delivered to Attorney Fuchs or his client a copy of the RRF application, which non-delivery was undisputed.  Although not raised in that Opinion, it is noteworthy that Attorney Colton did not appear to notify Attorney Fuchs earlier of the unacceptability of the agreement.

Although Settlement Agreements are enforceable in Pennsylvania without a writing, an attorney must still have express authority to settle their client’s case and to bind their client to a settlement agreement.  As distinguished by the Superior Court, King did not prove that Attorney Conlon, in fact, possessed that authority.  Moreover, King did not discredit Attorney Conlon’s and Driscoll’s claims that Driscoll’s receipt of the RRF Application was a condition precedent to any final settlement.

The Superior Court remanded the action to the trial court to resolve these issues, concluding that “the trial court erred in finding “that the parties, through merely the attorneys’ exchange of drafts and negotiations, bound their clients to the agreement.”  Based upon the recitation of the Superior Court in its opinion, it is doubtful that that on remand King will prevail.  However, it is difficult to conclude how – on the record below – the trial court found for King in the first instance.

Most importantly, the lesson learned from a review of the appellate Opinion in King is that (a) attorneys must have and should obtain, as a precondition of any role they have in negotiating on behalf of their respective clients with the other party(ies) to a dispute, the express approval of their client authorizing them to do so. A best practice would have counsel obtain that approval in a clear, unequivocal writing before counsel makes any settlement offer to opposing counsel, or engages in any negotiations or drafting of settlement documents.  Similarly, in addition to obtaining the prior consent of their clients, counsel should make clear to other recipients of counsel’s draft or even of “final” settlement documents, the conditions upon which the acceptance of same by the opposing counsel and any binding effect on counsel’s client, would be acceptable.

Counsel is not only “negotiating” with opposing counsel – and their client – but their own client.  Thus, they should ensure that before they bind their client in any matter to a settlement agreement or any proposed terms thereof, they have such authority to do so confirmed in writing.

The Superior Court of New Jersey, Appellate Division, recently issued an interesting opinion upholding claims against a New York law firm stemming from its employment of an IT support technician contrary to the terms of a restrictive covenant with his former employer. Notably the court also awarded the plaintiff, Accounteks.Net, Inc., attorney fees in the amount of $175,000. 

Accounteks, an IT consulting firm catering to small and medium sized businesses in New Jersey and New York, employed Christian Montes as an IT support technician.  Plaintiff assigned Montes to provide regular on-site tech support to CKR Law LLP. In the meantime, CKR began searching for an in-house IT technician. Montes had left the plaintiff’s employment and CKR reached out directly to him for help with an IT matter. CKR later advised plaintiff that it intended to hire Montes over plaintiff’s objection due to the noncompete.

Of particular interest to law firms, the law firm that hired the IT technician in the face of the non-compete agreement faced a series of claims, including tortious interference. The trial court held a bench trial, finding that the law firm engaged in conduct that was “intentional, malicious[,] and in wanton disregard of [plaintiff’s] contractual rights[.]”  The trial court awarded $72,000 in damages against the firm, representing two years’ worth of monthly fees under the IT services agreement as between plaintiff and the law firm. The judge also found the defendants jointly liable for breach of the implied covenant of good faith and fair dealing, and the firm for intentionally causing the IT technician to breach his ongoing duty to his former employer. At a separate hearing, the court awarded plaintiff counsel fees against the law firm defendant of over $175,000.

The Appellate Division largely rejected the law firm’s appeal points, and of particular interest here, upheld the award of attorney’s fees solely against the law firm despite the lack of an articulated basis in the trial court’s opinion for its departure from the “American Rule,” which generally holds each party responsible for its own attorney’s fees absent a contractual or other recognized basis for such an award. See Rendine v. Pantzer, 141 N.J 292, 322, 661 A.2d 1202 (1995).

The Appellate Division recognized an exception to the American Rule for third-party litigation:

One who through the tort of another has been required to act in the protection of his interests by bringing or defending an action against a third person is entitled to recover reasonable compensation for loss of time, attorney fees and other expenditures thereby suffered or incurred in the earlier action.

2023 WL 3311577 *5, citing DiMisa v. Acqaviva, 198 N.J. 547, 554, 969 A.2d 1091(2009)(quoting Restatement (Second) of Torts § 914(2) (1979)). The court noted that the plaintiff’s claims for payment for services rendered were subject to the American Rule, and therefore no attorney’s fees would be awarded for pursuit of those claims. The court remanded the attorney’s fee award for a recalculation consistent with the contractual non-compete language at issue.

The Accounteks ruling is sobering not only for law firms but also for any business looking to bring IT expertise in house. The court had no difficulty enforcing the restrictive covenant precluding the IT technician from working for any customer for two years after his separation from employment, notwithstanding the general burden on the employer to establish the agreement’s enforceability and the national trend to scrutinize such restrictions more closely.  The court did acknowledge, however, that an employer may not simply employ such a restriction to prevent competition from a former employee. More importantly, the court imposed attorney’s fees against the law firm, a non-party to the IT technician’s employment agreement and fee shifting provision attached to his restrictive covenant, on the basis that the firm had tortiously interfered with his employment contract and that fees were recoverable as reasonable compensation for the tortious conduct.

In light of the Bureau of Labor Statistics May 2023 jobs report that employers added 339,000 jobs to the already tight labor market, law firms and industry alike are well advised to familiarize themselves with this decision and be vigilant about hiring practices in this competitive labor market.  Finding skilled employees is particularly difficult in the current tight labor market. While it may be tempting to consider poaching a vendor’s employees who have proven their skills and usefulness, Accounteks stands as a stark warning to refrain from doing so until and unless the new employer has performed appropriate due diligence.  A law firm considering directly hiring employees of a vendor may benefit from directly addressing with the vendor agreeable terms and conditions for direct hires.

Unlike Pennsylvania, New Jersey also imposes attorney’s fees against lawyers and law firms in legal malpractice actions. E.g., Innes v. Marzano-Lesnevich, 136 A.3d 108 (2015); Saffer v. Willoughby, 143 N.J. 256 (1996); DiStefano v. Greenstone, 357 N.J. Super. 352, 815 A.2d 496 (App. Div. 2003).  This added risk can alter the settlement calculus for law firm defendants, particularly where their available professional liability insurance coverage erodes with the expenditure of attorney’s fees incurred in defending the malpractice action. Law firms facing that additional risk of exhausting their coverage may be more anxious to settle a marginal liability claim at an earlier time.

Another lesson of Accounteks is to consider whether a potential litigation matter could trigger fee shifting. If those considerations are at play, the litigant needs to factor that exposure into its calculus of the cost of the litigation.  

For additional background and takeaways from the Accounteks decision, please review the excellent post authored by Abigail Green below.

A Third Party in New Jersey May be Unable to Avoid Fee Awards Under an Exception to the American Rule

The Federal District Court in Philadelphia has sanctioned a lawyer for copying and pasting opposing counsel’s motion in limine and filing it as her own work product the next day. Finding that the motion had been plagiarized, the court granted a motion for sanctions and awarded attorney’s fees incurred by plaintiffs in opposing the motion and in moving for sanctions. 

In Stilp v. Borough of West Chester, the plaintiffs filed a civil rights suit after the defendant Borough of West Chester issued a citation threatening fines following their flag burning demonstration on the public courthouse steps. The plaintiffs, both political activists, claimed that the local ordinance prohibiting open burning relied on by the defendant borough violated their First Amendment rights. The district court concluded that the Borough could not extinguish plaintiffs’ constitutional claims on summary judgment. On the eve of the deadline for motions in limine, plaintiffs moved to exclude lay opinion testimony by a code enforcement officer to be offered by the defendant on the grounds that he did not have specialized expert knowledge regarding the safety of the flag burning demonstration. The following day, counsel for the defendant filed a virtually identical motion, seeking to preclude lay opinion testimony of the plaintiffs on the same grounds.

The Third Circuit recently opined that sanctions were warranted against investors who pursued claims against an ailing company that were brought solely for the purpose of leveraging a settlement.  The ruling stands as a stark warning of the potential consequences to securities lawyers and their clients if their claims are deemed frivolous.

In Scott, et al. v. Vantage Corp., et al., the plaintiff investors attempted to recover millions of dollars they invested in the company, which eventually declared bankruptcy. They claimed that the company sold securities without making required disclosures and that defendant Askew, a company officer, made misrepresentations about the company’s stock. The District of Delaware granted summary judgment in favor of the defendants in 2019, and the Third Circuit affirmed. After that affirmance, the district court performed a Private Securities Litigation Reform Act (PSLRA) mandated Rule 11 inquiry, and found that two of the plaintiffs’ three claims were asserted in violation of Rule 11, which forbids frivolous filings. However, the court did not award Askew attorneys’ fees or impose any other sanction.

Lawyers, particularly in-house lawyers, across the country had been anxiously awaiting the Supreme Court’s opinion on whether privilege attaches to attorney communications created for legal and non-legal purposes.  In re Grand Jury, No. 21- 1397 (U.S.)  The collective agita was perhaps misplaced, as the Supreme Court dismissed the case as improvidently granted on January 23, 2023. At issue, was an appeal in a Ninth Circuit case in which attorneys for an unnamed law firm focusing on international tax issues argued that certain documents pertaining to the preparation of the client’s tax returns contained privileged legal advice and should be shielded from production as privileged. The circuit fashioned a balancing test, holding that only where “the primary purpose of the communication is to give or receive legal advice, as opposed to business or tax advice,” will the attorney-client privilege apply. 23 F.4^th 1088, 1091-92.

The specific question accepted for review by the Supreme Court in October was as follows: 

Whether a communication involving both legal and non-legal advice is protected by attorney-client privilege where obtaining or providing legal advice was one of the significant purposes behind the communication.

Oral argument was held on January 9, 2023. The Justices pointed out that each side seemed to stray from the tests outlined in their briefs with the petitioner arguing that “any legal purpose” would suffice to protect communications rather than the “significant purpose” test set forth in the briefs. Similarly, the government argued for the “primary purpose” test, but at oral argument espoused a “significant purpose” test which would apply when it is impossible to determine the primary purpose of the communication. This led to a discussion of what percentage of non-legal v. legal advice would apply when attempting to determining the primary purpose with Justice Jackson noting “judges don’t do math.”

Ultimately, Justice Kagan raised “the ancient legal principle, if it ain’t broke, don’t fit it,” to support her conclusion that most courts currently employ the primary purpose test without difficulty which is perhaps why the appeal was dismissed. Attorneys dealing with these issues are frustrated with the outcome as summed up by Susanna McDonald, of the Association of Corporate Counsel who said “[w]ithout guidance from the Supreme Court, the legal landscape for dual purpose communications remains murky[.] Because the circuit courts are split over which test should be used to determine privilege in these situations, in-house counsel are left wondering what test will apply when so many transactions are across state borders and many companies have operations in multiple states.”

Did you hear about the case where the client’s CEO waived privilege by forwarding an email from his company’s counsel to a hotel’s front desk for printing? Whoops!

In Fourth Dimension Software v. Der Touristik Deutschland GMBh, linked below, the CEO of the plaintiff software company (“FDS”) received an email from the company’s former in-house counsel. Because the CEO was traveling in Germany and wanted to review the email before a key business meeting, he forwarded it to the hotel front desk’s email to print. The defendant successfully argued in the district court that forwarding the email to the hotel front desk waived attorney-client privilege.

We need LinkedIn, right? Sure? Yes! LinkedIn has become a very useful and key marketing tool for working professionals, including attorneys. The three most popular uses for LinkedIn are staying connected with colleagues, staying up to date on clients’ news, and as a passive marketing tool.

LinkedIn is a great way to stay connected to colleagues, former classmates, and current and future clients. Many consider it “your professional Facebook.” And while you might be hesitant to brag on Facebook that you were just promoted to partner at your law firm, that sort of announcement is right at home on LinkedIn. It is also a great place to post links to articles or blogs you or your colleagues wrote, or information about your next speaking engagement. Not only will this let your former law school classmates see just how well you are doing, but it will allow others who may need your help on a specific topic or who are also attending that conference where you are speaking, to reach out and get to know you better. Much the same way you use phone calls, educational and training opportunities, newsletters, and social events to stay top of mind with current clients and potential referral sources, you can use LinkedIn to do the same.