breach of fiduciary duty

The Los Angeles Times featured a story about the legal saga that has enveloped the Christian bestseller The Shack:

"The Shack," William Paul Young’s novel about a man rediscovering lost faith after the murder of his 5-year-old daughter, started out as a manuscript no one would touch. Finally, pastors Wayne Jacobsen and Brad Cummings

At the Weekly Standard, art critic Lance Esplund has an essay decrying the upcoming move of the Barnes Museum from Lower Merion, Pa., to Philadelphia:

Now after years of litigation, Albert Barnes’s intentions have been subverted and his will broken. And the Barnes Foundation is scheduled to be moved. Galleries have already been closed. Ground

Via the Am Law Daily, the Wall Street Journal had an article about an effort by Bank of America’s lawyers — at Wachtell, Davis Polk, and Cleary Gottlieb — to keep Judge Jed Rakoff from presiding over a shareholder class action against them:

Bank of America Corp. tried to keep cases pending against it

[Much later update for Jon Lebkowsky readers: the Aaron Swartz post is here.]

[Update I: There’s some additional discussion of this post in the comments at Hacker News.]

[Update II: Making matters worse, the warrant itself was patently overbroad and may have lacked probable cause for many of the items seized. My trusty copy of Criminal Defense Tools and Techniques refers to US v. SDI Future Health, Inc., 568 F.3d 684, 702-704 (9th Cir. 2009), which talks about prohibitions on “exploratory rummaging in a person’s belongings” and how “there must be probable cause to seize the particular things named in the warrant.”]

Remember when Shepard Fairey was criminally investigated for a humdrum instance of perjury in a civil suit? Fairey committed the type of perjury that is routine in our courts and is never investigated or prosecuted. Yet, because the victim there was the Associated Press, they were entitled to more justice than common folk like you and me, and so got themselves a federal investigation.

It seems that we have a new example of some crimes being more worthy of justice than others:

The Net is buzzing about San Mateo, California law enforcement officials’ search and seizure of Gizmodo Editor Jason Chen’s computers. Acting under a search warrant issued by California’s Superior Court, agents of the Rapid Enforcement Allied Computer Team (REACT), broke down Chen’s door this past Friday and searched his home, confiscating 24 items, including four computers, two severs, and several external hard drives. The authorities were  searching for evidence regarding how Chen and Gizmodo came to purchase an  iPhone prototype.

The Electronic Frontier Foundation, the Internet’s leading digital rights advocacy group, has also taken a public position on the search, telling us that California’s search warrant is illegal and should never have been issued. In a phone interview this afternoon, EFF Civil Liberties Director Jennifer Granick told us: “There are both federal and state laws here in California that protect reporters and journalists from search and seizure for their news gathering activities. The federal law is the Privacy Protection Act and the state law is a provision of the penal code and evidence code. It appears that both of those laws may be being violated by this search and seizure.”

I’ll leave the details to others. Here’s the EFF’s official position on the invalidity of the search.

I have but one simple question: where was Jessica Gonzales’ ‘rapid team’ when she needed it?

Here’s what happened to Jessica:

[A]t about 5 or 5:30 p.m. on Tuesday, June 22, 1999, respondent’s husband took the three daughters while they were playing outside the family home. No advance arrangements had been made for him to see the daughters that evening. When respondent noticed the children were missing, she suspected her husband had taken them. At about 7:30 p.m., she called the Castle Rock Police Department, which dispatched two officers. The complaint continues: “When [the officers] arrived … , she showed them a copy of the TRO and requested that it be enforced and the three children be returned to her immediately. [The officers] stated that there was nothing they could do about the TRO and suggested that [respondent] call the Police Department again if the three children did not return home by 10:00 p.m.”

At approximately 8:30 p.m., respondent talked to her husband on his cellular telephone. He told her “he had the three children [at an] amusement park in Denver.” She called the police again and asked them to “have someone check for” her husband or his vehicle at the amusement park and “put out an [all points bulletin]” for her husband, but the officer with whom she spoke “refused to do so,” again telling her to “wait until 10:00 p.m. and see if ” her husband returned the girls.

At approximately 10:10 p.m., respondent called the police and said her children were still missing, but she was now told to wait until midnight. She called at midnight and told the dispatcher her children were still missing. She went to her husband’s apartment and, finding nobody there, called the police at 12:10 a.m.; she was told to wait for an officer to arrive. When none came, she went to the police station at 12:50 a.m. and submitted an incident report. The officer who took the report “made no reasonable effort to enforce the TRO or locate the three children. Instead, he went to dinner.”

At approximately 3:20 a.m., respondent’s husband arrived at the police station and opened fire with a semiautomatic handgun he had purchased earlier that evening. Police shot back, killing him. Inside the cab of his pickup truck, they found the bodies of all three daughters, whom he had already murdered.

She sued the police department, alleging her rights and her daughters’ rights had been violated.

The Supreme Court dismissed her case, holding that she had no “property interest” in the temporary restraining order, and thus no right worthy of enforcement.

I’ve seen some hoopla about how the prototype iPhone was a “trade secret” and thus worth millions of dollars. It’s not and it wasn’t. Apple had no intention of keeping the iPhone and its features secret — the whole plan was to sell it to millions just a few months from now — and Gawker Media didn’t discover or publish anything more than information about the appearance of the phone. “A trade-secret claim based on readily observable material is a bust.” IDX Systems Corp. v. Epic Systems Corp., 285 F. 3d 581, 584 (7th Cir. 2002). Apple thus didn’t lose a “trade secret,” it just lost some control over the course of its marketing.

So all we’re really talking about is the alleged theft of a single phone, a phone that was returned a few days after it was “stolen.”

Assuming Gawker Media “stole” the phone or failed its duty to return the phone, is that a crime? Maybe so. It was, after all, Apple’s “property.” But it’s a trivial crime, the type of “crime” that gets ignored by police departments and district attorneys with better things to do.

Do you think that I’d get a ‘rapid team’ busting down doors if I reported my phone stolen? Would you get one?

As Robert Jackson — Nuremberg Prosecutor, Supreme Court Justice, and Attorney General — said:

The prosecutor has more control over life, liberty, and reputation than any other person in America. His discretion is tremendous. He can have citizens investigated and, if he is that kind of person, he can have this done to the tune of public statements and veiled or unveiled intimations. Or the prosecutor may choose a more subtle course and simply have a citizen’s friends interviewed. The prosecutor can order arrests, present cases to the grand jury in secret session, and on the basis of his one-sided presentation of the facts, can cause the citizen to be indicted and held for trial. He may dismiss the case before trial, in which case the defense never has a chance to be heard. Or he may go on with a public trial. If he obtains a conviction, the prosecutor can still make recommendations as to sentence, as to whether the prisoner should get probation or a suspended sentence, and after he is put away, as to whether he is a fit subject for parole. While the prosecutor at his best is one of the most beneficent forces in our society, when he acts from malice or other base motives, he is one of the worst.

One of the greatest powers exercised by the government is the discretion with which it investigates and prosecutes crimes. Why is Apple’s iPhone prototype entitled to more justice than Jessica Gonzales’ daughters?


Continue Reading Why Is Apple’s iPhone Prototype Entitled To More Justice Than Jessica Gonzales’ Daughters?

"Once the lawyers get involved…"

There are a hundred ways to end that sentence. Once the lawyers get involved, everything falls apart. It takes ten times as long to finish a deal. A lawsuit is inevitable. The hysterics start.

Few of the potential endings are favorable towards lawyers. Perhaps the most common sentiment is: once

The New York Times reports:

Private equity deal-makers, those kings of corporate buyouts, made billions for themselves when times were good. But some of their biggest investors, public pension funds, are still waiting for the hefty rewards they were promised.

The nation’s 10 largest public pension funds have paid private equity firms more than

Felix Salmon at Reuters caught something interesting:

[T]he facts of the case are pretty clear. The relationship between JP Morgan and Televisa goes back decades, and so JP Morgan was the natural choice for Televisa to turn to when it decided to buy a fiber-optic cable company called Bestel for $325 million, $225 million

[UPDATE: The WSJ Law Blog has copies of the letters submitted to the Delaware Chancery Court. Professor Hazard is undoubtedly one of the pre-eminent experts in the field, and he makes a compelling argument that Cravath violated the Rules of Professional Conduct. Yet, showing a violation of the Rules is not enough — to disqualify counsel under Chancellor Chandler’s standard, Airgas will have to show the violation will "materially advance" Air Product’s position or undermine the fair and efficient administration of justice. So far, I haven’t seen anything demonstrating that. The vague references made so far to Cravath’s insider knowledge of Airgas’s finances isn’t enough, since a firewall within Cravath can likely cure that problem.

UPDATE II: As predicted, the Eastern District of Pennsylvania declined to enter an injunction against Cravath, and the Delaware Chancery Court did not disqualify them.]

As has been reported all over the legal media,

Industrial gas producer Airgas filed suit against Cravath, Swaine & Moore on Friday over the firm’s role as legal adviser to rival Air Products on that company’s $5.1 billion bid for Airgas.

… Air Products filed a complaint on Thursday in Delaware’s Chancery Court against Airgas, claiming that the smaller company improperly blocked its board of directors from considering previous Air Products takeover offers. Cravath litigation partners Francis Barron, David Marriott and Gary Bornstein are representing Air Products in the Delaware litigation along with local counsel Kenneth Nachbar (he of sports gambling notoriety) and Jon Abramczyk from Morris, Nichols, Arsht & Tunnell. (Click here for the Chancery Court complaint, courtesy of The Times‘ Dealbook.)

Airgas responded by retaining Cozen O’Connor chairman Stephen Cozen, litigation chair Jeffrey Weil and litigation partner Thomas Wilkinson Jr., for a civil suit against Cravath in state court in Pennsylvania. In the suit, Airgas claims that Cravath has a conflict of interest and breached its fiduciary duty by representing Air Products because it previously advised Airgas on several financings. According to Airgas’ complaint against Cravath, the company has had a client relationship with the firm for 10 years and has paid Cravath about $2 million, including a $320,000 payment last October.

There’s an obvious question dangling over the Pennsylvania suit filed by Airgas: what basis — or power — does a state court in Pennsylvania have to preclude a New York law firm from representing a Delaware-registered company in Delaware state court litigation against another Delaware-registered company?

Unsurprisingly, that’s just what Philadelphia Court of Common Pleas (Commerce Court) Judge Albert Sheppard Jr. wondered before denying Airgas’ petition for a temporary restraining order:

In essence, I would be saying to a lawyer you can’t go to Delaware and represent your client. I find that difficult. I don’t want to do that.

Judge Sheppard only had it for two weeks, though, since Cravath, like virtually every out-of-state defendant, promptly removed the case to Federal court, i.e. the Eastern District of Pennsylvania, where it was assigned to Judge Eduardo Robreno (whose work in the Philadelphia Inquirer bankruptcy I’ve covered before).

Cravath (represented by a team at Conrad O’Brien*) has responded to the suit and has asked Judge Robreno to abstain from hearing the case at all:

First, whatever this Court may ultimately decide with respect to Airgas’s claim for money damages, Airgas’s request for a preliminary injunction is the functional equivalent of a motion to disqualify Cravath from appearing before the Delaware Chancery Court. With all due respect, Cravath submits that a motion precluding counsel from appearing in Delaware Chancery Court is more appropriately decided by Chancellor William B. Chandler III, who presides over the firstfiled Delaware litigation. Just as this Court has full authority over proceedings here, judicial comity warrants according Chancellor Chandler due authority over proceedings in his courtroom. …

Second, the Delaware Chancery Court is aptly suited to decide the key issue presented by Airgas’s petition to this Court—whether Cravath should be disqualified. Indeed, the dispute concerning Cravath’s ability to represent Air Products is intertwined with the merits of the (firstfiled) Delaware litigation. …

Third, whereas this Court’s ruling on Airgas’s petition for preliminary relief would be, by definition, provisional, the Delaware Chancery Court’s ruling on the question of whether Cravath should be disqualified will be a final decision on the merits.

(From Cravath’s brief, available on RECAP.)

It’s hard to argue with that; whatever the merits of the conflict-of-interest allegations, it seems they all relate to the Delaware litigation and so should be decided there.

Of course, there’s a reason Cravath wants the case decided in Delaware’s Chancery Court (and why Airgas wants it decided elsewhere). As Francis G.X. Pileggi notes:

[Airgas’] separate suit alleging a conflict was filed in Philadelphia. One might speculate that the suit was not filed in Delaware and it was not filed as a motion to disqualify, because the Delaware decisions recently have not granted many motions to disqualify. See, e.g., cases summarized on this blog here.

Indeed, one might speculate that. More on that in a moment.

Back in Delaware, it seems a war of correspondence has broken out:

Airgas (which has retained Wachtell, Lipton, Rosen & Katz) began the exchange of correspondence Monday, when it sent a letter to Chancellor William Chandler at Delaware’s Court of Chancery … In its Monday letter to Chandler, Airgas argues that a Pennsylvania courtroom is the proper place for the Cravath hearing. In response, Air Products and local counsel Kenneth Nachbar of Morris, Nichols, Arsht & Tunnell drafted their own letter to Chandler, urging him to decide on Cravath’s fate in Delaware and accusing Airgas of trying to "circumvent" Chandler’s authority by suing in Pennsylvania.

Airgas also has enlisted a legal ethics expert who has issued an opinion letter in which he claims Cravath was working under "a clear and serious conflict of interest" while it was helping Air Products formulate its takeover bid last fall, according to a copy of the letter obtained by The Am Law Daily. In his letter, Geoffrey Hazard Jr., a professor at the University of Pennsylvania Law School, says Cravath … violated the so-called "hot potato" rule, which holds that a firm cannot get out of a conflict simply by dropping one client on short notice, Hazard wrote.

Like I wrote before, the hot potato rule lives. Here’s a recent recitation of the rule:

Courts that have considered the issue have held that a firm will not be allowed to drop a client in order to shift resolution of the conflicts question from Rule 1.7 dealing with current clients, to the more lenient standard in Rule 1.9 dealing with former clients.

El Camino Res., LTD. v. Huntington Nat’l Bank, No. 1:07-cv-598, 2007 U.S. Dist. LEXIS 67813, at *39–40 (W.D. Mich. Sept. 13, 2007).

On the surface, that’s not good for Cravath — if Chancellor Chandler applies a similar analysis, then Cravath will be evaluated as if it was simultaneously representing Airgas and Air Products on both sides of the litigation, which is expressly prohibited by the Delaware, Pennsylvania and New York rules.

But the final analysis is a practical one:

The finding of an ethical violation, however, does not automatically require disqualification. The court should order disqualification only where some specifically identifiable impropriety has actually occurred and the balance of relevant factors requires vindication of the integrity of the legal profession over defendant’s interest in retaining counsel of its choice.

Id.

Returning again to why Cravath wants the issue decided in Delaware by Chancellor Chandler, it bears mention here that Chancellor Chandler took a strongly disqualification-unfriendly view in a similar case a year ago, in which Dow Chemical attempted to disqualify Wachtell from representing Rohm and Haas:

I am not persuaded that Wachtell’s access to this information will materially advance Rohm and Haas’s position or undermine the fair and efficient administration of justice. Dow’s defense to specific performance is that conditions in the market and within Dow have changed significantly since December 2008 and that it is no longer feasible for the merger to close. Dow has failed to convince me that the information Wachtell had access to regarding Dow’s strategies and asset values in 2006 and 2007 will substantially advance the interest of Rohm and Haas in this litigation. Additionally, Wachtell has assured the Court that its attorneys who obtained confidential Dow information have not and will not share Dow’s client confidences with the Wachtell attorneys working on this matter. While Dow is correct that the ethical rules impute knowledge of one attorney to other attorneys in the firm, the issue before the Court is not whether there was a violation of the ethical rules. To justify disqualification, the Court must find that allowing the representation to continue would threaten the fair and efficient administration of justice, a threat that is greatly reduced by a credible representation to the Court that the firm will ensure that the attorneys working on this matter do not have access to Dow’s client confidences. Dow has failed to point to information or confidences obtained by Wachtell in its 2006-2007 work for Dow that will have a material influence on the proceedings before me today.

Rohm and Haas Co. v. Dow Chem. Co., No. 4309-CC, 2009 WL 445609, at *3 (Del. Ch. Feb. 12, 2009)(also courtesy of Pileggi).

Truth be told, there’s not much distinguishing the Rohm and Haas v. Dow situation from the present case with Cravath, except for the "hot potato" rule aspect, given how Cravath’s work for Airgas was much more recent than Wachtell’s work was for Dow. Indeed, it seems Cravath’s work for Airgas unambiguously overlapped its work for Air Products.

As noted above, though, a mere violation of the rules isn’t enough; the question is what prejudice the former client will suffer and if that prejudice can be avoided. Cravath’s work for Airgas was comparatively small, and if Cravath sets up an ethical firewall that keeps the former Airgas attorneys away from the Air Products lawsuit, that will likely be enough to satisfy Chancellor Chandler.


Continue Reading Why Cravath Will Prevail In The Airgas / Air Products Conflict of Interest Lawsuit

Warren Buffet often gets credit for coining the phrase "skin in the game" — even though it’s not his — and his definition is, shall we say, on the money. "Skin in the game" makes a difference:

Mutual funds whose directors have "skin in the game" significantly outperform their competitors, according to a study