(Revised) Akin Gump Found to Have Breached Duty of Loyalty to Client: Important Lesson for Fee Agreements

The opinion from the district court in the breach of fiduciary duty suit of SAS Institute, Inc. v Akin Gump Straus Hauer & Feld, LLP (W.D.N.C. Feb. 6, 2015),  is here.  This post discusses only part of the 55-page decision.

Beginning in 2006, AG began representing SAS in federal lobbying activities.  Six months later, it worked to get JuxtaComm, a patent monetization entity out of Canada, as a client.  JuxtaComm owned the ‘662 patent.

During the due diligence period on whether AG could take on JuxtaComm’s enforcement of the ‘662 patent, AG did due diligence, determining (a) who were participants in the market the ‘662 affected; (b) ran a conflicts checks; and (c] made a determination as to whether a good faith infringement claim could be brought.  In this regard, it hired an outside consultant, Precedia to do a patent study.

AG soon learned that (you guessed it) SAS was the largest target.  Learned that fact twice, as a matter of fact.  AG went so far as to learn the identity of specific SAS products that “may have been infringing” the ‘662 patent.  Thus, AG knew SAS was a current client; was the leader in this field; and made products that “potentially infringed” the ‘662.  (The district court noted that, in a later suit by JuxtaComm against SAS — in which AG did not participate — one of these products in fact was the subject of a claim by JuxtaComm.)

AG then told JuxtaComm that it believed SAS was an infringer!  (The court’s words: not “potential” or “theoretical” but “an infringer.”)

In the fee agreement, AG got $10m as an up-front retainer and would get 20% of all future proceeds AG secured.  The fee agreement carved out SAS (and others) from the scope of potential defendants that AG would sue.

But, the fee agreement went further. It stated that the litigation AG was bringing would be the “foundation and framework upon which JuxtaComm [could]” start enforcing the patents against other infringers.  In consideration of this work, the fee agreement also provided that AG would get 20% of the value received… (wait for it) even if AG was not involved in obtaining that value.

And..  what happens next is a little disturbing to me.  After its representation of SAS had ended, Akin Gump went ahead and represented the patentee against SAS.  SAS moved to disqualify.  In sworn testimony in that disqualification motion, Akin Gump lawyers apparently persuaded the court that they hadn’t targeted SAS before long after the representation had ended.  Here’s a quote from the district court decision denying the motion to disqualify:

JuxtaComm first contemplated suing SAS in the fall of 2009. Kiklis Declaration, Docket No. 163-1 at ¶20. Indeed, in its motion SAS argued that JuxtaComm’s pre-suit investigation and contemplation of suit occurred in the fall of 2009. Based on Kiklis’s declaration, the conflict arose in the fall of 2009.

The conflict between JuxtaComm and SAS arose in the fall of 2009, when JuxtaComm began contemplating bringing this suit. This was more than twelve months after Kiklis’s representation of SAS ended. Accordingly, the conflict did not arise while JuxtaComm and SAS were concurrent clients, and the rules for concurrent conflicts of interest do not apply.

Juxtacomm-Texas Software, LLC v. Axway (E.D. Tex. Nov. 29, 2010).  Apparently, the engagement letter — which showed this fact finding was, in my view, was wrong — was not provided to the court.  By successfully persuading the court that Akin Gump had not become adverse to SAS until after its representation of SAS had ended, Akin Gump was able to use the former client rules and, as a result, dodge disqualification.

Then what you’d expect to happen happened:  SAS sued Akin Gump for breaching its fiduciary duty to SAS.  At the bench trial, AG testified that, despite the provision in the fee agreement giving it 20% of all funds (and, apparently, despite the fact that it actually sued SAS for the patentee???), Akin Gump would “never have taken any money from SAS.”  But, AG also testified that that part of the fee agreement “mean exactly what they say, nothing more, nothing less.”

From this, the district court concluded that AG had taken a pecuniary interest adverse to SAS, in violation of D.C. Rule 1.8, which requires disclosure and consent under such circumstances. It also found that because AG hadn’t told SAS of this deal, SAS did not give informed consent for AG to continue to represent it in the lobbying efforts.

I’d be surprised if this is the last word on this one. If I’m not understanding the timeline, I’d appreciate Akin Gump correcting me, since it seems pretty straightforward what happened here.

I’ve seen a lot of contingent fee agreements over the years, and a lot them avoided this problem by carving out any monies the patentee receives from the firm’s clients.  I’m not sure that solves the problem — in fact, it probably doesn’t or might not depending on how smart the parties are.

They didn’t do that here… and they did more.