Disqualification due to Foreseeable Conflict Leads to $32m Malpractice Judgment

By David Hricik, Mercer Law School

Ordinarily, a conflict of interest leads to disqualification, but they can lead to fee disgorgement (an attorney is supposed to be loyal, and like any other agent, is not entitled to keep a fee earned while being disloyal) and, on occasion, damages.  In a case affirmed by the Ohio Court of Appeals, those damages were $32 million.

In RevoLaze LLC v. Dentons US LLP, 2022-Ohio-1392 (Ohio App. Apr. 28, 2022), requires understanding what a “verein” is. It is a legal entity recognized under Swiss law somewhat similar to an association. A few law firms are organized this way, including Dentons.

In RevoLaze, Dentons US (part of a verein of many Dentons “entities”) had represented a patentee, RevoLaze, in an ITC proceeding and 17 related infringement suits. At the start of the matter, Revolaze received funding from a litigation funding group, and Dentons US agreed to reduce and cap its fees but had the right to a percentage of any recovery. Dentons had indicated to the litigation funding group that the recovery indicated potential damages of around a billion dollars, and so it vetted the patents and the case and after that agreed to fund the proceeding and related litigation, in phases, for up to $8 million.

But, Dentons US knew the ITC proceeding would be adverse to The Gap, and that Dentons Canada represented The Gap. Thus, if Dentons US was part of the same firm as Dentons Canada, then Dentons US’ representation of the patentee in the ITC proceeding was adverse to one of Dentons US’s clients, and it would be subject to disqualification.  There was no evidence that Dentons had advised RevoLaze of the risk of disqualification or of steps to reduce the impact if it happened.

Of course, The Gap moved to disqualify, and the ITC granted that motion. By that time, Dentons US had billed a significant amount, RevoLaze was struggling, and disqualification caused it to pay an additional $1 million to get replacement counsel up to speed.  The litigation funding group agreed to move up some funding to help, but RevoLaze settled the infringement cases and eventually dismissed the ITC proceeding while appeal of the disqualification order was pending there.

RevoLaze then sued Dentons, arguing the conflict had been foreseeable and that it had been damaged by, among other things, failing to obtain an ITC exclusion order and lost licensing revenue, with the total damages between $23 and $39 million.

To support breach — that disqualification had been foreseeable and so a reasonable lawyer would have either obtained informed consent or not taken the case — RevoLaze’s lawyers showed that Dentons US had been concerned about a conflict caused by the ITC proceeding with a client of a different “part” of Dentons (and so had not named that client in the ITC proceeding), it had a single conflicts database, Dentons’ own expert had written an article discussing the risk that a court would consider different “parts” of a verein to be one big law firm, and other facts

To support causation and proximate cause, RevoLaze had experts opine that but-for disqualification, the litigation funding costs would have been lower, RevoLaze would have obtained an exclusion order, and it would have obtained better settlements (i.e., better licensing and so had incurred lose profits).

The jury awarded $32 million. Then, the appellate court held the evidence was sufficient to support the verdict and the amount of damages.

This case, of course, is odd in that breach turned on whether Dentons was “one law firm” or separate firms, not on whether there was a conflict with a client. But the same logic would apply where a law firm undertakes a representation where it is foreseeable that it would be deemed to be adverse to a client, and so subject it to disqualification.

It appears from this June 2022 filing Dentons is seeking review by the Ohio Supreme Court, and it looks like on the issue of causation, so stay tuned.

Update:  A reader sent a link to an interesting student-authored article on the ITC decision that explains the verein (which auto-corrects to “vermin”) structure.

About David

Professor of Law, Mercer University School of Law. Formerly Of Counsel, Taylor English Duma, LLP and in 2012-13, judicial clerk to Chief Judge Rader.

10 thoughts on “Disqualification due to Foreseeable Conflict Leads to $32m Malpractice Judgment

  1. 4

    I doubt the Ohio Supreme Court will sustain the total damages.

    One likely cannot count one’s legal chickens- there is never a guarantee of a legal victory.

    The direct costs to replace counsel, OTH, are a slam-dunk.

  2. 3

    What is the value proposition to a client for firms growing this large? That is to say, I gather than Denton’s pitch is something like “you should choose us for your legal services, because our offices around the world enable us to assist you with your global business needs.” In practice, however, your individual attorney in Switzerland will have to work just as hard to come up to speed on your needs whether she is in the same firm as your attorney in New York or in a different firm that works in coordination with your attorney in New York. I am dubious, in other words, that the client really gets better representation on the basis of the firm having divisions spread across the globe.

    Given that the large, global firm has more opportunities for disqualifying conflicts than does a regional firm, there must be some countervailing advantage to make it worth the client’s while to take that risk when engaging a multinational firm like Dentons. What is that countervailing advantage?

    1. 3.1

      I doubt if you will get a response from any very large international firm partner, but note re this case that only such a large firm could absorb such large malpractice damages awards against any one partners activities. [I have heard over the years of a couple of formerly well known IPL firms that no longer exist for at least partly that reason.] Also, of course, very large firms can laterally hire and pay for in-house legal specialist experts or teams thereof to retain billings that a small firm would have to outsource. E.g., in-house billings [and steadier income from some billing averaging?] for opinions and other work on mergers, acquisitions, bankruptcies, taxes, antitrust, patents, copyrights, trademarks, trade secrets, admiralty, real estate, etc. [Not just being able to practice in different countries.] A surprising number of formerly independent IPL firms have been absorbed into large U.S. GP firms in the past 30 years.

      1. 3.1.1

        P.S. Criticisms of very large law firms include their impersonal purely business income driven structure, in which partners do not even know most of the other partners or have any way to evaluate them for other than their billings. However, maintaining a reputation of competence among business-world managers is vital to their long term income and growth, so partners attracting bad PR news may suffer consequences in spite of having high billings.

        1. 3.1.1.1

          Whatever Judge Judy says about as long as it’s true. I stand with Judge Judy.

  3. 2

    This $32 Million Ohio court judgement re removal of conflict-disqualified ITC counsel is presumably [all but the $1M replacement attorney cost award] due to what is indicated as: “RevoLaze had experts opine that but-for disqualification, .. RevoLaze would have obtained an exclusion order.”
    That is, apparently proving to the jury a “hypothetical case within a case.” Which is reportedly unusual to accomplish, or get sustained on appeal, in views I have heard expressed by malpractice experts. [Unless the defendants did not put on a rebuttal witness explaining why the ITC proceeding would more likely have been lost anyway?]

    The reported up to $8 million of litigation funding “from a litigation funding group” [unidentified], for “a percentage of any recovery,” to fund 17 related patent suits plus this U.S. ITC litigation, is further evidence of this increasing investment practice, primarily for PAE lawsuits funding, that does not that often get publicly disclosed.

    1. 2.1

      P.S. Wading through the lengthy Ohio App. decision, I found that “Longford Capital” [whoever that is] was identified as the litigation financiers in this case because its financing agreement was accidently included with some other delivered discovery documents.

  4. 1

    I’m amazed that a firm like Dentons wouldn’t anticipate conflicts like this and have advance waivers in its engagement letters. Maybe they do and it was ineffective. Or maybe The GAP is such a large client that it got its way and no waiver. It seems unlikely it was as simple as presented here.

    1. 1.1

      Can’t speak to this particular matter, but advance waivers are fraught with problems. The key element is the informed in informed consent. We learned a lot of about such issues in the Sheppard Mullin v. JM Manufacturing case in California.

    2. 1.2

      Sometimes, they overestimate their value to clients. Years ago, I was working on a litigation with a small boutique firm in one state in conjunction with a boutique NY firm. They had prepared opinions for the other side regarding a third party patent and, as is often the case, the other side waited until right before the trial was to begin to file a motion to disqualify. One of the senior partners PUT IN WRITING a threat that they would not testify at trial on the other side’s behalf if they did not withdraw their motion to disqualify. Imagine the hubris. That letter became an exhibit to the order disqualifying counsel.

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