Did a Lawyer's Conflict of Interest Cost a Man his Business?
The American Bar Association’s (ABA) model rule on conflicts of interest says, “Loyalty and independent judgment are essential elements in the lawyer's relationship to a client. Concurrent conflicts of interest can arise from the lawyer's responsibilities to another client, a former client or a third person or from the lawyer's own interests…
“Resolution of a conflict of interest problem under this Rule requires the lawyer to: 1) clearly identify the client or clients; 2) determine whether a conflict of interest exists; 3) decide whether the representation may be undertaken despite the existence of a conflict, i.e., whether the conflict is consentable; and 4) if so, consult with the clients affected under paragraph (a) and obtain their informed consent, confirmed in writing.”
The ABA rule or a similar version has been adopted in all fifty states.
Lawyer’s also owe a fiduciary duty to their client. That means they must act in their client’s best interest. Simply because a lawyer’s representation of a particular client comes to an end doesn’t mean his or her duty to that client ends. Thus conflicts of interest can arise long after representation ends.
Lawyers get in trouble over conflicts of interest when they:
- Attempt to represent two current clients whose interests are adverse to the other
- Represent a current client against a former client
- Failing to obtain written consent in cases where the conflict of interest can be waived
- Placing the lawyer’s interests above that of the client
A recent case filed this summer answers the question, “can I sue a lawyer for a conflict of interest.” The details are taken straight from court documents. As of this writing, the court has not made any findings of wrongdoings by the lawyers.
Chemist Sues Law Firm for Helping Partner Steal His Business
Finith Jernigan is a chemist. After completing his doctorate, he did research at Beth Israel Deaconess Medical Center, a 651 bed hospital affiliated with Harvard Medical School.
While at the medical center he developed a computer based platform called INSITE that identified new drug compounds used to treat challenging diseases.
Jernigan was a great chemist but had no business background. He turned to his advisor at the medical center, Dr. Lijun Sun. When the issue of financing the new venture came up, Dr Sun referred Jernigan to his son, Lanny Sun and his company Chengwei Capital HK, a venture capital firm.
In April 2016, Lanny hired Cooley to assist he and Jernigan with financing. Cooley LLP is a 946 attorney law firm headquartered in Palo Alto, California. Unbeknownst to Jernigan is that Cooley had a long relationship with Lanny Sun and his venture capital company.
Jernigan claims that Cooley never disclosed its relationship with Sun.
At Sun’s direction, Cooley formed a business called Silicon Therapeutics LLC (“STX”). Sun and Jernigan each owned 50% of the business but Sun was the sole manager.
Cooley also formed a second company called Silicon Insite that was wholly owned by STX. The purpose of the second company was to operate the new pharmaceutical company.
After the companies were formed, Sun asked Cooley to prepare the financing deal between STX and the venture capital company. At that point, Sun was acting both as an owner of STX and a partner in the venture capital firm.
Jernigan says Cooley had an obligation to also represent him or at least advise him to retain independent counsel. Jernigan believes that Sun was really acting in the interests of the venture capital company and STX, the company he formed with Jernigan. If his facts are true, Jernigan certainly was defrauded by Lanny Sun. The question is whether Cooley also owed him a duty?
In an August 2016 email Sun told Cooley that the venture capital company would want the “sole and exclusive option to purchase securities [in the new company] before maturity.” The attorney from Cooley never questioned whether this provision was in the best interests of STX or its owners including Jernigan.
The Cooley firm was for all practical purposes the venture capital company’s lawyers. But were they Jernigan’s lawyers as well? Jernigan claims that not only did Sun tell him Colley was representing Jernigan, the “Cooley attorneys themselves told Jernigan that they could advise him on legal issues affecting him during the deal.”
Two of the Cooley lawyers told Jernigan that “he could reach out to them any time with his legal questions… In reliance on this understanding, Jernigan turned to Cooley… to seek advice regarding the terms of his employment [with the new company, Silicon Insite].”
Later that month, Jernigan and Sun wrote to Cooley “seeking counsel” regarding their employment and ownership interests in the new venture. “None of the Cooley attorneys responded that Cooley could not provide the requested advice to Jernigan and Larry Sun in their individual capacities because they represented the company instead. Nor did they suggest to Jernigan that he seek counsel from an independent attorney.” Instead two Cooley lawyers said they “were happy to meet and discuss these points.”
At the meeting, none of the Cooley lawyers suggested that their representation of the venture capital company or even STX was adverse to Jernigan’s interests.
During the meeting, Cooley told Jernigan that following the financing deal he would own 10% of STX and that was the best he could expect. At that meeting he learned that even the 10% ownership was not automatic, instead he would vest over time. Jernigan said he was told that his 10% interest was “guaranteed.” He was also told that his employment terms would be favorable.
If you think you know the rest of the story, you are probably correct. It turns out that Jernigan’s employment was at will and his 10% ownership interest was not guaranteed.
Seven months after the deal was signed, Larry Sun told Jernigan he was being demoted. And a few months after that, Sun told Jernigan he would be fired unless he waived his additional interests in STX.
The company that Jernigan had founded was no longer his. When Jernigan balked and refused to sign off, he says Cooley presented him with a severance agreement in which Jernigan waived all claims against Sun, STX, the venture capital firm and even the Cooley law firm. Jernigan didn’t sign.
Jernigan was fired and left holding just 2.8% of the ownership interests. Because of a second financing round, Jernigan believes the company is worth $90,000,000,00.
Earlier this year he filed a legal malpractice law suit against Cooley LLP for legal malpractice.
Can I Sue a Lawyer for a Conflict of Interest?
As this post demonstrates, it is possible to sue a lawyer for legal malpractice if you believe a lawyer provided you poor advice or failed to disclose a conflict of interest.
To prevail against Cooley, Jernigan must prove that Cooley owed him a duty. Usually clients can point to a written representation agreement. Such an agreement is great evidence that there is a lawyer – client relationship.
In this case, there is no written agreement. That doesn’t mean Jernigan loses, however. He simply must demonstrate that the facts and circumstances of their interactions rises to such a level.
Examples would be emails in which Jernigan is seeking legal advice and the responses from Cooley. Ultimately, a jury may have to determine if such a. relationship existed. [Remember, this case was just filed. This post is based on Jernigan’s recollection of events. Cooley has not admitted any wrongdoing.]
Assuming there is a valid lawyer – client relationship, the next question is whether Cooley breached its duty of care to Jernigan? That is where the conflict of interest comes in. Our opinion is that Cooley cannot represent Jernigan, STX and the venture capital company. Sun, the venture capital company and even STX have interests adverse to Jernigan’s.
The issue in this case is more on whether or not the law firm owed a duty to Jernigan. Depending on the facts on each individual case, the issues almost always relate to whether the law firm owed the “client” a duty of care (was there an attorney – client relationship) and / or whether or not there was a conflict of interest such that the lawyers violated that duty of care.
In some cases, there may be a factual issue as to whether the conflict was properly identified and waived by the client. (In most states, the identification of the conflict and any waiver must be in writing.)
There are four basic elements of a successful legal malpractice case. They are:
- Duty – Did the attorney owe you a duty? Was there an attorney client relationship?
- Breach – Did the attorney have an improper conflict of interest? Breach his duty to you? Fail to do what she was hired to do? Miss a deadline?
- Causation – Did the attorney’s wrongful conduct cause you harm?
- Damages – Did you suffer financial losses or other damages as a result?
The attorneys at MahanyLaw have handled cases in over 30 jurisdictions. If you feel you have a legal malpractice case with actual damages in excess of $1 million, contact us today online, by email at [hidden email] or phone at 877-858-8018. All inquiries are without obligation and completely confidential. We also invite you to visit our legal malpractice information page.
Can I sue a lawyer for a conflict of interest? Yes!