Tips for minimizing your firm's malpractice exposure

Recent headlines from around the country reveal multi-million-dollar legal malpractice payouts, with firms facing big exposures arising out of foreseeable and avoidable problems.

In difficult economic times, current and former clients often look to attorneys - who they often perceive as "deep pockets" - to compensate them for failed businesses, lost homes, or risky investments. The number of large verdicts against attorneys confirms the risks of failing to follow effective risk management procedures for avoiding legal malpractice claims.

Notably, these multi-million-dollar payouts reflect trends and risks that can serve as useful tools in designing, implementing and following effective risk management procedures for attorneys. Here are some examples with a few recommendations on how to reduce the risk of a runaway jury or an unexpected multi-million-dollar settlement in connection with an avoidable legal malpractice claim.

Larger firm, larger risk

Although smaller firms certainly face the highest frequency of claims, larger law firms continue to face the highest severity of claims. Big firms face big risks. Unfortunately, neither the size of the firm nor the reputation of the attorney provides much insulation from legal malpractice exposure. Some of the bigger verdicts this year have been against attorneys with excellent reputations who were part of well-regarded law firms.

In the last few years, California juries have awarded large sums to plaintiffs in legal malpractice suits against lawyers and law firms. Reported cases in California in just the last three years include verdicts against law firms of $34 million and $50 million. Although attorneys have recourse through the appellate process, the verdicts demonstrate the high risks of such claims.

Conflicts driving up exposures

Juries do not like conflicts of interest, regardless of how they happen. In fact, even the appearance of a conflict of interest can, and often does, result in some of the largest legal malpractice verdicts.

For example, last May, a high-profile case in Texas found a prominent law firm liable for $40.5 million in losses to a former client on the basis that the client suffered because the firm helped its chief rival secure patents. Fortunately for the firm, the jury also found that the company failed to sue in a timely manner after learning about the conflict of interest.

And in December 2014, a law firm asked the 7th U.S. Circuit Court of Appeals to reconsider a decision refusing to vacate a $1 million legal malpractice verdict. That decision stemmed from a claimed conflict of interest arising from the law firm drafting a venture's operating agreement in favor of another party over the client.

As these cases make clear, actions alleging a breach of the duty of loyalty result in stiff penalties for attorneys and law firms. There is no good substitute for clear conflict of interest identification procedures and effective protocols for documenting the resolution of identified conflicts.

Regardless of the size of the firm or the matter, or the reputation of the attorney handling the matter, effective risk management depends on strict adherence - and, if necessary, enforcement - of these conflict of interest procedures.

The price of small mistakes

The time pressures have never been greater than in modern law practice, yet the standard of care has not changed. Attorneys must perform legal service in accordance with the standard of skill, prudence and diligence commonly exercised by other attorneys. As applied by juries, this means an attorney must focus on the task at hand regardless of how busy the attorney is. Under that standard, even the smallest mistake can have a high premium.

For example, a jury awarded a $4 million verdict against an attorney for drafting a complaint with an error in the case style. Once the style was corrected, the statute of limitations had expired and the case was barred. This is just one example of a small mistake, the style of a complaint, leading to a substantial verdict.

Unfortunately, this is not an isolated example. In Utah, a jury awarded $12.8 million where a client claimed that the attorney failed to keep the client informed about risks and options for real estate deals. Though the complaint was merely a consultation issue, the claim still resulted in a high verdict.

Similarly, an Oregon attorney faced a $3.5 million verdict because he failed to turn over notes in discovery that were provided to him by a client. As a complicating factor, the attorney attempted to imply that the client, rather than the attorney, had withheld the documents. Notwithstanding that attempted explanation, the result in that case was a high verdict for what could have been an avoidable mistake. And, if all those examples did not make the point, a Texas attorney must pay nearly $1 million for including the incorrect name on a contract.

Last year, a U.S. district judge ruled that AT&T was ineligible to appeal a $40 million patent verdict in favor of its adversary because its attorneys failed to file an appeal by the court's deadline. The firm challenged the malpractice contention, but the U.S. Court of Appeals for the Federal Circuit refused to reverse the decision. The Federal Circuit noted that, "[i]n this era of electronic filing," attorneys must monitor electronic dockets to be aware of deadlines.

Good news

Fortunately, legal malpractice statistics confirm that effective risk management procedures can substantially reduce these risks. These steps typically begin with effective client intake procedures and include conflict identification and resolution procedures.

Attorneys can consider using computers and supporting software with checklists for routine filings in litigation, corporate law and intellectual property prosecution. Checklists can include reminders for simple steps that might get overlooked when the attention is on high-level issues, such as obtaining a proper signature on documents and confirming the filing requirements for the specific courts.

Obviously, computer systems can be helpful in avoiding missed deadlines or in checking conflicts. Still, to be effective, risk management depends on compliance by every attorney in every law firm, regardless of size, experience or reputation. As the recent verdicts prove, no attorney is immune from a mistake or a corresponding legal malpractice verdict.

The challenge is to respond to the risk by adapting to the 21st century law practice. In many cases, this will require some old dogs learning new tricks. The alternative is just too much risk.