“Baby why you hurt me leave me and desert me?” — Foolish (2002) Ashanti
A California attorney sued his former law partner for allegedly stealing trade secrets and fraudulent billing practices, in violation of a contract detailing the disbanding of the attorneys’ prior partnership.
In a complaint filed in U.S. District Court for the Northern District of California on May 24, 2016, IP attorney Zurvan Mahamedi alleges that his former law partner, patent attorney William Paradice, misappropriated confidential information and client files, in violation of the recently enacted Defend Trade Secrets Act, which provides a federal cause of action for trade secret misappropriation. See Zurvan Mahamedi and Mahamedi IP Law LLP v. William Paradice and Paradice & Li, LLP, No. 5:16-cv-02805-HRL (N.D. Cal. May 24, 2016). Click here for a copy of the District Court Complaint. This lawsuit appears to be one of the first filed under the new federal trade secrets law.
The complaint alleges Mahamedi and Paradice were the sole partners in the law firm Mahamedi Paradice LLP (“the Old Firm”). In April 2016, Paradice withdrew from the Old Firm in order to start a new law firm, Paradice & Li LLP (the “Paradice Firm”). Mahamedi and Paradice allegedly entered into a Partnership Separation Agreement (“PSA”) on April 22, 2016. Part of the PSA allegedly addressed the division of clients and how Paradice’s client files would be transferred to the Paradice Firm. According to the complaint, Paradice was allowed to take only those files “which relate to clients that have provided written consent to transfer their files” to the Paradice Firm.
The complaint further alleges that some of the Old Firm’s files were maintained on a computer system (the “Mahamedi Database”), which operated on a server located at the premises of the Old Firm. The Mahamedi Database allegedly contained “Plaintiffs’ confidential and proprietary information concerning billings, proprietary legal research and strategy materials, and client contacts.” The complaint alleges Paradice exceeded his authority under the PSA by accessing and copying the entire Mahamedi Database, and further that Paradice intends to use the Old Firm’s trade secrets “to compete with Mahamedi, to tarnish Mahamedi’s reputation, to disseminate the Trade Secret information for improper use, and/or to contact Mahamedi’s clients and/or solicit business.”
The complaint also alleges a scheme by Paradice to defraud Mahamedi and the Old Firm by Paradice allegedly cancelling invoices from the Old Firm, and agreeing with those clients to re-issue these invoices through his new firm, the Paradice Firm. The complaint avers that revenues from these cancelled invoices rightfully belong to the Old Firm.
The complaint accuses Paradice of misappropriation of trade secrets under the Defend Trade Secrets Act of 2016 (DTSA), 18 U.S.C. § 1836(b)(1), which was signed into law on May 11, 2016, as well violating the California Uniform Trade Secrets Act. The complaint also alleges that Paradice’s use of his former firm’s computers to obtain trade secrets violated the Computer Fraud and Abuse Act. The complaint further alleges various state law causes of action arising from the breakup, including breach of fiduciary duty, fraud, conversion and breach of contract.
The complaint seeks preliminary and permanent injunctive relief, compensatory damages and punitive damages. A response to the complaint has yet to be filed.
Ethical Traps From Law Firm Break Ups
Law firm breakups can raise ethical issues. Indeed, there have been several ABA, state, and local bar association ethics opinions addressing the ethical obligations of lawyers when changing firms. In general these opinions address the obligations of lawyers to inform clients of their impending departure (Rule 1.4, Communication), the types of pre- and post-departure notices they can send to their clients (Rule 7.3, Direct Contact with Prospective Client), the duty to protect client interests (Rule 1.16(d), Declining or Terminating Representation), and the need to avoid conduct involving fraud, deceit, or misrepresentation (Rules 8.4, Misconduct, and 7.1, Communications Concerning a Lawyer’s Services). The USPTO’s Rules of Professional Conduct (effective May 2013) include similar rules governing the conduct of patent and trademark practitioners.
In 1999 the ABA Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 99-414, Ethical Obligations When a Lawyer Changes Firms. The committee provides the following overview of some of the key ethical issues when a lawyer leaves his law firm for another:
- disclosing the pending departure in a timely fashion to clients for whose active members the lawyer is currently responsible or plays a principal role in the current delivery of legal services;
- ensuring that the matters to be transferred with the lawyer to the new firm do not create conflicts of interest;
- protecting client files and property and ensuring that, to the extent reasonably practicable, no client matters are adversely affected as a result of her withdrawal;
- avoiding conduct involving dishonesty, fraud, deceit, or misrepresentation in connection with the withdrawal; and
- maintaining confidentiality and avoiding conflicts of interest in the new affiliation respecting client matters remaining in the client’s former firm.
The Illinois Bar warns (click here) that while claims arising from a law firm breakup are civil in nature, “they can become disciplinary matters when a lawyer decides to misappropriate fees owed to the firm, remove files from the firm without client consent, secretly remove property belonging to the firm or conduct an outside practice without the firm’s knowledge.”
Attorneys should be mindful of ethics guidance on how to avoid, or at least limit, exposure to civil and disciplinary claims when they are involved in a firm breakup. As Virginia State Bar Ethics Counsel James McCauley recently wrote (click here): “the law and ethics of lawyer mobility remain a contradictory and perplexing set of principles sorely in need of reconciliation.” By far the most significant problem is a departing partner “leaving and grabbing,” taking with him or her that which many regard as the firm’s assets—it’s clients. The increasing “free agency” of “rainmaking” partners has led to instability in law firms, leading “to the widespread abandonment of lockstep compensation systems, at least in the United States.”
Mr. McCauley states that, “Firms that want to stay viable in today’s environment need to accept and anticipate lateral movement between firms as a common and practical reality. Before preparing to leave one law firm for another, the departing lawyer should also inform herself of applicable law other than the ethics rules, including the law of fiduciaries, property and unfair competition.”
A must read for any lawyer or firm who wants to understand the ethical and legal issues arising from the law firm breakup is Professor Robert W. Hillman’s treatise, Hillman on Lawyer Mobility (Aspen Publishing). Professor Hillman’s book is recognized as the definitive work on lawyer mobility issues and is cited frequently by state and federal courts.