The 2003 Levit Essay Contest Winner
Submitted by David G. Yee
Ira Inventor filed this action against venture capitalists, Coldspring & Robem, the law firm of Crawford & Shaw (C & S), and its partner Barrett Dixon. Inventor alleged legal malpractice against C & S and Dixon, and the jury rendered a verdict in his favor. C & S and Dixon appeal the trial court's denial of their motion for judgment n.o.v. We conclude that, in the interest of justice, the judgment of the trial court should be vacated and the case remanded for a new trial.
FACTS
Inventor hired C & S and Dixon (collectively, "lawyers") to help his business, GPS, Inc. Inventor had created an electronic global positioning system. He needed capital to fund further research and development, create a prototype, and market the invention. And he sought protection for his intellectual property through domestic and foreign patents.
Inventor began negotiations for funding from Coldspring & Robem. The negotiations became lengthy and contentious, and the relationship between Inventor and Coldspring & Robem became sufficiently volatile. Consequently, Inventor turned all negotiations over to Dixon. During this period of approximately six months, Dixon did not file patent applications for Inventor's technology.
Inventor gave Dixon instructions on the minimum terms he would accept and told Dixon to bring the transaction to a conclusion within two weeks or to break off further discussions. Eventually, the parties reached a deal whereby Inventor would assign all rights to his invention to GPS and he would enter into employment and non-competition agreements with GPS. GPS then borrowed money from Coldspring & Robem in the form of debentures with attached warrants to build a prototype and to commence marketing efforts. Dixon, meanwhile, filed patent application for the invention on behalf of GPS.
Relations between Inventor and Coldspring & Robem did not improve under the new employment agreement. Coldspring & Robem exercised and converted its warrants. It then became the majority of the board of directors and fired Inventor.
Shortly thereafter, On Target Systems, Inc. ("OTS") filed a patent infringement and unfair competition suit against GPS, claiming that it had filed its patent application two months before GPS. The OTS device was similar in concept to Inventor's creation, but had a more cumbersome user interface. Coldspring & Robem nonetheless caused GPS to sell its prototype and all of GPS's patent rights, if any, to OTS. OTS recently contracted to install the electronic devices-based on Inventor's technology and superior user interface-in all General Motors' vehicles worldwide. GPS was liquidated in Chapter 7 bankruptcy.
Inventor brought suit against Coldspring & Robem and the lawyers. During the jury trial, Inventor presented over the lawyers' objections, an expert who testified concerning the contractual provisions he believed the lawyers should have obtained for Inventor and the damages resulting from the failure to do so. The jury returned a verdict against the lawyers, who then moved for judgment n.o.v. The trial court denied the motion.
DISCUSSION
Standard of Review
We review de novo a trial court's denial of a motion for judgment n.o.v. 9 James Wm. Moore et al., Moore's Federal Practice § 50.92[1] (3d ed. 2002). In so doing, we are bound to consider all the evidence and all reasonable inferences in the light most favorable to the party who secured the jury verdict. Id. We will not, however, intrude upon the province of the jury by weighing conflicting evidence or by determining the relative credibility of witnesses. See Fed. R. Civ. P. 50 advisory committee's note (1991 amend., subdivision (a)). If reasonable minds could differ as to the conclusion to be drawn from the evidence under the applicable law, then a court must deny the motion for judgment n.o.v. Moore et al., supra, § 50.60[3]. Conversely, the motion should be granted if "there is no legally sufficient evidentiary basis . . . with respect to a claim or defense . . . under the controlling law . . . ." Fed. R. Civ. P. 50(a)(1); see also Moore et al., supra, § 50.60[1].
The lawyers claim the trial court erred in denying their motion for judgment n.o.v. In particular, they claim that Inventor had the burden of proving (1) the attorney owed a duty of care to the plaintiff, (2) the attorney failed to exercise care or conform to the standard required by law, and (3) that failure is the proximate cause of the injury. Restatement (Third) of the Law Governing Lawyers §§ 48, 53 (2000). The lawyers claim the evidence at trial was insufficient to establish proximate causation when Inventor was required to prove their "case within a case."
These claims raise a novel issue regarding the standard of proof of causation for transactional malpractice. In contrast, for a malpractice action involving litigation errors, we require the plaintiff to recreate the underlying litigation and present evidence that would have been offered but for the attorney's negligence. Thus, the plaintiff of the malpractice action is often compelled to prove the equivalent of two cases in a single proceeding or what has been referred to as a "case within a case." The jury of the malpractice action decides what a reasonable jury would have concluded in the underlying case. The ultimate goal of this methodology is to avoid speculation by determining what the outcome should have been if the issue had been properly presented in the first instance.
Whether the case-within-a-case methodology is required for transactional malpractice cases-such as the case before us-is an issue we have never addressed. Accordingly, we resort to authorities in other jurisdictions for guidance.
Transactional Malpractice and Proof of Causation
The Honorable Richard A. Posner, Chief Judge of the United States Court of Appeals for the Seventh Circuit, once commented:Proof of causation is often difficult in legal malpractice cases involving representation in litigation-the vast majority of such cases-because it is so difficult, yet vital, to estimate what difference a lawyer's negligence made in the actual outcome of a trial or other adversary proceeding. . . . Proof of causation is even more difficult in a negotiating situation, because while there is (at least we judges like to think there is) a correct outcome to most lawsuits, there is no "correct" outcome to a negotiation. Not only does much depend on the relative bargaining skills of the negotiators, on the likely consequences to each party if the negotiations fall through, and on luck, so that the element of the intangible and the unpredictable looms large; but there is no single "right" outcome in a bargaining situation even in principle. Every point within the range bounded by the lowest offer that one party will accept and the highest offer that the other party will make is a possible transaction or settlement point, and none of these points is "correct" or "incorrect."
Nicolet Instrument Corp. v. Lindquist & Vennum, 34 F.3d 453, 455 (7th Cir. 1994) (citations omitted).
Two California cases went one step further and held that the case-within-a-case methodology was not required for "transactional malpractice." California State Auto. Ass'n Bureau v. Parichan, Renberg, Crossman & Harvey, 101 Cal. Rptr. 2d 72 (Cal. Ct. App. 2000) (hereinafter "CSAA"), and Viner v. Sweet, 112 Cal. Rptr. 2d 426 (Cal. Ct. App. 2001) ( depublished), review granted, 36 P.3d 627 (2001). While conceding the suitability of this methodology for malpractice claims involving litigation errors, the court in CSAA concluded that "in other contexts, most often involving business transactions, causation and damages may be more simply established under rules applicable to all negligence claims and the case-within-a-case procedure is not utilized." 101 Cal. Rptr. 2d at 78.
In Viner, the California Court of Appeal echoed this conclusion under facts similar to those in the present case. The Viners founded Dove Audio, Inc. They hired attorneys to negotiate agreements to terminate their employment with Dove and to sell a substantial portion of their stock in Dove to Media Equities International. After these agreements were executed, the Viners filed suit against their attorneys, claiming that such agreements were deficient. At trial, the Viners presented the testimony of an expert over the attorneys' objections. The jury returned a verdict in favor of the Viners. The attorneys then filed a motion for judgment n.o.v., which was denied. Upon appeal, the attorneys argued that, under the case-within-a-case methodology, the Viners were required to, but did not, prove Dove would have given them a "better deal" than it did, but for the attorneys' negligence.
In rejecting the attorneys' argument, the court in Viner noted that a business deal, unlike litigation, is not a zero-sum game with a clear winner and a clear loser. Viner v. Sweet, 112 Cal. Rptr. 2d at 435. "The terms of the contract are interdependent . . . . If one party gives on one contract term the other party may well give on another. Thus, it is difficult if not impossible to conclude a party could not have obtained a 'better deal' from the other party . . . ." Id. at 436.
We adopt the reasoning of Nicolet, CSAA, and Viner. The differences between a negotiated business deal and litigation warrant a different standard of proof of causation for transactional malpractice. We thus hold that ordinary principles of causation may apply to such cases and that the client need only show the attorney's negligence was a substantial factor to the client's injury.
The dissent criticizes our holding, citing Hazel & Thomas, P.C. v. Yavari, 465 S.E.2d 812 (Va. 1996) and cases such as Szurovy v. Olderman, 530 S.E.2d 783 (Ga. Ct. App. 2000), cert. denied, No. S00C1369, 2000 Ga. LEXIS 752 (Ga. Oct. 6, 2000), and Marshak v. Ballesteros, 86 Cal. Rptr. 2d 1 (Cal. Ct. App. 1999). The criticism centers on the dissent's concern that speculation and conjecture will abound by not requiring "but for" causation. In other words, while clients complain about terms they wanted but did not get, there is no requirement of showing that the other party to the negotiation would have accepted the clients' desired terms. And while clients complain about terms they got but did not want, they are not required to contend with the likelihood that the other party would not have entered into the agreement without the undesired terms. Absent these requirements, the dissent predicts, attorneys will become guarantors of the negotiated business transaction, and a parade of horribles will follow. See 1 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 8.5 (5th ed. 2000). We disagree.
Requiring "but for" causation for transactional malpractice is appealing in the abstract, but untenable in reality. To show "but for" causation, an aggrieved client could only rely upon documents maintained or exchanged during the negotiation process. They could be documents maintained by the other party to the negotiation or documents exchanged between the attorney and the other party or between the attorney and the client, so long as they are contemporaneous to or prior to the negotiated business deal. Anything after the fact would prove unreliable, unhelpful, and possibly biased. This is especially true of testimony by the other party-Coldspring & Robem in this case-as to what it would have accepted or not accepted in hindsight. n the present case, Coldspring & Robem is a named defendant, and its relationship with Inventor became sufficiently volatile during and after the lengthy and contentious negotiations.
Even if Coldspring & Robem were not in an adversarial position, Hazel & Thomas illustrates the unreliability of Coldspring & Robem's testimony. In Hazel & Thomas, a case cited by the dissent, the client failed to introduce sufficient evidence that his former attorneys' purported negligence was a proximate cause of his loss. 465 S.E.2d at 815. To show causation, the client offered the following testimony of the other party to the negotiation:Q: . . . . Back in February and early March, before the Purchase Agreement was signed, if Mr. Yavari's lawyers had requested at that time of you inclusion of a nondisturbance provision in the contract, would you have granted it?A: I don't know. It's problematic, but I certainly would have found a way to make the deal happen.
This testimony was nevertheless discounted in favor of testimony from the same party that he did not grant a nondisturbance provision shortly after the agreement was signed. Id.
While the aggrieved client cannot rely upon the testimony from the other party to the negotiation, it may also suffer from the potential problem that documentary evidence contemporaneous to the negotiation process is minimal or not dispositive regarding causation. If that is the case, the jury of the malpractice action is left to speculate over what terms a reasonable person sitting at the negotiation table would have accepted or rejected. The reason for this speculation is that the case-within-a-case methodology does not account for the reality that terms of a business deal are not accepted in isolation. A term desired by the client may be accepted if enough concessions are made to another term or set of terms. The questions then become what amount of concessions would be enough and would a reasonable person in the client's position be willing to concede that amount. These questions, in the context of transactional malpractice, present a Gordian knot. Unlike the legal malpractice claim involving litigation errors, the jury of the transactional malpractice action cannot simply step into the shoes of a reasonable jury of the underlying action. The case-within-a-case methodology thus would not serve as an apotropaion for speculation and conjecture for a negotiated business deal.
And unlike the dissent, we are not enamored with Szurovy and Marshak for two reasons. First, we note that the growing majority of cases disagree with Szurovy and Marshak and do not require "but for" causation for legal malpractice claims with similar facts. See, e.g., Thomas v. Bethea, 718 A.2d 1187, 1195 (Md. 1998). Second, these two cases are distinguishable, for they involve "settler's remorse." That is, the client settles an underlying action rather than proceed to trial, but at a later date, is unhappy with the settlement and sues the attorney for legal malpractice. As such, cases like Szurovy and Marshak permit a basis of comparison between the negotiated settlement and the outcome of the averted trial. The outcome can be decided by the jury of the malpractice action, who can comfortably fulfill the role of what a reasonable jury would have decided in the underlying action. In contrast, there is no valid basis of comparison with the negotiated business deal.
The dissent opines otherwise, suggesting that the business deal may be compared with a reenacted outcome of the OTS action against GPS. We do not share the dissent's opinion. The issue in this case is whether the lawyers were negligent in negotiating the employment and non-competition agreements and not whether they were negligent in handling the OTS action for patent infringement and unfair competition. See Estate of Campbell v. Chaney, 485 N.W.2d 421, 425 (Wis. Ct. App. 1992). And reenacting the OTS litigation will not serve as a bulwark against speculative claims regarding damages. The record below is clear that GPS sold its prototype and all of its patent rights to OTS and that OTS recently contracted to install the electronic devices based on Inventor's invention in all General Motors' vehicles worldwide. The sale price for the prototype and the value of the OTS contract are not speculative.
Nor do we share the dissent's concern that not requiring the case-within-a-case methodology will summon up a parade of horribles. In Thomas, 718 A.2d at 1195, the court noted:
Lawyers, like doctors and other professionals, are often called upon to make judgment calls with which their colleagues may disagree. Those calls, if challenged, can be examined in the light of traditional standard applicable to professional negligence. That is the standard applied by courts in other States, and we are aware of no indication that its application has caused any significant problem.
An aggrieved client will still have to prove that the attorneys breached the standard of professional care in negotiating the business deal. See Estate of Campbell, 485 N.W.2d at 425. We harbor no doubt that, despite our holding in this case, attorneys will continue to negotiate business deals in a manner consistent with their professional and ethical responsibilities. See Grayson v. Wofsey, Rosen, Kweskin & Kuriansky, 646 A.2d 195, 200-01 (Conn. 1994).
To allay the dissent's concerns, however, we shift the burden of proof on the issue of causation to the lawyers. We have done so in cases where demanded by public policy considerations. Where, as here, the attorney is in the best position to preserve documents related to the negotiated business deal, it is more appropriate to hold liable the attorney who breached the standard of care than to deny recovery to an aggrieved client, unless the attorney can prove that his or her negligence was not a cause of the injury. Here, the lawyers contend that they structured the transaction in accordance with Inventor's instructions and that Coldspring & Robem would not have given Inventor a better deal. Proof of either contention by the lawyers will serve as an affirmative defense. And to the extent that Inventor claims he would have filed and received a patent ahead of OTS, the lawyers may reenact the OTS action to determine whether there was patent infringement. A negative determination will render Inventor's claim moot.
Judgment N.O.V.
Under this controlling law, we find that the evidence at trial was sufficient to establish proximate causation. Inventor an expert who testified concerning the contractual provisions he believed the lawyers should have obtained for Inventor and the damages resulting from the failure to do so. The lawyers had the opportunity to cross-examine Inventor's expert. Moreover, they could have, but did not offer their own expert to refute the testimony of Inventor's expert. But because we now permit the defendants new affirmative defenses, the interest of justice dictates that we vacate the judgment and remand the case for a new trial under appropriate instructions. See Peterman v. Chicago, Rock Island & Pac. R.R. Co., 516 F.2d 328 (8th Cir. 1975), cert. denied, 423 U.S. 869 (1975).
