May 2008

Delaware Decision Exercises Jurisdiction Over Out-of-State Law Firm

By Garth T. Yearick, Litigation News Associate Editor

A “coast-to-coast” platform may have unforeseen ramifications

Many law firms outside of Delaware represent one or more of the hundreds of thousands of corporations incorporated in that state. Few attorneys, however, would think that their actions in representing those entities might bring them and their firms within the jurisdictional reach of Delaware courts.

In Sample v. Morgan, a Delaware chancery court ruled that an out-of-state law firm, and a partner within the firm, could be sued in a shareholder derivative class action—pending in Delaware—for allegedly aiding and abetting top managers of a corporation in breaching their fiduciary duties. The aiding and abetting claims were primarily based on advice given and actions taken by the law firm in representing a publicly held corporation that was incorporated in Delaware but based in Ohio.

In its decision, the court focused on an amendment to the certificate of incorporation that it found had been conceived of, prepared by, and filed in Delaware under the supervision of the out-of-state firm. The court stated that the amendment was integral to the scheme alleged by the plaintiffs and that the firm had assisted in directing the defense of the underlying lawsuit even before it was named as a defendant.

The court, however, focused at length on the firm’s promotional materials, which included a website touting its “coast-to-coast platform” and its ability, as the court put it, “to handle the full range of any corporation’s legal needs, regardless of its location in the United States.” It ruled that in light of the firm’s “self-proclaimed national reach,” the firm was in a “graceless position to claim to be constitutionally aggrieved by an exercise of jurisdiction” by the Delaware court in a case in which the allegations rested on “actions in providing Delaware law advice to a Delaware corporation.”

Erica L. Calderas, Cleveland, cochair of the Section of Litigation’s Pretrial Practice and Discovery Committee, describes the case as an “aggressive decision” and believes it is a “cautionary tale to all corporate advisors who counsel Delaware corporations.” Calderas notes that the “only pre-suit connection to Delaware is that the law firm, on behalf of and pursuant to the instructions of the corporation, filed a certificate amendment in Delaware.” She adds, “This simple act was enough to subject the law firm to the jurisdiction of the Delaware court.”

Paul M. Koning, Dallas, cochair of the Section’s Professional Liability Litigation Committee, says the decision “has raised eyebrows because the court’s comments could be quoted out of context.” Koning, however, does not believe that the opinion should be read to say that just advertising as a nationwide law firm or giving advice on the law of a different state subjects lawyers to jurisdiction in that state. Instead, he sees the filing of the certificate amendment as the linchpin of the court’s decision. “There has got to be something more. A finding of personal jurisdiction is not surprising when there is a direct link between what the plaintiffs are complaining about and specific conduct by the law firm that was directed to the State of Delaware.”

“The legal world is getting smaller every day both in the way law firms reach out to prospective clients and in the way law firms represent those clients,” says Lamont A. Jefferson, San Antonio, TX, cochair of the Section’s Commercial and Business Litigation Committee.  “Law firms have instant communications nationwide and national advertising at the click of a mouse.”

While he acknowledges that it is hard to divorce the facts of this particular case from the result, Jefferson believes the decision is fair and should serve as a “clarion call” for law firms with nationwide practices to recognize that they have to be ready to bear the responsibility for the broadened scope of their practice. “A nationwide practice has tremendous benefits but along with those comes the possibility of increased costs, and this case is a great example of that.”

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