Hinshaw reports this months old case about legal fee disgorgement.  We reported on it about a month ago.  Wilson Elser, a big defense firm which handles legal malpractice defense cases, unsuccessfully defended itself on this case.

"Ulico Casualty Company (“Ulico”) is an insurer that specializes in trustee and fiduciary liability insurance. In the early 1980s Ulico entered into managing general agency agreements with Professional Indemnity Agency, Inc. and Professional Intermediary Associates, Inc. (collectively “PIA”) for PIA to serve as its underwriting agent for this book of business. As part of this agreement, the Wilson, Elser, Moskowitz, Edelman & Dicker firm would serve as claims attorneys to handle claims for coverage made by Ulico insureds, as well as provide general claims handling and oversight. The retainer in effect at the time of this controversy provided that “Wilson, Elser shall devote all the time necessary to the business of the Company, but shall not by this retainer be prevented or barred from taking other employment of a similar or other legal character by reason of the employment herein specified.” Id. at 2.

Subsequently, PIA became concerned about Ulico’s declining Best rating and business practices. PIA decided to enter an agreement to place the business with Legion Insurance Company (“Legion”). PIA hoped to move 50 percent to 75 percent of the business from Ulico to Legion. Id. at 3. Wilson, Elser advised PIA that its managing general agency agreement with Ulico was not exclusive and drafted a managing general agency agreement for use by PIA and Legion. Wilson, Elser also prepared filings necessary to obtain regulatory approvals from the state insurance departments for Legion to provide the insurance. The filings included an endorsement to permit Legion to offer more favorable coverage than Ulico and enhance Legion’s competitive position. Id. at 4. Wilson, Elser also offered advice to PIA about strategy regarding the termination of its relationship with Ulico. The court noted it was “undisputed” that in four instances, Wilson, Elser engaged in dual representation of Legion and Ulico on claims by insureds for coverage when both companies had policies that could apply. Id. at 5.

After terminating its relationship with both PIA and Wilson, Elser, Ulico filed suit against Wilson, Elser claiming breach of fiduciary duty, aiding and abetting PIA’s breach of fiduciary duty, legal malpractice, tortious interference with contract and tortious interference with prospective economic advantage. Id. at 6. Ulico moved for summary judgment on the issue of breach of fiduciary duty and for an order that Wilson, Elser return legal fees it received during the period of alleged disloyalty. Id. at 1.

The court noted that “the conflict of interest on which the fiduciary duty claim is premised did not affect Wilson Elser’s representation of Ulico in any litigation, but consisted, rather, in advancing the business interests of certain clients, PIA and Legion, to the detriment of another client, Ulico.” Id. at 10. The court found this situation presented an “egregious” breach of fiduciary duty because the attorney “fostered the business interests and advanced the competitive position of certain clients not over a former client but over a client which the attorney still represented…The undisputed facts…demonstrate that Wilson Elser did not merely assist PIA with preliminary steps to set up a competing business, but rather assisted PIA at every stage of PIA’s plan to transfer Ulico’s TFL business from Ulico to Legion.” Id. at 12.

The fact that the parties had respective expert opinions on the issue of the breach did not create an issue of fact because the existence of the duty and its breach presented questions of law for the court. Id. at 14. The breach does not require the actual use of client confidences but only the “reasonable probability” that they will be disclosed. See Jamaica Public Serv. Co. Ltd. v. AIU Ins. Co., 92 N.Y. 2d 631 (1998). In light of the fact that Wilson, Elser had been Ulico’s claim counsel for more than 10 years, it held confidential information it had acquired from Ulico regarding insureds, premiums, rates, loss experience and profitability, which would have been very useful to Legion in competing with Ulico. Ulico at 15. The court easily rejected the argument that the retainer language about the ability to take other or similar employment allowed this conduct, as it fell far short of the complete disclosure required to obtain the client’s informed consent to this conflict of interest. Id. at 16.

Finally, the court turned to appropriate damages. The court rejected Wilson, Elser’s argument that the fees subject to forfeiture should be only those for services where there was a breach of fiduciary duty. When there is a persistent pattern of disloyalty, “the cases ordinarily order forfeiture without apportioning or limiting the forfeiture to fees for services performed with disloyalty.” Id. at 21. Because the monthly fee structure between Ulico and Wilson, Elser was “tantamount” to a salary and could not be broken down by individual tasks, the court held that the forfeiture of fees should cover all regular monthly fees paid during the period of disloyalty. Id. at 22. The court ordered further proceedings to determine whether, as Ulico contended, the amount to be disgorged equaled $3,420,612.05.

Significance of Case
As a general proposition, the representation of competing businesses vis a vis third parties is permissible without conflicts waivers. Here, as elsewhere, however, the devil is in the details. Where the matters being handled for the competing businesses are as related and the interests of the clients are as plainly adverse as this court found them to be, a critical line has been crossed. And even in the absence of actual harm to a client, one of the consequences of crossing such a line can be a forfeiture of fees "