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In case underlying e-‐discovery malpractice suit, company charges opposing lawyers with ‘embezzling’ records
By: Robert Hilson | ACEDS.org Date: Thursday, April 18, 2013
Nearly two years after its tough fight over privileged materials, the filing of the first e-‐discovery legal malpractice suit against McDermott Will & Emery, the disqualification of McDermott’s replacement firm, Sheppard Mullin, and 900 docket entries in the underlying False Claims Act federal case it is facing in Los Angeles, J-‐M Manufacturing Co. now alleges that the attorneys on the other side are guilty of serious transgressions.
J-‐M accuses the law firm, Phillips & Cohen, of instructing its client, John Hendrix, the lead plaintiff in the False Claims Act (FCA) case, to “embezzle” crucial documents from J-‐M’s offices while he was employed there. The firm is accused of acquiring the documents unlawfully “for the stated purpose of bringing this lawsuit.” J-‐M says some of the documents are protected by attorney-‐client privilege or contain trade secrets.
“We [have] learned that Mr. Hendrix and your law firm participated in an organized and extensive ransacking of J-‐M’s confidential and proprietary files…,” Marc Masters, attorney for J-‐M at Bird Marella wrote in an email to Eric Havian, lead attorney for Hendrix at Phillips & Cohen, court documents show.
J-‐M seeks to disqualify attorneys, dismiss case
Isabel Estrada, spokeswoman for J-‐M in Los Angeles, told ACEDS, “Based on new evidence…, J-‐M has filed a request for additional discovery from Hendrix and… Phillips & Cohen, relating to their alleged thefts of confidential, trade-‐secret and privileged documents and computer information in 2005….”
“J-‐M’s request for discovery, … filed under seal, seeks information that may be used to support a motion for sanctions against Hendrix and/or Philips & Cohen, including disqualification or dismissal of the entire action,” she continued.
The allegations arise from a deposition by Hendrix on January 24. J-‐M says
Hendrix testified to “knowingly misappropriating” materials and illegally providing Phillips & Cohen with more than 100 sensitive documents, including research and development reports, claims files, test reports, emails and internal memoranda.
Attorneys for Hendrix say J-‐M has known about these materials for more than two years. On April 2, Phillips & Cohen gave J-‐M 12 new documents that Hendrix held, of which Phillips & Cohen was unaware. Among them are two “potentially privileged” documents.
US district Judge George Wu has set a hearing on these issues for April 22.
‘Misappropriation’ charges increasingly common, says FCA expert
It is not uncommon for employees to take materials from their employers to buttress claims under the FCA. Whistleblowers, or “relators” as they are called in these cases, are required by the law to give all evidence they’ve obtained to the government so it may assess whether to “intervene.”
J-‐M notes that there are laws that dictate the delicate way in which this process must occur, who may see the materials, and for what purpose. Hendrix’s activities also violate non-‐disclosure and confidentiality agreements he signed, J-‐M says.
David Marshall, an attorney who specializes in representing whistleblowers at Katz, Marshall & Banks, in Washington, DC, told ACEDS that courts are increasingly siding with whistleblowers when these allegations surface.
“The shrill cry of misappropriation of confidential and proprietary documents accompanied by lawsuits and countersuits against whistleblowers who are acting in the public interest is something that plaintiffs attorneys and relators have to contend with more and more,” he says.
“The trend is for courts to protect the rights of the whistleblower,” he said, noting that confidentiality agreements do not hold weight in many investigations.
Generally, courts apply a reasonableness test to resolve allegations of misappropriated documents. Among other things, they look atwhether the whistleblower found the documents in the ordinary course of his or her duties.
‘Bet the company’ J-‐M suit includes three dozen plaintiffs
Hendrix is seeking to show that J-‐M, one of the largest manufacturers of PVC pipe in the world, knowingly sold inferior piping to state and local governments across the US and falsified test results that showed the pipe as substandard. More than three dozen state entities, cities and municipalities have joined the suit.
J-‐M has asked Judge Wu for permission to depose Hendrix and his lawyers as part of expedited discovery concerning the misappropriation allegations. It has also asked Phillips & Cohen to identify all individuals to whom it has shown the allegedly misappropriated documents. The long list of persons may include other plaintiffs, their attorneys, the US Attorney’s Office in Los Angeles, which originally investigated the FCA allegations and declined to intervene, prominent media and attorneys for plaintiffs in a related class action, J-‐M says.
On February 22, J-‐M filed under seal an ex parte application for the return or destruction of the documents.
The parties argued over privilege claims at a March 25 hearing. J-‐M’s assertion that it could not identify which documents were protected “because the obvious source of that information is Mr. Hendrix and [the Phillips & Cohen] law firm” aroused the ire of Judge Wu.
“You can’t make these types of assertions and not have done an examination of these documents. [That] would just be, to my mind, improper,” he warned.
J-‐M submitted a full list of the supposedly privileged documents on April 2.
Havian, the Phillips & Cohen attorney, in San Francisco, told ACEDS the firm does not comment on pending motions. “Those briefs are still under seal,” he said.
“J-‐M believes that by their actions, Hendrix and his counsel have abused the litigation process and tainted the evidence at issue in this… lawsuit, and that they must be held accountable for their action,” Estrada, the J-‐M spokeswoman, told ACEDS.
Hendrix attorneys call J-‐M’s allegations ‘mendacious’
Phillips & Cohen says it produced “nearly all” documents Hendrix took from J-‐
M in April 2011.
“(W)e find your letter disingenuous and mendacious,” Havian wrote in a February 7 email to Masters, the J-‐M attorney.
Phillips & Cohen is a well-‐known whistleblower firm that has participated in some of the largest False Claims Act settlements in history.
But J-‐M says the firm is not new to accusations of using allegedly “purloined” documents. In January 2012, a US judge in Arizona disqualified the firm and imposed a sanction of about $20,000 in attorneys’ fees after finding that it withheld privileged documents from the defendant, IASIS Healthcare Corp. The court found that the FCA relator had stolen thousands of documents from IASIS before he left the company.
J-‐M says the law firm’s activities are “part of a larger and deeply troubling pattern of apparent misconduct.”
FCA case gives many e-‐discovery lessons
While the FCA case careens toward a trial now set for August 13, the malpractice suit against McDermott is stalled. The parties are waiting for Judge Wu to rule on J-‐M’s September 2011 motion for the return of privileged materials it says McDermott repeatedly disclosed to the opposing parties. His decision is viewed as a key element to lay the groundwork for the damages J-‐M seeks to recover from the giant Chicago-‐based law firm. A status conference has been set for May 22.