Metropolitan News-Enterprise


Thursday, December 3, 2009


Page 1


Legal Malpractice Suit Not SLAPP, Appeals Court Rules




The anti-SLAPP statute does not protect a law firm from being sued for malpractice based on activities it performed on behalf of the client who later sued it, the Sixth District Court of Appeal ruled yesterday.

“[C]lients do not bring such lawsuits to deter the speech and petitioning activities done by their own attorneys on their behalf but rather to complain about the quality of their former attorneys’ performance,” Justice Franklin Elia wrote for the court.

The justices reversed a Santa Clara Superior Court judge’s ruling and revived a suit against Simpson Thacher & Bartlett LLP and Alexis Coll-Very, a litigation partner in the firm’s Palo Alto office.

PrediWave Corporation alleges that Simpson Thacher had an irreconcilable conflict of interest when it represented both the corporation and its founder and chief executive officer, Jianping “Tony” Qu, between May 2004 and June 2005, when the firm withdrew as counsel for all involved after billing more than $10 million in fees.

During that time, PrediWave alleges, the firm breached its fiduciary duties to PrediWave and aided Qu in resisting efforts by New World TMT Limited—a technology company and part of a Hong Kong conglomerate—to discover that Qu was committing fraud.

New World allegedly agreed to spend more than $700 million to purchase all of the preferred shares of PrediWave and related companies and to purchase video-on-demand set-top boxes manufactured by PrediWave with related hardware and software. As part of the agreement, New World received two seats on PrediWave’s board.

According to PrediWave’s complaint against Simpson Thacher, the outside directors tried to investigate allegations that Qu was diverting millions of dollars from the company but were stifled by the law firm, which sued to block the directors’ access to the company’s books, “stonewalled discovery,” and “facilitated Qu’s continued fraud and theft of PrediWave assets” by filing repeated motions, both in the suit against the directors and in a fraud/breach of fiduciary duties action that New World brought against PrediWave and Qu.

The set-top boxes turned out to be defective, and PrediWave filed for bankruptcy protection. New World, after obtaining leave of the bankruptcy judge to pursue its claims, obtained a judgment of more than $2.8 billion, including $2 billion in punitive damages.

The looting of the company could have been prevented, PrediWave alleges, if the lawyers had advised the directors of the conflict between their interests and Qu’s, recommended an independent investigation of the allegations against Qu, and established an independent audit committee, among other things.

 In granting the firm’s anti-SLAPP motion, Judge Joseph Huber ruled that the claims were “based in significant part upon protected petitioning activities” and that the company could not prevail because the suit, filed three years after the law firm withdrew, was untimely.

But Elia, writing for the appellate court, said that the lawyers could not use the anti-SLAPP statute to strike a complaint based on free-speech activities in which they engaged as the plaintiff’s representatives.

The court rejected the trial judge’s conclusion that Peregrine Funding, Inc. v. Sheppard Mullin Richter & Hampton LLP (2005) 133 Cal.App.4th 658—which held that claims by victims of a Ponzi scheme against a law firm, for professional malpractice and abetting a breach of fiduciary duty, arose from protected activity within the meaning of the anti-SLAPP statute—controls.

The justice explained:

“In determining the applicability of the anti-SLAPP statute, we think a distinction must be drawn between (1) clients’ causes of action against attorneys based upon the attorneys’ acts on behalf of those clients, (2) clients’ causes of action against attorneys based upon statements or conduct solely on behalf of different clients, and (3) non-clients’ causes of action against attorneys.”

The statute, Elia noted, applies only when the protected activity arises out of “any act of that person”—the defendant—“in furtherance of the person’s [constitutional] right of petition or free connection with a public issue.”

Treating the attorney’s actions in the first type of case as protected activity “unreasonably expands the language beyond the clear legislative purpose and leads to absurd results,” Elia said, adding that Peregine was wrongly decided to the extent it holds otherwise.

Jeremy B. Rosen of Horvitz & Levy argued the appeal for PrediWave and Bradley S. Phillips of Munger Tolles & Olson argued for Simpson Thacher.

The case is PrediWave Corporation v. Simpson Thacher & Barlett LLP, H03342.


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