Dentons does everything in an outsized way. And while the steady stream of news it creates often involves an acquisition, this time it’s a lawsuit. The firm and two of its partners are Defendants in a recently filed legal malpractice action. (RevoLaze LLP vs. Dentons US LLP et al., case number CV 16861410, in the Court of Common Pleas, Cuyahoga County, Ohio). It’s a case that is being watched closely in the legal industry because its outcome could have far-reaching ramifications for the Swiss verein structure that has helped fuel the expansion of Dentons and other mega firms including DLA Piper and Hogan Lovells.
Conflict, Disqualification, and Malpractice
Former Dentons client RevoLaze, LLC, filed its multi-million dollar Complaint alleging legal malpractice emanating from a conflict of interest in a patent case. Plaintiff maintains that the firm and two of its partners failed to disclose a conflict of interest that unleashed a chain of events including the disqualification of Dentons, Plaintiff’s retention of new counsel under less than ideal circumstances, and the settlement of an underlying case for far less than it was worth — all allegedly resulting from the Dentons conflict.
The 37- page Complaint (with multiple exhibits) reads like a post trial brief and lays out the case against Dentons in excruciating detail. It also essentially puts the firm’s Swiss verein structure under the microscope, exposing the inconsistency of the global brand with its financially and legally independent member firms. It is this facet of the case that has many eyeballs and pocketbooks around the world in rapt attention.
A Brief Prehistory of the Lawsuit
The story arises out of the Dentons representation of RevoLaze, LLC and Technolines, LLC in a patent infringement case against Gap, Inc. and several other defendants. Dentons – and its predecessors – had represented Gap in a significant number of matters over the course of more than two decades. Gap was also an active Dentons client when the firm initiated the subject litigation against it, and one of those Gap matters – involving the Dentons Canada representation of Gap— is alleged to have afforded Dentons US access to confidential and privileged information to Gap’s detriment.
This sounds like a serious potential conflict situation; the procedural predicate in the disqualification motion filed by Gap gets worse. Gap alleged that: (1) Dentons did not inform it of the conflict prior to initiating the adverse representation; (2) nor did it seek a waiver; (3) Dentons had a funding agreement with a litigation finance company to whom it had disclosed the conflict it declined to disclose to Gap; (4) Dentons entered into a partial contingency fee arrangement with Revolaze which gave the firm a heightened economic interest to maintain its position as trial counsel as well as a heightened financial incentive to resist withdrawal; and (5) Gap had negotiated with Dentons for several weeks to seek the firm’s voluntary withdrawal–which Dentons declined to do.
It is against this background that Charles E. Bullock, Chief Adminstrative Law Judge of the United States International Trade Commission, rendered his decision on Gap’s Motion to Disqualify Dentons from the Gap patent case. (In the Matter of Certain Abraded Denim Garments, case number 337-TA-930, at the U.S. International Trade Commission). Judge Bullock ruled that Dentons should be disqualified. In so doing, he not only considered the procedural history above, but he also rejected the Dentons contention that as a Swiss verein, the representation of Revolaze against Gap by its US member firm immunized it from conflict and access to Gap’s proprietary data resulting from the Dentons Canada representation of Gap.
Judge Bullock, citing the ABA Model Rules – and particularly Rule 1 related to law firms as well as Rule 1.7 dealing with Conflict of Interest with Current Clients – determined that the Swiss verein structure did not shield Dentons from the Rules. The Judge reasoned that Dentons held itself out as an integrated firm and, so, could not “have it both ways” by marketing itself as a single firm for one purpose while simultaneously invoking the juridical separateness of its member firms to circumvent a conflict.
Translation: “If you represent yourself to the public as Dentons, then you will be held accountable as Dentons whether you have a Swiss verein structure or not.”
Dentons has appealed the ITC disqualification. Last month, the ITC for the second time put off a decision on a review of the Order, setting a new deadline of April 26th.
The Larger Issue and Its Repercussions
Dentons has channeled the global strategy pioneered by the large accounting firms (formerly known as “The Big Eight” and now as the “Big Four”). The Big Four are Swiss verein networks, meaning that when a client contracts with a member (as with Dentons and law firm vereins), it is in privity with the individual member firm. Each member firm has its own P&L and retains more than a modicum of independence from the global brand. And while they are also a consideration for the Big Four, the conflict rules tend to be more stringent for lawyers than accountants. The Swiss verein structure has subtle differences as applied to different professional service groups as well as to the member agreements within them. This issue will no doubt take center stage if Dentons loses its appeal and other Swiss verein law firms look for cover.
Dentons and other law firm vereins have grown quickly in large part due to their structure and management’s global vision. As with all large law firms, conflicts are an endemic challenge. But until now, there was an underlying assumption — if not hope–that the verein structure would enable them to circumnavigate many conflicts because of the “separateness” of their member entities.
The Dentons disqualification opinion and subsequent malpractice action emanating from it has shed a harsh light on the issue. And if the Swiss verein structure’s conflict avoidance component is penetrated, the mega firms that operate under them will have to consider a “Plan B.”
The Difference Between Independent Law Firm Networks and Swiss Vereins
Law firm networks are a potent force in the marketplace. At the same time, they are often overlooked, if not misunderstood. Part of the confusion is because there are different types of legal networks, and that is a distinction thrown into high relief by the Dentons case.
Let’s start with independent law firm networks. These are groups of independent law firms that work together on an ad hoc basis, and, to a greater or lesser degree, leverage their firm brand by identifying themselves as a network member. There are approximately 170 such legal networks operating around the world, and collectively their members are responsible for approximately 25% of all law firm revenue. The largest such network, Lex Mundi, has approximately 23,000 lawyer members and well over one hundred law firms around the globe — about three times as many lawyers as Dentons has. And Lex Mundi’s aggregate revenues (Dentons combines all its members’ revenue) are many times that of the single-branded mega firms.
While there are many advantages to the Swiss verein single brand, conflicts are a huge counterweight. And though its true that the larger any law firm becomes conflicts will become a key challenge, it’s easier to resolve many of them in a unified organization than one where member firms each maintain their own P&L. Translation: money talks, and if the Swiss verein structure does not shield firms from conflicts between its members, its going to be a huge problem going forward.
If immunization from conflicts such as occurred in the Dentons case is lost, it could ultimately cause the goliath Swiss verein firms to split into multi-branded, independently named firms that are part of what was once the unified network. Or, of course, they could be broken up in other ways.
The Dentons case is a really big deal. One is left to wonder how and why Dentons let the matter get so far out of hand. The firm had multiple opportunities to address the conflict issue and to walk away relatively unscathed. That they elected not to speaks either to a lack of management oversight; a potentially disastrous reliance upon the Swiss verein structure as a shield for clear conflicts; hubris; and/or money.
Swiss verein law firms – and their clients – are no doubt reevaluating the merits of a structure that has fueled growth but has significantly increased the potential for catastrophic conflicts. In a buyer’s market where client-centricity is (and should be) paramount, this is another big challenge for mega firms and a reason for clients to think twice before retaining them.