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Staying Out of Court While Staying in Business

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Staying Out of Court While Staying in Business

Postby Pinskylaw.ca » 11 Jan 2014, 15:54

Given the current state of economy, there is an alarming tendency among lawyers, who are often general practitioners, to take on business and intellectual property files even if they do not practice business and intellectual property law. This kind of unwise conduct often leads to a disaster as far as corporate organization and protection of the client's rights are concerned. Last year we had to bring several court actions on behalf of our clients against their former business partners and their former legal counsel. This post addresses the issues that have to be addressed to ensure that everyone is staying out of court while staying in business.

1. Introduction

Lawyer malpractice claims may be based upon both tort and contract. In the context of intellectual property, the activities which may form the basis of a malpractice claim may be governed by both provincial malpractice laws and the Rules of the Patent and Trademark Office (PTO). The plaintiff in these cases must prove its claim by a preponderance of the evidence.

2. Existence of a client-lawyer relationship

A fundamental requirement for showing legal malpractice is that a lawyer-client relationship existed. There are no particular formalities required to form a lawyer-client relationship. Stripped down to its bare essentials, a lawyer-client relationship may exist where an individual or entity believes that a lawyer is representing the individual or entity, and that belief is reasonable. Various factors may be considered in determining whether a lawyer-client
relationship exists, including:

1. The existence of a fee arrangement;
2. Payment of a fee;
3. The existence of a retainer agreement or other written contract;
4. Actual performance of legal services;
5. The belief of the client that the lawyer is representing him;
6. Treatment of the plaintiff as a client internally by the law firm; and
7. Instructions by the plaintiff to the lawyer on legal matters.

Some courts allow a lawyer-client relationship to be implied where

1. A person seeks advice or assistance from a lawyer;
2. Pertaining to matters within the lawyer's professional competence; and
3. The lawyer expressly or impliedly agrees to give or actually gives the desired advice or assistance.

The existence of a lawyer-client relationship, and its termination, are questions of fact. Termination of the lawyer-client relationship may result solely from the client's actions, without the necessity of any corresponding actions on the part of the lawyer. In general, either the lawyer or the client may terminate the relationship, but in any event the terminating act should be clear and unambiguous to avoid having the issue to proceed to a court action.

3. Breach of fiduciary duty

The scope of a lawyer's fiduciary duty is a matter of law, but whether that duty has been breached is primarily a question of fact. Under the law of some provinces, an action for breach of fiduciary duty is separate from a cause of action for professional negligence. Typical elements of this action are:

1. The existence of a fiduciary duty;
2. Breach of the duty; and
3. Damage proximately caused by the breach.

The fiduciary duty itself is usually defined by the applicable ethical rules of the jurisdiction. In general, a lawyer has a duty of undivided loyalty to the client, a duty to preserve the client's confidences, and a duty to disclose to the client any material matters relating to the representation. A conflict of interest, for example, may be the basis for a breach of fiduciary duty claim. A lawyer may owe a fiduciary duty to a non-client if the lawyer has or should have reason to believe the non-client is relying on the lawyer. In some provinces, the execution of a power of attorney creates a fiduciary relationship.

4. Negligence

Some provinces have causes of action for negligence, independent of any specific tort. The elements of such a claim include:
1. A duty of reasonable care owed by the defendant to the plaintiff;
2. A breach of that duty by the defendant;
3. Damages, and
4. A causal relationship between the breach and the damage.

5. Standard of care

Although different provinces have different formulations, the standard of care a lawyer must meet to avoid malpractice usually requires that the lawyer exercise such skill, prudence, diligence, and knowledge as that commonly possessed by lawyers acting in similar circumstances. Whether a lawyer has met the required standard of care is a question of fact. Some courts require expert testimony both as to standard of care and as to whether that standard of care was met. If the conduct required by the circumstances is within the knowledge of laymen, however, expert testimony is not required. For example, determining whether a lawyer's opinion on the availability
of foreign patent protection was correct has been held to be outside the knowledge of laymen, so that expert testimony is required. Expert testimony on the standard of care should not be merely conclusory but rather should be based on the facts of the case and how the relevant standard applies to those facts.

6. Damages

Actual damage is an important element of most legal malpractice claims. Such damage must be real, rather than nominal, speculative, or threatened. The possibility of future damages is insufficient. Speculative damages are not those which are uncertain in amount, but rather those where the mere existence of damages is uncertain. The amount of damages must be supported by evidence from which the damages can be calculated on a reasonable or rational basis. A failure of proof of damage can result in a finding of no malpractice, even where a breach of duty has clearly occurred. Legal expenses may constitute malpractice damages, but some provinces have limitations on these damages. The theory behind this rule is that if the plaintiff prevails in the underlying action, any lawyer's fees incurred would be the result, not of malpractice, but of the fact of being sued by a third party. Some provinces also have prohibitions against punitive damages in legal malpractice cases.

7. Causation

Most malpractice statutes require the plaintiff to prove that the asserted harm resulted from the alleged malpractice, which is called “proximate cause.” There are several aspects of proximate cause. At a minimum proximate cause in most provinces requires that the plaintiff show that without the negligent action the injury would not have occurred - commonly referred to as the “but for” rule. Proximate cause usually also requires that the injury be a natural and probable result of the negligence. It is sometimes stated that proximate cause requires that the action complained of be a “substantial factor” in causing the injury. Some provinces also include the requirement that there be no substantial intervening cause.

8. Evidence

Some courts require expert testimony in a legal malpractice case to establish that the standard of care was violated, unless the violation was so apparent that a layperson would have no difficulty recognizing it. For example, whether failure to obtain a broader patent constitutes malpractice involves many complicated factual and legal issues which usually require an expert report. Mere experience in patent law, however, does not necessarily qualify one as an expert on the standard of care applicable to patent lawyers. Expert testimony is also necessary to establish causation in a legal malpractice action unless the cause of the injury would be obvious to a layperson. An expert report on behalf of the plaintiff that fails to address obviousness is fatally deficient where the patentee/plaintiff alleged in its complaint for malpractice that broader claims should have been obtained (and obviousness was at issue in the prosecution of the patent claims that did issue).
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