Kaye Scholer Hit with Malpractice Suit

Suit Against Kaye Scholer Alleges Discovery Foul-ups
The New York Law Journal by Anthony Lin - June 27, 2008

Kaye Scholer has been hit with a legal malpractice suit by a former client that claims the New York law firm's discovery mistakes forced it to enter into a $107 million antitrust settlement. Dallas-based chemical and plastics giant Celanese Corp. announced June 13 it was paying that amount to resolve multi-district litigation brought in federal court in North Carolina by several textile manufacturers that had accused the company of fixing prices in the market for polyester staple fibers. Kaye Scholer had represented Celanese in the disputes from March 2002 to July 2006. In a 33-page amended complaint filed Wednesday in the U.S. District Court for the Northern District of Texas, Celanese said it only paid such a large settlement because Kaye Scholer's failure to turn over hundreds of thousands of documents to the plaintiffs had exposed Celanese to draconian trial sanctions. "The negligence and malpractice of Kaye Scholer and the consequences of that negligence caused the chances of Celanese's prevailing at trial to decrease dramatically," the company said.

Celanese originally filed its complaint in Texas state court but the suit was removed to federal court. In addition to the firm itself, Celanese also names as individual defendants Kaye Scholer partner and executive committee member Michael D. Blechman and former special counsel Robert B. Bernstein. Celanese claims it would have only paid a nuisance settlement without the threat of sanctions but for Kaye Scholer's errors. It is asking in damages the difference between that nominal amount and the $107 million it paid. A spokesman for Kaye Scholer declined comment yesterday, citing a firm policy against discussing active litigation. However, the firm filed its own lawsuit against Celanese last week, seeking alleged unpaid legal fees as well as a declaratory judgment that Kaye Scholer's work met professional standards. "There is a bona fide dispute and actual controversy among the parties concerning the extent to which Kaye Scholer's legal services to the Celanese Entities were in accordance with the standards of care ordinarily provided by professionals providing legal representation and consistent with any fiduciary duty owed to the Celanese Entities," the firm said in its complaint.

Celanese claims that it and another of its law firms, Baker Botts, advised Kayer Scholer of the existence of 20,000 boxes of documents in a facility in Hillside, N.J., possibly relating to the polyester staple fiber market. Kaye Scholer lawyers, the complaint says, were also aware of responsive documents contained in a 3,000-roll microfilm archive, as well as additional responsive documents stored in North Carolina, Virginia and Mexico. But, according to the suit, Kaye Scholer only produced 220 pages of documents in response to the antitrust plaintiffs' document requests, repeatedly representing that those were the only relevant documents in Celanese's possession. At a June 6, 2006, hearing, the judge overseeing the antitrust case, Judge Richard L. Voorhees of the U.S. District Court for the Western District of North Carolina, took Celanese to task for "the trove of documents it held in the wings just out of sight" and said the company had been playing "cat and mouse" with the court and plaintiffs. According to malpractice suit, Judge Voorhees sanctioned Celanese $114,000 in fees and expenses, and said he would consider further sanctions on evaluating the impact of the discovery misconduct.

The judge also reserved ruling on an October 2006 sanctions motion by plaintiffs asking for a range of findings against Celanese, including that the company acted in bad faith that an adverse inference should be drawn against it on key issues and that the company should be prevented from presenting evidence on certain issues. Celanese said in its suit that the prospect of such sanctions, which would have severely hampered its ability to defend itself at trial, forced it to enter into a settlement in May. The company fired Kaye Scholer in July 2006 and hired Hector Torres of Kasowitz, Benson, Torres & Friedman to continue to represent it. The Kasowitz firm is also representing Celanese in its suit against Kaye Scholer. Trial sanctions over discovery foul-ups have been a major area of concerns for litigants and their lawyers in recent years. A sanction instructing a jury to draw an adverse inference led to a $1.6 billion verdict against Morgan Stanley in a high-profile suit in Florida state court. But that award was later overturned on appeal. - Anthony Lin can be reached at alin@alm.com.