Scathing conflicts decision v. Boies Schiller: What’s enough checking?

November 1, 2013

Last January, Boies, Schiller & Flexner filed a complaint in federal court in Manhattan against the hotel management company Marriott International, the New York hotel workers’ union and the real estate investment trust Host Hotels & Resorts, which owns 118 hotels in the United States and abroad. The suit made quite stunning assertions. Boies’s client, Madison 92nd Street Associates, accused Marriott, Host and the union of engaging in a racketeering conspiracy in which Marriott agreed secretly to help the union organize workers at certain unlucky Marriott-managed hotels in New York City, while leaving key Host properties managed by Marriott, including the Marriott Marquis, ununionized. Madison, which owned a Marriott-run hotel on New York’s Upper East Side, claimed that as a victim of the three-way conspiracy, it was forced into bankruptcy by high labor costs after its workers joined the union.

As it happens, Boies Schiller had represented Host – one of the defendants it was now accusing of conspiracy – at the time the supposed plot was hatched in 2002. In fact, the firm was counsel to a special Host board committee that engaged in a two-year, all-encompassing review of Host’s relationship with Marriott, which culminated in a new agreement between the companies in 2002. Host’s counsel at Hogan Lovells drafted the new deal, but Boies Schiller advised behind the scenes. In all, Boies Schiller worked about 3,700 hours for Host between 2000 and 2005, billing the company about $1.25 million.

That timing alone, according to an unbelievably scathing opinion made public Thursday by U.S. District Judge Colleen McMahon, should have put Boies Schiller on high alert about a potential conflict. According to McMahon, ethics advisers from inside and outside Boies Schiller should have needed “but a moment” to realize that its position in the Madison suit was untenable. It was attempting to assert on Madison’s behalf that an agreement Boies Schiller actually advised upon in 2002 was a sham, McMahon said, which meant that Host might call Boies lawyers who advised on the Marriott agreement as witnesses to defend against Madison’s claims. “A clearer conflict of interest cannot be imagined,” McMahon said. “A first year law student on day one of an ethics course should be able to spot it. BSF, which holds itself out as one of the country’s preeminent law firms, did not.”

As McMahon’s opinion recounts, Boies Schiller acknowledged its conflict and withdrew from the case in February. She said Boies’s realization came more than two months too late and ordered the firm to reimburse all of Host’s fees and costs for investigating and litigating the conflicts question. I’ll treat you to some of McMahon’s blistering comments below, but what makes this dispute more than good gossip about a big-name firm is the question it provokes about the time and money a firm must dedicate to investigating conflicts. As you’ll see, Boies Schiller did a more-than-cursory review after Host’s general counsel – who had received a draft of the Madison complaint in December, before Boies filed it – alerted the firm to conflict concerns in December 2012. Boies Schiller brought in an outside ethics firm, which worked with Boies’s inside deputy general counsel in interviewing lawyers from the old Host representation and reviewing documents from the old files.

Clearly, the investigation was insufficient or it would have revealed the irreconcilable conflict that ultimately led Boies to withdraw. But Boies contended in its brief opposing sanctions that part of the responsibility lies with its former client Host, which did not provide Boies Schiller with a precise explanation of the firm’s conflict and left Boies’s outside counsel and deputy GC to review 40 boxes of 10-year-old files without focus. Boies Schiller argued that it “continuously made good faith efforts to understand and evaluate Host’s conflict.” Host’s lawyers at Proskauer derided that “outlandish” excuse in their brief requesting sanctions, arguing that it would “turn a law firm’s obligation to investigate whether it has a conflict on its head and place the burden on the former client to prove the conflict to the law firm.” McMahon questioned whether Boies had even investigated the conflict in good faith. But I suspect that when Boies appeals the ruling – and to defend its honor, you can be sure it will – it will argue that firms cannot be expected to conduct wide-ranging reviews in response to non-specific conflict allegations by long-ago clients.

Last December, after Boies general counsel Nicholas Gravante got word that Host had raised a question about the firm’s conflict in representing Madison, he brought in outside counsel Michael Ross of The Law Offices of Michael S. Ross, who specializes in advising law firms. Gravante, who was working on the Madison case, delegated his deputy, Magda Jimenez Train, to work with Ross. Ross quickly reached what he called a “tentative conclusion” that Boies Schiller was not conflicted after he was told that the firm’s previous work for Host was “in connection with matters relating to Marriott’s financial misconduct toward Host.” He and Jimenez Train proceeded to interview the partners who had worked on the old Host case, who, according to Ross, said that the work didn’t involve labor relations. Ross also advised Jimenez Train to obtain Boies’s billing records from the previous Host engagement and to conduct a keyword search of the electronic case files for labor relations terms such as “union,” “collective” and “bargaining.”

Meanwhile, Jimenez Train pressed Host’s general counsel for details of the alleged conflict. Boies Schiller, she told the GC, did not believe its work in 2002 was substantially related to the Madison suit, but she asked the Host GC, Elizabeth Abdoo, to clarify Host’s conflict concerns. Abdoo had to cancel one phone appointment and then didn’t follow up on Jimenez Train’s requests to reschedule.

After Proskauer entered the matter for Host on Dec. 12, it reiterated Host’s demand that Boies withdraw. Boies once again declined. But it began forwarding boxes of its old case files to Proskauer. The production process was on a rolling basis because the firm, according to Jimenez Train, was carefully reviewing the paper files as they were retrieved from storage.

In February, with Boies continuing to resist withdrawal, Proskauer drew up a disqualification motion and requested a face-to-face meeting before filing it. At the meeting, Proskauer presented Ross and Jimenez Train with documents from the very files Boies Schiller had produced, which directly contradicted several paragraphs in the Madison complaint Boies had filed. Madison had asserted that there could be no explanation for Host’s concession to Marriott in the 2002 agreement aside from the secret benefits Host was receiving from the labor conspiracy. But Proskauer found (among other things) a draft analysis Boies had written of the 2002 agreement, outlining its advantages for Host. It also found a Boies-drafted response to a derivative suit by Host shareholders claiming that Host gave up too much to Marriott in the 2002 deal; in that document as well, Boies lawyers defended the agreement and extolled its advantages for Host.

Faced with that irreconcilable evidence, Boies withdrew from representing Madison the day after the Proskauer meeting. Host asked for reimbursement. Boies Schiller refused, citing the good faith of its investigation and the impediment Host raised by asserting an unspecific conflict claim. Host moved for sanctions. “It is beyond absurd for BSF to contend that it acted properly and timely by waiting for Host to show it documents that came from its own files – documents BSF represented it had reviewed before turning them over to Host,” the Proskauer brief said. Boies continued to assert that it had merely missed two documents that conflicted with a few paragraphs in Madison’s long complaint. Its conflicts investigators had “focused their conflicts analysis on a search for labor conspiracy or labor relations issues that might have possibly been raised in BSF’s prior representation of Host,” Boies’s opposition brief said. Ross and Jimenez Train “did not detect the more subtle issue of whether Host’s settlement with Marriott in 2002 benefited Host.”

Judge McMahon found fundamental flaws at pretty much every turn of Boies Schiller’s conflicts investigation. Ross reached his “tentative conclusion” that there was no conflict based on cursory information from Boies Schiller, before speaking to anyone who had been involved in the previous Host engagement. He didn’t read the Madison complaint before conducting his first interview with a lawyer who represented Host in 2002, which led McMahon to question how he could have asked informed questions or subjected answers “to anything but the most superficial analysis.” The keyword search of electronic files was doomed from the start by the search terms, which didn’t reflect the collusion Madison was alleging between Marriott and Host, McMahon said.

A prudent firm, McMahon said, would have halted work on the Madison case once Proskauer presented Host’s formal demand for withdrawal. “It is absolutely true that (Proskauer’s letter) does not spell out the conflict in words of one syllable,” she wrote. “It does not say, ‘Look, the fair import of your draft complaint is that, in settling their dispute in the middle of 2002, Marriott and Host entered into some sort of illicit conspiracy. You know that’s not true because you helped to negotiate their settlement and advised the board … And if it were true, you as our lawyers would have been a participant in or aider and abetter of the conspiracy. Either way you have confidential information from Host that will touch on the allegation that our 2002 settlement with Marriott was tainted with conspiracy; and some of your lawyers, including David Boies, might well be critical witnesses whose testimony could clear us of these charges. So it is obvious that you can’t represent Host in this proposed lawsuit.'” But Boies, the judge said, should have seen those issues and dug into its own investigation.

Instead, according to McMahon, the firm tacitly admitted that it hadn’t even retrieved the old case files. It claimed to be reviewing those paper files while it proceeded to finalize Madison’s complaint, which was filed in January. Yet it either didn’t conduct as careful a review as it claimed or misrepresented what it found, McMahon said. If Boies Schiller’s review had been careful, she said, it would have found the two documents that ultimately persuaded it to withdraw in the first batch of boxes sent to Proskauer. “Sadly, a lawyer from a firm that had no connection with BSF’s early representation had to point out the obvious before anyone from or representing BSF would acknowledge the multi-faceted conflict,” McMahon said.

That amounted to egregious conduct, according to the judge. “Proskauer and Host should not have had to physically place the relevant documents under the noses of lawyers who had purportedly reviewed them with ‘enhanced care’ weeks earlier,” she wrote. “The evidence establishes that BSF either failed to undertake an appropriate investigation despite its representations to the contrary, or did so in the most cavalier manner, stringing Host along for weeks and causing its former client to incur significant expense in trying to secure BSF’s acknowledgement of what should have been obvious.”

McMahon utterly rejected Boies’s argument that the conflict was easy to overlook, given the lack of specificity Host provided. “Frankly, the conflict was ‘subtle’ only if one did not particularly want to see it,” she wrote. “And from the first day of its ‘investigation,’ when Mr. Ross was given a ridiculously unduly narrow description of the scope of the firm’s work for Host, until the very end, when BSF had to ask Proskauer for copies of its own damning documents, the evidence suggests to this court that BSF did not want to see it.”

Boies Schiller put out a statement after the ruling: “We are disappointed in the court’s ruling, which was made without an evidentiary hearing and ignored crucial, undisputed facts,” it said. “We believe the ruling is wrong and its intemperate language, and the amount of sanctions awarded, wholly unjustified. We are confident that once the facts are fairly and properly evaluated on appeal, the ruling will be reversed.” The statement reiterated that Host refused to tell Boies Schiller why it believed the firm was conflicted and that Boies Schiller withdrew as soon as it understood the basis for Host’s demand.

Is that reason enough to excuse Boies Schiller? Judge McMahon sure thinks not. We’ll have to see whether the 2nd Circuit Court of Appeals is more sympathetic.

(Reporting by Alison Frankel)

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