Delaware High Court Hands Agency a New Shot at Malpractice Claim Against Law Firm

A Delaware insurance agency has won another chance at proving a law firm was negligent in defending it in a non-compete dispute with another agency, a dispute it ended up settling for $1.2 million.

The Delaware Supreme Court has reversed a Superior Court ruling of summary judgment for the law firm, Margolis Edelstein, which GMG Insurance Agency alleged committed legal malpractice. The Supreme Court found that the Superior Court erred in granting summary judgment because there are questions of fact concerning whether the lawyers breached the standard of care for a Delaware attorney.

The high court returned the case to the lower court for consideration of the law firm’s competence in its discovery process, its legal briefing of a tortious interference claim, and its representation of both an employer and the employee involved in the litigation.

Margolis Edelstein defended both GMG and its employee, Harold Wilson, in the Court of Chancery against a complaint brought by Lyons, another insurance agency where Wilson last worked. Lyons alleged that Wilson’s employment with GMG breached its non-compete agreement with Lyons.

Lyons brought multiple causes of action including breach of contract against Wilson; breach of the duty of good faith and fair dealing against Wilson; aiding and abetting against GMG; unjust enrichment against Wilson and GMG; and tortious interference with contract and prospective economic relations against GMG.

Margolis Edelstein managed to win summary judgment in Court of Chancery for GMG and Wilson on all of the claims except the tortious interference claim against GMG. As to that claim, the Court of Chancery held that “the factual record was not sufficiently developed as to whether GMG’s actions satisfied the remainder of the tortious interference requirements.” That claim was then flagged to go to trial.

After the failure to have the tortious interference dismissed, GMG fired the Margolis firm and hired new counsel. The new counsel informed Wilson he would need to get his own attorney. Also, through its discovery, the new firm uncovered important documents tending to show that GMC partners had relied on the advice of previous counsel in making the decision to hire Wilson despite his non-compete obligations.

Following the production of these documents, Lyons moved for sanctions, arguing that the newly disclosed evidence revealed “pre-planning” of Wilson’s hiring in connection with GMG’s obtaining the business of Lyons’s clients or prospects. Lyons said the evidence was wrongfully withheld and had it been previously disclosed the tortious interference count would have been resolved in its favor at summary judgment.

The Court of Chancery declined to decide on an appropriate sanction until after trial. However, it acknowledged the significance of the newly produced information, noting that the information should have “clearly” been produced, given its “extraordinary” importance to the underlying theories of the case. The court also recognized that the information could have affected the court’s resolution of the summary judgment motion.

On the eve of trial, Wilson recanted his prior testimony and submitted a new affidavit with testimony that was drastically inconsistent with his prior testimony and unfavorable to GMG. Wilson stated that he, GMG, and a large client had a series of meetings and calls, during which they agreed that the client would change brokers to GMG. Wilson also stated that they collectively agreed that GMG would hire Wilson to service the account and other clients as soon as a previous injunction against Wilson by a third agency had been lifted. Wilson also stated that GMG said it would cover this defense cost and have done so to date.

Shortly after hearing Wilson’s revised testimony, Lyons and GMG reached a $1.2 million settlement.

GMG then sued Margolis in Superior Court for legal malpractice, arguing that but for Margolis’s negligent representation in the Court of Chancery, GMG would not have been exposed to the consequences of Wilson’s pre-trial eleventh-hour change in testimony. In response to Margolis’s motion for summary judgment, GMG claimed that because Lyons’s tortious interference claim survived summary judgment in the Court of Chancery, GMG incurred significant damages in the form of fees and costs and the $1.2 million settlement, which, but for Margolis’s negligence, would not have been incurred.

The Superior Court did not squarely address the newly revealed evidence. Instead, sidestepping the Court of Chancery’s acknowledgement of the potential effect of Margolis’s discovery deficiencies on the summary judgment proceedings, the Superior Court pointed to Margolis’s success on the claims that were dismissed as proof that there had been no legal malpractice. It ruled in favor of Margolis. GMG appealed.

The state Supreme Court has now said the Superior Court erred in failing to recognize evidence that supported an inference that Margolis’s performance did not meet the standard of care owed by a Delaware attorney.

Overall, the high court found there was evidence that Margolis attorneys breached the standard of care in three ways: by failing to competently handle discovery and develop the record; by failing to adequately brief and argue in favor of dismissing the tortious interference claim against their client; and by simultaneously representing GMG and Wilson despite a potential conflict of interest.

GMG cited evidence including Margolis’s internal communications suggesting that the delayed production was attributable solely to its own failures and acknowledging the lawyers’ inexperience with Delaware’s comprehensive e-discovery requirements. In one email a Margolis lawyer wrote, “[I]t has become clear to me that I am wholly inexperienced with how to handle litigation in the Court of Chancery.”

GMG further alleged that during discovery, Margolis’s attorneys failed to ask GMG’s principals if they consulted with an attorney prior to hiring Wilson, and specifically if they had any discussions about whether the hiring would violate the non- compete agreement.

For its part, Margolis asserted that it fulfilled its discovery obligations and that, in any case, “any deficiency” did not “proximately cause any harm as alleged by GMG.” The firm also disputed that testimony from the attorney who consulted with GMG’s principals would have been “highly probative” or helpful in any way to GMG.

GMC provided evidence that Margolis did not adequately brief and argue on behalf of dismissal of the tortious interference charge. The Supreme Court tended to agree: “As GMG points out, the summary judgment briefing Margolis authored on Lyons’s tortious interference claim in the Chancery litigation is cursory at best.”

Margolis claimed that further record development would not be as consequential as GMG suggests.

The high court also found there was a genuine dispute as to whether Margolis breached the standard of care by simultaneously representing GMG and Wilson.

Margolis disputed that its representation of both GMG and Wilson was problematic. It argued that at the time, “their interests appeared to be completely aligned.” Margolis also argued that GMG failed to explain how it was harmed by Margolis’s joint representation.

GMG said Margolis failed to advise GMG that it was unwise for Margolis to represent both GMG and Wilson. GMG claimed that upon viewing Lyons’ allegations in the Chancery litigation, “it should have been readily apparent to Margolis that there was a significant possibility that Wilson was in breach of the non-compete agreement,” which GMG argued was a circumstance “directly contrary to its interests.”

The Supreme Court further concluded that the Superior Court erred by failing to address GMG’s contention that, but for Margolis’s negligence, none of Lyons’s claims would have survived GMG’s summary judgment motion in the Chancery litigation. If that claim has merit, then it seems that GMG would have a viable claim for damages given that it incurred considerable fees and costs and paid to settle the case after the Court of Chancery denied its motion as to its tortious interference claim, thus keeping the Chancery litigation alive, the high court concluded.