Sometimes the prenuptial agreement to a law firm merger is far more interesting than its consummation.
Such was the case in May with a stipulation and order dismissing a bitter lawsuit between Washington, D.C., litigation and lobbying powerhouse Patton Boggs and Chevron Corporation.
The dismissal, filed in the Southern District of New York, tied off one strand in a twisted skein of litigation known as the Lago Agrio case, originating decades ago in the same federal court. Two weeks after Patton Boggs and Chevron settled, partners at Cleveland-based Squire Sanders held a three-day discussion and voted overwhelmingly to become Squire Patton Boggs. The prenup, however, was crucial - and its provisions can be traced all the way back to the Ecuadorean rainforest.
In 1993 villagers in Lago Agrio, Ecuador, sued Texaco (acquired by Chevron in 2001) in the Southern District under the Alien Tort Claims Act for environmental damage at its drilling sites. The oil company challenged jurisdiction; on appeal, the Second Circuit ruled that dismissal would be proper if Chevron agreed to submit to jurisdiction in Ecuador.
Patton Boggs joined the marathon case on a contingency basis in 2010, hired to represent the Lago Agrio plaintiffs (LAPs) in discovery proceedings in the United States brought by Chevron's lawyers at Gibson, Dunn & Crutcher. Patton Boggs also devised a strategy to pursue international enforcement in multiple jurisdictions, should the plaintiffs obtain a favorable outcome.
In February 2011 a provincial court in Ecuador entered the hoped-for judgment, calculating Chevron's actual damages at $9.5 billion. The ruling later was affirmed on appeal in a de novo judgment and upheld by Ecuador's highest court. (Aguinda v. Chevron Corp.
, No. 002-2003).)
Chevron responded by filing a civil racketeering suit in New York before U.S. District Judge Lewis A. Kaplan, who had already ruled in the company's favor on several related matters. The RICO suit alleged a massive fraud - conceived primarily by New York attorney Steven Donziger - to extort money from Chevron, and it included Patton Boggs as a nonparty co-conspirator. (Chevron Corp. v. Donziger
, No. 11-CV-0691 (S.D.N.Y. filed Feb. 1, 2011).)
At the last minute, Chevron dropped its request for $60 billion in damages and sought only equitable relief - eliminating the defendants' right to a jury trial. After a seven-week bench trial, Kaplan issued a 485-page decision in March, finding that Donziger, the LAPs, and others had obtained the Ecuadorean judgment by illegal means. (Chevron Corp. v. Donziger
, 974 F. Supp. 2d 362 (S.D.N.Y. 2014).) The plaintiffs immediately appealed.
Nonetheless, Chevron wasted no time leveraging Kaplan's findings. Earlier this year, Gibson Dunn filed counterclaims against Patton Boggs, alleging fraud and malicious prosecution related to its work for the LAPs. (Patton Boggs, LLP v. Chevron Corp.
, No. 12-CV-9176 (S.D.N.Y. complaint filed April 3, 2014).)
By this time, Patton Boggs was bleeding partners - losing nearly 100 in the previous 16 months, according to one report - and was under intense financial pressure. But potential suitors, concerned about the firm's contingent liability to Chevron, stayed away.
In late April, Patton Boggs capitulated: Judge Kaplan granted its motion to dismiss all claims against Chevron. A week later the parties signed a settlement agreement, marked "so ordered" by the court. (Patton Boggs, LLP v. Chevron
(stipulation and order of dismissal filed May 7, 2014).) The partners at Squire Sanders scheduled a merger vote.
That convoluted case history is prologue to examining the settlement - an extraordinary document that permits Chevron, under the court's retained jurisdiction, to initiate discovery of Patton Boggs's former clients, depose its former lawyers, and bolster civil lawsuits pending against third-party funders.
The stipulation states, "Chevron shall serve document requests of which the subject matter will be litigation and enforcement funding, the identification of legal representatives associated with litigation and enforcement, international enforcement efforts, and documents previously produced by Patton Boggs in redacted form in the RICO litigation or any other Chevron-related litigation or proceeding."
Patton Boggs also offered up two of its lawyers - James E. Tyrrell Jr. and Eric S. Westenberger - who had represented the LAPs, stating that each "shall make himself available for a deposition." (Neither Tyrrell nor Westenberger were included in the Squire Sanders merger.)
In addition, Patton Boggs agreed to pay Chevron $15 million and assign its interests in the Ecuadorean judgment to Chevron. And it agreed to release a prepared statement - and to issue no other - that concluded: "Based on the Court's findings [in Chevron v. Donziger
], Patton Boggs regrets its involvement in this matter."
As an expression of its regret, Patton Boggs would "decline to assist in any way any party, including the LAPs, in any effort to enforce the Lago Agrio Judgment or in any litigation against Chevron relating to the same subject matter."
To the LAPs, their lawyers, and the litigation funders, the settlement included blatant violations of the rules of professional conduct. The LAPs' lawyers in Ecuador sent Patton Boggs a letter - which briefly interrupted Squire Sanders's merger vote - accusing the firm of failing to communicate, failing to provide notice of withdrawal, failing to protect client confidentiality, and failing to avoid prejudice to a client. Although the LAPs were nonparties, Donziger and the Ecuadorean lawyers filed a motion to intervene and to reconsider the settlement agreement with Chevron.
The flurry of briefs in support and opposition to the motion was vitriolic. "How much of a discount on its cash payment to Chevron did Patton Boggs get in return for issuing its public statement of 'regret'?" Donziger asked. "How much for its voluntary agreement to turn over confidential client information in a discovery process not ordered by any court?"
Randy M. Mastro, a partner at Gibson Dunn's New York office and Chevron's lead counsel, responded in kind. "Donziger articulates no personal interest in any of this, apparently seeking to 'intervene' just to make another press release," Mastro wrote. "There is more than a little irony in the prospect of Steven Donziger seeking to 'intervene' to teach anyone about ethical obligations of lawyers, after having devoted his career to breaching those duties."
As for the LAPs, Mastro stated, "The motion's principal purveyor of 'evidence,' Pablo Fajardo, is a confirmed serial perjurer whose untested paper 'testimony' on these and other topics is not worthy of this, or any, Court's credence."
Patton Boggs's separate opposition memo, submitted by Elkan Abramowitz of Morvillo Abramowitz Grand Iason & Anello of New York, was more civil - and more troubling. Abramowitz argued - quoting Kaplan in the parallel RICO action - that "the Court's authority does not extend to approving, disapproving, or otherwise passing on the substantive terms of a private settlement of private claims in this ordinary civil litigation."
Again quoting Kaplan, Abramowitz argued, "Typically settlement rests solely in the discretion of the parties, and the judicial system plays no role."
Chevron and Patton Boggs contend that Donziger and the LAPs lack standing to intervene, that their motion is untimely, and that Patton Boggs's former clients and funders have not lost their right to assert attorney-client and work-product protection.
But not everyone who reviewed the settlement feels that way. "Agreeing to cooperate in the discovery of a former client - I've never seen anything like this," says Nora Freeman Engstrom, a Stanford law professor whose research lies at the intersection of tort law and professional ethics. "The stipulation raises real questions of prejudice: Was the client offered up as a bargaining chip?"
Engstrom concedes the agreement permits the LAPs to assert any privilege that may attach to any information sought in discovery, instructs that a court-appointed special master shall "supervise" relevant depositions, and specifies that the parties shall comply with the rules of professional conduct. Based as it is on Judge Kaplan's RICO ruling, the stipulation implies - but does not state - reliance on the crime-fraud exception to client confidentiality. (See ABA Model Rule 1.6(b)(3).) "Still," Engstrom says, "I don't know of any other case where, in the midst of a dispute, an attorney has agreed to drop a client, and, in the same breath, promised to assist the client's current adversary."
Richard Zitrin, of counsel to San Francisco's Carlson, Calladine & Peterson and an expert on legal ethics and attorney conduct, questions the ability of Patton Boggs to include as "releasees" in the settlement all of its present and former attorneys. "How can Patton Boggs bind all of its attorneys to the agreement when they haven't signed it?" he asks. "On what basis can Patton Boggs bind Tyrrell and Westenberger to be deposed?"Adds sole practitioner Carol M. Langford, a legal ethics specialist in Walnut Creek, "You can't prejudice a client to benefit yourself." But Langford says the court's "so ordered" marking on the stipulation is critical. "If a settlement has been preapproved, it's much harder to have a court reconsider it," she says. "You would have to show harm to intervene."
The LAPs, Langford adds, could bring a civil suit alleging breach of fiduciary duty. But they would still have to show harm, they would still be in Judge Kaplan's court, and they would have to hire legal representation in the United States.
Even if Kaplan's order stands, the Patton Boggs deal with Chevron doesn't sit well with merger consultants. "In the world of big law, you just don't see an adversary demand total capitulation from their opponent's counsel," says Peter Zeughauser, chair of Zeug-hauser Group, a law firm management consultancy in Newport Beach. "What happened here is not good for the profession."
Whichever way Kaplan rules on the motion to intervene, the pleadings raise interesting contradictions for him. If Kaplan denies the LAPs a hearing on a private agreement that affects their fundamental rights, he risks confirming allegations of bias in the appeal of his RICO decision. If he grants the motion, he might expose the newly minted law firm of Squire Patton Boggs to contingent liability. Either way, the Lago Agrio skein of litigation could begin to unravel.