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Ethics & Professional Responsibility FLASHPOINTS August 2019

August 15, 2019Print This Post Print This Post

Terrence P. McAvoy & Katherine G. Schnake
Lawyers for the Profession, Hinshaw & Culbertson LLP, Chicago
312-704-3000 | E-mail Terrence P. McAvoy | E-mail Katherine G. Schnake

California Supreme Court Holds Monster Energy Can Pursue Claim Against Attorney for Breach of Settlement Agreement

The California Supreme Court ruled that when an attorney signs a settlement contract under the notation: “approved as to form and content,” and where the terms of the contract repeatedly referenced both the attorney and the parties, it is not unreasonable for a court to find that like the parties, the attorney was bound by the terms of the settlement contract. Monster Energy Co. v. Schechter, No. S251392, 2019 WL 3022773 (Cal. July 11, 2019). However, the question of whether the attorney intended to be bound by the contract was a question of fact.

In 2012, the plaintiffs sued Monster Energy Company for wrongful death after their 14-year-old daughter consumed two 12-ounce Monster Energy drinks and subsequently died from cardiac arrest. The plaintiffs were represented by attorney Bruce Schechter, and they and Monster ultimately entered into a confidential settlement agreement in 2015. The parties’ attorneys, including Schechter, also signed the agreement under the notation: “APPROVED AS TO FORM AND CONTENT.” 2019 WL 3022773 at *1. Several months later, Schechter stated in the media that the settlement resulted in “ ‘substantial dollars’ for the family” but that “Monster want[ed] the [settlement] amount to be sealed.” 2019 WL 3022773 at *2.

Monster then filed suit against Schechter, alleging he breached the terms of the agreement by speaking about it publicly. The agreement had a confidentiality clause that included the following language: “Plaintiffs and their counsel agree that they will keep completely confidential all of the terms and contents of this Settlement Agreement”; and “Plaintiffs and their counsel of record, individually and on behalf of themselves and their principals . . . agree . . . to not publicly disclose . . . certain facts related to the settlement.” The agreement also stated: “the Parties and their attorneys . . . hereby agree that neither shall make any statement about the Action.” [Emphasis added.] 2019 WL 3022773 at *1.

Monster alleged four causes of action: breach of contract; breach of implied covenant of good faith; unjust enrichment; and promissory estoppel. Schechter filed a motion to strike the complaint pursuant to California’s anti-SLAPP statute, and he argued the lawsuit implicated his constitutional free speech rights.

The trial court denied Schechter’s motion as to the breach of contract claim, finding the agreement clearly contemplated that Schechter was bound by its terms. The appellate court reversed, holding that an attorney’s signature under the words “approved as to form and content” does not objectively manifest that attorney’s intent to be bound by the agreement.

The California Supreme Court reversed and found that Monster sufficiently established a probability of prevailing on its breach of contract claim, and Schechter’s anti-SLAPP motion should thus be denied. In reaching its ultimate ruling, the court analyzed whether Schechter was bound by the agreement.

The court found there was no question the agreement purported to encompass both the parties to the litigation as well as their counsel, at least with respect to the confidentiality clause. The court rejected the appellate court’s reasoning that because counsel were not identified as parties to the agreement, they could not be bound by it. Regardless of the fact that Schechter was not a party to the lawsuit, the court reasoned it was substance of the Agreement that determined Schechter’s status as a party to the contract.

The court acknowledged that generally, the language “approved as to form and content” simply affirms that a party’s attorney has read the document and perceives no impediment to his or her client signing it. However, the agreement contained extensive confidentiality provisions that referred to both the parties and their counsels. At times, the agreement even referred specifically to the plaintiff’s counsel. Additionally, the court noted that confidentiality was an important term of the settlement and quoted Schechter’s deposition testimony that Monster probably would not have settled the case without the plaintiffs’ agreement to keep the settlement confidential. Ultimately, the court concluded that an attorney’s signature under the terms “approved as to form and content” does not preclude, as a matter of law, a finding that the attorney also intended to be bound by the contract.

The court noted that the question of whether Schechter actually intended to be bound by the agreement was a question that would be resolved by the trier of fact.

Beware — attorneys who sign settlement agreements with confidentiality provisions “as to form and content” may also be bound by the terms of such agreements. They thus expose themselves to potential liability (and attorneys’ fees and expenses) for any alleged breach. If you agree to confidentiality, be quiet . . . or face exposure to a claim for breach of contract.

Minnesota Appellate Court Finds Litigation-Funding Agreement Void and Unenforceable

In Maslowski v. Prospect Funding Partners LLC, No. A18-1906 (Minn.App. July 8, 2019), a Minnesota appellate court upheld a trial court’s conclusion that a litigation-funding agreement was invalid because it was champertous under Minnesota law, even though the agreement had a choice-of-law provision that would have been valid in New York.

In 2012, Pamela Maslowski was injured in a car accident and retained a law firm, Schwebel Goetz & Sieben, P.A (Schwebel), to represent her in a personal injury lawsuit. Two years later, Maslowski entered into a litigation-funding agreement with Prospect Funding Partners LLC. Maslowski sold Prospect an interest in her personal injury claim for $6,000. In return, in the event that Maslowski recovered damages, Prospect was entitled to receive $6,000, a $1,425 processing fee, and 60-percent annual interest based on a set schedule. Prospect’s total “repurchase” was not to exceed $25,245.

Prospect does business in both New York and Minnesota, and the agreement contained a choice-of-law provision stating that New York law would be applied in any disputes regarding the agreement. Prospect’s manager used a Minnesota address when signing the agreement, and any payments or notices were required to be sent to that same address. Schwebel signed a mandatory “Attorney Acknowledgement” and “Letter of Direction” as to how Prospect should be paid.

In July 2015, Maslowski settled her personal injury case. She then filed an action in Minnesota state court seeking a declaration that the agreement was invalid on grounds of champerty and unconscionability. In Minnesota, champerty is broadly defined as “[a]n agreement between a stranger to a lawsuit and a litigant by which the stranger pursues the litigant[’s] claims as consideration for receiving part of any judgment proceeds.” Maslowski, supra, quoting Johnson v. Wright, 682 N.W.2d 671, 675 – 676 (Minn.App. 2004). By contrast, New York champerty law more narrowly requires the stranger to have an intent to sue. Under New York law, the agreement would have been valid because Prospect did not enter into the agreement with the intent to sue on its own behalf.

Prospect brought a breach of contract claim in New York and moved to dismiss Maslowski’s declaratory action based on the New York choice-of-law provision in the agreement. The Minnesota court denied Prospect’s motion to dismiss. The New York court also concluded that Minnesota was the proper forum to resolve the dispute and dismissed Prospect’s breach of contract claim.

The Minnesota trial court declined to enforce the choice-of-law provision in the agreement; rather, the court applied Minnesota law. The court ultimately found the agreement unenforceable and void because it violated Minnesota’s prohibition against champerty and maintenance. Prospect appealed, but the Minnesota appellate court affirmed.

The appellate court noted that although Minnesota generally enforces choice-of-law provisions, Prospect admitted that it specifically drafted the provision to avoid Minnesota’s law against champerty. The court also acknowledged Minnesota’s “strong local interest” in applying its prohibition against champerty, and the court thus upheld the trial court’s decision not to enforce the New York choice-of-law provision. After engaging in a general conflict-of-law analysis, the court applied Minnesota law.

Applying Minnesota law, the court found the agreement was champertous and void. The agreement allowed Prospect to receive part of Maslowski’s judgment proceeds, and Prospect charged her an exorbitant interest rate. In addition, the agreement required Maslowski to relinquish control over some aspects of her litigation. For example, Maslowski was obligated to notify Prospect if she retained a new lawyer, and her lawyer was required to sign the “Acknowledgment” and “Letter of Direction.”

The court agreed with the trial court’s assessment that champertous agreements “have untoward economic effects on the legal system that can provide both improper incentives and disincentives to pursue and settle litigation.” As a matter of public policy, Minnesota prohibits champerty in order to “prevent an outsider’s intrusion into a lawsuit solely for speculative gain.”

Litigation-funding agreements can be held unenforceable and void on grounds of champerty, depending on the state law that is applied. A choice-of-law provision in such agreements may not be enough to overcome the forum state’s application of its own law in such circumstances.

For more information on Ethics and Professional Responsibility, see ATTORNEYS’ LEGAL LIABILITY — 2018 EDITION. Online Library subscribers can view it for free by clicking here. If you don’t currently subscribe to the Online Library, visit www.iicle.com/subscriptions.

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