Law firms face a growing number of expensive lawsuits due to large insurance policies, client resistance to paying fees, and the involvement of investors in litigation, putting legal operations on the defensive.
Clients are bringing suits against law firms alleging missteps such as conflicts of interest or failure to timely file a document. These clients are turning to attorneys specializing in suing law firms.
“There’s a greater willingness for clients to turn against their lawyers,” said Bethany Kristovich, a litigation partner in the Los Angeles office of Munger, Tolles & Olson who defends Big Law firms against suits. Clients often see the firms “as simply as another pot of money,” she said.
Law firm insurance claims resulting in multimillion-dollar payouts increased year over year, insurance broker and consultant Ames & Gough said in a 2023 report. Of 10 companies that insure about 80% of Am Law 100 firms, seven paid a claim of more than $50 million in 2021 or 2022—and two paid a claim that topped $150 million, according to the report.
There are “big claims happening all the time,” said Eileen Garczynski, a senior vice president at Ames & Gough.
Trusts and estates, followed by business and commercial transactions, are the leading practice areas for malpractice claims against law firms, Ames & Gough’s report found. The role of litigation finance in client suits—with investors paying the cost of a litigation while seeking a return—is boosting the risk of large payouts, the broker said.
Insurance Role
Law firms’ appearance of being backed by deep-pocketed insurers helps make them malpractice targets, said Leslie Corwin, managing partner of Eisner LLP, who represents law firms in malpractice cases.
“Most law firms have professional liability insurance and people know that,” he said. “Clients know that. It’s a matter of common knowledge.”
Market pressures and economic turmoil also make law firms more vulnerable to legal attacks, Corwin said. Clients are more likely to contest a big bill when business is tough, he said.
The Elon Musk-owned X Corp. last July sued Wachtell, Lipton, Rosen & Katz over $90 million in fees, saying the firm exploited a brief, vulnerable period as Musk was closing on a $44 billion deal to purchase what was then called Twitter.
TerraForm Power LLC sued Orrick, Herrington & Sutcliffe and Cleary Gottlieb Steen & Hamilton in 2021, claiming the company faced $300 million in payments because lawyers at the firms allowed the word “buyers” instead of “buyer” into a purchase agreement.
3M sued Covington & Burling in 2017 over its decision to drop the multinational conglomerate to represent one of its legal adversaries.
Firm v. Firm
Lawyers who once hesitated to bring legal actions against the industry that employs them are taking cases today without fear of repercussions and reputational harm.
Bill Reid, a lawyer on Musk’s team suing Wachtell, said attorneys used to fear bringing actions against law firms “in part based on the notion that they will soon become a pariah in the legal world and that other law firms won’t send them business.” But Reid said that hasn’t been his experience since he took on the work that “no one else was willing to do” two decades ago.
Reid, senior founding partner at Reid Collins & Tsai, said that since launching the plaintiff-focused boutique in November 2009, the firm has netted at least $100 million in actions against law firms. Such cases, including actions against Paul Hastings and Greenberg Traurig, have become a significant portion of his current portfolio, he said.
Few of Reid’s cases end up on a public docket. He said he engages in a pre-suit process that allows firms’ and their insurance carriers to engage with a client. The discretion, he said, buys Reid good favor with insurance carriers and the law firms, which, he said, still send him referrals.
Law firms will face more legal claims in the coming year alleging breaches of fiduciary duties and breach of conflicts, said Kristovich of Munger, Tolles & Olson. “The size of the claims continue to grow as lawyers and law firms handle bigger and bigger transactions and deals,” she said.
Kristovich is representing Pillsbury Winthrop Shaw Pittman as the firm fights malpractice allegations of its bankruptcy counsel to a now-defunct luxury hotel in California. She was also hired by Willkie Farr & Gallagher, which is being sued for malpractice over its lawyers’ counsel of Murray Energy Holdings bankruptcy.
Kristovich said she expects to see more law firms sued for their association with a client’s alleged crimes, rather than their legal advice. Fenwick & West in September asked a federal judge to dismiss a lawsuit that alleges the law firm helped enable massive fraud committed by its client, cryptocurrency exchange FTX, saying its work for the crypto exchange amounted to “routine” legal services.
“Fifteen years ago it was understood that if a client made a decision to pursue a risky business endeavor that was the client’s decision,” she said. “You’re starting to see more allegations where the basic premise is ‘You should have save me from myself.’”