Answers to Winter 2010
California Bar Exam Questions

The Writing Edge

Winter 2010 Bar Question 2

Business Associations and Professional Responsibility

Able, Baker, and Charlie are successful attorneys who set up a law firm under the name “ABC Legal Services LLP” (“ABC LLP”). They agreed to share profits and losses equally. Able prepared the documents required to register the firm as a limited liability partnership and instructed his assistant to file them with the Secretary of State. Inadvertently and unbeknownst to Able, Baker, and Charlie, Able’s assistant never filed the appropriate documents.

Able, Baker, and Charlie leased office space for four attorneys in the name of ABC LLP. They rented the extra office to David, an attorney who had a small solo law practice, for a monthly rent of the greater of $1100 or 10% of his billings. David committed malpractice arising from a case that he undertook soon after he moved into the ABC LLP office space.

Able, Baker, and Charlie hired Jack as head of computer services. Jack had just graduated from college with a degree in computer science. Jack, in an effort to save ABC LLP the cost of Internet access budgeted at $500 a month, accessed and used the wireless network of an adjacent law firm for free. Able, Baker, and Charlie were surprised at the savings, but did not inquire how it came about. Their use of the network resulted in the disclosure to a third party of confidential client information for one of Able’s clients, which caused the client economic loss.

1. May Able, Baker, and Charlie each be held personally liable for the economic loss to Able’s client caused by the disclosure of confidential client information? Discuss.

2. May Able, Baker, and Charlie each be held personally liable for David’s malpractice? Discuss.

3. Have Able, Baker, and Charlie breached any rules of professional conduct? Discuss. Answer this question according to California and ABA authorities.

All questions © 2010 California State Bar Exam. All rights reserved

Business Associations and Professional Responsibility
Question 2, Winter 2010

In a limited liability partnership, the state statute affords individuals some protection from individual liability from acts of other partners. However, in a general partnership, all partners are individually liable for each other’s actions in the conduct in furtherance of the partnership.

Here, A, B and C failed to complete the LLP registration. The purpose for the registration is to give notice to third parties doing business with the entity that their recourse for recovery of losses is limited. When the registration is not completed, third parties do not have notice, so it would be unfair to limit the sources of their recover. Even though the failure to complete the registration was inadvertent, and A, B, and C did not realize it had failed, members of the public were not given the notice that is the purpose of registration. Therefore, ABC will not be found to be an LLP and will not enjoy limited liability. The default under the law is a general partnership.

Conclusion: ABC is a general partnership. A, B and C are individually liable for the acts of other partners conducting partnership business.

ABC’s liability for Able’s conduct.—Actual authority. Each partner is an agent of the partnership and of the other partners for actions expressly authorized or implied by custom, usage or the conduct of the partners. Here, A, B and C are all lawyers who intended to operate as a law firm and who specifically agreed to share profits and losses. This gives each lawyer actual authority to act for the partnership. Able’s conduct raises two issues of liability for the partnership.

·Failure to file LLP documents. Here, Able was acting for the partnership in preparing the LLP documents. Therefore, Able’s conduct was within his actual authority, and the partnership will be liable for losses caused by Able’s negligence. 

A’s assistant – master-servant. A master is liable for the acts of his servant. When an employee has no autonomy in carrying out the employer’s tasks, the employee acts as an extension of the employer himself. Here from the job title, “assistant,” it is reasonable to surmise that the assistant had no independence, and Able controlled his actions. Able should have checked the assistant’s work when he returned from the Secretary of State. Presumably, the assistant would have received a date-stamped copy of the documents he filed. The assistant was inadvertent in failing to carry out the task, but Able was directly negligent for failing to supervise he assistant’s work.  Therefore, Able is liable for the failure to properly file the LLP documents.

Conclusion. Because Able was acting with the actual authority of ABC when he failed to properly file the LLP papers, all partners will share the losses caused by the lack of limited liability protection.

·Failure to protect his client’s documents. Furthermore, Able caused his client economic loss for which the client will likely seek recovery from A. Even though Able did not know of the insecurity of the computer internet network, the client vouchsafed his confidential documents with Able, and Able is liable for their accidental disclosure.

Conclusion. Because Able was acting within the actual authority of ABC in practicing law when he damages his client, all partners will be equally liable to repay the client for his economic loss.

ABC’s liability for Jack’s conduct—Implied Authority. A principal is liable for the acts that are expressly authorized by its agents or are within the scope of the authorization by implication. Here, ABC partnership is the principal and Jack is the agent. ABC hired Jack as head of computer services to set up the firm’s internet access, among other things. Jack decided to access the wireless network of an adjacent law firm. Jack’s conduct was within the scope of his authority as head of computer services. Since Jack was acting within the scope of his agency, ABC is liable for Jack’s actions.

Even if it is found that Jack exceeded the scope of his implied authority in accessing another firm’s internet connection, ABC would still be liable directly for its negligence in failing to supervise Jack’s conduct. The firm gave Jack a budget for setting up a wireless network of $500 and A, B and C noticed that the $500 had not been spent. If Jack did not have autonomy in the use of his budget, A, B and C should have inquired as to how Jack set up a network without spending any money.

Therefore, regardless of whether Jack acted within in the scope of his implied authority or not, ABC is liable for Jack’s hacking.

David as ABC partner.  ABC agreed to share profits and losses equally. A very weak argument could be made that David is also a partner because he “shares” his profits with ABC. But one characteristic of partnerships is that all partners share equally. Here, David’s lease allows him to pay ten percent of his profits as rent, if that is higher than the set rent of $1100. David’s ten percent is completely different form the equal sharing of A, B and C. Further doubt is cast on David being a partner because he has a different legal relationship with A, B and C—a lease. Therefore, a court would not find that David is a partner of ABC.

David’s apparent authority? Where a principal through words or conduct leads a third person to reasonably believe an agency exists between the principal and another person, then apparent authority may exist. The principal may be estopped from denying the agency relationship the third person believed existed.

Here, a client retained David as attorney. If ABC represented that David was a member of ABC partnership, the client may be able to hold ABC liable for his losses from David’s malpractice.

David had the fourth office in ABC’s offices. If there was a central receptionist for all four attorneys and if the four offices all led off of the same foyer, it may have appeared to David’s client that David was a member of ABC. The exterior and interior signs for the office may have also left the impression that David was a member of the ABC firm. For example, if ABC had a sign and David had no separate sign. If David did not have letterhead that identified himself as a solo practitioner, this could also have led to reasonable belief that David was simply part of ABC’s firm.

Able, Baker and Charlie were experienced attorneys. David, by contrast, may have been just starting out. He was a solo practitioner and his practice was small. He was renting space in another’s law office. He may have rented from ABC  for the convenience of shared reception and phone service and to give greater credibility to his office’s appearance. His income was uncertain from month to month, as the terms of his rental agreement show. David’s client may have been misled into thinking he was hiring a bigger, more experienced firm with greater peer review to prevent malpractice.

If the appearance of the offices and the signage gave the impression that David was associated with ABC, and if the client relied on this appearance in retaining David, then ABC may be estopped from denying that David was an agent and would be liable for David’s malpractice.

A’s breach of loyalty, confidences and secrets. Under both ABA and California rules of professional conduct, an attorney has a duty to maintain his client’s confidences. Here, Able received confidential information from a client which he recorded into his computer. This confidential information was released to a third party because the firm had an insecure computer network, causing economic loss to the client.

The question is whether Able has breached his duty to his client by this inadvertent disclosure, when Able was unaware that the network was insecure. This is similar to a situation when a client’s documents are faxed to the wrong fax number. Generally, professional ethics decisions concern the duties of the recipient of the accidental document not to treat the privilege as waived and not to use the document.

If the release of the document is seen as truly accidental, Able is not likely to be in violation of his duty of loyalty.
Conclusion: no ethical violation.

Breach of duty to avoid malpractice. If however, the failure of ABC to have a secure network for client files may be seen as professional negligence, and A, B and C may have violated their duty not to commit malpractice, prohibited by both ABA and California rules.

Firm’s ethical liability. The ethical injunction against committing malpractice is personal to the practitioner. Baker and Charlie would not be guilty of an ethical violation for Able’s malpractice.

Duty not to engage in illegal or unethical conduct.  Under both ABA and California rules, attorneys have an ethical duty not to engage in criminal conduct. Some states treat using another person’s computer network without permission as a crime. In these jurisdictions, A, B and C would have committed a crime, which is a violation of their ethical duties. The fact that A, B and C were unaware that their network was illegally tapping into another person’s may prevent criminal prosecution. On one hand, A, B and C were liable for Jack’s conduct since he was the agent of the firm. On the other hand, vicarious liability usually extends only to tort liability not criminal culpability.

Attorneys also have an ethical duty not to engage in unethical conduct, under the ABA and California.  Under some state laws, piggy-backing onto another’s network is not a crime. However, given the fact that ABC is a law firm bound by ethics to protect client information and the fact that the network ABC was accessing was also a law firm with similar ethical duties, ABC’s use of the network of another without informing them was unethical conduct.

ABC’s ethical liability. Able, Baker and Charlie have each engaged in an ethical violation by tapping into another law firms computer network, so each member of ABC breached the code of professional conduct.

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