illustration by Phil Foster
The Positive Software/New Century saga, ongoing for more than five years, has more twists and turns than a John le Carré spy novel. (Full disclosure: Years ago, I represented Positive Software Solutions and its CEO Edward Mandel in a variety of litigation and transactional matters; however, I did not represent them in the New Century lawsuit, nor have I represented them in years.)
Back in 2003, Positive Software filed a copyright-infringement lawsuit in federal court in Dallas, alleging that New Century (once the country’s second-largest subprime mortgage lender) had breached its contract with Positive and stolen the software company’s proprietary information by paying for a small number of subscriptions to Positive’s mortgage lending database (LoanForce) and then making widespread use of that database throughout New Century.
New Century responded by invoking a binding-arbitration provision in its software-subscription agreement with Positive. U.S. District Judge David Godbey then sent the case to arbitration in 2003, but not before entering a protective order that forbade New Century from de-stroying evidence and from further use of Positive’s database.
Houston sole practitioner Peter J. Shurn III was the arbitrator. On May 5, 2004, after considerable discovery and a multi-day arbitration, he sided with New Century, even going so far as to order Positive to pay New Century’s attorneys’ fees. Stunned by the ruling, Positive’s lead counsel, Michael Shore of Shore Chan Bragalone, did a little digging in a completely different database—the federal courts’ PACER (Public Access to Court Electronic Records) system. What he found was curious, indeed; arbitrator Shurn had a longstanding co-counsel relationship (while with a former firm, Arnold White & Durkee) with Ophelia Camina of Susman Godfrey in litigation years earlier while representing Intel Corp. He failed to disclose this connection.
Positive moved to vacate the arbitration award because of this previously undisclosed relationship. On Sept. 28, 2004, Judge Godbey granted the motion and set aside the award in favor of New Century, noting that “prospective arbitrators must not be permitted to turn a blind eye toward potentially problematic conflicts of interest.” In his order, Godbey also expressed “great difficulty with New Century’s conduct” during the discovery process, and observed that one of New Century’s lawyers (whom he didn’t name) failed to produce certain key evidence in the case—an early version of the software script. New Century appealed the ruling to the 5th U.S. Circuit Court of Appeals. In January 2006, a three-judge panel of that court upheld Judge Godbey’s decision, holding that “Shurn’s past professional relationship with Susman Godfrey and Camina might have conveyed an impression of possible partiality to a reasonable person.”
But New Century wasn’t done yet. The mortgage company sought a rehearing by the entire 5th Circuit, which on Jan. 18, 2007, decided not to overturn the arbitration award. The appellate court held that the “mere appearance” of a conflict of interest or bias shouldn’t be enough to overturn the award. In the meantime, New Century got a head start on the subprime-lending meltdown by filing for bankruptcy protection in Delaware. After trying unsuccessfully to get the Supreme Court to step in—and to get the Delaware judge to lift the automatic stay imposed on the case by the bankruptcy proceedings—Positive Software tried a new tactic: Sue the lawyers.
In late August 2007, Positive filed a new lawsuit in the U.S. District Court for the Northern District of Texas, this time against New Century’s law firm, Susman Godfrey, and two firm partners, Barry Barnett and Ophelia Camina, as well as Jeff Lemieux, the CEO of a New Century-related entity, and Frank Nese, a member of New Century’s senior management team. The lawsuit claimed that these defendants had defrauded Positive by “intentionally concealing documents, willfully withholding material evidence, offering perjured testimony, and fraudulently misrepresenting facts to obtain a favorable ruling in the arbitration.” The suit claimed that this conduct allegedly forced Positive CEO Mandel to sell his company “at a fire-sale price” in order to fund an appeal, which Positive’s attorney Michael Shore contends damaged the software provider by $500 million or more. Among other support for its theories, Positive pointed to more than 36,600 computer files that New Century and Susman Godfrey had produced in the wake of arbitration, files that purportedly demonstrated the lender’s use of Positive’s software in violation of a court-imposed preliminary injunction.
Although Susman Godfrey and its lawyers steadfastly maintained their innocence, they could hardly have anticipated the next sharp turn the case would take. In August 2008, Positive fired off another pleading seeking sanctions against the firm and its two partners, but this time the software company’s ammunition came from a most unusual source—New Century itself. Months ago, in settling Positive’s claims against it, the bankrupt lender agreed not only to pay the comparatively modest sum of $2 million, but also to waive its attorney-client privilege with Susman Godfrey and to turn over privileged internal information for Positive to use against New Century’s former lawyers.
To give the opposition a taste of what was in store, Positive’s lawyers attached to the pleading a copy of an April 8, 2003, e-mail from Monika McCarthy, New Century’s then-general counsel, to another officer referencing the fact that “our attorneys have done a good job of covering up the fact that we are continuing to use their database.” Positive followed that salvo with a demand to see Susman Godfrey’s internal work product, maintaining that such documents would be discoverable because of the crime-fraud exception to the privilege that protects them; in essence, if Positive could show fraud and misconduct by the lawyers, then it would be entitled to review all of these privileged documents.
At press time, the court was still reviewing these thousands of documents turned over by Susman Godfrey to determine if they could be released. Through their lawyers at Houston’s Beck Redden & Secrest, the embattled law-firm defendants oppose the release of their work product and maintain that no criminal or fraudulent conduct occurred.
It’s a situation that troubles many lawyers, and how it’s ultimately resolved could potentially alter the landscape of communications between a company and its outside counsel. On the one hand, the privilege at issue belongs to the client—as does the attorneys’ entire file. While it is the client’s privilege to waive, the notion of a company agreeing to produce such confidential information as part of a settlement may have a chilling effect on a lawyer’s ability to be candid with the client. Multiple drafts and rewrites of documents, internal memoranda, candid discussions not intended for public consumption—these are but a few of the privileged contents of a typical litigation file.
Depending on how many more twists and turns the Positive Software/New Century road takes, it is a path that may lead to more companies pointing the finger of blame at their lawyers, and to more lawyers being very careful what they say—even to their own clients.
John G. Browning is a partner in the Dallas office of Gordon & Rees, where he handles a wide variety of litigation representing businesses. He can be contacted at [email protected].