The Emergence of Legal Vendor Risk

by Michael Bell

Risks posed by today's third-party legal vendors are dramatically different than the risks posed by legal vendors of the past. These new risks are far beyond what many existing law firm professional liability policies were designed to insure. Failing to account for these changing risks can result in uninsured liability exposures and potentially catastrophic consequences for law firms.

Excerpt:

The legal profession is undergoing profound change. The once simple, straightforward law firm-client relationship has evolved into a complex web of relationships with third-party legal vendors, including, but not limited to, discovery vendors and legal process outsourcers (LPOs). Coupled with these structural changes of legal services delivery is the increasingly hostile risk environment for law firms in which escalating settlements are routinely in the tens of millions of dollars. Importantly, the most exposed firms are not those operating on the fringe of the legal profession, but rather the most prominent and global law firms. Understanding and addressing these risk implications is essential for any law firm that engages or supervises third-party legal vendors.

Risks posed by today's third-party legal vendors are dramatically different than the risks posed by legal vendors of the past. These new risks are far beyond what many existing law firm professional liability policies were designed to insure. If something goes wrong, who is to blame and do lawyers have additional professional obligations to their clients? Furthermore, who pays for the damages of a legal vendor? Are traditional risk management approaches and policies enough in the increasingly dynamic legal environment? Failing to account for these changing risks can result in uninsured liability exposures and potentially catastrophic consequences for law firms.

Setting the Stage

On June 2, 2011, a law firm client levied the first reported malpractice claim against a prominent AmLaw firm regarding the law firm's use of a certain third-party vendor during the course of the discovery process. In the first reported case of its kind, this lawsuit, filed in California State Court located in Los Angeles (Case No. BC462832) on June 2, 2011, against McDermott Will & Emery LLP ("McDermott"), alleges liability arising from the conduct of a third-party vendor. Plaintiff, J-M Manufacturing Company doing business as JM Eagle ("JME"). JME, the world's largest maker of plastic pipe, claims that McDermott is liable for malpractice as a result of its contract attorneys sending privileged documents to the government. JME believes the privileged materials that were improperly produced consisted of approximately 3,900 documents. On August 8, 2011, the lawsuit was removed to United States District Court for the Central Division of California (Western Division) located in Los Angeles (Case No. 2:11-cv-06666-PSG).

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Michael D. Bell is the founder and managing principal of Fronterion LLC legal outsourcing advisory (http://fronterion.com/). His expertise covers the full spectrum of legal outsourcing advisory services including solution development, onsite vendor due diligence and selection, risk management, ethical compliance, solution implementation, and ongoing vendor relationship management. As an internationally sought-after conference speaker on the topic legal outsourcing, Bell has also been featured and quoted in a number of professional and mainstream publications such as The Lawyer, The Law Society Gazette, and The Washington Post. He is also the author of LPO Source blog (www.LPOsource.com) and contributor to the LPO Ethics Resource Centre (www.LPOethics.com).