Month: August 2019

By Lindsey M. Welfley

Robert Chastain grew up in Boise and is a tried and true Idahoan. Chastain attended Borah High School and played baseball before attending Boise State University for his undergraduate education. Contemplating his next steps after receiving his undergrad from Boise State, Chastain took his father’s advice to find a career that would provide him with a “license to eat.” He decided between two of the more common options at the time – school teacher, or lawyer – choosing the latter. Chastain relocated to Utah to attend law school at the University of Utah S.J. Quinney College of Law.

During law school, Chastain was hired as an intern by Greg Bower, former Ada County Prosecutor. Chastain cites Greg as one of his mentors and role models: “Greg taught me the importance of going to work and showing up on time […] he gave me room to make my own decisions, to grow, to both succeed and fail.” Chastain received his juris doctorate in 1981 and returned to Idaho immediately thereafter for admission into the Idaho State Bar that same year. Chastain met his wife, Marilyn (also an Idaho attorney), a few years later in 1983 while she was working at the Boise City Attorney’s Office. They were married in 2000.

After relocating to Idaho post-law school, Chastain began working in the Ada County Prosecutor’s Office. He prides himself in his time as a prosecutor as it gave him the foundation on which he would later build a career in criminal defense. Chastain worked his way through the ranks and became a felony prosecutor by the time he left the Prosecutor’s Office. After his time at the Prosecutor’s Office, Chastain briefly worked for a small firm. He quickly determined that he did not enjoy civil law quite like he had enjoyed the criminal side of things. At that point, he ventured into opening his own solo practice, in which he has been practicing ever since.

Early on in his career, Chastain was introduced to another of his trusted mentors. Larry Scott was a public defender while Chastain worked at the Prosecutor’s Office and Chastain recalls one of the more important lessons he learned from Larry: “You knew when you talked to Larry that his word was gold. He said something was going to happen or he was going to do something and you could go to the bank on it.” This lesson on the value of being true to your word stuck with Chastain throughout his career and is a quality he admires in many other attorneys and colleagues. He says, “It’s a heck of a lot easier to practice law when you trust your opposition.”

In addition to mentors within the profession, Chastain speaks highly of his late father’s influence on his life. “My father was and always has been a huge influence on me. He instilled the idea that you’re going to have to work and support yourself – and he was right. Not a day goes by I don’t think about him.”

Chastain practices criminal defense at his small Boise firm Chastain Law Offices in downtown Boise. Over the course of his career, he has tried several high profile murder cases and is one of the few Idaho attorneys who is death penalty certified. Chastain has worked closely with attorney Deborah Kristal throughout his career and they have tried several controversial murder cases together.

Those who have known Chastain over the years admire him for his quiet control and ability to get along with everyone he deals with. A longtime friend and colleague of Chastain’s, Fourth District Magistrate Judge Michael Oths mentions that, in a legal genre that doesn’t get the recognition it deserves, Chastain is widely regarded as one of the best criminal defense attorneys around while consistently staying properly humble. Being held in such high regard by his friends and colleagues is just one measure of Chastain’s high reputation.

Outside of the office, Chastain enjoys “playing the horses” and has traveled around the country for several thoroughbred races and events. Chastain does his best to stay young, mentioning, “I still play old-guy softball with Brad Andrews and Mike Oths. We have a good time and I’ve done that for about 35 years.” He and Marilyn have kept to their roots and live in Boise; they have a black Labrador named Roz.

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By Christina Mott Hesse

Utilization of telehealth services is on the rise, particularly as health systems—and especially those serving rural populations—are thinking beyond the traditional, literal walls of their facilities. Telemedicine increases appropriate and timely access to medical services, especially in rural areas, and promotes improved health outcomes and less costly treatments.[i] Thirty-five of Idaho’s 44 counties are rural or frontier, often facing limited access to health-care services and challenges in recruiting and retaining local physicians. Hospital systems recognize the need to provide medical services in these more rural communities.

For example, Intermountain Healthcare operates a 24-hour telehealth center that provides 40 telehealth services to seven western states. St. Luke’s Healthcare System recently opened a 24 -hour Virtual Care Center, which provides telehealth services throughout Idaho and Eastern Oregon. Through its Virtual Care Center, St. Luke’s successfully piloted a unique Remote Patient Management program[ii] for home monitoring of patients living with chronic conditions.[iii]

As telehealth usage increases, we will likely see a natural increase in medical professional liability claims, medical malpractice claims, and other related litigation. Telehealth providers should be prepared to protect themselves from this exposure.^[iv]

Telehealth and Telemedicine: Expanding Access and Improving Outcomes

Telehealth, or the delivery of health-related care, services, education, and information via telecommunications technology, which includes video-conferencing, remote monitoring, electronic consults, and wireless communications, is becoming an increasingly widespread practice. Telehealth and telemedicine are often used interchangeably, but telemedicine is a more specific term referring to clinical care delivered by a licensed health-care provider at one location to a patient at another site by means of health information and telecommunications technologies. From video-conferencing with patients in remote locations to monitoring ICU patients from centralized command centers, telemedicine is increasing patient access, improving quality of care, and lowering health care costs.

Telehealth has immense potential to increasingly promote better patient care and faster access to medical services. According to a fairly recent industry report, the global telemedicine market is expected to be a $35 billion industry by 2020,[v] and an $86.7 billion industry by 2023.[vi] The American Telemedicine Association estimates a majority of hospitals now use some form of telemedicine, and the overall number of telemedicine video consultations is expected to increase from 19.7 million in 2014 to about 158 million by 2020—a 700 percent increase over a five-year period.[vii] Additionally, the Medicare Telehealth Parity Act of 2015 expanded telehealth coverage to Medicare beneficiaries to include both rural and urban areas, and to streamline the payment system.

Telemedicine providers vary in technological sophistication, and a wide variety of medical specialties are now common offerings of telehealth services. Because telehealth can be provided 24-hours per day from any location, it is often an optimal choice to those seeking care on an alternative basis to traditional physician clinical settings or hospital facilities, or for patients unable to access in-person services due to factors such as distance from providers or non-traditional work schedules.

Telehealth and Telemedicine Malpractice Risks

Studies have suggested that there is little difference between the care given in-person and the care given via telemedicine appointments,[viii] and medical malpractice-related claims substantiate that data. Further, state and federal government, as well as medical associations, including the American Medical Association (AMA), are encouraging and assisting telehealthcare. While there have been only a handful of reported telemedicine malpractice claims to date, this is likely due to the low number of telemedicine visits as compared to in-person visits. The low number of claims may also be due to liability suits being settled out of court and not reported and, when claims are settled, confidentiality agreements preventing any information from being disclosed. Nevertheless, it would be imprudent to ignore potential liability issues as telemedicine use continues to grow.

Theoretically, telemedicine tends to be low liability for several reasons. First, telemedicine physicians are more likely to deal with routine checkups and prescription-writing than complex, high-risk procedures. Additionally, rather than simple phone call consultations as would occur between on-call physicians and patients in years past, secure video chat platforms that replace these phone calls often provide a platform to capture notes from online visits, arguably leading to better documentation and less liability in the event a claim does arise.

Nevertheless, a number of potential issues exist that can lead to and influence future litigation, such as communication, system and facility telehealth requirements, informed consent, applicable standard of care, insurance coverage, licensing and credentialing, and data management and cybersecurity.

Communication

Communication is often at the root of medical malpractice claims. A 2015 study analyzing more than 23,000 medical professional liability cases concluded that as much as 30% of the cases studied involved communication difficulties.[ix] Of that 30%, 55% involved a provider-patient miscommunication. Miscommunication may result either where one party is not technologically savvy or where there are issues relating to technology malfunctions. Given the inherent, often complex, nature of medical malpractice claims, and that they often involve weighing a patient’s account of a situation against a treatment provider’s, increased miscommunication, due to the technological component of telemedicine, could further complicate these claims. Conversely, tele-ICU setups are uniquely primed to significantly reduce the risk of medical error because they provide constant, continuous exchange of patient information.

Interaction and Informed Consent

Flexible or undefined system requirements for telehealth combined with lacking in-person interaction can potentially lead to incorrect diagnoses or prescriptions.  For example, if a patient sends a picture of a physical impairment, such as a rash or distortion, poor picture quality could lead to an incorrect diagnosis, which, in turn, could be the basis for litigation. Practitioners need to ensure proper clinical evaluation of a patient occurs before prescribing medications, given early court holdings that review of a patient’s online questionnaire, without more, is insufficient to establish a doctor-patient relationship and to support prescribing medications.

Informed consent is often an issue in medical malpractice claims. Because of the absence of in-person interaction, it is imperative that telemedicine providers establish a clear and complete informed consent procedure. A best practice for this procedure would ostensibly involve a written form including the names, credentials, and locations of every involved healthcare provider; the names, credentials, and locations of any other staff that may help facilitate the telehealth service; and descriptions of every telehealth service that will be performed and the technology that will be used.

Standard of Care

With respect to negligence-based claims, geography plays a significant role, specifically in determining what standard of care is applied to judge a practitioner’s care and treatment. Some states, like Idaho, utilize a community-based standard of care, while others use a uniform state-wide standard of care or national standard of care. Technology enables people to communicate from anywhere; however, standards haven’t yet been explicitly set forth for physicians who give medical advice and virtual care across state lines. Since care is provided in a patient’s state, that state’s laws may well prevail. With the exception of Hawaii, Colorado, and Texas, most states have not yet determined a standard of care specifically applicable to telemedicine.

Additionally, the Roush v. Southern Arizona Ear, Nose & Throat[x] case involving an action for tortious slander against a defendant physician, who during a telemedicine consultation stated, in front of two medical assistants, that the plaintiff’s “problem was never an ear problem” but a “brain disorder” and that his “problem was all in his head,” underscores the notion that telemedicine practitioners are held to the same professional standard of care as practitioners providing care as similarly positioned practitioners without the use of telemedicine technologies.

Insurance

It would be advisable for physicians to seek, and insurers to provide, telehealth policies that allow for reporting of facts and circumstances that might lead to a claim, otherwise known as “incident reporting.” A policy with incident reporting language allows the insured to report potential claims or bad outcomes as soon as they become known to the insured party. A policy that allows incident reporting would prove helpful in telehealth cases given the lack of current legal precedent for these types of claims. After proper notice is given, even if the insured changes carriers before a written demand for damages should occur, the carrier would bear the burden for that claim. Insurers and physicians may also benefit from negotiating specifically how any sexual abuse claims and punitive damages are handled in medical professional liability policies for telehealth providers. Additionally, issues may arise where malpractice liability policies do not cover multiple states.

Licensing and Credentialing

Most telemedicine providers make reasonable efforts to ensure that a patient is treated by an appropriately licensed professional in the state where the patient is located at the time the telehealth services are provided. While many telehealth providers may be able to confirm patient location via geolocation data provided by the device or conferencing platform used by patients, that may not always be the case. One can envision a myriad of scenarios in which licensure issues could arise.

For example, a patient in a vehicle crosses state lines during a video consult, or a patient receives a video consult utilizing a virtual private network that actively conceals his or her true location, or a physician who is licensed in Idaho but resides in Oregon conducts a telehealth visit from home with a patient who lives in Idaho. Telehealth providers using traditional technology, such as a landline telephone, should confirm the exact patient location before matching the patient to a duly licensed professional. The licensed physician would also be wise to confirm the patient’s location. It would also behoove telemedicine providers to employ physicians and other professionals that are licensed in multiple states to help address these potential licensing concerns.

Healthcare providers should be aware that some liability policies exclude coverage if a healthcare provider is not appropriately licensed in the state in which the patient is located at the time virtual services are provided. Further, some medical professional liability policies may contain coverage exclusions for treatment rendered by an individual who fails to obtain the proper professional license in the state or locality in which the treatment was provided or coverage exclusions for criminal activity, which could be implicated if the practice of medicine without a proper license is deemed criminal in the jurisdiction where treatment is provided.

While current licensure requirements for practicing telemedicine across state lines vary among states, the majority still require a physician to be licensed in the state in which the patient is located. Nine states’ medical boards[xi] issue special licenses or certificates related to telehealth that allow an out-of-state provider to render services via telemedicine in a state where they are not located or allow a clinician to provide services via telehealth in a state if certain conditions are met. Some states have laws that do not specifically address telemedicine licensing but make allowances for contiguous states or for certain situations where a temporary license might be issued, provided the specific state’s licensing conditions are met. Idaho is one of the 25 states who have adopted the Interstate Medical Licensure Compact that allows the Interstate Medical Licensure Compact Commission to form an expedited licensure process for licensed physicians to apply for medical licenses in other states.[xii]

Data Management and Cybersecurity

It is axiomatic that medical information, including patient health information, is protected under a number of laws, including HIPAA, the Health Information Technology for Economic and Clinical Health Act, and the Child Online Privacy Protection Act. As is with any internet-based service, with telehealth there is the potential for data breaches, which may put patient information at risk of public exposure and subject telehealth providers to legal action. Telehealth providers and insurers should be actively aware of this risk and take steps to safeguard confidential and protected information from public disclosure. Additionally, telehealth providers must take extra precautions to not conduct telehealth sessions in areas where patient information could be overheard, seen, or otherwise interpreted by third-parties.

Telehealth and Telemedicine Precedent

As of this writing, the legal community has seen little precedent on telemedicine malpractice claims, compared to general medical malpractice actions. The main reason for this lack of precedent is that telemedicine is still a relatively new tool being used in the administration of health care services. Nevertheless, the lack of precedent is likely to be short-lived.

The majority of legal actions that have been brought against telehealth providers resulted from telemedicine practitioners prescribing medications over the internet, rather than from negligently administered care through telemedicine.

In Hageseth v. Superior Court of California,[xiii] a California court asserted jurisdiction over a Colorado-licensed physician criminally charged with practicing without a license where the physician prescribed a generic version of Prozac over the internet to a patient in California who then committed suicide. The doctor prescribed the medicine after the patient filled out an online questionnaire; this was the extent of the doctor-patient interaction. The California Court of Appeals held that California had jurisdiction over the case, even though the doctor never physically entered the state because the defendant intended his acts to have effects in California.

In U.S. v. Kanner,[xiv] the defendants owned and operated PharmaCom, an online prescribing company that allowed customers to receive non-controlled prescription drugs over the internet by answering questions on a medical questionnaire. Physicians never saw the patients, and there was no previous physician-patient relationship.

In U.S. v. Hernandez,[xv] a Florida physician administered non-controlled substances over the internet without previously examining the patient.

Procedural Concerns

Telehealth providers should also be aware of procedural concerns. Specifically, telehealth providers administering care across state lines may have to confront the issue of personal jurisdiction; that is, the state court’s ability to require a defendant (i.e. the physician) to appear in the home state of the plaintiff (i.e. the patient). Choice of law issues may also arise, and in telemedicine malpractice lawsuits, neither the defendant nor the plaintiff should automatically assume that the laws of the state where the case is being heard will automatically govern the case. Additionally, while physicians providing care via telemedicine have the same responsibilities and obligations to their patients as physicians providing in-person care, in situations where the telemedicine practitioner provides a medical consult to another physician at a distance, a physician-patient relationship is not typically established, which may pose unique situations should litigation arise.

Given the overall continuous upward trend in numbers of initiated medical malpractice claims, it is likely that the number of telehealth-related claims will also start to rise. Further, given provider shortages throughout the U.S., in both rural and urban areas, telemedicine has a unique capacity to increase and improve service to millions of new patients. With a little foresight and planning, the severity and complexity of associated legal issues may be reduced.

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[i] Marc Harrison, Telehealth is Improving Health Care in Rural Areas, Harvard Business Review, May 15, 2019, https://hbr.org/2019/05/telehealth-is-improving-health-care-in-rural-areas.

[ii] Mandy Roth, Got Rural? Go Virtual. St. Luke’s Did, Health Leaders (Sept. 11, 2018), https://www.healthleadersmedia.com/innovation/got-rural-go-virtual-st-lukes-did.

[iii] Eric Wicklund, New Telemedicine Center to Extend Connected Health Across Idaho,mHealthIntelligence (Aug. 28, 2018), https://mhealthintelligence.com/news/new-telemedicine-center-to-extend-connected-health-across-idaho.

[iv] See generally RNCOS, Global Telemedicine Market Outlook 2020, at 4.2.2, 4.2.4 (2015).

[v] MarketWatch, Healthcare Machine to Machine (M2M) Market Size is Projected to be Around US$ 35.0 Billion By 2020 (Aug. 10,2018), https://www.marketwatch.com/press-release/healthcare-machine-to-machine-m2m-market-size-is-projected-to-be-around-us-350-billion-by-2020-2018-08-10.

[vi] Transparency Market Research, Telemedicine Technologies and Services Market to reach US$ 86.7 Bn in 2023, GLOBENEWSWIRE (July 13, 2016), https://globenewswire.com/news-release/2016/07/13/855662/0/en/Telemedicine-Technologies-and-Services-Market-to-reach-US-86-7-Bn-in-2023.html.

[vii] Press Release, Tractica, Telehealth Video Consultation Sessions to Reach 158 Million Annually by 2020 (June 24, 2015), available at https://www.tractica.com/newsroom/press-releases/telehealth-video-consultation-sessions-to-reach-158-million-annually-by-2020/.

[viii] American Telemedicine Association, Examples of Research Outcomes: Telemedicine’s Impact on Healthcare Cost and Quality (April 2013), https://www.amdtelemedicine.com/telemedicine-resources/documents/ATATelemedicineResearchPaper_impact-on-healthcare-cost-and-quality_April2013.pdf.

[ix] Highlights: Malpractice Risks in Communication Failures (Crico Strategies 2015), available at https://www.youtube.com/watch?time_continue=70&v=trJ1DUaEIuk.

[x] No. 2 CA-CV 2008-0049, 2009 WL 368865, at *1 (Ariz. Ct. App. Feb. 13, 2009).

[xi] These nine states include Alabama, Louisiana, Maine, Minnesota, New Mexico, Ohio, Oregon, Tennessee (osteopathic board only), and Texas. See Center for Connected Health Policy, State Telehealth Laws & Reimbursement Policies, The National Telehealth Policy Resource Center, 10 (2018), https://www.cchpca.org/sites/default/files/2018-10/CCHP_50_State_Report_Fall_2018.pdf.

[xii] Id.

[xiii] See 150 Cal. App. 4th 1399, 1417 (2007).

[xiv] See No. 07-CR-1023-LRR, 2008 WL 2663414, at *1 (N.D. Iowa June 27, 2008).

[xv] See No. 07-60027-CR-ZLOCH/Snow (S.D. Fla. Oct. 4, 2007).

By Kelsey J. Nunez

Throughout the world, for-profit entities are declaring their commitment to “using business as a force for good”^{TM [i]} and matching their ability to generate profits with their desire to create social and environmental benefits. Businesses led by social entrepreneurs have gained market share and the attention of impact investors (i.e., investors who also seek to create social and environmental benefits).^[ii] But what happens when a social entrepreneur promises these benefits but fails to deliver?

But First, What’s a Benefit Corporation?

Benefit corporations were formed after decades of litigation and debate over the doctrine of “shareholder primacy.” When asked if corporate directors and officers may make decisions that did not seek to maximize shareholder profits, the prevailing view – put extremely simply – was no. Directors and officers have fiduciary duties to the shareholders, not external stakeholders who are affected by the corporation.

The terms “benefit corporation” and “B-Corp” are related but not synonymous.

Following some key judicial opinions, many states enacted “constituency statutes” that allowed corporate decision-makers to consider other constituencies (such as workers, the environment, suppliers, etc.) if they wanted to. But even in states with constituency statutes, the dominant ethos in corporate governance prioritized shareholder profit over other impacts. So advocates for corporate social responsibility continued to pursue alternatives.^[iii]

In 2006, the nonprofit organization B-Lab created a robust third-party certification system that allows entities to earn designation as a “Certified B-Corporation” (aka B-Corp).^[iv] Any entity form (LLC, C-corp, S-corp, partnership, etc.) can apply for the certification, which has no impact on the legal status of the entity. However, a corporation certified as B-Corp would still be subject to shareholder primacy constraints. Thus, B-Lab proceeded to create model legislation for states to establish a new corporate form with different fiduciary duties.

Since 2010, 34 states have enacted benefit corporation legislation, including Idaho in 2015.^[v] In a benefit corporation, directors and officers must create (or at least attempt to create) a “general public benefit” while considering and reporting on impacts to a broad range of issues and stakeholders. A “general public benefit” is “a material positive impact on society and the environment, taken as a whole, as assessed under a third-party standard, resulting from the business and operations of a benefit corporation.”^[vi]

In addition to making it quite clear that shareholders are just one of the many relevant considerations, the legislation created a “benefit enforcement proceeding” as the mechanism to ensure decision-makers are fulfilling the public benefit purposes.^[vii]

Benefit Enforcement Proceedings, Generally

The Idaho Benefit Corporation Act (the “Act”) establishes the benefit enforcement proceeding (“BEP”) as an exclusive and limited remedy for issues related to the “benefit” part of a benefit corporation. The BEP is the exclusive forum for claims of: (i) failure to pursue or create the required public benefit; or (ii) violation of an obligation, duty, or standard of conduct under the Act.^[viii] Only certain parties can initiate a BEP. The corporation may bring an action directly, and the following parties may bring one derivatively: (i) a person or group of persons that own at least 2% of the shares; (ii) a director; (iii) a person or group of persons that own at least 5% of the parent company; or (iv) anyone else specified in the articles of incorporation or bylaws.^[ix] No monetary damages may be sought unless otherwise stated in the articles of incorporation.^[x]

Interestingly, but perhaps not surprisingly, there are no judicial opinions involving a BEP in any state yet.^[xi] This doesn’t mean that the management of benefit corporations is conflict-free, of course. It just means that no conflicts have resulted in litigation that has made it through the court system. I’ve reached out to my colleagues in the Benefit Corporation Bar Association, and so far we have only heard of one lawsuit and it settled quickly. In Pirron v. Impact Makers, a founder and former CEO of a Virginia benefit corporation sued the board of directors to (among other things) reverse a sale of shares that threatened the philanthropic mission of the company. The 147-page, multi-count complaint was filed on May 3, 2019, and the settlement was announced about a month later.^[xii]

While we don’t have judicial guidance yet, it’s only a matter of time before one of these cases goes all the way. Practitioners in this field should understand what a BEP might entail so we can help our clients uphold the commitments they make when choosing this corporate form. What follows are some ideas about how a BEP could be handled, depending upon what went wrong.

Failure to Pursue or Achieve Public Benefit

Theoretically, the plaintiffs could argue that the decision-makers didn’t even try to create public benefit. I find this to be unlikely with respect to founders. Why would a group of people incorporate as a benefit corporation and opt-in to a legally enforceable scheme of additional fiduciary duties and reporting requirements if they weren’t even going to try?^[xiii] I speculate that a failure-to-pursue claim is more likely to apply to directors and officers who join the company down the road and who may not be as committed as the early managers. But because I’d like to think that someone who takes a job with a benefit corporation understands what they are expected to do, I think BEPs will focus more on failure to achieve rather than failure-to-pursue.

How would one prove “failure to achieve?” This raises so many questions. What if progress is being made but the results just need more time to be realized? When is it too soon to declare failure? And who gets to decide whether something failed or not? Expectations rarely match reality, and some people consider a partial win to be a success while others are never satisfied. The analysis of “failure” versus “success” needs some sort of objective metric if it is going to be litigated.

Creating and improving metrics to measure returns on investment in social and environmental benefits is a rapidly evolving industry. It’s not as easy as reviewing financial statements for profits and losses because the cost-benefit analysis involves more than money. The “right thing to do” is subjective, and the complex nature of cause and effect makes it challenging to assign a value to a social or environmental outcome. But social entrepreneurs and impact investors are not known for shying away from challenges! Many resources are available to measure Return on Investment (“ROI”) and analyze failure or success and these tools are getting more advanced.

Clearly, there is more than one way to skin a social entrepreneur. Anyone initiating, defending, or trying to avoid a BEP would benefit by analyzing the action or inaction at issue using the above resources.

Social ROI Metrics B-Corp Resource Library – contains case studies, templates, best practice guides, webinars, and live recordings to help create benefits and measure impacts to affected stakeholders.[xiv] B Impact Assessment – known as “the most credible tool a company can use to measure its impact on its workers, community, environment, and customers.”14 The Assessment has supportive analytical tools that benchmark data from over 50,000 businesses around the world using over 300 indicators.[xv] Impact Portfolio Assessment Reporting (“iPAR”) platform – created by the Global Impact Investment Network to collect and report data relating to capital deployed for social and environmental impact.[xvi] Bloomberg Professional Services – provides high-quality tools for integrating environmental, social, and governance data into investment portfolios.[xvii] Sustainability Accounting Standards Board – creates standards for identifying, managing, tracking, and reporting on investments in sustainability.[xviii] Edwards Mother Earth Foundation’s Impact Investment Study – the experiences of a portfolio dedicated to measurable social and environmental impacts.[xix]

Failure to Analyze Properly

Benefit corporation directors and officers have a standard of conduct that requires them to consider a host of groups and issues when making decisions. This list was developed in response to the case law upholding shareholder primacy in various fact patterns. Impacts on the shareholders must still be considered, but not in a vacuum.

The list of considerations includes: (i) shareholders; (ii) employees; (iii) subsidiaries and suppliers; (iv) interests of customers as beneficiaries of the general public benefit or specific public benefit purposes; (v) community and social factors, including those of each community in which offices or facilities of the benefit corporation, or its subsidiaries, or its suppliers are located; (vi) local and global environment; (vii) short-term and long-term interests of the benefit corporation, including benefits that may accrue to the benefit corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the benefit corporation; and (viii) ability of the benefit corporation to accomplish its general public benefit purpose and any specific benefit purpose.^[xx]

This “stakeholder governance” model requires some sort of structure for decision making to ensure that directors and officers engage in the required analysis before deciding to act or not act. A BEP brought for breach of this duty or violation of the standard of conduct would have to argue that the analysis wasn’t done at all or was done poorly. I advise my benefit corporation clients to document their discussion of these statutory factors in their meeting minutes, referencing whatever research they conducted to arrive at their decisions. The more controversial or costly the decision, the more detail should be preserved in the notes. Each individual should keep their own records as well. Then, if a BEP is brought for this reason, the minutes and other records can be used as evidence of the scope of analysis.

Concluding Thoughts

In my experience advocating for corporate social responsibility and supporting social entrepreneurs, I’ve met successful people who are incredibly passionate about using capitalism and entrepreneurship to “save the world.” I’ve also been told that benefit corporations are a millennial ego-stroking tactic. It is my position that there is a place for [almost] everyone in our complex economy. People who enjoy business, as usual, have plenty of options. Now, those who want to do the work differently have support as well. The community of businesses committed to the triple bottom line (i.e., social, environmental, and economic impacts) will continue to grow and work out the kinks together. The benefit enforcement proceeding creates a forum to ensure that those who choose to use business as a force for good can keep each other in check.

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[i] “Using business as a force for good” is the motto of Certified B Corporations. See https://bcorporation.net/.

^[ii] A Google search will reveal loads of information on the topic of impact investing. Treasure Valley locals can get involved with the Boise Impact Investing Group, hosted by Figure 8 Investment Strategies (https://figure8investing.com).

^[iii] For an analysis of case law and legislative history that inspired the benefit corporation, see generally Frederick H. Alexander, Benefit Corporation Law and Governance: Pursuing Profit With Purpose (2018) (especially Part 1: Shareholder Primacy and Its Discontents).

^[iv] The Certified B Corporation program uses a rigorous screening process that looks at governance, employees, supply chain, community involvement, and more. See https://bimpactassessment.net/.

^[v] Idaho benefit corporations are governed by both the Idaho Benefit Corporation Act at Idaho Code §§ 30-2001 et seq. and the Idaho Business Corporation Act at Idaho Code § 30-29-101 et. seq. Chapter 20 provides requirements that are in addition to or in lieu of the general business corporations laws in Chapter 29. Idaho Code § 30-2001(4). For an overview of the Idaho Benefit Corporation Act, see Kelsey Nunez & Mark Buchanan, New Corporate Form Provides More Options For Social Entrepreneurs, 60 Idaho Advocate 42 (August 2017). For a state-by-state status of benefit corporation legislation, seehttps://benefitcorp.net/policymakers/state-by-state-status.

^[vi] Idaho Code § 30-2002(5). Benefit corporations may also commit to one or more “specific public benefits” such as: (a) providing low-income or underserved individuals or communities with beneficial products or services; (b) promoting economic opportunity for individuals or communities beyond the creation of jobs in the normal course of business; (c) protecting or restoring the environment; (d) improving human health; (e) promoting the arts, sciences, or advancement of knowledge; (f) increasing the flow of capital to entities with a purpose to benefit society or the environment; or (g) conferring any other particular benefit on society or the environment. Id. at § 30-2002(9).

^[vii] If you’re wondering why someone would choose a corporate form with such fundamental diversions from generations of corporate practice, hold that thought. My next article will focus on entity selection for social entrepreneurs (teaser: transparency, accountability, and market differentiation). Here, I discuss what happens when someone who has chosen to be involved with a benefit corporation becomes disgruntled about its social and environmental performance.

^[viii] Idaho Code § 30-2011(1).

^[ix] Id. at § 30-2011(3).

^[x] Id. at §§ 30-2011(2), 30-2007(5)(b). Because there are no monetary damages, the remedy would likely be akin to specific performance where the court would instruct the defendants to act or not act.

^[xi] Last Westlaw search conducted July 1, 2019.

^[xii] The complaint is posted at https://dunlaponcloud.egnyte.com/dl/CzgQ5pAtMY/. For a summary, see John Reid Blackwell, Richmond-Based Impact Makers and Its Founder Settle Lawsuit, Richmond Times Dispatch (June 18, 2019), https://www.richmond.com/business/local/richmond-based-impact-makers-and-its-founder-settle-lawsuit/article_f591f6b8-3925-5c9e-9f81-210480a31a34.html?utm_medium=social&utm_source=email&utm_campaign=user-share.

^[xiii] Practice tip – make sure your clients know what a benefit corporation is before they decide to form one or invest in one.

^[xiv] B-Lab’s Resource Library is available at https://bcorporation.net/for-b-corps/resource-library.

^[xv] The assessment can be accompanied by a new data aggregation tool, B-Analytics. https://b-analytics.net.

^[xvi] More about iPAR is available at https://impacttoolkit.thegiin.org/impact-performance-assessment-and-reporting-ipar/.

^[xvii] See generally,https://www.bloomberg.com/professional/blog/integrate-esg-data-investment-portfolios.

^[xviii] See generally, https://www.sasb.org/.

^[xix] See generally, https://www.caprock.com/wp-content/uploads/2019/05/EMEF_Case-Study.pdf.

^[xx] Idaho Code § 30-2007(1). The Act does not establish a hierarchy, although the articles of incorporation may prioritize some factors over others if desired. Id. at § 30-2007(3).

By Kevin A. Griffiths

Introduction

Declaring bankruptcy requires a disclosure of all of your “assets,” and this requirement is broad, necessitating the identification of lawsuits both actual and potential.  Failing to identify pending lawsuits—or, on the more difficult front, potential lawsuits—can have dramatic consequences.  As a result, a pitfall that can befall any litigator arises when the client has declared bankruptcy immediately before, during, or after the injury that gave rise to the litigation.  At its most basic this implicates the equitable defense of judicial estoppel, which can prove a complicated issue to litigate.

While this issue is well settled for claims arising prior to the bankruptcy petition, questions remain concerning claims arising during (or after) the pendency of the bankruptcy. This article will explore two recent decisions from the Bankruptcy Court for the District of Idaho which provide valuable guidance on ownership of claims arising during the pendency of bankruptcy as well as the need to amend bankruptcy schedules to disclose those claims in order to avoid a subsequent judicial estoppel issue.

The Intersection of Bankruptcy, Estoppel, and Civil Litigation

“Judicial estoppel precludes a party from gaining an advantage by taking one position, and then seeking a second advantage by taking an incompatible position.”[i] The purpose of the doctrine is to protect the integrity of the judicial system by preventing a party from gaining an advantage through misrepresentations to the court.

This defense often arises in response to claims pursued by those who have been through bankruptcy and is based upon a debtor in bankruptcy’s obligation (or failure) to disclose all potential claims to the bankruptcy trustee. “In the bankruptcy context, a party is judicially estopped from asserting a cause of action not raised in a . . . plan [or petition] or otherwise mentioned in the debtor’s schedules or disclosure statements.”[ii]

Judicial estoppel “will be imposed when the debtor has knowledge of enough facts to know that a potential cause of action exists during the pendency of the bankruptcy but fails to amend his schedules or disclosure statements to identify the cause of action as a contingent asset.”[iii] This is because non-disclosure, by implication, would indicate that the claim has no value, which is a position that is inconsistent with later pursuit of the claim.[iv]

The Idaho Supreme Court’s decisions concerning judicial estoppel in the bankruptcy context have made clear that when a party is chargeable with knowledge of a claim prior to the filing of the bankruptcy petition, i.e., when an injury occurs prior to bankruptcy, judicial estoppel applies.[v] The issue, however, is more nuanced. The Idaho Supreme Court has yet to address the treatment of claims that arise after the initial filing of the bankruptcy petition and property schedule, but before discharge is granted. Fortunately, two recent decisions from the U.S. Bankruptcy Court for the District of Idaho shed some light on this subject: Wisdom v. Gugino (In re Wisdom)[vi] and Avery v. Mikkelsen (In re Mikkelsen).[vii] In re Wisdom lays a foundation, later built upon by In re Mikkelson, which suggests that the relevant inquiry in determining whether judicial estoppel applies turns on whether the claim would have belonged to the bankruptcy estate. Each of these cases, their interplay, and the conclusions to be drawn therefrom are discussed below.

In re Wisdom

The issue presented by In re Wisdom required the bankruptcy court to deal with a variety of claims asserted by the debtor against his legal counsel arising out of his representation during the bankruptcy to determine whether it had jurisdiction over those claims. The debtor’s claims were based upon three specific incidents—(1) liquidation of the debtor’s insurance policies, (2) sale or compromise of the debtor’s pro se lawsuits, and (3) counsels’ withdrawal from representation of the debtor—all of which the Court determined arose post-petition.[viii]

In the context of determining whether it had subject-matter jurisdiction over the malpractice claims asserted by the debtor, the bankruptcy court was required to determine whether those claims were sufficiently related to the bankruptcy case to render them “core” proceedings.[ix] The bankruptcy court found that the claims were unrelated, and it lacked jurisdiction over them, because they were based upon post-petition conduct and belonged to the debtor, not the bankruptcy estate, and could be pursued by the debtor under state law outside of the bankruptcy court. In making this finding, the Court found that the claims presented, arising as they did from post-petition conduct, “have no impact upon the administration of the bankruptcy case, or on property of the estate, or on the distribution to creditors. . . .”[x]

In re Mikkelsen

In re Mikkelsen builds on the concepts explored by In re Wisdom to determine ownership of claims against the debtors’ former attorneys arising from both pre- and post-petition conduct. The procedural history of In re Mikkelsen reflects a somewhat complicated invocation of the principles underlying judicial estoppel (although the term is never explicitly invoked). In re Mikkelsen was an adversary action against the debtors brought by their former attorneys in bankruptcy court seeking a determination that a state court malpractice filed against the attorneys was property of the bankruptcy estate and could not be pursued by the debtors in state court.[xi] This course of action, presumably, was pursued in lieu of simply raising the defense of judicial estoppel in the state court action, as the principle remains.

The claims against the debtors’ former attorneys were based upon alleged negligent preparation of a homestead declaration prior to the filing of the bankruptcy petition which allowed the trustee to successfully avoid the debtors’ homestead exemption claim. The debtors also alleged that their former attorneys had negligently advised them to pay off certain financial obligations prior to filing the bankruptcy petition, which resulted in the debtors being required to reimburse the bankruptcy estate for those payments.

In its decision, the bankruptcy court expanded on its reasoning from Wisdom by again focusing on the issue of whether the claims in question were property of the bankruptcy estate. The bankruptcy court found that even though it was dealing with claims based upon conduct that occurred pre-petition, that fact alone did not make the claims the property of the estate. Instead, the relevant inquiry was whether the cause of action in question accrued pre- or post-petition.[xii] In short, claims that have accrued prior to the filing of the petition are property of the bankruptcy estate while those accruing post-petition are not.

The bankruptcy court noted accrual is to be determined according to state law, which for negligence claims requires the occurrence of “some damage.”[xiii] Under this legal framework, the bankruptcy court determined that even though the debtors’ claims were based upon pre-petition conduct, the claims accrued post-petition because the debtors were not damaged until the trustee avoided their homestead exemption and successfully sought reimbursement for pre-petition debt payments. Thus, the bankruptcy court determined that the malpractice claims were not the property of the estate and could be properly pursued in state court, granting the debtors’ motion to dismiss.

Conclusion

Although neither In re Wisdom nor In re Mikkelsen use the term “judicial estoppel,” they are dealing with the underlying concept—benefit to the bankruptcy estate and its impact on a debtor’s ability to pursue claims arising around the time of filing the petition. Those decisions indicate that if the claim does not belong to the bankruptcy estate, non-disclosure is not per se inconsistent with later pursuit of the claim by the debtor.

In re Mikkelsen, in particular, indicates that the deciding factor is claim ownership, which is to be determined based upon when the cause of action accrued. That is, if the claim accrued post-petition, a debtor has a strong argument that judicial estoppel does not apply even if the claim was not disclosed on the debtor’s bankruptcy petition. This does not mean, however, that a debtor who has made the determination that a claim has not yet accrued should not disclose the claim to the bankruptcy court as the Idaho Supreme Court has made clear that there is a continuing “duty to disclose all assets and potential assets.”[xiv] Instead, these decisions show that one of the key factors to be taken into account when dealing with a judicial estoppel defense is whether the claim(s) in question had accrued at the time bankruptcy was declared.

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[i] A & J Const. Co. v. Wood, 141 Idaho 682, 684 (2005)

[ii] Id. at 685 (quoting Hamilton v. State Farm Fire & Cas. Co., 270 F.3d 778, 783 (9th Cir. 2001).

[iii] Id. at 686 (quoting Hamilton, 270F.3d at 784).

[iv] See id. at 688, 116 P.3d at 18 (“It is undisputed that A & J succeeded in persuading the bankruptcy court to accept its prior position, in which it failed to disclose any interest in either the real property subject to the dispute or the joint venture agreement. Now, A & J takes an inconsistent position by seeking to have the courts determine the existence, nature and extent of its interest in the nondisclosed real property and joint venture agreement.”).

[v] See, e.g., id. (holding that plaintiff seeking accounting of a joint venture was judicially estopped from doing so because he knew of the interests before his bankruptcy filing and did not disclose that interest to the trustee); see also Strong v. Intermountain Anesthesia, P.A., 160 Idaho 27 (2016) (finding that plaintiff was judicially estopped from pursuing undisclosed medical malpractice claim arising from procedure performed prior to bankruptcy); Mowrey v. Chevron Pipe Line Co., 155 Idaho 629 (2013) (finding that plaintiff was estopped from pursing personal injury claim arising from undisclosed pre-bankruptcy injury); McAllister v. Dixon, 154 Idaho 891 (2013) (finding that undisclosed malpractice claim based upon medical procedure performed over a year before the bankruptcy was barred by the doctrine of judicial estoppel.)

[vi] Wisdom v. Gugino (In re Wisdom), Case No. 11-01135-JDP, Adv. No. 13-06045-TLM, 2016 WL 872102 (D. Idaho Bankr. Mar. 7, 2016).

[vii] Avery v. Mikkelsen (In re Mikkelsen), Case No. 16-01489, Adv. No. 18-06018-TLM, 2018 WL 4182448 (D. Idaho Bankr. Aug. 30, 2018).

[viii] In re Wisdom, 2016 WL 872102 at *1. 

[ix] Id. at *1-2.

[x] Id. at *2.

[xi] In re Mikkelsen, 2018 WL 4182448, at *1.

[xii] Id. at *2.

[xiii] Id. at *3.

[xiv] A & J Const., 141 Idaho at 686, 116 P.3d at 16.

By D. Andrew Rawlings

The situation is familiar.  Your client has filed a claim in a lawsuit.  The other party has been served.  The time to respond has passed.  But the other party has not responded.  Reflexively, legal practitioners seek default.  To refine this legal reflex, this article is intended to clarify the terminology and delve into some common trouble spots in the analysis of both default and default judgment.  Precise vocabulary leads to better analytical understanding and, together with clear applications, provides a simpler path to obtaining default judgment.

From the outset, it is important to bear in mind that “judgments by default are not favored.”[i]  While this is frequently applied ex post facto to support granting relief from a judgment “in doubtful cases in order to decide the case on the merits,”[ii] it also places a gatekeeping function on the court.  For this reason, compliance with all of the requirements for default and default judgment is essential.  The better a party’s submissions in pursuit of default judgment are, the more likely they are to be granted the desired default judgment.

Distinguishing Default from Default Judgment

Frequently in lawyers’ parlance “default” includes the default entered against a party and the resulting judgment.  While this can be a convenient shorthand, the rules of civil procedure use these terms more specifically.  “Courts distinguish a judgment by default from the mere entry of default. … An entry of default and an entry of default judgment are two separate events or steps.”[iii]  As a result, entry of default can occur simultaneously with default judgment or the two can occur at different times.

The entry of default is the first step and does not constitute a judgment.[iv]  The entry of default, by itself, is interlocutory and not an appealable order.[v]  The effect of default being entered against a party is that the defaulted party is no longer entitled to be served with orders, pleadings (except as to new claims against the defaulted party), motions, memoranda, notices, etc.[vi]  In short, a defaulted party is not usually entitled to further notice of the proceedings.[vii]

In contrast, default judgment is—above all—a judgment.  It must comport with all of the requirements of judgments in Idaho Rule of Civil Procedure 54(a).  Thus, it must be titled a “Judgment”; “begin with the words ‘JUDGMENT IS ENTERED AS FOLLOWS:…”; “state the relief to which a party is entitled on one or more claims for relief in the action”; and “must not contain a recital of pleadings, the report of a master, the record of prior proceedings, the court’s legal reasoning, findings of fact, or conclusions of law.”[viii]  Once signed by the court, it can be enforced like any other judgment.

Entry of Default

The entry of default is governed by Rule 55(a).  Generally, “[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the court must order entry of the party’s default.”[ix]  For this reason, entry of default is not an area of discretion for the trial court but is mandatory when the underlying conditions are satisfied.[x]  There are three underlying conditions that require the court to enter default against a party: (1) proper service on the party (2) who has failed to plead or otherwise defend (3) within the time for doing so.

First, a party must be served with the claim.  Service of an original complaint, third-party claim, or a new claim for relief against an already-defaulted party must comply with Rule 4. Once completed, the written proof of service must be filed unless the defendant files an appearance.[xi]  When the claim is not in an original pleading (e.g., a counterclaim, crossclaim, or an amended claim), service must comply with Rule 5 and the Rule on Electronic Filing and Service.  After appropriate service is completed, the served party has the obligation to “plead or otherwise defend.”[xii]

Second, to plead or otherwise defend usually means filing a responsive pleading[xiii] or a Rule 12(b) motion.[xiv]  A defendant may instead file a notice of appearance, but doing so will not prevent the entry of default, though it does create an additional procedural hurdle.  “If a party has appeared in the action, that party must be served with three days’ written notice of the application for entry of default before default may be entered.”[xv]

But this notice can also be necessary even without a formal notice of appearance being filed with the Court.  The term “appearance” is “broadly defined” and comes down to whether there are sufficient indications of a defendant’s “intent to defend against the action.”[xvi]  Thus, “[s]ufficient contacts between attorneys” can constitute an appearance.[xvii]  Even engaging with a plaintiff’s attorney and attending a deposition has been considered an appearance,[xviii] though that “probably marks the outer bounds of activity that can be considered an appearance.”[xix]

Accordingly, an appearance is not completed by a single letter to plaintiff’s attorney,[xx] a single phone message proposing a settlement,[xxi] “participating in preliminary settlement negotiations,”[xxii] or “[t]estifying as a witness at a deposition.”[xxiii]  Ultimately, “[t]o amount to an appearance, the defendant’s actions must be responsive to plaintiff’s formal court action, so it is insufficient to simply be interested in the dispute or to communicate to the plaintiff an unwillingness to comply with the requested relief.”[xxiv]  The key action is an indication of acknowledged representation of defendant—either by an attorney or self-representation—in response to the lawsuit.[xxv]

Third, the timeframe for pleading or defending (or appearing, to trigger the additional notice) depends on the procedural posture.  A party must respond “21 days after being served with” a summons and complaint, counterclaim/crossclaim, or an order to reply.[xxvi]  Alternatively, the timeframe to respond is 14 days after an amendment is filed,[xxvii] the trial court decides a Rule 12(b) motion,[xxviii] or a more definite statement (resulting from a successful Rule 12(e) motion) is filed.[xxix]  Finally, a shorter time can be set with the consent of the defaulting party and a court order shortening the time for a response made upon a showing of good cause by the non-defaulting party.[xxx]

Mechanically, the non-defaulting party must seek the entry of default against a party that has failed to timely appear.  After establishing adequate service (under Rule 4(g) or 5(e)), the non-defaulting party must submit an application and an affidavit (or a declaration, per Rule 2.7) showing that the defaulting party (1) failed to plead or otherwise defend (2) within the time for doing so, and (3)if the defaulting party “appeared,” whether the required additional notice was provided.  Upon a satisfactory showing, the court must enter default against the defaulting party.

Default Judgment

Default judgment is governed by Idaho Rule of Civil Procedure 55(b).  The procedures are somewhat different depending on whether the claim is for a “sum certain” or not.  Each of these situations warrants separate consideration.

Default Judgment for a Sum Certain

When the “claim is for a sum certain or a sum that can be made certain by computation, the court, [once all the requirements are met], must order judgment for that amount and costs against the party who has been default.”[xxxi]  Note that default judgment is also a mandatory action, but only once the requirements for it are satisfied.  The requirements are spelled out in the rules.  Just as with the entry of default, default judgment requires an application and an affidavit (or declaration).  When a “sum certain” or calculable is sought, the non-defaulting party must submit an application and a supporting affidavit (or declaration).

At a minimum, the application must certify: (1) the name of the party against whom default judgment should be entered,[xxxii] and (2) the address most likely to give notice of the default judgment to that party.[xxxiii] The supporting affidavit (or declaration) must show: (1) the amount due and the method of calculation,[xxxiv] (2) an original instrument evidencing the claim (unless otherwise permitted by the court),[xxxv] and (3) that the party against whom default judgment should be entered: (a) Was personally served (“other than by publication or personal service outside of this state”),[xxxvi] (b) has been defaulted,[xxxvii] (c) is not a minor or incompetent,[xxxviii] and (d) is not protected by the Servicemembers Civil Relief Act (“SCRA”), 50 U.S.C. §§ 3901–4043. In submitting these materials, some points are common trouble spots in obtaining default judgment and bear further description.

First, the amount due and the method of calculation must be clear.  Thus, if interest is being claimed, the calculation needs to be understandable.  Except in very limited circumstances, “courts in Idaho are averse to awards of compound interest.”[xxxix]  And specifically, practitioners must be aware that “[p]rejudgment interest is not compounded” in Idaho.[xl]  Thus, for purposes of default judgment, a claimant is only entitled to simple interest.[xli]  To show the calculation of simple interest, the affidavit or declaration should show: (a) the principal amount due, (b) the due date, (c) the number of days from the due date to the date of the application for default judgment, and (d) the interest per diem.  The first and second items are factual allegations that should already be in the pleading.  The third is readily counted.  The fourth requires some accounting acumen.

 Unless otherwise specified in a contract, statute, or rule, Idaho’s prejudgment interest rate in most cases is 12% per annum.[xlii]  Divided by 365 days per year, this yields an effective rate of approximately 0.0329% per day (using a spreadsheet program will diminish rounding errors but, in any event, the use or disuse of rounding must be explained so the court can understand the calculation).  Multiplying that per day interest rate by the principal results in the interest per diem.  With that, the total interest due is calculated by multiplying the interest per diem by the number of days from the due date to the date of the application for default judgment.

Second, it is worth noting that the default rule is that a party seeking default judgment must provide “any original instrument evidencing the claim,” and can only be relieved of that obligation if the court permits otherwise.[xliii]  None of the local rules of any of the judicial districts discuss this requirement to provide an original instrument.[xliv]  Thus, without a specific court order providing otherwise in the pending action, a non-defaulting party is required to submit “any original instrument evidencing the claim.”[xlv]  As most default judgments for a sum certain arise from a contract, the contract at issue is the original instrument.

From an evidentiary point of view, this original instrument must be properly authenticated.[xlvi]  While the term “original” is used in this rule, and is the best evidence,[xlvii] the rules of evidence provide that a “duplicate is admissible to the same extent as the original unless a genuine question is raised about the original’s authenticity, or the circumstances make it unfair to admit the duplicate.”[xlviii]

Third, while a detailed discussion of the SCRA, codified at 50 U.S.C. §§ 3901–4043, would be lengthy, compliance with the SCRA is usually straightforward.  Generally speaking, the SCRA is “a federal law that provides protections for military members as they enter active duty.”[xlix]  If the defaulted party is a business entity, it cannot be protected by the SCRA since it cannot be a “servicemember” protected by these federal statutes.[l]  If the defaulted party is an individual, there are means of obtaining a report showing whether that person is a “servicemember.”[li]

Default Judgment in Other Cases

In “other cases,” including where a “sum certain” is not sought or where the defendant is a “minor or incompetent person,” the non-defaulting party must submit an application.[lii]  But because this category of default judgment definitionally encompasses all of the claims that cannot “be made certain by computation,” the rule provides some additional explicit protections and more adaptable procedures the court can use.   

One protection in Rule 55(b)(2) is that default judgment can only “be entered against a minor or incompetent person only if represented by a general guardian, conservator, or other like fiduciary who has appeared.”[liii]  Another protection provides for three days’ notice prior to a hearing for any party that has appeared.[liv]  When default is sought at the same time as default judgment in this case, the three days’ notice for both can be combined, although a hearing is required to obtain a default judgment.[lv]

Beyond that, the issues depend on the case.  To accommodate all of the variances possible in these cases, the rule provides that the “court may conduct hearings or make referrals when, to enter or effectuate judgment, it needs to: (A) conduct an accounting; (B) determine the amount of damages; (C) establish the truth of any allegation by evidence; or (D) investigate any other matter.”[lvi]

Costs and Attorney Fees Upon Default Judgment

A party prevailing by means of a default judgment is, like any other prevailing party, entitled to an award of costs pursuant to Rule 54(d) and, perhaps, attorney fees per Rule 54(e).  This requires a memorandum of costs, which can be combined into the application and affidavit/declaration filed to seek default judgment.

Along with costs, attorney fees may be awarded to a prevailing party, even in a default judgment, “when provided for by any statute or contract.”[lvii]  However, “[n]o attorney fees may be awarded pursuant to Idaho Code section 12-121 on a default judgment.”[lviii]  Thus, under whatever basis the attorney fees are claimed as part of the default judgment, “the amount of attorney fees in the event of default must be included in the prayer for relief in the complaint and the award must not exceed the amount in the prayer.”[lix]

Further, when fees are claimed in a default judgment under Idaho Code § 12-120, the “award of attorney fees … must not exceed the amount of the judgment for the claim, exclusive of costs.”[lx]  Consequently, when fees are claimed under a contract or another statute, the same restriction does not apply, and the fees can exceed the amount of the claim.[lxi]  In any event, the fees must be reasonable, and the court must have a basis to analyze the factors listed under Rule 54(e)(3).

Conclusion

Obtaining default and default judgment against a non-responsive party requires compliance with the applicable rules of civil procedure.  Understanding the analysis and presenting the requisite information clearly will make the process—for the Court and your client—more streamlined, effective, and efficient.

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[i]       Maynard v. Nguyen, 152 Idaho 724, 733, 274 P.3d 589, 598 (2011) (quoting Idaho State Police ex rel. Russell v. Real Prop. Situated in the Cnty. of Cassia, 144 Idaho 60, 62, 156 P.3d 561, 563 (2007), and citing Suitts v. Nix, 141 Idaho 706, 708, 117 P.3d 120, 122 (2005)). 

[ii]       Maynard, 152 Idaho at 733, 274 P.3d at 598 (citations omitted).

[iii]      Martinez (Portillo) v. Carrasco (Mendoza), 162 Idaho 336, 340-41, 396 P.3d 1218, 1222-23 (2017) (quoting 46 Am. Jur. 2d Judgments § 233 (2006) (omitting footnotes therein)). 

[iv]      See Martinez, 162 Idaho at 340–41, 396 P.3d at 1222–23. 

[v]       See id.

[vi]      Idaho R. Civ. P. 5(a)(2).

[vii]     Id.

[viii]     Idaho R. Civ. P. 54(a)(1). 

[ix]      Idaho R. Civ. P. 55(a)(1) (emphasis added). 

[x]       See Rife v. Long, 127 Idaho 841, 848, 908 P.2d 143, 150 (1995) (“This Court has interpreted the meaning of the word ‘may’ appearing in legislation, as having the meaning or expressing the right to exercise discretion. When used in a statute, the word ‘may’ is permissive rather than the imperative or mandatory meaning of ‘must’ or ‘shall’” (citation omitted)); see also Kimbrough v. Idaho Bd. of Tax Appeals, 150 Idaho 417, 420, 247 P.3d 644, 647 (2011) (“Administrative rules are interpreted the same way as statutes”). 

[xi]      Idaho R. Civ. P. 4(g)(1). 

[xii]     Idaho R. Civ. P. 55(a)(1).

[xiii]     See Idaho R. Civ. P. 7(a).

[xiv]     See Idaho R. Civ. P. 12(b). 

[xv]     Idaho R. Civ. P. 55(a)(1). 

[xvi]     Newbold v. Arvidson, 105 Idaho 663, 665, 672 P.2d 231, 233 (1983), abrogated on other grounds by Shelton v. Diamond Int’l Corp., 108 Idaho 935, 703 P.2d 699 (1985). 

[xvii]    Newbold, 105 Idaho at 665, 672 P.2d at 233 (citations omitted). 

[xviii]   Id. 

[xix]     Meyers v. Hansen, 148 Idaho 283, 289, 221 P.3d 81, 87 (2009) (citations omitted). 

[xx]     Marano v. Dial, 108 Idaho 680, 683, 701 P.2d 300, 303 (Ct. App. 1985).

[xxi]     Secured Inv. Corp v. Myers Exec. Bldg., LLC, 162 Idaho 105, 111, 394 P.3d 807, 813 (Ct. App. 2016).

[xxii]    Olson v. Kirkham, 111 Idaho 34, 36, 720 P.2d 217, 219 (Ct. App. 1986).

[xxiii]   Meyers, 148 Idaho at 289, 221 P.3d at 87. 

[xxiv]   Id. 148 Idaho at 288, 221 P.3d at 86 (internal brackets, quotation marks, and citation omitted; emphasis added). 

[xxv]    See Secured Inv. Corp., 162 Idaho at 111, 394 P.3d at 813. 

[xxvi]   Idaho R. Civ. P. 12(a)(1). 

[xxvii]   Idaho R. Civ. P. 15(a)(3).

[xxviii] Idaho R. Civ. P. 12(a)(2). 

[xxix]   Id.

[xxx]    Idaho R. Civ. P. 55(a)(2)(B).

[xxxi]   Idaho R. Civ. P. 55(b)(1) (emphasis added). 

[xxxii]   Idaho R. Civ. P. 55(b)(1) and –(3)

[xxxiii] Idaho R. Civ. P. 55(b)(1) and –(3) (which is the address the clerk “must use … in giving the party notice of judgment”).

[xxxiv] Idaho R. Civ. P. 55(b)(1).

[xxxv]   Id.

[xxxvi] Id.

[xxxvii]         Id.

[xxxviii]         Id.

[xxxix] N. Idaho Bldg. Contractors Ass’n v. City of Hayden, 164 Idaho 530, 432 P.3d 976, 990 (2018) (citing Holladay v. Lindsay, 143 Idaho 767, 770, 152 P.3d 638, 641 (Ct. App. 2006); Doolittle By & Through Doolittle v. Meridian Joint Sch. Dist. No. 2, 128 Idaho 805, 814, 919 P.2d 334, 343 (1996)). 

[xl]      Doolittle, 128 Idaho at 814, 919 P.2d at 343. 

[xli]     See id. 

[xlii]     Idaho Code § 28-22-104. 

[xliii]    Idaho R. Civ. P. 55(b)(1). 

[xliv]    See the Local Rules of each Judicial District, all available at: https://isc.idaho.gov/district-courts. 

[xlv]     Idaho R. Civ. P. 55(b)(1). 

[xlvi]    See Idaho R. Evid. 901. 

[xlvii]   Idaho R. Evid. 1002.

[xlviii]   Idaho R. Evid. 1003. 

[xlix]    United States Dept. of Justice, The Servicemembers Civil Relief Act (SCRA) (June 12, 2019), https://www.justice.gov/servicemembers/servicemembers-civil-relief-act-scra (citations omitted). 

[l]       See 50 U.S.C. § 3911(1) (“The term ‘servicemember’ means a member of the uniformed services, as that term is defined in section 101(a)(5) of title 10”). 

[li]       See, e.g., United States Dept. of Defense, Defense Manpower Data Center, Servicemembers Civil Relief Act (SCRA) Website (June 12, 2019), https://scra.dmdc.osd.mil/scra/#/home (which allows users, without an account or fee, to conduct a single record request to search a person’s social security number, date of birth, and name for purposes of showing SCRA compliance). 

[lii]      Idaho R. Civ. P. 55(b)(2). 

[liii]     Id. 

[liv]     Id. 

[lv]      Compare id. with Idaho R. Civ. P. 55(a)(1). 

[lvi]     Idaho R. Civ. P. 55(b)(2) (paragraphing modified).

[lvii]     Idaho R. Civ. P. 54(e)(1). 

[lviii]    Idaho R. Civ. P. 54(e)(2). 

[lix]     Idaho R. Civ. P. 54(e)(4)(B). 

[lx]      Id. 

[lxi]     See id. 

By Leland K. Faux

As an attorney primarily practicing in the area of consumer protection, I frequently handle cases involving used car sales and Idaho’s lemon law.  Nearly as frequently, I hear of other attorneys declining to take on those cases because they do not make financial sense or are not the type of case they handle.  Through this article I will address both issues: (1) how to address the economics of a used car case, and (2) how to navigate a used car case should you decide to take one.  Idahoans with legitimate claims should be able to find recourse other than having to eat the losses caused by a dealer’s deceptive or unlawful acts.

The Economic Reality of Used Car Cases

Most attorneys who handle these types of cases take them on a deferred fee basis, meaning the hourly fees—whether in whole or in part—are deferred until successful completion of the case. Theoretically, if you assist a consumer who has been the victim of unlawful acts by a dealer and win, the court will require the dealer to pay your attorney’s fees and costs.  Practically, attorneys structure the arrangement this way because many victims of deceptive or unfair acts by car dealers are not able to pay legal fees.

Idaho’s relevant law is the Idaho Consumer Protection Act (the “ICPA”)[1] and the Idaho Rules of Consumer Protection, (the “Consumer Rules”).[ii]  Idaho’s fee-shifting provision is found in Idaho Code § 48-608(5), which grants “reasonable attorney’s fees to the plaintiff if he prevails.” The Idaho Supreme Court has instructed that awarding fees to the prevailing consumer is “a nondiscretionary directive” and that “[a]llowing recovery of fees is consistent with and promotes the purpose and intent of the Consumer Protection Act.”[iii]  In fact, one purpose of the ICPA “is to provide attorneys with an incentive for representing litigants who assert publicly favored claims.”[iv]

In other words, the Idaho Legislature enacted the ICPA so that consumers can have protection against deceptive and unfair acts. This law is pointless if consumers lack the representation necessary to assist them in enforcing their rights. Thus, both the legislature and the Idaho Supreme Court have attempted to incentivize attorneys to help these people by mandating the award of attorney’s fees.

This does not mean that litigating for consumers is without risks to the attorney. You may not prevail, a district court may not award your fees, or you may not be able to collect even if you are awarded fees.  Attorneys who wish to help consumers will have to be willing to take on these risks.  Despite these risks, assisting consumers in obtaining relief can be an emotionally and financially fulfilling endeavor.

What to do with the Case?

If you feel incentivized to help, the next steps are to identify the key players and the potential causes of action. After this, it is just a matter of determining your litigation strategy.

The Key Players

A used car sale may involve the dealer, a salesperson, a lender, a surety bond, and the Idaho Transportation Department (“ITD”) by virtue of the Idaho Consumer Asset Recovery fund (“ICAR”).  There may also be a warranty or service contract provider.

The Key Players in buying a used car

• The dealer should be licensed. A list of current vehicle dealers can be found online through the ITD.
• The salesperson should be licensed. Idaho Code § 49-1610 grants a consumer a private right of action against the salesperson. You will have to request a salesperson licensing information from the ITD.
• The lender will take assignment of the Retail Installment Sales Contract and may thereby be liable for the conduct of the dealer through the federal Holder in Due Course Rule and its Idaho counterpart, IDAPA 04.02.01.210.
• Dealers are required to carry bonds for at least three years (Idaho Code § 49-1610). A surety may pay undisputed claims without a judgment (see Hestead v. CNA Supply, 152 Idaho 575, 580; 272 P.3d 547, 552 (2012)). Otherwise, bond claims are generally not actionable until after a judgment is obtained (see Idaho Code 49-1610(4)). As such, a claimant should consider giving notice of a claim to a surety in the event the claim is not disputed. Bond information must be requested from the ITD.
• The ITD oversees the ICAR. The ICAR will pay up to $50,000 for an award involving a single transaction (Idaho Code § 49-1680F). To be eligible to recover, an action that may become a claim on the fund must be served on the board (Idaho Code § 49-1608E(2)).
• If the dealer sold a service contract or extended warranty, identify the actual provider of the services and payment.

The Causes of Action

In the used car context, the primary hurdle is the “as-is” sale. The impression many people have (including attorneys and judges) is that an “as-is” sale means that the buyer has no recourse.  This is not so. There are many laws that may give a used car purchaser legal recourse against a dealer.  Here is a non-exhaustive list of the most common:

The ICPA. As referenced above, the ICPA prohibits businesses from engaging in deceptive acts and practices in the course of a trade.[v] These deceptive acts are delineated in Idaho Code § 48-603. The Consumer Rules specify others. You can literally go down the list in the ICPA and the Consumer Rules to see if you can make a case based on your client’s facts.

If you find a violation, the next question is whether you can show an “ascertainable loss” resulting from the violation. An “ascertainable loss” is:

Any deprivation, detriment, or injury, or any decrease in amount, magnitude, or degree that is capable of being discovered, observed, or established. It is not necessary for a private plaintiff to prove actual damages of a specific dollar amount to prove ascertainable loss, but only that the item was different from that for which the private plaintiff bargained, or that the private plaintiff suffered some like loss.[vi]

Because the Idaho Supreme Court has instructed that the ICPA should be “construed liberally,” this definition should likewise be liberally construed. [vii] Assuming an “ascertainable loss” has been demonstrated, the ICPA provides at least three useful remedies.

First, it allows the consumer to treat any related agreement as voidable[viii] or, alternatively, to seek actual damages (or $1,000, whichever is greater).[ix]  Second, the consumer “may also seek restitution, an order enjoining the use or employment of methods, acts or practices declared unlawful under this chapter and any other appropriate relief which the court in its discretion may deem just and necessary.”[x] Third, and notably, the consumer may request punitive damages “in cases of repeated or flagrant violations.”[xi]  The ICPA also provides enhanced penalties if the business engages in violations against a senior or disabled individual which results in certain losses.[xii]

UCC Revocation. Idaho Code section 28-2-608 states that “[t]he buyer may revoke his acceptance of a lot or commercial unit whose nonconformity substantially impairs its value to him” under certain circumstances. As with the voiding of a contract, this is a self-help remedy. Justifiably revoking the contract expunges the buyer’s obligations on the contact. It also grants the buyer a security interest in the vehicle.[xiii]  Because the obligations to the secured party have ceased, the secured party must terminate any lien.[xiv]  The failure to do so will expose the lender to damages, including the finance charge and 10% of the cash price.[xv]

Implied Warranties. Implied warranties will apply unless they are properly disclaimed by the seller. This is most often done by properly stating on the face of the contract that the sale is “as-is.”[xvi]  Indeed, all “as-is” means is that the vehicle does not come with implied warranties. Still, there may be exceptions to a disclaimer of warranties even if the “as-is” language is used by the dealer. For example, a dealer cannot disclaim the warranty of title. Additionally, the dealer may be prohibited from disclaiming implied warranties if they sell a service contract or warranty in connection with the vehicle.[xvii]  Finally, the language of Idaho Code section 28-2-316 itself suggests that the phrase “as is” disclaims implied warranties “unless the circumstances indicate otherwise.” Therefore, the circumstances surrounding the transaction may be at issue in determining whether the disclaimer was effective.

Express Warranties. The dealer may have created an express warranty under Idaho Code § 28-2-313. In the used car context, this most often will occur when the dealer makes “[a]ny affirmation of fact or promise . . . which relates to the goods and becomes part of the basis of the bargain” or provides “[a]ny description of the goods which is made part of the basis of the bargain.”[xviii]

False Advertising/Fraud. Even if a car is sold “as-is,” a dealer cannot engage in false advertising or fraud in making the sale. For example, if a dealer advertises that the vehicle is in “excellent condition” or “has no problems” and it turns out the bottom is rusted out so that the vehicle is not safe to be driven, the dealer may still be liable for the false representation. It’s not an issue of whether warranties apply. Rather, the issue is whether the dealer engaged in fraud to make the sale.

Violation of Disclosure Laws. When selling a used vehicle, dealers must disclose a Federal Used Car Buyers Guide that is designed to give consumers important information. This law also states that it is a deceptive practice for a dealer to “make any statements, oral or written, or take other actions which alter or contradict the disclosures.”[xix]  The violation of this regulation could result in an actionable claim. For example, a dealer may tell a consumer, “Don’t worry, if you have any problems you can bring it back and we’ll help you out.” This is an oral statement that would contradict the “as is” language on the Used Car Buyers Guide.

Additional disclosure requirements include the mileage (unless the vehicle is exempt—typically older than 10 years) and, if the car is financed, all finance charges and terms.

Litigation Strategy

Prior to asserting the claims in court, I believe a demand letter is important both ethically and tactically. Ethically, the demand letter gives the parties a chance “to secure the just, speedy and inexpensive determination” of the dispute.[xx]  I also believe it gives the defendants an opportunity to provide additional information that can be used to assess the merits of the case. Tactically, if your client wishes to void or revoke the agreement, sending a demand letter is a good way to set a clear date triggering those self-help remedies.

That being said, my experience is that most often the response will be a one-paragraph letter basically saying the demand letter is spurious and without merit followed by a threat about attorney’s fees or sanctions. I have my theories on why this is the case, but I think it is unfortunate because it forces cases that could or should be quickly and inexpensively resolved into prolonged litigation.

Conclusion

Representing victims of deceptive used car sales practices can be a rewarding area of practice. There are some unique dynamics and risks that come with the territory. Unfortunately, the main risk is that you might never get paid for your work.  Consequently, it is important to do your homework upfront.  Hopefully, the information in this article can point you in the right direction the next time you come across someone that has been wronged by a car dealer. You just might be the attorney they need.

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[1] Idaho Code § 48-601 et seq.

[ii] IDAPA 04.02.01 et seq.

[iii] Nalen v. Jenkins, 113 Idaho 79, 82, 741 P.2d 366, 369 (Ct. App. 1987).

[iv] Id. at 83, 370.

[v] See Idaho Code § 48-603.

[vi] IDAPA 04.02.01.020.

[vii] See Fenn v. Noah, 142 Idaho 775, 780, 133 P.3d 1240, 1245 (2006).

[viii] Idaho Code § 48-608.

[ix] Id.

[x] Id.

[xi] Id.

[xii] Id.

[xiii] Idaho Code § 28-2-711.

[xiv] Idaho Code § 28-9-513.

[xv] Idaho Code § 28-9-625.

[xvi] Idaho Code § 28-2-316.

[xvii]  15 U.S.C. § 2308(a).

[xviii] Idaho Code § 28-2-313(1)(a)-(b)

[xix] 16 CFR Part 455.4.

[xx] See I.R.C.P. 1.

By Hon. Michael J. Oths

“Why did you want to run for the Bar Commission?”  I’ve been asked this question many times over the last two years, including by my fellow Commissioner with a similar first name.  My answer to the question seemed easy, at first, but has led to some deeper reflection about the role the Idaho State Bar (ISB) serves for the legal profession.

As many of you know, I was Idaho’s Bar Counsel for 17 years before appointment as a Magistrate.  Although I’ve written a few “President’s Messages” in my time (a shout-out to the late, great Fred Hoopes) this is the first as ISB President.  The easy answer is that I have always enjoyed bar involvement, tracing all the way back to 1965, when my dad brought me to my first ABA Annual Meeting, in New York City.  At that time, I thought all lawyers went to bar meetings and that family vacations just necessarily involved such gatherings.  I recall asking my dad whether another lawyer from our small town (and his son) would be at the Ohio Bar convention, and being confused when dad said that the lawyer didn’t attend bar meetings.  I thought all lawyers did that.

One of the lessons gleaned from years of employment with ISB is that not all lawyers have the same view of bar activity.  Over the years, for example, we have devised different methods for encouraging attendance at the Annual Meeting.  Diane and I finally concluded that for some lawyers, we could hold the meeting across the street from their office, offer free registration, CLE and food, and they would still not attend.  It’s simply not “their thing.”  And that’s okay.

One of the challenges, then, of serving as a Bar Commissioner is to appreciate the different points of view.  Many of you simply want the trains to run on time, for the necessary administrative functions to be handled with optimum efficiency, and for us to otherwise stay out of your way.

One role of the Bar Commission is to take the lead in recognition of issues that may affect you, whether you realize it or not.  In the April 1986 edition of The Advocate (the month I was hired as Bar Counsel), then-President Howard Humphrey discussed the fluctuating legal malpractice market and whether it was time to explore the creation of a legal malpractice insurer owned and directed by lawyers.  That was the genesis of ALPS, which today covers a third of Idaho’s private malpractice market.  Being aware of tomorrow’s looming issue is an important role for the Bar Commission.

Others see the Bar as an avenue for lawyers, judges and law students to share a common experience.  These avenues are both social and professional.

During my term as Bar Commissioner, I have made a concerted effort to work an integration of the various constituencies.  Lawyers, judges, and law students have much in common.  Law students are invited for a free lunch at the Roadshow meetings, while lawyers are encouraged to serve as mentors.  The Idaho Magistrates Association has committed to sending at least one member from each judicial district to the Idaho State Bar Annual Meeting, while the Fourth District Bar intends to reinstitute bench-bar lunches.

The social interaction is important, but it also serves to allow us to relate shared experiences.  Much has been written recently about the anxiety associated with law school and within the profession.  The challenges are very real and the stress must be taken seriously, but it is also possible, through interaction with others, to celebrate the fact that law school, the practice of law, and the administration of justice through the judiciary is stressful because it is very difficult.  Not everybody can do what we do.  When we post-mortem a case with other lawyers and judges, we rarely do so about run-of-the-mill cases, but about ones that kept us up at night.

I recently read an interesting law review article entitled “Normalizing Struggle.” [i]  While primarily geared to law students, it has equal application to the practice of law.  The author notes that struggle is too often seen as the equivalent of failure. She suggests that struggle should be embraced in recognition of the reality that navigating law school is difficult.  The same is true for the practice of law – it is a challenging profession that frequently causes us to struggle.  Often the narrative is that our profession is too stressful, too difficult, and too thankless, without the self-congratulation that we are really good at what we do. So the answer to the predicate question is that I want to continue to be part of advancing our shared profession. I want to make sure that the administrative process is as painless as possible, but also want to continue to celebrate my lifelong association with an interesting and talented group of people.

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[i] Professor Catherine Christopher, to be published in an upcoming edition of the University of Arkansas Law Review.

By Mark J. Fucile

One of the most significant developments across the legal profession in the past 25 years has been the increasing frequency of cross-border practice by law firms and individual lawyers alike.  For firms, it has become common to have offices in more than one state.  For individual lawyers, it has become equally common to be licensed and practice actively in multiple states.  The reasons are many—ranging from regional economic integration to regulatory changes like reciprocal admission that make it easier to practice across state lines.

Generally, the increase in cross-border practice has been a positive development for both law firms and individual lawyers.  At the same time, it has also sharpened the focus on choice of law issues in law firm-related litigation.  This article will first survey the choice of law rules governing law firm-related litigation—including their practical effects.  It will then address proactive steps law firms can take to manage this risk.

The Rules

There are two primary choice of law rules governing law firm-related litigation.  The first is Idaho Rule of Professional Conduct 8.5(b), which controls choice of law in lawyer discipline and has increasingly been applied in other contexts where the RPCs are used as, in effect, substantive law such as disqualification.  The second is the Restatement (Second) Conflict of Laws (1971) and associated case law interpreting the Restatement.  The Restatement typically applies in settings such as legal malpractice that are controlled by a standard of care rather than the RPCs.  The Restatement also governs purely contractual aspects of lawyer-client agreements beyond the RPCs.

RPC 8.5(b).  RPC 8.5(b) was adopted in 2004 as a part of Idaho’s consideration of the American Bar Association’s “Ethics 2000” amendments to the corresponding ABA Model Rules of Professional Conduct.[i]  The text of RPC 8.5(b) has remained the same since then and sets the standard for choice of law in lawyer discipline:

“(b) Choice of Law. In any exercise of the disciplinary authority of this jurisdiction, the rules of professional conduct to be applied shall be as follows:
“(1) for conduct in connection with a matter pending before a tribunal, the rules of the jurisdiction in which the tribunal sits, unless the rules of the tribunal provide otherwise; and
“(2) for any other conduct, the rules of the jurisdiction in which the lawyer’s conduct occurred, or, if the predominant effect of the conduct is in a different jurisdiction, the rules of that jurisdiction shall be applied to the conduct. A lawyer is not subject to discipline if the lawyer’s conduct conforms to the rules of a jurisdiction in which the lawyer reasonably believes the predominant effect of the lawyer’s conduct will occur.”

Comment 5 of Idaho RPC 8.5, in turn, was amended in 2014 to recognize choice of law provisions governing conflicts.  The amendment was patterned on a similar change to ABA Model Rule 8.5 as a part of the ABA’s “Ethics 20/20” review of the ABA Model Rules.[ii]  The addition to Comment 5 adopted in 2014 reads:

“With respect to conflicts of interest, in determining a lawyer’s reasonable belief under paragraph (b)(2), a written agreement between             the lawyer and client that reasonably specifies a particular jurisdiction as within the scope of that paragraph may be considered if the agreement was obtained with the client’s informed consent confirmed in the agreement.”

As noted earlier, RPC 8.5(b) controls choice of law determinations in lawyer disciplinary proceedings.  In re Summer, 105 P.3d 848 (Or. 2005), for example, involved a lawyer whose principal office was in Idaho but who was also licensed in Oregon.  The lawyer was accused of misrepresentations in handling prelitigation settlement negotiations for an Idaho client in two automobile accidents—one in Oregon and the other in Idaho.  Before reaching the merits, the Oregon Supreme Court evaluated whether the Oregon or Idaho RPCs should apply using a similarly worded predecessor to ABA Model Rule 8.5(b).  The Oregon Supreme Court determined that—under an equivalent to ABA Model Rule 8.5(b)(2)—the “predominant effect” of the lawyer’s actions occurred in Oregon and, therefore, decided the case under the Oregon RPCs.[iii]

RPC 8.5(b) has also been used beyond lawyer discipline when the matter involved focusses on a lawyer’s duties under the professional rules.  Philin Corp. v. Westhood, Inc., No. CV-04-1228-HU, 2005 WL 582695 (D. Or. Mar. 11, 2005) (unpublished), for example, involved a disqualification motion in a commercial dispute.  The defendant asserted that counsel for the plaintiff should be disqualified because one of the defendant’s directors had earlier discussed aspects of the dispute with a partner of the same law firm officed in Boston.  Before reaching the substance of the motion, the federal district court first considered whether the asserted disqualifying conflict should be assessed under Oregon or Massachusetts law.  The district court concluded—using an equivalent to ABA Model Rule 8.5(a)(1)—that it should review the matter under Oregon law because the case was being litigated there.

Restatement.  Although Idaho’s appellate courts have not yet addressed choice of law principles in a legal malpractice case, the Idaho Supreme Court in Grover v. Isom, 137 Idaho 770, 772-73, 53 P.3d 821 (2002), applied the Restatement to the analogous area of medical malpractice:

“Idaho applies the ‘most significant relation test’ as set forth in the Restatement (Second) of Conflict of Laws § 145 in determining the applicable law. In a tort case the following considerations must be taken into account:
“(a) the place where the injury occurred,
“(b) the place where the conduct causing the injury occurred,
“(c) the domicile, residence, nationality, place of incorporation and place of business of the parties, and
“(d) the place where the relationship, if any, between the parties is centered.”[iv]

Increasingly, legal malpractice claims are being paired with claims for breach of fiduciary duty—usually involving asserted conflicts.[v]  Idaho’s appellate courts have not yet determined the appropriate choice of law standard in this context.  On a practical level, however, “predominate effect” under RPC 8.5(b)(2) and “most significant relation” under the Restatement should generally produce the same result—but might be influenced by a choice of law selection if the decision turns heavily on competing conflicts analysis and the parties had designated controlling law on that point.  Similarly, fee-related issues are generally treated as contract matters and, therefore, should ordinarily be subject to the Restatement’s choice of law portions governing contracts—principally Sections 187 addressing contractual choice of law clauses and 188 outlining choice of law factors when the parties have not included a controlling provision.[vi]  Nonetheless, fee disputes are also increasingly intertwined with issues under the RPCs—most notably the “fee rule”—RPC 1.5—but also the conflict rules if disgorgement is sought as a remedy.[vii]  Again on a practical level, RPC 8.5(b)(2) and the Restatement will likely not produce disparate results unless a conflict issue looms large and the parties designated controlling law on that point in their fee agreement.

Practical Effects.  Particularly when conflicts are involved, nuances can occasionally make for starkly different outcomes.  Although the states surrounding Idaho generally use conflict rules patterned on the ABA Model Rules, subtle variations remain that can impact whether or not a given conflict has been effectively waived.  Wyoming RPC 1.7(b)(4), for example, requires that a conflict waiver be signed by the clients concerned whereas Idaho’s version simply requires that a waiver be “confirmed.”  Oregon RPC 1.0(g), in turn, defines “informed consent” for conflict purposes to include a requirement that “the lawyer shall give and the writing shall reflect a recommendation that the client seeks independent legal advice to determine if consent should be given.”  Idaho does not include a similar requirement for most waivers.[viii]

Just as the conflict rules are not uniform regionally, neither are other RPCs that litigators encounter relatively frequently.  The “no contact” rule, for example, varies in important respects among Idaho, Oregon and Washington even though they share a common rule number—4.2—and are all based generally on the corresponding ABA Model Rule.  In Idaho, the text of RPC 4.2 limits the prohibition on direct contact to a person represented in the matter in which the contact occurs.  By contrast, the Oregon Supreme Court in In re Newell, 234 P.3d 967 (Or. 2010), extended the prohibition to factually related matters as well.  In Idaho, Comment 7 to RPC 4.2 includes line-level corporate employees within the representation of corporate counsel if the opposing party is attempting to hold the corporate employer liable through the acts of the employee involved.  By contrast, the Washington Supreme Court in Wright v. Group Health Hospital, 691 P.2d 564 (Wash. 1984), held that such line-level employees do not automatically fall within corporate counsel’s representation unless they are “speaking agents” of the corporation under Washington evidence law.

Beyond the RPCs, other variations in the law of lawyering can produce markedly different results depending on which state’s law controls.  Idaho, for example, stands apart from other states regionally in permitting attorney fee recovery by the prevailing party in at least some legal malpractice claims involving “commercial transactions.”[ix]  Idaho joins some other states regionally, like Washington, in allowing Consumer Protection Act claims against law firms while others, like Oregon, do not.[x]  Idaho’s limitation period for legal malpractice claims is two years while Utah’s corresponding period is four.[xi]

Risk Management

Two tools stand out in managing choice of law risk.

First, as noted earlier, Comment 5 to RPC 8.5 now permits firms to include choice of law provisions in their retention agreements with clients.  Although Comment 5 is nominally limited to conflicts, it does not necessarily preclude broader choice of law provisions governing the contract-based elements of a representation.[xii]  Further, conflicts can be particular flashpoints for regulatory discipline, disqualification and civil claims.  In a multi-state setting, specifying the controlling jurisdiction will at least clarify which law applies and guide decision-making accordingly.  At the same time, firms need to assess the practical application of this tool.  Although there is no “sophisticated user” prerequisite, the informed consent requirement means on a practical level that a choice of law provision is more likely to be enforced with a corporate client being advised by its legal department than against unsophisticated individuals.

Second, to borrow an adage from highway travel before GPS, “know before you go.”  When handling a matter that crosses state lines, a primary task of law firm risk management is to understand the nuances of the jurisdictions involved.  Taylor v. Bell, 340 P.3d 951 (Wash. App. 2014), for example, involved a malpractice claim by an Idaho client against a Washington law firm asserting that the firm was negligent in advising him on a facet of Idaho law central to a business transaction in Idaho.[xiii] 

Summing Up

Over the past quarter century, we have witnessed a sea change in cross-border practice for both individual lawyers and their firms.  With that has come the need to weigh choice of law issues both more frequently and more carefully as a routine part of law firm risk management as those issues have assumed a larger role in law firm-related litigation.

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Author Bio
Mark Fucile of Fucile & Reising LLP handles professional responsibility, regulatory and attorney-client privilege matters for lawyers, law firms and legal departments throughout the Northwest.  He is a member of the Idaho State Bar Litigation and Professionalism & Ethics Sections.  He has chaired of the Washington State Bar Committee on Professional Ethics and teaches legal ethics as an adjunct for the University of Oregon School of Law’s Portland campus.  He can be reached at 503.224.4895 and Mark@frllp.com.

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            [i]Developments at the ABA are summarized in ABA, A Legislative History:  The Development of the ABA Model Rules of Professional Conduct, 1982-2013 (2013) (ABA Legislative History) at 865-79.  For a summary of Idaho’s consideration of the ABA Ethics 2000 amendments generally, see Hon. Michael J. Oths, E2K Is on the Way, 46 Idaho State Bar Advocate 17 (June 2003).

            [ii] See ABA Legislative History, supra, at 876-77.  For a general discussion of Idaho’s review of the ABA 20/20 amendments, see Larry C. Hunter and Bradley G. Andrews, Idaho to Consider Following ABA on Electronic Communication, Outsourcing and Confidentiality, 56 Idaho State Bar Advocate 26 (Sept. 2013).

            [iii] Notwithstanding the Oregon Supreme Court’s finding, the lawyer was convicted for the same misconduct under Idaho law.  See State v. Summer, 139 Idaho 219, 76 P.3d 963 (2003).

            [iv] For a comprehensive review of choice of law in Idaho generally, see Andrew S. Jorgensen, Choice of Law in Idaho:  A Survey and Critique of Idaho Cases, 49 Idaho L. Rev. 547 (2013) (Jorgensen).

            [v] See, e.g., Blough v. Wellman, 132 Idaho 424, 974 P.2d 70 (1999).

            [vi] See generally Jorgensen, supra, 49 Idaho L. Rev. at 568-77 (surveying Idaho choice of law decisions involving contracts).

            [vii] See, e.g., In re Larson, No. 03-04001, 2004 WL 307182 (Bankr. D. Idaho Jan. 30, 2004) (unpublished) (disqualifying lawyer for conflict and ordering disgorgement of fees).

            [viii] An exception is Idaho RPC 1.8(a) that governs lawyer-client business transactions and includes a requirement that the client be “advised in writing of the desirability of seeking . . . independent legal counsel[.]”

            [ix] See generally H-D Transport v. Pogue, 160 Idaho 428, 435-37, 374 P3d 591 (2016) (discussing attorney fee recovery in legal malpractice claims under Idaho Code § 12-120(3)).

            [x] See Taylor v. McNichols, 149 Idaho 826, 846, 243 P.3d 642 (2010); Short v. Demopolis, 691 P.2d 163, 165-71 (Wash. 1984); Roach v. Mead, 722 P.2d 1229, 1234-35 (Or. 1986).

            [xi] See Parsons Packing, Inc. v. Masingill, 140 Idaho 480, 482, 95 P.3d 631 (2004); Jensen v. Young, 245 P.3d 731, 735 (Utah 2010); see also Idaho Code § 5-239 (“borrowing” statutes of limitation).

            [xii] See generally Jorgensen, supra, 49 Idaho L. Rev. at 568-71 (compiling Idaho appellate decisions enforcing contractual choice of law clauses).

            [xiii] See also Taylor v. Riley, 162 Idaho 692, 403 P3d 636 (2017) (summarizing the Idaho portion of this litigation).