PITFALLS TO AVOID IN PRE LITIGATION DISPUTES 10... · are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s

10 PITFALLS TO AVOID IN PRE‐LITIGATION DISPUTES

Presented by

Bill Devine, Esq., Williams Mullen Jennifer Romano, Esq., Crowell & Moring LLP

Introduction ‐ How Decisions and Actions in Audit Process Can Affect Future Claims

Understanding rights and responsibilities that arise with commencement of audit processThe things auditors say can bind that retailer in subsequent litigationRecognizing and responding to landlord tacticsImportance of maintaining positive relationship with landlord during audit processPreserving confidentiality of documents and analysis

Expanding Knowledge 2012…Unlock the Power of Your Leases

1. Don’t Accidentally Destroy Evidence



Obligation to preserve is triggered when litigation is:▫ “reasonably anticipated” ▫ “pending, imminent or reasonably foreseeable”

Identify relevant documents Identify relevant custodiansPreserve emails (be careful about auto‐delete)Send out litigation hold/preservation notice


What happens if you make this mistake?▫ Monetary sanctions▫ Evidentiary sanctions▫ Terminating sanctions▫ Negative inferences drawn against your case▫ Criminal penalties for intentional acts (in some

jurisdictions)




Examples of spoliation

Not suspending routine destruction of electronic data▫ Naaco Materials v. Lilly Group

Removing photos from your Facebook profile ▫ Lester v. Allied Concrete Company


2. Don’t Delay – Waiting A While Longer for Landlord to Respond Couldn’t Hurt, Could it?Landlords typically follow the same “script”▫ Delay▫ Delay some more▫ Promise to respond▫ Miss promised deadline▫ Blame delay on something▫ Delay some more


2. Don’t Delay – Waiting A While Longer for Landlord to Respond Couldn’t Hurt, Could it?

Delay can affect litigation rights due to expiration of statute of limitationsLandlords may rely on other legal doctrines, such as laches and waiver, in an effect to limit claimsProtect yourself with lease language (“no waiver” provisions) and tolling agreements▫ Tests landlord’s good faith desire to work through

the issues▫ Protects retailer from limiting claims due to passage

of firm


3. Emails: admissions, mistakes, or worse


Would you put that in a letter? Would you post it on Facebook?What if your supervisor saw it? Your husband? Your grandma?Don’t write things if you do not know whether it is true



Campmor, Inc. v. Brulant, LLC, Civ. No. 09‐5465 (WHW), 2011 WL 2745922 (D.N.J. July 12, 2011)

Facts:▫ Contract between website developer and a retailer for the creation of a website

▫ Retailer sued for breach of contract after it noticed problems with the website



Campmor continued . . .

Internal E‐mails By Web Developer:▫ “Between [our] guys, I am pretty embarrassed on the quality of the site that we created . . .”

▫ “I am shocked that we released anything of this nature. Work . . . was either completely overlooked, not tested . . .”

▫ “I have spent some time on the site lately and the issues are clearly there and they are clearly issues that we have caused.”



Campmor continued . . .

Court permits emails to be presented to jury because they could demonstrate▫ That the website developer was reckless▫ That the company was aware of its contractual obligations, yet disregarded them



Attorney‐Client PrivilegeProtects confidentiality of communications between client and lawyer where communications are for purpose of obtaining legal adviceEncourages clients to communicate openly and honestly with their lawyers so legal advice is based on full and accurate information

4. Don’t Waive the Privilege – Internal Communications


Elements▫ Person asserting privilege must be a client, or must have sought to become a client at the time of disclosure

▫ Person connected to communication must be acting as a lawyer

▫ Communication must be between lawyer and client exclusively – no non‐clients may be included in communication



Elements▫ Communication must have occurred for purpose of securing legal opinion, legal services, or assistance in some legal proceeding, and not for purpose of committing a crime

▫ Privilege may be claimed or waived by client only▫ United States v. United Shoe Machinery Corp., 89 F. Supp. 357 (D. Mass. 1950)



Internal communications pose some special risks▫ Attorney‐client privilege applies to in‐house counsel. Upjohn Co. v. United States, 449 U.S. 383 (1981).

▫ Privilege may be claimed or waived by client only▫ In‐house counsel don’t always act in their capacity as lawyers▫ Dual role complicates privilege decisions▫ Businesses attempt to make internal communications “privileged” by filtering documents through in‐house counsel

▫ Courts try to distinguish between counsel’s legal and business roles.



▫ Adding in‐house counsel to emails and other communications does not necessarily make communications privileged

▫ Courts look to “primary purpose” of communication to determine what role in‐house counsel was playing. In re Vioxx Products Liability Litigation, 501 F. Supp. 2d 789 (E.D. La. 2007).

▫ Court rejected argument that complex regulatory environment created legal issues in virtually all communications

▫ Court required Merck to demonstrate a primary legal purpose for each communication to assert privilege.



Lease audits entail lease interpretation and other legal issues, but also involve non‐legal considerations such as maintaining relationships with key Landlords and other business issue. Involve in‐house attorneys as appropriate for legal issues, but recognize that their involvement on business issues does not magically make an e‐mail string privileged.



Documents that may actually be privileged can become discoverable due to company’s method of dissemination.

When communication is simultaneously sent to lawyers and non‐lawyers, sender or recipient usually cannot claim that the primary purpose of the communication is legal simply because it “serves in both a business and legal capacity.”Consider sending one email to in‐house lawyer and one to non‐lawyers

Better safe than sorry!!



Work‐Product DoctrineRule 26(b)(3) of the Federal Rules of Civil Procedure: “Ordinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party’s attorney, consultant, surety, indemnitor, insurer, or agent).”



Different courts define the work‐product doctrine differently (more or less expansively). Some courts only protect the attorney’s written materials, charts, notes of conversations and investigations, and other materials directed toward preparation of a case or other legal representation.



Documents created by client (not lawyer) can be entitled to work‐product protection if they are created in anticipation of litigation, rather than in the ordinary course of business.

Privileges can be waived by sharing internal documents or communications outside lawyer/client team



Client’s communications with auditors and expert witnesses are generally discoverableRule 26(b)(4) of the Federal Rules of Civil Procedure protects communications between a party’s attorney and an expert witness

Rule 26(b)(4)(B) provides: “Rules 26(b)(3)(A) and (B) protect drafts of any report or disclosure required under Rule 26(a)(2), regardless of the form in which the draft is recorded.”

5. Don’t Waive the Privilege – External Communications (Auditors/Experts)


Rule 26(b)(4)(C) provides: “Rules 26(b)(3)(A) and (B) protect communications between the party’s attorney and any witness required to provide a report under 26(A)(2)(B), regardless of the form of the communications, except to the extent the communications: (i) relate to compensation for the expert’s study or testimony; (ii) identify facts or data that the party’s attorney provided and that the expert considered in forming the opinion to be expressed; or (iii) identify assumptions that the party’s attorney provided and that the expert considered in forming the opinion to be expressed.”



Recognize that the rules in state courts may differ.Consider having all communications with expert come through counsel.



6. Don’t Neglect the Estoppel Process


6. Don’t Neglect the Estoppel ProcessOffice Depot, Inc. v. District at Howell Mill, LLC, 309 Ga. App. 525 (2011)

The FactsIn 2005, Office Depot entered into a commercial lease agreement for property in a shopping center The lease included an exclusive‐use provision that prohibited the Landlord from entering into another lease with an entity whose primary business was the sale, leasing, distribution or display of “school supplies”


Office Depot continued . . .

▫ In 2006, the Landlord leased property in the center to The School Box, which used the premises for “the display and sale at retail of educational supplies for school and home”

▫ In 2007, Office Depot executed an estoppel certificate stating:▫ “To Tenant’s knowledge, Landlord is not in default in the

performance or observance of any of its obligations under any terms or provisions of the Lease.”

▫ A few months after executing the estoppel certificate, Office Depot claimed that the Landlord’s lease with The School Box violated the exclusive‐use provision in Office Depot’s lease




Office Depot’s Position▫ Any reliance by the Landlords on the estoppel certificate was unreasonable because they knew that The School Box lease violated Office Depot’s exclusive‐use provision

Landlord’s Position ▫ The Landlord relied on Office Depot’s estoppel certificate▫ The School Box was not in the primary business of displaying or selling school supplies; its presence in the shopping center did not violate the exclusive‐use provision




Court’s Decision▫ Because Office Depot executed the estoppel certificate subsequent to the alleged breach, and because it had no evidence of the Landlord’s unreasonable reliance on the estoppel certificate, the certificate precluded Office Depot’s breach of contract claim



But, a “no waiver” provision may save you

Fresh Pond Mall Ltd. Partnership v. Payless ShoeSource, Inc., 26 Mass. L. Rptr. 32 (2009)“No waiver of any default hereunder shall be implied from any omission by either party to take any action on account of such default if such default persists or is repeated . . .”



7. Don’t Forget to Read the Lease . . . again, again and again


The plain language is paramountPlain language is read in the context of the entire leaseThe other evidence matters only to interpret the parties intent where there is an ambiguityNegotiation historyDraftsCourse of dealingCourse of performanceIndustry practice

7. Don’t Forget to Read the Lease . . . again, again and again


Before beginning audit, review lease provisions related to pass‐through expenses and audits carefully

Are there notice requirements?What time deadlines apply?Are there confidentiality provisions?Are there limits on the use of outside auditors?Does lease set forth where audit is to be conducted?Are there audit fee provisionsAre you required to share results of audit with landlord?

8. Don’t Forget Audit Requirements


Make sure to follow these provisions scrupulously Don’t derail right to audit by failing to cross T’s and dot I’sDon’t put yourself in position where audit work product cannot be used

8. Don’t Forget Audit Requirements


Landlords try to argue that an audit rights limitation effectively acts as a statute of limitation for claims

Lease may provide that Tenant has 12 months from receipt of annual statement to audit pass‐through expensesLandlords may refuse to consider claims outside the 12 month periodAbsent very clear lease language waiving or extinguishing claims, an audit rights limitation is not a claim limitation

9. Don’t Leave Money on the Table


Applicable statutes of limitation determine what years are in issue. Example: Ohio (15 years)Several states have statutes that preclude enforcement of contractual provisions that purport to shorten statutes of limitationClaim for a lease year accrues at the earliest when Landlord sends reconciliation for that year Calculate claims back to the statute of limitation



Include interest as part of claimIn overcharge claims, Landlord has obtained and had the use of Tenant’s money for yearsWhen resolving claims, Landlords want to treat this as a no‐interest loanLeases often provide for interest on overchargesCommon law in many (all??) states recognizes that when one party has had the use of another party’s funds, interest is required in order to provide complete relief



10. Don’t forget the good stuff


Document the factsDocument your position and share it with the landlordAct consistently with your positionGet key admissions from landlord



Fundus Am. (Atlanta) Ltd. Partnership v. RHOC Consolidation, LLC, 313 Ga. App. 118 (2011)

Facts▫ The original Tenant, RHOC, wanted to assign the property to another party

▫ RHOC could foresee potential a dispute arising with the Landlord

▫ To protect itself, the company requested the Landlord execute an estoppel certificate



Fundus Am. continued . . .

The estoppel certificate executed by the Landlord stated:▫ “Landlord has not delivered or received any notices of breach or a default under the Lease, and to the best knowledge of Landlord, there is no breach or default by Tenant or Landlord under the Lease . . .”

▫ “Landlord, and to the best knowledge of Landlord, Tenant, have performed all their obligations under the lease.”




Sometime after executing the estoppel certificate, the Landlord inspected the property and identified that repairs were needed in order to bring the property to the standard required by the leaseThe Landlord sent the new Tenant a Notice of Default, terminated the lease, and sued both Tenants for breach of contract




Landlord’s Position▫ The estoppel certificate does not preclude the Landlord’s claims against the Tenant because the Tenant was in a better position to know that the lease had been breached at the time of assignment

▫ Reliance on the estoppel certificate is therefore unreasonable

Tenant’s Position▫ The very knowledge of the hotel’s condition led the Tenant to insist upon the estoppel certificate in the first place, before it would assume liability for the lease


FundusAm. continued . . .

Court’s DecisionLandlord had a duty to make reasonable inquiries into the state of the hotel prior to executing the estoppel certificate An estoppel certificate can be enforceable even if the party signing it did so negligently Alleged breaches of the lease that arose prior to the execution of the estoppel certificate were barredHowever, claims for breach of the lease that arose after the execution of the estoppel certificate were not barred



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