LAW OFFICES OF PETER H. PRIEST, PLLC, Plaintiff, v. GABRIEL COCH and INFORMATION PATTERNS, LLC, Defendants.
No. COA15-254
IN THE COURT OF APPEALS OF NORTH CAROLINA
Filed: 17 November 2015
Durham County, No. 12 CVS 3532
Bryant & Ivie, PLLC, by John Walter Bryant and Amber J. Ivie, for Plaintiff.
Glenn, Mills, Fisher & Mahoney, P.A., by Carlos E. Mahoney, for Defendants.
STEPHENS, Judge.
Plaintiff Law Offices of Peter H. Priest, PLLC, argues that the trial court erred in granting summary judgment to Defendants Gabriel Coch and Information Patterns, LLC, on Plaintiff‘s claims for breach of contract and fraud, and in dismissing Plaintiff‘s claims for breach of fiduciary duty, constructive fraud, and unfair and deceptive trade practices, as well as dismissing Priest as a party in his individual capacity. After careful consideration, we hold that the trial court did not err and consequently affirm both its Order and its Order and Opinion.
I. Factual Background and Procedural History
This case presents as an issue of first impression the question of whether an attorney who enters into a business transaction with a client as compensation for a legal representation can be barred from enforcing the terms of their agreement based on the attorney‘s failure to comply with the explicit requirements of Rule 1.8(a) of the North Carolina Rules of Professional Conduct.
A. Factual Background
Plaintiff Law Offices of Peter H. Priest, PLLC, is a North Carolina law firm specializing in patent law, and its principal, Peter H. Priest, is a North Carolina-licensed attorney. Beginning in 2004, Priest and his law firm1 represented Defendants Gabriel Coch and Information Patterns, LLC (“IP“), in the filing and prosecution of a patent for a computer program for geo-collaboration and internet-based mapping (“the Program“). Coch is a member-manager of IP, which is a small information technology start-up that was formed as a North Carolina limited liability company in 2003 for the purpose of developing the Program, which Coch co-invented with his partners Graham Knight and Mark Smith, who are both citizens and residents of the United Kingdom and are also members of IP.
On 24 September 2009, Priest received a “non-final rejection” from USPTO regarding the claims in IP‘s patent application.2 After learning that Coch, Knight,
On 19 March 2010, shortly after the Notice of Allowance was issued, Priest and Coch met to discuss entering into an agreement (“the Agreement“) regarding how to generate revenue through licensing the patent. Given Coch‘s concerns that he and IP were financially unable to pay the same rate Priest had charged to file the patent application, the two men also discussed how best to compensate Priest for the work his firm had already performed without pay since 2009. Eventually, they agreed in principle that going forward, Priest and his law firm would continue to prosecute and maintain IP‘s patent and pay 25% of the actual costs of doing so, with the remainder split evenly between Coch, Knight, and Smith, in return for Priest receiving 25% of the proceeds Priest helped to generate from the patent. Coch‘s contemporaneous emails to Knight and Smith demonstrate that Coch believed the Agreement‘s terms would make Priest “an equal partner in pushing the Patent forward” based on the rationale that “there is still work to be done, of which I don‘t know anything and
Over the next several weeks, after the managing partner of Priest‘s firm completed a first draft of the Agreement, Priest handled all subsequent edits and revisions and continued to confer via email and in person with Coch, who requested that Knight and Smith be added as parties. Priest would later testify that during a meeting on 23 April 2010, he orally notified Coch that he and IP should have another attorney review the Agreement, given Priest‘s role in drafting it, but Coch declined because “he didn‘t feel like that was necessary.” On 5 May 2010, Coch and Priest met to review the final draft of the Agreement. At the end of their meeting, Priest signed the final draft. Priest thereafter contended that he believed Coch signed it as well and then took it with him to obtain signatures from Knight and Smith. On 6 May 2010, Priest emailed a copy of the final draft to Coch so that he could circulate it to Knight and Smith.
In keeping with their earlier discussions, the terms of the Agreement provided that Priest was “willing to work with [Coch, Knight, and Smith] in identifying a licensee or licenses [sic] and negotiating a license or other agreement” on IP‘s behalf and that Priest would therefore continue to prosecute the patent by filing necessary paperwork and writing letters to potential licensees “at no further cost.” Instead, the Agreement provided that the out-of-pocket, actual costs of patent filing, prosecution,
a) GROSS REVENUES from licenses negotiated by PRIEST under this AGREEMENT will be distributed on an annual basis on or before December 31 of each year, in the following manner:
b) PATENT EXPENSES and LICENSE EXPENSES shall be reimbursed as outlined above, and then Twenty-Five Percent (25%) of NET REVENUES shall be distributed to each Party.
A separate, earlier section of the Agreement defined “NET REVENUES” as “GROSS REVENUES minus PATENT EXPENSES and LICENSING EXPENSES,” and further defined “GROSS REVENUES” as “the total actual amount of all fees, royalties, and/or consideration, of any kind, collected from licensing, optioning or selling the [patent].” The Agreement did not include any sections specifically addressing the sale of the patent, nor did it expressly convey any interest in the
On 7 May 2010, Coch forwarded the Agreement to Knight and Smith to review and sign, but never received a signed copy from either of them and later testified that he did not remember ever signing or returning the Agreement to Priest himself. Indeed, during the discovery phase of the ensuing lawsuit, Priest was unable to produce any signed or executed copies of the Agreement. Nevertheless, at the time, both Coch and Priest believed they had entered into the Agreement and proceeded according to its terms, with Priest paying the full costs to complete registration of the patent and then billing Coch, Knight, and Smith for 75% of his expenses, which they paid.
On 15 June 2010, USPTO issued the patent for the Program. In November 2010, Priest sent letters to twelve potential licensees, including representatives of Microsoft, Google, and Facebook, but ultimately generated little interest in the patent. On 9 June 2011, Priest sent follow-up letters to the same twelve potential licensees and received no response. No licenses were ever successfully negotiated, and eventually, Coch grew dissatisfied with Priest‘s lack of progress.
In September 2011, Coch contacted William J. Plut, a patent broker at Patent Profit International (“PPI“) in Silicon Valley, to discuss retaining PPI to sell the
By early January 2012, Plut and PPI had placed the patent on the market and mailed a detailed sales package to prospective purchasers. During this time, Priest assisted PPI by making minor edits to the sales package, participating as the prosecuting attorney in a handful of telephone conferences, and sending files to potential purchasers. Within two months, Plut and PPI found a buyer and completed negotiations to sell the patent for $1,000,000. The sale closed on 16 March 2012, and the buyer wired payment to IP‘s bank account on 19 March 2012. After the close of the sale, Priest claimed that the terms of the Agreement entitled his law firm to
B. Procedural History
On 19 June 2012, acting on behalf of his law firm and in his individual capacity, Priest filed a complaint in Durham County Superior Court alleging claims for breach of contract, breach of fiduciary duty, constructive fraud, fraud, and unfair and deceptive trade practices against Coch and IP based on their refusal to pay Priest 25% of the patent sale proceeds he alleged he was entitled to under the Agreement. On 24 June 2012, the matter was designated a mandatory complex business case and assigned to Chief Special Superior Court Judge for Complex Business Cases James L. Gale. On 10 July 2012, a consent order was entered directing Coch and IP to place $200,000, representing Priest‘s purported share of the sale proceeds, in escrow.
On 27 August 2012, Coch and IP filed a motion to dismiss Priest‘s claims under
In support of this motion, Coch and IP included an affidavit from James G. Passe, a North Carolina attorney who specializes in patent and trademark law. Based on his three decades of experience in the field, Passe concluded the Agreement represents a business transaction. As Passe explained, “It is my experience that a commission on the sale of a patent by a third party is not a standard transaction. I have never heard of such an arrangement during my 30+ years of practice as a patent attorney.” Moreover, according to Passe, “[i]t is not common for a patent attorney to enter into an agreement to license or sell a client‘s patent.” Although he
On 25 March 2014, Priest filed a motion for summary judgment in his firm‘s favor, arguing that the Agreement was validly entered and enforceable; that its terms clearly reached all proceeds from monetizing the patent, whether by licensing or sale given that its definition of “gross revenues” explicitly included both; that our State‘s Rules of Professional Conduct are not intended to be used as a procedural weapon to
On 5 November 2014, the trial court entered an Order and Opinion granting summary judgment in favor of Coch and IP based on Priest‘s failure to comply with Rule 1.8(a)‘s explicit requirements. After first noting that “at the heart of this matter is the determination of whether a valid, enforceable contract exists,” the court analyzed and ultimately rejected Priest‘s reliance on Baars, reasoning that although it is well established that violations of the Rules of Professional Conduct do not give rise to an affirmative claim of civil liability, in the present case, Coch and IP were not asserting that Priest or his law firm were liable for any harm, but instead were contesting their own liability. Thus, as the court noted, “The issue is whether the client can use the Rules defensively even though the client may not seek to impose civil liability based on a violation of the Rules.”
Priest insisted, based on Comment [7] to Rule 0.2, that the Rules cannot be used defensively, but the trial court held that this argument was foreclosed by this Court‘s decision in Cunningham v. Selman, 201 N.C. App. 270, 689 S.E.2d 517 (2009),
is made inapplicable simply because the Cunningham appeal followed a fee-dispute administrative proceeding. Rather, the [c]ourt finds that this case is controlled by Cunningham‘s holding that the affirmative use of the Rules as a defense to an attorney‘s claim is proper where the procedural requisites of Rule 1.8 are not satisfied. Rule 1.8 reflects that attorneys have a special obligation when dealing with their clients and are thus fairly held to abide by the Rules as a condition of their own recovery when the recovery is based on contracts with their clients.
Having determined that Coch and IP could raise violations of Rule 1.8 to defend against Priest‘s lawsuit, the court then focused on whether Priest had complied with the Rule. Despite Priest‘s claims to the contrary, the trial court declined to interpret the scope of Rule 1.8(a) as applying only to “a business transaction . . . directly adverse to a client,” and explained that Priest‘s narrow reading of the Rule depended on an erroneous attempt “to graft the condition of ‘directly adverse’ onto any business transaction between attorney and client, essentially ignoring the disjunctive ‘or’ between business transactions and adverse interests.”
Priest and his law firm argue that the trial court erred in granting summary judgment to Coch and IP. We disagree.
“Summary judgment is appropriate when there is no genuine issue as to any material fact and any party is entitled to a judgment as a matter of law.” Builders Mut. Ins. Co. v. N. Main Constr., Ltd., 361 N.C. 85, 88, 637 S.E.2d 528, 530 (2006) (citations and internal quotation marks omitted). We review the trial court‘s order granting summary judgment de novo. Id.
In the present case, Priest contends that the trial court should have granted summary judgment in his law firm‘s favor on the breach of contract and fraud claims because, in Priest‘s view, the express terms of the Agreement clearly entitle his law firm to 25% of proceeds from the sale of the patent. Priest further contends there is ample evidence in the record that Coch understood the promise he was making, but never intended to keep it, and instead concocted an elaborate scheme to induce Priest to provide free legal services before breaching their bargain. Priest also argues that the trial court erred in dismissing him as an individual party to the action and in
However, before any of these claims can be addressed, we must turn first to the threshold issue of whether the trial court erred in granting summary judgment to Coch and IP based on its determination that they could defend against Priest‘s claims for his failure to comply with Rule 1.8(a)‘s explicit requirements. On this point, Priest argues that the trial court erred by concluding that: (1) his purported violation of the Rules of Professional Conduct could be used defensively as a procedural weapon against his claim; and (2) Rule 1.8(a) applied to the Agreement, which Priest insists was not a business transaction. We address each of these arguments in turn.
A. Defensive use of Rules violation
Priest argues first that the trial court erred in allowing Coch and IP to rely on his purported violation of Rule 1.8(a) as a procedural weapon to defend against his claim. In support of this argument, Priest cites our prior decision in Baars, 148 N.C. App. at 421, 558 S.E.2d at 879 (recognizing that “[t]his Court has held that a breach
Violation of a Rule should not give rise itself to a cause of action against a lawyer nor should it create any presumption in such a case that a legal duty has been breached. In addition, violation of a Rule does not necessarily warrant any other nondisciplinary remedy, such as disqualification of a lawyer in pending litigation. The rules are designed to provide guidance to lawyers and to provide a structure for regulating conduct through disciplinary agencies. They are not designed to be a basis for civil liability. Furthermore, the purpose of the Rules can be subverted when they are invoked by opposing parties as procedural weapons. The fact that a Rule is a just basis for a lawyer‘s self-assessment, or for sanctioning a lawyer under the administration of a disciplinary authority, does not imply that an antagonist in a collateral proceeding or transaction has standing to seek enforcement of the Rule. Accordingly, nothing in the Rules should be deemed to augment any substantive legal duty of lawyers or the extra-disciplinary consequences of violating such a Rule.
[t]he fact that the Rules are not designed to be a basis for civil liability; that the purpose of the Rules can be subverted when they are invoked by opposing parties as procedural weapons; and that nothing in the Rules should be deemed to augment any substantive legal duty of lawyers does not mean that the Rules of Professional Conduct have utterly no bearing on the proper resolution of civil litigation. Instead, we believe Comment [7] and the principle enunciated in Baars are directed primarily toward cases in which a former client claims that an attorney is civilly liable, based, in whole or in part, on alleged violations of the Rules of Professional Conduct. The present case does not involve such a scenario. Furthermore, neither Comment [7] nor Baars categorically precludes the use of standards set out in the Rules of Professional Conduct in civil litigation; instead, they simply point out that the Rules of Professional Conduct do not have the primary purpose of establishing a standard of care for use in determining civil liability. In this case, however, the principle upon which Plaintiff relies is totally inapplicable because Defendant does not seek to hold Plaintiff liable for an alleged violation of Rule 1.5(f); instead, Defendant found herself on the receiving end of civil litigation after having invoked the State Bar‘s fee dispute resolution process and attempted to use Plaintiff‘s noncompliance with the State Bar‘s rules as a jurisdictional defense to Plaintiff‘s claim.
201 N.C. App. at 287-88, 689 S.E.2d at 529 (internal quotation marks and certain brackets omitted).
In Robertson, we upheld the trial court‘s award of costs and attorney fees in quantum meruit to an attorney who brought suit against his former clients after they fired him on the eve of accepting a lucrative settlement offer and refused to pay for his services. Id. at ___, 760 S.E.2d at 316. The former clients argued that because the contingent fee contract for their representation was never put into writing as Rule 1.5(c) requires, the award of costs and attorney fees should be vacated as contrary to public policy due to the attorney‘s violation of the Rules and a line of cases in which our State‘s appellate courts refused to allow recovery in quantum meruit where the underlying contracts giving rise to such claims were unenforceable due to violations of public policy. Id. at ___, 760 S.E.2d at 320. In rejecting this argument, we explained
the fact that an agreement for legal representation was determined to be in violation of the Rules of Professional Conduct and unenforceable is of no consequence where an attorney‘s right of recovery arises in quantum meruit, because the trial court‘s award of fees is based upon the reasonable value of [the attorney‘s] services and not upon the failed agreement.
Id. at ___, 760 S.E.2d at 321 (citation and internal quotation marks omitted). We found support for our holding in Baars and Comment [7] to Rule 0.2 and, more importantly, in “the comments to Rule 1.5 itself [which] explicitly provide that a trial court‘s determination of the merit of the petition or the claim [for costs and attorney fees] is reached by an application of law to fact and not by the application of this Rule.” Id. at ___, 760 S.E.2d at 319 (citation, internal quotation marks, and emphasis omitted).
Our review of Robertson does not support Priest‘s argument, which ignores the fact that the reason we cited Baars and Comment [7] to Rule 0.2 in the context of rejecting the former clients’ argument that the attorney should be barred from recovery in quantum meruit as a matter of public policy was because we recognized
Here, Comment [1] to Rule 1.8 provides that “[a] lawyer‘s legal skill and training, together with the relationship of trust and confidence between lawyer and client, create the possibility of overreaching when the lawyer participates in a business, property, or financial transaction with a client[.]”
B. Priest‘s violation of Rule 1.8(a)
Rule 1.8(a) provides that
[a] lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest directly adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer‘s role in the transaction, including whether the lawyer is representing the client in the transaction.
Priest does not dispute the fact that by failing to advise Coch in writing of the desirability of seeking independent counsel to review the Agreement and by failing to obtain informed consent in writing from Coch, Knight, and Smith as to the Agreement‘s essential terms, he failed to comply with Rule 1.8(a)(2) and (a)(3). Instead, Priest argues that Rule 1.8(a) does not apply to the Agreement, which he characterizes as both a contingent fee contract and an accommodation to a long-term
Here again, our review of the record does not support Priest‘s argument. It is clear that Coch and IP hired Priest‘s law firm to assist them in applying for a patent. While the 7 November 2005 engagement letter only specifically addresses the first phase of filing the patent application, we can infer that both parties contemplated that the representation would continue once USPTO responded to that application. While this process spanned multiple years, the representation had one clearly defined goal—obtaining a patent—with compensation for Priest‘s firm at a clearly defined rate. We therefore view the Agreement as a fundamental shift in the nature and objective of the representation, a shift that Coch and IP‘s affidavit from Passe demonstrates is “not a standard transaction” in patent and trademark law and is thus more accurately viewed as a business transaction in which Priest and his firm exercised influence and control from a position of trust when dealing with their legally unsophisticated clients to obtain unusually favorable terms for their own compensation.
Priest also argues that the Agreement is not within the scope of Rule 1.8(a) because the Rule only applies to “a business transaction . . . directly adverse to a client.” However, as the trial court correctly noted, this interpretation of the Rule
C. Quantum Meruit
Priest argues in the alternative that even if the Agreement is unenforceable based on his violation of Rule 1.8(a), he should still be entitled to recovery in quantum meruit. We disagree.
It is well established that “an agent or attorney, even in the absence of a special contract, is entitled to recover the amount that is reasonable and customary for work of like kind, performed under like conditions and circumstances.” Robertson, ___ N.C. App. at ___, 760 S.E.2d at 321 (citations and brackets omitted). Although we have observed that a party who seeks recovery in quantum meruit while also seeking to recover on an express contract should ideally plead these claims in the alternative in her complaint, see, e.g., James River Equip., Inc. v. Mecklenburg Utils., Inc., 179 N.C. App. 414, 419, 634 S.E.2d 557, 560 (2006), appeal dismissed and disc. review denied, 361 N.C. 355, 644 S.E.2d 226 (2007), we have also recognized that while “the better practice is to plead both the express and implied contracts, recovery in quantum meruit will not be denied where a contract may be implied from the proven facts but the express contract alleged is not proved[,]” Paxton v. O.P.F., Inc., 64 N.C. App. 130, 132, 306 S.E.2d 527, 529 (1983) (citation omitted), so long as it “appear[s] from the facts that services are rendered by one party to another, that the services were knowingly and voluntarily accepted and that they were not gratuitously rendered.” Id. at 133, 306 S.E.2d at 529 (citation omitted).
In the present case, Priest did not plead quantum meruit in his complaint, which exclusively addressed his claims based on the Agreement. The only indication in the record before us that Priest ever subsequently attempted to amend his pleadings to include a claim for quantum meruit is a footnote in the trial court‘s Order and Opinion, which states:
A claim is limited by “admissions and allegations within their pleadings unless withdrawn, amended or otherwise altered.” Webster Enters., Inc. v. Selective Ins. Co. Se., 125 N.C. App. 36, 41, 479 S.E.2d 243, 247 (1997). This doctrine precludes [Priest‘s] efforts to assert claims for breach of oral contract6 and quantum meruit, which were first raised
after the pleadings were closed and discovery completed.
On appeal, Priest insists that his complaint “gives notice of [his] claim for quantum meruit despite not labeling it as such” and that he therefore remains entitled to collect 25% of the proceeds from the sale of the patent, just as he contends the Agreement provided.
This argument fails. While Priest‘s failure to specifically plead quantum meruit is not necessarily fatal, see Paxton, 64 N.C. App. at 132, 306 S.E.2d at 529, we again find his reliance on Robertson misplaced. As noted supra, in Robertson, we recognized that a contingent fee contract for representation in litigation was unenforceable because it violated the express requirements of Rule 1.5(c) that such arrangements be in writing, but we nevertheless allowed the attorney to recover on his alternative claim in quantum meruit because the Rules violation was one of form, rather than content. Id. at ___, 760 S.E.2d at 320. Here, by contrast, Priest‘s claim arises from the Agreement, which, as explained supra, is not a contingent fee contract but instead a business transaction. Given that Priest failed to comply with the express requirements of Rule 1.8(a), and in light of the strong public policy considerations
Furthermore, Priest cites no evidence whatsoever to support the proposition that the amount he seeks to recover for the value of his services—$200,000, or 25% of the net proceeds from the sale of the patent—is “reasonable and customary for work of like kind, performed under like conditions and circumstances.” Id. at ___, 720 S.E.2d at 321. Indeed, Passe‘s affidavit in support of Coch and IP‘s motion for summary judgment demonstrates that “a commission on the sale of a patent by a third party is not a standard transaction” and that “a 25% commission for licensing a patent” is virtually unprecedented. We therefore hold that the trial court did not err in refusing to allow Priest to assert a late claim for recovery in quantum meruit.
Accordingly, the trial court‘s Order and Opinion is
AFFIRMED.
Judges MCCULLOUGH and ZACHARY concur.