A recent decision from the U.S. District Court in Seattle highlights why it’s important to define the client decision-maker, especially when dealing with small, closely held corporations (Kische USA LLC v. Simsek, 2016 WL 7212534, W.D. Wash. Dec. 13, 2016, unpublished). In this case, charges were brought by the owner of a retail clothing firm against two former employees who had left to start a rival apparel business. The suit claimed that one of the employees, identified as the chief executive manager, had transferred a registered trademark from the plaintiff to the new firm. The plaintiff also sued the company’s outside lawyer who had assisted with the transfer for legal malpractice and breach of fiduciary duty.
The defendant lawyer moved to dismiss, arguing that he was simply following the instructions of the manager. The lawyer stated that the executive manager had reasonably appeared to be acting within the scope of his authority. The Court agreed and dismissed claims against the lawyer.
Kische is a “pleadings case” — one that is dismissed on the face of the complaint rather than following discovery and additional factual development. As such, the result is case-specific, but it offers this useful lesson to lawyers who work with closely-held companies: It is often prudent to define exactly who is the person or group authorized to direct the lawyer.
With Kische, the operating agreement defined the role of the chief executive manager, and that was central to the Court’s view that the manager had apparent authority to direct the lawyer. In other circumstances, careful lawyers will define the client decision-maker with an engagement agreement. It will not necessarily eliminate issues of whether the designated decision maker was acting with proper authority and other questions of good faith. But, when there is a flat organizational structure in a closely held corporation, it will at least define who has authority to give directions to the lawyer.