95 N.Y.2d 305 (2000)

An attorney is not liable for failing to advise a client about a novel and questionable theory of insurance coverage, especially when the relevant jurisdiction’s case law does not support such a theory.

Summary

A New York law firm, Darby & Darby, was retained by VSI, a Florida corporation, to defend it in a Florida patent infringement suit. After a dispute over unpaid legal fees, Darby & Darby sued VSI to recover the outstanding amount. VSI counterclaimed, alleging malpractice for Darby & Darby’s failure to advise them about potential insurance coverage for the litigation costs under their general liability policy. The New York Court of Appeals held that Darby & Darby had no such duty because the theory of insurance coverage was novel and unsupported by New York or Florida law at the time of the representation.

Facts

VSI, a Florida company selling reading glasses, was sued for patent infringement in Florida in 1990. VSI retained Darby & Darby, a New York law firm, to defend them. VSI incurred substantial legal expenses and failed to pay nearly $200,000 in fees. Darby & Darby withdrew as counsel in 1993 and sued VSI for unpaid fees in 1996. Successor counsel for VSI secured insurance coverage for the litigation expenses in 1994. The insurance carrier, however, denied coverage for the period when Darby & Darby represented VSI.

Procedural History

Darby & Darby sued VSI in New York to recover unpaid legal fees. VSI asserted counterclaims for legal malpractice and breach of fiduciary duty, alleging failure to advise about potential insurance coverage. Supreme Court denied Darby & Darby’s motion to dismiss the counterclaims. The Appellate Division modified, awarding summary judgment to Darby & Darby on the account stated claim and dismissing VSI’s counterclaims. The Court of Appeals affirmed the Appellate Division’s order.

Issue(s)

Whether a New York law firm retained to defend a corporate client in a Florida patent infringement litigation had a duty to advise the client about possible insurance coverage for the costs of the litigation, under a novel theory of coverage?

Holding

No, because at the time of the representation, the theory of such coverage was novel and questionable, and neither New York nor Florida recognized such a duty of an insurer to defend patent infringement claims under a general liability policy’s advertising injury clause.

Court’s Reasoning

To establish legal malpractice, a party must show that the attorney failed to exercise “the ordinary reasonable skill and knowledge” commonly possessed by a member of the legal profession. The court noted that at the time of Darby & Darby’s representation, New York and Florida did not recognize a duty of an insurer to defend patent infringement claims under a general liability policy’s advertising injury clause. To the contrary, both states had rejected coverage for similar claims. The court cited Meyers & Sons Corp. v. Zurich Am. Ins. Group, 74 NY2d 298 (1989), where it refused to interpret a policy’s “advertising injury” clause to include liability arising from patent infringement.

The court emphasized that the theory of such coverage was largely undeveloped at the time, with only a few courts, primarily in California, finding a duty to defend patent infringement claims. The court stated that, “Because plaintiff acted in a manner that was reasonable and consistent with the law as it existed at the time of representation, it had no duty to inform defendants about possible ‘advertising liability’ insurance coverage for their patent infringement litigation expenses.” The court also held that Orlinsky’s allegations of oral protests were insufficient to raise a triable issue of fact as to the existence of an account stated.