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American Lawyer Praises Third Circuit Decision Striking Down Litigation Privilege for Systemic Fraud

Susan Beck/Litigation Daily

Third Circuit Gets It Right in Cahill Fraud Case | Litigation Daily

Third Circuit Gets It Right in Cahill Fraud Case Susan Beck, . Sometimes, during an oral argument, a judge will express such profound common sense that it startles me. That’s what happened as I listened to a recording of oral arguments at the U.S. Court of Appeals for the Third Circuit in a fraud case against Cahill Gordon & Reindel and BASF Catalysts LLC. Class action plaintiffs accuse Cahill and BASF of destroying evidence that Engelhard Corp. (which BASF bought in 2006) sold talc products containing asbestos and then lied about the existence of that evidence in thousands of personal injury lawsuits for more than two decades. BASF, represented by Kirkland & Ellis, and Cahill, represented by Williams & Connolly, had convinced New Jersey U.S. District Judge Stanley Chesler to dismiss the case. Among other things, they persuaded the judge that these alleged tactics were immunized by litigation privilege, which broadly protects lawyers from lawsuits based on their statements in judicial proceedings. At the appellate arguments in March, the Third Circuit judges queried counsel about choice of law issues and the esoteric anti-injunction act. But then, just before BASF’s lawyer from Kirkland & Ellis began his presentation, Chief Judge Theodore McKee took a big figurative step back and observed: “Sometimes we get down into the weeds of these really intricate legal issues. And sometimes just applying the old-fashioned smell test will get us to a better place.” Last week the Third Circuit decided that the odor surrounding this case was too rank to ignore. It overturned Chesler and held that the plaintiffs could sue Cahill and BASF for the alleged scheme to thwart their lawsuits. “The privilege has never applied to shield systematic fraud directed at the integrity of the judicial process,” wrote Judge Julio Fuentes. “Nor should it.” The judges apparently felt so strongly that they went beyond the legal approach advocated by the plaintiffs. Their lead appellate lawyer, Jeffrey Pollack of Fox Rothschild, had suggested that the privilege should cover litigation statements, but not statements connected to fraudulent actions, such as the destruction of evidence. (Pollack and his cocounsel Christopher Placitella of Cohen, Placitella & Roth earned Litigators of the Week honors for their Third Circuit win.) But the Third Circuit didn’t even want to make this kind of distinction. Although the New Jersey Supreme Court had never addressed the scope of litigation privilege in a case alleging such widespread fraud, the Third Circuit concluded that the court would not immunize systemic fraud, or “fraud calculated to thwart the judicial process.” The panel noted that based on the allegations in the complaint, Cahill and its client didn’t just bend the rules in bad faith. “They rigged the game from the beginning,” wrote Fuentes. The court also allowed the plaintiffs’ fraud claims to proceed against six individual lawyers who allegedly were involved in this scheme—three from Cahill and three from Engelhard. In a statement, BASF stressed that the court upheld the dismissal of the plaintiffs’ related RICO claims, and only a “small portion” of the plaintiffs’ claims remain. It also pointed out that the Third Circuit’s ruling is based on allegations that have yet to be proven. Significantly, BASF is not defending Cahill, but instead distancing itself from the firm. “It bears emphasis that the core of the allegations concern Engelhard and its outside law firm, Cahill Gordon & Reindel. After these allegations arose in 2009, BASF—as the acquiring company—has worked hard to address the allegations. After these allegations arose in 2009, BASF retained Kirkland & Ellis. BASF is no longer represented by Cahill.” Cahill’s lead outside counsel, John Villa of Williams & Connolly, told the New Jersey Law Journal that the court was required to accept as true the unproven allegations in the plaintiffs’ complaint. “The firm is confident that the facts will demonstrate that the allegations against it are unwarranted and that the firm’s conduct met all professional standards,” Villa said. Regardless of how this case ends, at least the Third Circuit has taken a welcome step toward holding lawyers more accountable for their actions.

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