No Duty To Disclose

The United States Court of Appeals for the Seventh Circuit affirmed the dismissal of claims brought by a litigation funding firm 

Signal is a litigation funding company. One of its executives resigned to start a competing venture and, in the process of doing so, sought legal advice from Signal’s outside counsel. What ensued was a protracted dispute between Signal, the executive, and the law firm.

Before us are claims Signal brought against the law firm and several of its attorneys. The district court resolved the claims in favor of the firm and attorneys, some on a motion to dismiss and others at summary judgment. Signal now appeals from those rulings. The district court handled the case with great diligence and care through a series of detailed orders. We affirm across the board. 

The lawsuit involved a departing executive and others

Signal alleges that Sugar Felsenthal impermissibly had an attorney-client relationship with the company and, at the same time, Farva Jafri. Sugar Felsenthal breached its contract with and ethical duties to the company, Signal continues, by advising Jafri on directly adverse matters, foremost counselling Jafri on potential litigation involving Signal and helping her set up the competing companies. Signal further contends that Sugar Felsenthal committed fraud by lying about and concealing its representation of Jafri. And Sugar Felsenthal’s actions injured Signal, the company insists, by causing it to wrongfully incur legal fees and lose outside investments.

Facts

From July 2016 through September 2017, Farva Jafri held several executive positions at Signal. Sugar Felsenthal Grais & Helsinger LLP provided legal services to Signal throughout Jafri’s tenure at the company.

In July 2017 an individual named Matthew Eager sent an inquiry to Signal’s general email address. Eager ran an investment group and asked whether Signal took on outside investors or knew of any competitors who did. Jafri saw and forwarded the email to Signal’s chief executive officer, Josh Wander, but Wander never responded to Eager.

Around this same time, Jafri began planning to start a competing litigation funding business of her own. While still employed by Signal, Jafri emailed Eager from her personal email account in September 2017. She arranged a call with Eager, provided information regarding her new venture, and sought his investment. Jafri also solicited investments from Pete Karnowski, who managed another investment firm, and Brij Shah, a personal friend. Jafri told Karnowski she was working with Signal’s chief marketing officer and represented that she had “staff and technology ready to go” to start the new venture.

Jafri resigned from Signal on September 28, 2017. She had a call with attorneys at Sugar Felsenthal the next day where they discussed, according to the law firm’s timesheets, “pre- vs. post-settlement funding and various other matters.” From there Sugar Felsenthal attorneys helped Jafri incorporate several new companies, and one attorney at the firm became the registered agent for three of those businesses.

Signal’s general counsel contacted the law firm about their role

[Firm partner] Friedland replied the next day, October 20, stating, “[N]o, there was no point in time at which [Sugar Felsenthal] represented [Jafri] in a manner adverse to Signal. If you are also asking the broader question of whether we represent [Jafri] on other matters, I cannot answer that.”

Friedland emailed again on October 27, terminating Sugar Felsenthal’s attorney-client relationship with Signal. Jafri had asked the law firm to “represent her in matters unrelated to Signal,” Friedland explained, and Jafri’s “future endeavors may not be completely unrelated to the space in which Signal operates.” “While not an ethical conflict,” he continued, it was “a business conflict” that warranted choosing between Signal and Jafri. Sugar Felsenthal chose Jafri.

Signal appealed the district court’s dismissal

Signal’s complaint alleged a single claim for “fraud and fraudulent concealment” against Sugar Felsenthal and four of its attorneys. The claim centered on the October 20, 2017 email sent by Jonathan Friedland in which he stated that Sugar Felsenthal did not represent Farva Jafri in matters directly adverse to Signal and, further, refused to answer whether the law firm represented Jafri in any other matters. The district court reasonably understood the claim as seeking relief based on two separate legal theories: fraudulent misrepresentation and fraudulent concealment. So the district court separately analyzed whether Signal plausibly pleaded a claim as to each theory of fraud.

Signal’s allegation that Friedland knowingly made a false statement when he denied any adverse representation of Jafri by Sugar Felsenthal, the district court found, stated a plausible claim for relief under a theory of fraudulent misrepresentation. But the district court concluded that Friedland’s refusal to disclose Sugar Felsenthal’s representations of Jafri in other matters did not present a viable fraud claim on a theory of fraudulent concealment. Fraudulent concealment, under Illinois law, the district court reasoned, requires a duty to speak, yet Sugar Felsenthal had no duty to disclose non-adverse, unconflicted representations of other clients like Jafri. The district court therefore effectively bifurcated Signal’s fraud claim—dismissing the fraudulent concealment theory of the claim and allowing the fraudulent misrepresentation theory to go forward.

The court

The Illinois Rules of Professional Conduct require attorneys to disclose representations of clients that are directly adverse and, as a result, present a conflict of interest. See Ill. R. Prof’l Conduct R. 1.7(b)(4) (2010) (requiring a client to give “informed consent” before a lawyer may represent a client where the representation involves a concurrent conflict of interest); id. R. 1.7(a) (defining a conflict of interest as where “the representation of one client will be directly adverse to another client” or “there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client”). But not so for representations that do not present such a conflict.

While Rule 1.6(b)(7) allows an attorney to disclose information to “detect and resolve conflicts of interest if the revealed information would not prejudice the client,” such disclosure is only permissive, not mandatory. Id. R. 1.6(b)(7).Indeed, the comments make clear that a lawyer’s decision not to disclose does not violate the Rules. See id. R. 1.6 cmt. 17.

A duty to disclose unconflicted representations of other clients, therefore, finds no support in the Illinois Rules of Professional Conduct. And Signal has failed to point to any source of law otherwise establishing such a duty. Put another way, because Signal could not allege that Sugar Felsenthal “was under a duty to disclose” the law firm’s unconflicted representations of Jafri, the company had no possible basis for relief on this theory of fraudulent concealment at summary judgment. Connick v. Suzuki Motor Co., 675 N.E.2d 584, 593 (Ill. 1996); see also Moore v. Pendavinji, No. 1-23-1305, 2024 WL 4489612, at *7 (Ill. App. Ct. Oct. 15, 2024) (explaining that “failure to establish … a duty to speak[] is fatal to a claim of fraudulent concealment”).

Other claims

Recall that three of Signal’s claims against Sugar Felsenthal and its attorneys survived dismissal: legal malpractice, breach of contract, and fraud—albeit the latter limited to a fraudulent misrepresentation theory of liability. The district court concluded that each claim failed at summary judgment because the record contained insufficient evidence on which a reasonable jury could find in favor of Signal. Upon reviewing the record in light of Illinois law governing Signal’s claims, we agree. The district court properly granted summary judgment on the malpractice and breach of contract claims, and on appeal Signal has waived any challenge to the award of summary judgment on the fraudulent misrepresentation theory of fraud liability.

(Mike Frisch)