Professionals may be exposed to liability outside of their “home” state. For those professionals that provide interstate advice, they may be subject to the jurisdiction and laws of any state in which they practice. Take for example the recent legal malpractice case in which a Connecticut law firm was dragged into a lawsuit in Arizona because of allegedly negligent tax advice. Sure, the first rule is to avoid a lawsuit. But, a close second rule is to implement procedures such that the professional is in a better position to defend the inevitable lawsuit. A forum selection and choice of law clause may be the key.
PL Matters hesitates to add another headache to tax professionals who are in the midst of tax season. Along with weight fluctuation, marital problems, and other health risks associated with tax season, tax professionals should be aware of the possibility of a lawsuit anywhere in the country in light of the recent decision in Beverage v. Pullman and Comley. In that case, an Arizona taxpayer engaged a Connecticut law firm to provide advice regarding a tax “shelter.” The law firm issued a lengthy opinion that the tax shelter was legitimate under federal law. During a subsequent audit, the IRS disagreed and disallowed substantial tax losses included in the plaintiff’s income tax return. The plaintiff sued the Connecticut law firm in Arizona for malpractice.
Before reaching the merits, the Connecticut law firm argued that it was not subject to the jurisdiction of Arizona. After a series of appeals, the AZ Supreme Court rejected the argument. It held that the firm engaged in a series of purposeful acts in Arizona including sending an agreement to represent an Arizona client, marketing in Arizona, and communicating with the client in Arizona. Although the law firm performed all of the work within Connecticut, those legal services were directed to Arizona.
This decision, which is not necessarily surprising, provides a reminder to professionals that providing advice across state lines could lead to liability away from home. Given the many differences between state laws across the country, and the difficulty and expense of participating in a lawsuit many miles away, there is reason for concern when accepting an engagement to represent an out-of-towner. The solution may be to add a clause or two in the professional engagement letter. Forum selection and choice of law clauses, which are generally enforceable, can be very useful features of an engagement letter because they help make future litigation more predictable for the parties and possibly less expensive. These clauses are great tools available to the professional and should be considered in all engagement letters.