Watts Water v. Sidley (Sidley Motion for Summary Judgment)

IN THE SUPERIOR COURT FOR THE DISTRICT OF COLUMBIA CIVIL DIVISION

WATTS WATER TECHNOLOGIES, INC.

PLAINTIFF,

V. SIDLEY AUSTIN LLP,

DEFENDANT.

2012 CA 004847 M Hon. Gregory E. Jackson Next Court Date: September 7, 2012, 9:30 a.m. Event: Initial Scheduling Conference

MOTION FOR SUMMARY JUDGMENT

Pursuant to Rule 56 of the Rules of Civil Procedure, Defendant Sidley Austin LLP

respectfully moves for summary judgment as to all counts of the Complaint on the grounds set

forth in the accompanying Memorandum of Points and Authorities.

RULE 12-I(A) STATEMENT

Defendant’s counsel unsuccessfully sought Plaintiff’s consent to the relief requested.

ORAL HEARING REQUESTED

Dated: July 27, 2012 Respectfully submitted,

WILLIAMS & CONNOLLY LLP

By: /s/ John K. Villa John K. Villa (D.C. Bar No. 220392) Charles Davant IV (D.C. Bar No. 484305) Marcus P. Smith (D.C. Bar No. 996721) 725 Twelfth Street, N.W. Washington, DC 20005 Telephone: (202) 434-5000 Facsimile: (202) 434-5029 E-Mail: [email protected] [email protected] [email protected] Counsel for Sidley Austin LLP



PLAINTIFF,


DEFENDANT.


DEFENDANT SIDLEY AUSTIN LLP’S MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT OF ITS MOTION FOR SUMMARY JUDGMENT

WILLIAMS & CONNOLLY LLP John K. Villa (D.C. Bar No. 220392) Charles Davant IV (D.C. Bar No. 484305) Marcus P. Smith (D.C. Bar No. 996721) 725 12th Street, N.W. Washington, DC 20005 (202) 434-5000 Counsel for Sidley Austin LLP

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TABLE OF CONTENTS

TABLE OF AUTHORITIES .......................................................................................................... ii

SUMMARY OF ARGUMENT .......................................................................................................1

RELEVANT STATUTORY BACKGROUND: THE FCPA .........................................................4

UNDISPUTED FACTS ...................................................................................................................5

A. Sidley Is Engaged for Limited Due Diligence at Changsha Valve. .........................5

B. Deloitte Reported the Purported “Kickback Policy” to Watts in 2004. ...................7

C. Watts Creates and Operates a New Chinese Subsidiary. .........................................7

D. Watts and Its Newly Formed Subsidiary Begin Violating the FCPA More Than Two Years After Sidley’s Due Diligence at Changsha Valve. .......................8

WATTS’ COMPLAINT ..................................................................................................................9

SUMMARY JUDGMENT STANDARD......................................................................................11

ARGUMENT .................................................................................................................................11

I. WATTS CANNOT SHIFT TO INNOCENT OUTSIDE COUNSEL THE CONSEQUENCES OF WATTS’ WRONGFUL CONDUCT. .........................................11

A. In Pari Delicto Bars Watts’ Claims. .......................................................................12

1. In Pari Delicto. ...........................................................................................12

2. The Complaint Establishes Watts’ Vastly Greater Culpability. ................13

B. Watts’ Wrongdoing Proximately Caused Its Own Alleged Losses. ......................14

C. Watts’ Claims Violate Judicially Recognized Public Policy. ................................15

D. Contributory Negligence Bars the Negligence Claims (Counts 1 and 3). .............17

II. FCPA WORK WAS BEYOND THE SCOPE OF SIDLEY’S ENGAGEMENT. ............18

III. THE STATUTE OF LIMITATIONS BARS ALL THREE COUNTS. ............................21

A. The Breach of Contract Claim Is Time-Barred. .....................................................21

B. The Negligence Claims Are Time-Barred. ............................................................21

IV. SUMMARY JUDGMENT IS WARRANTED ON WATTS’ DUPLICATIVE COUNTS 2 AND 3. ...........................................................................................................23

CONCLUSION ..............................................................................................................................24

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TABLE OF AUTHORITIES

FEDERAL CASES

Alberts v. Tuft (In re Greater Se. Cmty. Hosp. Corp.), 353 B.R. 324 (Bankr. D.D.C. 2006) ........12

Allison v. Howard Univ., 209 F. Supp. 2d 55 (D.D.C. 2002) ........................................................21

Bateman Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299 (1985) ..........................................12

Bradley v. Nat’l Ass’n of Sec. Dealers Dispute Resolution, Inc., 433 F.3d 846 (D.C. Cir. 2005) ........................................................................................................................................22

Dooley v. United Techs. Corp., 803 F. Supp. 428 (D.D.C. 1992) ...................................................5

Hartz v. Farrugia, No. 06-3164, 2009 WL 901767 (E.D. La., Mar. 31, 2009), cert denied, 131 S. Ct. 104 (2010) ...............................................................................................................19

Havens v. Patton Boggs LLP, No. 05-01454, 2006 WL 1773473 (D.D.C. June 26, 2006), aff’d, 235 F. App’x 750 (D.C. Cir. 2007) ................................................................................21

Iacangelo v. Georgetown Univ., 760 F. Supp. 2d 63 (D.D.C. 2011) .............................................24

Meador v. Albanese Law Office, No. 5:08-cv-562, 2010 WL 3807163 (N.D.N.Y. Sept. 23, 2010) ..................................................................................................................................24

N. Am. Catholic Educ. Programming Found., Inc. v. Womble Carlye Sandridge & Rice, PLLC, 800 F. Supp. 2d 239 (D.D.C. 2011) .............................................................................24

Pinter v. Dahl, 486 U.S. 622 (1988) ..............................................................................................12

USACM Liquidating Trust v. Deloitte & Touche LLP, 764 F. Supp. 2d 1210 (D. Nev. 2011) ........................................................................................................................................13

Wyo. Outdoor Council v. Dombeck, 148 F. Supp. 2d 1 (D.D.C. 2001) .........................................11

STATE CASES

AmBase Corp. v. Davis Polk & Wardwell, 866 N.E.2d 1033 (N.Y. 2007) .............................19, 20

Biomet Inc. v. Finnegan Henderson LLP, 967 A.2d 662 (D.C. 2009) ....................................11, 23

Breezevale Ltd. v. Dickinson, 759 A.2d 627 (D.C. 2000), vacated & reh’g granted by 769 A.2d 133, reaffirmed by 783 A.2d 573 (D.C. 2001) (en banc) ................................................17

Bussineau v. President & Directors of Georgetown Coll., 518 A.2d 423 (D.C. 1986) .................21

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Choquette v. Isacoff, 836 N.E.2d 329 (Mass. App. Ct. 2005) .......................................................12

Dalo v. Kivitz, 596 A.2d 35 (D.C. 1991) .......................................................................................14

Evans v. Cameron, 360 N.W.2d 25 (Wis. 1985) ...........................................................................13

Ferguson v. Lieff, Cabraser, Heimann & Bernstein, LLP, 69 P.3d 965 (Cal. 2003).....................16

Gilbert v. Miodovnik, 990 A.2d 983 (D.C. 2010) ..........................................................................11

Hicks v. Nunnery, 643 N.W. 2d 809 (Wis. Ct. App. 2002) ...........................................................16

Karma Constr. Co. v. King, 296 A.2d 604 (D.C. 1972) (per curiam) ...........................................18

Kirschner v. KPMG LLP, 938 N.E.2d 941 (N.Y. 2010) ..........................................................12, 14

Maillard v. Dowdell, 528 So. 2d 512 (Fla. Dist. Ct. App. 1988) ...................................................19

Massengale v. Pitts, 737 A.2d 1029 (D.C. 1999) ..........................................................................17

McKethean v. Wash. Metro. Area Transit Auth., 588 A.2d 708 (D.C. 1991) ................................15

Paul v. Smith, Gambrell & Russell, 599 S.E. 2d 206 (Ga. Ct. App. 2004) ...................................16

R.D.H. Commc’ns, Ltd. v. Winston, 700 A.2d 766 (D.C. 1997) ....................................................22

Spannaus v. Larkin, Hoffman, Daly & Lindgren, Ltd., 368 N.W.2d 395 (Minn. Ct. App. 1985) ........................................................................................................................................19

Tri-G, Inc. v. Burke, Bosselman & Weaver, 856 N.E.2d 389 (Ill. 2006) .......................................16

Wagner v. Sellinger, 847 A.2d 1151 (D.C. 2004) ..........................................................................21

Watson v. Calvert Building & Loan Ass’n, 45 A. 879 (Md. 1900) ................................................19

Whiteheart v. Waller, 681 S.E.2d 419 (N.C. Ct. App. 2009), review denied, 693 S.E.2d 353 (N.C. 2010) .......................................................................................................................13

Wingfield v. People’s Drug Store, 379 A.2d 685 (D.C. 1977) ......................................................17

OTHER AUTHORITIES

4 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice (2012 ed.) .................................11, 23

D.C. Code § 12-301 .......................................................................................................................21

Foreign Corrupt Practices Act of 1977 (“FCPA”), 15 U.S.C. §§ 78dd-l et seq. ................... passim

Restatement (Third) of The Law Governing Lawyers (2000). ..........................................16, 18, 19

iv

Superior Court R. Civ. P. 56(c)......................................................................................................11

Williston on Contracts (4th ed. 1990) ............................................................................................21

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SUMMARY OF ARGUMENT

In this case, an admitted corporate wrongdoer that was required to disgorge illegal profits

and pay penalties to the federal government for violating a federal anti-bribery law seeks to

recoup the fruits of its wrongdoing and penalties from its former counsel, based on allegations

that counsel were negligent. Plaintiff Watts Water Technologies, Inc. (“Watts”) is an American

company that has admitted violating the Foreign Corrupt Practices Act (“FCPA”) in two

respects: (1) by bribing Chinese government officials at its China subsidiary and (2) by

maintaining inaccurate books and records. This illegal conduct resulted in the Securities and

Exchange Commission (SEC) ordering Watts to disgorge $2.7 million in illegal profits (plus

interest) and pay a $200,000 penalty. Watts now sues its former counsel Sidley Austin LLP

(“Sidley”), alleging that Sidley failed to prevent Watts from breaking the law. 1 Watts makes this

claim even though Watts never engaged Sidley, and Sidley never agreed, to provide advice on

the FCPA, a fact the documentary record confirms.

Watts cannot, as a matter of law, shift the consequences of its wrongdoing to Sidley.

Allowing Watts’ claims to proceed would reward a wrongdoer and eliminate the deterrent and

punitive purposes that the SEC penalty was meant to serve. It would be contrary to well-

established legal rules that require courts to deny recovery to a wrongdoer in these

circumstances. The result Watts seeks would be particularly egregious because Watts violated

the FCPA for several years and reaped a large financial benefit, while Sidley is merely alleged to

have been negligent—an allegation Sidley denies.

1 For ease of reference, for this Motion only, the term “Watts” will refer both to Plaintiff Watts Water Technologies, Inc. and its affiliate Watts Regulator Co. “Sidley” will refer to Sidley Austin Brown & Wood LLP in connection with events before January 2006 and will refer to Sidley Austin LLP in connection with events after that date.

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A shorthand version of the facts set out in the Complaint and its attached SEC Order

demonstrates why Watts’ case against Sidley is, as a matter of law, foreclosed. In November

2005, Watts formed a new, wholly owned subsidiary in China. In April 2006, Watts’ new

subsidiary bought certain assets from the Chinese company Changsha Valve Works (“Changsha

Valve”) and hired certain Changsha Valve employees. In December 2006, Watts’ new

subsidiary adopted an “illegal policy” of bribing Chinese government officials in violation of the

FCPA, and inaccurately recording those bribes on Watts’ books in violation of the FCPA’s

accounting requirements. As the SEC found (based on Watts’ own submissions), Watts China’s

Vice President of Sales “approved many of the payments . . . and knew or should have known

that the payments were improperly recorded on Watts’ books.” The illegal “payments generated

profits for Watts of more than $2.7 million,” plus interest, from 2006 to 2009.

Under the FCPA, Watts had an independent legal duty to refrain from bribing foreign

government officials. See 15 U.S.C. § 78dd-1. Watts also had an independent legal duty to

“devise and maintain a system of internal accounting controls sufficient to provide reasonable

assurance” that its books and records were accurate. Id. § 78m(b)(2)(A)–(B). Watts

indisputably violated its legal duties. The SEC has found that Watts could and should have

accomplished compliance by conducting basic FCPA training for its employees in China. At no

point did Watts request that Sidley review Watts’ or its subsidiary’s compliance with the FCPA

or other United States laws, and Watts certainly never asked Sidley, a law firm, to assess Watts’

compliance with accounting rules.

Watts’ negligence theory against Sidley stems from the fact that Watts had hired Sidley

back in 2004 to conduct specified due diligence tasks—none of which included FCPA

compliance—at the old Changsha Valve, the company that sold its assets to Watts in 2006.

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Watts alleges that Sidley negligently failed to detect and report that Changsha Valve had bribed

government officials. According to Watts, if Sidley had only reported Changsha Valve’s bribery

to Watts in 2004 or 2005, then Watts would not have engaged in bribery at Watts’ own

subsidiary from 2006 to 2009, and would have maintained adequate books and records. The

argument is preposterous. For one, Deloitte & Touche Corporate Finance Ltd., which conducted

financial due diligence for Watts at Changsha Valve, specifically identified and reported

Changsha Valve’s so-called “kickback policy” to Watts in writing on November 19, 2004.

Watts’ then-Assistant General Counsel wrote in a memorandum, long before the Changsha

Valve deal was concluded, “I have reviewed the . . . draft Financial Due Diligence report . . . by

Deloitte.” Yet Watts went ahead with the conduct described in the Complaint despite Deloitte’s

written report. Under these circumstances, it is frankly amazing that Watts comes to this Court

seeking a recovery from Sidley.

As we show in Part I, courts at the summary judgment stage have rejected claims like

Watts’ as barred by a number of legal principles. These include (1) in pari delicto; (2) a lack of

proximate causation; (3) a public policy against permitting wrongdoers to keep ill-gotten gains

by shifting blame; and (4) contributory negligence.

A separate ground for summary judgment, as we show in Part II, is that a lawyer is not

liable for failing to perform a duty that he or she did not agree to perform. A clear documentary

record shows exactly what Sidley was engaged to do, and FCPA work was not within the scope

of Sidley’s engagement. As part of the initial correspondence discussing the requested due

diligence, Sidley sent Watts a detailed “due diligence” checklist. The checklist did not provide

for FCPA review. The Sidley partner explained that Sidley “would conduct our legal DD [due

diligence] based on the assumption of asset/business rather than equity acquisition and would

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focus our attention on the following two major areas”: (1) whether Changsha Valve’s assets

were cleanly owned and (2) whether the assets/business proposed for sale could lawfully be sold

to Watts. Watts responded: “The checklist looks fine.” If Watts had wished to engage Sidley to

evaluate other issues, including FCPA issues, then it should have done so.

In Part III, we show that the three-year statutes of limitations bar Watts’ claims, which

concern alleged breaches in 2004 and 2005, and which Watts as a matter of law has known about

since at least December 2006, when Watts began violating the FCPA.

Finally, in Part IV, we show that Count 2 (breach of contract) and Count 3 (negligent

misrepresentation) must be dismissed under controlling precedent because they are duplicative of

Count 1 (professional negligence).

This lawsuit never should have been brought. Watts’ legal theory offends notions of fair

play, justice, and public policy. It is foreclosed by dispositive legal bars appearing on the face of

the Complaint. The Court should enter summary judgment in favor of Sidley. 2

RELEVANT STATUTORY BACKGROUND: THE FCPA

This case involves a federal statute, the Foreign Corrupt Practices Act of 1977 (“FCPA”).

The FCPA contains two sets of provisions. The anti-bribery provisions, enforced by the

Department of Justice through civil and criminal penalties, make it unlawful for publicly traded

United States corporations to bribe foreign government officials to obtain or retain business. See

15 U.S.C. § 78dd-1–3 (2006). The FCPA also contains accounting provisions that require

publicly traded United States corporations to make and keep books and records that accurately

reflect the company’s transactions, and to devise and maintain an adequate system of internal

2 To the extent this brief makes reference to Sidley’s alleged negligence, it is accepting the allegations of the complaint at face value only for purposes of the legal arguments set forth herein. In fact, Sidley’s legal work exceeded professional standards and was in no way negligent.

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accounting controls. See id. § 78m(b)(2)–(3). The books and records and internal control

provisions are enforced by the SEC. Payment of a bribe to a foreign government official violates

both the bribery provisions and the books-and-records provisions, unless, as to the latter, the

bribe is properly reflected as such in the company’s records. See id. The FCPA does not apply

to Chinese-owned companies doing business in China. See id. § 78dd-1; Dooley v. United

Techs. Corp., 803 F. Supp. 428, 438–39 (D.D.C. 1992).

FACTUAL BACKGROUND3

A. Sidley Is Engaged for Limited Due Diligence at Changsha Valve.

Plaintiff Watts Water Technologies, Inc. (“Watts”) is a publicly traded company that

designs, manufactures, and sells water valves in North America, Europe, and Asia. See Compl.

¶¶ 4, 25. Watts has approximately 70 facilities worldwide, and its annual sales exceed $1 billion.

See id. ¶ 25. By 2004, Watts had “substantial operations” in China, including ownership of

several corporate subsidiaries. Id. ¶ 26. Watts sought to expand its China presence through a

deal with Changsha Valve, a Chinese company. See id. ¶¶ 28, 37.

On November 12, 2004, a Watts executive e-mailed a Sidley partner in Shanghai: “We

need your participation in a legal due diligence on a target company . . . . The scope of the

review will be your firm’s standard legal due diligence review.” Ex. 1 (11/12/04 Ho E-Mail). A

few hours later, the Sidley partner (Zhengyu Tang, a Chinese national) responded to Watts by e-

mail: “[W]e have prepared the attached legal DD [due diligence] request/checklist . . . .” Ex. 2

(DD Checklist). The due diligence checklist that Sidley provided to Watts addressed various

topics: “a detailed list of all assets of the Company,” “documentary proof of title to major

assets,” “a specific description of the land and buildings currently used by the Company,”

3 The facts are derived from the Complaint, its attachments, and the Statement of Undisputed Facts, which attaches documents the authenticity of which cannot reasonably be disputed.

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“present or potential environmental pollution,” “mortgages and other encumbrances,” and

numerous other topics. Ex. 3 (Certified Translation). The checklist made no mention of any due

diligence to be conducted in connection with the FCPA or any other laws of the United States.

See id. The Watts executive responded to Sidley on November 15, 2004: “The checklist looks

fine.” Ex. 4 (11/15/04 E-Mail Exchange) at 2.

The Sidley due diligence checklist documented that Watts was “planning to purchase the

core assets and businesses of Changsha Valve” and to place them in a Watts subsidiary. Ex. 3

(Certified Translation) (emphasis added). Because Watts would not be buying Changsha Valve

as an entity, Watts would not acquire legal liability for Changsha Valve’s past conduct. See Ex.

4 (11/15/04 E-Mail Exchange) at 1. Watts would be liable only for how it conducted its

subsidiary’s operations going forward. See id. The Sidley Shanghai partner explained to Watts

on November 15, 2004 that the contemplated transaction structure was relevant to the scope of

Sidley’s planned due diligence:

[W]e would conduct our legal DD [due diligence] based on the assumption of asset/business rather than equity acquisition and would focus our attention on the following two major issues (in addition to your specific concerns):

1. Whether the assets/business proposed for sale by Changsha Valve are lawfully . . . , exclusively . . . and cleanly . . . owned . . . ; and

2. Whether the assets/business proposed for sale by Changsha Valve can be lawfully sold to Watts by Changsha Value without unusual . . . difficulties.

Id. (emphasis added). Watts never requested that Sidley conduct due diligence directed at

Changsha Valve’s compliance with the FCPA, any other anti-bribery law, or any other law of the

United States. See Ex. 4 (11/15/04 E-Mail Exchange) at 1.

Sidley personnel conducted due diligence at Changsha Valve. See Compl. ¶ 40. Sidley

issued a preliminary due diligence report on November 24, 2004, and an updated due diligence

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report on July 20, 2005. See id. ¶¶ 42–43. Sidley did not conduct due diligence directed at

FCPA issues. See id. ¶ 47.

B. Deloitte Reported the Purported “Kickback Policy” to Watts in 2004.

Sidley was not the only firm Watts hired in 2004 to conduct due diligence at Changsha

Valve. See Ex. 5 (Deloitte Rpt.). Watts also hired Deloitte & Touche Corporate Finance Ltd.

(“Deloitte”) to conduct financial due diligence. See id. Deloitte specifically reported Changsha

Valve’s so-called “kickback policy” to Watts in writing on November 19, 2004 as part of

Deloitte’s “[s]elling expenses analysis.” Id. at 14–15. Deloitte wrote: “Consulting fee was paid

to government or design institutions for projects and/or bidding information, and rebate to

customer was usually provided at a range of 3% of revenue.” Id. (emphasis added). (The

Deloitte personnel in China apparently translated the Chinese for “rebate” into English as

“rebate.” Id. For purposes of this litigation, however, Watts in the Complaint chooses to

translate the Chinese for “rebate” into English as “kickback.” Compl. Ex. C.)

Watts’ then-Assistant General Counsel (and now General Counsel) read Deloitte’s report

before Watts agreed to proceed with the Changsha Valve deal. See Ex. 6 (6/13/05 Watts Memo).

He wrote on June 13, 2005: “I have reviewed the . . . draft Financial Due Diligence report dated

November 19, 2004 prepared by Deloitte & Touche . . . regarding Changsha Valve . . . and have

the following follow-up questions and requests for information.” Id. Although Watts’ Assistant

General Counsel was a United States-based lawyer for a publicly traded company with

approximately 70 facilities worldwide, he apparently sought no further information concerning

what Watts now characterizes as Changsha Valve’s “kickback policy.” See id.

C. Watts Creates and Operates a New Chinese Subsidiary.

In November 2005, Watts formed Watts Valve (Changsha) Co., Ltd. (“CWV”) as a

wholly owned subsidiary. See Compl. Ex. D (SEC Order) ¶ 1. In April 2006, Watts’ newly

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formed CWV subsidiary acquired Changsha Valve’s assets and businesses. See Compl. ¶ 57;

Ex. 7 (10/26/05 Acq. Agmt.). Watts’ new CWV subsidiary thereafter hired former employees of

Changsha Valve (see Ex. 8 (10/26/05 Empl. Arr. Agmt.)), took over certain Changsha Valve

contracts (see Ex. 9 (4/24/06 Contract Assnmt. Agmt.)), and began selling valves in China (see

Compl. ¶ 60). Watts China Vice President of Sales Leesen Chang became interim general

manager of the new subsidiary. See Compl. Ex. D (SEC Order) ¶ 3.

Watts never retained Sidley to provide advice on Watts’ or CWV’s compliance with the

FCPA, to investigate possible FCPA violations at Watts or CWV, or to offer an opinion on its

financial reporting or internal controls. See Stmt. of Undisp. Fact ¶¶ 12–13.

D. Watts and Its Newly Formed Subsidiary Begin Violating the FCPA More Than Two Years After Sidley’s Due Diligence at Changsha Valve.

Eight months after the April 2006 transaction with Changsha Valve, Watts’ newly

formed CWV subsidiary began committing FCPA violations by making illegal “payments . . . to

Chinese government officials.” Compl. ¶¶ 14, 19–20, 72–74. An SEC Cease-and-Desist Order,

to which Watts agreed, explains that “[t]he purpose and effect of those payments was to

influence the design institutes to recommend CWV valve products . . . and to create design

specifications that favored CWV valve products.” Compl. Ex. D (SEC Order) ¶ 1.4 “CWV’s

improper payments generated profits for Watts of more than $2.7 million.” Id. Watts China

Vice President of Sales, Leesen Chang, the interim general manager of CWV, “approved many

of the payments . . . and knew or should have known that the payments were improperly

recorded on Watts’ books as commissions.” Id. ¶ 3. Chang also “resist[ed] . . . efforts to have

4 The factual findings in the SEC Order attached to the Complaint as Exhibit D were “made pursuant to [Watts’] Offers” of Settlement. Compl. Ex. D (SEC Order) at 2 n.1. Watts “consent[ed] to the entry” of the SEC Order. Id. at 1. For purposes of this Motion only, Sidley credits Watts’ allegations that Watts and its CWV subsidiary violated the FCPA.

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[CWV’s December 2006] Sales Policy translated and submitted to Watts’ management in the

U.S.,” which, according to the SEC Order, “was a cause of Watts’ internal control [FCPA]

violations.” Id. ¶ 12. Watts “failed to conduct adequate FCPA training for its employees in

China until July 2009.” Id. ¶ 9. Watts “failed to devise and maintain a system of internal

accounting controls sufficient to prevent and detect the payments.” Id. ¶ 2.

In this lawsuit, Watts claims that CWV’s illegal payments were made pursuant to an

“illegal policy” that previously had been in place at Changsha Valve. 5 Compl. ¶ 67. Watts

reported to the SEC that CWV employees chose to “adopt” that old Changsha Valve policy “in

December 2006,” more than two years after Sidley was hired to conduct due diligence at

Changsha Valve, more than two years after Deloitte reported the policy to Watts’ law department

in Deloitte’s financial due diligence report, and more than a year after CWV was created. See

Compl. Ex. D (SEC Order) ¶ 11 (illegal policy was “adopted by CWV in December 2006”).

Watts reported its violations to the SEC and DOJ on August 6, 2009, “to obtain the

benefits of self-disclosure.” Compl. ¶¶ 73–74. Under the resulting SEC Order, Watts was to

“pay to the United States Treasury disgorgement of $2,755,815” (the amount of Watts’ unlawful

profits from “CWV’s improper payments”), prejudgment interest on those ill-gotten gains of

$820,791, and a civil money penalty of $200,000”: a total of $3,776,606. Compl. Ex. D (SEC

Order) ¶ 2, at 7.

WATTS’ COMPLAINT

Watts on June 6, 2012 filed this lawsuit against Sidley. Watts alleges that Sidley’s file

from Changsha Valve due diligence contained a “red flag” in the form of some language at the

bottom of a one-page, Chinese-language document—language Watts now calls a “kickback

5 Again, Changsha Valve, as a Chinese company doing business in China, was not subject to the FCPA or other United States laws.

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policy.”6 Compl. ¶¶ 13, 15. Watts goes on to allege that the Chinese lawyers in Sidley’s

Shanghai office should have provided the document to Watts, on the theory that the document

suggests the possibility that Changsha Valve might have violated the FCPA—a foreign law that

did not apply to that Chinese company in any event. See id. ¶¶ 14–15.

Watts asserts a claim for professional negligence (Count 1). Based on the same facts as

its negligence claim, Watts also asserts claims for breach of contract (Count 2) and negligent

misrepresentation (Count 3). As damages, Watts demands that Sidley pay it:

$2,755,815, to “recover” the illegal profits generated by “CWV’s improper payments” that Watts was required to disgorge to the U.S. Treasury (Compl. ¶ 124, Ex. D (SEC Order) ¶ 2);

$820,791 of interest on those ill-gotten gains that Watts was required to disgorge to the U.S. Treasury (see Compl. ¶ 124, Ex. D (SEC Order) ¶ 2);

$200,000 for the “civil money penalty” Watts paid to the U.S. Treasury (Compl. ¶ 124, Ex. D (SEC Order) ¶ 2);

Watts’ legal fees and costs in connection with its FCPA violations (see Compl. ¶ 21); and

“the [unspecified] losses that Watts [allegedly] suffered when it was forced to sell [CWV] at a substantial loss.” (id.). 7

6 For purposes of this litigation, Watts translates the Chinese word for “rebate” in that document as “kickback,” and overlooks the fact that the “kickback policy” says nothing whatsoever about payments to government officials. See Compl. Ex. C. Sidley denies Watts’ allegations that this language was a “red flag,” and denies Watts’ allegation that a Sidley partner agreed with Watts’ characterization of it as such. See Answer ¶ 77. That issue, however, is not before the Court at this stage.

7 Under the guise of seeking legal fees and costs from Sidley, Watts apparently is improperly seeking to “recover” from Sidley the costs of Watts’ “worldwide corruption audit,” “additional FCPA and anticorruption training for . . . the company’s locations in Europe,” a “risk assessment and anti-corruption compliance review of Watts’ international operations in Europe,” and “anti-corruption testing at seven international Watts sites” (Compl. Ex. D (SEC Order) ¶ 17)—steps that Watts should have taken in any event, and that Sidley’s alleged negligence cannot have proximately caused.

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SUMMARY JUDGMENT STANDARD

Summary judgment should be granted when “there is no genuine issue as to any material

fact and . . . the moving party is entitled to a judgment as a matter of law.” Super. Ct. R. Civ. P.

56(c); see Gilbert v. Miodovnik, 990 A.2d 983, 988 (D.C. 2010). Summary judgment motions

are commonly granted in legal malpractice cases when there is no viable cause of action. See,

e.g., Biomet Inc. v. Finnegan Henderson LLP, 967 A.2d 662 (D.C. 2009). “A plaintiff needs to

present proof on each element of the cause of action, but a defendant needs only to negate an

element of a cause of action or show a complete defense.” 4 Ronald E. Mallen & Jeffrey M.

Smith, Legal Malpractice, § 37:12 (2012 ed.). Summary judgment is particularly appropriate

when “the unresolved issues are primarily legal rather than factual.” Wyo. Outdoor Council v.

Dombeck, 148 F. Supp. 2d 1, 7 (D.D.C. 2001).

Here, the facts that require summary judgment appear on the face of the Complaint and

its attachments, or in a few documents the authenticity of which cannot reasonably be disputed.

ARGUMENT

I. WATTS CANNOT SHIFT TO INNOCENT OUTSIDE COUNSEL THE CONSEQUENCES OF WATTS’ ILLEGAL CONDUCT.

Watts’ claims against Sidley are premised on Watts’ allegations that employees of Watts

and its wholly owned CWV subsidiary broke federal law for more than three years, yielding

Watts an illegal, multi-million dollar profit. Watts now seeks to use this Court to recover that

illegal profit, the fruits of its wrongdoing, by recovering it from former counsel. Watts’ request

offends justice and common sense. It also contravenes a number of settled legal principles that

deny recovery to a wrongdoer in these circumstances: (1) in pari delicto; (2) a lack of proximate

causation; (3) a public policy against permitting wrongdoers to keep ill-gotten gains by shifting

12

blame; and (4) contributory negligence. These principles have long been part of the fabric of the

law, including in the District of Columbia. We address each in turn.

A. In Pari Delicto Bars Watts’ Claims.

1. In Pari Delicto.

The doctrine of in pari delicto “is grounded on two premises: first, that courts should not

lend their good offices to mediating disputes among wrongdoers; and second, that denying

judicial relief to an admitted wrongdoer is an effective means of deterring illegality.” Bateman

Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 306 (1985) (footnote omitted). The

doctrine bars a plaintiff’s recovery where “the plaintiff bore at least substantially equal

responsibility for his injury, and where the parties’ culpability arose out of the same illegal act.”

Alberts v. Tuft (In re Greater Se. Cmty. Hosp. Corp.), 353 B.R. 324, 362 (Bankr. D.D.C. 2006)

(dismissing legal malpractice case on in pari delicto grounds) (quoting Pinter v. Dahl, 486 U.S.

622, 632 (1988)). When applying in pari delicto, the acts of corporate agents are imputed to the

corporation. See id. A corporation is “responsible for the acts of its authorized agents even if

particular acts were unauthorized” because “[t]he risk of loss from the unauthorized acts of a

dishonest agent falls on the principal that selected the agent.” Kirschner v. KPMG LLP, 938

N.E.2d 941, 950–51 (N.Y. 2010) (internal quotation marks omitted).

The doctrine of in pari delicto is regularly applied in professional negligence cases,

including in the District of Columbia. See In re Greater Se. Cmty. Hosp., 353 B.R. at 324. In

the professional negligence context, courts repeatedly have held that in pari delicto bars claims

where the plaintiff violated the law and thereafter attempts to recover from its attorneys for

advising the plaintiff to violate the law or for not preventing the plaintiff from violating the

law—conduct far worse than that alleged against Sidley. See Choquette v. Isacoff, 836 N.E.2d

329, 335 (Mass. App. Ct. 2005) (even where the attorney urged the client “to perform illegal

13

acts,” the client will not be permitted to “fil[e] suit against the attorney to recover damages

incurred due to being caught”) (internal quotation marks omitted). See also Whiteheart v.

Waller, 681 S.E.2d 419 (N.C. Ct. App. 2009) (in pari delicto barred plaintiff who knew his

actions were unethical from bringing action for legal malpractice against his former counsel who

was charged with failing to advise him not to send a defamatory letter), review denied, 693

S.E.2d 353 (N.C. 2010); Evans v. Cameron, 360 N.W.2d 25 (Wis. 1985) (in pari delicto applied

where plaintiff followed lawyer’s advice to lie under oath because wrongfulness of lying under

oath was apparent); USACM Liquidating Trust v. Deloitte & Touche LLP, 764 F. Supp. 2d 1210

(D. Nev. 2011) (accountants who negligently failed to prevent client’s Ponzi scheme could not

be liable to the client under in pari delicto).

If an attorney who advises his client to break the law cannot be liable to the law-breaking

client, then, a fortiori, Sidley cannot be liable here.

2. The Complaint Establishes Watts’ Vastly Greater Culpability.

Watts admits it violated the FCPA. See, e.g., Compl. ¶ 20 (“Watts self-reported the

violations . . . .”); see also id. ¶¶ 14, 19, 67, 72–74, 91, 106, 124; Compl. Ex. D (SEC Order) ¶ 1

(“This matter concerns violations of the . . . FCPA . . . by Watts Water Technologies, Inc.”).

Watts’ wholly owned subsidiary “made improper payments to” Chinese government officials (Compl. Ex. D (SEC Order) ¶ 1).

“The purpose and effect of those payments was to influence the design institutes to recommend CWV valve products” (Id.).

“The improper payments were facilitated by a sales incentive policy . . . adopted by [Watts’] CWV in December 2006” (Id. ¶ 11)—more than a year after Sidley’s due diligence had concluded.

“CWV’s improper payments generated profits for Watts of more than $2.7 million” (Id. ¶ 2).

Watts China’s Vice President of Sales “approved many of the payments . . . and knew or should have known that the payments were improperly recorded on Watts’ books as commissions.” Id. ¶ 3. And

14

The illegal payments were made after Watts’ then-Assistant General Counsel was provided with the Deloite financial due diligence report. Ex. 5 (Deloitte Rpt.) at 14–15.

In contrast to Watts’ wrongdoing, Sidley is alleged to have been, at worst, careless (an

allegation that Sidley denies). See Count 1 (“Professional Negligence”). Summary judgment for

Sidley under in pari delicto therefore is warranted. “The justice of the in pari delcito rule is

most obvious where a willful wrongdoer is suing someone who is alleged to be merely

negligent.” Kirschner, 938 N.E. 2d at 950–51. “We are not working here with narrow questions

of technical law. We are applying fundamental concepts of morality and fair dealing . . . .” Id. at

950 (internal quotation marks omitted). Given the Complaint’s allegations that Watts violated

the FCPA, the Court should enter summary judgment for Sidley under in pari delicto.

B. Watts’ Wrongdoing Proximately Caused Its Own Alleged Losses.

To prevail on its claims, Watts would need to prove a “‘substantial and direct causal link’

between the attorney’s breach and the injury sustained by the client.” Dalo v. Kivitz, 596 A.2d

35, 41–42 (D.C. 1991).

Watts cannot demonstrate a “substantial and direct causal link” between Sidley’s alleged

negligence and Watts’ loss of its illegal profits—money to which Watts was never entitled in the

first place.

Nor can Watts demonstrate a “substantial and direct causal” link between Sidley’s

alleged negligence and Watts’ other claimed damages, Watts’ legal expenses and its alleged

“forced” sale of CWV at a loss. All of Watts’ claimed damages are direct consequences of Watts

and CWV employees’ decisions to break the law long after the completion of Sidley’s agreed-

upon due diligence at the old Chinese company Changsha Valve. See, e.g., Compl. Ex. D (SEC

Order) ¶ 3 (Watts China’s Vice President of Sales “approved many of the payments . . . and

knew or should have known [they] were improperly recorded”). After Sidley’s work was

15

completed, Watts had an independent legal duty to maintain accurate books and records, to

maintain adequate internal controls, and to prevent corrupt payments to government officials.

See 15 U.S.C. §§ 78dd-l et seq. Watts has admitted that it failed to discharge that legal duty.

See, e.g., Compl. ¶¶ 14, 19, 67, 72–74, 91, 106, 124. That is why it was punished. Watts’

wholly owned CWV subsidiary did not even exist until after the completion of Sidley’s work,

and did not “adopt” its “illegal policy” until “December 2006.” Compl. Ex. D (SEC Order) ¶ 11.

CWV employees’ decisions to violate the FCPA from 2006 through 2009 (and Watts’ failure to

monitor their conduct), not Sidley’s work at Changsha Valve years earlier, proximately caused

Watts’ losses. Watts is not relieved of its obligations to comply with the law just because a law

firm allegedly failed to alert it to another company’s past conduct. The Court should enter

summary judgment on Watts’ claims. 8

C. Watts’ Claims Violate Judicially Recognized Public Policy.

Watts seeks to recover from Sidley the penalties that Watts paid to the SEC for violations

of federal law, and thereby seeks this Court’s aid in avoiding the consequences of its own

wrongdoing. See Compl. ¶ 21. Allowing a proven wrongdoer to use a malpractice action to shift

the consequences of its wrongdoing to counsel would offend public policy and undermine the

very purpose of those legal penalties.

In the context of punitive damages—which involves civil wrongs and not violations of a

federal criminal statute—courts have not permitted a torfeasor-plaintiff to shift a punitive

8 Watts’ claim also is barred by the doctrine of intervening cause. As a matter of law, Watts’ CWV subsidiary’s intentional wrongdoing, from 2006 to 2009, broke the chain of causation from Sidley’s alleged negligence in 2004 and 2005. See, e.g., McKethean v. Wash. Metro. Area Transit Auth., 588 A.2d 708, 716 (D.C. 1991) (proximate cause is “that cause which, in natural and continual sequence, unbroken by any efficient intervening cause, produces the injury, and without which the result would not have occurred”) (internal quotation marks omitted) (granting summary judgment).

16

damages award to its negligent attorney. A case on point is Paul v. Smith, Gambrell & Russell,

599 S.E. 2d 206, 211 (Ga. Ct. App. 2004), where the appeals court reasoned that the plaintiffs

were “the active tortfeasor[s].” Accordingly, “to allow the plaintiffs to shift [to their former

counsel] their tort liability for punitive damages that the plaintiffs were specifically found by

clear and convincing evidence to have caused intentionally would be contrary to the public

policy of Georgia.” 599 S.E. 2d at 211. See also Hicks v. Nunnery, 643 N.W. 2d 809, 824 (Wis.

Ct. App. 2002) (“[A]s a matter of public policy, persons who actually commit the criminal

offenses for which they are convicted should not be permitted to recover damages for legal

malpractice from their former defense attorneys.”). See generally Restatement (Third) of The

Law Governing Lawyers § 53 cmt. h (2000) (“Collecting punitive damages from the lawyer will

neither punish nor deter the original tortfeasor . . . .”).9

The Court should apply the rule prohibiting the shifting of punitive awards from a

tortfeasor to its counsel in the far more serious circumstances of this case, where the rule makes

even more sense. Violating federal criminal laws is far worse than the civil wrongs for which

punitive damages are assessed. A fortiori, the recovery Watts seeks should be denied.

Disgorgement and penalties imposed by the SEC are designed to punish and deter conduct illegal

under federal law. Watts’s other alleged damages—such as its legal fees to defend against

criminal prosecution—are also a consequence of its wrongdoing. Allowing Watts to recover

9 See also Ferguson v. Lieff, Cabraser, Heimann & Bernstein, LLP, 69 P.3d 965 (Cal. 2003) (attorney liability inconsistent with the purpose of punitive damages, which is to punish the wrongdoer and deter unlawful conduct; an award would be unjust because the amount of the award would have no relation to the gravity of the attorney’s misconduct or his or her wealth); Tri-G, Inc. v. Burke, Bosselman & Weaver, 856 N.E.2d 389, 413 (Ill. 2006) (“imposing liability for lost punitive damages on the negligent attorney would neither punish the culpable tortfeasor nor deter that tortfeasor and others from committing similar wrongful acts in the future. Also, the amount of the award bears no relationship to the gravity of the negligent attorney’s misconduct or the attorney’s wealth.”).

17

against its counsel, and thereby avoid the consequences of its wrongdoing, would be far worse

than shifting a punitive damages award from a tortfeasor to its counsel. This Court should not

permit Watts to use the Court’s offices to accomplish that perverse and unjust result. Summary

judgment is warranted on this basis as well.

D. Contributory Negligence Bars the Negligence Claims (Counts 1 and 3).

Sidley does not need to prove Watts’ obviously greater culpability to establish that

summary judgment is warranted. Rather, if Watts was even slightly negligent—a conclusion the

Complaint makes inescapable—then Watts is barred from recovery under the doctrine of

contributory negligence.

Under District of Columbia law, a plaintiff’s contributory negligence completely bars its

recovery where the plaintiff’s negligence “was a substantial factor in causing the alleged damage

or injury.” Massengale v. Pitts, 737 A.2d 1029, 1031 (D.C. 1999); see also Breezevale Ltd. v.

Dickinson, 759 A.2d 627, 634 (D.C. 2000) (“[c]ontributory negligence is a complete bar to

recovery” in a legal malpractice suit), vacated & reh’g granted by 769 A.2d 133, reaffirmed by

783 A.2d 573, 575 (D.C. 2001) (en banc); Wingfield v. People’s Drug Store, 379 A.2d 685, 687

(D.C. 1977) (“[T]he District of Columbia does not recognize different degrees of contributory

negligence. The rule is simply that contributory negligence bars a plaintiff’s recovery.”).

The Complaint and its attachment make clear that Watts’ FCPA problems stemmed from

Watts’ negligence (or worse), and that its personnel were active participants:

Watts China’s Vice President of Sales “knew or should have known that the payments were improperly recorded” in violation of the FCPA (Compl. Ex. D (SEC Order) ¶ 3);

Watts “failed to conduct adequate FCPA training for its employees in China until July 2009” (id. ¶ 9);

Watts “failed to implement an FCPA compliance and training program commensurate with the extent of its international operations and its ownership of

18

CWV, a subsidiary that sold its products almost exclusively to” state-owned enterprises (id. ¶ 22); and

Watts “failed to devise and maintain a system of internal accounting controls sufficient to prevent and detect the payments” (id. ¶ 2).

Even absent these facts, it is undisputed that Deloitte specifically identified and reported

Changsha Valve’s purported “kickback policy” to Watts in a Financial Due Diligence Report on

November 19, 2004. See Ex. 5 (Deloitte Rpt.) at 14–15. Watts’ then-Assistant General Counsel

(now General Counsel) admitted he “reviewed the . . . draft Financial Due Diligence report dated

November 19, 2004 prepared by Deloitte & Touche” and had follow-up questions. Ex. 6

(6/13/05 Watts Memo). He raised no questions about the kickback policy, however, despite

being a U.S. lawyer for a publicly traded company with 70 facilities worldwide. See id.

Watts’ claim is barred by contributory negligence if the in-house lawyer was even

slightly negligent. See, e.g., Karma Constr. Co. v. King, 296 A.2d 604, 605 (D.C. 1972) (per

curiam) (corporate plaintiff’s claim barred by its employee’s contributory negligence). Watts’

Complaint alleges that a reasonably competent lawyer would have considered the “kickback

policy” a “red flag.” See Compl. ¶ 15. Crediting that allegation, Watts’ Assistant General

Counsel was at least as negligent as Sidley is alleged to have been; he allowed Watts to go

forward with its conduct despite reading Deloitte’s written report.

Watts’ contributory negligence, as established by Watts’ own Complaint and the

foregoing undisputed facts, warrants summary judgment for Sidley as to Counts 1 and 3

(Professional Negligence and Negligent Misrepresentation).

II. FCPA WORK WAS BEYOND THE SCOPE OF SIDLEY’S ENGAGEMENT.

The attorney-client relationship is contractual and consensual, and lawyers are only

required to advise clients on issues within the agreed-upon scope of their engagements. See

Restatement of The Law Governing Lawyers (Third) § 16 cmt. c (2000) (“The lawyer’s duties

19

are ordinarily limited to matters covered by the representation.”); id. at § 50 cmt. d (a lawyer is

not liable for failing to act beyond the scope of representation).

For example, in AmBase Corp. v. Davis Polk & Wardwell, 866 N.E.2d 1033 (N.Y. 2007),

a client had hired the law firm Davis Polk to litigate a tax dispute with the Internal Revenue

Service before the Tax Court. During the Tax Court litigation, Davis Polk had been “provided

with a copy of [an] Agreement” that “provided that [the client] was not primarily liable for the

subject taxes in the underlying Tax Court proceeding—that primary liability rested with”

another. 866 N.E.2d at 1036. But Davis Polk “never fully reviewed the document to determine

what effect, if any, it had on the underlying dispute,” resulting in various damages to the client.

Id. After the client filed a malpractice action against Davis Polk, New York’s highest court

affirmed the action’s dismissal. The New York Court of Appeals reasoned: “Davis Polk was

retained to litigate the amount of tax liability, and not to determine whether the tax liability could

be allocated to another entity.” Id. at 1037. Whether another entity was liable for the alleged tax

shortfall—as suggested by the document obtained by Davis Polk during its work—“was outside

the scope of its representation,” thus requiring dismissal of the malpractice claim. Id.

Likewise, in the venerable and often-cited Maryland decision Watson v. Calvert Building

& Loan Ass’n, 45 A. 879, 880 (Md. 1900), the court of appeals held that an attorney hired to

examine the title to real property and prepare a report had no obligation to also report a judgment

and lien on that property. The court reasoned that the attorney had not been hired for general

legal duties but for one specific task. See id. 10

10 See also, e.g., Spannaus v. Larkin, Hoffman, Daly & Lindgren, Ltd., 368 N.W.2d 395, 398 (Minn. Ct. App. 1985) (affirming summary judgment on malpractice claim where alleged negligence was outside the scope of the attorney-client relationship); Maillard v. Dowdell, 528 So. 2d 512 (Fla. Dist. Ct. App. 1988) (attorney hired to assist in condominium purchase had no duty to research claims against the condominium association); Hartz v. Farrugia, No. 06-3164,

20

Here, the contemporaneous documentary record proves that FCPA review was outside

the scope of Sidley’s engagement. Changsha Valve, as a Chinese company operating within

China, was not subject to the FCPA, and Watts was not proposing to buy Changsha Valve as an

entity. Sidley specifically informed Watts of the planned scope of its due diligence by providing

it with Sidley’s “due diligence checklist” before starting work. See Ex. 2 (DD Checklist); Ex. 3

(Certified Translation). The due diligence checklist made no mention of any due diligence to be

conducted in connection with the FCPA. See id. The Sidley partner responsible for the due

diligence wrote to Watts that Sidley “would conduct our legal DD [due diligence] based on the

assumption of asset/business rather than equity acquisition and would focus our attention on the

following two major issues (in addition to your specific concerns)”: (1) whether the assets were

cleanly owned by Changsha Valve and (2) whether the assets proposed for sale can be lawfully

sold to Watts. Ex. 4 (11/15/04 E-Mail Exchange) at 1. Watts agreed in writing to the scope of

Sidley’s planned due diligence: “The checklist looks fine.” Id. at 2. Watts never requested that

Sidley conduct due diligence directed at Changsha Valve’s compliance with the FCPA or any

other laws of the United States.

Lawyers have no duty to address issues outside the boundaries of their agreed-upon

undertakings. See, e.g., Davis Polk, 866 N.E.2d at 1036. FCPA matters were not within the

scope of Sidley’s agreed-upon due diligence. Summary judgment should be entered for Sidley

for this reason as well.

2009 WL 901767, at *3 (E.D. La., Mar. 31, 2009) (“The attorney-client relationship is purely contractual and results only from the mutual agreement and understanding of the parties concerned. Such a relationship is based only upon the clear and express agreement of the parties as to the nature of the work to be undertaken by the attorney . . . .”) (internal quotation marks omitted), cert denied, 131 S. Ct. 104 (2010).

21

III. THE STATUTE OF LIMITATIONS BARS ALL THREE COUNTS.

A. The Breach of Contract Claim Is Time-Barred.

The statute of limitations for breach of contract is three years. See D.C. Code § 12-

301(7). The limitations period runs from the date the contract is breached. See Havens v. Patton

Boggs LLP, No. 05-01454, 2006 WL 1773473, at *2 (D.D.C. June 26, 2006), aff’d, 235 F. App’x

750 (D.C. Cir. 2007); Allison v. Howard Univ., 209 F. Supp. 2d 55, 59 (D.D.C. 2002). See 31

Richard A. Lord, Williston on Contracts § 79:14 (4th ed. 1990) (“[A] cause of action in contract

accrues at the time of the breach . . . irrespective of any knowledge on the part of the plaintiff or

of any actual injury occasioned to him or her.”) (internal quotation marks omitted).

The contract here (i.e., Sidley’s agreement to conduct due diligence) allegedly was

breached in 2004 and 2005. See Compl. ¶ 104. This lawsuit was filed on June 6, 2012—

approximately seven years after the alleged breach. The contract claim already was barred long

before Watts requested, and Sidley agreed to, a tolling agreement in June 2011. Sidley made

sure the parties’ tolling agreement expressly provided that “any statute of limitations or statute of

repose that expired prior to [June 23, 2011] shall remain expired.” The contract claim, therefore,

is barred by the three-year statute of limitations.

B. The Negligence Claims Are Time-Barred.

D.C. Code § 12-301(8) prescribes a three-year statute of limitations for all actions “for

which a limitation is not otherwise specially prescribed . . . .” Legal malpractice claims fall into

this category, see Wagner v. Sellinger, 847 A.2d 1151, 1154 (D.C. 2004), as do negligent

misrepresentation claims, id. Under the discovery rule employed in D.C., the statute of

limitations begins to run when the plaintiff knows, or by the exercise of reasonable diligence

should know (1) of the injury, (2) its cause in fact and (3) some evidence of wrongdoing. See

Bussineau v. President & Directors of Georgetown Coll., 518 A.2d 423, 425 (D.C. 1986).

22

The undisputed facts are that Watts knew, or should have known, of its alleged injury, its

alleged cause, and Sidley’s alleged negligence no later than December 2006. Watts’ “illegal

policy” was “adopted by CWV in December 2006.” Compl. Ex. D (SEC Order) ¶ 11. As of

December 2006, Watts therefore knew or should have known of the policy (as stated in the SEC

Order11), knew that Sidley had not reported the policy, and (crediting Watts’ other allegations for

purposes of this Motion) knew that it had overpaid for Changsha Valve’s assets. See Compl. ¶

91 (“Watts purchased a company [sic] whose core business operations were built on an express

system of paying kickbacks to government officials (including design institutes) to obtain or

maintain business, which is a patent FCPA violation.”). Because Watts employees knew or

should have known of Watts’ claim no later than December 2006, Watts’ negligence claims

became barred by the three-year statute of limitations no later than December 2009, long before

Watts belatedly sought a tolling agreement (in June 2011) or filed its complaint (in June 2012).

Watts may argue that the “continuous representation doctrine” saves its expired

professional negligence claim. This is incorrect. That doctrine tolls the statute of limitations for

professional negligence claims during the attorneys’ continued representation of the

client/plaintiff on the same specific matter that gave rise to the claim for malpractice. See R.D.H.

Commc’ns, Ltd. v. Winston, 700 A.2d 766, 768 (D.C. 1997); see also Bradley v. Nat’l Ass’n of

Sec. Dealers Dispute Resolution, Inc., 433 F.3d 846, 850 (D.C. Cir. 2005) (continuous

representation rule no longer applies when “the attorney’s representation concerning [a]

particular matter [at] issue is terminated.”) (emphasis added) (internal quotation marks omitted);

11 See, e.g., Compl. Ex. D (SEC Order) ¶ 22 (Watts “failed to implement an FCPA compliance . . . program commensurate with the extent of its international operations and its ownership of . . . a subsidiary that sold its products almost exclusively to” state-owned enterprises”); id. ¶ 2 (Watts “failed to devise and maintain a system of internal accounting controls sufficient to prevent and detect the payments”).

23

4 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 23.13, at 498, 511–12 (2012 ed.)

(question is “when the representation of the specific subject matter concluded,” and a “general

ongoing relationship on other matters does not suffice”).

Watts alleges that it “hired Sidley . . . to perform legal due diligence with respect to the

potential acquisition” of Changsha Valve’s assets and businesses, and Sidley’s due diligence

gives rise to Watts’ claim. Compl. ¶ 10 (emphasis added).12 Sidley’s legal due diligence in

anticipation of the Changsha Valve transaction ended in 2005. Indeed, the Acquisition

Agreement was signed on October 26, 2005. See Ex. 7 (10/26/05 Acq. Agmt.). As a matter of

law and common sense, Sidley’s representation of Watts on “the specific subject matter” of pre-

acquisition due diligence was concluded no later than the date the Acquisition Agreement was

executed. The continuing representation doctrine therefore cannot have tolled the statute of

limitations beyond that date.

Watts’ claims are time-barred. The Court therefore should grant summary judgment.

IV. SUMMARY JUDGMENT IS WARRANTED ON WATTS’ DUPLICATIVE COUNTS 2 AND 3.

Where breach of contract and negligent misrepresentation claims are premised on the

same facts, and seek identical relief, as a legal malpractice claim, those claims are duplicative

and must be dismissed. See Biomet Inc. v. Finnegan Henderson LLP, 967 A.2d 662, 670 n. 4

12 See also, e.g., Compl. ¶ 38 (“On or around November 11, 2004, Watts instructed Sidley, and Sidley agreed, to conduct legal due diligence on Watts’ behalf with respect to the company.”); id. ¶ 13 (alleged negligence occurred “[i]n the course of [Sidley’s] legal due diligence.”); id. ¶ 55 (Sidley’s due diligence reports “constituted Sidley’s legal advice and counsel to Watts with respect to legal due diligence in preparation for Watts’ acquisition of [sic] Changsha Valve.”); id. ¶ 88 (“in the course of the legal due diligence examination of Changsha Valve, the applicable standard of care [allegedly] required Sidley to” perform certain tasks); id. ¶ 98 (parties’ engagement agreement “included Sidley’s agreement to conduct legal due diligence for Watts in connection with Watts’ assessment of its potential acquisition of Changsha Valve”); id. ¶ 120 (“Watts was relying on Sidley to provide complete and accurate statements regarding its legal due diligence . . . to . . . decid[e] to purchase Changsha Valve [sic].”).

24

(D.C. 2009) (“Biomet’s attempt to recast its malpractice argument as also breach of contract and

breach of fiduciary duty fails”); Iacangelo v. Georgetown Univ., 760 F. Supp. 2d 63, 66 (D.D.C.

2011) (courts in malpractice cases must “as a matter of judicial economy” dismiss duplicative

claims) (internal quotation marks omitted); cf. Meador v. Albanese Law Office, No. 5:08-cv-562,

2010 WL 3807163, at *4 (N.D.N.Y. Sept. 23, 2010) (“Where claims of negligence, breach of

contract, breach of fiduciary duty, negligent misrepresentation, or fraudulent misrepresentation

are premised on the same facts and seek identical relief as a claim for legal malpractice, those

claims are duplicative and must be dismissed.”).

In this case, the allegations describing the breach of contract claim (Count 2) are

materially identical to the allegations describing the professional negligence claim (Count 1).

Compare Compl. ¶¶ 85–95, with Compl. ¶¶ 96–107. Similarly, the allegations supporting the

negligent misrepresentation claim (Count 3) are materially identical to the allegations supporting

the legal malpractice claim. Compare Compl. ¶¶ 85–95, with Compl. ¶¶ 108–25. All three

counts seek the same relief. Accordingly, the Court should enter summary judgment in favor of

Sidley on Counts 2 and 3. See N. Am. Catholic Educ. Programming Found., Inc. v. Womble

Carlye Sandridge & Rice, PLLC, 800 F. Supp. 2d 239, 244 (D.D.C. 2011) (dismissing contract

and other duplicative claims upon determining that plaintiff could not demonstrate causation in

its legal malpractice claim).

CONCLUSION

For the forgoing reasons, the court should grant summary judgment for defendant Sidley

Austin LLP on all counts.

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Dated: July 27, 2012

Respectfully submitted,


By: /s/ John K. Villa John K. Villa (D.C. Bar No. 220392) Charles Davant IV (D.C. Bar No. 484305) Marcus P. Smith (D.C. Bar No. 996721) 725 Twelfth Street, N.W. Washington, DC 20005 Telephone: (202) 434-5000 Facsimile: (202) 434-5029 E-Mail: [email protected] [email protected] [email protected] Counsel for Sidley Austin LLP



PLAINTIFF,


DEFENDANT.


STATEMENT OF UNDISPUTED FACTS

Pursuant to Rule 12-I(k) of the Rules of Civil Procedure, Defendant Sidley Austin LLP

hereby sets forth facts as to which there is no genuine issue.1

1. Exhibit 1 includes a true and correct copy of an e-mail that Sin Leong Ho sent to

Zhengyu Tang on or around November 12, 2004.

2. Exhibit 2 is a true and correct copy of an e-mail and attachment that Zhengyu

Tang sent to Sin Leong Ho on or around November 12, 2004.

3. Exhibit 3 is a translation of the attachment to Exhibit 2.

4. Exhibit 4 is a true and correct copy of an e-mail exchange between Sin Leong Ho

and Zhengyu Tang on or around November 15, 2004.

1 The cited exhibits are exhibits to the Memorandum of Points and Authorities in Support of the Motion for Summary Judgment filed herewith. For the Court’s convenience, Defendant’s counsel has added underlining and arrows to indicate relevant passages. Defendant Sidley Austin LLP does not here repeat the facts that are alleged in the Complaint and that are expressly relied upon in the Memorandum of Points and Authorities. Those facts are taken as true only for purposes of this Motion.

5. Exhibit 5 is a true and correct copy of a “Financial Due Diligence—1st and 2nd

Phase Draft” dated November 19, 2004 and prepared by Deloitte & Touche Corporate Finance

Ltd. for Watts (“the Deloitte Report”).

6. Exhibit 6 is a true and correct copy of a memo by Watts’ then-Assistant General

Counsel dated June 13, 2005.

7. In November 2004, Sin Leong Ho was an employee or agent of Plaintiff Watts

Water Technologies, Inc. (formerly known as Watts Industries, Inc.) (“Watts”). See Ex. 1

(11/12/04 Ho E-Mail).

8. Between November 2008 and June 2009, Leesen Chang was an employee or

agent of Watts. See Compl. Ex. D (SEC Order) ¶ 5.

9. No officer, employee, or agent of Watts specifically requested, in writing or

orally, that Sidley make an inquiry into whether Changsha Valve made payments to government

employees. See, e.g., Ex. 4 (11/15/04 E-Mail Exchange); Ex. 6 (6/13/05 Watts Memo).


orally, that Sidley Austin Brown & Wood (“Sidley”) make an inquiry into whether Changsha

Valve had complied with the Foreign Corrupt Practices Act, any other anti-bribery law, or any

other law of the United States. See, e.g., Ex. 4 (11/15/04 E-Mail Exchange); Ex. 6 (6/13/05

Watts Memo).

11. In November 2005, Watts formed Watts Valve (Changsha) Co., Ltd. (“CWV”) as

a wholly owned subsidiary. See Compl. Ex. D (SEC Order) ¶ 1.


orally, that Sidley conduct an investigation into, or offer an opinion on, whether CWV was

complying with the FCPA.


orally, that Sidley conduct an investigation into, or offer an opinion on, whether Watts was

complying with the FCPA.

14. Sidley’s due diligence in connection with Watts’ Changsha Valve transaction

concluded before June 23, 2008. See Ex. 7 (10/26/05 Acq. Agmt.).

15. On or before June 13, 2005, Watts’ Assistant General Counsel reviewed the

Deloitte Report. See Ex. 6 (6/13/05 Watts Memo).

16. CWV did not acquire Changsha Valve’s equity. See Ex. 7 (10/26/05 Acq.

Agmt.).

17. The statements of fact in the SEC Order attached to the Complaint reflect the

substance of facts that Watts (through counsel) communicated to the Securities and Exchange

Commission. See Compl. Ex. D (SEC Order) at 2 n.1.

18. The findings in the SEC Order attached to the Complaint were made pursuant to

Watts’ Offer of Settlement. See id.

19. Watts consented to entry of the SEC Order. See id. at 1.

Dated: July 27, 2012

Respectfully submitted,


By: /s/ John K. Villa John K. Villa (D.C. Bar No. 220392) Charles Davant IV (D.C. Bar No. 484305) Marcus P. Smith (D.C. Bar No. 996721) 725 Twelfth Street, N.W. Washington, DC 20005 Telephone: (202) 434-5000 Facsimile: (202) 434-5029

E-Mail: [email protected] [email protected] [email protected] Counsel for Sidley Austin LLP



PLAINTIFF,


DEFENDANT.


[PROPOSED] ORDER

Upon consideration of Defendant’s Motion for Summary Judgment, the Opposition

thereto, and the entire record in this matter, it is HEREBY ORDERED this __ day of

__________________, 2012, THAT:

Defendant’s Motion be and hereby is GRANTED; and it is FURTHER ORDERED

THAT:

the Clerk shall enter JUDGMENT FOR DEFENDANT.

_______________________________

Hon. Gregory E. Jackson Superior Court Judge

Copies to: Barry J. Nace, Esq. Christopher T. Nace, Esq. Paulson & Nace, PLLC 1615 New Hampshire Avenue, N.W. Washington, DC 20009 H. Lamar Mixson, Esq. Jason J. Carter, Esq. Bondurant, Mixson & Elmore, LLP 1201 West Peachtree Street, Suite 3900 Atlanta, GA 30309 Counsel for Plaintiff Watts Water Technologies, Inc.

John K. Villa, Esq. Charles Davant IV, Esq. Marcus P. Smith, Esq. Williams & Connolly LLP 725 Twelfth Street, N.W. Washington, DC 20005 Counsel for Defendant Sidley Austin LLP

CERTIFICATE OF SERVICE

I hereby certify that on this July 27, 2012, I caused a true and accurate copy of

Defendant’s Motion for Summary Judgment, Memorandum in Support Thereof, Statement of

Undisputed Facts, and proposed Order to be served on the following via CaseFileXpress:

Barry J. Nace, Esq. Christopher T. Nace, Esq. Paulson & Nace, PLLC 1615 New Hampshire Avenue, N.W. Washington, DC 20009

/s/ Charles Davant IV Williams & Connolly LLP

725 Twelfth Street, N.W. Washington, DC 20005 [email protected] Counsel for Defendant Sidley Austin LLP

Documents

Watts Water v. Sidley (Sidley Motion for Summary Judgment)