A professional service firm’s liability for its partner’s acts hinges on a key question: was the partner acting within the scope of her employment? If so, the fi rm will have respondeat superior (also called “vicarious”) liability for the partner’s wrongful or negligent acts, making it – or its insurer – responsible for the resulting damages. New Jersey’s Appellate Division recently applied this principle in a legal malpractice case, Moorehead v. Luhn (January 22, 2007), and affi rmed the trial court’s ruling that a defendant law fi rm was liable for some of its partner’s wrongful acts, but not those that were performed outside of the scope of the partner’s employment and for the partner’s benefi t alone. In Moorehead, a former client, Moorehead, sued his attorney, Luhn, for legal malpractice. He also sought damages from Luhn’s law fi rm, the Courter fi rm, under the common law theory of respondeat superior and New Jersey’s Professional Service Corporation Act, N.J.S.A. 14A:17-1, et seq.

(“PSCA”). While tort liability must normally be based on personal fault, an employer can have respondeat superior liability for its employees’ wrongful or negligent acts committed within the scope of their employment. Similarly, the PSCA makes a professional service corporation liable for its shareholders’ negligent or wrongful acts committed while “engaged on behalf of the corporation in the rendering of professional services.” (Emphasis added.)

Moorehead’s claims arose from two transactions. First, he sought damages for Luhn’s default on $199,000 in interest- free, unsecured loans that Moorehead had made to Luhn without independent counsel or proper documentation. Second, he sought to recover monies that Luhn had aggressively solicited from Moorehead in connection with one of his other client’s restaurant franchise without advising Moorehead to obtain separate counsel or disclosing the restaurateur’s past business failures. Based on the limited information Luhn provided, Moorehead invested almost $200,000, which he lost when the franchise failed. After Moorehead fi led suit, Luhn fi led for bankruptcy protection, effectively staying Moorehead’s claims and dashing any meaningful chance of enforcing a judgment against him. The bankruptcy court, however, allowed claims against Luhn that were “covered by legal malpractice insurance” to proceed. After a non-jury trial, the judge found Luhn liable for $199,000 plus interest on the loans claim, and for $198,340 on the business investment claim, but only held the Courter fi rm to be vicariously liable on the latter. Both the Courter fi rm and Moorehead appealed.

On appeal, the Courter fi rm argued that it could not be held vicariously liable on the business investment claim because, in seeking Moorehead’s investment in the restaurant business, Luhn was acting outside the scope of his employment. The Appellate Division disagreed. It reasoned that Luhn simultaneously represented both Moorehead and the restauranteur, despite an obvious confl ict of interest, because he “did not want to lose, for himself and the Courter fi rm, the prospect of signifi cant future business if the restaurant venture was a success and additional franchises were opened . 

. .” The appeals court found that evidence of Luhn’s sharp practices, which were designed to increase the prospects of this future business, supported the trial judge’s conclusion. Moorehead argued on appeal that the Courter fi rm should have been held liable not only on the business investment claim, but on the loans claim, as well, because Luhn acted within the scope of his employment when he prepared documents for some of the loans that failed to adequately protect Moorehead’s interests. In resolving the issue, the Appellate Division considered whether or not Luhn’s conduct (1) was the kind of work he was employed to perform; (2) was performed substantially within the fi rm’s authorized time and space; and (3) was “actuated, at least in part, by a purpose to serve the master.” The Appellate Division agreed with the trial judge that the loans were taken, and the documents prepared, for Luhn’s benefi t alone. In this regard, it noted that Luhn took the loans to meet his own personal ends and did so “in a manner so as to conceal the same from his employer.” As the Moorehead case illustrates, the “scope of employment” analysis can make or break a professional negligence case. To a plaintiff, its outcome likely means the difference between full recovery and a hollow judgment. Likewise, to the professional service fi rm, it can mean the difference between serious fi nancial consequences and a no-cause verdict.