IRELL’S INFRACTION?

A cable deal and an associate error mean trouble.

The $150 million malpractice suit filed in April against Irell & Manella by former client Charter Communications, Inc., is just the latest twist in the firm’s rocky relationship with the cable company.

For years, Charter was one of Irell’s biggest clients. The firm handled much of the company’s corporate work, earning more than $55 million in fees from 1998 to 2005, according to court documents.

The trouble began when Charter bought cable systems from AT&T Corp. back in 2000. Paul Allen, the Microsoft Corporation cofounder who chairs Charter, was investing some of his own money in the AT&T deal. (Irell was representing both Allen and Charter in the transaction.) In a complicated maneuver, Charter transferred the cable systems into a new subsidiary. AT&T was given shares in the subsidiary that Allen would later buy back.

But Allen and Charter’s board of directors had a different agenda. Allen wanted control of the new subsidiary. The board thought he should simply receive a bigger stake in the overall company. The company asked Irell to draft a provision that would automatically convert Allen’s stake in the subsidiary into Charter stock.

The provision was added, but an Irell associate later cut it from the deal documents. (The associate has not been identified by the company nor the firm.) No one caught the error before papers were signed in February 2000.

Fast-forwarding to October 2002. A UBS Warburg analyst was doing a routine review of the deal and asked Charter about the subsidiary. Charter went to Irell. According to court documents, Charter’s board set up a committee to investigate the episode. The committee found that partners at Irell not only knew about the mistake at least six months before they told Charter, but also billed Charter for the time they spend trying to correct the mistake. The company was furious and began phasing out work with Irell. The firm no longer does any work for the company.

Meanwhile, the disagreement between the Charter board and Allen landed in mediation. Charter wanted Allen to give back his interest in the subsidiary. Allen wanted to keep it—and argued that the deal documents (sans provision) were written correctly by Irell. In the end, Allen agreed to give up 70 percent of his stake in the subsidiary.

The Charter board wasn’t satisfied, however. It blamed Irell for the drafting errors—and that led to the malpractice suit. Charter is seeking payment for the 30 percent of the subsidiary that it lost, as a well as its legal fees. St. Louis-based Charter is being represented by Thompson Colburn, local counsel Enterprise Counsel Group, and malpractice counsel Freishtat, Mullen & Dubnow. Irell is being represented by Williams & Connolly.

Allen is still chairman of Charter, although he is not taking an active role in the case against Irell. The firm wishes he would. It asked Allen to waive attorney-client privilege, according to a lawyer for Irell. He refused. So it remains a mystery whether Allen pushed the firm to leave the provision out of the deal documents.

In a statement, Irell partner and general counsel David Gindler wrote, “If Charter suffered any loss at all, our firm was not the cause.” One lawyer close to the transaction says Irell “represented two clients, and they had different expectations.” In that situation, he asks, “What do you do?” Irell, it seems, had the wrong answer.

--ARUNA VISWANATHA