This is the third in a series of posts that discuss the challenges now facing certain professional global networks. Specifically, we looked at an accountant's network, and two (2) cases that have affected how they operate now. Today, I conclude this series by discussing what all of this means to professional networks operating globally.
What lies ahead for International networks
There is nothing exceptional about many of the arrangements that were regarded in these two cases as constituting sufficient evidence to allow the "agency" claim to proceed to trial by jury. Networks will rightly object that, if the umbrella entities were to be shorn of all such functions, their ability to promote and safeguard the network brand in the interest of all members would be severely limited. Nevertheless, Parmalat suggests that claimants will be given added encouragement if an umbrella entity, rather than an external party, acts as arbiter between member firms, or gives the appearance of influencing the course or outcome of a member firm's engagement.
Of course, the umbrella entities faced a much higher evidential threshold on the motions which resulted in these two judgments than they would at trial. There they will be able to present evidence of member firms' autonomy and raise other matters which sit uneasily with the agency theory (such as the retention of profit by member firms). The ultimate evaluation of these factors will, however, now lie with the jury in those cases.
The real prize for U.S. claimants is the deep pocket of any member firm that might be attacked through the umbrella entity. It is to be expected that networks will have long sought to protect their members from the risk of being required to indemnify umbrella entities against potential vicarious liabilities. While member firms have recognized the risk of claims alleging their direct control over other firms, the claim against the U.S. firm in Parmalat demonstrates that member firms might also face claims in U.S. litigation involving (in effect) allegations of indirect control exercised through their alleged control of umbrella entities. The liability of the member firm in question is then wholly dependent on the issue of the umbrella entity's own vicarious liability. Pending the final outcome of the claims in Banco Espirito Santo and Parmalat, a member firm that is particularly influential within a network organization should be aware of the danger arising from any activity that might be capable of being presented as consistent with an allegation of control over the umbrella entity (for example through the actions of partners or executives who sit on the board of that entity). Firms may also wish to consider whether their insurance policies provide appropriate protection against claims based on their indirect control of other firms through umbrella entities.
The Banco Espirito Santo and Parmalat cases serve as a reminder that international networks, and leading member firms, continue to face vicarious liability risk in the U.S.. For so long as that remains the case, the current fashion for international integration may be unlikely to lead to true global partnerships or common ownership across the members of each of the large accounting networks. Networks will undoubtedly monitor future developments in order to gauge whether the effect of recent integrations has been to increase the opportunities for claimants to select the U.S. as a forum for litigation, and to balance this against any commercial advantage to be gained from establishing closer legal relationships between member firms in a highly globalised business environment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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