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Hit with $11M Malpractice Suit, Dady & Gardner Refutes Claim

A management firm representing franchised coffee and tea shops filed an $11 million malpractice lawsuit against J. Michael Dady and his Dady & Gardner firm, alleging the attorneys' negligence and incompetent legal advice caused their businesses irreparable harm. Franchisee clients say in court documents that the Minneapolis lawyers billed the franchisee firm $5 million for legal services and then abandoned their case three weeks prior to a critical arbitration hearing.

While the lawsuit was filed in California Superior Court, Los Angeles County on February 28, 2017, the case has now been moved to district court. Represented by Gordon & Rees in Los Angeles, Dady & Gardner defendants filed their response to the allegations in the lawsuit on May 3. U.S. District Judge George H. Wu, presiding over the case, has set the scheduling conference for June 22, 2017.

An email sent to Blue MauMau on May 10, signed by J. Michael Dady, managing partner of Dady & Gardner, states that the lawsuit “by a former client, alleging that we did not meet our professional responsibilities in representing that client, is quite surprising and very disappointing to all of us at Dady & Gardner.” He continues, “Our firm has vigorously and successfully met our professional responsibilities in representing thousands of franchisees, dealers, and distributors since the day we founded the firm in 1994,” adding that they currently represent over 50 different franchisee and dealer associations. Dady also notes, “In 2016, Chambers USA again ranked Dady & Gardner as the top franchisee law firm in America, and named my partner, Ron Gardner and me, as two of the top four franchisee lawyers in America.”

The senior partner explains his unexpected exit from the case this way: “A temporary acute medical condition rendered me unable to continue to practice law, a condition that my professional responsibilities as a lawyer required me, but not my firm, to personally withdraw from my continued representation of this client.” He confirms that they worked with their California co-counsel, who became this client’s successor lead counsel, to obtain an eight-month continuance of the hearing of this matter, which was granted.

But at the center of the litigation is another Michael Dady email.

“Overwhelmed,” Dady resigns from case

The franchisee complaint states, that after representing New Amsterdam Coffee & Tea for more than two years, Dady withdrew as their counsel, with no advance notice, explaining, “He merely sent an email to his [local] co-counsel, Stephen Garcia, on April 19, 2016.” In that email Dady stated,

“I woke up in the middle of the night with that very crystal thought—I am overwhelmed. I cannot do, in a professionally responsible way, everything that needs to be done between now and the hearing, and during the hearing itself. There are two lawyers, out of the ten in our firm, on this case. My younger lawyer is very smart and very dedicated, but quite inexperienced.”

In his email, Michael Dady explained that he and his firm had multiple deadlines in other cases. He wrote,

“Recently, we have been asked to defend and take depositions at the same time tremendous other pre-hearing responsibilities are on us, including being asked to defend our three expert depositions next week . . . We also have multiple pre-hearing deadlines due rather immediately, including identifying exhibits for the pre-hearing, preparing hearing exhibits, preparing witnesses for hearing, writing a pre-hearing brief, designating portions of transcripts not yet received, and the list goes on. The colleagues in my firm and I are not able to cope with these multiple demands in a professionally responsible way.”

Michael Dady also admitted that he should have withdrawn from the case much sooner. He related to his client he would support their motion to substitute counsel, as he, Dady, “is not professionally capable of handling these multiple demands in this large matter.” He adds, “but the last straw likely was realizing that I would be compelled to send inexperienced attorneys to defend our three experts in this case . . .”

The lawsuit against the Dady defendants claims Michael Dady did not send the email to his client, New Amsterdam Coffee & Tea, only to co-counsel Garcia.

He withdrew as counsel three weeks before the Coffee Bean arbitration hearing. The franchisees sought an emergency continuance of the Coffee Bean arbitration hearing and were charged a $120,000 cancelation fee by the American Arbitration Association (AAA).

The complaint states that after sending the email Dady checked himself into a hospital and left the case in the hands of Ms. Kristy Zastrow and his client’s local counsel, who had no real involvement in the case. “Dady’s purported health concerns necessitated an emergency request to the [AAA] panel. Shockingly, Dady did not prepare a declaration to support the emergency request, and instead allowed his privileged and prejudicial email to be submitted to the panel,” the court document states.

The Dady defendants agree that Michael Dady sought and obtained the arbitration panel’s consent to his withdrawal from the case, “because of a diagnosed disabling medical condition,” three weeks prior to the hearing, but they deny the firm Dady & Gardner withdrew from the case. The AAA charged  New Amsterdam Coffee & Tea a cancelation fee of $120,000 for substituting its counsel. The law firm's response denies the franchisee entity paid the cancelation fee. 

Dady & Gardner argue that Michael Dady advised co-counsel Stephen Garcia of his need to immediately withdraw from the case. Garcia agreed to do what he could to help him address his health concerns and protect their mutual clients’ interests. The co-counsel then advised New Amsterdam Coffee of the circumstances and gave them a copy of Dady’s email.

Crux of the lawsuit

As background to the lawsuit detailed in the complaint, New Amsterdam Coffee & Tea Company, a franchisee entity of The Coffee Bean & Tea Leaf brand, had obtained exclusive franchise rights by entering into multi-year development agreements in 2011 and 2012. Under their contracts, they were allowed to open multiple stores in the New York metropolitan area each year for the next 15 to 20 years. Despite their success in opening 15 coffee and tea shops in less than three years and investing more than $35 million, their operation began hemorrhaging money by 2013, losing approximately $300,000 a month.

At that point, New Amsterdam Coffee sought out experienced franchise attorneys who could advise them as to what potential claims could be brought against The Coffee Bean & Tea Leaf franchisor. In interviewing the Dady & Gardner firm in June 2013, the lawsuit asserts that the firm “held itself out as franchise law specialists,” with the right expertise. The attorneys touted Dady & Gardner as the best franchisee law firm in the country. The complaint states that specifically, Michael Dady expressed that, despite his firm’s small size, Dady & Gardner had a national practice, and that he and his co-founder were “two of the three best franchisee lawyers in America.” He also divulged that his firm’s past successes in litigating against franchisors resulted in wins in excess of one million dollars for “franchisee victims of unfair treatment.”

Dady advised the coffee shop owners that they had strong claims under state franchise laws against the franchisor, the complaint states, and New Amsterdam Coffee made the decision to sign an agreement with the firm for its legal services. They assert they gave Michael Dady authorization to negotiate with the franchisor and determine why their franchisee entity business was in financial jeopardy.

Based on Dady’s advice to litigate, New Amsterdam Coffee decided to arbitrate against the franchisor. Dady then tasked his nephew, Mark Dady, to advise them regarding the opportunity to open a shop in JFK airport under the governing contract, even though they did not have a contractual right to do so. When the franchisor filed an intentional interference claim against them, Dady advised they should consider litigation.

After an investigation into the matter, Dady advised the franchisees again that they had “very good claims” against the franchisor and advocated for filing a demand for arbitration. In late 2013 and early 2014, the Dady firm drafted an arbitration demand, but the New Amsterdam franchisees claim Dady and his firm had no plan, their advice was wrong, and they delegated key tasks to inexperienced junior lawyers, the complaint states.

Lawsuit documents declare that the Dady & Gardner attorneys’ malpractice permeated every aspect of their representation of the New Amsterdam franchisees: They never should have advised the franchisees to file the demand for arbitration; they never should have permitted the franchisees to incur more than $5 million in attorney fees pursuing essentially worthless claims and they never should have permitted inexperienced lawyers to take key depositions. Most notably, the attorneys should never should have agreed to take on this case. The documents explain, “They wandered aimlessly until they finally became so overwhelmed that they had to immediately withdraw as counsel.”

The complaint lists four counts: Professional Negligence, Legal Malpractice; Breach of Fiduciary Duty; Breach of Written Contract; and Breach of the Implied Covenant of Good Faith and Fair Dealing. It is filed against J. Michael Dady, individual; Dady & Gardner, P.A.; and Does 1-10, inclusive, unknown to plaintiff franchisees, who sue the Dady defendants by such fictitious names. The complaint states the franchisee plaintiffs seek to amend the lawsuit to state the true names and capacities of the Doe defendants when they have been ascertained. 

Dady & Gardner respond 

In answer to the lawsuit, New Amsterdam Coffee and Tea Co., LLC et al v. J. Michael Dady, et al, Dady & Gardner deny many allegations brought against them in the lawsuit. They reject the claim that they were initially retained to represent any of the franchisee plaintiffs in an arbitration, although they admit they subsequently participated in the action, representing certain franchisees. The firm also asserts that the arbitration case did not come “crashing down,” as franchisees allege, when Michael Dady withdrew from the case because of his acute medical diagnosis.

Dady & Gardner’s response further explains that New Amsterdam did not ask them to draft any arbitration demand in late 2013, but affirmed that in late January 2014, at the request of Ira Smedra, chairman of New Amsterdam Coffee, with his lead counsel, Sidley Austin, their attorneys participated in the drafting of the arbitration demand. The attorneys deny the allegations that the arbitration demand was “highly defective” and they were not aware of potential problems with their claims based on statutory and contractual limitations, as the franchisees assert. Dady & Gardner also reject that the arbitration demand sought relief based on inapplicable franchise disclosure laws or that they “got the law and the facts wrong.” Regarding claims that Dady tasked his nephew, Mark Dady, to advise franchisee plaintiffs regarding an opportunity to open a store at JFK airport and submitted the bid when the franchisor had informed them that they did not have a contractual right to do so, Dady again denies the allegations.

On another matter, Dady attorneys do admit the American Arbitration Association panel of judges granted summary judgment. They add, “But only as to the exemption issue as to the franchisor’s duty to register and to provide a franchise disclosure document and, therefore specifically deny that the panel of judges granted summary judgment against franchisee plaintiffs on the franchise claims since, after the panel’s ruling, the anti-fraud claims under the New York and California Franchise Acts, and the franchisees’ common law fraud and negligent misrepresentation claims, remain intact.”

New Amsterdam strongly asserts that Dady & Gardner’s negligence encompassed more than just the pleadings and legal claims. They state Dady was the “captain of a rudderless ship,” that he and the co-counsel, Sidley Austin, billed franchisees more than $5 million for legal fees “without taking any third-party discovery and without obtaining critical documents.” They state that the Dady firm failed to take any discovery on key issues, like mitigation of damages, and they dispatched inexperienced attorneys to take the most significant depositions in the case. Again, Dady defendants reject those allegations of negligence.

As to billing they say they are “without knowledge, information or belief as to how much lead counsel Sidley Austin billed plaintiffs” before they withdrew, reportedly based on the franchisees’ nonpayment of over $1 million in past due fees. Dady defendants argue their total billing for legal fees was less than $1 million, and that nearly $200,000 of their bills remain unpaid, despite the franchisee plaintiffs’ promise to pay in full once New Amsterdam Coffee received additional contributions from their investors. The franchisee entity also never asked for any reduction in attorneys’ fees, and they made installment payments on its past due amounts through October 10, 2016.

As to the assertion that Dady and his firm advised franchisee plaintiffs to continue to operate their unprofitable stores, the law firm denies that they provided any advice to the franchisee entity based on an incorrect interpretation of the law and the relevant agreements. They also reject the claims that the franchisees relied on any of their advice that caused them to suffer avoidable operational losses.

Franchisees: Dady caused co-counsel to bill over $4M in legal fees

New Amsterdam franchisees reiterated in their lawsuit that they relied on the Dady defendants, who promoted their law firm to be the “best in America,” in representing franchisees and to efficiently and effectively steer the litigation toward the best possible resolution. Under the governing arbitration provisions, the arbitration was required to take place in Los Angeles. “To assist Dady and his Minnesota-based firm, plaintiffs hired a large national firm with [a] Los Angeles office as co-counsel,” the franchisees explain. They contend that Dady and their co-counsel “immediately began running up exorbitant legal bills to litigate the case,” and failed to present a litigation plan or budget to set forth their strategy.

The franchisee plaintiffs added, “The use of litigation plans and budgets is especially important when the representation is to be split between two law firms.” They assert that for nearly two years, Dady and its co-counsel litigated the case aimlessly, causing their co-counsel, Sidley Austin, to incur over $4 million in legal fees “despite not taking a single deposition or serving a single interrogatory.”

The Dady defendants admitted the arbitration was required to take place in Los Angeles, but deny New Amsterdam hired Sidley Austin, a firm that had worked with them more than 30 years, to serve as lead counsel in the matter. They claim the co-counsel was dealing with other issues involving the same franchisor. Dady denies that their bills to litigate the case were exorbitant.

After representing New Amsterdam Coffee & Tea management firm for three years, Dady & Gardner are now accused of “legal malpractice and breach of fiduciary duty,” which the franchisees declare caused them to sustain millions of dollars in additional losses.

The New Amsterdam franchisees ask for a trial by jury and for judgment including general and compensatory damages in excess of $11 million, or to be proven at trial; special and consequential damages in an amount to be proven at trial; putative damages on second cause of action; statutory prejudgment interest on the third and fourth causes of action; attorney fees and costs to the extent permitted by law; and such other and further relief as the court deems just and proper.

In closing, Dady stated in his email to Blue MauMau last week, “We will do our best to let all of our clients and our referral sources know, by work and deed, that all nine members of our firm are able and committed to continue to do our best to help all our clients maximize their ability to accomplish their objectives, as effectively and as efficiently as we can.”

"Unclean Hands" defense

In the sixth affirmative defense, Dady defendants argue that the franchisees' claims are barred in whole or in part because they are "barred by the doctrine of unclean hands." Dady & Gardner give an example stating, "per opposing counsel's submission and the declaration of a witness in the underlying arbitration, one of the plaintiffs allegedly represented himself as one of Coffee Bean's attorneys from Bryan Cave [the opposing law firm in the underlying arbitration] in seeking to contact a key witness known to be represented by opposing counsel."

Another example is using materially misleading financial projections to induce prospective investors to twice invest and lose millions of dollars in plaintiffs' Coffee Bean opportunity."

Plaintiff New Amsterdam Coffee & Tea Co. LLC is represented by Louis R. Miller of Miller Barondess LLP

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Dady & Gardner Response.pdf545.61 KB
Complaint for Legal Malpractice Dady & Gardner....pdf1.93 MB
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About Janet Sparks

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Public Profile

Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.