TCW-Gundlach trial a $35 million 'grudge match'

The only sure winners in the legal dispute between TCW and Jeffrey Gundlach are the lawyers, expert witnesses and public relations firms that have been involved in the costliest courtroom battle in the history of the money management industry.

Total costs should easily top $35 million, the bulk of it coming from legal fees that by themselves exceed $30 million, according to those familiar with the case.

“This is not your typical case,” said attorney Daniel Westman, chair of the trade secrets committee of the American Intellectual Property Lawyers Association in Arlington, Va. “It's more of a grudge match than a dispute about the stealing of commercial trade secrets.”

The median cost of legal fees in a trade secrets trial with more than $25 million at stake is $4 million, according to data from the American Intellectual Property Lawyers Association. The association tracked cases from the middle of 2009 to early 2011 for its latest report.

But in grudge cases, Mr. Westman said, each side throws as many lawyers at each other as possible. “It may not make economic sense, but it makes emotional sense,” he said.

Mr. Gundlach's lawyers insist their client would have walked away if TCW had dropped its suit, and TCW officials deny that there is anything personal to the legal proceedings. “We have said all along this is a business dispute”, said TCW spokesman Peter Viles.

Still, there is no arguing that the battle pitting TCW against Mr. Gundlach and his new firm, DoubleLine Capital LP, has become a brutal, nasty and expensive fight.

TCW fired Mr. Gundlach, then its chief investment officer, in December 2009 because, according to TCW Chairman Marc Stern, he uncovered a plot by Mr. Gundlach and his associates to steal trade secrets and other proprietary information to help establish a rival money management firm. Mr. Gundlach insists he was the victim of a plot that TCW officials hatched to deprive him of $500 million in incentive fees.

Neither side will divulge how many lawyers they used or what their costs have been, but transcripts of the trial show that on some days TCW had as many as 11 attorneys listed as being in attendance and DoubleLine, seven.

TCW had four attorneys — led by John Quinn, one of the named partners at the law firm of Quinn Emanuel Urquhart & Sullivan LLP — who took turns questioning witnesses in the courtroom. As many as seven other attorneys from the firm were at trial on some days, helping with a range of issues, from advising the trial attorneys on questions of law to handling media interviews.

Mr. Gundlach and DoubleLine also had four attorneys who took turns questioning witnesses, led by attorney Brad Brian, a partner at Munger, Tolles & Olson LLP. On any given day during the trial, Munger Tolles had as many as three other attorneys on hand to help.

In addition, each firm had paralegals, evidence technicians and other support personnel on hand each day.

A second law firm — Kelley Drye/ White O'Connor, which represented DoubleLine's mutual funds — also had a representative at the trial.

A rule of thumb during a trial is that for every attorney in the courtroom, one to two associates are working behind the scenes on various issues from legal motions to witness preparation, said Chris Scott Graham, chairman of the trade secret practice at Dechert LLP in Mountain View, Calif.

Those attorneys don't come cheap, Mr. Graham said. Partners in law firms like Quinn Emanuel or Munger Tolles typically bill between $750 and $900 an hour while associates' rates range between $325 and $500 an hour.

He said each day of trial in a big case, such as the TCW-Gundlach trial, could cost each side $100,000, and attorneys often will work seven days a week, around the clock, during the trial period.

The TCW-Gundlach trial lasted 30 days, so based on Mr. Graham's estimations, the lawyers' costs for the trial would come to a combined $6 million.

But that's just the trial.

Tens of thousands of hours of legal work occur before opening arguments. For example, TCW's legal team would have needed to review more than 7 million pages of documents and data the asset manager claimed were taken by Mr. Gundlach's associates to assess its value in the case, Mr. Graham said.

Around 90 potential witnesses were deposed, according to those familiar with the TCW-Gundlach case. Mr. Gundlach alone spent four days being deposed by lawyers for TCW.

The relevant portions of those videotapes were then edited by lawyers and technicians for possible viewing at the trial, a lengthy process for both sides.

Both sides also spent hours before the trial started filing motions over what could or could not be brought up in court. Even during the trial, lawyers on both sides acknowledge they were working 24/7 over issues such as which witnesses could testify and the scope of that testimony.

TCW originally sued Mr. Gundlach in January 2010 and the trial started at the end of July 2011, a relatively quick turnaround, Mr. Graham said. Still, he said, that means 18 months during which at least several lawyers for each side would have been involved full time.

He said one partner working on a trial would typically work around 2,000 hours in a year. Assuming a rate of $900 an hour, that would mean $1.8 million alone just for that one attorney's work, he said.

Exact legal fees are hard to calculate. Law firms will give discounts on rates they charge — particularly if they think a particular case or client will add to their firm's prestige.

Then there are the expert witnesses. They bill for hours spent reviewing material, hours spent preparing for testimony, and hours spent giving depositions and testifying.

Six expert witnesses testified in the trial. Computer forensic expert Christian Hicks testified that his firm, Elysium Digital LLC, had been paid more than $1 million for work it did for TCW. Another expert witness testified he billed $575 an hour and a third said his figure was $750 an hour, although they never said how many hours they put in.

Still other expert witnesses were paid but didn't testify.

And the final bill isn't in yet.

On Sept. 16, the jury in the civil trial in California Superior Court in Los Angeles awarded Mr. Gundlach and key associates $66.7 million in back wages, but found Mr. Gundlach, the three associates and DoubleLine Capital LP, liable for stealing trade secrets.

The jury also found for TCW on charges that Mr. Gundlach violated his fiduciary duty to the firm and interfered with contractual relations. The jury, however, decided not to assess any damages on those counts.

Both sides will present expert witnesses in a scheduled hearing on Oct. 25 as to just how much of a reasonable royalty TCW is entitled on the trade secrets verdict. At a later date, Judge Carl West will then set the royalties, which are, in effect, a licensing fee, charging Mr. Gundlach, the three associates and DoubleLine for using TCW's trade secrets.

TCW officials acknowledged before the trial that they could not determine the amount of damages suffered from the theft of the millions of documents and data. TCW now says in court papers it wants $89 million in royalties.

TCW officials also plan to ask the judge to vacate the jury's award of $66.7 million to Mr. Gundlach and his team. “We think we can knock it out,” said Susan Estrich, a partner at Quinn Emanuel.

Ms. Estrich said that because the jury found in favor of TCW regarding the breach of fiduciary duty claim, Mr. Gundlach should not be entitled to any compensation.

Mr. Gundlach's lawyers plan to argue, according to those with knowledge of the case, that interest and penalties should be added to the original award because 21 months have gone by since Mr. Gundlach was fired.

And then there are all the costs not related to law firms.

Public relations consultants were present throughout the trial, and they can charge in excess of $500 an hour.

When Mickey Mandelbaum, a public relations consultant who works for TCW, went on vacation for a week during the trial, the law firm brought in a representative from the San Francisco office of Kekst and Co., a New York firm.

Mr. Gundlach and DoubleLine didn't have an outside public relations representative present every day. Still, Lew Phelps, an executive with public relations firm Sitrick and Co., a firm known for handling crisis communications, was present during key days of the trial.

The TCW-Gundlach trial makes past money management industry disputes seem like small potatoes. The accusations that flew and the filing of the suit and countersuit immediately following the termination of Mr. Gundlach brought to mind for many the dispute in the mid-1990s between Arnold Schneider and Wellington Management Co. Legal costs in that resulting two-week trial totaled several million dollars, according to those familiar with the case.

Wellington, however, did incur additional costs as it became embroiled in additional lawsuits with clients who wanted to move to Mr. Schneider's new firm. n