As previously reported on this blog, Brocade Communications Systems, Inc. and its directors and officers have been the subjects of civil litigation for allegedly improper stock option practices.  In addition, two former officers – former CEO Greg Reyes and former human resources director Stephanie Jensen – have been convicted of securities fraud and conspiracy, respectively, arising out of Brocade’s alleged stock option backdating.  On April 18, 2008, a new shareholder derivative action was filed that named as a defendant Brocade’s outside counsel, the law firm of Wilson, Sonsini, Goodrich & Rosati.   Although the complaint is not yet publicly available electronically, Plaintiffs reportedly allege that Wilson Sonsini committed legal malpractice in providing advice to Brocade on its stock options practices that ultimately led to civil litigation and criminal convictions.

Derivative litigation asserting legal malpractice claims against the outside law firms of public corporations is relatively rare.  This may be because a company likely will succeed in having a derivative action (which is an action brought by a third party in the name of the company) dismissed where it can demonstrate that the current board of directors is sufficiently independent that they can be trusted to decide whether to pursue the litigation on behalf of the company.  As a practical matter, it is relatively rare that a board of directors would have conflicts of interest with respect to their outside counsel.  Nevertheless, if plaintiffs in this case are successful, this may inspire other similar lawsuits, particularly in the stock options backdating context.