Divider
Divider


Jason Rosenthal
 

Where Can Your CPA Firm Be Sued?

Do you or your CPA firm perform work for clients in other states? If so, you may be subject to a lawsuit there.

January 31, 2011
by Jason Rosenthal, JD

Where you do business, and who you do business with, may determine where you or your CPA firm can be sued. Certain contract language may help protect your firm.

Expanding Your Practice Expands Your Risk

The practice of accounting has expanded in many ways, including of course geographically. Many CPA firms do work for clients in different states, and sometimes other countries. No one likes to be sued. But what may be worse than being sued in a courthouse down the street is being sued in another state.  While hopefully it will never happen, if your firm is sued by a client who lives in a different state, it may be subject to personal jurisdiction there. This means that you may have to travel to another state to defend a lawsuit, and may need to hire attorneys in that state. With that said, the benefits of expanding your practice may likely outweigh the risks. And, as explained below, there are ways to reduce that risk.

A Lawsuit May Be Filed Wherever You Are Subject to Personal Jurisdiction

Courts are limited to hearing disputes over which they have jurisdiction. A court must have both subject matter jurisdiction and personal jurisdiction:

  • Subject matter jurisdiction. As the name suggests, subject matter concerns the power of a court to hear certain types of disputes. Federal courts, for example, are courts of limited jurisdiction, and generally only have the power to hear disputes in which there is diversity of citizenship between the parties (i.e., they are citizens of different states) involving at least $75,000, or disputes that arise from a question of federal law.


  • Personal jurisdiction. This refers to the power of a court to hear a dispute with respect to a particular person or entity. There are typically two types of personal jurisdiction:

    • General personal jurisdiction exists where the defendant has “systematic and continuous” contacts with a state. Where general jurisdiction exists, a defendant can be sued for any type of claim. Maintaining a satellite office in another state, for example, will mean that your CPA firm can probably be sued in that state for any claim.


    • Specific jurisdiction involves limited contact regarding a particular matter or transaction. In contrast to general jurisdiction, if only specific jurisdiction exists, a defendant can be sued solely for claims arising out of the contacts that give rise to specific jurisdiction. For example, if a CPA firm’s contact with Illinois is limited to performing work for a particular client located in Illinois, the CPA firm may be subject to jurisdiction for disputes arising out of that work. But the firm will not be hailed into an Illinois court to defend unrelated lawsuits.

The exercise of personal jurisdiction over a defendant essentially means that the party being sued has certain “minimum contacts” with the state in which the court sits. Additionally, the court must consider whether the exercise of personal jurisdiction offends “traditional notions of fair play and substantial justice” (in other words, the exercise of jurisdiction must be reasonable under the circumstances of each case). The longer and more established your relationship with a client in another state, the more likely you may be subject to jurisdiction there.

For example, the Supreme Court of Connecticut ruled that a New York CPA firm could not be sued for malpractice in Connecticut, even though it prepared the client’s Connecticut tax return, where the CPA firm was primarily retained to prepare tax returns on income earned in New York and performed all work from its New York office. Ryan v. Cerullo, 282 Conn. 109 (2007). On the other hand, a federal court in California held that a Kansas CPA firm could be sued in California where the CPA firm performed services for a Kansas medical practice that later moved to California. Although the CPA firm stayed in Kansas, it continued to perform work for the relocated medical practice, and periodically visited the client in California. T.M. Hylwa, M.D., Inc. v. Palka, 823 F.2d 310 (9th Cir. 1987). 

Indeed, entering into a contract with a party in another state may subject you to jurisdiction in that state for claims arising out of the contract. And in some states, providing certain services in that state (whether you are physically present there or not) requires the CPA to consent to personal jurisdiction for any disciplinary action arising out of the work performed there. Similarly, while certain states have enacted mobility legislation that expressly permits CPAs to perform services in other states in which they are not licensed, CPAs availing themselves of that benefit may thereby subject themselves to jurisdiction in those other states, but there have not been any reported cases deciding that issue.

Whether you or your firm are subject to jurisdiction in another state will depend on the specific circumstances of each case. Keep in mind that other countries have their own legal systems and jurisdictional rules. Thus, doing business with a foreign client may bring its own additional risks.

Protect Your Business With Appropriate Contract Language

There are several contractual clauses that can protect your CPA firm or business from these risks:

  1. Consider an exclusive jurisdiction or forum selection clause. Such clauses typically provide that any lawsuit arising out of the parties’ relationship or the work performed will be filed in a particular jurisdiction. A court cannot exercise subject matter jurisdiction simply because the parties consent to the court hearing a dispute (the court must perform its own analysis to determine whether subject matter jurisdiction exists). Parties can, however, properly consent to the personal jurisdiction of a court. Thus, these contractual clauses are generally enforceable, provided there is some reasonable justification for the location selected (e.g., your firm’s office is located there).


  2. A choice of law provision dictates which state’s law will apply to any dispute between the parties, irrespective of where the lawsuit is filed. There may be advantages to having the applicable law be that of the state in which your firm’s primary practice is located. For example, you or your attorneys’ may be more familiar with your own state’s law; applying one state’s law may result in more consistency; and it is possible that law may be more favorable to CPA’s on certain issues.


  3. Consider an arbitration clause, which can also reduce both jurisdictional and other risks (for a discussion of the pros and cons of arbitration, see Selecting the Best Resolution Process for Legal Disputes).

Conclusion

While expanding your practice to other geographic locations may bring great opportunities, it may also bring additional risk. Protect your firm at the outset of any business relationship by including contract language that will ease the burdens and risks if the relationship ever deteriorates. While one hopes you will never have to rely on that language, it is good to know it is there when you need it.

Rate this article 5 (excellent) to 1 (poor). Send your responses here.

Jason M. Rosenthal, JD, is a managing partner of Schopf & Weiss LLP, a national business litigation firm based in Chicago. For more information, please contact him at 312-701-9300.