Watts Water v. Sidley (Sidley Answer)

IN THE SUPERIOR COURT FOR THE DISTRICT OF COLUMBIA CIVIL DIVISION

WATTS WATER TECHNOLOGIES, INC.

PLAINTIFF,

V. SIDLEY AUSTIN LLP, One South Dearborn Chicago, Illinois 60603

DEFENDANT.

2012 CA 004847 M Hon. Gregory E. Jackson Next Court Date: September 7, 2012, 9:30 a.m. Event: Initial Scheduling Conference

ANSWER

Defendant Sidley Austin LLP (“Sidley”), by and through undersigned counsel, hereby

responds to the complaint of Watts Water Technologies, Inc. (“Watts”).

I. PRELIMINARY STATEMENT1

In this case, an admitted corporate wrongdoer that was required to disgorge illegal profits

and pay penalties to the federal government for violating a federal anti-bribery law seeks to

recoup the fruits of its wrongdoing and penalties from its former counsel, based on erroneous

allegations that counsel were negligent. Watts cannot shift the consequences of its Foreign

Corrupt Practices Act (FCPA) violations to Sidley for multiple reasons, including the following:

Sidley was engaged to perform certain, specified due diligence tasks—not to include FCPA review—in connection with Watts’ purchase of specified assets from Changsha Valve Works;

Sidley’s legal work on the agreed-upon due diligence was of the highest quality and exceeded professional standards;

1 Sidley accepts certain allegations of the complaint at face value only for purposes of making this Preliminary Statement. Watts’ responses to the particular allegations in the Complaint, pursuant to Rule of Civil Procedure 8(b), are set forth below in Part II.

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Watts mistranslates and mischaracterizes Chinese-language documents to support its erroneous claim;

Watts ignores that its Assistant General Counsel was provided written notice of the so-called “kickback policy” in advance of Watts’ decision to proceed with buying Changsha Valve Works’ assets; and

Watts, as a matter of law, is solely responsible for Watts’ own illegal conduct in China in the years following Sidley’s limited engagement.

Under these circumstances, no basis exists for Watts to come to this Court seeking a

recovery from Sidley. Sidley discusses the pertinent facts in detail in the Memorandum of Points

and Authorities accompanying Sidley’s Motion for Summary Judgment, filed herewith.

II. RESPONSES TO WATTS’ SPECIFIC ALLEGATIONS

In response to the numbered paragraphs in the Complaint, Sidley admits, denies, or

otherwise responds to the allegations as set forth below pursuant to Rule of Civil Procedure 8(b).

All allegations are denied unless expressly admitted. An admission to a portion of an allegation

does not constitute an admission, whether express or implied, to the remainder of the allegation.

To the extent Sidley states that it lacks sufficient information or knowledge to admit or deny an

allegation, such statement shall operate as a denial pursuant to Rule 8(b) of the Rules of Civil

Procedure. Sidley’s responses are based on the information reasonably available to it as of the

below date, and could change if additional information becomes available.

1. Paragraph 1 states legal conclusions to which no response is required. Sidley

admits that it maintains a law office and practices law in the District of Columbia.

2. Paragraph 2 states legal conclusions to which no response is required. Sidley

admits that it maintains a law office and practices law in the District of Columbia.

3. Paragraph 3 states legal conclusions to which no response is required. To the

extent any response is required, Sidley denies the allegations in Paragraph 3.

4. Sidley admits the allegations in Paragraph 4.

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6. Sidley admits the allegations in the first sentence of Paragraph 6. The second

sentence of Paragraph 6 states a legal conclusion to which no response is required.2


8. Sidley admits that it has a Management Committee to which certain governance

powers have been delegated. Sidley admits that at least one member of its Management

Committee works out of Sidley’s District of Columbia office.

9. Sidley admits that Watts has designed and manufactured water valves and other

water-related products, and that Watts has substantial business interests overseas. Sidley lacks

sufficient information or knowledge to admit or deny the remaining allegations in Paragraph 9.

10. Sidley admits that it was hired to perform legal due diligence with respect to a

potential transaction involving a Chinese company. Sidley denies the remaining allegations in

Paragraph 10.

11. Sidley denies the allegations in Paragraph 11.

12. Sidley denies the allegations in Paragraph 12 inasmuch as Paragraph 12 defines

“these potential liabilities and legal risks” by reference to Paragraph 11’s erroneous premise that

Sidley was engaged to or required to identify “all potential legal risks and liabilities that Watts

might be exposed to or acquire if it purchased the target company,” when, in fact, Sidley’s

engagement was limited. To the extent any further response is required, Sidley denies the

allegations in Paragraph 12.

13. Sidley denies the allegations of Paragraph 13.

2 Throughout this Answer, Defendant Sidley Austin LLP’s use of the term “Sidley” when referring to events allegedly occurring before January 2006 refers to Sidley, Austin, Brown & Wood LLP.

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“this policy” by reference to erroneous allegations in Paragraph 13. The first clause of Paragraph

14 states a legal conclusion to which no response is required. Sidley denies the remaining

allegations of Paragraph 14, including because they are argumentative, misleading, and not in the

proper context.


“the kickback policy” by reference to erroneous allegations in Paragraph 13. Sidley denies the

remaining allegations of Paragraph 15.


“this written policy” by reference to erroneous allegations in Paragraph 13. Sidley admits that a

copy of the document attached to the Complaint as Exhibit B was among the numerous

documents obtained by Sidley. That document speaks for itself, and Sidley denies any

characterization of it or allegations that are inconsistent therewith, including Watts’

misrepresentation of it. Sidley admits that the document was not discussed in any

communication by Sidley to Watts. Except as otherwise admitted, Sidley denies the allegations

of Paragraph 16, including because they are argumentative and misleading.




20. Sidley lacks sufficient information or knowledge to admit or deny the allegations

in Paragraph 20.

21. Sidley denies the final clause in Paragraph 21. Sidley lacks sufficient information

or knowledge to admit or deny the remaining allegations in Paragraph 21.

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22. Paragraph 22 states a legal conclusion to which no response is required. Sidley

nonetheless denies the allegations of Paragraph 22.

23. Sidley admits that Watts’ affiliated companies have designed and manufactured

water valves and related products. Sidley lacks sufficient information or knowledge to admit or

deny the remaining allegation in Paragraph 23.

24. Sidley admits that Watts has expanded its operations through a series of

transactions. Sidley lacks sufficient information or knowledge to admit or deny the remaining


25. Sidley admits that Watts is a publicly traded company listed on the New York

Stock Exchange, that Watts services the plumbing and heating and water-quality markets, and

that Watts’ products include under-sink water connectors and large diameter “butterfly valves”

used in municipal pipelines. Sidley lacks sufficient information or knowledge to admit or deny

the remaining allegations in Paragraph 25.


in Paragraph 26.


in Paragraph 27.


in Paragraph 28.

29. Sidley denies that it was engaged to provide counsel and to assist Watts in

ensuring that all of Watts’ new business dealings complied with the laws of both the United

States and China. Sidley lacks sufficient information or knowledge to admit or deny the

remaining allegations in Paragraph 29.

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31. Sidley admits that Watts engaged Sidley, Austin, Brown & Wood in 2002. The

statement that Sidley, Austin, Brown & Wood is “Sidley’s predecessor” states a legal conclusion

to which no response is required. Sidley denies the remaining allegations of Paragraph 31.

32. The statement that Sidley, Austin, Brown & Wood is “now Sidley” states a legal

conclusion to which no response is required. Sidley admits the remaining allegations in

Paragraph 32.

33. Sidley admits that a copy of the June 7, 2002 engagement letter is attached to the

Complaint as Exhibit A. The document speaks for itself, and Sidley denies any characterization

of it or allegations that are inconsistent therewith. Except as otherwise admitted, Sidley denies

the allegations of Paragraph 33.



36. Sidley admits that Watts or its affiliates engaged it as counsel, from time to time,

in connection with different matters, and that one such matter was not concluded until at least

June 11, 2009. Sidley in particular denies that its engagement in connection with Changsha

Valve Works pre-acquisition due diligence continued beyond October 26, 2005, when the

Acquisition Agreement was executed. Sidley denies the remaining allegations of Paragraph 36.

37. Sidley admits that by November 11, 2004, Watts was contemplating a transaction

with a Chinese company called Changsha Valve Works. Sidley lacks sufficient information or

knowledge to admit or deny the remaining allegations in Paragraph 37.

38. Paragraph 38 appears to refer to a November 12, 2004 e-mail exchange. That e-

mail exchange speaks for itself, and Sidley denies any characterization of it or allegations that

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are inconsistent therewith. Except as otherwise admitted, Sidley denies the allegations of

Paragraph 38.


40. Sidley admits that it conducted legal due diligence in advance of the acquisition

and that Watts paid Sidley for this legal work. Sidley denies the remaining allegations of

Paragraph 40.

41. Sidley admits that a copy of the document attached to the Complaint as Exhibit B

was among the numerous documents obtained by Sidley. That document speaks for itself, and

Sidley denies any characterization of it or allegations that are inconsistent therewith, including

Watts’ misrepresentation of it. Sidley denies that a true and correct translation of Exhibit B is

attached to the Complaint as Exhibit C. Except as otherwise admitted, Sidley denies the

allegations of Paragraph 41, including because they are argumentative and misleading.

42. Sidley admits that it provided Watts with a Preliminary Due Diligence Report,

dated November 24, 2004. Sidley denies the remaining allegations of Paragraph 42.

43. Sidley admits that it provided Watts with a full Due Diligence Report, dated July

20, 2005, subject to the qualification that the July 20, 2005 report was, by its terms, “subject to

further update.” Sidley denies the remaining allegations of Paragraph 43.

44. Sidley admits that it provided information to Watts by e-mail on July 26, 2005.

Sidley denies the remaining allegations in Paragraph 44.


46. Paragraph 46 refers to a document that speaks for itself, and Sidley denies any

characterization of it or allegations that are inconsistent therewith. Except as otherwise admitted,

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Sidley denies the allegations of Paragraph 46, including because they are argumentative and

misleading.




Watts’ misrepresentation of it. Sidley admits that the document was not discussed in any

communication by Sidley to Watts. Watts’ statement that there was an “illegal policy” states a

legal conclusion to which no response is required. Except as otherwise admitted, Sidley denies

the allegations of Paragraph 47, including because they are argumentative and misleading.

48. Sidley admits that it provided a translation of certain documents concerning

Changsha Valve contracts to Watts on September 5, 2005. The documents speak for themselves,

and Sidley denies any characterization of them or allegations that are inconsistent therewith.

Except as otherwise admitted, Sidley denies the allegations of Paragraph 48, including because

they are argumentative and misleading.

49. Paragraph 49 refers to documents that speak for themselves, and Sidley denies

any characterization of them or allegations that are inconsistent therewith, including Watts’

misrepresentations of them. Sidley admits that the document attached to the Complaint as

Exhibit B was not discussed in any communication by Sidley to Watts. Watts’ statement that

there were “illegal” payments states a legal conclusion to which no response is required. Except

as otherwise admitted, Sidley denies the allegations of Paragraph 49, including because a

“Written Kickback Policy” was not part and parcel of the Changsha Valve sales agent contracts,

and because the allegations of Paragraph 49 are argumentative and misleading.

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50. Sidley admits that Zhengyu Tang was the Sidley partner responsible for overall

oversight of Sidley’s work in connection with Changsha Valve Works due diligence. The

document attached to the Complaint as Exhibit B speaks for itself, and Sidley denies any

characterization of it or allegations that are inconsistent therewith, including Watts’

misrepresentation of it. Sidley denies the remaining allegations of Paragraph 50, including

because they are argumentative, misleading, and not in the proper context.

51. Sidley denies the allegations of Paragraph 51, including because they are

argumentative, misleading, and not in the proper context.

52. The first clause of Paragraph 52 states a legal conclusion to which no response is

required. Sidley denies the remaining allegations of Paragraph 52.





communication by Sidley to Watts. Watts’ statement that there was an “illegal” policy states a

legal conclusion to which no response is required. Except as otherwise admitted, Sidley denies

the allegations of Paragraph 53, including because they are argumentative and misleading.

54. Sidley admits that Watts consulted with Sidley on various occasions. Sidley lacks

sufficient information or knowledge to admit or deny the allegations in Paragraph 54.

55. Sidley admits that its due diligence reports and Sidley’s related due diligence

communications included legal advice with respect to legal due diligence. Sidley denies the


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56. Sidley admits that Watts entered into a purchase agreement on October 26, 2005.

That agreement speaks for itself, and Sidley denies any characterization of it or allegations that

are inconsistent therewith. Sidley denies the remaining allegations in Paragraph 56.





Watts’ misrepresentation of it. Watts’ statement that there was an “illegal” policy states a legal

conclusion to which no response is required. Sidley denies the remaining allegations in

Paragraph 58.

59. Sidley admits that Watts or its affiliates engaged it as counsel, from time to time,

in connection with different matters, and that one such matter was not concluded until at least

June 11, 2009. Sidley denies the remaining allegations of Paragraph 59. Sidley in particular

denies that its engagement in connection with Changsha Valve Works pre-acquisition due

diligence continued beyond October 26, 2005, when the Acquisition Agreement was executed.

60. Sidley admits that after the closing of the transaction contemplated by the October

26, 2005 purchase agreement, assets formerly owned by Changsha Valve were owned by Watts’

new, wholly owned subsidiary, CWV. Sidley denies the remaining allegations of Paragraph 60.


in Paragraph 61.


in Paragraph 62.

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in Paragraph 63.

64. Sidley denies the allegations in paragraph 64.


in Paragraph 65.


in Paragraph 66.





communication by Sidley to Watts. Sidley lacks sufficient information or knowledge to admit

or deny the remaining allegations in Paragraph 67.

68. Sidley admits that Paul Hastings is a U.S.-based law firm with multiple offices

overseas, and that Watts hired Paul Hastings to conduct an investigation. Sidley lacks sufficient

information or knowledge to admit or deny the remaining allegations in Paragraph 68.


in Paragraph 69.

70. Sidley admits the allegations of Paragraph 70, save that Paul Hastings acquired

copies of the Changsha Valve legal due diligence files from Sidley.


was among the numerous documents obtained by Sidley, and that Sidley subsequently provided

it to Paul Hastings. That document speaks for itself, and Sidley denies any characterization of it

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or allegations that are inconsistent therewith, including Watts’ misrepresentation of it. Sidley

lacks sufficient information or knowledge to admit or deny the remaining allegations in

Paragraph 71.

72. The document attached to the Complaint as Exhibit B speaks for itself, and Sidley

denies any characterization of it or allegations that are inconsistent therewith, including Watts’

misrepresentation of it. Sidley lacks sufficient information or knowledge to admit or deny the


73. Watts’ statement that it committed “potential and unintentional FCPA violations”

states a legal conclusion to which no response is required. Sidley lacks sufficient information or

knowledge to admit or deny the remaining allegations in Paragraph 73.

74. Sidley lacks sufficient information or knowledge to admit or deny the remaining


75. Sidley lacks sufficient information or knowledge to admit or deny the remaining


76. Sidley admits that during its investigation, on December 16, 2009, Paul Hastings

interviewed Mr. Tang, the Sidley attorney in charge of Sidley’s work in connection with

Changsha Valve Works due diligence. Sidley denies the remaining allegations in Paragraph 76.






in Paragraph 79.

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in Paragraph 80.



in Paragraph 82.


in Paragraph 83.


85. Sidley incorporates by reference herein each and every response to Paragraphs 1

through 84 above.

86. Sidley admits that it had an attorney-client relationship with Watts and acted as its

counsel in certain matters. Sidley denies the remaining allegations in Paragraph 86.

87. Paragraph 87 states legal conclusions to which no response is required.


extent any response is required, Sidley denies the allegations in Paragraph 88, including because

the standard of care does not require a lawyer to vouch for or guarantee the accuracy of all

information transmitted to its client.







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through 95 above.

97. Sidley admits the allegations of Paragraph 97.

98. Sidley admits that it agreed in 2004 to perform legal due diligence with respect to

Changsha Valve. Sidley denies the remaining allegations of Paragraph 98.







103. The first clause of Paragraph 103 states a legal conclusion to which no response is

required. Sidley admits that Watts paid Sidley for Sidley’s services.





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through 107 above.

109. Sidley admits that at certain times in 2004 and 2005, Sidley personnel believed

that Watts was relying in some measure on Sidley’s statements regarding legal due diligence.

Sidley denies that Watts in that time frame was considering purchasing Changsha Valve. Sidley

lacks sufficient information or knowledge to admit or deny the remaining allegations in

Paragraph 109.


any characterization of them or allegations that are inconsistent therewith. Except as otherwise

admitted, Sidley denies the allegations of Paragraph 110.







113. Paragraph 113 purports to refer to a document. Any such document speaks for

itself, and Sidley denies any characterization of it or allegations that are inconsistent therewith.

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114. Paragraph 114 purports to refer to a document. Any such document speaks for

itself, and Sidley denies any characterization of it or allegations that are inconsistent therewith.

Watts’ statement that there were “illegal kickback[s]” states a legal conclusion to which no

response is required. Except as otherwise admitted, Sidley denies the allegations of Paragraph

114.


was among the numerous documents obtained by Sidley. Paragraph 115 also purports to refer to

other documents. Any such documents speak for themselves, and Sidley denies any

characterization of them or allegations that are inconsistent therewith, including Watts’

misrepresentations of them. Sidley lacks sufficient information or knowledge to admit or deny

the allegations concerning the respective timing of its receipt of a copy of Complaint Exhibit B

and the unspecified representations to which Paragraph 115 purports to refer. To the extent any

further response is required, Sidley denies the remaining allegations in Paragraph 115.





communication by Sidley to Watts. Except as otherwise admitted, Sidley denies the allegations

of Paragraph 116, including because they are argumentative and misleading.




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* * *

Watts’ prayer for relief does not contain any allegations to which a response is required.

To the extent any response is required, Sidley denies that Watts is entitled to any relief and

therefore denies any allegations in the Prayer for Relief on that basis.

The Complaint also includes headings to which no response is required. To the extent

any response is required, Sidley denies the allegations therein.

To the extent that any further answer is required to any paragraph, Sidley denies all

further allegations.

III. AFFIRMATIVE AND OTHER DEFENSES.

Sidley sets forth the following affirmative and other defenses. Sidley does not hereby

intend to assume the burden of pleading or proof with respect to those matters as to which,

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pursuant to law, Watts bears the burden. Nor does Sidley waive any additional defenses or

claims that are not otherwise waived.

FIRST DEFENSE

The Complaint fails to state a claim upon which relief can be granted.

SECOND DEFENSE

Watts’ claims are barred, in whole or in part, by in pari delicto.

THIRD DEFENSE

Watts’ claims are barred, in whole or in part, because they violate public policy.

FOURTH DEFENSE

Watts’ claims are barred, in whole or in part, because of illegality.

FIFTH DEFENSE

Watts’ claims are barred, in whole or in part, by the contributory or comparative

negligence of Watts and its employees and agents.

SIXTH DEFENSE

Any loss or damage allegedly sustained by Watts was the result of superseding causes for

which Sidley is not responsible, or were not proximately caused by Sidley.

SEVENTH DEFENSE

Watts’ claims are barred by the statute of limitations, statute of repose, doctrine of laches,

or other similar time bar.

EIGHTH DEFENSE

Any injury or damage to Watts, to the extent that any exists, was caused, in whole or in

part, by the conduct of third parties for whom Defendants were not responsible.

NINTH DEFENSE

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Watts’ claims are barred by estoppel.

TENTH DEFENSE

Watts’ claims are barred, in whole or in part, based upon an absence of reasonably certain

damages.

ELEVENTH DEFENSE

Watts’ claims are barred, in whole or in part, for failure to mitigate damages.

TWELFTH DEFENSE

Watts’ second and third claims are barred as duplicative of its professional negligence

claim.

THIRTEENTH DEFENSE

Sidley met the standard of care during its representation of Watts.

FOURTEENTH DEFENSE

Watts has failed to plead certain allegations with the particularity required by Rule of

Civil Procedure 9(b).

FIFTEENTH DEFENSE

Watts’ claims are barred in whole or in part by ratification.

SIXTEENTH DEFENSE

Watts’ claims are barred in whole or in part by assumption of risk.

* * *

Sidley hereby gives notice that it intends to rely upon such other defenses and affirmative

defenses as may become available or arise during discovery or at trial, and hereby reserves the

right to amend its Answer to assert any such defense or affirmative defense.

Dated: July 27, 2012 Respectfully submitted,

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WILLIAMS & CONNOLLY LLP

By: /s/ John K. Villla John K. Villa (D.C. Bar No. 220392) Charles Davant IV (D.C. Bar No. 484305) 725 Twelfth Street, N.W. Washington, DC 20005 Telephone: (202) 434-5000 Facsimile: (202) 434-5029 E-Mail: [email protected] [email protected] Attorneys for Sidley Austin LLP

CERTIFICATE OF SERVICE

I hereby certify that on this July 27, 2012 I caused a true and accurate copy of

Defendant’s Answer to be served on the following via CaseFileXpress:

Barry J. Nace, Esq. Christopher T. Nace, Esq. Paulson & Nace, PLLC 1615 New Hampshire Ave., N.W. Washington, D.C. 20009

/s/ Charles Davant IV ________ Williams & Connolly LLP

725 Twelfth Street, N.W. Washington, DC 20005 [email protected] Counsel for Defendant Sidley Austin LLP

Watts Water v. Sidley (Sidley Answer)

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Transcript of Watts Water v. Sidley (Sidley Answer)