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Article: Courts Finally Taking Unreasonable Contest Counsel Fees Seriously

November 20, 2020

A recent Law.com article by Christian Petrucci, “Courts Finally Taking Unreasonable Contest Counsel Fees Seriously,” reports on attorney fee claims in workers’ compensation cases.  This article was posted with permission.  The article reads:

Absent the legal mechanism to pursue a bad faith claim against a workers’ compensation carrier, one of the only weapons in a claimant’s arsenal to discourage the baseless denial of claims is that of the unreasonable contest counsel fee demand.  Tragically, it is commonplace for an overly aggressive defendant to deny a claim with no factual or legal basis to do so.  Claimants are routinely forced to needlessly prosecute a petition for benefits or otherwise oppose baseless defense petitions, which causes precious judicial resources to be misallocated and inflicts significant undue stress, mental anguish and financial distress on the injured worker.

Of course, the humanitarian nature of the Workers’ Compensation Act is supposed to prevent any delay in the payment of benefits or the baseless denial of claims.  The law directs that the act be liberally construed to be remedial in nature, although one would never know it from the paucity of unreasonable contest counsel fee awards at the trial level.  The actual law provides that awarding counsel fees is to be the rule and excluding fees the exception to be applied only where the factual record establishes a reasonable contest. See Millvale Sportmen’s Club v. Workers’ Compensation Appeals Board, 393 A.2d 49 (Pa. Commw.1978).  It is also important to note that the question of whether a reasonable basis exists for an employer to have contested liability is fully reviewable on appeal as a question of law to be based upon findings supported by substantial evidence.  See Kuney v. Workers’ Compensation Appeals Board, 562 A.2d 931 (Pa. Commw. 1989).

The Pennsylvania Workers’ Compensation Act provides in pertinent part: In any contested case where the insurer has contested liability in whole or in part … the employee, or his dependent, as the case may be, in whose favor the matter at issue has been finally determined in whole or in part shall be awarded, in addition to the award for compensation, a reasonable sum for costs incurred for attorney fee, witnesses, necessary medical examination, and the value of unreimbursed lost time to attend the proceedings: Provided, That cost for attorney fees may be excluded when a reasonable basis for the contest has been established by the employer or the insurer.

Despite the plain reading of the statue, unreasonable contest attorneys fees are almost never awarded and even in the most egregious situations, are awarded in a nominal amount which is stayed pending appeal in every instance.

Given this background, Gabriel v. Workers’ Compensation Appeals Board (Procter and Gamble Products), decided by the Commonwealth Court in September, offers significant hope that the tide will be turning in the effort to police instances of bad faith in the workers’ compensation world.  At a minimum, Gabriel affords a heightened expectation that an attorney can be compensated in cases which lack a wage-loss benefit award, which is the normal corpus on which contingency fees are based.

In Gabriel, the claimant injured his arm at work and notified his employer.  The claimant treated with doctors based at the company’s plant and the employer’s insurance carrier actually paid medical expenses associated with the claim.  However, the employer inexplicably failed to file a bureau document either accepting or denying the claim within 21 days, as required by the act.  Consequently, the injured worker was forced to retain an attorney and file a claim petition, which was summarily denied by the employer.

Before the WCJ, both parties presented evidence over the course of a number of hearings and the record was eventually closed.  Perhaps sensing what was about to happen, the employer finally issued a medical only notice of compensation payable toward the end of the litigation.  The filing date was more than two years after the date of injury.

The WCJ granted the claim petition, but as is normally the case consistent with the above background, did not award unreasonable contest counsel fees or grant a penalty for failure to file a bureau document within 21 days as required by law.  The WCJ reasoned that the employer “was paying the claimant’s medical bills,” and “it was not until the last hearing in this matter that the claimant produced any medical evidence establishing a specific diagnosis for his work injury other than a puncture wound.”

The claimant appealed the denial of attorney fees and penalties, but the board affirmed the WCJ’s decision.  The board held that the WCJ did not err or abuse his discretion in not awarding a penalty or attorney fees since although the employer paid for the claimant’s medical  expenses, doing so is not an admission of liability.  The board also found that the claimant was seeking a description of injury different than what was listed on the NCP.

Following the board decision, the claimant petitioned for review by the Commonwealth Court.  The court reversed the decisions of the WCJ and the board, finding that the employer presented an unreasonable contest in defending the claim petition because it had, in fact, violated the act by failing to timely issue a bureau document.  The court also noted that the employer denied all allegations in the claim petition, including ones it knew to be true, forcing the claimant to commence needless litigation.  Moreover, the employer did not  present any evidence to contest the claim petition.  Had the employer filed a bureau document timely, the claim petition would have had to be filed.

Similarly, the court found a penalty award to be appropriate, since the employer violated the act when it did not timely issue the medical only NCP as required under Section 406.1(a) of the act, thus forcing the claimant to hire an attorney, produce evidence of the injury of which it had notice, and hire an expert to review the medical records of the employer’s own company doctors who had treated him.  The act was intended to avoid this.

As a practice tip, it is vital that claimants’ attorneys zealously demand the imposition of unreasonable contest counsel fees in almost every case.  Until insurance companies actually begin to risk the forfeiture of entire counsel fee awards during the pendency of a two-year petition, they will continue to have little incentive to voluntarily accept claims that have no defense but are denied anyway for a variety if bogus reasons.  Gabriel demonstrates that a new day may have arrived in this battle.

Christian Petrucci of the Law Offices of Christian Petrucci, concentrates his practice in the areas of workers’ compensation and Social Security disability.  He also counsels injured workers in matters involving employment discrimination and unemployment compensation benefits.

Article: Five Cost-Cutting Strategies for Corporate Legal Departments

October 22, 2020

A recent Law.com article by Nathan Wenzel of SimpleLegal Inc., “5 Cost-Cutting Strategies For Corporate Legal Department,” reports on legal cost measures for corporate legal departments.  This article was posted with permission.  The article reads:

Corporate legal departments have long been focused on reducing legal spending.  The emphasis on cost-cutting has only increased in 2020 as the economic uncertainties of the pandemic have caused companies to scrutinize expenses across the board.

According to a recent report from the Corporate Legal Operations Consortium, 61 cents of every dollar spent on legal costs in 2020 goes to external legal costs — a 15-cent increase from 2018.  This uptick, combined with the year's novel challenges, has many legal departments looking for new ways to control legal expenses beyond reviewing line items, which has proven to be ineffective for many companies.

While there's been a lot of chatter in the industry about the need to switch to fixed fees or alternative fee arrangements to reduce costs, these shifts have been slow to take hold.  They're also difficult to measure if we retain a focus on the billable hour.

When clients ask firms for fixed fees but also request the hours worked so they "know that the fixed fee was the right price," then we haven't really made the change to fixed fees.  It is a difficult transition and one that will take time.  We should always push toward better alignment of price and value, but we need to balance near-term realities with long-term goals.

In the near term, we need to control costs — even if that only means focusing on hourly rates.  In the long term, we need to align the work to the right types of providers at the right price, where price has very little connection to hourly rates.  No one wants to buy time.  We want outcomes, not hours.

To solve for both the short-term and long-term goals, we start with data.  Analyzing and reducing your legal spending start with asking yourself the following questions:

What am I spending now, on what and with which providers?
How does my current spending compare to past spending?
How am I allocating my legal work?
What metrics am I using to measure cost control?
Are there other cost considerations I'm overlooking?

1.  Understand where you are now.

The first step of implementing a change is to understand the current state. Reducing legal spending first requires knowing where you are right now.  This means not only keeping up with the total dollar figure of your spending, but how much you're spending in each practice area and with which law firms or providers.

Don't forget to also investigate the work you currently perform in-house.  With an understanding of outside legal spend and in-house legal work, you will have the current picture of how you allocate the demand for legal services from the business to the supply of legal services you have available.  With this deeper insight, you'll start to see where you can actually have an impact on spending.

Without this data, you risk investing time into an area that looks compelling but won't create real savings.  For example, reducing money spent on compliance may seem like a good idea because the partners at your primary firm have very high billing rates.  But if only 5% of your annual spending goes toward compliance work or if the primary compliance firm effectively leverages associates and paralegals, your efforts won't translate into real savings for the business.

When you track data and analyze legal spending details from your e-billing system, you'll be better equipped to start a real conversation about reductions.  You can identify the practice areas and firms where your efforts will create real returns.

2.  Compare now to where you used to be.

Your business is not static.  It's important to understand where you are today, but it is even more important to understand how things change over time. After you determine where you're spending your money today, you need to compare those numbers to what you were doing last year or the last time you negotiated rates and pricing.

You may have a reliable history of sending work to a single attorney or team at a firm. You may have increased the amount of work sent to a particular firm or in a particular practice area.  If you used to send $2 million worth of business to a firm and now spend $5 million with that firm, that's a powerful position for starting rate and price negotiations.

Additionally, if your team uses multiple firms for similar work, you may benefit from consolidating that work with fewer preferred firms.  Larger companies may go through a formal panel selection process annually or every few years.  A preferred panel is a great tool to provide the best legal services to the business at the best price if you have the team and time to implement this type of program.  But you can still achieve the benefits of allocating work to fewer firms without a full preferred panel program.

You don't always know what the demand for legal services will be from year to year.  But if your data shows that you have a history of allocating work among several firms, ask those firms what they would be willing to do to earn a greater share of that work.

3. Understand how you're allocating work.

After you have an understanding of the dollar value of your legal spending, you need to know how you're allocating different types of work, to whom and why. How you're assigning your legal work certainly depends on finding the provider with the right expertise but should be equally dependent on its business impact and complexity.

Your high-impact, high-complexity work probably belongs with the more expensive firms.  An example of a high-impact matter could be a large litigation that threatens the balance sheet of the company.  Or it might be a patent for the core technology driving your business.  In either case, you might choose to work with the very best money can buy.

Every year the legal press makes a big deal about high billable rates for eye-catching headlines.  But for your highest-impact and highest-complexity work, those firms and lawyers are probably a bargain at twice the price.  You're buying outcomes, not hours.

Too many companies simply send the rest of their work along with their high-impact work without stopping to see if smaller matters would be better handled by a lower-cost provider.  There are a variety of suppliers beyond the Am Law 100, such as specialty firms, alternative legal service providers, nonlegal consultants and your in-house team.

Your low-impact, low-complexity work probably doesn't need to go to the premier firms.  Specialty firms, alternative legal service providers, consultants and solo practitioners may not have massive staff and unlimited support resources, but they can still provide high-quality work at a fraction of the price.

You may also have high-impact but routine work where speed and a deep understanding of business issues are important.  The most common example here is commercial contracts.

For customer contracts, any delay in reviewing costs the company revenue. An extensive back-and-forth over mundane legal minutiae could cause your company to miss a quarter's revenue target.  In-house teams will have a better understanding of business priorities and can better deliver the right kind of legal work with speed at the right price.

When you satisfy your demand with the right mix of supply, the potential for savings is much greater than through rate discounts alone.  Allocating work based on impact and complexity provides far greater cost savings than a 10% rate reduction when the right provider is already half the price.

4. Use the right metrics.

You can't manage what you can't measure.  You get what you incentivize.  These two classic business statements tell us that we need to measure savings with the right metrics.

How are you measuring cost savings today?  Is it through average hourly rates?  Adjustments to bills based on guidelines?  If you measure discounts on rates to determine savings, you're going to focus on high hourly rate firms that discount their hour rates.  But is that really saving your company any money?

Achieving savings by reallocating work rather than by negotiating rate discounts definitely makes sense.  But with the wrong metrics it is harder for the C-suite to understand what you've accomplished.  If you measure and report savings only as the discount on standard rates, the reallocation effort appears to have achieved nothing.  In fact, if the work was moved in-house or to a provider with a lower but not discounted rate, it may appear that you have lost savings because you won't have a discount to report.

In fact, with the wrong metrics, if you were to implement a routing tool for automated nondisclosure agreement review, it might appear to be a driver of cost even if it created hard dollar savings from external counsel and soft dollar savings — i.e., efficiencies — from allowing in-house counsel to spend time on high-impact, high-complexity work.  With the right metrics, you can show the true return on these investments.

To demonstrate the full value of the savings and quality initiatives, you might need to use new metrics.  I am certainly not advocating for cherry-picking data or choosing vanity metrics.  To the contrary, the right metrics will actually make more sense to the business, the CEO and the board.

Legal expense as a percentage of revenue has been promoted in Association of Corporate Counsel benchmarking studies and Altman Weil Inc. surveys. It is well understood and trusted by chief financial officers and CEOs.

Whichever metrics are used to measure legal cost controls, just remember that you get what you incentivize.  If you're going to achieve cost savings, you need to use the right metrics to incentivize your team and showcase results.

5. Monitor compliance with your billing guidelines, consider automation of certain legal tasks and standardize workflows.

The preceding four steps are the critical actions that build on each other to significantly trim legal spending.  It's a journey.  You don't need to take all the steps all at once to achieve results.  Alongside those major considerations, there are a couple other things to keep in mind to run alongside those longer-term initiatives.

The first is billing guidelines.  Your billing guidelines let your firms know what it means to be a good legal partner to your department and a good business partner to your company.

Guidelines often devolve into rules about copy charges and not billing excessively for underqualified people — things your firms probably already do on their own to better serve their clients.  You should always be monitoring compliance with your billing guidelines and enforcing timekeeper rates, but it is important to remember that ensuring that your firms only bill for work in accordance with your guidelines isn't actual savings — it only prevents overcharging.

Another way to reduce legal costs and improve response time is to automate low-complexity, low-impact legal tasks and standardize workflows.  Automation of basic document review by artificially intelligent contract review tools can be a big time and money saver.  As an example, nondisclosure agreements are high-volume but typically low-impact documents that can be reviewed with the help of AI-enabled tools.

In addition to automation, standardized playbooks designed by the legal team to give other departments a checklist of items to review can also help improve turnaround time and reduce costs.  For example, a sourcing manager in a procurement department could be given a checklist of five or six specific business and legal terms to review before sending to the legal team.

Automation and standardization improve speed of delivery and reduce cost of delivery for the business.

The Path to Lower Legal Spending

It's time to shift the perspective on cost reduction beyond hourly rates and copy charges.  As legal departments, you need to look at where you are now, how that compares to the past, how you're allocating your work and whether you're using the right legal spending metrics to achieve real savings.  These steps with effective legal billing guidelines, automation and standardization provide the foundation to match your company's demand for legal services to the right legal service providers to trim your spending while improving delivery.

Nathan Wenzel is co-founder at SimpleLegal Inc.

Article: 3 Tips for Working with Bankruptcy Fee Examiners

October 2, 2020

A recent Law 360 article by Robert M. Fishman, “3 Tips For Working With Bankruptcy Fee Examiners” provides practice tips for working with outside bankruptcy fee examiners.  This article was posted with permission.  The article reads:

The appointment of a fee examiner and the fee examination process in any given bankruptcy case seem to generate a variety of questions.

Will a fee examiner process be better for the case — read: me — than having the judge address the reasonableness and appropriateness of fees?  Will there now be three parties — the fee examiner, the court and the U.S. Trustee — scrutinizing my fees as well as criticizing my staffing, timing and approach to the case?  What will the nature and approach of the fee examiner be in my particular case?  Will the appointment of a fee examiner speed up the review and payment process?

Fee examiners are most often appointed in larger cases.  In such cases, the ability of the court to make the time to review, analyze and rule on fee applications may be a concern.  This is especially true if that court is one in which a large number of substantial cases are currently pending.

The number of parties that will be submitting fee applications to the court also plays a role in the consideration of whether a fee examiner is appropriate in a particular case.  Multiple law firms, financial advisers and other professionals for the debtor and one or more committees, creates a substantial burden on the court in terms of reviewing and ruling on fee applications.

A request for the appointment of a fee examiner can either come from the parties in the case or directly from the court.  Some courts routinely appoint a fee examiner in large, complex cases, while others do so only upon the request of one or more parties in interest.

The selection of the particular fee examiner can originate from any of three places.  Once a court decides to appoint a fee examiner, the court may: (1) select its own fee examiner; (2) appoint one that has been suggested, or agreed to, by the principle parties in the case; or (3) defer to the Office of the U.S. Trustee for the selection.  Courts are often happy to utilize a qualified fee examiner that has been agreed to by the main parties in the case.

In light of the current number of pending large cases, particularly in a few, specific jurisdictions, the burden of the fee review and allowance process is going to be substantial.  Further, I anticipate that the upcoming months may see an even greater number of small, medium and large cases filed, which will place an even greater strain on the system's ability to efficiently and timely process fee applications for numerous professional firms.

As a result, I believe that both courts and the affected parties will look to the appointment of fee examiners to ease that burden and provide a more timely and efficient practice for processing fee applications.  In evaluating candidates for fee examiner appointments, the following questions may be pertinent.

Is the candidate:

An experienced practitioner with actual bankruptcy case experience or an analyst who identifies typical problematic situations and focuses on them;

A reasonable, big picture type of examiner or a more granular, item-by-item examiner;

One that believes that he has been appointed to:

Cut fees (to a specific or general degree), or

Determine if the applicable rules have been followed and the services and expenses are actual, reasonable and necessary in the context of the particular case; or

One who generally gives deference to the billing partner involved or is more apt to substitute his/her own judgment for that of the billing partner as to how to staff cases or how much time it should take to write a brief?  As an attorney discussing fee application issues with fee examiners, I have discovered that examiners have a wide range of approaches and attitudes.

In my role as a fee examiner discussing fee application issues with countless professionals, I have found that they also exhibit a broad range of approaches and attitudes.  My experience both as an attorney submitting numerous fee applications subject to review by fee examiners, and as an appointed fee examiner in both large and medium-sized cases has led me to a view on the preferred type of fee examiner and how best to work with them.

Understanding where your fee examiner fits into the above criteria is essential to both having a realistic expectation of how you will be dealt with and knowing how best to interact with the fee examiner.   So, what lessons have I learned? Here are what I have found to be the three most important guidelines for a successful relationship with a fee examiner.

Every Case has Ground Rules

They include the Bankruptcy Code, the applicable local rules and the cases interpreting the same.  Importantly, the ground rules also include the process that the fee examiner intends to utilize — and most likely have the court bless — to govern the timing, organization and review of the fee applications.

One of the best pieces of advice I can give an applicant is to present the fee application in the way requested by the fee examiner.  Independent creativity is often not rewarded.  Most fee examiners have a method to their madness.

Choose the Right Person to Prepare the Fee Application.

The fee application or invoice must be prepared — or at least thoroughly reviewed — by someone who understands the case and is able to explain the issues handled by the firm and the staffing decisions that were made in support of providing the necessary services.  Many issues that fee examiners raise come from an inability to truly understand what has taken place and why things were handled in the manner in which they occurred.

Most fee examiners are willing to be at least somewhat deferential to the billing partner when presented with a cogent and rational explanation of what happened and why.  This approach tends to be even more effective when the explanation is part of the original application rather than offered only in response to concerns raised by the fee examiner.

It Doesn't Pay to Fight with a Fee Examiner

First of all, most fee examiners aren't out to get anyone.  They are merely trying to apply the rules in an even-handed way to provide for the allowance of reasonable compensation for actual and necessary services.  Every fee application or invoice has potential issues, such as too many professionals working on a project, too much time spent working on an issue or overqualified professionals providing basic services.

Also, a firm cannot be compensated for fighting fee objections in court, where raised by a fee examiner of a party in interest.  Be rational and open minded.  Fee examiners want to reach agreements and resolve differences of opinions by consent.  They will almost always compromise on the amount of reductions necessary to address any point they are raising.

The right fee examiner can be a valuable asset in a case.  They are likely to allow for a more timely resolution of interim fees.  A fee examiner who is also an experienced practitioner will likely speak the same language as the applicant and have a good feel for what it takes to perform the services for which the applicant seeks payment.  In short, a good and experienced fee examiner should really be your ally in making the process move quickly and efficiently, and in obtaining a fair and reasonable outcome for everyone.

Robert M. Fishman is a NALFA member and a member at Cozen O’Connor in Chicago.  He served as the fee examiner in the city of Detroit Chapter 9 case.

Article: When Do Insureds’ Legal Fees Constitute Defense Expenses?

September 11, 2020

A recent Law.com article by David Kroeger and Catherine Doyle of Jenner & Block LLP, “When Do Insureds’ Legal Fees Constitute Defense Expenses?, reports on attorney fees and expenses in underlying insurance coverage litigation.  This article was posted with permission.  The article reads:

When is a defendant actually a plaintiff, and when are a defendant's legal expenses not defense expenses?  While the intuitive answer may begin with the case caption and a review of the defendant's legal bills, some courts may not stop the analysis there.

In Turner v. XL Specialty Insurance Co., the U.S. District Court for the Western District of Oklahoma recently determined that none of the legal expenses incurred by a named defendant counted as defense expenses, at least where the nominal defendant to a declaratory judgment claim purportedly stood in the same posture as the plaintiff and sought the same relief via affirmative counterclaims, cross-claims and third-party claims.  The decision was appealed to the U.S. Court of Appeals for the Tenth Circuit, and policyholders and insurance law practitioners would do well to monitor how far insurers may try to extend this argument in the future.

The federal district court in Turner v. XL Specialty reached the surprising conclusion that legal fees and costs incurred while defending against a declaratory judgment claim did not constitute covered defense expenses for purposes of a directors and officers insurance policy.  The factual scenario in Turner was detailed, complex and most certainly drove the court's unique conclusion.

The story began with American Energy Partners LP, a company founded in 2013 by oil and gas businessman Aubrey McClendon, which Forbes magazine once described as America's most reckless billionaire.  The plaintiff, Ryan Turner, served for a period as an executive of both AELP and an AELP affiliate.

While in that role, McClendon, Turner and two other AELP executives, Scott Mueller and Thomas Blalock, entered into an equity and co-investment agreement that reflected their profit-sharing agreements relating to the AELP business as well as new businesses that were not yet formed.

Under the equity and co-investment agreement, McClendon owned a 76% interest in the profit from new domestic businesses; Turner owned a 12% interest, and Mueller and Blalock each owned a 6% interest.  The individuals allegedly entered into the equity and co-investment agreement as a result of their membership in AELP's executive management team.

Shortly after signing the equity and co-investment agreement two additional AELP affiliates, SCOOP Energy Company LLC and Scoop Energy Holdings LLC (collectively referred to as SCOOP), were founded.  The parties to the equity and co-investment agreement agreed that it should apply to the sale of any SCOOP assets, and an amendment was prepared to explicitly include SCOOP within the equity and co-investment agreement.

Before the amendment could be executed, McClendon died in a single-vehicle accident on March 2, 2016, the day after he was indicted by a federal grand jury.  All surviving parties to the equity and co-investment agreement nevertheless agreed that a definitive and enforceable agreement with respect to the SCOOP assets had already been reached.

After McClendon's death, Blalock was appointed special administrator for McClendon's estate with authority to continue the AELP business.  Blalock thereafter sought an order permitting the estate to distribute the proceeds from the sale of the SCOOP assets according to the percentage interests set forth in the equity and co-investment agreement, but Blalock withdrew the application after one of McClendon's other creditors opposed it.

On the same day as that withdrawal, Mueller filed a lawsuit naming SCOOP, Blalock in both his individual capacity and as the personal representative of McClendon's estate, and Turner as defendants.

The only relief sought against Turner was a declaration of the rights and liabilities of the parties, including a determination that each of the members of AELP's executive management team was entitled to his respective share of profits from the sale of the SCOOP assets.  Turner's answer either admitted, or did not dispute, the allegations in Mueller's petition.  Turner also filed his own affirmative counterclaims, cross-claims and third-party claims seeking the same relief as Mueller.

Turner thereafter sought coverage for his legal expenses from XL Specialty under AELP's company and management liability policy.  Per the policy, XL Specialty was obligated to pay "on behalf of the Insured Person Loss resulting from a Claim first made against the Insured Person during the Policy Period ... for a Wrongful Act."

"Wrongful act" was in turn defined as a "matter asserted against, or investigated or inquired with respect to, an Insured Person by reason of his or her status as an Insured Person."

XL Specialty denied Turner's claim, asserting that Turner was sued by reason of his status as an equity holder in various businesses, rather than his status as an insured person, and therefore no claim was asserted against him for a wrongful act as defined under the policy.  XL Specialty also asserted that the policy did not provide coverage for Turner's prosecution of his affirmative claims.  After receiving XL Specialty's denial, Turner settled the litigation over the SCOOP assets and filed suit against his insurer for breach of contract and bad faith.

Applying Oklahoma law, the federal district court agreed with XL Specialty and concluded that there was no coverage because Turner was not named as a defendant in the Mueller lawsuit by reason of his status as an insured person.  In so doing, the court rejected Turner's argument that it was significant that the policy's definition of "wrongful act" used the term "status" in place of the more commonly found term, "capacity."

The court found those two terms to be interchangeable, and then concluded that Turner was involved in the action solely because of his status or capacity as an individual equity holder under the ECOIA, and not in his capacity as a former executive of AELP.

But the court did not end its analysis after finding that there was no wrongful act asserted against Turner. It instead continued, and found (given the initial part of its ruling, arguably in dicta) that Turner did not incur defense expenses in the Mueller lawsuit, and therefore had suffered no loss.

The XL Specialty policy defined loss as "damages, judgments, payments, settlements, relief or other amounts ... and Defense Expenses."  The term "defense expenses" was defined as "reasonable legal fees and expenses incurred in the investigation and defense of any Claim."

In explaining its conclusion, the court first noted that the XL Specialty policy did not define the term "defense," and found persuasive a definition of that term from Black's Law Dictionary:

 A defendant's stated reason why the plaintiff or prosecutor has no valid case ... that which is alleged by a party proceeded against in an action or suit, as a reason why the plaintiff should not recover or establish that which he seeks by his complaint or petition.

Viewing the situation from this prism, the court concluded that Turner's legal expenses were incurred for purposes other than demonstrating why Mueller had no valid case or should not recover the relief he sought.  The court further concluded that the declaratory judgment claim — the sole claim asserted against Turner in the Mueller lawsuit — did not place Turner in a defensive posture: "Rather, it appears that Mr.Mueller asserted the claim for the benefit of himself and Mr. Turner."

Indeed, the court found significant that Turner's answer did not dispute any of Mueller's material facts, nor did it dispute or oppose any of Mueller's requested relief. Instead, both Mueller and Turner, in his affirmative claims, requested entry of the same relief. Thus:

While Mr. Turner was nominally pleaded as a "defendant" in the Mueller lawsuit, the pleadings demonstrate clearly that he stood in the same posture as Mr. Mueller … Accordingly, the legal expenses Mr. Turner incurred are not "Defense Expenses," and as such they are not covered "Loss" under the insurance policy at issue here.

Notably, the court also rejected Turner's argument that at least some of the costs for which he sought recovery had to have been incurred in connection with the defense of the Mueller lawsuit, no matter how "defense" was defined.  Had the court accepted that argument, Turner arguably would have been able to invoke a very pro-policyholder allocation provision entitling him to coverage for the full amount of his legal expenses:

If a Claim covered in whole or in part under the Policy results in both Loss covered under this Policy, and loss not covered by this Policy, because such a Claim includes both covered and uncovered matters ... the Insureds and the Insurer shall allocate 100% of such amounts to covered Loss.

The court thus granted summary judgment in favor of XL Specialty on both Turner's breach of contract claim and bad faith claim, and denied Turner's motion for partial summary judgment on the breach of contract claim.  Turner appealed the decision to the Tenth Circuit.

While the Turner decision was no doubt heavily influenced by the district court's perception of the specific parties and facts before it, the path it traveled ought to give rise to at least some level of concern.

Policyholders, insureds and many others commonly think of defense costs as being synonymous with the attorney fees and expenses that they have to pay counsel who represent them when they get sued; they do not parse that term so finely as to include within the concept only those costs incurred to specifically oppose allegations made or relief sought by the plaintiff.

Turner did not file the Mueller lawsuit, but upon being served with the petition he had to retain counsel and incur defense costs.  It seems highly, if not extraordinarily, unlikely that a party in Turner's position would not have incurred at least some measure of defense expenses — even under the narrow definition of that term the district court read into the policy.  Indeed, Turner presumably incurred legal fees to have his counsel prepare the answer that the court cited repeatedly in its opinion, and answers are a classic example of a defense expenditure.

By interpreting the policy in a manner that allowed it to recharacterize a uniquely situated defendant as effectively being a plaintiff, the court overlooked these issues and may have unintentionally opened the door to future arguments that other, less similarly situated, insureds should be denied coverage for some or all of their defense costs on the same logic.  It is common for plaintiffs and defendants to jointly request court approval of a securities class action or derivative settlement; those defendants are incurring defense costs in so doing.

Similarly, individual defendants to a securities class or derivative action may, for strategic reasons, want to agree with the plaintiffs in placing blame on other individual defendants; they, too, are incurring defense costs in all meaningful senses of the term. Yet the analysis used in Turner could be argued to require a contrary result.  For these reasons, it will be important for policyholders to monitor Turner as it makes its way through the Tenth Circuit.  In the interim, Turner may well produce an increased focus on the definition of "defense costs" in a D&O or similar policy.

Many definitions of that term define "defense costs" by reference to "defense" of or "defending" a claim, without much further elaboration. Other definitions also add the concept of "investigation" or "investigating," like the definition at issue in Turner.  And yet others include additional concepts, such as "opposing," that arguably make the result in Turner more difficult to justify, because they make more clear that "defense" and "defending" must mean something different than "opposing."  These differences in language could become very important, depending on the outcome at the Tenth Circuit.

David M. Kroeger is a partner at Jenner & Block LLP and co-chair of the firm's insurance recovery and counseling practice and its reinsurance practice.  Catherine L. Doyle is an associate at the firm.

Article: A Mixed Ruling on Coupon Redemption Rates and Attorney Fees

September 8, 2020

A recent Law.com article by Diane Flannery, Trent Taylor, Frank Talbott, and Andrew Gann of McGuireWooods LLP, “A Mixed Ruling on Coupon Redemption Rates and Atty Fees,” reports on the recent Sixth Circuit ruling on coupon settlements and awarding attorney fees.  This article was posted with permission.  The article reads:

In an Aug. 12 ruling in Linneman v. Vita-Mix Corp., the U.S. Court of Appeals for the Sixth Circuit joined the U.S. Court of Appeals for the Seventh Circuit in holding that the Class Action Fairness Act, or CAFA, does not require that a court consider coupon redemption rates when assessing an award of attorney fees under Title 28 of the U.S. Code, Section 1712, and that a court may instead choose to utilize a lodestar method alone.

The Sixth Circuit, however, did not write off analysis of coupon redemption rates wholesale.  Instead, it held that those rates may be relevant to the overall reasonableness of the award.  In so doing, the Sixth Circuit deepened a circuit split — and offered a reminder to litigants that coupon redemption rates may still play an important role in determining an appropriate attorney fee award in class action settlements.

Accordingly, litigants should be cognizant of practical implications that result if courts require the use of redemption rates in class action coupon settlements — including the potential chilling effect of lengthening litigation for years, in order to analyze such rates to determine any attorney fee award.

The litigants in Linneman originally settled the underlying claims related to defective blenders for two classes of plaintiffs: a household class and a commercial class.  The household class would be eligible for a $70 gift card or replacement blade assembly for their blenders, while the commercial class would only be eligible for a replacement blade assembly.  Although the settlement provided for an award of attorney fees, the parties could not agree on a specific amount.  The parties "then spent most of the next two years arguing about attorney's fees."

Ultimately, the U.S. District Court for the Southern District of Ohio applied a lodestar analysis to the issue.  The calculation resulted in a $2.2 million award, which the district court then enhanced by 75%, for a final award of approximately $4 million.

The parties did not seriously contest that the settlement qualified as a coupon settlement, but Vita-Mix argued that the district court erred by applying a lodestar analysis without consideration of the coupon redemption rate as required under Section 1712.  Subsection (a) provided that in coupon settlements, "the portion of any attorney's fee award to class counsel that is attributable to the award of the coupons shall be based on the value to class members of the coupons that are redeemed."

Subsection (b), however, provided that if "a portion of the coupons is not used to determine the attorney's fee to be paid to class counsel, any attorney's fee award shall be based on the amount of time class counsel reasonably expended working on the action."

Section 1712, as the Sixth Circuit noted, "is not a model of draftsmanship."  Although subsection (a) seemingly required an analysis of what may be "attributable to" any coupon, Congress gave courts an escape hatch in subsection (b).

According to the Sixth Circuit, that subsection makes it clear: (1) that a district court might not "use ... " a portion of a coupon award "to determine the attorney's fee" and (2) that in such cases the court should determine the fee "based upon the amount of time class counsel reasonably expended working on the action" (i.e., the lodestar method).

Subsection (c) only reinforced this view, because it required that when awarding attorney fees on a "mixed basis" (some based on coupon value, some not), the portion not attributable to the coupon value should be calculated under a lodestar analysis.  Thus, the Sixth Circuit followed the Seventh Circuit's holding in In re: Southwest Airlines Voucher Litigation in finding that a district court could utilize a lodestar method to calculate an attorney's fee award under Section 1712.

In so doing, the Sixth Circuit rejected the U.S. Court of Appeals for the Ninth Circuit's holding in In re: HP Inkjet Printer Litigation, stating that the Ninth Circuit's interpretation that subsection (a) prohibited the utilization of a lodestar analysis would "erase" subsection (b) completely.  The Sixth Circuit then tweaked the Ninth Circuit for "disregarding its own admonition that 'intelligent drafters do not contradict themselves.'"

Although the Sixth Circuit endorsed the lodestar method as appropriate under Section 1712, it did not completely toss out the notion that redemption rates need not be considered when assessing an attorney's fee award.  A district court still must ensure that an attorney's fee award is reasonable — an analysis that includes assessing the value of the settlement to the class, "the most critical factor" being "the degree of success obtained."

And a district court "will often abuse its discretion if it fails to consider the redemption rate as part of that analysis."  That is because courts "know from experience (and Congress) that the face value of a coupon may be quite different from its actual value to the class members — even if the coupon is for more than an 'illusory amount.'"

Because "the district court failed to make any specific findings about the value of the settlement," the Sixth Circuit found error.  The "most straightforward way" to remedy this would include evidence regarding the coupon redemption rate, but the Sixth Circuit did not "rule out the possibility that a court might be able to determine the reasonableness of an award . . . without reference to redemption rates."

In Linneman, the Sixth Circuit deepened the circuit split regarding whether Section 1712 permitted a purely lodestar analysis, or required only an assessment of redemption rates in coupon settlements.  Although the Sixth Circuit endorsed the view that the lodestar analysis was permissible, it did not enunciate a rule that said coupon redemption rates were not important.

In fact, the Sixth Circuit endorsed that these rates were likely the best indicator of what value the class received in a settlement — and, therefore, were relevant to any attorney's fee award.  Thus, litigants should be cognizant that while a lodestar analysis alone under CAFA is likely permissible, redemption rates may still play an important role in determining whether any ultimate attorney's fee award is reasonable.

At first blush, this may not appear to be a significant issue for class action defendants, especially given the fact that such analysis is cabined to the award of attorney fees for plaintiffs' counsel.  But practical considerations make this decision potentially important.

First, any redemption rate requirement could drag out litigation for years past final approval.  For example, many coupons provided in litigation can be redeemed for years after receipt.  Thus, the parties may be waiting two, three, five or more years until it is possible to clearly determine the redemption rate.

Second, and related, a redemption rate requirement could have a chilling effect on the use of coupons in settlement.  In some cases, a coupon provides the only possibility of settlement.  If plaintiffs counsel know that the redemption of these coupons will determine their fees, it is likely they will begin to not accept these settlements — resulting in prolonged litigation that is not beneficial to either party.  While other practical considerations likely exist, these two prove the potential import of resolution of the circuit split.

Diane P. Flannery and R. Trent Taylor are partners, and Frank Talbott V and Andrew F. Gann Jr. are associates, at McGuireWoods LLP.