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Question: When Is a $3 Million Attorney Fee Award Painful?

April 19, 2017

Answer:  When your fee request was $25 million higher.

And so it was in In Re: Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation, pending in federal court in San Francisco.  The case arose, in the court’s words, from VW’s “deliberate use of a defeat device – software designed to cheat emissions tests and deceive federal and state regulators – in nearly 600,000 Volkswagens- and Audi-branded turbocharged direct injection diesel engine vehicles sold in the United States.” 

Here’s how the software worked, per the court:  the “defeat device” would sense when the vehicles were being tested and would then produce regulation-compliant results.  But when the vehicles were driven under normal circumstances, they’d use a less effective emissions control system.  “Only by installing the defeat device on its vehicles was Volkswagen able to obtain” the requisite governmental approvals “for its 2.0- and 3.0-liter diesel engine vehicles,” even though those vehicles actually emitted “nitrogen oxides at a factor of up to 40 times over the permitted limit.”

Franchise dealers of VW-branded vehicles sued VW, claiming they were damaged by this “emissions scandal.”  Class certification was sought, and a settlement was reached, encompassing a nationwide class consisting of “all authorized Volkswagen dealers in the United States who, on September 18, 2015, operated a Volkswagen branded dealership pursuant to a valid Volkswagen Dealer Agreement.”  Under the settlement, VW was required to pay $1.19 billion in cash and provide various non-cash benefits to the class.

All told, a good deal for the class.  As the court noted, the settlement “had multiple cash and non-cash components, and … ultimately will provide franchise dealer class members with a recovery of nearly all of their losses attributable to Volkswagen’s disclosure of its use of a defeat device.” 

High fives in plaintiffs’ camp!  Crack open the Veuve Clicquot! 

Class counsel then moved for attorneys’ fees, stating in their motion that their “intense negotiations with Volkswagen led to the second largest class action settlement in automotive case history … and likely one of the top 20 largest class settlements in history in any arena.  In fact, the over $2.1 million average payment to Franchise Dealer Class Members may be the highest average payment to members of a class in any class action settlement.” 

They asked the court to award them “$28.56 million in attorneys’ fees, inclusive of costs.”  And they described their request – which represented, they said, “a fee of 2.0% of the constructive settlement fund of $1.39 billion” – as a “historically miniscule fee” which was “unquestionably fair, reasonable and appropriate compensation in relation to the exceptional results achieved for the” class.  “This remarkably small request,” they declared, “is likely the second-smallest fee amount ever requested in a large common fund case.”

So why did the district court cut their requested fee by nearly ninety percent? 

Because it found that under “the unique circumstances leading to the Settlement,” the “lodestar method, as opposed to the percentage method, is the appropriate method for determining fees,” and the lodestar amount was far lower than the amount they’d requested in their fee application. 

Under the “lodestar method,” fees are calculated by multiplying the number of hours reasonably expended by reasonable hourly rates.  Computing fees by this method tends to yield lower fee awards than does the percentage method, especially in cases like this one where the settlement fund is large.

The court found that using the percentage method in this case “would overcompensate” class counsel “for its work.”  Class counsel, it reasoned, “did not expend significant additional time procuring the Settlement, nor did it undertake significant additional risk, given Volkswagen’s incentive to settle quickly.”

What does that mean, “significant additional time” and “significant additional risk?”  And why did VW have an “incentive to settle quickly?”

Well, as it happens, before settling the franchise dealer case, VW had settled another emissions-related case; that one between VW, on one hand, and consumers, dealers, securities plaintiffs and government agencies, on the other.  That case settled for $10.033 billion, and class counsel in that one were awarded $167 million in fees. 

That case, in other words, was the main event.  Given that the franchise dealer settlement followed on the heels of that larger settlement, the court reasoned that the former “flowed naturally and necessarily” from the latter.  It calculated class counsels’ lodestar sum in the franchise dealer case as being “only $1.48 million,” meaning that their requested $28.56 million fee “would be a 19x lodestar multiple.”  That didn’t fly.  But a 2x multiplier did, given the risks class counsel assumed in the litigation, and so class counsel were awarded $2,954,455 in fees for work performed relating to that settlement, plus $87,538 in costs. 

And so class counsels’ fee request was mightily reduced by the court.  But they could still take solace in the praise their efforts elicited from the court.  Class counsel “achieved a great result for the franchise dealer class members, even in the face of uncertain risk and litigation length.” “The result” they “achieved is excellent.”  Words like those endure long after the fees have evaporated.

Wouldn’t you say?

The case is In Re: Volkswagen “Clean Diesel” Marketing, Sales Practices, and Products Liability Litigation, United States District Court, Northern District of California, MDL No. 2672 CRB (JSC), and the decision was rendered on April 12, 2017.

This article, “Question: When Is a $3 Million Attorney Fee Award Painful?”, was written by Jeremy Gilman, a partner at Benesch based in Cleveland.  He has been litigating complex business cases for both plaintiffs and defendants nationwide for the past 34 years.  He is a prolific writer on legal topics, and his fiction has been nominated for a national literary prize.  He is also a musician whose first album is due out this summer.

Five Tips for Fee Agreement ADR Clauses

April 4, 2017

A recent The Recorder article by Randy Evans and Shari Klevens, “5 Tips for Fee Agreement ADR Clauses,” address ADR clauses in fee agreements.  This article was posted with permission.  The article reads:

Attorneys and law firms have been experimenting with strategies to collect unpaid client fees while limiting the risk of malpractice claims.  One approach that is gaining traction involves the use of alternative dispute resolution (ADR) provisions, including mandatory arbitration clauses, in retainer agreements and engagement letters to address the status of unpaid fees.

ADR has several advantages over litigation.  Most obviously, arbitration or mediation of a fee dispute is often less expensive than litigation.  Additionally, arbitration and mediation proceedings are confidential and do not become matters of public record.  Thus, a client’s assertion of a malpractice counterclaim in an ADR proceeding as justification for his or her failure to pay the fees at issue may stay out of the public realm.  Attorneys should be aware, however, that their professional malpractice insurance will likely require them to report such a potential claim as a condition of coverage (regardless of whether it is confidential).

The American Bar Association (ABA) has provided ethical guidance when using mandatory arbitration clauses in retainer agreements.  In a 2002 Formal Opinion, the ABA advised: “It is ethically permissible to include in a retainer agreement with a client a provision that requires the binding arbitration of fee disputes and malpractice claims provided that (1) the client has been fully apprised of the advantages and disadvantages of arbitration and has been given sufficient information to permit her to make an informed decision about whether to agree to the inclusion of the arbitration provision in the retainer agreement, and (2) the arbitration provision does not insulate the lawyer from liability or limit the liability to which she would otherwise be exposed under common and/or statutory law.”

California attorneys and clients may enter into valid and enforceable agreements requiring binding arbitration of both legal malpractice and fee dispute claims at the initiation of their relationship.  Powers v. Dickson, Carlson & Campillo, 54 Cal.App.4th 1102 (1997).  But these agreements do not extinguish a client’s right to nonbinding mandatory fee arbitration (MFA) under Business & Professions Code §6200.  Benjamin, Weill & Mazer v. Kors, 195 Cal.App.4th 40, 53 (2011).  MFA arbitration is mandatory for the lawyer if the client requests arbitration.

Here are five things to keep in mind when including or enforcing an ADR provision in a fee agreement.

Use a proven arbitration clause

There is no need to reinvent the wheel or to take risk testing the general enforceability of an arbitration provision.  The safer option is to use a boilerplate provision or judicially tested language for a binding arbitration clause.  In addition, in the event the attorney-client agreement is treated like other commercial transactions, a generally accepted and commercially enforceable arbitration clause will be a significant asset.

Include the bar association disclosure

Although generally not controlling, ABA Formal Opinion 02-425 certainly is persuasive precedent regarding how a client can be apprised of the significance of the terms of the agreement.  Specifically, in California, an attorney must serve, either personally or by first class mail to the client, the California State Bar’s “Notice of Client’s Right to Arbitrate” form prior to or at the time of serving a summons or claim in an action or other proceeding against the client for recovery of fees that are subject to mandatory arbitration.  If an attorney fails to give the notice, the failure is a ground for dismissal of the action. Bus. & Prof. Code §6201(a).

Most attorneys dealing with this issue, therefore, will ensure that the client has been apprised fully and in writing of the advantages and disadvantages of arbitration and has been given sufficient information to permit an informed decision about whether to agree to the inclusion of the arbitration provision in the agreement.

Advise client of right to independent counsel

California attorneys are required to advise the client of the right to seek independent counsel when there is a malpractice claim and the attorney is seeking to settle the claim with the client.  Specifically, California Rules of Professional Conduct Rule 3-400 provides that a lawyer shall not “settle a claim or potential claim for the member’s liability to the client for the member’s professional malpractice, unless the client is informed in writing that the client may seek the advice of an independent lawyer of the client’s choice regarding the settlement and is given a reasonable opportunity to seek that advice.”

Separate fee disputes from other disputes

The ABA Formal Opinion raises serious questions regarding the enforceability of a mandatory arbitration provision that limits the attorney’s substantive liability.  Rather than risk both binding arbitration for fee disputes and binding arbitration of claims arising out of the representation by combining them, some firms will segregate the two into separate mandatory arbitration provisions.

By doing this, attorneys and law firms can save one, even if the other is lost.  In California, a properly worded provision requiring binding arbitration of legal malpractice claims is not ethically improper, and these provisions are generally enforceable.  See Powers v. Dickson, Carlson & Campillo, 54 Cal. 4th 1102 (1997).  The attorneys just must take care not to prospectively contract with their client in a way that limits the attorneys’ liability to the client for malpractice. Rule 3-400.

Include a severability clause

Like any successful contractual arrangement, a valid and enforceable retainer agreement or fee contract containing a mandatory arbitration clause also typically includes a severability clause.  That way, if a particular state or jurisdiction finds the binding arbitration agreement unenforceable, other protections in the agreement still may remain in effect.

By considering these issues, attorneys can take steps to reach an agreement with their clients that helps protect both sides and reflects the requirements of the bar rules.

Randy Evans is a partner and Shari Klevens is a partner and deputy general counsel at Dentons, which has six offices throughout California.  The authors represent attorneys and law firms and regularly speak and write on issues regarding the practice of law, including “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” (ALM 2013) and “California Legal Malpractice Law” (ALM 2014).

Five Fundamentals of Collecting Attorney Fees

April 3, 2017

A recent Daily Report article by Randy Evans and Shari Klevens, “5 Fundamentals of Collecting Fees,” addresses attorney fee collection.  This article was posted with permission.  The article reads:

It pays to implement an effective billing system—literally.  On the front end, having a system in place increases realization rates because it gets money in the door.  On the back end, fee disputes and related malpractice claims can be minimized, if not avoided altogether.  Knowing the fundamentals of billing and collections can make the world of difference for any law practice from both a financial and risk management perspective.  Here are five steps worth considering when implementing or revising your billing and collections processes.

Determine Fee Arrangement Before Attorney-Client Relationship Begins

Subject to market conditions and the simple economics of supply and demand, lawyers typically enjoy the ability to negotiate fees with a prospective client.  The best way to minimize problems down the road is to finalize the negotiations before the attorney-client relationship commences.  In negotiating a fee arrangement, the most significant requirement under the ethical rules is that the fee must be reasonable.  In addition, fee agreements cannot penalize a client who decides to terminate an attorney at any time.  (Notably, requiring a client to pay an attorney for the time spent on the representation prior to termination is generally not an unreasonable term.)

If the fee arrangement is not finalized until after the representation begins, the attorney and client may already be in a fiduciary relationship at that point.  Attorneys have to take care not to use information learned in the course of the attorney-client relationship to the attorney's advantage and to the client's detriment in negotiating the fee.  If a client challenges the fee later, courts and bars will look to whether the attorney took advantage of the client's need for continued representation.

That is not to say that mid-representation fee changes are impermissible.  In fact, they happen frequently, such as when an attorney's hourly rate changes due to market conditions.  This is fairly routine.  For a major fee change mid-representation, however, the attorney could recommend that the client consult with independent legal counsel regarding the amended fee arrangement.  Attorneys who advise clients on new fee arrangements during the representation that seriously alter the previous terms may be subject to heightened scrutiny.

Set Expectations

If the attorney or law practice expects to get paid on a monthly or quarterly basis, that is something that can be discussed with the client at the outset of the representation.  Similarly, if the fees are expected to be paid directly from settlement proceeds or at closing, tell the client.

Avoiding surprises is the most important risk prevention technique.  When both attorney and client have set their respective expectations (and adjusted them as appropriate), then the attorney-client relationship begins and proceeds on the same page.

Memorialize the Fee Arrangement

There has been considerable commentary regarding the implications of a "fee agreement," particularly whether written agreements extend the statute of limitations for legal malpractice claims.  However, the risks of failing to document a fee arrangement far exceed the risks of an extended statute of limitations.

A great majority of fee disputes involve the amount of the fee itself.  The simplest and most effective method for avoiding this type of dispute is simply to agree in writing to the terms of the fee arrangement and to have the client sign the document confirming the fee arrangement.

Bill Regularly

Sending out bills on a regular basis helps show the client—in close to real time—what tasks are being completed and what charges are being incurred.  Then, if the client objects to the services or has a problem with the charges, such issues can be addressed quickly.  If the attorney is not sending bills on a regular basis, however, the client may later object to the fees (even if the client would have paid the same aggregate amounts if invoiced at regular intervals).

Most attorneys will recommend informing the client what the fees are or will be well in advance of the request for payment.  For the hourly fee attorney, this means sending out bills regularly so that the client gets a sense of what the fees and costs are.  What constitutes "regular" billing will obviously differ based on the circumstances of each representation.

If there is little activity while a motion or appeal is pending, then bills might not be sent for a few months.  On the other hand, if there is significant activity, then bills might be sent on a monthly basis.

For transactional representations, providing a pre-closing preview of the closing statement with the fees is helpful.  For contingency fees, pre-settlement previews of the amount of the fees is appropriate.  If the representation involves significant out-of-pocket expenses for which the client is responsible, consider interim bills.  The key is to make sure the client understands (and accepts) what the projected fees are before they are locked in by a closing or settlement to avoid a fee dispute.

Timely Address Unpaid Bills

Unpaid bills are problems waiting to happen.  The sooner those problems are identified and resolved, the better.  While many attorneys do a good job at documenting the fee and sending the bills, they may do a poor job on the follow-up.  Rather than leave the follow-up to chance, the better approach is to set an internal deadline for following-up on outstanding bills.  This contact enables the attorney to determine if the client has any issues with the bill or whether the failure to pay is a simple oversight or intended delay.

If there are concerns or issues about the bills, then the attorney should address them.  If nonpayment is an oversight, then the contact will serve as a friendly reminder.  If it is intended delay, then the attorney and client can discuss what the limitations are and how they might be addressed.

There is no magic time for following up.  Instead, it will depend on the contours of the relationship with the client.

For attorneys and law practices that follow the steps discussed above, fee collections can be a little less daunting.  For attorneys and law practices who do not, it is never too late to put the systems in place or revise existing ones.  Your balance sheet and law license will thank you.

Randolph Evans is a partner at Dentons US in Atlanta.  He handles complex litigation matters in state and federal courts for large companies and is a frequent lecturer and author on the subjects of insurance, professional liability and ethics.  Shari L. Klevens is a partner and deputy general counsel at Dentons US in Washington and Atlanta.  She is co-chair of the global insurance sector team, a member of the firm's leadership team and is active in its women's initiative.

When Someone Else Pays the Legal Bills

March 7, 2017

A recent CEBblog article by Julie Brook, “When Someone Else Is Paying Your Fees,” writes about when a third party pays some of all of your legal fees in California.  This article was posted with permission. The article reads:

When, in a noncontingent matter, a third party is paying all or some of the attorney fees for your client, do you know how to deal with the issues that can arise?  Short answer: Address them upfront in your fee agreement.  Here are sample provisions to get you started.

You should be aware that Cal Rules of Prof Cond 3-310(F) requires informed written consent of your client when someone else is paying for his or her attorney fees.  In explaining this requirement to your client, advise him or her of the potential problems that might arise with this arrangement.

Here are two alternative sample provisions you can use in your fee agreement, depending on whether the third person will be a party to the agreement:

[Alternative 1: If the person/entity responsible for payment of fees and costs isn’t a party to the fee agreement]

Another person or entity may agree to pay some or all of Client’s attorney fees and costs.  Any such agreement will not affect Client’s obligation to pay attorney fees and costs under this agreement, nor will Attorney be obligated under this agreement to enforce such agreement.  Any such amounts actually received by Attorney, however, will be credited against the attorney fees set out in this agreement [or delivered to Client if there is no balance due Attorney].  The issue raised by having a third party pay the fees is the potential or perceived potential that the third party may try to influence the prosecution of the case to minimize costs or to achieve other goals.  However, the fact that another [person/entity] may agree to pay some or all of Client’s attorney fees will not make that [person/entity] a client of Attorney and that [person/entity] will have no right to instruct Attorney in matters pertaining to the services Attorney renders to Client.  Unless Client gives written permission to discuss all or a portion of Client’s matters with [the person/the entity] paying all or a portion of the attorney fees, Attorney will not disclose any confidential information to [him/her/it].  By signing this agreement, Client consents to this arrangement and acknowledges that Attorney has advised Client of the advantages and disadvantages of this arrangement.

[Alternative 2: If the person/entity responsible for payment of fees and costs will be a party to the fee agreement]

[Name] agrees to pay attorney fees for services performed and costs incurred in the representation of Client under this agreement.  [Name] acknowledges that [his/her/its] agreement to pay attorney fees and costs does not make [him/her/it] a client of Attorney.  Unless Client gives written permission to discuss all or a portion of Client’s matters with [name], Attorney will not disclose any confidential information to [him/her/it].

Alternative 1 avoids potential ethical issues posed by such arrangements by making it clear that the party paying the bills isn’t the client and isn’t party to the confidential attorney-client relationship.

But if you want a remedy against the third party if he or she stops paying, you must have an agreement with that individual or entity.  One way to do that, illustrated in Alternative 2, is to make the payor a party to the fee agreement.  It’s best, however, to have a separate written agreement with the payor rather than having him or her sign the same engagement letter as the client; this will preserve the attorney-client privilege of the fee agreement with the client.

Also, consider doing the following when a third party is paying the bills:

  • Give notice of fee dispute arbitration.  Even though the party assuming responsibility for payment doesn’t become your client in the sense of directing the representation or becoming privy to confidential information, you should send notice of the right to compel arbitration of a fee dispute to this individual or entity as well as to the client. Wager v Mirzayance (1998) 67 CA4th 1187.
  • Refund advanced fees at end of case.  To the extent funds advanced by a third party remain after the case is concluded, you should refund the balance to the payor, not the client.  See California State Bar Formal Opinion No. 2013-187.

Read This Before You Go the Contingency Fee Route

March 3, 2017

A recent CEBblog article by Julie Brook, “Read This Before You Go the Contingency Fee Route,” discusses some of the pitfalls of contingency fees in California.  This article was posted with permission.  The article reads:

Among the several alternatives to the traditional hourly fee arrangement, contingency fees have been commonly used for decades.  Under a contingent fee agreement, the attorney and client agree that the attorney will receive a particular percentage of the client’s recovery or of the savings obtained for the client as a fee for legal services, if there is a recovery.  The attorney takes on the risk with the potential for significant reward.  Not surprisingly, there are statutory requirements for these types of agreements—and failing to comply with them is risky, too.

Follow these statutory requirements whenever you enter into a contingent fee agreement:

  1. Put it in writing. Contingent fee agreements must be in writing to be enforceable, except those for the recovery of workers’ compensation benefits or certain merchants’ claims. Bus & P C §§6147-6147.5.
  2. Include certain specific provisions.  In addition to a description of the contingencies entitling the attorney to a fee, the agreement must specify such matters as (Bus & P C §6147(a)):
    • The fee rate agreed on;
    • How the costs of prosecuting and settling the case will affect the fee and the client’s recovery (e.g., in the event of a structured settlement, whether the attorney is paid from first funds);
    • A statement as to what extent the client is required to pay compensation for related matters arising out of his or her relationship with the attorney that aren’t covered by the contingency fee agreement; and
    • A statement that the fee is negotiable.
  3. Follow additional requirements for medical malpractice claims.  If the claim is for medical malpractice and is subject to the maximum fee limits on contingent fees (see Bus & P C §6146), then the fee agreement must include a statement that the rates set out in §6146 are the maximum limits for the contingent fee arrangement and that the attorney and the client may negotiate a lower rate.  Bus & P C §6147(a)(5).  You may want to attach a copy of Bus & P C §6146 to the fee agreement to ensure that the client is informed of its content.
  4. Specify the contingent fee rate.  Contingent fee agreements must specify the contingent fee rate (Bus & P C §6147(a)(1)) and how disbursements and costs in connection with the prosecution or settlement of the claim will affect the contingent fee and the client’s recovery (Bus & P C §6147(a)(2)).  Unless the claim is for medical malpractice and the agreement is thus subject to Bus & P C §6146, the agreement must also include a statement that the fee isn’t set by law but rather is negotiable between the attorney and the client.  Bus & P C §6147(a)(4).
  5. Provide an hourly rate just in case.  The agreement should provide an hourly rate so that the attorney may establish a baseline to recover quantum meruit in the event the attorney is discharged by the client before the completion of the representation.  The hourly rate will also assist the attorney in providing a basis for attorney fee recovery in any potential attorney fee motion.
  6. Anticipate deferred payments or structured settlements.  Whenever payment of the recovery, or any part of it, may be deferred, the fee agreement should specify when the attorney fees must be paid and, when appropriate, how they should be calculated.  Otherwise, the agreement invites dispute and may be subject to being voided by the client for failing to fully comply with Bus & P C §6147.  If the award for future damages in an action for injury or damages against a health care provider is at least $50,000 and either party requests that the award be paid by periodic payments, then the court must order that the future damages be paid, in whole or in part, by periodic payments rather than by a lump-sum payment. CCP §667.7.  In that event, the court must also place a total value on the periodic payments and include that amount in computing the total award from which attorney fees are calculated for purposes of determining the statutory maximum fee. Bus & P C §6146(b).
  7. Provide for noncash awards.  When the award might be partially or entirely in a form other than cash (e.g., reinstatement in a wrongful termination action), the fee agreement should provide for that possibility.  This might be done by providing for a specified hourly fee if the award is not entirely in cash and a contingent fee if it is.  It may also be accomplished by providing for a method for valuing noncash awards.

Failure to include any of the required items makes the agreement voidable at the option of the client (but you would still be entitled to a reasonable fee). Bus & P C §6147(b).  See, e.g., Arnall v Superior Court (2010) 190 CA4th 360, 366 (failure to state in fee agreement that fees were negotiable rendered fee agreement void; fees recoverable by way of quantum meruit).

Attorney Fee Awards in the Lanham Act

January 19, 2017

A recent law firm blog post, “Attorney Fees Awards in Lanham Act,” by James Bikoff and Holly James of Smith Gambrell & Russell LLP in Washington, DC report on attorney on attorney fee awards...

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