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Article: Rohrmoos Highlights Steps to Securing Attorney Fees in Texas

July 8, 2019

A recent Law 360 article by Amy Anderson, Tiffany Raush and Joshua Norris, “Rohrmoos Highlights Steps to Securing Atty Fees in Texas,” reports on the recent Texas Supreme Court case, Rohrmoos Venture v. UTSW DVA Healthcare.  This article was post with permission.  The article reads:

In Rohrmoos Venture v. UTSW DVA Healthcare LLP, the Supreme Court of Texas has finally thrown down the gauntlet for attorney fees claims: Submit your billing records or else!

While the court’s opinion issued April 26, 2019, stopped short of actually mandating submission of billing records in support of an attorney fees request, “billing records are strongly encouraged.”  In reality, nothing short of contemporaneous billing records would likely satisfy the stringent evidentiary requirements articulated in Rohrmoos.

In Rohrmoos, the lessee prevailed in a lease dispute against its landlord; however, it supported its attorney fees claim only with the testimony of its attorney.  The attorney testified as to the mountain of documents, emails and depositions he reviewed, prepared for and completed in addition to time spent in trial.  He also testified regarding his rate, why that rate was reasonable and why the fees in this case (about $800,000) were so high compared to the total amount in dispute (about $300,000).

He did not introduce his billing records, which would have certainly been voluminous, and instead asserted before the court that the billing records would give the jury no additional basis on which to award his client attorney fees.  The jury awarded the lessee $800,000 for fees incurred in addition to conditional amounts for appeal.  The landlord challenged the fee award and, in particular, the failure to produce billing records in support.  The court of appeals affirmed the award concluding that billing records were not required to prove attorney fees in this case.

The Supreme Court of Texas disagreed.  The court issued a lengthy, 20-plus page opinion to address the issue of the attorney fees claim, apparently flummoxed that practitioners, parties and lower courts did not understand that Texas exclusively subscribed to the lodestar method following City of Laredo v. Montano.

The lodestar method requires the calculation of reasonable hours multiplied by a reasonable rate, producing the “lodestar.”  From there, adjustment up or down is possible depending on particular circumstances not already accounted for in the lodestar calculation.  If it was unclear before, it is clear now — the lodestar method applies to every claim for attorney fees in Texas.  And, as the Rohrmoos court sees it, there is little to no reason for an award to ever deviate from the lodestar.

Attorney fees claims are valuable to parties because they constitute an entirely separate claim for damages.  An award of fees is meant to compensate the winning party and make that party whole.  The award is not intended to punish the losing party, nor is it intended to benefit the attorney.  The contours of the court’s Rohrmoors opinion provide important clarifications, reminders and cautions on the issue of attorney fees, several of which are highlighted in the following practice pointers.

Get Your Ducks in a Row Ahead of Time — Chapter 38 (Probably) Won’t Save You

Texas follows the “American Rule” regarding attorney fees recovery — each party pays its own way.  To “shift” the payment of attorney fees, parties must point to either a contract provision or a statute.  In Texas, we have long revered Chapter 38 as the attorney fees saving grace for oral contracts or the occasional contract without an attorney fee provision.  But Chapter 38 has fallen from grace over the past decade following several state and federal court opinions holding that it does not apply to limited liability companies or limited partnerships.

Even before that spate of decisions, however, Chapter 38 had its limitations.  As discussed in Rohrmoors, to prevail on an attorney fees claim under Chapter 38, parties have to show (1) they prevailed on a claim entitling them to attorney fees, and (2) they recovered damages for that claim.  Thus, while a party who successfully pursued a breach of contract claim for damages can recover attorney fees under Chapter 38, a party who successfully defended a breach of contract claim cannot.

It is imperative that attorney fees are properly addressed in a contract. Among other things, the Rohrmoors decision demonstrates that contractual fee-shifting provisions should specify when a party is a “prevailing party.”  If the contract is silent, the trial court will likely apply Chapter 38 prevailing party law — meaning that your successful defense of a breach of contract claim will not yield an attorney fee award.

Parties should also consider whether fee recovery should be limited to fees “incurred.”  In Rohrmoors, the court explained that use of the word “incurred” limits the amounts of fees to only those fees for which the requesting party is liable.  Without using “incurred,” a party may recover attorneys’ fees that are reasonable and necessary to the representation without a showing that they were “incurred.”  While broader is better if you are seeking the fees, and limited is better if you are defending against fees, what is best is to predictably know how the fee provision will be interpreted and applied by the court.  Therefore, clarity is king.

Litigation Is Nigh — Now What?

When the parties to a contract find themselves staring down inevitable litigation, the focus is naturally on the claims giving rise to the litigation: breach of contract, breach of warranty, fraudulent conduct, etc.  Early on, attorney fees may not be foremost in mind, but they should be.  Informed consideration of likely avenues for recovery of attorney fees will help the parties evaluate their potential damages and their potential risks in litigating.

In addition, Chapter 38 has “presentment” requirements and other fee-shifting statutes, such as the Deceptive Trade Practices Act, may have similar preconditions.  Developing your attorney fees claim, or defending against the opposing party’s fee claim, is often overlooked until trial approaches when the costs have already been incurred and discovery is coming to a close.  Understanding the fee claim and developing or defending it alongside the core claims will pay dividends in the long run.

Proving It Up for the Win

Rohrmoors clears up any lingering mystery: Plan to submit your attorneys’ billing records to support your fee claim.  “Sufficient evidence [to support a fee claim] includes, at a minimum, evidence of (1) particular services performed, (2) who performed those services, (3) approximately when the services were performed, (4) the reasonable amount of time require to perform the service, and (5) the reasonable hourly rate for each person performing such services.”

From that, the factfinder determines the reasonable hours times the reasonable hourly rate resulting in the lodestar.  Only in extremely limited and unusual circumstances may the factfinder apply a multiplier upward or downward to account for factors not otherwise baked-in-the-cake of the lodestar.

Thus, when proving up your attorney fees, it is critical to provide accurate and complete billing records in support of your claim.  The Supreme Court of Texas stated this was “strongly encouraged” in Rohrmoos, but the clear implication of that opinion as a whole is that it is indispensable to recovery of fees.

That means the attorneys’ time entries should be detailed enough to provide sufficient information for review and payment, but not so detailed that extensive redacting is going to be required to protect work product or attorney-client privileged information.  Such extensive redaction may fall short of the Rohrmoors’ requirement that the evidence show the particular services performed and may also fail to satisfy segregation requirements.

Also consider whether a fee claim will require a separate, retained expert.  The attorney in Rohrmoors opted to testify as his own expert, which is fairly common.  There are multiple schools of thought on this.  The attorney who generated the fees is going to have a better grasp on the facts and nuances of the case, especially in complex litigation where the total hours and requested award might be especially large.  Most judges know that a retained expert is no less self-interested than the lawyer in the case.  On the other hand, to a jury, a retained expert may appear at least somewhat less self-serving.  If the attorney’s rate is particularly high, it may be helpful to have another attorney explain why that rate is reasonable.  Finally, if there is a great degree of tension between opposing lawyers related to the litigation, cross examination of the lawyer in the case on the issue of fees could get heated.  In that case, it may be better to have one degree of separation with a retained expert.

Amy K. Anderson and Tiffany C. Raush are associates and Joshua A. Norris is a partner at Jones Walker LLP in Houston.

Nine Rules for Billing Ethically and Getting Paid on Time

May 28, 2019

An article on the ABA website by Todd C. Scott, “Nine Rules for Billing Ethically and Getting Paid on Time,” reports on the ethical rules on legal billing.  This article was posted with permission.  The article reads:

Henry Ferro (an Ocala, Florida, attorney) was very frustrated with his client, Ron Butler, for refusing to pay his legal fees from a criminal matter where Ferro represented Butler’s son Nick.  But all chances of Ferro recovering the $14,000 he says Butler owes him were probably lost for good when Ferro ran into his client at a Lowe’s checkout line and, according to a complaint filed against him, the attorney began yelling that Butler was “a deadbeat who does not want to pay his debts.”

As a result, Ferro became the subject of a harassment complaint by his client Butler, and Butler’s new lawyer argued that not only does his client not owe the fee (because there was no written fee agreement) but also that any amount in excess of the $3,500 Butler already paid to Ferro for his son’s burglary matter would be excessive and unreasonable.

Ferro’s personal attempt to recover his unpaid fee at a Lowe’s store were not any more successful than his other attempts, which are also coming back to haunt him.  According to the complaint, when Ferro’s phone calls to the client to inquire about the fees were unsuccessful, he attempted to discuss the fee issue with his client’s sister-in-law after phoning her about the matter.  Butler’s harassment claim sought a temporary restraining order enjoining the lawyer from having any further contact with Butler or any member of his family about the fee matter.

Nothing is more frustrating for a lawyer who has worked diligently on legal matters than the realization that clients do not intend to pay their bills.  Complicating matters is the fact that, given current economic difficulties, unpaid legal fees are on the rise, and lawyers are looking for ways to recover lost fees more than ever before.

From a malpractice carrier’s point of view, suing your client for unpaid legal fees rarely results in a good outcome.  Savvy clients who know that the legal fee is owed will often turn the tables on a lawyer, filing a counterclaim alleging that the fee the lawyer seeks to collect is unreasonable or cannot be justified because the lawyer did substandard work.  The client’s counterclaim may be a simple tactic to leverage a bill, but because it is a suit against a lawyer, it must be reported to the lawyer’s malpractice carrier, creating an added headache for a lawyer who just wants to be paid.

So what should a lawyer do to recover a legal fee in a matter that he or she is rightfully owed?  Most practice management experts agree that the key to successfully recovering the firm’s net receivables is to take certain steps up front, at the start of the attorney-client relationship, that will put the lawyer in control of the matter if the client falls behind in paying.  Also, what you do after the first time a client falls behind with a payment can determine whether you will ever recover anything for your legal services.

ABA Model Rule 1.5, Fees, is the primary regulatory guideline outlining proper fee arrangements and billing practices.  The rule addresses several aspects of fee setting, including contingency fees, prohibited fee arrangements, fee sharing, and whether a fee is reasonable.  Many states are now considering changes to Rule 1.5 to reflect some of the changing ways lawyers and clients are contracting for legal services.  Changes to the rule include provisions on flat fees, availability fees, nonrefundable fees, and unearned fees.  In Minnesota, changes to Model Rule 1.5 were adopted by the Supreme Court in late 2010 and became effective on July, 1, 2011.

Throughout Rule 1.5, a few themes are prevalent.  Legal fees, whether they are fixed, contingent, or shared with lawyers outside the firm, need to be reasonable.  Changes in the rule addressing availability fees and nonrefundable fees are also based on what’s considered to be reasonable billing practices.  Although determining whether a bill is reasonable can sometimes be difficult, the rule does provide some factors to be considered when determining the reasonableness of a fee including: the difficulty of the matter, the fee that is customarily charged, whether the work precluded you from working on other legal matters, the results obtained, and the experience of the lawyer performing the service.

Another theme throughout Rule 1.5 centers on consumer protection and has to do with putting the fee agreement in writing.  Although the rule stops just short of requiring that a fixed fee agreement be in writing, the authors of the rule state that the “preferable” method for communicating a fee arrangement to a client is in writing, and a written fee agreement is required for legal services involving contingent fees, nonrefundable fees, flat fees, and fee sharing.

So why do some clients choose to not pay their legal bills?  When asked, most clients involved in legal fee disputes will tell you the primary motivator for not paying their lawyer was their sense that the amount they were being billed was unfair.  Even one small item that affects the client’s sense of fairness in an otherwise large legal bill can sometimes be enough to delay payment and jeopardize the good will that the lawyer previously established.  By closely following the tenants of 1.5, lawyers stand a better chance of having clients who understand the billing process and pay the legal bill on time.

The following nine rules for billing and collecting fees from clients that will help you stay on firm ethical grounds, and avoid spending a lot of time on legal work for which you will never be compensated.

1. Communicate the fee arrangement before you start the case.

Getting your client to pay your bill starts with making sure he or she fully understands what you will charge for your services. It may not be a requirement in your jurisdiction, but putting the fee agreement in writing is a good idea, and it allows both you and the client to refer to the document if there are ever any misunderstandings about the bill.  Any lawyer that works for several hours on a legal matter and then discusses with the client the fee arrangement risks losing the billable time already devoted to the matter.   Clients may not like what they are being charged, but if they feel they understand why they have received the charge and it conforms to what they previously agreed to, they are more likely to pay their legal bill in full.

2. Your fee better be reasonable.

The factors for determining reasonableness of a legal fee in Rule 1.5 are a good guideline for fee setting, and they should be considered on the whole.  For example, your hourly fee may be appropriate for the type of work that you are doing, but if your lack of legal experience requires you to spend an inordinate amount of time performing a routine legal task, the amount you bill might be out of line with what’s considered to be reasonable.  It is a good idea to take a close look at the factors for determining whether a legal fee is reasonable because they are likely to be referred to by both the lawyer and the client when parties find themselves arbitrating a legal fee dispute.

3. “Nonrefundable” does not mean that you can be paid for doing nothing.

Nonrefundable retainer agreements have caused an increase in attorney-client fee disputes; especially when a lawyer accepts a large retainer fee at the outset of a matter and the matter is soon settled or the lawyer is discharged after having done little or no work.  The sense of “reasonableness” that permeates the rules on legal fees extends to nonrefundable fee arrangements, so even if your state has not yet adopted changes prohibiting nonrefundable fee arrangements, you should be ready to refund any unearned portion of your fee unless you can show the amount retained is not disproportionate to the amount of work you committed to the legal matter.

4. Verbal flat fee arrangements are as good as the paper they’re written on.

Some states have adopted changes to the professional fee rules to reflect the growing trend towards flat fee arrangements.  A flat fee represents a complete payment for specified legal services and is typically paid in full in advance of the lawyer providing the services.  Unless both the lawyer and the client have a clear understanding what the client will be receiving in exchange for the fee, flat fee arrangements can be fraught with misunderstandings and disappointed parties.  Therefore, make sure your flat fee agreement is in writing, signed by the client, and notifies the client with specificity the nature and scope of the services to be provided, the total amount of the fee and other terms of payment, that the fee will not be held in trust until it is earned, and that the client has the right to terminate the lawyer-client relationship.

5. Availability fees are separate and distinct from legal services fee.

An availability fee is a charge that ensures the lawyer may be available to the client during a specified period of time or on a specified matter.  Because the fee is only for reserving your time that could be used working on other legal matters, your writing to the client should state the fee is for availability only and that fees for legal services will be charged separately.

6. If the fee is shared with someone outside the firm, the client should know exactly where it is going.

It is never a good idea to surprise a client at the end of a legal matter by revealing to them in a remittance statement that an attorney who is not a member of the firm will be sharing in some of the fee.  Clients will sometimes assume that if an outside legal expert was involved, then the lawyer they’ve been talking to all along didn’t really do anything to earn the portion of the fee that is going to them.  Fee sharing between lawyers of different firms is permitted under Rule 1.5 so long as the division is in proportion to the services performed by each lawyer, the client agrees to the arrangement in writing (including the share each lawyer will receive), and the total fee is reasonable.

7. Three keys for effective invoicing: detail, detail, detail.

Clients may not always like getting a legal bill from you, but if they have sufficient information in the invoice about the legal services you performed, they are more likely to consider the bill to be reasonable and compensate you for your work.  The description area for each time entry in the invoice is a prime spot to inform the client with specificity what tasks the lawyer or the staff has performed on their behalf.  Even if you’ve handled tasks for which you have no intention of charging the client, let the client know about the work, how much time you spent on the task, and the fact they are getting the service for no charge.

8. When the payment is late, be direct. Clients like direct.

For individual clients that are on a tight budget, when deciding whether to pay the lawyer’s bill or the bill of the person who may have just completed shingling their garage, they think that the lawyer is sufficiently wealthy and won’t mind accepting a late payment.  Maybe you don’t mind, but if you do, contact the client after the first missed payment and be direct about your expectations.  Often, if you let them know that it is important, they will pay you on time.  They may need to be reminded to adhere to the payment schedule in order to continue receiving legal services.

9. Foonberg’s rule: If you’re going to get burned, get burned cheap.

It is much easier to resolve fee problems with clients early on in the legal matter then later when there may be much more at stake.  One question lawyers often reflect on when fee disputes arise is, “Why did I let the bill get so high?” If you have to part ways with a client who won’t pay, it is a lot easier to do if they don’t already owe you a lot of money.  Jay Foonberg, author of the best selling ABA publication “How to Start and Build a Law Practice,” sums up his advice for lawyers in these situations: if you’re going to get burned, get burned cheap.

Todd C. Scott is VP of Risk Management at Minnesota Lawyers Mutual and specializes in helping lawyers understand legal ethics, risk management techniques, and legal technology systems.  Todd blogs at www.attorneysatrisk.com and can be reached at tscott@mlmins.com.

Article: How the Contingency Fee Provides Access to Justice

May 20, 2019

A recent article in Legal Intelligencer by Samuel H. Pond, “The ‘Great Equalizer—How the Contingent Fee Provides Access to Justice” reports on the benefits of the contingency fee model in civil litigation.  This article was posted with permission.  The article reads:

The core principle of our legal system is that all people, no matter their station in life, can bring their disputes to be heard in a court of law.  That’s in theory, in practice, however, justice is not always so available to those with limited means.  However, one innovation has somewhat evened the playing field—the contingent fee agreement.

Leveling the Playing Field

The pursuit of justice can be expensive, with litigation costs and attorney fees piling up quickly.  The average billing rate in 2018 for Pennsylvania attorneys was $262 per hour, according to Clio, a Canadian research firm tracking legal industry metrics.  Corporations and insurance companies often have unlimited resources at their disposal during litigation, putting the average person at a great disadvantage.

Under a contingent fee agreement, a client in a civil matter does not need to pay an attorney unless the case is successful.  Often, attorneys will also front all litigation costs.  Thus, the client does not have to pay anything out of their pocket.  Thus, all fees and costs are paid out of the recovery.

‘Not Going to Get Bullied’

This arrangement has greatly expanded access to the justice system and allowed those with modest means obtain the justice they deserve.  It’s the only way an injured worker can go up against a big insurance company and feel comfortable and confident. You’re not going to get bullied.  It’s a great equalizer.

The contingent fee has allowed ordinary people to sue large corporations and influential entities and receive monetary compensation.  In addition, the contingent fee has given credence to the idea all should be held accountable for their actions and no one is above the law.

Incentivizing Success

In addition, the contingent fee ensures that a lawyer’s interests are fundamentally linked to those of the client.  It incentivizes lawyers to provide the best quality service to clients because if they fail, they will not get paid.

The contingent fee agreement also discourages the filing of frivolous matters.  It is highly unlikely that an attorney on a contingent fee agreement will take on a case that lacks merit because doing so would mean investing thousands of dollars on a case with no hope of recovery.

Contingent fees restore some fairness to the system.  A powerful corporation with its economic clout and high-priced attorneys cannot simply steamroll over a litigant of modest means.  The average person can still get a fair shake by hiring a worthy champion to take up their cause.

Samuel H. Pond is the managing partner at Pond Lehocky Stern Giordano, the a workers’ compensation firm.  For more than 30 years, he has been representing workers injured on the job.  He is also the host of the Legal Eagles radio show, which aims to educate the public on the law.

Article: Court Reduces Class Action Fee Award After Reversionary Clause

April 29, 2019

A recent New York Law Journal article by Thomas E.L. Dewey of Dewey Pegno & Kramarsky, “District Court Reduces Class Counsel’s Attorney Fee Award in Light of Reversionary Clause,” reports on a case, Grice v. Pepsi Beverages Co., where a district court reduced an attorney fee award in a class action by more than one-third based primarily on the reversionary clause in the settlement agreement.  This article was posted with permission.  The article reads:

When parties to a class action reach a settlement agreement and include a clause that defendant will not oppose class counsel’s attorney fee award, they may expect that the unopposed fee will be approved by the court.  But a recent decision from the Southern District of New York reminds us that courts have an interest in ensuring the reasonableness of attorney fees and protecting the members of the class. Courts are particularly wary of reversionary clauses, which allow the defendant to recoup portions of the settlement fund not claimed during a claims process.

In Grice v. Pepsi Beverages Co., No. 17-CV-8853 (JPO), 2019 WL 340714 (S.D.N.Y. Jan. 28, 2019), after reaching a class action settlement, class counsel sought approval of their attorney fees.  The court reduced the attorney fee award by more than one-third based primarily on the reversionary clause in the settlement agreement.

Background

In Grice, plaintiffs brought a class action against defendant Pepsi Beverages Company (Pepsi) based on Pepsi’s alleged violations of the Fair Credit Reporting Act (FCRA). Id. at *1  Plaintiffs alleged that Pepsi had violated the FCRA by procuring plaintiffs’ consumer reports for employment purposes without making the required disclosure in a stand-alone document. Id.  Less than eight months after the case was filed and before any significant discovery or motion practice, the parties engaged in a private mediation and settled the case. Id.

Under the proposed settlement, Pepsi agreed to pay approximately $1.2 million to a common fund, which would cover all payments owed under the settlement, including class member payouts, attorney fees and costs, the cost of settlement administration, and a service fee to the named class plaintiff. Id.  After deducting all costs and fees, the remaining amount in the settlement fund was $710,850, which was to be distributed to the class members submitting valid claims forms. Id.  However, only about 8 percent of the class members submitted valid claims forms. Id.  This low participation rate triggered a reversionary clause under the settlement agreement that allowed Pepsi to claw back 40 percent of the settlement fund, meaning that only $426,510 remained to be distributed among the participating class members. Id.

Class counsel then moved for an attorney fee award of $397,387. Id.  The $397,387 attorney fee figure represented one-third of the initial $1.2 million common fund. Id.  In support of their application, class counsel stated that they had worked over 450 hours at hourly rates ranging from $500-875 per hour, which resulted in a lodestar figure of $331,281. Id.

Per the terms of the settlement agreement, Pepsi agreed not to oppose the attorney fee award and no class member objected to the motion. Id.

District Court Reduces Attorney Fee Award

Even without a motion opposing class counsel’s proposed attorney fee award, Judge J. Paul Oetken performed an in-depth analysis of the reasonableness of the requested fees, and ultimately ruled that a lower amount was appropriate.

In determining the reasonableness of class counsel’s attorney fees, the court followed the three-step analysis set forth in Goldberger v. Integrated Res., 209 F.3d 43, 47 (2d Cir. 2000). Id. at *2.  The first step in the Goldberger analysis is to compare the attorney fee sought to fees in other common fund settlements of similar size and complexity. Id.  The court noted that recent studies of attorney fees in common fund settlements for similarly sized cases found the median percentage to be 26.4 percent to 30 percent of the settlement fund. Id.  The court also cited empirical evidence showing that for FCRA cases, the median fee is approximately 29 percent. Id.  In distinguishing the cases offered by class counsel, the court reasoned that those cases “differ[] materially” while the empirical studies offered a more comprehensive view. Id. at *3.

The court determined that the Grice class action was “not very complex” since it involved a “single claim” and a “single statutory provision.” Id.  Therefore, the “magnitude and complexity” of the case favored a baseline fee percentage on the lower end of the median fees found by empirical studies. Id. (citing McGreevy v. Life Alert Emergency Response, 258 F. Supp. 3d 380, 386 (S.D.N.Y. 2017)).  Furthermore, the court noted that the parties settled early in the litigation, without any extensive discovery. Id.  The court rejected class counsel’s arguments that the need to prove willfulness under the FCRA statute and the inherently complex nature of Rule 23 class actions justified a higher baseline fee percentage. Id.  As such, the court concluded that a reasonable baseline fee for this case was 27 percent. Id.

The second step in the Goldberger analysis is to consider (1) the risk of the litigation; (2) the quality of class counsel’s representation; and (3) any remaining public policy considerations to determine whether there is any basis to further adjust the baseline fee. Id.  With respect to the riskiness of litigation, the court determined that though class counsel would have had to prove willfulness in order to recover any statutory damages under the FCRA, the risks were “not so unusual as to merit a change in the reasonable baseline fee for this case.” Id. at *4 (quoting McGreevy, 258 F. Supp. 3d at 387).

Next, to analyze the quality of class counsel’s representation, the court compared the total possible recovery to that obtained in the settlement. Id.  The court noted that each class member had obtained a recovery of $51.54, which was only 5 percent of their maximum potential recovery, since the FCRA statutory damages range from $100 to $1,000. Id. (citing 15 U.S.C. §1681n(a)(1)(A)).  However, this payout was “generally in line with other FCRA class action settlement recoveries” and in light of the “factual and legal hurdles” the class would have had to overcome to obtain a favorable judgment, the court determined that the settlement was a “good result” for the class members. Id.  Despite finding that the settlement was favorable, the court ruled that it was “not so exceptional as to merit an increase in the baseline percentage, especially where the court does not have the benefits of an adversarial examination of the issues.” Id.

Finally, the court considered any other policy considerations to determine whether to adjust the baseline fee.  Significantly, the court found that the public policy consideration that “distinguish[ed] this case from other common fund cases is the reversionary nature of the settlement fund.” Id. at *5.  The court explained that the reversion clause in the settlement agreement, which allowed Pepsi to claw back 40 percent of the settlement fund since the participation rate was less than 60 percent, was the “least favored” way to distribute unclaimed common settlement funds due to its potential to create perverse incentives. Id.  The court pointed out that if class counsel’s fees were calculated based on the gross settlement amount prior to reversion, class counsel risk having an incentive to acquiesce in such reversion arrangements even if they are not in the best interest of the class. Id.  Here, the fee award requested by class counsel was calculated as one-third of the gross settlement prior to the reversion. Id.  As such, the court determined that a further reduction of the baseline percentage from 27 percent to 22 percent was appropriate, resulting in an attorney fee award of $262,300. Id.

The third step involved a lodestar “cross-check” on the reasonableness of the award. Id.  A reasonable fee under lodestar is generally “the product of a reasonable hourly rate and the reasonable number of hours required by the case.” Id. (quoting Millea v. Metro-North R.R. Co., 658 F.3d 154, 166 (2d Cir. 2011)).  Notwithstanding class counsel’s hourly rates of $500 and $875 in other states, the court determined that the “prevailing market rates in the Southern District of New York” for partners in consumer cases is $300 per hour. Id. at *5-6.  The court accepted class counsel’s representation that they had worked 450.4 hours on the case, despite their failure to “substantiate their representation.” Id. at *6.  Based on the lodestar cross-check, the court concluded that the $262,300 fee award was reasonable. Id.

Practice Tips

The Grice case provides helpful insight into the factors courts consider when faced with a class action attorney fee award motion.  Furthermore, this case reminds us that even if the class action settlement agreement includes a clause that defendant will not oppose class counsel’s attorney fee award and even if no other class member objects, the award may still be modified sua sponte by the court.  In class actions, courts typically take on a proactive role in approving settlements and awarding costs.  Here, the court reduced the proposed attorney fee award by more than one-third.

This case also shows that courts disfavor reversionary clauses and practitioners should be mindful that including such clauses may result in a lower attorney fee award.  As explained by Judge Oetken, there are other options to address a situation when some portion of a common fund goes unclaimed: (1) pro rata redistribution among the class members who did make claims; (2) escheat to the state; or (3) cy pres distribution to charitable organizations. Id. at *5.  The court described reversion as the “least favored” option due to “its potential to create perverse incentives.” Id.  In drafting settlement agreements, practitioners should consider whether including a reversion clause is in the best interests of the class and how such clauses may be perceived by courts.

Thomas E.L. Dewey is a partner at Dewey Pegno & Kramarsky.  Sarah A. Sheridan, an associate at the firm, assisted in the preparation of the article.

Article: Cautionary Tales on Recovering Attorney Fees in the Third Circuit

April 17, 2019

A recent Legal Intelligencer article by Colin Wrabley and Devin Misour of Reed Smith LLP, “Cautionary Tales on Recovering Attorney Fees in the Third Circuit,” reports on a trio of appellate decisions and trial court rulings on the recovery of attorney fees in the Third Circuit.  This article was posted with permission.  The article reads:

In the past year, the U.S. Court of Appeals for the Third Circuit has issued three precedential rulings laying down clear and strict limits on the recovery of attorney fees.  While these kinds of rulings rarely draw attention, this trio of appellate decisions and the trial court rulings they affirm should because they are emphatic reminders that courts take their duty in reviewing fee petitions and awards just as seriously as they do in any other case.  Practitioners and their clients should take heed.

The Cases

The first case we’ll discuss, Young v. Smith, 905 F.3d 229 (3d Cir. 2018), is perhaps the most glaring example of how a fee petition can go wrong.  The appellant attorney in that case represented a group of students who brought a 42 U.S.C. Section 1988 civil rights suit against a school district and a teacher.  After two trials, the lone remaining defendant (the teacher) made an offer of judgment for $25,000, which the plaintiffs accepted, and the parties’ entered a settlement agreement allowing for “reasonable attorney fees and costs as to the claims against the teacher only.”  Plaintiffs counsel proceeded to submit a petition seeking over $700,000 in fees and costs against the school district, which had won a complete defense verdict.  Perhaps unsurprisingly, the district court thought the fee request excessive and issued a show cause order.  Plaintiffs counsel responded with a 44-page, single-spaced, six- or eight-point font fee petition purporting to justify the request.  That prompted, in the Third Circuit’s words, a “scathing 136-page opinion” from the district court denying all requested fees, levying a $25,000 sanction on the plaintiffs counsel, and referring counsel to the Pennsylvania Disciplinary Board.

The Third Circuit affirmed.  The court of appeals focused on the problems with the plaintiffs counsel’s billing practices, noting that the “district court’s meticulous opinion paints a picture of an attorney whose attitude toward billing and the court is cavalier in the extreme and whose conduct and demeanor bear no relationship whatsoever to an attorney’s obligations to the court.”  Concluding that Section 1988 gives a district court the discretion to reject a fee petition in its entirety, the Third Circuit found that the fee petition was “not only grossly excessive and absurd, but also fraudulent.”

The second case, Clemens v. New York Central Mutual Fire Insurance, 903 F.3d 396 (3d Cir. 2018), involved a fee award under Pennsylvania’s bad faith statute.  There, after settling an uninsured motorist claim for $25,000 and obtaining a jury verdict of $100,000 in punitive damages on the bad faith claim, plaintiffs counsel submitted a fee petition seeking in excess of $900,000 in fees and costs.  Here again, the district court scrutinized counsel’s request, which resulted in a 100-page opinion rejecting the petition in its entirety.  The district court reviewed every one of counsel’s time entries and found that 87 percent of the hours billed had to be disallowed as “vague, duplicative, unnecessary or inadequately supported by documentary evidence.”

On appeal, the Third Circuit found that the denial of this petition was not an abuse of discretion either.  Of note, the attorney kept no contemporaneous records of his time, so everything had to be recreated after the fact for purposes of the petition.  And when the attorney did recreate those records, he did so largely with one-word explanations, such as “other,” “communicate,” “analysis/strategy, or “review/analyze,” with no other explanation.  The court of appeals also highlighted the “staggering 562 hours” billed for trial preparation, which amounted to 70 straight eight-hour days of preparation for a four-day trial with only five witnesses.  On this record, the Third Circuit held that the district court was well within its discretion to reject the fee petition in its entirety because it was “outrageously excessive.”

The third case involved an award of attorney fees to defendants after the plaintiffs voluntarily dismissed a case pursuant to Rule 41(a)(2) of the Federal Rules of Civil Procedure.  In Carroll v. E One, 893 F.3d 139 (3d Cir. 2018), the plaintiffs alleged that they had suffered hearing loss caused by fire sirens manufactured by the defendant.  But the defendant’s investigation and discovery revealed that the plaintiffs—some of whom did not even know that they were parties to a lawsuit until after the case was filed—had asserted time-barred claims, and at least one of the plaintiffs did not suffer from hearing loss attributable to noise exposure.  Armed with this information, the defendant’s counsel sought voluntary dismissal with prejudice.  The district court concluded that the plaintiffs could not voluntarily dismiss the action without prejudice—as they had tried to do—and instead dismissed the case with prejudice and awarded fees and costs to the defendants.

The Third Circuit affirmed, finding that dismissal with prejudice and the award of fees and costs was appropriate given the plaintiffs’ “failure to perform a meaningful pre-suit investigation,” coupled with counsel’s “repeated practice of bringing claims and dismissing them with prejudice after inflicting substantial costs on the opposing party and the judicial system.”  Addressing plaintiffs’ pre-filing investigation, the court of appeals noted that even a cursory review of the evidence or an interview with the potential plaintiffs would have revealed the problems with their case.  Having failed to do so, the court concluded that the “exceptional circumstances” warranted an award of fees and costs.

The Takeaways

If you’re a practitioner, you may be thinking, “I’ve never filed a fee petition like the ones in these cases” or “I’ve never conducted such a slipshod pre-filing investigation” of claims I’ve filed.  So, why do these cases—and understanding how they were decided and why—matter to me?  There are plenty of reasons.

First, the legal principles outlined in each of these cases hinged on a district court’s broad discretion in the context of attorney fees.  Whether it is a denial of fees sought—as in Young and Clemens—or an award of fees in the Rule 41 context—as in Carroll—it is important to remember that the courts have a wide berth in deciding how much, if any, fees should be awarded.  This is equally true before the trial court in the first instance and on appellate review.  Litigants therefore must keep this in mind when preparing and filing a fee petition to avoid any unwanted surprises once the court explores into the substance of the request.

Second, when the court (either trial or appellate) does dig into that substance, no one wants their fee petition to become the next teachable moment.  It should go without saying that parties seeking fees and costs must be scrupulous about how they keep time, record it and present it to the court.  On a practical level, this means that counsel and their clients should file user-friendly fee petitions that allow the court to quickly determine what was done (consistent with the attorney-client privilege), how long it took and at what cost.  From that, a “lodestar” fee calculation—based on a reasonable rate and a reasonable amount of time worked, which is how federal courts determine fee awards—easily follows.  As the Third Circuit reminded in Clemens, while courts “have never strictly required that fee petitions be supported by contemporaneous records … they have long been ‘the preferred practice.’” Needless to say, avoiding six- or eight-point fonts in petitions is also prudent.

Third and above all else, these cases serve as an important reminder that—perhaps contrary to conventional wisdom—courts can, and often do, spend significant time and resources on reviewing fee petitions.  The trial court opinions in Young and Clemens tipped the scales at 100-plus pages and reflected a substantial investment of judicial energy.  And the Third Circuit decisions discussed above—each published, one argued orally—were relatively extensive and reflected the same commitment of resources.  In other words, don’t hope or expect courts to gloss over questionable or deficient fee requests.

Accordingly, while these cases may be outliers, they offer important lessons about what counsel can do to make life easier for the courts tasked with reviewing even innocuous filings (like fee petitions).  By taking steps to carefully consider how courts will receive petitions, counsel can help to save judicial resources and ultimately better serve their clients.

Colin Wrabley is a Reed Smith partner and a member of the firm’s appellate group. He has experience counseling and representing clients in litigations and substantive legal issues before state and federal courts across the country.  Devin Misour is an associate at the firm and a member of the appellate group.  He focuses his practice on a wide array of substantive legal matters including False Claims Act, regulatory matters and issues involving state and federal laws.

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