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Category: Fee Dispute Litigation / ADR

Consider Mandatory Arbitration to Resolve Fee Disputes

May 24, 2018

A recent Daily Report article by Shari Klevens and Alanna Clair, “Consider Mandatory Arbitration to Resolve Fee Disputes,” reports on the most effect manner to resolve attorney fee disputes.  This article was posted with permission.  The article reads:

Although many state bars recognize that attorney-client disputes may be resolved through arbitration, the use of mandatory arbitration clauses in engagement letters may be subject to federal law. The FAA (Federal Arbitration Act) governs requests for arbitration and, on its face, is supreme to state law on the issue.

Recently, the U.S. Court of Appeals for the Third Circuit reviewed the application of the FAA to a mandatory arbitration clause in an attorney engagement letter. Smith v. Lindemann, No. 16-3357 (3d Cir. 2017). In a nonprecedential opinion, the court concluded that, although a mandatory arbitration clause could be set aside on the basis of fraud, duress or unconscionability (which analysis may be governed by state law), federal law generally governs the application of such a provision. Indeed, the U.S. Supreme Court has indicated that state law may not prohibit the arbitration of any specific type of claim. AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011).

Though the FAA may govern an arbitration clause absent any restriction by the parties, the state-level rules of professional conduct may still have some impact. Indeed, those rules bearing on a client’s right to be informed about the scope of the representation and the potential waiver of rights may impact whether an arbitration provision violates public policy.

Indeed, separate from the requirements of federal law, attorneys have certain duties to clients that can be reflected in the use of an arbitration provision in an engagement letter.

Consider the Advantages of Mandatory Arbitration

It is helpful for law firms and practitioners to give thought at the outset of a representation as to whether they would like any fee disputes or other claims to be resolved by private arbitration. Some firms adopt a mandatory arbitration clause in every engagement letter they use, while others may limit the use of an arbitration clause to address fee disputes only.

For some, there is an advantage to using arbitration to address fee disputes only. It is well-recognized that often, when an attorney sues a client for unpaid fees, the client will bring a counterclaim for legal malpractice. Some sources indicate that the likelihood of receiving such a counterclaim could be as high as 40 percent; others place it even higher.

Therefore, some firms elect to include in their engagement letters a provision that requires all fee disputes to be resolved by private arbitration. That can help attorneys pursue fee claims, which can be unpleasant in and of themselves and can allow them to carve out malpractice claims for separate resolution.

Other potential advantages of binding arbitration for fee disputes or malpractice claims include that arbitration can be faster than litigation. The procedure can be less formal than litigating in court, which some attorneys view as an advantage. Using arbitration can also help the parties keep the proceedings and the outcome confidential, which may be a great advantage to some law firms.

FAA May Apply Absent Restriction

Courts read the FAA expansively in interpreting arbitration clauses. The default understanding of a general demand for arbitration in an engagement letter or other form is usually that it is a demand being made consistent with the FAA.

Generally, if a law firm and client want a state’s arbitration statute to apply to any future dispute, they will take steps to ensure that the engagement letter specifically says as much. Otherwise, a general reference to arbitration in an engagement letter is understood to invoke the FAA and federal law, rather than state law.

Obtaining Informed Consent

If a law firm or lawyer has determined that they want to use a mandatory arbitration clause in the engagement letter, it is helpful at this point to consider the requirements of the Rules of Professional Conduct. Indeed, most attorneys considering a mandatory arbitration clause will consider additional language to help ensure that the client understands the differences between arbitration and litigation.

The engagement letter can detail many factors relating to the use of mandatory arbitration should a dispute arise between lawyer and client, including that proceeding to arbitration necessarily involves foregoing a jury trial. The engagement letter can also explain that there is typically a limited scope of any appeal of an arbitration. Others will consider the procedural issues, such as the speed of resolution, confidentiality (if applicable) and the potentially relaxed procedure.

Considering these issues is consistent with the guidance provided by the ABA in Formal Opinion 02-425. There, the ABA recognized that it is ethically permissible for attorneys to include mandatory arbitration provisions in their engagement letters. However, Formal Opinion 02-425 recommends ensuring that the client has been “fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement.”

Notably, in Smith v. Lindemann, the Third Circuit approved of a mandatory arbitration clause that did not detail all the risks and advantages of proceeding with an arbitration, but simply confirmed that agreeing to arbitration meant waiver of the right to have disputes heard by a jury.

Therefore, even if federal law governs the application of the arbitration clause generally, attorneys can anticipate the requirements of any applicable ethical rules to help ensure that the clause will not be stricken down as contrary to public policy or the attorney’s ethical duties.

Does the Bar Provide Help?

The State Bar of Georgia has a fee arbitration program that assists in the resolution of fee disputes between attorneys and clients. The hearing is conducted by a panel of three arbitrations: two Georgia attorneys and one nonlawyer. A client can elect to have a fee dispute arbitrated—even over the attorney’s objection—but the parties may seek to reference this program in an engagement letter.

Comment 9 to Rule 1.5 of the Georgia Rules of Professional Conduct recognizes that “[i]f a procedure has been established for resolution of fee disputes, such as an arbitration or mediation procedure established by the Bar, the lawyer should conscientiously consider submitting to it.”

Shari L. Klevens is a partner at Dentons US in Atlanta and Washington and serves on the firm’s U.S. board of directors. She represents and advises lawyers and insurers on complex claims and is co-chair of Dentons’ global insurance sector team.  Alanna Clair is a partner at Dentons US in Washington and focuses on professional liability and insurance defense. Shari and Alanna are co-authors of “The Lawyer’s Handbook: Ethics Compliance and Claim Avoidance” and the upcoming 2019 edition of “Georgia Legal Malpractice Law.”

Tenth Circuit: Billing Dispute Suit Not Covered by Insurance

May 23, 2018

A recent Law 360 story by Emma Cueto, “Atty Overbilling Suit Not Covered By Insurance: 10th Circ.,” reports that the Tenth Circuit declined to revive a dispute between a Colorado foreclosure attorney and his insurance company, ruling that the lower court was right to find the company did not have to defend the lawyer from a class action over alleged overbilling.

The appellate panel ruled that under Michael Medved's policy with Evanston Insurance Co., the insurer had no duty to defend Medved or his solo practice from a homeowner class action or during an investigation by the state attorney general — which eventually resulted in a $1 million settlement — because the policy only covered professional services, which did not include billing.

"The claims against Mr. Medved and his firm arose out of their billing practices, not their professional services," the decision said. "The policy therefore did not cover either the class action or the Colorado attorney general's investigation, and Evanston had no duty to defend in either of these matters."

Evanston filed suit against Medved in 2014, asking the court to clarify that it was not obligated to defend the attorney regarding his billing practices. Medved was one of several lawyers and law firms investigated by the Colorado attorney general connected to alleged foreclosure overbilling. Medved represented lenders and investors, and although he billed them directly, the cost of his services was typically passed on to property owners, according to the decision.

After the investigation became public, Medved was hit with a class action that eventually settled for $16,000, the decision said.

Evanston defended Medved for 10 months during the class action, but said it reserved the right to later assert it wasn't obligated to cover the suit, according to the decision. It declined to represent Medved during depositions in the state's investigation because no legal action had been filed, the decision said.

The insurer later argued it had no duty to defend Medved's billing and that Medved should reimburse it for its expenses, an argument backed by the district court, which granted Evanston a quick win.

On appeal, the Tenth Circuit agreed. Under Colorado precedent, billing does not fall under the heading of "professional services," the court said. It also rejected Medved's argument that his policy did include billing-related suits because it promised coverage for damages "by reason of" professional services.

"By reason of" was much more limited than the term "arising out of," the panel said, and was not expansive enough to fold billing matters into his policy, the decision said.

Counsel for both parties did not respond Tuesday to a request for comment.  Evanston is represented by M. Courtney Koger of Kutak Rock LLP.   Medved is represented by Damian Arguello of Colorado Insurance Law Center.  The case is Evanston Insurance Co. v. Law Office of Michael P. Medved et al., case number 16-1464, in the U.S. Court of Appeals for the Tenth Circuit.

Update: Kasowitz Wins in Fee Dispute Matter

February 8, 2018

A recent New York Law Journal story by Christine Simmons, “Law Firm Legal Battles That Slipped from the Headlines in 2017,” reports on an update of the Kasowitz Benson Torres unpaid legal fees case.  The story reads:

While law firms have a mixed record of beating back legal malpractice and discrimination cases, they often are successful in obtaining judgments against ex-clients for unpaid legal fees on a quantum meruit basis.  For instance, Kasowitz Benson Torres, which has a history of going to court to get such fees, sued Patriot National Inc. in late May 2017 in Manhattan Supreme Court, seeking $1.097 million in legal fees.

The company, which provided back-office functions to insurance companies, then filed suit against the firm the Florida state court, alleging it engaged in fraudulent billing, malpractice and other misconduct that cost the company millions of dollars. The former CEO of Patriot also sued Kasowitz as well as Simpson Thacher & Bartlett in Florida state court.

Despite the malpractice litigation in Florida, Kasowitz prevailed in its New York collection fee suit: it obtained a $1.185 million judgment against Patriot National in December 2017, after a ruling from Manhattan Supreme Court Justice Gerald Lebovits.

Yet any immediate opportunity to collect the judgment is in doubt. Patriot National filed for Chapter 11 bankruptcy papers in late January in Delaware.

Kathryn Coleman, a partner at Hughes Hubbard & Reed representing Patriot in its bankruptcy, did not return a call for comment, neither did Kasowitz’s attorney in the collection matter, partner Joshua Siegel.

Fee Dispute Litigation Moves Forward with Firm that Skipped Retainer, Invoices

February 7, 2018

A recent New York Law Journal story by Jason Grant, “Client Fee Suit Continues Against Nassau County Law Firm That Skipped Retainer Invoices,” reports that a Nassau County law firm that failed to provide its client with a written retainer agreement or an accounting of time spent working on his case will continue to face a lawsuit alleging that the firm owes him thousands of dollars in never-earned fees.

An Appellate Division, First Department, panel ruled that the lawsuit, claiming breach of an oral agreement, launched by physician Alan Dubrow against his former lawyers at Herman & Beinin must go forward and not be dismissed.

Dubrow has sued the boutique firm for what he calls the “unearned portion” of a $176,500 retainer he paid to the firm near the start of his employment discrimination action, according to the panel. The exact amount of money he wants returned was not specified by the court.

“In context of an attorney-client relationship, the attorney bears the burden of showing that the parties’ fee agreement was fair, reasonable, and fully known and understood by plaintiff,” the unanimous panel wrote.

The panel simultaneously dispensed with Herman & Beinin’s argument that Dubrow’s breach claim was barred by the “voluntary payment doctrine.” The court wrote that, “while defendants assert that plaintiff voluntarily made payments to compensate them for their services, they have not established that plaintiff had full knowledge of the relevant facts, such as the number of hours spent by defendants in connection with their representation of him. Nor did they submit any evidence to show that the amount of plaintiff’s payments was fair and reasonably related to the value of services rendered.”

On Tuesday, Herman & Beinin’s Mark Herman, who described himself as having more than 35 years of litigation experience, said that while he “respects” the First Department’s decision, he believes the panel “failed to appreciate the fact that Dubrow didn’t want a retainer.”

“There was never a retainer because he didn’t want a retainer. We’d be happy to give him a retainer,” Herman said by phone, adding that “every quarter [we took in payments from Dubrow] was earned.”

“I’m not in the business of taking money and not doing services for it. That’s wrong,” Herman said. He added that as the case progresses, his firm intends to provide an itemization of the time it billed when representing Dubrow in what he said was an age discrimination lawsuit lodged by the nephrologist after being dismissed by Beth Israel Medical Center.

But the panel, composed of Justices Sallie Manzanet-Daniels, Judith Gische, Peter Tom, Ellen Gesmer and Anil Singh, wrote in the Jan. 25 decision that Herman & Beinin had “not conclusively refute[d] plaintiff’s allegations,” and therefore its motion to dismiss had been properly denied by Manhattan Supreme Court Justice Ellen Coin.

The justices also took the Bellmore, Long Island, law firm to task for not providing Dubrow with more information about the lawyer-client relationship, and the billing and services performed. “It is undisputed that defendants never provided plaintiff with a written agreement, as required under 22 NYCRR 1215.1, and failed to provide plaintiff with written billing statements, as required by 22 NYCRR 1210.1(4),” the panel wrote in Dubrow v. Herman & Beinin, 651605/16.

“Nor does defendants’ contention that plaintiff never questioned their legal fees until the underlying matter was dismissed on summary judgment warrant dismissal,” the court continued. “Plaintiff alleges that defendants promised to return any balance at the resolution of the underlying action, and his attempts to obtain an accounting after dismissal of the action are in line with this alleged understanding.”

Jonathan Strauss, the lawyer for Dubrow, said that while it has been hard to pin down the exact amount of money owed to his client, because he “still doesn’t have a breakdown” of the services rendered by Herman & Beinin, “it’s nowhere near 176,500.”

“It’s much more of a nominal amount,” he said, while contending that Dubrow had paid Herman & Beinin the large retainer in advance of a trial or appeal, but that his discrimination action never went to trial because it was dismissed.

Strauss, a solo practitioner in Manhattan, also said that he has asked for punitive damages against the law firm, “because I think a New York County jury may look at this and find outrageous conduct in it.”

“If jurors believe the worse [about Herman & Beinin and the firm’s motives], they could decide to send the bar a message” by awarding high punitive damages, he said. Then, after pausing, he said of the entire episode and lawsuit, “It’s disturbing that it has had to come to this.”

Judge: Reed Smith Can’t Sue for Share of Attorney Fees in Class Action

November 21, 2017

A recent New York Law Journal story by Christine Simmons, “Judge Says Reed Smith Can’t Sue for $7M Slice of SAC Capital Fees,reports that a Manhattan federal judge ruled that Reed Smith can't sue former co-counsel Wohl & Fruchter in state court for a chunk of class action attorney fees.  A federal judge has shot down Reed Smith’s attempt to sue its former co-counsel law firm Wohl & Fruchter, in state court for its share of fees from a class action against SAC Capital Advisors, finding Reed Smith was “seeking a mulligan.”

U.S. District Judge Naomi Reice Buchwald of the Southern District of New York ruled that she had misgivings about Wohl’s conduct—including its settling a case amid the expulsion of Reed Smith from the plaintiffs’ counsel group—but said Reed Smith, which had served as class co-counsel for a brief period in September 2016, missed an opportunity to seek its fees in the right venue.

“The sequence of events surrounding Reed Smith’s retention and subsequent termination certainly raises questions regarding Wohl and [Wohl & Fruchter's] motivations.  But Reed Smith was given an opportunity to fully raise those questions, and it failed to do so,” Buchwald said, enjoining Reed Smith’s lawsuit in New York state court against the Wohl firm.

In the underlying class action case against hedge fund SAC Capital and other defendants alleging insider trading of securities, plaintiffs attorneys in May were awarded $27 million in attorney fees after obtaining a $135 million settlement.  About a month after the fee award, Reed Smith, which submitted no fee application in federal court, sued attorney Ethan Wohl and his four-attorney law firm in New York state court arguing it was entitled to fees for its work under tortious interference and unjust enrichment claims.  The firm was seeking at least $6.75 million.

Reed Smith claimed that Wohl & Fruchter, when looking for co-counsel, realized that it was a small firm “overmatched by the resources available to the SAC defendants,” represented by Paul, Weiss, Rifkind, Wharton & Garrison, Willkie Farr & Gallagher, Goodwin Procter and Bracewell.  After Reed Smith was retained, the firm said, it immediately committed significant resources to the SAC action.  And soon after Reed Smith filed notices of appearance in the case, the SAC defendants reached out to Wohl for settlement discussions, Reed Smith said.  “Reed Smith’s appearance was the obvious catalyst for the settlement discussions, which proved to be successful,” the firm claims.

But Reed Smith asserts that when counsel for the SAC defendants at Paul Weiss mused about a possible conflict involving Reed Smith before Southern District Judge John Koeltl, the Wohl firm saw an opportunity to eliminate Reed Smith and “intentionally exploited Paul Weiss’ statements.” Reed Smith formally withdrew from the SAC case in December 2016.

In her Nov. 16 ruling, Buchwald rejected Reed Smith’s jurisdictional arguments.  “We have jurisdiction over the fee dispute between Reed Smith on the one hand and Wohl and [Wohl & Fruchter] on the other, and our jurisdiction is exclusive,” Buchwald said, adding that Reed Smith’s presentation of a tort-based theory of recovery “does not change the reality that some quantum of attorneys’ fees is the ultimate recovery sought.”

Buchwald also considered collateral estoppel issues. “The amount of fees to which [Wohl & Fruchter] was entitled was an issue that was litigated, and Judge Koeltl determined that a $27 million award was ‘fair and reasonable,’” she said.  Analyzing the case broadly, Buchwald said she found “little about either side’s conduct that is sympathetic.”

“The rapid succession of events—Reed Smith’s entry into the case, the settlement, and Reed Smith’s dismissal—naturally raises questions as to Wohl and [Wohl & Fruchter's] actions and motivations, and these questions are amplified when the weakness of [Wohl & Fruchter's] conflicts arguments are considered,” she said.  “The record is hardly inconsistent with Reed Smith’s theory that it was terminated by [Wohl & Fruchter's] so that [Wohl & Fruchter] could obtain a larger share of attorneys’ fees.”

However, Reed Smith missed an opportunity to submit an application for fees, she noted.  “We find little equity in allowing Reed Smith to take a mulligan, through duplicative litigation, on an issue that had been squarely teed up,” Buchwald said.

Reed Smith’s explanation for why it failed to do so—that it did not want to interfere with approval of the settlement—“holds little water,” Buchwald said, noting that Reed Smith’s declaration supporting its withdrawal from the federal case detailed its grievances with Wohl and raised questions about the propriety of the settlement.

While the judge said she was enjoining Reed Smith from prosecuting the state court lawsuit “and the implicit application for fees contained therein,” she denied Wohl’s request to reject Reed Smith’s application for attorney fees in federal court.  “Reed Smith has never made a direct application for attorneys’ fees in this court, and there accordingly exists no such application for us to deny,” Buchwald said.