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Category: Fee Dispute Litigation / ADR

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.

Fee Allocation Dispute Action Filed Against Milberg

March 27, 2017

A recent New Jersey Law Journal story by Charles Toutant, “Milberg Targeted in $10.6 Million Legal Fees Fight Linked to Merck Drug,” reports that a Louisiana law firm's seeking $10.6 million in legal fees from class action firm Milberg for securities litigation against Merck & Co. painkiller Vioxx was moved to the District of New Jersey.  Milberg, formerly known as Milberg Weiss Bershad & Schulman, is accused in the suit of underpaying law firm Kahn, Swick & Foti of Madisonville, Louisiana, which received $400,000 for its work on the Vioxx securities case.

Kahn Swick claims in the suit that its fees from the Vioxx securities case were reduced by strategic measures undertaken by Milberg as the firm and two of its principals were indicted in 2006 on charges of paying kickbacks to class action plaintiffs.  Milberg principals Steven Schulman and David Bershad were each sentenced to six months in prison in that case.

The Vioxx securities suit, filed in 2003, sought to recover damages on behalf of shareholders for allegedly false statements the company made about Vioxx, a pain medication that was withdrawn from the market amid reports it caused heart problems.  In June 2016, U.S. District Judge Stanley Chesler gave final approval to a settlement that included $830 million for class members and another $232 million in attorney fees and expenses.

The criminal indictment prompted challenges to Milberg's status as co-lead counsel in the Vioxx securities case, Kahn Swick said in its complaint.  Milberg retained Carella, Byrne, Cecchi, Olstein, Brody & Agnello of Roseland as local counsel, and consented to the appointment of two New York firms, Bern­stein Litowitz Berger & Grossman and Brower Piven, as co-lead counsel.  As a result, Kahn Swick saw its role in the case reduced.

Kahn Swick filed its fee suit in state court in the Parish of Orleans, Louisiana, before it was removed to federal court in the Eastern District of Louisiana and then to the District of New Jersey.  Milberg asserted in court papers that New Jersey is a suitable venue because a substantial portion of the events behind the claim occurred in that district.  Furthermore, an analysis of factors weighed in favor of transferring the case to New Jersey for the convenience of the parties and witnesses and in the interest of justice, the firm said.

The suit brings a petition for damages and seeks declaratory judgment and a preliminary and permanent injunction against Milberg.  Besides Milberg, the suit names Mark Whitehead III and the Whitehead Law Firm of Lafayette, Louisiana, as defendants.  Whitehead and Milberg were co-liaison counsel in the Vioxx case in Louisiana state court.  Milberg claimed in its removal motion that Whitehead and his firm are fraudulently joined defendants because there is no reasonable basis to think the plaintiff will prevail against them.  Therefore, their citizenship must be ignored for removal purposes, Milberg claimed.

Milberg first approached Kahn Swick in 2003 and asked the firm to serve as its local counsel in Louisiana for Merck securities litigation, the suit claims.  The two firms entered into an oral agreement giving Kahn Swick 10 percent of Milberg's proceeds from the litigation, plus Kahn Swick's lodestar for its own work as liaison counsel.  The terms were placed in writing in 2005, according to Kahn Swick.

The Judicial Panel for Multidistrict Litigation transferred the Merck securities case to New Jersey for pretrial proceedings before U.S. District Judge Stanley Chesler.  After the settlement was reached, Special Master Layn Phillips was appointed to oversee the division of attorney fees.  Ultimately, Milberg was awarded $25 million.

Lewis Kahn of Kahn Swick said in a statement about the fee dispute, "We are pleased to be back in New Jersey, where we sought to have this contract dispute resolved initially through the court-ordered Special Master process, and look forward to moving forward to the merits of the case.  We believe our firm fulfilled our obligations under our written joint venture with Milberg and, notwithstanding Milberg's indictment and subsequent diminished role in the Merck litigation, believe that Milberg must honor this agreement."

Nortel Creditors Challenge $4M in Fees in Chapter 11 Case

March 20, 2017

A recent Law 360 story by Matt Chiappardi, “Nortel Creditors Seek $4M Cut to Indenture Trustee Fee Bid,” reports that two hedge funds that held senior notes issued by a Nortel Networks Inc. unit pushed the Delaware bankruptcy court to cut their indenture trustee’s roughly $8 million attorney fee request in half, arguing that Delaware Trust Co. didn’t properly discharge its duties.

During a daylong hearing in Wilmington, PointState Capital LP and Solus Alternative Asset Management LP argued that roughly $4 million of Delaware Trust’s fee request comes from work connected to the defunct telecom’s official committee of unsecured creditors, the massive allocation dispute to decide how to divide $7 billion in sale proceeds among Nortel’s global units, fighting to protect its legal fees, or other duplicative efforts, none of which benefited the noteholders directly.

The hedge funds argued that as an indenture trustee, Delaware Trust has a duty of undivided loyalty to its constituency, but didn’t manage its professionals in such a way that limited the scope of their work to tasks directly benefiting the noteholders, and is looking for an outsized fee that doesn’t comport with its role in the case.

Arguing for the hedge funds, attorney James C. Tecce of Quinn Emanuel Urquhart & Sullivan LLP stressed that the dispute was not about the “qualifications, caliber or integrity” of the counsel Delaware Trust retained, but how the trustee chose to utilize them and whether the fee request, some of which could be taken out of their recoveries, now pending is reasonable.

“This is not an objection we took lightly,” Tecce told U.S. Bankruptcy Judge Kevin Gross.  “The duty was not properly discharged … [professionals] were not managed in a way to avoid duplicating expenses.”  Delaware Trust countered that its fee bid was indeed reasonable, calling the Nortel case “unprecedented, complex and massive,” and arguing that it, and its predecessor Law Debenture Trust Co. of New York, “carried the torch” for the noteholders throughout the eight-year-long case.

Decisions about where to focus efforts were prudently made on a day-to-day basis throughout the case, and that work ultimately led to the noteholders receiving a full recovery on their roughly $300 million in claims, Delaware Trust attorney Daniel A. Lowenthal of Patterson Belknap Webb & Tyler LLP said in court.  “The irony is that now that they are receiving a 100 percent recovery, they now object to the amount of the work done,” Lowenthal said.  “These are the same holders who demanded we not sit on the sidelines.”

The issue stems from an objection the hedge funds lodged against Nortel’s Chapter 11 plan, which Judge Gross confirmed in January, not to the strategy itself, but to the fees, and how it plays out could have wide-reaching implications for indenture trustee fees in bankruptcy cases.

Indenture trustee attorney fees that are not covered by a debtor’s estate are typically paid by the noteholders or charged against their recoveries, but the hedge funds argue that the full amount of such costs are not reasonable when the indenture trustee is also working as a member of a statutory committee with different or overlapping constituents.

The hedge funds additionally argue that the indenture trustee is mischaracterizing its arguments, claiming that they object to its decision to sit on the unsecured creditors committee when they only take issue with charging fees for work there.  They also contend that the indenture trustee hadn’t kept the hedge fund in the loop about the expenses, only springing them at the end of an eight-year case.

Delaware Trust took issue with that argument, asserting that the noteholders were informed about the expenses at periodic intervals during the case.  Judge Gross did not rule, but did question whether the hedge funds were engaging in a “hindsight exercise.”  He said he would issue a decision in writing shortly.

The fee dispute is only one of several vestiges left hanging after Nortel came to a major peace deal that allowed for confirmation of a Chapter 11 plan earlier this year for a case that has been pending since 2009.  The major sticking point was how to divide more than $7 billion raised in asset sales, a good potion of it intellectual property transactions, among the various Nortel units around the globe, a dispute that was adjudicated through an unprecedented simultaneous cross-border trial in Delaware and Toronto in 2014.

Professional fees throughout the case have been estimated to exceed $2 billion, making it one of the most expensive Chapter 11 cases in history.  The case is In re: Nortel Networks Inc. et al., case number 1:09-bk-10138, in the U.S. Bankruptcy Court for the District of Delaware.

London Arbitration Firm Recovers Costs from UAE Fee Dispute

March 13, 2017

A recent Law 360 story by Jimmy Hoover, “London Arbitration Firm Recovers Costs From UAE Fee Spat,” reports that a London-based international arbitration firm won back nearly all of the costs it spent pursuing around $2 million in legal fees from its representation of a wealthy United Arab Emirates (UAE) family in a commercial contract dispute, when a U.K. court found the family was drawing out the appeal process to delay payment of the fees.

The England and Wales High Court ruled that Shackleton and Associates Ltd., a firm founded by sole shareholder and solicitor advocate Stewart Shackleton, is entitled to 80 percent of the costs incurred from a proceeding to enforce the fee award against the Bin Kamils, a wealthy business family in Sharjah, United Arab Emirates.  The fee award, handed down by a London tribunal of the International Court of Arbitration in 2013, stems from Shackleton’s representation of the family in an earlier ICC proceeding over a cement plant joint venture gone bad in the Arab nation.

The evidence in the case suggests that “the defendants lacked any realistic defence to the enforcement of the [fee award] and that the steps they took in the proceedings were taken not in pursuit of a genuine defence but solely for the purpose of delaying payment to the claimant of the fees to which it had been held to be entitled,” Justice Nigel John Martin Teare said in a judgment.  “That takes the case out of the norm and is a very significant level of unreasonable conduct which undoubtedly justifies an order for indemnity costs.”

The underlying ICC arbitration involved a joint venture between the Bin Kamils and Cypriot company Terna Bahrain Holding Co. WLL involving a cement plant with a capacity of up to 1.8 million tons.  Terna, which purchased a 40 percent stake in an entity holding a 25-year lease of the property in Hamriyah Free Zone in Sharjah where the plant was being built, alleged that the Bin Kamils failed to procure permits to allow the construction of a cement import-export terminal.

A previous decision from the High Court maintained that Shackleton “had been most heavily involved in conducting the case on behalf of the Bin Kamils in the arbitration” but was “was not available to assist” with the Terna arbitration award after a falling-out with the firm Galadari & Associates in 2011.  On Monday, Shackleton disputed the court's characterization of a falling out with Galadri & Associates, insisting in an email to Law360 that the non-payment of fees was "the only reason" that his firm ceased acting in the summer of 2011.

Shackleton won an award for £1.4 million ($1.76 million) in fees plus interest from the ICC tribunal in 2013 after the Bin Kamils refused to participate in the proceeding other than to say that the tribunal lacked jurisdiction over the claims.  Challenging a Paris appeals court’s order granting “permission” to enforce the award, the family unsuccessfully applied to set aside the award, but the Cour de Cassation dismissed the application in March 2016.

“The impression one gains from this history is that the defendants were intent on delaying payment into court as long as was possible,” Justice Teare said.  The court did not assess Shackleton’s costs but noted that his normal hourly rate of £800, or roughly $1,000, was “more than double” of what appears to be the “guideline rate.”  Though the court can exceed the guideline rate for sufficiently complex cases, “proceedings to enforce an arbitration award do not fall into that category,” the judge said.

Is Highland Fee Dispute Arbitable?

March 10, 2017

A recent Law 360 story by Martin O’Sullivan, “Arbitrator to Say If Highland Fee Dispute is Arbitrable,” reports that a Delaware Chancery judge has declared that an arbitrator must decide whether...

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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...

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