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Category: Fee Dispute Litigation / ADR

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.

NJ Appeal Panel: Prior Fee Suit Bars Malpractice Claims

October 20, 2017

A recent Law 360 story by Jeannie O’Sullivan, “Prior Fee Suit Bars Malpractice Claims, NJ Panel Says,” reports that Borrus Goldin Foley Vignuolo Hyman & Stahl dodged a legal malpractice complaint over its representation of a client suing a business partner over allegedly diverted funds, as a New Jersey appeals court affirmed the claims should have been lodged in a prior fee-collection dispute.

The two-judge Appellate Division panel’s decision dealt a blow to Evangelos and Matilde Dimitrakopoulos, agreeing with a trial court’s determination that the couple’s claims against the North Brunswick, New Jersey-based firm over alleged discovery, expert witness and billing gaffes were barred by the entire controversy doctrine.  The doctrine aims to prevent claims arising from the same set of facts from being relitigated.

The panel acknowledged that legal malpractice claims are exempt from the preclusive effect of the entire controversy doctrine, in that they needn’t be asserted in the underlying action that gives rise to the claim.  But the Dimitrakopouloses mistakenly applied the doctrine to the collection action, when the underlying action was actually the couple’s dispute with a former business partner, according to the appeals judges.

By the time the collection action was filed, the couple knew or should have known that their alleged damages were attributable to Borrus Goldin’s alleged professional negligence and could have filed their malpractice claims then, the opinion said.

“Instead, plaintiffs delayed three more years before filing their malpractice complaint.  Our consideration of the facts and equitable factors leads us to conclude that the motion judge correctly determined that the entire controversy doctrine applied here and barred plaintiffs' malpractice complaint,” the opinion said.

The Dimitrakopouloses retained Borrus Goldin in 2009 to assert claims that their business partner in a construction enterprise improperly diverted funds, according to the opinion.  The dispute went to arbitration in December 2010, and Borrus Goldin withdrew as counsel.  The issue was settled in September 2011 after the couple had retained new representation.

Meanwhile, Borrus Goldin had filed a collection action against the Dimitrakopouloses in March 2011 to collect its unpaid legal fees for services rendered in the underlying business dispute, the opinion said.  The court awarded a $121,947.99 judgment in favor of the firm.

The couple filed their malpractice action in September 2015, alleging the firm failed to properly plead claims and obtain consent before agreeing to arbitration, didn’t properly perform discovery and secure expert rebuttal reports, and billed for excessive amounts, the opinion said.  A Middlesex County Superior Court judge dismissed the claims, agreeing with the firm’s argument that the claims were barred by the entire controversy doctrine.

The case is Evangelos Dimitrakopoulos and Matilde Dimitrakopoulos v. Borrus Goldin Foley Vignuolo Hyman & Stahl PC et. al., case no. A-0880-16T3, in the Superior Court of New Jersey, Appellate Division.

Investor Seeks Attorney Fees in Compensation Savings Matter

September 26, 2017

A recent Law 360 story by Vince Sullivan, “Puma Investor Seeks Fees for $20M in Director-Pay Savings,” reports that a shareholder of Puma Biotechnology Inc. filed suit in Delaware seeking the payment of attorneys’ fees and expenses for his efforts in pursuing changes to the compensation packages of non-employee directors, which he says ultimately saved the company more than $20 million.  In a complaint, shareholder Paul Alan Leafstedt said Puma made changes to its director compensation plans that saved the company millions after he sent a demand letter to the board in February, but the sides could not work out a deal on compensation for attorneys he brought on in the effort.

As a result of Leafstedt’s demand letter, the company engaged an independent compensation consultant and amended its director packages to reduce awards to non-employee directors significantly.  The demand letter was spurred by the board awarding itself what Leafstedt described as “grossly excessive levels” of compensation that were allegedly nine times greater than what was appropriate.

Puma also capped director stock award and allowed shareholders to provide input on compensation procedures at annual meetings.  The company also added information about the program into its proxy statement, which were reviewed by Leafstedt’s attorneys before filing, and instituted additional corporate governance reforms relating to pay practices.

“Plaintiff’s efforts directly conferred a substantial and quantifiable benefit to Puma and its stockholders — with the compensation reductions and limits alone amounting to a savings of up to $20 million over the next five years,” the complaint said.  Leafstedt cites Delaware law that allows for fee awards where a corporate benefit results from a meritorious demand on the board in asking for attorneys’ fee and expenses related to the effort.

The compensation packages for non-employee directors of the company resulted in average annual awards in the amount of more than $1.4 million each, with each director receiving a $50,000 cash retainer and options to purchase 10,000 shares of Puma stock.  Directors who sat on a committee of the board were granted an additional option for 10,000 shares, while committee chairs could buy up to 20,000 shares.  Each newly appointed director would also receive a one-time option to buy 30,000 shares.

“The demand letter asserted that the compensation program constituted a waste of corporate assets, a breach of fiduciary duty and an unjust enrichment for the non-employee directors who agreed to accept the excessive levels of compensation they granted themselves,” the complaint said.

Puma made changes to the program that cap the annual compensation for non-employee directors at $1 million and shifted the stock option award metrics from a specific number of shares to a dollar amount.  So directors still receive a $50,000 cash retainer each year, but the annual stock option award is capped at $300,000, and committee service retainers have been switched to cash amounts ranging from $20,000 to $5,000.  Newly appointed directors will have the option to purchase stock up to an amount of $700,000.

These changes resulted from negotiations between the company and Leafstedt’s attorneys and were accomplished in May without the need to file a lawsuit.  Leafstedt filed the current complaint because the parties could not come to an agreement on reasonable attorneys’ fees for achieving the benefit that will save Puma more than $20 million over the next five years.

“Plaintiff’s counsel has expended considerable time and expense, completely at risk of loss and without remuneration, in pursuit of making the demand and subsequent negotiations, the resolution of which conferred substantial benefits to Puma and its stockholders,” the complaint said.  Leafstedt is asking for an equitable apportionment of attorneys’ fees and payment of legal expenses incurred in the pursuit of the demand and the negotiations, as well as the costs of bringing the current action.

The case is Leafstedt v. Puma Biotechnology Inc., case number 2017-0659, in the Court of Chancery for the State of Delaware.

Law Firm Settles $20M Fee Dispute in Antitrust Case

September 14, 2017

A recent Law 360 story by Dan Packel, “Ballard Spahr Settles $20M Antitrust Fee Suit With Symphony,” reports that Ballard Spahr has settled a Pennsylvania state court lawsuit aimed at recouping $20 million in fees the firm said it was owed by Symphony Health Solutions Corp. for work on a now-settled antitrust case against IMS Health Inc., according to a court filing.

The terms of the settlement are confidential, according to a Ballard Spahr attorney.  The Philadelphia-based firm sued Symphony in June 2016, alleging it was owed money pursuant to a fee agreement entitling the firm to a share of any recovery from the antitrust case, which accused IMS of illegally dominating the market for pharmaceutical and health care industry data.

Symphony filed the underlying suit in Pennsylvania federal court in July 2013 accusing IMS of preventing would-be competitors from accessing drug and health care data by entering into exclusive long-term agreements with pharmacies and providers.  A month before the antitrust suit was filed, the complaint said, Ballard Spahr and Symphony reached an agreement to substantially reduce month-to-month charges in return for a share in any recovery.

Symphony agreed to pay a monthly fee of 65 percent of fees incurred by Ballard Spahr attorneys capped at $125,000, with any excess carried over to the following month.  The complaint said Ballard Spahr was then entitled to 25 percent of any recovery below $25 million, and 15 percent of any recovery above $25 million.  The firm said its attorneys spent 53,000 hours on the case over two years.  Though Ballard Spahr blacked out the amount it believes it was owed in its complaint, Symphony said in preliminary objections in July 2016 that the law firm is seeking $19.9 million for a contingency fee payment.

The settlement inked in November 2015 to end the underlying case included the sale of AlphaImpactRx, a business spun off from Symphony, to IMS, according to the complaint.  The closing of that transaction was announced in February 2016.

However, Symphony argued in the preliminary objections that Ballard Spahr was not entitled to any money from the AlphaImpactRx sale because the company and stakeholders that made the sale to IMS were not the firm’s clients and not a party to any engagement letter.

Ruling on the preliminary objections in October 2016, Judge Patricia McInerney in the Philadelphia County Court of Common Pleas agreed to dismiss claims against certain Symphony shareholders after concluding Ballard didn't say it had provided legal services for them directly.  But she left the core of the suit intact, saying it was unclear precisely who had been a party to the fee agreement.

The case is Ballard Spahr LLP v. Symphony Health Solutions Corp. et al., case number 160501565, in the Court of Common Pleas of Philadelphia County.

Fee Allocation Dispute in MDL Moves to Texas Court

July 24, 2017

A recent Law 360 story by Michelle Casady, “RI Atty Must Face Fee Dispute Suit in Texas, Court Affirms,” reports that Texas' Fifth Court of Appeals affirmed a trial court's ruling in a fight between two plaintiffs firms, holding a Rhode Island-based attorney and his firm will have to face litigation in Texas stemming from a fee-sharing agreement with a Texas attorney and his firm.

John E. Deaton and Deaton Law Firm LLC had argued the trial court wrongly refused to dismiss him and his firm from the dispute with Texas attorney Steven M. Johnson and his firm, Steven M. Johnson PC.  Deaton, who served as local counsel for Johnson's firm in multidistrict litigation over alleged injuries from hernia mesh made by C.D. Bard Inc. subsidiary Davol Inc., argued he shouldn't have to litigate the fee dispute in Texas.

Johnson — who negotiated a global settlement for nearly 200 mesh cases the lawyers had worked on together — had argued that when Deaton signed a stipulation of nondisclosure related to the settlement amounts for Johnson's clients, Deaton became bound by the terms of the underlying attorney representation agreements Johnson signed with his clients, which stated disputes would be arbitrated in Texas.  That includes the agreement with Louisiana resident Rickie Patton, he argued.

Deaton, who argued his role in the case is defined by his fee-sharing agreements with Johnson that contain no arbitration clause, has claimed Johnson failed to pay him 5 to 10 percent of fees earned as part of the global settlement Johnson negotiated.

The Fifth Court of Appeals held that all of the Johnson law firm attorney representation agreements, including the one with Patton, contained clauses that disputes would be arbitrated in Texas.  The court rejected Deaton's argument that he wasn't a signatory to Patton's attorney representation agreement.

“We conclude that, by undertaking to represent Patton as 'associate counsel' under the attorney representation agreement and reaffirming his status by signing the stipulation as to nondisclosure, Deaton consented to personal jurisdiction in Texas under the terms of the attorney representation agreement,” the court wrote.

Deaton served as local counsel on 174 hernia mesh cases for Johnson in Rhode Island state court over a period of eight to 10 years, and worked on one case, Patton's, in federal court.  That case was initially filed in the Southern District of Texas but was transferred to Rhode Island District Court for pretrial proceedings.  Deaton hired a Texas expert witness for the Patton case, which would have been tried in Texas had it not been for the global settlement.

In oral arguments before the appellate court in May, an attorney for Deaton said while he had recommended the expert, it was Johnson who hired and paid the witness and Deaton never visited Texas during that time.

But Johnson's attorney told the panel Deaton spent eight years working on a Texas federal case, establishing jurisdiction in Texas for the fee dispute.  Although the Patton case's original pretrial proceedings were in Rhode Island, Deaton's pretrial work was all aimed at a trial in Texas, and he had availed himself of the protections of the state.