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Category: Defense Fees / Costs

US Airways Defends $122M Fee Request in Sabre Antitrust Case

April 20, 2017

A recent Law 360 story by Rick Archer, “US Airways Defends $122M Fee Bid in Sabre Antitrust Suit” reports that US Airways defended its request for $122 million in attorneys' fees for its $15 million victory against trip-planning giant Sabre Inc. in a suit over a contract giving booking access to all of the airline's seats, saying the fees are reasonable and in line with Sabre’s own legal costs.

Refuting Sabre’s argument that the fee request should be trimmed by nearly 90 percent because of unnecessary expenses, failure to get the full award sought and the dismissal of three-fourths of its claims, US Airways said the recommendation would make its fee award $40 million less than Sabre’s own reported defense costs.

“Although Sabre begrudgingly concedes that US Airways is entitled to some of what it incurred in this lengthy and aggressively defended case, reading Sabre’s opposition, one would think that Sabre — not US Airways — had won,” US Airways said.

The airline won a $5 million verdict, automatically tripled to $15 million, late last year in its case accusing Sabre — which controls 58 percent of the ticket distribution market — of restraining trade by forcing unfavorable terms on US Airways in a 2011 contract that required the airline to give Sabre access to all of its seats in order to reach the large cadre of travel agents that use the Sabre system.

US Airways has requested $122 million in attorneys’ fees and costs, arguing last month that the lengthy and complex nature of litigation justified fees that are more than eight times the amount of damages.  Sabre had argued US Airways should receive only $13 million in fees, noting three of its four original claims were rejected and the award was less than US Airways had asked for, and claiming a number of specific decisions in the airline’s legal strategy had generated unnecessary fees.

US Airways replied that the claim it ultimately won on was always the focus of their efforts, saying two of the claims were dismissed at the beginning of the case when minimal work had been done and the third had required only a fraction of the work.  “The Clayton Act does not require a plaintiff to prevail on all motions and claims in order to be entitled to a full recovery, particularly where it wins what it set out to achieve,” the airline said.

The airline said the reasonableness of the fees was justified by Sabre’s own $53 million in reported attorneys' fees, and argued this number was deceptively low because defense counsel Bartlit Beck Herman Palenchar & Scott LLP agreed to work at a discount in exchange for a success fee.

“Sabre refused our request to see Bartlit’s success-fee rate, but it appears to be nearly 50 percent based on the bonus Sabre paid for defeating declaratory relief,” it said.  “Even a 30 percent bonus would have increased Sabre’s fees to roughly $70 million had it, not US Airways, won.  That approximates US Airways’ roughly $85 million in attorneys’ fees.”

The case is US Airways Inc. v. Sabre Holdings Corp. et al., case number 1:11-cv-02725, in the U.S. District Court for the Southern District of New York.

Report: Wells Fargo Was Too Focused on Legal Spend

April 12, 2017

A recent Bloomberg Big Law Business story by Gabe Friedman, “Wells Fargo Lawyers Were Too Cost Focused, Report Says,” reports on the recent abusive sales practices of Wells Fargo.  The story reads:

After taking six months to investigate how Wells Fargo became enveloped in an abusive sales scandal, Shearman & Sterling has produced a 113-page report (pdf) that lays into the legal department for missing the big picture and focusing too much on legal cost containment.  The report was commissioned by the board of directors, which in September retained Shearman to assist an oversight committee in examining the scandal, in which bank employees created an untold number of fraudulent bank accounts in customers’ names in order to meet their sales targets.

The team of Shearman lawyers interviewed 100 people, mostly in senior management, and reviewed 35 million documents, collected from 300 custodians with FTI Consulting providing data analytics assistance, according to a note within the 113-page report.  It assesses each department in the bank, from human resources to audit, for its contribution to the scandal.  Although the law department is far from alone in the blame, the Shearman team repeatedly knocked the department under former general counsel James Strother for failing to see a pattern and recognize the seriousness in a growing number of incidents beginning in 2011 related to improper sales practices.

Right up until September 2016, “there continued to be a lack of recognition within the Law Department (as in other parts of Wells Fargo) about the significance of the number of sales integrity terminations, and the potential reputational consequences associated with that number,” the report notes.  “The Law Department’s focus was principally on quantifiable monetary costs — damages, fines, penalties, restitution.”

It adds, “Confident those costs would be relatively modest, the Law Department did not appreciate that sales integrity issues reflected a systemic breakdown in Wells Fargo’s culture and values and an ongoing failure to correct the widespread breaches of trust in the misuse of customers’ personal data and financial information.”

Former general counsel Strother, who retired last month, also comes up for serious scrutiny in the report including that the board’s risk committee felt badly misled for a presentation he was involved in.  Most notably, according to the report, in May 2015, three weeks after the Los Angeles City Attorney’s Office filed a lawsuit against Wells Fargo, accusing it of setting unrealistic sales goals that created pressure on employees to resort to opening fraudulent accounts, Strother and Carrie Tolstedt, head of community banking made a presentation to the board’s Risk Committee about the matter.

The Risk Committee specifically requested the number of employees that had been fired up to that point related to improper sales practices, which numbered around 2,600 at that point, the report states.  But this number was deleted from the presentation during a pre-conference call between members of the legal department and Tolstedt’s community banking department — for reasons no one could recall, according to Shearman.

Instead, the Risk Committee heard that only 230 employees had been fired and that “the root cause was intentional employee misconduct, not systemic issues,” according to the report. It was the first time that the committee even heard that there were as many as 230 terminations, and members “felt blindsided by the disclosure,” the report says. 

And in fact, the report notes, the actual number of people who had been fired or resigned as a result of investigations was closer to 2,600 at that time.  “Multiple Board members have stated that they felt misled by the presentation; they left with the understanding that sales integrity terminations were in the range of 200-300 and were largely localized in Southern California,” the report states.  “The Board was not provided with the correct aggregated termination data until well into 2016.”

While the report does credit some members of the law department with making “commendable attempts to address the sales abuses … through work on various committees,” it faults its members for not fully considering “whether there might be a pattern of illegal conduct” rather than a series of discrete legal problems.

Already, the report is being held up as a rare inside look at how a law department failed to mitigate a problem before it grew into a full scandal that resulted in major regulatory fines and executive management changes.  “This is the Wells Fargo Investigative Report.  It is well worth reading.  The next in the chronicles from Enron to GM,” Abercrombie & Fitch’s general counsel Robert Bostrom wrote on LinkedIn on Monday.

Amar Sarwal, vice president and chief legal strategist of the Association of Corporate Counsel, agreed that the report is likely to be studied by lawyers in the future.  “Normally you’re not going to have the confidential workings [of a law department] exposed like this,” Sarwal said.

The fact that it is written by a law firm, and critiques a corporate law department for focusing too much on cost containment and not seeing the big picture marks an “intriguing turnaround” from the normal roles, he added.  It is more common to hear corporate law departments critique law firms for being too focused on the billable hour and not spending enough time learning their client’s business.

The Shearman team was lead by New York partner Stuart Baskin, a former federal prosecutor in Manhattan.  Baskin previously represented J.P. Morgan’s board of directors as it dealt with the London Whale scandal, which involved a trader who accumulated an outsized position in the credit default swap market and lost $6.2 billion, raising questions about the bank’s risk management system.

Sarwal said the report puts a spotlight on the fact that all corporate lawyers, both in house and at law firms, face a tension between advising their client on a specific matter, and advising them on how to run their business.  “There’s this idea that the lawyers are the conscience of the company, but they’re not,” he added.

Instead, they operate within the hierarchy of the company and have to work with other executives to identify and solve problems.  He criticized the report for not contextualizing what else the law department had on its plate as the sales abuse problem unfolded, but nonetheless praised it as useful information.  “For GCs, this report is just another reminder that your job involves trying to change a real culture of human beings,” said Sarwal.

Fifth Circuit: Defense Fees/Costs Can Count Against Insurance Policy Limits

April 7, 2017

A recent Law 360 story by Rick Archer, “Policy Limits Apply to Hospital System’s Defense Claims,” reports that the Fifth Circuit has ruled defense costs can count against insurance policy limits, leaving Mississippi-based hospital system Singing River Health Services is on the hook for some of the legal fees it paid defending itself from pension fraud claims.  The panel reversed a district court decision that SRHS’ defense costs did not erode its policy limit with Federal Insurance Co., finding it ignored the wording of the policy.

“Reading several clauses out of the policy, including ones that make clear that a non-eroding policy will cost extra, is inconsistent with the requirement to consider the language of the policy as a whole,” Judge Catharina Haynes, writing the opinion for the panel, said.

The suit stems from costs the hospital system incurred defending against federal class actions and two state suits accusing it of failing to make annual required contributions into a retirement fund.  The hospital settled the suits in January 2016 for $156 million.

Federal Insurance had argued a $1 million policy limit applied to the defense costs, while SRHS claimed Federal was obligated to pay the entire cost.  A district court agreed the limit did not apply to defense costs, but also found a number of SRHS’ claims were barred by a policy exclusion for losses resulting from employee benefits program laws.

The panel reversed the district court on the policy limits decision, saying the policy explicitly states defense costs erode the policy limit, and that SRHS specifically declined to purchase extra coverage for defense costs.  The panel also rejected claims state law requires the defense costs be covered and that the eroding coverage clause was invalid because it was not placed in SRHS’ board’s minutes.

“Mississippi law does not allow the courts to use rules of construction to defeat the parties’ own agreement as expressed in the policy, Judge Haynes said.  The panel upheld the district court hearing on the exclusion, rejecting SRHS’ claim that it did not apply because the plaintiffs made constitutional and common law claims with an argument that those laws also govern pension plans.

“Accordingly, they ‘govern’ employee benefit plans because the obligations they create control the pension plans.  Indeed, the plaintiffs in the SRHS lawsuits only bring claims under the identified common law and statutes because they create obligations with which pension plans must comply,” Judge Haynes said.

The case is Federal Insurance Company v. Singing River Health System, case number 15-60876 in the Federal Court of Appeals for the Fifth Circuit.

Attorney Fees Against Lloyd’s Underwriters Affirmed

March 31, 2017

A recent Business Insurance story by Judy Greenwald, “Bad Faith, Attorneys Fee Awards Against Lloyd’s Underwriters Affirmed,” reports that a California appeals court has upheld a $50,000 punitive damages award plus more than $1 million in attorneys fees (known as Brandt fees in California) against Lloyd’s of London underwriters in connection with its denial of coverage under a fire insurance policy because of a mistake in listing the insured.

In January 2011, the Saddleback property suffered a fire resulting in a $2,150,000 million loss, and Saddleback submitted a claim to Lloyd’s, which hired an attorney to investigate the loss.  In May 2011, the attorney sent a letter to Saddleback on behalf of Lloyd’s denying coverage “because Saddleback owned the property and J.K. Properties did not have an insurable interest in the damaged property,” according to the ruling.

J.K. Property and Saddleback filed suit against defendants including Lloyd’s in January 2012, charging breach of contract, professional negligence and bad faith.  An amended complaint added a reformation cause of action to add Saddleback as an additional insured on the policy at issue.  A reformation is a remedy available when an otherwise valid insurance policy does not reflect the parties’ true intentions.

At a bifurcated hearing in July 2014 in Santa Ana, the court determined Saddleback and Lloyd’s had intended Saddleback be named as the insured under the policy, and the court reformed the contract to list the named insured as “Saddleback Inn, LLC and JK Properties, Inc., dba Saddleback Inn.” Lloyd’s paid Saddleback $2,884,583, reflecting the $2,150,00 for the fire damage and $734,583 in interest.

During the second phase of the trial, a jury determined Lloyd’s had unreasonably denied payments and awarded Saddleback $50,000 in punitive damages, plus $1,062,117 in attorneys fees and expenses.  Lloyd’s appealed the punitive damages and attorneys fees awards, which a three-judge California Court of Appeals panel unanimously affirmed. 

“Underwriters argue there is no bad faith liability as matter of law when an insurer properly denied coverage under a policy as issued, even if a court later reforms the policy to provide coverage,” said the ruling.  However, said the court, “Ultimately, a claim for bad faith liability hinges on whether the insurer’s refusal to pay policy benefits was reasonable at the time.”

AIG, Other Insurers Liable for Verizon Defense Fees & Costs

March 29, 2017

A recent Business Insurance story by Judy Greenwald, “AIG, Other Insurers Liable for Verizon Defense Costs in Failed Spinoff,” reports that an American International Group Inc. (AIG) unit and several excess insurers are obligated to provide more than $48 million in defense costs to Verizon Communications Inc. in connection with litigation over the spinoff of a unit that later went bankrupt, says a Delaware court.

The litigation concerns Verizon’s 2006 spinoff of its print and electronic directories business into a stand-alone company, Idearc Inc., which eventually defaulted on notes issued in connection with the deal and filed for bankruptcy in March 2009, according to the ruling by Delaware Superior Court in Wilmington in Verizon Communications Inc. et al. v. Illinois Insurance Co. et al. 

In anticipation of the spinoff, Verizon and Idearc had purchased primary and excess executive and organizational liability policies to insure against litigation risks and potential liabilities that had arisen from the transactions, according to the ruling by the Wilmington court.
 
AIG unit Illinois National issued the primary policies, while excess policies, which were “follow-form” and incorporated the primary policy’s provisions, were issued by Stamford, Connecticut-based XL Specialty Insurance Co., a unit of XL Group Ltd.; Schaumburg, Illinois-based Zurich American Insurance Co.; and Twin City Fire Insurance Co., a unit of the Hartford Connecticut-based Hartford Insurance Group.

The runoff polices provide coverage for liability resulting from claims made during the six-year period from November 2006 to November 2012, according to the ruling.  Policy provisions allow Verizon to recover defense costs where a securities claim is brought against both Verizon and an insured person and a joint defense is maintained, said the ruling. 

Shortly after Idearc defaulted on the notes, several lawsuits were filed against Verizon and others alleging liability about the spinoff, including litigation filed by Minneapolis-based U.S. Bank, which demanded $14 billion in damages from Verizon.  Verizon sought and obtained dismissal of a number of the claims asserted, with judgment by a Texas court later affirmed by the 5th U.S. Circuit Court of Appeals in New Orleans.

Plaintiffs incurred significant legal expenses in successfully defending the U.S. Bank action, but insurers denied defense costs on the basis the litigation was not a securities claim as defined in the policies, and filed litigation in the matter with the state court.  After an extensive and complex analysis of policy language, the Delaware court ruled in the plaintiffs’ favor. 

“Here, it appears the financial incentive to sell these polices and obtain a marketing advantage by touting their more expansive coverage trumped the common sense, plain language approach to clearly articulating what was covered,” said the ruling

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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