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Category: Fee Agreements

Article: Two Overlooked Advantages of Hourly Billing

January 20, 2020

A recent Law 360 article by J.B. Heaton, “2 Overlooked Advantages of Hourly Fees,” reports on hourly billing advantages.  This article was posted with permission.  The article reads:

I was happy to see that my former colleagues at Bartlit Beck LLP prevailed at arbitration on a large fee dispute with a contingency client.  However, it appears that the dispute remains active, and that the firm is now forced to seek confirmation of the award (Bartlit Beck LLP v. Okada, in the U.S. District Court for the Northern District of Illinois) before beginning what may be a long fight to enforce it against a Japanese billionaire.

Bartlit Beck was a forerunner in the effort to move clients away from hourly fees toward alternative fees.  While most of the firm’s work while I was there (1999-2017) was on a flat monthly fee with bonuses, some work was on a contingency of the type now at issue in the arbitration recently reported.  Those flat monthly fees and bonuses were also a source of tension with clients who sometimes felt (wrongly, in my view) they were not getting good value for their money.  The firm hurt its relationship with Microsoft Corp. when it insisted on the payment of a relatively small promised bonus.  And the firm has been in a similar arbitration before like the one now at issue, where a client, EchoStar Corp., unsatisfied with its payment obligation to the firm found itself in arbitration.

While alternative fees continue to get attention in the legal press, there is no question that such fees remain overshadowed by the hourly fee.  Fee disputes like the one Bartlit Beck finds itself in again may tell us something about the reasons for the continued vitality of the hourly fee, especially among clients who have the wherewithal to pay.  It is no coincidence that most of the very large fee disputes we read about involve alternative fees.  What we don’t read about, but what is well-known to plaintiff-side lawyers such as I used to be, is the additional problem that large contingency fees can cause in generating suspicion of the lawyer recommending that the client take a large, pretrial settlement offer.

Fee arrangements for litigation require picking between two bad choices.  Hourly fees come with the incentive problem that lawyers make more money with every hour for which the client is willing to pay.  Since clients are usually not in the best position to determine the efficiency of undertaking a particular task (that is, it’s impact on the expected value of the litigation), the possibility exists that lawyers will respond to their incentives to undertake tasks that are not worth doing.

Flat fees address this problem by removing the incentive to work on inefficient tasks, but flat fees bring their own serious problem: They create an incentive to underwork the case, again taking advantage of the client’s poor positioning to see that a worthwhile project was left undone.  This allows the flat-fee lawyer to either use those hours on another flat-fee or hourly case or use the time in leisure, not working at all.  Contingency fees create an even more powerful incentive to end a case on terms that generate a large return for the lawyer on few hours worked.

The possibility of high-stakes fee disputes may be a relatively unexplored reason why alternative fees have not caught on among well-funded clients in high-stakes cases.  Clients may say — on the front end — that they want to pay for performance, but it can be hard sometimes to judge the importance of the lawyers’ actions in resolving high-stakes business disputes.

Where a dispute is resolved for reasons unrelated to the work of the lawyers, it is difficult for a client to pay a walloping fee that was, perhaps, based on the assumption that the resolution would have depended more on the lawyers’ work.  In the place where huge contingency fees reign supreme — class action litigation — the court has the power to set the fee, and virtually never ignores the hours worked in doing so.

Even where the lawyers have generated huge value by identifying a novel legal theory and bringing a defendant to the table for serious settlement talks, even the most sophisticated of clients can and do question the incentives of the lawyers advising them.

In some cases, a defendant can be brought to the table with a very large settlement offer based on the legal risk it faces in a relatively untested area of law.  The client, however, may question the lawyer’s advice to take the settlement where the lawyer stands to make millions of dollars on only a few hundred hours' work.  This suspicion, in turn, may lead the client to reject the settlement, only to find out later that the lawyer was right, the theory was too risky to have a large enough possibility of prevailing, and the huge settlement was the best that could have been obtained.

Discussions of hourly versus alternative fees will no doubt continue in 2020.  The market has spoken rather clearly, however.  The legal market seems to prefer hourly fees, especially in high-stakes cases for clients that can pay the fees as they go.  The bad incentives are controlled by long-term relationships with lawyers and firms, and by more and more sophisticated review of bills and descriptions.  Especially for high-stakes cases, the cost of not doing a valuable task is higher than the cost of doing some additional tasks that may be inefficient or unnecessary.  There are exceptions, of course, but they remain the outliers.

Here, I suggest that hourly fees have two advantages not yet adequately focused on: minimizing large-scale fee disputes, and maintaining the perceived integrity of the lawyers’ advice.

J.B. Heaton is President of J.B. Heaton PC in Chicago.

Fee Allocation Dispute in Antitrust Case in Seventh Circuit

January 15, 2020

A recent Law 360 story by Celeste Bott, “Attys Spar Over Fees From Antitrust Row at 7th Circ.,” reports that a Seventh Circuit panel took issue with an attorney’s arguments that the allocation of attorney fees from an underlying case should have been settled in arbitration and that Cozen O'Connor wasn’t entitled to its share of a $4 million deal for representing that attorney in the fee dispute.  Judges Amy J. St. Eve, Diane P. Wood and Ilana Rovner said attorney Michael Needle appeared to waive arbitration, noting that he didn’t move to compel it and had previously stated that the district court was the proper forum to resolve all claims in a dispute over a $4.2 million settlement fund.

“How can you come in and argue now there’s no jurisdiction because it should have gone to arbitration, when you argued the opposite in the district court?” Judge St. Eve asked.  The panel heard argument in two related cases, both stemming from a Racketeer Influenced and Corrupt Organizations Act case alleging that International Profit Associates Inc. and its affiliates bilked small businesses into buying expensive but useless consulting.

Needle and Merle L. Royce were co-counsel on a contingent fee basis representing 16 plaintiffs in the RICO case, and in 2013 obtained a $4.2 million settlement, then disagreed over the fees for their work, according to court documents.  Cozen O'Connor represented Needle in the fee dispute and later sought a lien to get paid.

After the settlement, Royce said the fees should be limited to one-third of the settlement proceeds, while Needle sought a much larger sum of $2.5 million, according to briefs in the case.  In 2015, Royce filed an interpleader complaint to determine how the fees should be allocated, and a lower court ruled that the pair were entitled to one-third of the settlement, with 60% to Needle and 40% to Royce.  Needle argued on appeal that the fee dispute should have been decided in arbitration under a binding mediation provision in the fee agreement.  That provision means there’s no jurisdiction to proceed, said Frank C. Fusco, arguing for Needle.

The judges pushed back on that argument and against Needle’s assertion that he was wrongfully sanctioned for asking for an extension that was ultimately granted.  They said he waited “until the last minute” and that the district court had the right to grant him extra time yet still find his actions sanctionable.

Alan R. Borlack of Bailey Borlack Nadelhoffer & Carroll, arguing for Royce, said the sanctions were warranted, noting that even the lower-court judge had said he had “never encountered” anyone so “unrelentingly obstructionist” as Needle in more than six decades of practicing law.  Needle had asked for the added time allegedly because he had failed to file time sheets and was seeking a transcript from a status hearing, Borlack said.

“These were disingenuous reasons for an extension,” Borlack said.  “This case goes to whether a district court can have control of a courtroom so it can administer justice.”  And in the Cozen O'Connor appeal, Fusco told the panel the firm was wrongfully granted a lien because the fee agreement didn’t provide for compensation if the firm withdraws, and that the firm’s work didn’t help Needle recover funds.

Federal Circuit: Attorneys Lack Standing to Recover Attorney Fees for Veteran

January 13, 2020

A recent Law 360 story by Kevin Penton, “Fed Circ. Won’t Let Attys Get Fees From Feds on Vet’s Behalf, reports that attorneys lack standing under federal law to sue the federal government on their own to recover fees for work they performed on behalf of a veteran, the Federal Circuit held in a precedential opinion.  The appellate panel rejected arguments by attorneys Meghan Gentile and Harold H. Hoffman III of the nonprofit Veterans Legal Advocacy Group that they could collect over $4,000 in fees after their former client, Matthew Shealey, prevailed in his case, even though he had fired them and had opposed their attempt to collect the money.

The Federal Circuit noted that in a 2010 case known as Astrue v. Ratliff, the U.S. Supreme Court held that under the Equal Access to Justice Act, the “prevailing party” is the actual party in a case, not the individual’s attorneys.  “The fact that the statute awards to the prevailing party fees in which [its] attorney may have a beneficial interest or a contractual right does not establish that the statute ‘awards’ the fees directly to the attorney,” the Federal Circuit said, quoting the Supreme Court.

The Federal Circuit also rejected an alternative argument by Gentile and Hoffman that they had a right to the money under the fee agreement that they had inked with Shealey, as “the fee agreement on its face does not purport to assign Mr. Shealey’s [Equal Access to Justice Act] claim to intervenors, and the intervenors expressly disclaimed such a theory at oral argument.”  The appellate panel also rejected the argument that the attorneys had so-called third party standing to sue for fees on their former client’s behalf, as Shealey revoked his authorization for them to apply for the fees and costs, according to the opinion.

“The interests of a client such as Mr. Shealey — including the ability to resolve their fee claim by settlement with the government and the ability to decline pursuing an [Equal Access to Justice Act] claim at all — would be impaired if their attorneys were afforded standing to file a claim on their behalf when that authority has been revoked,” the Federal Circuit wrote.

Class Counsel Says He Was Cheated Out of $2.6M in Attorney Fees

January 9, 2020

A recent Daily Report story by Greg Land, “Lawyer Booted From Class Action Says He Was Cheated Out of $2.6M in Legal Fees,” reports that a Georgia law firm is accused of scheming to cheat its former co-counsel out of nearly $2.6 million in legal fees, according to a series of court filings related to an $80 million MetLife class action settlement.  The court awarded more than $26 million in attorney fees as part of the July settlement, but M. Scott Barrett of Barrett Wylie in Indiana said his share awarded—more than $134,000—is a fraction of what he really should have gotten.

In a series of filings entered after the settlement was approved, Barrett said he was an integral part of the plaintiffs’ team until the lead lawyer, John Bell Jr. of Augusta’s Bell & Brigham “orchestrated” his removal.  Barrett said Bell—with whom he has a long history of co-counseling on class actions—had insisted that any fees he ultimately received would be totally at Bell’s discretion, “if and when there might be a fee.”

When Barrett protested, Bell purportedly manipulated the lead plaintiff and class representative, Laura Owens—whom Barrett had never met—to terminate his representation, which he was obliged to do.  Barrett argued that, his withdrawal notwithstanding, he should be paid 10% of the fee award, not a figure calculated on the hours he put into the case.

“Between April 24, 2014, and May 8, 2017, Barrett was actively involved in the prosecution of this matter,” said his September motion asking the court to allocate fees.  “During that time, over 140 docket entries were made, including multiple declarations from Barrett. Motions to dismiss and for summary judgment had been filed, responded to, and successfully defeated.  Discovery had been completed and an initial motion to certify the class had been filed.”

The settlement agreement approved by U.S. District Judge Richard Story of Georgia’s Northern District allocated $25 million in fees and $1.6 million in expenses to the plaintiffs’ counsel—nine lawyers, including Barrett.  The others include Bell and his partner, Leroy Brigham; Jason Carter and Michael Terry of Bondurant Mixson & Elmore; Cleveland, Georgia, solo Todd Lord; William Dobson and Michael Lober of Lober & Dobson in LaFayette, Georgia; and Oxendine Law Group principal John Oxendine.

Ruling on a motion by the plaintiffs’ counsel, U.S. District Judge Richard Story of the Georgia’s Northern District used the “lodestar” method to calculate Barrett’s portion of the award based on the hours he reported working on the case, rather than on a percentage basis of the fee award.  In his final order approving the settlement, Story specified that the issue of Barrett’s fees would not delay the settlement of the class’ claims.  In a Dec. 26 order, Story said Barrett’s share came to $134,311.

Barrett’s lawyer, Cochran & Edwards partner R. Randy Edwards, said in a motion to reconsider that the judge should at minimum reopen discovery and allow in evidence “because the court’s quantum meruit analysis is devoid of crucial and necessary findings of fact required under [federal rules] and to make an equitable allocation.  “This lack of findings has led to the anomalous result that Barrett’s allocation should be a scant one half-of one percent of the total attorneys’ fee.  How can this be?” Edwards said.

In response, the remaining plaintiffs lawyers argued that well-settled Georgia law makes clear that an attorney discharged from a case before it is resolved is not entitled to a contingency fee.  Further, they said, Barrett has provided “no evidence of any services he actually rendered for the benefit of Ms. Owens or the class she represents.”  Story has not yet ruled on Edward’s Dec. 31 motion.

Barrett filed another motion on Jan. 7 in opposition to Story’s division of fees after the plaintiffs filed a motion to approve it, arguing that “limited discovery and an evidentiary hearing” will allow the court to determine a proper split.  “Alternatively,” it said, “if the court is not inclined to do this, Barrett asks that he be allocated 10% of the total amount of the fee awarded as a minimum allocation.”

In an interview, Edwards said that—should those efforts prove unavailing—he can “virtually guarantee” that there will be an appeal.  The 10% figure, he said, is based upon Barrett and Bell’s “17-year track record of working together on these types of cases.”  As detailed in Barrett’s September motion for allocation, Bell, Barrett and three other lawyers not involved in the MetLife case began working together on retained asset account class actions several years ago.

They originally had a co-counseling agreement that any fee awards would first split 10% to each firm, with the remainder based on hours billed.  Bell became “dissatisfied” with the original arrangement, and it was reworked so that local counsel and the referring lawyer would each get 10% off the top.  Bell’s firm got 50% of the balance, Barrett’s got 30%, with the by then two remaining members splitting the last 20%.

Jones Day Says Pharma Client Owes $5.3M in Legal Bills

December 30, 2019

A recent Law 360 story by Hailey Konnath, “Jones Day Says Pharma Client Owes $5.3M in Legal Bills,” reports that Jones Day sued a pharmaceutical company in New York state court, claiming the former client has refused to pay nearly $5.3 million in legal bills it racked up while the firm defended it in two patent disputes.  According to the complaint, Serenity Pharmaceuticals LLC researches and develops patented pharmaceuticals to address urinary conditions.  The company tapped Jones Day to represent it and several affiliated companies in a pair of patent lawsuits over antidiuretic products in 2017, the firm said.

Jones Day "zealously represented" the company in both suits, dedicating nearly a dozen attorneys and staff and spending more than 15,000 hours working the cases, the firm said.  And up until December 2018, Serenity paid its bills in full, it said.  But starting that month, the company stopped paying, and now it owes nearly $5.3 million in fees and costs, according to the complaint.

"Serenity has never disputed that it owes this sum in full," Jones Day said. "Because Serenity still has not paid what it owes, Serenity is in breach of the engagement agreement and Jones Day now brings this action."  Serenity confirmed Jones Day's billing arrangement, including its attorneys' hourly rates, in an engagement agreement dated July 2017, the firm said. 

Following the agreement, Jones Day represented Serenity through "complex fact and expert discovery and extensive motion practice," including the successful defense of two summary judgment motions, the filing of a motion to dismiss, a preliminary injunction hearing, a bench trial, post-trial briefings and appellate proceedings, the firm said.

"Defendants often praised Jones Day for its work related to the representation," the complaint said.  And throughout its representation, the firm regularly sent detailed billing statements to Serenity and its CEO, Dr. Samuel Herschkowitz, Jones Day said.  On top of not paying Jones Day, Serenity owes third-party service providers — including experts, a trial graphics vendor, a document management vendor and court reporters — almost $468,000, the firm said.

Jones Day said it spent six months meeting, emailing and speaking on the phone with the company, trying to reach an agreement regarding payment.  But over the course of those meetings, emails and phone calls, "Serenity declined to provide payment for the overdue Jones Day legal fees," it said.  The firm said it asked to withdraw from one of the cases, but was told such a move would be impractical given a trial that began in July.  Since then, the firm continued its "uninterrupted representation," though it informed the company it would not be representing it in an upcoming appeal, per the complaint.

Three Places Overbilling May Be Lurking

December 2, 2019

A recent Law 360 article by Andrew Strickler, “3 Places Overbilling May Be Lurking,” reports on overbilling.  The article reads: By most accounts, the wild ol’ days of lawyer invoicing —...

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