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Category: Fee Splitting / Sharing

Attorney Fees Under CA Trade Secrets Act Belong to Attorney, Not Client

September 16, 2020

A recent Metropolitan News-Enterprise story, “Attorney Fees Under Trade Secrets Act Belong to Attorney, Not Client—C.A.,” reports that attorney fees awarded to a “prevailing party” under the California Uniform Trade Secrets Act belong to the attorney and not the attorney’s client absent an enforceable agreement providing otherwise, the Third District Court of Appeal held.  The opinion by Acting Presiding Justice Coleman Blease affirms a judgment by Sacramento Superior Court Judge Alan G. Perkins who determined that the law firm of Porter Scott, P.C. was entitled to the attorney fees paid by the opposing party in litigation in which the firm successfully represented defendant Johnson Group Staffing Company.

The amount that was awarded initially, pursuant to Civil Code §3426.4, was $735,781.27; appeals ensued and, when paid, the fees had expanded to $917,811.48; after Perkins deducted sums which the Johnson Group had paid to Porter Scott, the remainder was $827,938.17, to which the judge added 90 percent of the interest that accrued while the money was in a blocked account.  Blease pointed to the California Supreme Court’s 2001 decision in Flannery v. Prentice.  The issue was whether the client or her former lawyers and their firms had entitlement to attorney fees that were awarded under Government Code §12900, a portion of the California Fair Employment and Housing Act.

Then-Justice Kathryn Werdegar (now retired) wrote, over the lone dissent by then-Justice Joyce Kennard (also retired): “[W]e conclude that attorney fees awarded pursuant to section 12965 (exceeding fees already paid) belong, absent an enforceable agreement to the contrary, to the attorneys who labored to earn them.”

Blease declared in yesterday’s opinion: “We thus conclude that attorney fees awarded under section 3426.4 (exceeding fees the client already paid) belong to the attorneys who labored to earn them, absent an enforceable agreement to the contrary.”

He went on to say: “Reading section 3426.4 to vest awarded ‘attorney’s fees’ in counsel would be consistent with the ordinary view that attorney fees compensate attorneys, not litigants… Reading the statute to vest fee awards in litigants, on the other hand, would at times stray from that ordinary understanding of attorney fees.”

The Johnson Group argued that Porter Scott had agreed to forego an award by consenting, in writing, to forfeit its entitlement to the past-due amount of $92,845.86, except for $25,000 of that amount, and to provide pro bono representation.  Blease noted that a footnote in the agreement provides: “Should the Johnson Group or Chris Johnson be awarded fees in the future based on Porter Scott’s underlying representation, all fees shall be reimburseable [sic] at that point and this waiver shall not apply.”

Blease added: “[A]s the Flannery court recognized, even attorneys who perform services pro bono may obtain ‘reasonable’ attorney fees under a fee-shifting statute.”

Five policies discussed by the Flannery court in support of such fees belonging to attorneys and not litigants were: 1) to encourage representation of legitimate FEHA claims and discourage frivolous suits; 2) to avoid unjust enrichment where an attorney had not been paid for services rendered; 3) to ensure fairness that the losing party pays only fees incurred and not a punitive penalty; 4) to avoid attorney fee-splitting; and 5) to avoid wrongly punishing attorneys who fail to secure written fee agreements.

ABA Adopts Best Practices for Third-Party Litigation Finance

August 4, 2020

A recent American Lawyer story by Dan Packel, “ABA Adopts Best Practices for Third-Party Litigation Finance” reports that the American Bar Association’s House of Delegates overwhelmingly voted to approve a new set of best practices for litigation funding arrangements, updating their guidance on the increasingly popular tool for the first time since 2012.  The report, which outlines a list of issues lawyers should consider before entering into agreements with outside funders, cleared the body by a vote of 366 to 10.

While the document avoids taking a position on the use of outside funding, it recommends that lawyers detail all arrangements in writing, while making clear the non-recourse nature of the investment.  Lawyers are also advised to ensure that the client retains control of the matter.  “The litigation should be managed and controlled by the party and the party’s counsel,” the report asserts.  “Limitations on a third-party funder’s involvement in, or direct or indirect control of or input into (or receipt of notice of), either day-to-day or broader litigation management and on all key issues (such as strategy and settlement) should be addressed in the funding agreement.”

The report also cautions attorneys against providing advice to funders about the merits of any given case, warning that this could raise concerns about the waiver of attorney-client privilege and also expose lawyers to claims that they have an obligation to update this guidance as the litigation develops.

Zachary Krug, a former Quinn Emanuel Urquhart & Sullivan litigator who now works as a senior investment adviser with Woodsford Litigation funding, suggested this concern was misguided.  “Courts have been fairly consistent in protecting such communications under the work product doctrine,” he said in an email.

He also cautioned that the guidance could backfire in an environment where critics of litigation funding are already arguing that the availability of outside capital may lead to an increase in unmeritorious lawsuits.  “If our concern is making sure good cases get funded—and bad ones don’t—this seems like a problematic and short-sighted approach,” he said.

The report aims to stay neutral on a number of other contested issues surrounding the practice of litigation funding. In a controversial 2018 ethics opinion, the New York City Bar Association warned that paying funders through attorney fees could violate ethics rules over fee splitting.  “Positions on fee splitting, however, are far from unanimous; the New York City Bar Opinion is not the ‘law of the land’ outside of its reach, nor are opinions or approaches that contradict the New York City Bar Opinion,” the report said.

Likewise, opponents of the practice, namely business groups led by the U.S. Chamber of Commerce, have pushed for rules requiring mandatory disclosure of funding arrangements during litigation.  The report does not take a stance on whether disclosures to judges or adversaries should be obligatory.  But in a footnote, it urges lawyers to be prepared for the prospect of arrangements being scrutinized.

“A careful lawyer will assure that the written undertakings accurately reflect that the client retains control of the litigation, that disclosures to the funder are limited so as not to create risks of waiver of attorney-client privilege or work product, and that the attorney retains and protects his or her ability to exercise independent professional judgment,” it said.

The Nation’s Top Attorney Fee Experts of 2020

June 24, 2020

NALFA, a non-profit group, is building a worldwide network of attorney fee expertise. Our network includes members, faculty, and fellows with expertise on the reasonableness of attorney fees.  We help organize and recognize qualified attorney fee experts from across the U.S. and around the globe.  Our attorney fee experts also include court adjuncts such as bankruptcy fee examiners, special fee masters, and fee dispute neutrals.

Every year, we announce the nation's top attorney fee experts.  Attorney fee experts are retained by fee-seeking or fee-challenging parties in litigation to independently prove reasonable attorney fees and expenses in court or arbitration.  The following NALFA profile quotes are based on bio, CV, case summaries and case materials submitted to and verified by us.  Here are the nation's top attorney fee experts of 2020:

"The Nation's Top Attorney Fee Expert"
John D. O'Connor
O'Connor & Associates
San Francisco, CA
 
"Over 30 Years of Legal Fee Audit Expertise"
Andre E. Jardini
KPC Legal Audit Services, Inc.
Glendale, CA

"The Nation's Top Bankruptcy Fee Examiner"
Robert M. Fishman
Cozen O'Connor
Chicago, IL

"Widely Respected as an Attorney Fee Expert"
Elise S. Frejka
Frejka PLLC
New York, NY
 
"Experienced on Analyzing Fees, Billing Entries for Fee Awards"
Robert L. Kaufman
Woodruff Spradlin & Smart
Costa Mesa, CA

"Highly Skilled on a Range of Fee and Billing Issues"
Daniel M. White
White Amundson APC
San Diego, CA
 
"Extensive Expertise on Attorney Fee Matters in Common Fund Litigation"
Craig W. Smith
Robbins Arroyo LLP
San Diego, CA
 
"Highly Experienced in Dealing with Fee Issues Arising in Complex Litigation"
Marc M. Seltzer
Susman Godfrey LLP
Los Angeles, CA

"Total Mastery in Resolving Complex Attorney Fee Disputes"
Peter K. Rosen
JAMS
Los Angeles, CA
 
"Understands Fees, Funding, and Billing Issues in Cross Border Matters"
Glenn Newberry
Eversheds Sutherland
London, UK
 
"Solid Expertise with Fee and Billing Matters in Complex Litigation"
Bruce C. Fox
Obermayer Rebmann LLP
Pittsburgh, PA
 
"Excellent on Attorney Fee Issues in Florida"
Debra L. Feit
Stratford Law Group LLC
Fort Lauderdale, FL
 
"Nation's Top Scholar on Attorney Fees in Class Actions"
Brian T. Fitzpatrick
Vanderbilt Law School
Nashville, TN
 
"Great Leader in Analyzing Legal Bills for Insurers"
Richard Zujac
Liberty Mutual Insurance
Philadelphia, PA

Client’s Acknowledgement of Fee Splitting is Not ‘Consent’ in CA

June 9, 2020

A recent Metropolitan News story, “Client’s Acknowledgement of Fee-Splitting is Not ‘Consent’” reports that a lawyer cannot collect an agreed-upon referral fee from another attorney where the client merely acknowledged receipt of a letter telling him of the arrangement and affirming that he understood, but without his expressing explicit consent, the Third District Court of Appeal held.

The client’s subsequent testimony that his acknowledgement indicated his approval of the fee was ineffective, Justice Louis Mauro wrote.  At the time of the arrangement, Rules of Professional Conduct, rule 2-200 was in effect.  It read: “(A) A member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless: (1) The client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division….”

To like effect is the current rule 1.5.1, which declares: “(a) Lawyers who are not in the same law firm shall not divide a fee for legal services unless: (1) the lawyers enter into a written agreement to divide the fee; (2) the client has consented in writing, either at the time the lawyers enter into the agreement to divide the fee or as soon thereafter as reasonably practicable, after a full written disclosure to the client of: (i) the fact that a division of fees will be made; (ii) the identity of the lawyers or law firms that are parties to the division; and (iii) the terms of the division….”

The opinion reverses a San Joaquin Superior Court judgment in favor of the referring attorney, Robert K. Reeve of Valley Springs (in Calaveras County), and against Stockton attorney Kenneth N. Meleyco.

A jury awarded Reeve $78,750, based on both his causes of action for breach of contract and under a quantum meruit theory, and San Joaquin Superior Court Judge Barbara A. Kronlund added an award of $49,364.35 in prejudgment interest.  Explaining the reversal as to contract damages, Mauro said: “We conclude the client’s written acknowledgement that he received and understood the letter did not constitute written consent to the referral fee agreement under former rule 2-200, and the client’s subsequent testimony did not remedy the deficiency.  The referral fee agreement is unenforceable as against public policy and Reeve cannot recover for breach of contract.”

The client signed and returned a copy of the letter from Meleyco apprising him of the arrangement with Reeve, with his signature appearing under the words, “I, JAMES G. LUOMA, acknowledge receipt of this letter and understand the contents.”

Mauro set forth: “Consent is different from disclosure or receipt, and it is also different from understanding….Written consent requires written words expressing agreement or acquiescence, not just words expressing receipt or understanding.  Luoma’s acknowledgement was deficient in this regard.

“We understand Reeve to suggest that Luoma’s acquiescence can be inferred from his receipt of the letter, his understanding of the letter, and his lack of objection to the referral fee.  But because consent must be expressed in writing, silence cannot convey written consent.”

The testimony by Luoma that he intended his signing of the letter to indicate assent was ineffective because there was no ambiguity to be resolved in light of the meaning of the language being clear.  Mauro also said Reeve cannot recover under a quantum meruit theory because the last of his services in the case occurred more than three years before he filed his complaint and the statute of limitations in two years.

Article: Fee Sharing Between Discharged Counsel and New Counsel in Contingent Fee Cases

June 5, 2020

A recent The Legal Intelligencer article by Sarah Sweeney and Thomas Wilkinson of Cozen O'Connor, “Fee Division Between Discharged Counsel and New Counsel in Contingent Fee Cases” reports on the division of attorney fees between discharged counsel and new counsel in contingency fee matters.  This article was posted with permission.  The article reads:

When a client terminates, without cause, its legal representation in a contingent fee matter and subsequently retains new counsel from a different firm, the Rules of Professional Conduct related to the division and disbursement of fees impose certain requirements on the successor attorney.  The American Bar Association recently issued Formal Opinion 487—ABA Formal Opinion 487 (Fee Division with Client’s Prior Counsel), June 18, 2019—to identify the applicable rules, and to clarify the duties owed to the client by the successor attorney.

The opinion explains that Model Rule 1.5(e) (or its state equivalent) has no application to the division of fees in cases of successive representation.  Model Rule 1.5(e) applies to the division of fees between lawyers of different firms who are representing the client concurrently or who maintain joint ethical and financial responsibility for the matter as a whole.  Such situations are governed by Rule 1.5(b)-(c), which according to the opinion, require the successor counsel to “notify the client, in writing, that a portion of any contingent fee earned may be paid to the predecessor attorney.”

Specifically, Rule 1.5(b) requires attorneys to communicate the rate or basis of legal fees, and Rule 1.5(c) requires that the written fee agreement include the method of determining the fee.  Both subsections are designed to ensure that the client has a clear understanding of the total legal fee, how it will be computed, and when and by whom it will be paid.  When a client replaces its original counsel with new counsel in a contingent fee matter, the discharged attorney may have a claim for fees under quantum meruit or pursuant to a clause in the contingency fee agreement; and the successor counsel’s failure to communicate to the client the existence of such claim would run afoul of Rule 1.5(b)-(c).  Therefore, even if the exact amount or percentage (if any) owed to the first attorney is unknown at the time, it is incumbent on the successor attorney to advise a contingency client of the existence and effect of the predecessor attorney’s claim for fees as part of the terms and conditions of the engagement from the outset.

While the foregoing ABA guidance is reasonable, Model Rule 1.5(b) and (c) do not provide the most compelling basis to obligate successor counsel to advise the client of predecessor’s possible fee claim.  As explained in Pennsylvania Bar Association Formal Opinion 2020-200: Obligations of Successor Contingent Fee Counsel to Advise Client of Potential Obligations to Prior Counsel, “a contingent fee agreement that fails to mention that some compensation may be due to, or claimed by, the predecessor counsel in circumstances addressed by this opinion is inconsistent with Rules 1.4(b) and 1.5(c),” which “mandate that successor counsel provide written notice that compensation may be claimed by Lawyer 1, and explain the effect of that claim on Lawyer 2’s contingent fee.” See also Philadelphia Bar Association Professional Guidance Comm. Op. 2004-1 (“In discharging the inquirer’s obligations under Rule 1.1 (competence) and Rule 1.4 (communication), the committee recommends that the inquirer have a thorough discussion with the client about the potentials for a fee and cost claim by the discharged attorney, and how such a claim, if made, might affect the inquirer’s representation of that client and/or the client’s ultimate distribution, if there is any recovery in the client’s case.”). Pennsylvania Rule 1.4(b) is identical to Model Rule 1.4(b).

The role of the successor attorney with respect to the discharged attorney’s claim for fees should also be set forth in the engagement agreement.  The opinion advises that the engagement agreement should expressly state whether the issue is one to be decided between the discharged attorney and the client or, alternatively, whether the successor attorney will represent the client in connection with the resolution of prior counsel’s fee interest.  If the latter, the successor attorney must obtain the client’s informed consent to the conflict of interest arising from his/her dual role “as counsel for the client and a party interested in a portion of the proceeds.” (emphasis in original)  In many situations, the fees paid to the discharged and successor attorneys may not affect the client’s ultimate recovery, and the client may make an informed decision to leave the matter for the two attorneys to determine among themselves.  In resolving any such dispute, both attorneys remain bound by Rule 1.6 confidentiality or pursuant to any confidentiality provisions in any underlying settlement agreement.

Upon recovery, the successor attorney must comply with Rule 1.15(d) by notifying the discharged attorney of the receipt of funds.  However, client consent is required prior to disbursement of any fees that may be payable to the discharged attorney.  If there is a disagreement about the discharged attorney’s claim or the amount owed, the successor attorney must hold the disputed fees in a client trust account under Rule 1.15(e) until the dispute is resolved.

The Disciplinary Board of the Pennsylvania Supreme Court (board) has proposed that the guidance in the opinion be incorporated into the comment supporting Pennsylvania Rule of Professional Conduct 1.5 governing fees.  Recognizing that the opinion is not binding precedent, the board’s published notice for comment dated Dec. 7, 2019 stated that the opinion represents “helpful guidance to successor counsel and predecessor counsel in this common situation.  The original lawyer in a contingency-fee matter will often assert a lien on the proceeds.  But if the client retains new counsel, that client may not understand there is a continuing obligation to pay the original lawyer for the value that lawyer contributed or was entitled to under the original fee agreement.”

The board has proposed amending Comment [4] of Rule 1.5 to expressly reference the opinion.  The comment period has expired, so practitioners should proceed on the assumption that the board’s recommendation will likely be approved by the Supreme Court.  While adoption of the new proposed comment will not make compliance with all aspects of the opinion mandatory, practitioners would be wise to include a written notice to clients that a portion of the fee may be claimed by predecessor counsel.  In addition, successor counsel should confirm in writing any undertaking to resolve the prior counsel’s fee interest.  Since the opinion characterizes this as involving a conflict of interest requiring the client’s informed consent to a waiver, the successor firm should also confirm that consent in writing.  In this respect the opinion goes further than previous bar association ethics guidance in Pennsylvania.

Inclusion of an express reference to an ABA or other ethics opinion in the text of a comment to a disciplinary rule is highly unusual.  An alternative would have been to instead include a concise summary of that guidance.  In any event, the Disciplinary Board presumably felt it appropriate to supplement the guidance on this important topic to lawyers handling contingent fee cases because lawyers often fail to engage in earnest efforts to resolve the respective fee interests promptly after successor counsel is retained, leaving the unsuspecting client exposed to complications, potential litigation and delays over the allocation of fees and costs following an award or settlement.

When asked by a prospective client to replace the client’s counsel in a pending contingency fee case, attorneys and firms should be mindful of the duties imposed by the opinion on successor counsel, as well as the specific Rules of Professional Conduct in the relevant jurisdiction and any other applicable substantive law or authority.  In many cases compliance with the new guidance will require updating contingent fee agreements, as well as ensuring the client is adequately informed of the prior counsel’s fee interest and how it will be addressed in the event of a recovery.

Sarah Sweeney is professional responsibility and compliance counsel at Cozen O’Connor.  She serves as co-chair of the Philadelphia Bar Association’s professional guidance committee.  Thomas G. Wilkinson is a leader of the legal professionals practice group at Cozen O’Connor.  He is a member of the professional guidance committee and the ABA standing committee on professionalism.