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Category: Fees in Arbitration

NJ Case Has Lessons on Arbitration Clauses in Attorney Retainers

February 14, 2021

A recent Law 360 article by Hilary Gerzhoy, Deepika Ravi, and Amy Richardson, “NJ Case Has Lessons On Arbitration Clauses in Atty Retainers”, reports on arbitration clauses in attorney retainers in New Jersey.  This article was posted with permission.  The article reads:

On Dec. 21, 2020, the New Jersey Supreme Court issued Delaney v. Dickey, an opinion that severely limits the enforceability of arbitration provisions in law firm retainer agreements.  The court held that an arbitration provision in a retainer agreement is only enforceable if an attorney provides "an explanation of the advantages or disadvantages of arbitration" to a client before the client signs the retainer agreement.

The decision, which applies prospectively, tracks and builds on other jurisdictions' limitations on the enforceability of arbitration provisions in retainer agreements.  Attorneys wishing to resolve client disputes via arbitration should take close note of these heightened disclosure obligations.

Delaney v. Dickey

Delaney v. Dickey addressed whether an arbitration provision contained within Sills Cummis & Gross PC's four-page retainer agreement was enforceable.  A Sills attorney provided the retainer agreement to client Brian Delaney during an in-person meeting.  The retainer agreement contained a provision stating that any disputes about the law firm's fees or legal services would be resolved by arbitration.

The arbitration provision stated that the result of any arbitration would not be subject to appeal, and that Delaney's agreement to arbitration waived his right to a trial by jury:

The decision of the Arbitrator will be final and binding and neither the Firm nor you will have the right to appeal such decision, whether in a court or in another arbitration proceeding.  You understand that, by agreeing to arbitrate disputes as provided in this retainer letter, you are waiving any and all statutory and other rights that you may have to a trial by jury in connection with any such dispute, claim, or controversy.

The retainer agreement included a one-page attachment that contained a hyperlink to the JAMS rules.  However, the Sills attorney did not provide Delaney with a hard copy of the JAMS rules at the meeting.  The attachment also stated that the arbitration would be conducted by one impartial arbitrator; that the parties waived any claim for punitive damages; that the arbitration would be binding, nonappealable and confidential; and that the parties would share the arbitrator's fees and expenses, except that the arbitrator could award costs, expenses, and reasonable attorney fees and expert witness costs.

The New Jersey Supreme Court held that the arbitration provision was unenforceable "[b]ecause Delaney was not given an explanation of the advantages or disadvantages of arbitration."

The court recognized that the Sills attorney had disclosed, in the retainer agreement and attachment, several of the differences between an arbitral and judicial forum — but it found that disclosure insufficient.  Instead, the court required that the attorney provide an "explanation" of these differences — but it did not provide clear guidance on what is required for a sufficient explanation.  Importantly, the court held that an attorney must explain the differences between an arbitral and judicial forum, even when the client is "a sophisticated businessman."

The mere recitation of these differences in the retainer agreement, and the Sills attorney's "[offer] to answer any questions" Delaney had about the retainer agreement was insufficient to meet the attorney's fiduciary obligations.  Instead, the court imposed an obligation to explain the advantages and disadvantages of an arbitration provision either orally or in writing.

Although the court did not explicitly so state, its opinion suggests that an attorney cannot merely list the differences between an arbitral and judicial forum, but rather must explain how those differences might affect the client's interests in the event of a future dispute.

What Happens Outside of New Jersey?

The New Jersey Supreme Court pointed to a string of ethics opinions and case law from other states that support heightened disclosure obligations on an attorney where an arbitration provision is included in a retainer agreement.  The court also pointed to jurisdictions that require a lawyer to go even further and advise a client to seek independent counsel before agreeing to arbitrate future disputes.  Delaney closely tracks the American Bar Association's Formal Opinion 02-425, Retainer Agreement Requiring the Arbitration of Fee Disputes and Malpractice Claims, issued in 2002.

The opinion concluded that a binding arbitration provision requiring all "disputes concerning fees and malpractice claims" to be resolved via arbitration does not violate ABA Model Rule of Professional Conduct 1.4(b), "provided that the client has been fully apprised of the advantages and disadvantages of arbitration and has given her informed consent to the inclusion of the arbitration provision in the retainer agreement" and the arbitration provision does not "insulate ... or limit the liability to which she would otherwise be exposed under common and/or statutory law."

Because a lawyer has a fiduciary "duty to explain matters to a client," she must "advise clients of the possible adverse consequences as well as the benefits that may arise from the execution of an agreement" that includes an arbitration provision.  Accordingly, compliance with Rule 1.4(b) requires that the lawyer "'explain' the implications of the proposed binding arbitration provision 'to the extent reasonably necessary to permit the client to make [an] informed decision' about whether to agree to the [provision's] inclusion" in the retainer agreement.

Unlike the New Jersey opinion, the ABA concluded that just how extensie that disclosure must be will depend on "the sophistication of the client."  However, consistent with Delaney, the lawyer "should make clear that arbitration typically results in the client's waiver of significant rights, such as the waiver of the right to a jury trial, the possible waiver of broad discovery, and the loss of the right to appeal."

For these reasons, the Sills attorney's failure to explain these differences to Delaney would similarly fail under the ABA standard.  While ABA opinions are persuasive, not binding, authority on the states, they are an important road map for attorneys seeking to understand their ethical and practical obligations.

The District of Columbia takes a similar approach.  D.C. Ethics Opinion 376, published in November 2018, concludes that an agreement to arbitrate fee disputes and legal malpractice claims is otherwise permitted by the rules, provided that the lawyer has adequately informed the client about "material risks of and reasonably available alternatives to" the proposed arbitration clause such that the client is "fully informed."

That requires, at minimum, that the attorney inform the client about differences between a judicial and arbitral forum as to (1) the fees to be charged; (2) the scope of discovery; (3) a right to a jury; and (4) a right to an appeal.  Like ABA Formal Opinion 02-425, the D.C. opinion also advises that the scope of the discussion depends on the level of sophistication of the client.

What Should an Attorney Explain to a Client, and How?

While the Delaney case is only controlling in New Jersey, it provides useful guidance for attorneys hoping to create binding arbitration provisions in retainer agreements.  As the Delaney court noted, the differences between resolving an attorney-client dispute in arbitration or before a judicial forum can be communicated orally, in writing, or both.

The New Jersey Superior Court's Appellate Division stated in Delaney that it did not hold that the "reasonable explanation" required of an attorney cannot be contained in the written retainer agreement.  However, the New Jersey Supreme Court's opinion did not directly address that question, suggesting that an attorney can sufficiently explain the advantages and disadvantages of the arbitral forum within the retainer agreement.

Rather, the court held that the disclosure in the case before it — which merely recited several of the differences between a judicial and arbitral forum, with no additional explanation provided orally or in writing about these or other differences — was insufficient.  Recognizing that not all arbitration provisions are alike, the court enumerated several differences between an arbitral and judicial forum about which a client might need to be advised including the following:

1.  An arbitration resolves a dispute before a single arbitrator and not a jury of one's peers.

2.  The arbitrator's decision is final and binding with no right of appeal.

3.  Unlike court proceedings, arbitration proceedings are conducted privately and the outcome will remain confidential.

4.  Unlike court proceedings, the arbitration process offers a more limited right to discovery.

5.  The client may be responsible, in part, for the costs of the arbitration proceedings, including payments to the arbitrator.

6.  A plaintiff prevailing in a judicial forum may be entitled to punitive damages, but that right may be waived in an arbitral forum.

7.  A judicial forum generally does not permit reasonable attorney fees to be imposed against a nonprevailing client in a nonfrivolous malpractice action, whereas an arbitral forum may permit an award that imposes costs, expenses and reasonable attorney fees against the nonprevailing party.

However, the court was silent as to how an attorney is to translate that list into a compliant explanation to a client.  Practically then, attorneys should, at a minimum, explain — not merely recite — these differences to a client prior to the client agreeing to a mandatory arbitration provision.

The attorney's explanation should include, for example, that applicable arbitration procedures offer limited discovery — for instance, the JAMS procedures "limit each party to 'one deposition of an opposing [p]arty or of one individual under the control of the opposing [p]arty'" whereas judicial rules do not have a set limitation on the number of depositions available.

The attorney should also explain that, unlike a court proceeding where neither party pays for a judge's time, parties in arbitration often split the cost of the arbitrator's hourly rate, which can be costly.  And, at least in New Jersey, an attorney must provide a hard copy of the rules governing the arbitration — but note that neither D.C. Ethics Opinion 376 nor ABA Formal Opinion 02-425 imposes that requirement.  And, perhaps most importantly, an attorney must understand the relative benefits and disadvantages of arbitration so as to answer any client questions.

Conclusion

While agreements to arbitrate attorney-client disputes are routinely permitted, attorneys' ability to enforce such agreements will turn on the client's ultimate understanding of the implications of agreeing to arbitration.  Attorneys should, as always, consult the ABA Model Rules of Professional Conduct and related guidance in their jurisdiction — and when in doubt, should err on the side of explaining, both orally and in writing, the benefits and disadvantages of an arbitral forum.

Hilary Gerzhoy is an associate, and Deepika Ravi and Amy Richardson are partners, at Harris Wiltshire & Grannis LLP.

Article: Granting Arbitrators the Power to Award Attorney Fees

January 4, 2021

A recent Legal Intelligencer article by Abraham J. Gafni, “Unintentionally Granting Arbitrators the Power to Award Attorney Fees” reports on granting the power to award attorney fees in arbitration.  This article was posted with permission.  The article reads:

In this pandemic period, as courts are limited in their ability to conduct civil trials, parties increasingly consider whether and how to settle their disputes through arbitration.  In his article last month in the Legal Intelligencer, “How Pre-Lawsuit Demand Letters Can Undermine Arbitration” (Nov. 16, 2020), Charles Forer, through his erstwhile attorney foil Bob, explained how a party who had entered into an agreement providing for mandatory arbitration almost suffered the unintended consequence of forfeiting that right by threatening litigation in court.

Yet another area in which this “law of unintended consequences” appears to be regularly occurring these days is when a party unintentionally extends authority to the arbitrator to award attorney fees.  The general “American Rule,” of course, is that, in the absence of a contractual agreement or statutory provision, each party is responsible for its own attorney fees.  Similarly, arbitrators generally lack the authority to award attorney fees.  Nonetheless, parties often determine that it is within their interests to include a provision in the arbitration agreement allowing the arbitrators to award them.

Even when the parties have not included such authority in the arbitration agreement, however, they may unexpectedly find that through their arbitration pleadings or other actions during the arbitration proceeding, they have granted such authority and become responsible for the payment of their successful adversaries’ attorney fees.

A recent opinion of the Massachusetts Superior Court, business litigation session, reflected how a party’s own actions authorized an arbitration panel to award attorney’s fees even though the contract did not provide that authority. See Credit Suisse Securities (USA), (Credit Suisse) v. Galli, No. 2020-0709-BLS 2 (Aug. 31, 2020).  The case involved employees who were formerly employed by Credit Suisse.  They filed an arbitration demand against Credit Suisse alleging a violation of the Massachusetts Wage Act (Wage Act) and related contract claims, asserting that Credit Suisse had failed to pay them earned deferred compensation.

Credit Suisse denied these allegations and filed a counterclaim claiming that the employees had breached their contracts with Credit Suisse.  Consequently, in addition to asserting a claim of millions of dollars in compensatory damages it sought “transaction costs, interest and fees.”  In closing arguments, the employees’ counsel specifically sought attorney fees, asserting that the arbitrators could award them pursuant to the Wage Act, and “because we believe that Credit Suisse, in filing their counterclaims … are requesting” not only millions of dollars in compensatory damages but also “related transaction costs and fees.”  Employees’ position was that since both parties were requesting attorney fees and costs, the arbitrators had the authority to award such fees to the successful party.

In response, in its closing arguments, Credit Suisse’s counsel stated that “we do not think there is any legal basis for an award of fees and expense in this case,” but added that if the arbitration panel were to award fees to the employees, the fee application was insufficiently itemized.  However, they did not directly contest the assertion that Credit Suisse had itself requested attorneys’ fees or that by so doing it had given the arbitrators the authority to award such fees even without a finding of a Wage Act violation.  Moreover, at no time in the proceedings, did they make clear to the arbitrators that they were withdrawing any claim for attorneys’ fees should they prevail.

The arbitration panel awarded the employees compensatory damages as well as over $100,000 in attorney fees.  Credit Suisse appealed, arguing that the panel had exceeded its powers in awarding such fees.  In considering this contention, the court noted that judicial review of an arbitral decision “is extremely narrow and exceedingly deferential.”  Among the limited bases for vacating an award under both the Federal Arbitration Act, 9 U.S.C. Section 10(a)(4) and the Wage Act, however, is where the arbitrators have exceeded the scope of their arbitral authority.

Had the arbitration panel found violations of the Wage Act, the employees would have been entitled to attorney fees pursuant to that statute. The court noted, however, that it was unclear whether the findings of the panel had been based upon violations of the Wage Act.

Critically, however, the arbitration panel did not cite the Wage Act as the basis for its award of attorney fees.  Rather, according to the Massachusetts Superior Court, “the panel stated that it had the authority to award fees because each side had requested its fees.  Where the parties mutually request attorney’s fees in an arbitration, courts have concluded that this mutual request can provide the requisite legal basis for an award of fees, even though the general rule is that each party pays its own attorney fees.  This is precisely what happened here.”

In citing other cases containing a similar holding, the court noted that Rule 43(d) of the Commercial Arbitration Rules of the American Arbitration Association at Rule 43(d) also authorizes the award of attorney fees where all parties have requested it.  In short, “by expressly demanding attorney’s fees and then submitting that demand (through its counterclaim) to arbitration, Credit Suisse effectively gave the arbitrators the authority they would not have otherwise had to award such fees to the prevailing party.”

The court distinguished this situation from Matter of Stewart Abori & Chang, 282 A.D. 2d 385, 723 N.Y.S. 2d 492 (App. Div. 2001), in which the court vacated the arbitrator’s award of attorney fees to the prevailing party because prior to the rendering of the award, the opposing party withdrew its claim to recover its own attorney fees and objected to the opponent’s claim for such relief. It was not deemed, therefore, to have acquiesced in the arbitrator’s consideration of that claim.

Finally, Credit Suisse sought to escape this conclusion by arguing that its counterclaim only asked for “fees,” not “attorney fees.”  This contention was also rejected by the court.  It noted that it was clear from the employees’ closing argument that the employees understood the Credit Suisse counterclaim to be seeking attorney fees and the employees’ own counsel were also seeking attorney fees, regardless of whether an award in its favor was based on a Wage Act violation.  In the face of these contentions by the employees, however, Credit Suisse was silent, neither correcting the supposed mischaracterization of its counterclaim nor making clear that Credit Suisse was not seeking attorney fees.  In addition, its only expressed opposition to the award of attorney fees was based solely on the sufficiency of the fee application submitted by the employees.

Otherwise stated, while Credit Suisse did not actively litigate the issue of its own fees, it never expressly withdrew that claim.  In addition, Credit Suisse did not dispute the employees’ assertion in closing arguments that the parties had agreed to submit the question of attorney fees for resolution by the panel.

In summary, whether arbitrators should be granted the authority to award attorney fees is an issue that must always be considered when drafting an arbitration agreement; and, of course, as the nature of any future dispute is not yet known and the incorporation of such a provision will be adopted without any knowledge of the potential financial burden that may result , counsel must always evaluate the likelihood of success in the arbitration, the relative financial situations of the parties, and the ability to bear such further expense in the event of an adverse result.

What has been further demonstrated here is that parties must remain wary of the possibility of becoming responsible for attorney fees, even when the arbitration agreement does not provide for such by making or joining in such a demand or, perhaps, by simply remaining silent and not objecting in the face of the other side’s request for attorney fees.  Unfortunately, this often occurs merely because parties wish to demonstrate that their aggressiveness and confidence match that of their adversaries.  Ignoring the potential risk of this unintended consequence, however, may result in a significant award well beyond what was contemplated by the parties when they agreed to arbitration.

Abraham J. Gafni is a retired judge and mediator/arbitrator with ADR Options.  He is also a professor of law emeritus at the Villanova University Charles Widger School of Law.

Quinn Emanuel Seeks to Collect $15M in Unpaid Fees

November 18, 2020

A recent Law 360 story by Diamond Naga Siu, “Quinn Emanuel Looks to Collect $15M in Unpaid Fees,” reports that Quinn Emanuel Urquhart & Sullivan LLP urged a D.C. federal judge to confirm and enforce a $15 million arbitration award for unpaid legal fees after the Indian textile manufacturer it previously represented ignored documents to confirm the amount for more than a year.  CLC Industries Limited — formerly known as Spentex Industries Limited — used the law firm when it initiated a failed cotton investment claim against Uzbekistan in 2013 for bankrupting three cotton processing plants it invested in.

After the case was tossed, CLC Industries allegedly did not pay Quinn Emanuel its legal fees, and the firm initiated arbitration in the United States with the Judicial Arbitration and Mediation Services, Inc., or JAMS, against the textile company to receive payment.  JAMS awarded the fees in 2018, according to Quinn Emanuel's affidavit, ruling that the law firm could collect them as described under a letter of engagement the law firm and company entered ahead of the arbitration against Uzbekistan.

"More than 500 days elapsed since Respondents were served with the Petition," Quinn Emanuel wrote in its filing, referring to how long the firm's petition to confirm the award amount has been ignored.  "Petitioner respectfully requests the entry of a default against Respondents."  "Petitioner served the Petition and accompanying exhibits on Respondents by Federal Express on July 3, 2019, pursuant to Respondents' consent to service of process 'by regular mail or courier' in the Engagement Agreement," the firm added.

Quinn Emanuel said that CLC Industries received and signed for the documents at its New Delhi, India, office within the week the petition was sent.

CLC Industries opened a case in the Delhi High Court in India, asking Judge Jayant Nath to dismiss certain fees in its letter of engagement with Quinn Emanuel.  CLC and the law firm had signed the original agreement in 2013 but amended it in 2015 after they realized the case would be complex and expensive to fight, according to Judge Nath's opinion.

He ruled in favor of the law firm in May, saying that the textile company was responsible for paying Quinn Emanuel's contingency fees, which aren't permitted in India.  The judge ruled that since the letter of engagement was governed by U.S. laws, the fee arrangement was allowed.  "They have chosen to abstain themselves from the arbitration proceedings and the award has already been passed," Judge Nath wrote, referring to the award of legal fees.  "They are free to take appropriate steps as per law against the award."

Article: Unusual Settlement Structure Leads to Fee Award Almost Double Judgment

November 1, 2020

A recent New York Law Journal article by Thomas E.L. Dewey, “Unusual Settlement Structure Leads to Approval of Fee Award Nearly Double the Payout,” reports on a recent New York class action were the attorney fee award exceeded the settlement amount.  This article was posted with permission.  The article reads:

Public policy generally prohibits class action settlements in which the attorney fee awards dwarf the amount awarded to the class.  But as a recent case in the U.S. District Court for the Southern District of New York illustrates, such a settlement may be approved if it is structured so that class counsel’s award does not come at the class’s expense.

In Hart v. BHH, No. 15-cv-4804, 2020 WL 5645984, at *2 (S.D.N.Y. Sept. 22, 2020), Judge Pauley approved over $4.6 million in fees and expenses for class counsel, even though the total payments to class members were expected to top out at less than $2.5 million.  However, the court balked at the inclusion of a “quick-pay” provision in an earlier draft of the settlement, which would have allowed class counsel to collect its fees before the class members were paid, and did not allow the parties to submit attorney fees to a separate arbitration.

Background

The two named plaintiffs filed suit in in June 2015, alleging that “ultrasonic pest repeller” devices they had purchased from BHH LLC (branded Bell + Howell) were “ineffective and worthless.”  The complaint included claims under the federal Magnuson-Moss Warranty Act, multiple California consumer protection laws, and the implied warranty of merchantability. In May 2016, the court dismissed the federal statutory claim, but allowed the state law claims to proceed. An amended complaint then added a claim for fraud, citing representations made on the devices’ packaging and via the Home Shopping Network that they would rid homes of “ants, spiders, mice, roaches, rats and other pests.”

In July 2017, the court certified three classes of plaintiffs who had purchased the devices—a nationwide fraud class, a California-only class, and a multi-state breach of warranty class.  Each party then offered experts on the efficacy of the devices.  Judge Pauley began his Sept. 5, 2018, opinion on summary judgment with images from one of the expert reports, noting, “As the photographs show, mice can apparently relax comfortably under a Repeller and even appear to be so drawn in by its siren song that one would scale a wall just to snooze on it.”  Having thus found a disputed issue of fact regarding the efficacy of the devices, the court set jury trial for Sept. 9, 2019.  On July 16, 2019, the parties informed the court that they had reached a settlement, and on Sept. 3, 2019, the plaintiffs moved for preliminary approval of the agreement.

‘Quick-Pay’ Attorney Fees Provision Scuttles Preliminary Approval

The most notable feature of the proposed agreement in Hart was its so-called “quick-pay” provision, under which the plaintiff’s attorneys would be paid their fees within 10 days of final settlement approval.  Plaintiff contended the provision was necessary to discourage “the filing of baseless objections (and appeals), which can delay payment of class relief.”  Analyzing that provision in a July 17, 2020, opinion, the court wrote that it “strains credulity” that such a measure would deter baseless objections.  The court assured the litigants that such objections could be better discouraged by the threat of Rule 11 sanctions.

The court also found that, having reached a proposed agreement, the two parties had little incentive to pour any more resources into the case if valid objectors came forward.  The court noted that “money is the best way to keep lawyers engaged.”

Although plaintiffs’ counsel cited seven previous SDNY orders in which similar provisions had been granted preliminary approval, the court pointed out that none of those previous orders contained “an iota of analysis on ‘quick-pay’ provisions.”  Thus, in the first detailed analysis of such a provision in the Southern District, the court held that paying counsel “prior to compensating the class conflicts with Rule 23(e)’s mandate for fairness, reasonableness, and adequacy.”

Also as part of the preliminary agreement, the parties proposed to engage an arbitrator to determine the amount of attorney fees to be awarded to plaintiffs’ counsel.  The court ruled that such an arrangement was contrary to law, as it would usurp the court’s discretion and eviscerate its duty to “act as a fiduciary who must serve as a guardian of the rights of absent class members.”

The court thus denied preliminary approval of the settlement.  The plaintiffs quickly submitted a revised proposed settlement which no longer included the quick-pay provision or arbitration of attorney fees.  The court reviewed the revised settlement on Feb. 12, 2020, and granted preliminary approval, setting a hearing on final approval for September 2020.

Refunds for Class Members Found Fair

In its Sept. 22, 2020, opinion granting final approval of the settlement, the court devoted significant consideration to the structure of the awards to the class, which were styled as refunds for purchases of repeller devices.  By providing proof of purchase that included the price paid for each unit, a class member could receive a full refund for up to six units.  Without proof of the price paid, the amount of each refund was set at $15, which the parties chose as the best estimate of the purchase price.  Finally, class members who could not provide any proof of purchase could still receive $15 each for up to two units purchased.

As of August 24, class members had filed 82,503 claims for payment, and a total payout of $2,118,505 had been approved by the class administrator.  And crucially, no objections to the settlement had been received from notified class members.  The administrator expected a final payout between $2.1 million and $2.5 million.  BHH had agreed in the settlement to a total potential liability of over $57 million.

In evaluating the fairness of the settlement, the court noted that if the case had proceeded to a jury trial, class members might have received considerably less than full refunds—especially because plaintiffs “faced substantial risk in proving loss causation.”  The court found the settlement to be procedurally and substantively fair, and moved on to considering the fees to be awarded to class counsel.

Attorney Fees Exceed Amount Awarded to Class Members

The agreement allowed class counsel to seek up to $6.5 million in attorney fees and expenses—an amount almost triple the expected payout to class members.  That would typically pose a problem for a reviewing judge, who must “carefully scrutinize lead counsel’s application for attorneys’ fees to ensure that the interests of the class members are not subordinated to the interests of … class counsel.” Hart at 10, citing Maywalt v. Parker & Parsley Petroleum Co., 67 F.3d 1072, 1078 (2d Cir. 1995).  But as the court explained, “This case provides one unique feature absent from most class-action settlements: rather than the class members sharing from a settlement pool, the recovery to the class will be claims based.  As a result, attorneys’ fees will not reduce the class recovery.” Hart at 10.

For such claim-based settlements, the court explained that its “fiduciary role in overseeing the award is greatly reduced, because there is no conflict of interest between attorneys and class members.” Id. citing McBean v. City of New York, 233 F.R.D. 377, 392 (S.D.N.Y.2006).  The opinion also noted that the attorney fees were negotiated after the parties had reached an agreement on class recovery, which “tends to eliminate any danger of the amount of attorneys’ fees affecting the amount of the class recovery.” Hart at 11, citing In re Sony SXRD Rear Projection Television Class Action Litig., 2008 WL 1956267, at *15 (S.D.N.Y. May 1, 2008).

Performing the Second Circuit’s preferred fee analysis from Goldberger v. Integrated Res., as checked by the lodestar method, the court awarded $3,976,762.50 in legal fees and $700,227.57 in litigation expenses.  It rejected plaintiffs’ argument that unclaimed funds should be used as the denominator to calculate the fee percentage, since in this instance, the unclaimed funds would revert to BHH instead of being distributed via cy pres, and therefore the unclaimed funds did not provide an actual benefit to the class.  That was significant, because by plaintiffs’ calculation, nearly 90 percent of the agreed $57 million settlement was expected to go undistributed.

Even so, the final fee award was substantially greater than the total award to the class.  The court considered this carefully. “On one hand, allowing lawyers’ recovery to dwarf the settlement is against public policy,” the court wrote.  Hart at 21. “On the other hand, Class Counsel should be rewarded for concentrating their time, effort, and resources in successfully representing the class on a contingent basis.  And, most importantly, the fee will be paid directly by Defendants and will not come at the class’ expense.”  The court ordered that the attorney fees may be paid when at least 75% of the settlement has been distributed.  The court also awarded each class representative a $5,000 incentive award.

Practice Tips

The Hart case is as a helpful illustration of the restrictions on attorney fee provisions in class action settlements.  Though courts will be skeptical of attorney fee provisions that approach or exceed the total benefit to class members, such skepticism may be overcome if the settlement is structured so that increasing class counsel’s payout does not decrease the benefit to the class.  Additionally, the Hart court’s reasoned disapproval of a quick-pay attorney fee provision may portend greater scrutiny of such provisions in future cases in the Southern District and elsewhere.

Thomas E.L. Dewey is a partner at Dewey Pegno & Kramarsky.  L. Lars Hulsebus, an associate at the firm, assisted in the preparation of the article.

Insurer Wins Recovery of $5.5M in Defense Fees

September 7, 2020

A recent Law 360 story by Daphne Zhang, “Insurer Win ‘Incompetent’ Atty Fight to Recoup $5.5M,” reports that a California federal judge axed a claims handler's suit seeking additional coverage of its legal bills from an insurer that it says hired a bad lawyer to fend off underlying litigation involving a car crash, ruling instead in favor of the insurer's counterclaim to recoup over $5.5 million in defense and arbitration costs it paid.  U.S. District Judge Janis L. Sammartino said that American Claims Management Inc.'s coverage claims are barred by Allied World Surplus Lines Insurance Co.'s policy exclusions, and since some of the claim handler's legal bills should not have been covered, the insurer is entitled to recoup its over $5.5 million payment from ACM.

Allied World has sufficiently shown that its policy's claims services and dishonest acts exclusion precludes coverage since ACM acted in bad faith and concealed information in its handling of insurance claims in the underlying case, Judge Sammartino said.  The judge dismissed ACM's allegation that Allied World breached its duty of defense because the claims handler failed to show that attorney Alan Jampol of Jampol Zimet, appointed by Allied World to defend ACM in the underlying suit, was incompetent or inexperienced, according to the order.

ACM processed claims for QBE Insurance Corp. As of October 2010, it retained Allied World to insure its work for up to $5 million and contracted with other insurance companies for an additional $10 million in coverage.  In the underlying case, a driver insured by QBE crashed into a vehicle and injured a family.  When processing the injured family's claim, ACM missed a March 2011 deadline that would have capped QBE's exposure at $30,000.  The family subsequently won a $21 million jury verdict in the underlying case, which QBE later settled for $15 million, according to filings.

QBE then offered to settle with ACM for $15 million, but Allied World allowed the matter to go to arbitration.  In July 2017, an arbitration panel awarded QBE more than $18.5 million, according to court papers.  With the portion of the over $5 million policy that Allied World paid and the $10 million paid by its other insurance carriers, ACM wanted Allied World to pay the remaining $4.9 million of the arbitration award and sued them.

In the order, Judge Sammartino said that Allied World's policy exclusions bars coverage for acts of bad faith and dishonest conduct in handling an insurance contract, and QBE specifically alleged that ACM handled the car accident claim in bad faith.  The judge said the arbitration panel in the underlying case found that ACM "chose to withhold from QBE evidence of its own negligent performance," provided QBE with "inadequate and misleading" information, and that ACM "has repeatedly tried to conceal and misrepresent the fact of timely receipt of the letter demand" from the injured family.

Additionally, the court has found that Jampol was competent at the time of his appointment by Allied World to defend ACM, Judge Sammartino said. ACM has alleged that Jampol was inexperienced with car accident cases and had never handled a "bad-faith" case as complicated as the underlying suit, according to filings.

"Plaintiff gives no reason why an auto accident case such as this would be more complex than other bad-faith insurance claims that Jampol had experience handling.  Nor does plaintiff identify any skills or knowledge necessary to litigate an auto accident case that Jampol lacked," the judge said.