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Category: Quantum Meruit

Article: Why the Catalyst Theory Matters in Class Actions

March 11, 2024

A recent Law.com article by Adam J. Levitt, “Arguing Class Actions: Why the Catalyst Theory Matters”, examines the catalyst theory in class action litigation.  This article was posted with permission.  The article reads:

The story presents a conundrum.  Plaintiffs file a class action, which the defendant initially resists.  Plaintiffs counsel spends hundreds of thousands of dollars (or more) in lodestar and costs prosecuting the case, but after potentially years of hotly contested litigation, the defendant issues a recall or announces a refund program that fixes the problem and then argues that the case is moot.  The question: Should those who filed this case, and consequently induced (or “catalyzed”) the defendant to fix the problem, be paid?

The right answer is obvious.  Of course the plaintiffs lawyers should be paid.  Without plaintiffs counsel’s actions and active litigation threat, the defendant would have never changed its behavior, ultimately for consumers’ benefit.  The law routinely rewards those who confer benefits on others, even in the absence of, say, a contractual guarantee (as with the doctrine of quantum meruit).  In short, nobody works for free.  Nobody, as some would have it, except plaintiffs lawyers.

The Rise and Fall of the Catalyst Theory

Rewarding lawyers for catalyzing a change used to be noncontroversial. See, e.g., Marbley v. Bane, 57 F.3d 224 (2d Cir. 1995) (“a plaintiff whose lawsuit has been the catalyst in bringing about a goal sought in litigation, by threat of victory … has prevailed for purposes of an attorney’s fee claim…”); Pembroke v. Wood Cnty., Texas, 981 F.2d 225, 231 (5th Cir. 1993) (recognizing viability of catalyst theory); Wheeler v. Towanda Area Sch. Dist., 950 F.2d 128, 132 (3d Cir. 1991) (same).

But the law became murkier in May 2001, with the U.S. Supreme Court’s decision in Buckhannon Bd. & Care Home v. W. Virginia Dep’t of Health & Hum. Res., 532 U.S. 598 (2001).  There, an assisted living facility sued West Virginia, arguing that a regulation violated the Fair Housing Amendments Act.  After the suit was filed, the Legislature removed the regulation, mooting the case.

In a 5-4 decision, the Supreme Court ruled that the plaintiff was not a “prevailing party” for purposes of the applicable fee-shifting statute.  Discarding the “catalyst theory,” it ruled that: “A defendant’s voluntary change in conduct, although perhaps accomplishing what the plaintiff sought to achieve by the lawsuit, lacks the necessary judicial imprimatur on the change” sufficient to make the plaintiff a “prevailing party.” Id. at 605.  As Justice Ruth Bader Ginsburg explained in her dissent, the Buckhannon decision frustrates the goals of the catalyst theory because it “allows a defendant to escape a statutory obligation to pay a plaintiff’s counsel fees, even though the suit’s merit led the defendant to abandon the fray, to switch rather than fight on, to accord plaintiff sooner rather than later the principal redress sought in the complaint.” Id. at 622 (Ginsburg, J., dissenting).

The Catalyst Theory Today

Notwithstanding the Buckhannon decision, the catalyst theory remains a powerful tool outside of Buckhannon’s specific context.

First, Buckhannon has no bearing on state causes of action.  In California, Cal. Code Civ. Proc. §1021.5 allows a court to award fees to a “successful” party.  The California Supreme Court has explained it takes a “broad, pragmatic view of what constitutes a ‘successful party,’” Graham v. DaimlerChrysler, 34 Cal. 4th 553, 565 (2004), and explicitly endorsed the “catalyst theory [as] an application of the … principle that courts look to the practical impact of the public interest litigation in order to determine whether the party was successful.” Id. at 566.  In short, it disagreed with the U.S. Supreme Court regarding what it means to “prevail” or “succeed” in a litigation.

The catalyst theory has also largely survived in the context of favorable settlements.  For example, in Mady v. DaimlerChrysler, 59 So.3d 1129 (Fla. 2011), the Supreme Court of Florida considered an award of attorney fees to a consumer who accepted defendant’s offer of judgment, an offer that neither conceded liability nor plaintiff’s entitlement to fees, in a case filed under the Magnuson Moss Warranty Act (MMWA), which guarantees fees to a “prevailing party.” Id. at 1131.  Explicitly considering and distinguishing Buckhannon, the court found that a party may “prevail” with a settlement.  In doing so, it rearticulated the logic underpinning the catalyst theory:

[The plaintiff] achieved the same result with a monetary settlement only after being forced to bear all of the costs and expenses associated with litigation and facing the statutory penalty if the offer of judgment had not been accepted. DaimlerChrysler could have resolved this dispute during the “informal dispute settlement” phase, but instead waited until after [plaintiff] was forced to commence this action and incur the expenses of this litigation. Id. at 1133.

Further, even in federal court, attorney fees may be awarded under statutes other than those limiting such awards to “prevailing” parties.  For example, in Templin v. Indep. Blue Cross, 785 F.3d 861 (3d Cir. 2015), the Third Circuit explained that a fee may be awarded for an Employee Retirement Income Security Act claim under the catalyst theory, because ERISA does not limit fee awards to the “prevailing party.” 785 F.3d at 865.  Including the Third Circuit, at least five circuits have endorsed the catalyst theory under such statutes: Scarangella v. Group Health, 731 F.3d 146, 154–55 (2d Cir. 2013); Ohio River Valley Env’l Coalition v. Green Valley Coal, 511 F.3d 407, 414 (4th Cir. 2007); Sierra Club v. Env’l Protection Agency, 322 F.3d 718, 726 (D.C. Cir. 2003); Loggerhead Turtle v. Cty. Council, 307 F.3d 1318, 1325 (11th Cir. 2002).

Despite the ongoing recognition of the catalyst theory in many contexts, there remains the risk that courts may apply the catalyst theory narrowly, or that defendants may find a way around it. Consider Gordon v. Tootsie Roll Indus., 810 F. App’x 495, 496 (9th Cir. 2020), a “slack-fill” case in which the plaintiff alleged that the defendant’s boxes of Junior Mints were mostly air.  After the plaintiff moved for class certification, the defendant changed the box’s label.  The plaintiffs dismissed and moved for fees.

The fee application was denied because “Gordon’s theory of the case was that the size of the box was itself misleading, and that Tootsie Roll should either fill the Products’ box with more candy to account for the size of the box … or shrink the box to accurately represent the amount of the candy product therein[, and] Tootsie Roll did not make either of these changes.” Id. at 497 (internal quotation omitted).  Considering the disincentives (or, conversely, the moral hazards) that arise from this type of narrow application of the catalyst theory, courts should take a decidedly more equitable view when adjudicating this important issue.

A Way Forward

For practitioners, a few lessons come out of this case law and history.  First, in writing their complaint, attorneys must think through the various paths that a company might take to remedy the purported harm.  Recall that in Gordon, the plaintiff focused entirely on the misleading box, but not on the misleading labeling. Second, favorable settlements and offers of judgment remain viable tools, and may support a catalyst theory attorney-fee payment even if the defendant resists paying fees in the settlement itself.  Finally, despite Buckhannon, the catalyst theory remains readily available under a host of statutes (state and federal).  In relying on citing those statutes, plaintiffs should not shy away from the catalyst theory’s compelling logic.  Courts understand that basic fairness requires that attorneys be paid if their lawsuit ultimately confers a significant benefit.  Nobody should work for free.  Not even plaintiffs lawyers.

Adam J. Levitt is a founding partner of DiCello Levitt, where he heads the firm’s class action and public client practice groups.  DiCello Levitt senior counsel Daniel Schwartz also contributed to this article.

Client Says Attorney Destroyed Billing Record in Fee Dispute Case

May 31, 2023

A recent Law 360 story by Madeline Lyskawa, Atty Trashed Time Records, Spa Says in $1.15 Fee Fight,” reports that an Atlanta-based airport travel spa operator urged a Georgia appellate court to unravel an attorney's $1.15 million jury award covering nearly 2,000 hours of work he said he performed without pay, arguing that he intentionally destroyed his time records and that the award is excessive.  Cordial Endeavor Concessions of Atlanta Inc., which operates an airport travel spa in Hartsfield-Jackson Atlanta International Airport, maintained in a brief that the Georgia Court of Appeals should reverse a Georgia State-wide Business Court's judgment confirming a jury's $1.15 million verdict and send the case back for a new trial, saying the jury should have awarded damages at the lower range of a reasonable fee because the spa hadn't signed a fee agreement with attorney Carl Gebo and his law firm, Gebo Law, before the work was complete.

"A lawyer who fails to secure an engagement agreement, fails to communicate his hourly rate to the client, and then discards his contemporaneous time records when fee litigation is likely does not get to recover unpaid fees at the upper range of what might be considered a reasonable hourly rate," the spa operator said.  The jury verdict challenged by Cordial Endeavor on appeal was rendered in mid-December, following a five-day trial that took place in Cobb County before Georgia State-wide Business Court Judge William "Bill" Grady Hamrick III. After deliberations, the jury ordered Cordial Endeavor to pay Gebo $1.15 million in quantum meruit damages for nearly 2,000 hours of work he said he performed without pay between April 2015 to May 2020.

But, according to Cordial Endeavor, the jury's verdict represents an hourly rate of roughly $630 for the 1,829 hours of unpaid legal services Gebo says he provided, which the company said represents the "uppermost range of a reasonable fee."  Moreover, it is unrepresentative of the rate Gebo said he would charge and said was reasonable in his complaint, Cordial Endeavor said.

Instead, Gebo began representing Cordial Endeavor at a rate of $300 per hour, and then failed to inform the company of his rate increase to $425 per hour once he began representing the company in New York state trial court, Cordial Endeavor said.  Additionally, in his complaint, Gebo alleged that a $425 per hour rate reflected a reasonable value for his services, the company said.  Even so, at trial, Gebo's expert called for a $600 per hour rate, which the company said is higher than it would have been prepared to pay had Gebo "properly communicated" his fees to Cordial Endeavor.

As for Gebo's alleged destruction of scrap notes and time records detailing his work for the company, Cordial Endeavor accused the business court of improperly denying its motion for sanctions against Gebo, arguing that Gebo should have been required to keep his time records in order to prove the amount he was entitled to, especially given that he failed to secure an engagement agreement with the company.  As a result, the jury should have been given a spoliation instruction, Cordial Endeavor said, without which it was seriously prejudiced.  Furthermore, Cordial Endeavor also accused the business court of having faltered by excluding evidence of Gebo's alleged indifference to rules of professional conduct requiring him to secure a written fee agreement with clients.

"Without evidence of Gebo's disregard for Rule 1.5(b), the jury did not understand that Gebo disregarded an important rule of professional responsibility and thus did not understand Gebo should be awarded recovery at the lower range of what otherwise would be a reasonable negotiated fee," Cordial Endeavor said.

Court Rejects Fee Agreement that Would Result in ’Windfall’ to Law Firm

May 3, 2023

A recent Law.com by Riley Brennan, “In Fee Fight, State Appeals Court Rejects Contractual Interpretation That Would Result in ‘Windfall’ to 1 Law Firm,” reports that, in a dispute over a contingency fee following a lateral move, the Kansas Court of Appeals ruled that the only reasonable interpretation of a law firm’s operating agreement with one of its now-former owners is the one that allows the firm to recover under the doctrine of quantum meruit.

The appeals court reversed and remanded a lower court’s grant of summary judgment to plaintiff Krigel & Krigel, instead siding with defendant Shank and Heinemann’s interpretation of its operating agreement with attorney Stephen Moore.  In an April 21 opinion, Judge Patrick McAnany for the Kansas Court of Appeals, ruled that the operating agreement between the Shank firm and Moore wasn’t a waiver of the firm’s right to recover in quantum meruit.

Moore originally worked at Shank, first as an associate, then later as one of three owners of the firm, according to the opinion.  Eventually, he left Shank to join Krigel.  On his exit, Moore took one of Shank’s contingent fee cases, representing client Trudi Shouse.  Shouse hired the Shank firm on a contingent fee basis to pursue her claim in an employment dispute.

According to the court, “She acknowledged in her engagement agreement with the firm that Shank would have an attorney’s lien against any award or settlement in the matter.”   Yet, two years later, Moore left Shank, taking the Shouse litigation with him.  Days later the Shouse employment litigation was settled, but Krigel refused to honor Shank’s attorney lien, according McAnany’s opinion.

Krigel sought a declaratory judgment against Shank, looking to invalidate its attorney lien claim, in an attempt to avoid sharing the contingent fee with Shank.  The firms then filed competing motions for summary judgment, with the district court entering judgment in favor of Krigel and against Shank.  This left Krigel entitled to retain the entire contingent fee from the Shouse litigation, excluding Shank, according the opinion.

But McAnany determined the district court had erred in this ruling.  “Shank represented Shouse for the majority of her case,” McAnany said.  ”It paid $2,401.68 in expenses, provided the staff needed to assist with the case, and paid the overhead costs that come with operating a law firm.  It also compensated Moore for the time he worked at the firm.  Interpreting the operating agreement as a waiver of quantum meruit recovery in the Shouse action would result in a windfall to Krigel, which has provided no consideration for the benefit.”

According to McAnany, there was “nothing in the operating agreement that could be construed as an express waiver by Shank of its right to relief through quantum meruit upon Shouse discharging Shank and retaining Krigel in its stead.” 

“Under such an arrangement, the departing senior attorney may be compensated for capital contributions to the firm and the attorney’s share of the tangible assets of the firm but not for any intangibles such as goodwill or for work in progress or a share in unrealized recoveries in pending cases.  Such an arrangement does not signal a disregard for the value of these intangibles for which a departing attorney realizes no monetary consideration,” McAnany wrote.  “Rather, the arrangement recognizes the importance of husbanding the value of these intangibles for the cultivation and development of new attorneys who will carry on the task of maintaining and expanding clients for the future health of the firm.  We fail to see how such an arrangement could ever be viewed as an abandonment of the firm’s right to seek relief through quantum meruit from clients who choose to take their legal business elsewhere.”

The district court’s interpretation of the operating agreement was also inconsistent with Shank’s actions and the concept of principal-agent relationships, according to McAnany.  “Shank took on Shouse’s case on a contingent fee basis and spelled out in the engagement agreement its right to an attorney’s lien against any recovery by Shouse if she went to another law firm,” McAnany wrote.  “And when Shouse left and Krigel settled the case, Shank asserted its attorney lien for the work done on the case before Shouse left.  None of this is consistent with waiver, but it is entirely consistent with the right to claim quantum meruit.”

The appeals court also rejected the district court’s interpretation of the agreement’s provision that valued contingency fee cases at zero.  “The district court believed that its interpretation of the operating agreement was reasonable because allowing quantum meruit in the Shouse case would allow Moore to make a quantum meruit claim in the cases that stayed at Shank and this was ‘[t]he result that the parties presumably sought to avoid when they set the contingency case book value at zero,’” McAnany said.  “Such an interpretation ignores the fact that Moore had no quantum meruit claim in cases he worked on while at Shank.  The clients were the clients of Shank and Moore was paid for his work on the firm’s clients through his compensation agreement with the firm.”  Likewise, the appeals court said Krigel’s interpretation of that provision of the operating agreement did not hold up to scrutiny when applied to different scenarios.

“[U]nder Krigel’s theory, death of one of the owners necessarily would trigger these same provisions of the operating agreement; and because the value of contingent fee matters would not be calculated in arriving at the value of the deceased owner’s equity in the firm, a contingent fee client—or all the firm’s contingent fee clients, for that matter—would be free to pick up and move to a different firm and, in the process, insulate the proceeds of any recovery in their cases from a claim under quantum meruit by Shank for legal work performed on their behalf,” McAnany determined.  “The same could be said of the other means by which an owner of the Shank firm could depart: an owner being expelled from the firm or being disbarred.  Such an outcome based on Krigel’s interpretation of the operating agreement would be an absolute absurdity.  Moreover, we cannot rewrite the operating agreement under the guise of construction in order to accommodate Krigel’s theory of waiver.”

Judge Wants Trial for Law Firms’ Fee Allocation Dispute

May 1, 2023

A recent Law 360 by Chart Riggall, “Judge Says Trial Needed to Split Firms’ Fee Award,” reports that a federal magistrate judge said a trial is necessary to split the $1.8 million baby of attorney fees that two law firms have been squabbling over since their 2020 victory in a labor class action against DuPont.  In a recommendation, Pennsylvania Magistrate Judge Martin Carlson found that while there exists "no legally enforceable agreement" to split the fees between MoreMarrone LLC and Stephan Zouras LLP, the latter firm — which sued MoreMarrone shortly after the fees were awarded — had unquestionably contributed to winning the $5 million settlement.

"The undisputed evidence establishes that the Zouras firm has a valid, yet unquantified, quantum meruit claim, since it is uncontested that the plaintiff attorneys provided some value and sweat equity to the successful litigation of the Smiley case and have not yet been compensated for their efforts," Judge Carlson wrote, referring to the Bobbi-Jo Smiley v. E.I. du Pont De Nemours and Co. case resulting in the settlement.  Judge Carlson, whose recommendation will be reviewed by a federal district judge, lamented — as he has in past orders — the falling out between the firms as "a sobering parable regarding the divisive and destructive power of money."

The original lawsuit against DuPont was first filed in 2012 by MoreMarrone and Greenblatt Pierce Funt & Flores — now Weir Greenblatt Pierce LLP — on behalf of workers who said they were denied pay for off-clock work.  The Greenblatt firm eventually stepped away from the case, with Stephan Zouras joining as co-counsel in 2018.  MoreMarrone and Stephan Zouras, however, never entered into any formal agreement about how the funds would be split were they to prevail, according to Judge Carlson.  Zouras was instead assured by its co-counsel only that the terms would be "as favorable to you as possible."

After the district court awarded the roughly $1.8 million to MoreMarrone — charging the two firms with sorting out the split for themselves — Stephan Zouras sued, claiming a $573,000 figure well above the $325,000 MoreMarrone offered.  At issue before Judge Carlson were dueling motions for summary judgment.  MoreMarrone, citing the lack of a binding agreement, asked the court to toss out Stephan Zouras' breach of contract, fraud, and breach of fiduciary duty claims. That request was granted.

But Judge Carlson went on to find that contrary to MoreMarrone's claims, that lack of contract did not exclude Stephan Zouras from any and all compensation — the firm is still entitled to payment for the work done.  "There can be no question that it would be inequitable for the defendants to continue to retain the benefit of the full fees award without payment of value to the Zouras firm for its reasonable contribution to this effort," Judge Carlson wrote.

Law Firms Spar Over Attorney Fees Ahead of Trial

August 4, 2021

A recent Law 360 story by Celeste Bott, “Chicago Firm, Attys Spar Over Fees Ahead of Ex-Client’s Trial”, reports that Chicago law firm Wood Phillips and one of its former attorneys suing an ex-client for payment for their two decades of work in a patent case are embroiled in a contentious dispute over how potential recovery would be allocated between them, and the firm is asking an Illinois federal judge to weigh in on the applicability of its contingency fee agreements ahead of trial.

Wood Phillips Katz Clark & Mortimer and named partner John S. Mortimer are seeking to file either a pretrial motion to resolve whether the parties are bound by those agreements or, alternatively, to add a cross-claim against former Wood Phillips attorney Dean Monco for anticipatory breach of contract.

The case is set to go to trial early next year, as the firm and attorneys seek to be compensated for more than 20 years of work for carbon fiber manufacturer Zoltek Corp.  The firm and Mortimer argue, in their motion for leave to file, that it would be unfair and would create "chaos and confusion" to have the plaintiffs arguing amongst themselves at trial.

But U.S. District Judge Martha M. Pacold appeared skeptical of those proposed procedural avenues during a status hearing, pushing the parties to address how a Rule 16 pretrial motion could resolve a substantive issue such as the applicability of the firm agreements, how it would impact how the trial would be conducted and whether a potential cross-claim is premature given there's no recovery to divvy up yet.  The judge also questioned whether a cross-claim against Monco was fair given the late stage of the litigation.

Acknowledging that resolving the intra-plaintiff dispute could assist in a potential settlement, the judge said that there still needs to be a legal basis for resolving the issue, not just a practical one.  "I don't think I have a kind of free-ranging power, even if I wish I might, to just decide random stuff," Judge Pacold said.  "There has to be a legal basis and legal hook for really every issue that is teed up.  So I certainly understand all those practical considerations, there just has to be a legal framework for resolving it."

Lee Grossman, an attorney representing Mortimer and the firm, told the court the vehicle for the pretrial motion could entail a jury instruction telling jurors to conduct the recovery for Monco, Mortimer, and the firm based on the formula laid out in the firm agreements at issue.  As for whether a cross-claim is premature ahead of a potential recovery at trial, Monco has already stated in interrogatories that he doesn't intend to honor the firm fee agreements, Grossman said.

"One party has already said, 'I'm not going to follow that contract,'" Grossman said. "In the interest of judicial economy, or whatever economy is left, I don't think it's a practical way to go."  But Monco argued to the court that Wood Phillips has made multiple improper attempts to adjudicate an unfiled and disputed contract claim against any future quantum meruit recovery from Zoltek, and that his former employer can't use Rule 16 to skip the required steps of filing a pleading and then a motion for summary judgment.

Paul Vickrey of Vitale Vickrey Niro & Gasey LLP, representing Monco, said allowing that avenue would lead to a "sideshow" at trial and would only invite confusion and delay. The firm agreements have nothing to do with the elements for determining quantum meruit under Illinois law, Vickrey said, and the firm can later challenge the results in state court if they so choose.

The calculations laid out in the agreements at issue are "hotly disputed," said Patrick F. Solon, another attorney for Monco. The contract claim that the firm is now trying to pursue was never filed, and there's been no pleading, no answers and no discovery on the matter, he said.  But Grossman countered that the fee agreements have been a cornerstone in the yearslong case.  "There's no discovery needed on these agreements," he said.  "They've been talked about in this case from day one."

Also, before the judge is a conditional bid by Monco to disqualify Grossman as counsel. Monco contends that if the firm is allowed to pursue its claim for his "anticipatory breach" of firm agreements, "using Grossman as their counsel [...] would result in Grossman suing his own former client in this very action."  Judge Pacold didn't rule on the pending motions immediately, saying she would either issue a decision after reviewing the materials and arguments or schedule another hearing for further discussion.

According to the 2017 complaint, Zoltek had hired Monco and Mortimer in 1996 to represent the manufacturer in a lawsuit against the federal government alleging that the B-2 bomber, which was developed by aerospace company Northrop Grumman Corp., infringed its patented method to produce carbon fiber sheets that help military aircraft avoid being detected by radar. Japanese conglomerate Toray Industries Inc. acquired Zoltek in 2014.

The litigation, which proved "extremely contentious and difficult," lasted 20 years, with the attorneys spending almost 13,000 hours representing Zoltek, the firm said.  But after a July 2016 strategy meeting in St. Louis, which Monco and Mortimer said led to their termination as counsel, the manufacturer then allegedly refused to pay the attorneys for overdue legal bills.

The manufacturer eventually settled the previous litigation for $20 million, but Wood Phillips and the attorneys got nothing, according to the complaint.  In July 2019, an Illinois federal judge said Monco and Mortimer can't pursue fees out of that settlement and must instead raise their claims against the company, with whom they had the attorney-client relationship.