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Category: Unpaid Fees

London Arbitration Firm Recovers Costs from UAE Fee Dispute

March 13, 2017

A recent Law 360 story by Jimmy Hoover, “London Arbitration Firm Recovers Costs From UAE Fee Spat,” reports that a London-based international arbitration firm won back nearly all of the costs it spent pursuing around $2 million in legal fees from its representation of a wealthy United Arab Emirates (UAE) family in a commercial contract dispute, when a U.K. court found the family was drawing out the appeal process to delay payment of the fees.

The England and Wales High Court ruled that Shackleton and Associates Ltd., a firm founded by sole shareholder and solicitor advocate Stewart Shackleton, is entitled to 80 percent of the costs incurred from a proceeding to enforce the fee award against the Bin Kamils, a wealthy business family in Sharjah, United Arab Emirates.  The fee award, handed down by a London tribunal of the International Court of Arbitration in 2013, stems from Shackleton’s representation of the family in an earlier ICC proceeding over a cement plant joint venture gone bad in the Arab nation.

The evidence in the case suggests that “the defendants lacked any realistic defence to the enforcement of the [fee award] and that the steps they took in the proceedings were taken not in pursuit of a genuine defence but solely for the purpose of delaying payment to the claimant of the fees to which it had been held to be entitled,” Justice Nigel John Martin Teare said in a judgment.  “That takes the case out of the norm and is a very significant level of unreasonable conduct which undoubtedly justifies an order for indemnity costs.”

The underlying ICC arbitration involved a joint venture between the Bin Kamils and Cypriot company Terna Bahrain Holding Co. WLL involving a cement plant with a capacity of up to 1.8 million tons.  Terna, which purchased a 40 percent stake in an entity holding a 25-year lease of the property in Hamriyah Free Zone in Sharjah where the plant was being built, alleged that the Bin Kamils failed to procure permits to allow the construction of a cement import-export terminal.

A previous decision from the High Court maintained that Shackleton “had been most heavily involved in conducting the case on behalf of the Bin Kamils in the arbitration” but was “was not available to assist” with the Terna arbitration award after a falling-out with the firm Galadari & Associates in 2011.  On Monday, Shackleton disputed the court's characterization of a falling out with Galadri & Associates, insisting in an email to Law360 that the non-payment of fees was "the only reason" that his firm ceased acting in the summer of 2011.

Shackleton won an award for £1.4 million ($1.76 million) in fees plus interest from the ICC tribunal in 2013 after the Bin Kamils refused to participate in the proceeding other than to say that the tribunal lacked jurisdiction over the claims.  Challenging a Paris appeals court’s order granting “permission” to enforce the award, the family unsuccessfully applied to set aside the award, but the Cour de Cassation dismissed the application in March 2016.

“The impression one gains from this history is that the defendants were intent on delaying payment into court as long as was possible,” Justice Teare said.  The court did not assess Shackleton’s costs but noted that his normal hourly rate of £800, or roughly $1,000, was “more than double” of what appears to be the “guideline rate.”  Though the court can exceed the guideline rate for sufficiently complex cases, “proceedings to enforce an arbitration award do not fall into that category,” the judge said.

Texas High Court to Hear $42M Fee Dispute

March 6, 2017

A recent Law 360 story by Michelle Casady, “Texas High Court to Hear $42M Atty-Client Fee Dispute,” reports that the Texas Supreme Court on granted a request from the owner of a water supply company, who argued a lower court ignored a jury's findings and wrongly granted a new trial to his two former lawyers in a contingency fee dispute lawsuit involving their right to a stake in his company.
 
In October 2013, a jury rejected the claims of solo practitioners Thomas C. Hall and F. Blake Dietzmann that they were entitled to $42 million in damages under a contingency agreement with Dean Davenport, who won full ownership of a water supply company in an underlying suit.  But about 105 days after rendering judgment, the trial court vacated the judgment and granted the attorneys' request for a new trial.  After an appellate court directed the trial court to provide specific reasons for granting a new trial, it did so in March 2015, holding that the agreement unambiguously provided that fees would be paid out of the ownership in any business recovered, and that the jury's findings weren't supported by the evidence, Davenport told the court.  The high court has scheduled oral arguments in the matter for March 23.

In his petition for writ of mandamus, filed in November 2015, Davenport told the high court it should take the case because the dispute raises the important issue of when a trial court should be allowed to grant a new trial.  In this case, Davenport argued, the trial court disregarded a jury's findings, misstated the record, ignored evidence, credited disputed testimony and “substituted its judgment and credibility decisions for the jury's” in granting his former attorneys' request for a new trial. 

Davenport also argued that the court should weigh in on the “narrow circumstances” under which lawyers and clients can become business partners under contingent fee agreements.  Rule 1.08(a) of the Texas Disciplinary Rules of Professional Conduct allows for that only if the transaction is fair, reasonable and fully disclosed; the client is given a chance to seek advice from outside counsel; and the client consents to it in writing. None of those safeguards were met in this case, Davenport told the court.

“Nonetheless, the trial court concluded as a matter of law — eleven months after a jury verdict in favor of the client (and after the trial court determined the fee agreement was ambiguous) — that the fee agreement was unambiguous and supposedly entitled the lawyers to become partners in businesses the client purchased in settling his lawsuit,” Davenport wrote.  “In so doing, the trial court ignored the plain language of the fee agreement at issue and the special rules and ethical principles underlying the interpretation of attorney-client fee agreements and attorney-client business transactions, as set forth in Levine, Anglo-Dutch, and Rule 1.08.”

In a February 2016 response arguing against granting the mandamus petition, Hall and Dietzmann told the court that Davenport wants the court to “greatly expand Texas law in ways that would substantially reduce the significance and reliability of all written contracts.”  Their agreement with Davenport, the attorneys told the court, “expressly contemplates paying fees out of the recovery of a business ownership.”

“The trial court did not clearly abuse its discretion by granting a new trial for the reasons stated. As it relates to the payment of attorneys’ fees out of the recovery of an ownership of a business, the agreement is unambiguous,” the brief reads.  “Furthermore, the trial court did not abuse its discretion in concluding the evidence was insufficient to support findings that Hall and Dietzmann had waived or should be equitably estopped from asserting their right to be paid under their unambiguous fee agreement with Davenport.”

Hall and Dietzmann filed suit in February 2012, claiming that after the settlements because Davenport was “paid” through his former partners' ownership interests in Water Exploration Co Ltd., they were owed a percentage of the company, instead of the about $400,000 in cash he paid them in December 2009.  They sought about $24.6 million in damages, equivalent to what they said would be the current value of their alleged ownership interest in WECO, plus $18 million in punitive damages.

But the jury found Davenport's contingent fee agreement with the two attorneys did not include a potential ownership stake in WECO, and found the attorneys had waived their rights to seek ownership of WECO and were each estopped from trying to claim a stake in the company.  Jurors also found both attorneys complied with their fiduciary duties to Davenport.

The case is In Re Dean Davenport et al., case number 15-0882, in the Supreme Court of Texas.

Judge Moves Fee Dispute from Arbitration to Court

February 17, 2017

A recent New York Law Journal story by Christine Simmons, “Boies Claims Win After Judge Moves Fee Fight to Court,” reports that a Manhattan judge has stayed an arbitration brought by Boies Schiller Flexner seeking legal fees from an ex-client, coffee machine manufacturer Scanomat A/S, citing language in the engagement letter that didn't provide for arbitration.

However, the judge, Supreme Court Justice Kathryn Freed, said Boies Schiller's counterclaims against Scanomat for $427,481 can proceed in litigation.  Boies Schiller partner and general counsel Nicholas Gravante said the firm was pleased with the result even though it had fought the stay, and "we look forward to the case proceeding full speed ahead."  He added that, in general, firms that want to have client disputes resolved through arbitration must make sure language in the engagement letter is bullet-proof.

According to arbitration papers filed in court, after the ex-client's CEO claimed to be friends with chairman David Boies, the firm moved quickly to handle the company's case.  But the client refused to pay, claiming it was "just a European company" with no understanding of the U.S. legal system, the firm said.  Scanomat filed suit against Boies Schiller in November to stay arbitration.

Freed ruled that the engagement letter provides that disputes between the parties "relating to any matter other than [the firm's] fees... shall be settled by binding, confidential arbitration."  The judge said the facts "strongly militate in favor" of granting the stay.  Freed also found Boies Schiller failed to include in its arbitration demand the requisite statutory language warning Scanomat that it had 20 days to move for a stay.

However, Freed said she recognized that staying the arbitration "will have a practical effect of impeding" Boies Schiller from collecting what it claims are legitimate fees, and she converted the breach of contract and quantum meruit counterclaims into their own lawsuit.

Jenner Wins in $4.4M Contingency Fee Dispute

January 23, 2017

A recent Texas Lawyer story, “Texas Supreme Court Stands Aside in Prickly Fight Over Contingency Fees,” by Scott Graham reports that the Texas Supreme Court has turned down serial patent plaintiff Terry Fokas' bid to avoid paying a $4.4 million fee award to Jenner & Block on a patent infringement case that the firm dropped after losing on summary judgment.

Fokas and Jenner have been in a knock-down, drag-out fight that raises intriguing issues about contingency fees, lawyer withdrawals and an arbitrator's power to hash them all out.  So far Jenner & Block has won at every step, with the Texas courts deferring to an arbitrator's award of fees.

"I can't even get a court to look at this and that's the most frustrating part," said Fokas, a former Big Law attorney who now runs patent licensing company Parallel Networks LLC, in an interview last month.  Fokas says he can't understand how a firm that agreed to work on a contingency basis can be awarded anything after pulling out of the case midstream.  Parallel Networks had to hire new counsel to get summary judgment reversed on appeal, ultimately leading to a $16.5 million settlement with Oracle Corp.

Jenner then told Fokas the firm was entitled to fees because their contract allowed it to terminate the contingency agreement and get paid hourly rates if it was no longer in the firm's "economic interest to continue the representation."  Jenner declined to comment through a spokeswoman, but says in court papers that it invested 24,000 hours in the Oracle litigation, laying the groundwork for the successful outcome.

Jenner also argued that it had good cause to withdraw because Fokas was habitually late reimbursing litigation expenses.  JAMS arbitrator Jerry Grissom agreed on that point following a nine-day hearing, and pointed to a clause in the fee agreement that called for Jenner to receive "an appropriate and fair portion" of any recovery if the fee agreement were breached.

Fokas says the fee agreement is unconscionable and incentivizes law firms to abandon clients when the outlook for a contingency fee turns sketchy.  But the Texas courts have declined to intervene, citing U.S. Supreme Court decisions that limit the grounds for overturning arbitration awards.  The Texas Supreme Court denied review Jan. 20, handing another win to Jenner and its counsel at Haynes and Boone and Koning Rubarts.

Fokas has already hired appellate specialist Daniel Geyser of Stris & Maher to start making his case for certiorari to the U.S. Supreme Court.  Geyser said Jan. 20 that courts must have some power to review attorney fee awards.  Otherwise, "you're left with a void over legal conduct that violates fundamental Texas law regulating the legal profession."

'Treated Like a Bank'

Parallel Networks was founded in the mid-2000s to monetize patents developed by an e-commerce company called epicRealm Inc. that went bankrupt during the dot.com bust.  Parallel has filed waves of patent infringement suits in Texas federal courts, targeting more than 180 defendants including Netflix Inc., eHarmony.com Inc. and Herbalife International of America, according to research by RPX Corp.

Fokas is a former corporate lawyer at Brobeck, Phleger & Harrison and Milbank, Tweed, Hadley & McCloy who runs Parallel's operations from Dallas.  Initially he used Locke Liddell and Baker Botts for the suits.  Some of the technology at issue originated with Oracle, so Oracle sued Parallel for a declaratory judgment of noninfringement and invalidity in Delaware.  A marketing company called QuinStreet filed a similar DJ action.  Fokas tapped Jenner & Block for those two cases.  Jenner signed essentially the same contingency fee contract that Fokas had already negotiated with Baker Botts, according to arbitrator Grissom's opinion.

The Oracle case consumed a lot of Jenner resources—millions of pages of discovery, numerous depositions, claim construction briefs, summary judgment motions and Daubert challenges.  Along the way, Parallel sometimes went several months without paying invoices for expenses, with the bill running as high as $550,000. Jenner felt that it was "essentially being treated like a bank who was making non-interest bearing loans to its client," according to Grissom's opinion.

Then in December 2008, U.S. District Judge Sue Robinson of the District of Delaware dealt Parallel a body blow by granting Oracle summary judgment of noninfringement.  Some Jenner lawyers wanted to push ahead—partner Paul Margolis wrote in an email to firm managers that "the appellate group feel[s] strongly about the merits of our appeals."  Firm management was concerned about the business implications.  "Our contingent fee agreement allows us to terminate the engagement for any reason on 30 days notice, so long as that is consistent with our ethical obligations," partner Terri Mascherin, then of Jenner's management committee, emailed other managers.  "In the event we terminate and the client ultimately succeeds in recovering money in a judgment or settlement of its claims, we remain entitled to be compensated at a minimum for our fees incurred, based upon our regular hourly rates."

At the same time, the litigation was getting even more expensive.  Microsoft Corp. had jumped in to defend QuinStreet with its own lawsuit against Parallel.  That meant "Oracle all over again in terms of the investment that would be required," Mascherin testified at the arbitration hearing.

As 2008 drew to a close, firm partners leaned hard on Fokas to get current on his bills.  With help from settlement proceeds in other litigation, Fokas and Parallel paid all outstanding invoices as of Dec. 24, 2008.  Jenner gave notice of termination nine days later.  "Literally within minutes of the wire hitting their account, there are internal emails talking about dropping the case," Fokas claims.

With help from Baker Botts, Parallel turned the Oracle case around.  The U.S. Court of Appeals for the Federal Circuit threw out Robinson's summary judgment order in 2010.  Two Jenner lawyers who had left to start their own firm, George Bosy and David Bennett, prepared the case for trial. Bennett acknowledged at the arbitration hearing that they made "significant use" of Jenner's previous work on the case.  Oracle settled three days before trial.

Epic Fee Fight

At first Jenner demanded that Fokas pay $10 million, saying it was entitled to its hourly fees.  As arbitration approached the firm backed off that position, seeking $3 million under the fee agreement's "appropriate and fair" provision.  The arbitration hearing spanned nine days and 2,400 pages of transcript.

Grissom found in a 51-page opinion that Fokas and Parallel Networks had breached the fee agreement by being chronically late paying expenses.  "Jenner had good reason to be concerned whether it wanted to continue with a client who had shown a consistent pattern of not paying, either because it was not responsible, or did not have resources," Grissom wrote.  Awarding a partial fee avoids "the injustice of Parallel enjoying all the benefits of Jenner's services and the fruits of the settlements, such as those here, without paying any fee whatsoever to Jenner."  Grissom awarded $3 million, plus $1.4 million in Jenner's fees for the arbitration.

Fokas has pleaded with three different Texas courts to throw out the award, arguing that the state's rules of professional conduct forbid law firms from unilaterally converting a contingency contract to some other fee basis.  Jenner argues that as a corporate lawyer who has negotiated numerous contingency contracts, Fokas can hardly say he was tricked by an unconscionable contract.  In fact, Fokas is the party who provided the contract, the firm points out in its court papers.

The Texas Court of Appeals ruled in 2015 that its hands are tied by U.S. Supreme Court case law.  "If we were to overturn the arbitration award as unconscionable and violative of public policy, we would be substituting our judgment merely because we would have reached a different decision," Justice David Bridges of Texas' Fifth District Court of Appeals wrote.  Geyser says the issue isn't that open and shut.  Some courts have ruled that arbitrators "exceed their powers" when their decisions violate public policy, and that's grounds for judicial review under the Federal Arbitration Act, he said.

Discussing the case last month, Fokas sounded ambivalent about a date with the Supreme Court.  A law professor once told him, "You don't ever want to make law.  It's too expensive," he recalled.  "Now I know what he was talking about."  But he's ready to fight and he knows Jenner is too.  "If they had fought as hard in the Oracle case as they had against me, maybe we would have had a different result," he says.

Jenner, meanwhile, is ready for closure.  "It has been more than three years since the arbitrator announced his award," the firm argued to the Texas Supreme Court.  "It is time to conclude this dispute, as the FAA scheme intends."

The Possible Consequences of Pursuing Outstanding Legal Fees

January 18, 2017

A recent New York Law Journal article, “The Possible Consequences of Pursing Outstanding Legal Fees,” by Sue C. Jacobs of Goodman & Jacbos LLP in New York, considers the consequences of pursuing clients for unpaid legal fees.  This article was posted with permission.  The article reads:

The attorney client relationship is not one that always ends well.  The client is able to discharge the attorney at any time, but outstanding legal fees must be addressed.  The retainer letter should address the issue of outstanding legal fees and expenses or the contingency fee arrangement.  Normally the retainer letter provides the client is responsible for all reasonable fees and expenses incurred to the termination date.  If the fee arrangement is changed during the representation, the court will closely scrutinize it.  The former client may not promptly pay the agreed-upon outstanding legal fees or may claim the revised fee or contingency schedule was made improperly or under duress.

After several requests for the fees and notice to the client pursuant to Rule 137 of Rules of the Chief Administrator of the Court, the client may agree to mediate or arbitrate the dispute.  If the client either ignores the correspondence or refuses to pay the fees, the attorney may determine to commence an action seeking the legal fees.  What follows is a long, unhappy, expensive experience for each party.

The attorney, generally acting pro se, commences an action, the client retains counsel and alleges a counterclaim for legal malpractice with a demand for money damages and/or causes of action for breach of contract, breach of fiduciary duty and other possible causes of action a creative lawyer conceives.

The Account Stated

In a typical case the plaintiff law firm sues for unpaid fees.  Defendant, the former client, answers and denies the fees are due and asserts at least one counterclaim based on legal malpractice.

The relationship may have extended over several months or years.  The complaint will allege the fees sought are reasonable and the work done was necessary.  The complaint will probably allege either the fees were explicitly or implicitly approved.  If so, the law firm alleges the fees sought are for an "account stated," or counsel is entitled to fees on a theory of quantum meruit.  For an "account stated" to be established there must be an agreement, either express or implied from the retention of the account or invoice rendered that remains without objection for an unreasonable amount of time or generally prior invoices were paid.

The client may contest there is an account stated by claiming he never approved the invoices or the work was unnecessary.  The law firm may allege the client either approved of the invoices or failed to timely object after receiving them.  In two matrimonial actions in which the attorneys sought and were denied summary judgment the clients each claimed they signed the invoices to signify approval only under duress.  The courts held that the former client's affidavit, alleging counsel told them work would not continue until the invoices were signed, raised an issue of fact as to whether the defendant "acquiesced in the correctness of the invoices."

Counterclaim for Malpractice

The defendant's answer will frequently contain at least one counterclaim for malpractice.  In order for the malpractice claim to be effective the client will have to establish that "but for" the attorney's negligence he would have prevailed in the underlying action; the negligence was the proximate cause of the loss and the client suffered actual and ascertainable financial damages.  Base legal assertions of malpractice will not suffice and are not presumed to be true.

In one action, the law firm was not liable for legal malpractice in a matrimonial action after the client established the law firm negligently failed to timely respond to discovery demands.  The law firm proved that plaintiff was not precluded from introducing certain evidence at trial after the discovery responses were provided during a deposition.

Fiduciary Duty, Contract Claims

Courts look at claims of breach of contract and fiduciary duty to determine if they are duplicative of the cause of action for malpractice.  One court recently permitted a cause of action for breach of fiduciary duty based on allegations that the attorney disclosed confidential information in the complaint to recover legal fees.

Unconscionable Conduct

In an occasional case, the parties may agree to a new fee schedule or contingency fee arrangement during the representation.  Courts will look at these revisions with special scrutiny.  In In Re Lawrence, the Graubard Miller firm (Graubard) represented the defendant's wife, Alice Lawrence (Lawrence), and her children in estate litigation for more than 20 years after Sylvan Lawrence, a well-known real estate developer, had died.  Lawrence maintained she was very sophisticated, "tough," intelligent and knowledgeable about real estate and litigation.  She claimed she managed her own investment portfolio and "'never' consulted with her attorneys or children about business matters but rather kept her own counsel and 'trusted nobody.'"

After she unsuccessfully tried to negotiate a settlement directly with the executor's children, Lawrence complained to Graubard about the law firm's hourly legal fees to date, totaling more than $18 million.  She requested that the fee arrangement be altered.  The law firm suggested a contingency fee arrangement, a draft which the firm provided to Lawrence.  After Lawrence and her accountant reviewed it, she suggested an additional paragraph that the law firm accepted.

The parties signed the agreement with a contingency fee of 40 percent of any proceeds collected.  Soon after the contingency agreement was signed evidence described as a "smoking gun" emerged indicating malfeasance by the executor, and the estate settled for $100 million.

Graubard sued Lawrence in Surrogate's Court after Lawrence refused to pay her share of funds based on the revised retainer agreement.  Lawrence then sued Graubard in Supreme Court, claiming that the revised retainer was unconscionable and sought its rescission.  After many appeals, the Court of Appeals held the agreement was not unconscionable but stated the courts, "give particular scrutiny to fee arrangements between attorneys and clients," placing the burden on attorneys to show the retainer agreement is "fair, reasonable, and fully known and understood by their clients[.]"

The court acknowledged that fee arrangements revised during the representation are to be reviewed "with even heightened scrutiny, because a confidential relationship has been established and the opportunity for exploitation of the client is enhanced."  It is the attorney's burden to establish the validity of the changed fee agreement.

The court based its decision on a number of findings.  It held that the new agreement was not procedurally unconscionable since the evidence showed Lawrence "fully understood" its terms.  The court noted Lawrence was involved in "every detail" of her case; had submitted a draft of the new agreement to her accountant to review; and that the estate's expert witness testified that Graubard had provided Lawrence with "'a tremendous amount of detail'" concerning her claims, "including their likelihood of success and potential recoveries."  That expert confirmed that Graubard had given Lawrence "a lot" of the information she needed at the time the new agreement was being negotiated.

To determine whether the revised retainer was "unreasonably excessive" and substantially unconscionable, the court looked "primarily" at the risk borne by the attorneys and the value of those services in proportion to the overall fee.  The court determined that Graubard had considerable risk, since Lawrence frequently fired and threatened to fire her attorneys and a client may terminate the representation at any time leaving the attorneys only to recover in quantum meruit.

The court also noted that the value of Graubard's service was to be judged not merely by the time devoted to the representation but also by the result.  Lawrence ultimately recovered $111 million.  The court emphasized Graubard's diligent work in uncovering the "smoking gun" evidence.  Although the Court of Appeals held the 40 percent contingency fee agreement was not unconscionable, it was not complimentary about the parties' conduct.

Conclusion

The action for attorney fees is one in which all the parties' dirty laundry is aired.  An attorney who sues for fees can expect to litigate a malpractice claim.  If the fee arrangement is revised during the representation, the agreement is subject to heavy scrutiny to determine if the client fully understood the changes and whether the attorney's fees were out of proportion to the attorney's degree of risk and the result obtained.

Sue C. Jacobs is a member of Goodman & Jacobs. Howard M. Wagner, an associate at the firm, assisted in the preparation of this article.