A recent American Lawyer story, “Kirkland on Contingency: Behind a $93 Million Fee Deal” reports that Kirkland & Ellis earned $93 million for its work recovering environmental cleanup costs under an unusual fee arrangement approved by the Department of Justice, according to records obtained by The American Lawyer under the Freedom of Information Act. The amount included a $70 million contingency fee—possibly the largest such payment ever involving a federal agency.
Kirkland received the contingency award in January 2015. The remaining $23 million was paid in 2011 and 2012. Because the firm’s fiscal year ends Jan. 31, the $70 million payment was counted in its Am Law 100 financial results for 2014 and represented more than half of Kirkland’s reported revenue growth that year.
The firm won its contingency fee after Anadarko Petroleum Corp. and Kerr-McGee Corp. agreed to pay more than $5.15 billion to settle fraudulent conveyance claims tied to the spinoff of a subsidiary, Tronox Inc., a decade earlier. Kirkland’s client—a litigation trust created to pursue claims on behalf of the United States and several states against Anadarko and Kerr-McGee—accused the companies of saddling Tronox with massive environmental liabilities, placing the burden of environmental cleanup on taxpayers when Tronox later declared bankruptcy.
In a January 2015 press release lauding the settlement, the DOJ called it “the largest payment for the cleanup of environmental contamination ever obtained in a lawsuit brought by the Department of Justice.”
It doesn’t appear that the federal government has ever been involved in a contingency fee arrangement of this magnitude before or since. In fact, since 2007 federal agencies have been banned from entering into contingency fee arrangements with outside lawyers under an executive order signed by President George W. Bush.
In this case, Kirkland’s fee agreement was with the Anadarko Litigation Trust, not the Justice Department or any other agency. However, the fee agreement required government approval, and the DOJ was the main beneficiary of the trust. The trust was also expected to coordinate its litigation with the federal government.
While the litigation turned out quite well for Kirkland, the firm took a major risk. It was guaranteed payment of just $23 million to cover standard hourly fees in the sprawling case, and that amount had to include its out of pocket expenses for experts.
Kirkland was hired in early 2011 by John Hueston, the court-appointed trustee of the Anadarko Litigation Trust. Hueston was then a partner at Irell & Manella and has since formed his own firm, Hueston Hennigan.
For decades, oil and gas giant Kerr-McGee had operated businesses linked to environmental damage, including uranium mining, processing radioactive thorium, creosote wood treating and manufacturing perchlorate, a component of rocket fuel. The company transferred its biggest environmental liabilities onto its Tronox subsidiary before spinning it off into a separate corporation in 2005. Anadarko acquired Kerr McGee in 2006.
Tronox filed for bankruptcy in 2009, leaving federal and state governments to clean up thousands of contaminated sites. The government and the litigation trustee claimed the Tronox spinoff was a fraudulent conveyance under bankruptcy law. Bingham McCutchen and Weil, Gotshal & Manges jointly represented Kerr-McGee and Anadarko.
Andarko was pressured to settle after a Kirkland team lead by litigation partner David Zott won a bench trial ruling in December 2013 that Anadarko could be liable for as much as $14.2 billion. The federal government, as the main beneficiary of this trust, was entitled to 42 percent of the $5.15 billion settlement. The state of Nevada got 25 percent and the remainder was paid to other states and the Navajo nation.
The terms of Kirkland’s fee arrangement are contained in a Feb. 14, 2011 Special Fee Agreement, which the DOJ released in response to The American Lawyer’s FOIA request. While the fee agreement was signed by Zott and Hueston, the Department of Justice had the sole authority to approve it, according to the document creating the litigation trust.
At first Kirkland was paid under a standard hourly billing arrangement, charging rates ranging from $885 for Zott to $485 for junior associates, although it could raise its rates annually. Those fees came from $23 million that was put into the trust by Tronox. Kirkland went through that $23 million in 16 months, including money it spent to hire experts.
Starting in May 2012 Kirkland was working purely on contingency, and would be paid only from funds it recovered for the trust. The firm would also have to carry the cost of experts it hired.
The first $10 million of the contingency component was calculated using Kirkland’s hourly rates, while the remaining $60 million was determined by a sliding scale percentage of the recovery. The DOJ redacted the exact terms of the sliding scale from the agreement it gave The American Lawyer, but Kirkland received less than 2 percent of the total amount recovered in the settlement.
In 2014 Kirkland’s revenue rose 6.6 percent to $2.15 billion and profits per equity partner increased 7 percent to $3.51 million, according to our Am Law 100 reporting. The $70 million Anadarko fee represented more than half of the increase in Kirkland’s revenue that year. Kirkland hasn’t yet reported its financial results for 2015.