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."