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Law Firm Can’t Avoid Contingency Fee Cap

February 2, 2018 | Posted in : Contingency Fees / POF, Fee Caps / Fee Limits

A recent New Jersey Law Journal story by David Gialanella, “Law Firm Can’t Skirt Contingency Fee Cap, Court Rules,” reports that a New Jersey plaintiff firm seeking a 45 percent contingency fee in a student discrimination case—a common arrangement, the firm claims—has twice failed in convincing a court that actions based on statute are not subject to contingency limits set out by court rule.

In a published decision Thursday, the Appellate Division upheld a reduction, from 45 percent to 25 percent, of the contingency fee payable to Costello & Mains, rejecting the Mount Laurel firm’s “contention that the trial court lacked authority to review a consensual contingent fee arrangement in a statutorily based discrimination action in which the plaintiff did not apply for a fee-shifting award against the defendant.”

“It would make little sense to permit unrestricted and unreasonable contingent fees in cases in which a fee-shifting application is not made but limit fee-shifted awards to reasonable amounts,” Judge Richard J. Geiger wrote for the court. “On the contrary, our court rules, rules of professional conduct, fee-shifting discrimination statutes, fee arbitration procedure, and interpretive case law universally require all attorney’s fees to be reasonable.”

Name partner Kevin Costello said the 45 percent fee has been a common practice for the firm, and one that’s been approved in the past.

“In a couple dozen cases prior to this, we had judges approving the fee structure,” Costello told the Law Journal.

“It’s not going to stop us from taking these cases,” he said. “But we are of course going to be much more cognizant of putting before the court all the risks we faced and all the work that was done.”

According to the decision, Costello & Mains was retained to represent a Mount Holly public school student, identified only as A.W., and her mother, B.W., in a suit claiming the student was bullied and harassed during her time at Folwell Elementary School and F.W. Holbein Middle School. The suit, filed in March 2014, alleged violations of the New Jersey Law Against Discrimination and Civil Rights Act, each of which contains fee-shifting provisions for successful litigants.

The retainer agreement executed by Costello & Mains and B.W., the decision notes, provided for a contingent fee of 45 percent, or a fee based on the firm’s hourly rate, whichever was greater, in the event of a recovery, including a recovery by lump-sum settlement. The agreement also provided that, if the case went to trial or arbitration and yielded an award, the firm would be entitled to 45 percent of the total recovery, including any fee award by the court or arbitrator. Finally, the agreement laid out the firm’s right to seek a higher fee “if … the firm has performed work that is in excess and thus disproportionate to the fee that it has earned,” according to the court.

Following discovery, the parties in early 2016 entered a settlement for $100,000, which the Mount Holly Township Board of Education ultimately approved. By the terms of the accord, B.W. agreed to refrain from seeking an award of fees and costs under the statutory fee-shifting provisions. The settlement was the subject of a friendly hearing, in which Costello & Mains sought approval of the 45 percent contingency fee, which would have amounted to $42,888, in addition to $4,692 in costs, according to the decision.

The judge approved the settlement, but ultimately awarded Costello & Mains a fee in the amount of 25 percent of the net recovery, finding the 45 percent fee ”an unconscionable result” and “unreasonable overreaching,” even though the client didn’t dispute the fee arrangement.

The judge is not identified in the Appellate Division’s ruling, but judiciary records indicate it was Burlington County Superior Court Judge Michael J. Hogan.

Hogan, according to an excerpt of his 18-page written decision included in the Appellate Division’s ruling, noted the firm’s “apparent determination not to seek counsel fee-shifting against the defendant in order to expedite a settlement.” He referred to Court Rule 1:21-7(c), which caps contingency fees at 25 percent in cases involving a minor or disabled plaintiffs when a settlement is reached before trial commences.

Excluded from that limit are “statutorily based discrimination and employment claims,” the rule says. But the judge noted “a hidden benefit to counsel by waiving the right to fee-shifting in certain circumstances”: that the attorney could get a larger fee without going through a lodestar analysis, or applying for an enhanced fee as per subsection (f) of Rule 1:21-7. That would mean the fee is shifted not to the defendant but “instead contractually shifted back onto the client—in this case, a fifteen-year-old whom counsel represents,” which could create a conflict between the attorney’s and client’s interests, the judge ruled.

The judge held that, in cases involving a discrimination claim where the plaintiff counsel nevertheless eschews fee-shifting in favor of a contingency agreement, the fee percentage should be capped in accordance with Rule 1:21-7(c).

In setting Costello & Mains’ fee at 25 percent, the judge said no evidence was provided of the 45 percent fee’s reasonableness, and no testimony from B.W. that she understood fee-shifting or the decision to decline a fee application as part of the settlement.

Costello & Mains appealed, contending that the language of Rule 1:21-7(c) excluding “statutorily based discrimination and employment claims” from contingency fee limits means that any fee is permissible if the client agrees to it.

Geiger, a Law Division judge in the Gloucester-Cumberland-Salem vicinage temporarily assigned to the Appellate Division last June, disagreed. He was joined by Appellate Division Judges Carmen Alvarez and William Nugent.

“Ostensibly, appellant argues that, no matter the content, contingent fee arrangements in statutorily based discrimination actions are enforceable as written, provided they are entered into voluntarily and without fraud or overreaching,” Geiger wrote.

By the firm’s interpretation, the court said, “attorneys could enforce any consensual contingent fee arrangement in statutory discrimination actions, no matter how high the percentage contingent fee, without any judicial review of the reasonableness of the fee, whenever the plaintiff does not make a fee-shifting application.”

Costello & Mains did not apply for an enhanced fee or show exceptional circumstances, the panel said, noting that Rule of Professional Conduct 1.5(a) requires that fee agreements must be “reasonable,” even if fee enhancement is allowed.

“More fundamentally, fee shifting awards are payable by the unsuccessful opposing party, not the prevailing plaintiff,” Geiger wrote.

The panel noted the “‘almost unchallenged power over the practice of law in all of its aspects’” since adoption of the 1947 state Constitution, quoting the Supreme Court’s 1981 ruling in In re LiVolsi. It also added that, while attorney-client agreements are contracts, courts still retain authority over terms that affect clients.

Costello & Mains relied in part on the state Supreme Court’s 1995 decision in Szczepanski v. Newcomb Medical Center, where it held that a contingency fee “may bear little relation to the reasonable fee award authorized by statute.” But Geiger rejected that argument, noting that Costello & Mains’ retainer provided for the firm to potentially reap contingency as well as statutory fees.

Costello said cases such as A.W.’s are typically discovery-heavy and, unlike a tort claim against the government, don’t require proof of permanent injury, so damages can be limited. Judges have questioned the 45 percent structure in the past, but have been satisfied with the sort of explanation and briefing provided in this case, he said.

Thought disagreeing with Hogan’s and the appeals court’s holding, the firm will not seek Supreme Court review of the case, Costello said, adding that he thinks the rule needs no amendment.

Neither the plaintiffs nor the Mount Holly Board of Education participated in the appeal, according to the court.

The board of education’s counsel, Richard K. Goldstein of Marshall Dennehey Warner Coleman & Goggin in Mount Laurel, didn’t return a call inviting comment on the plaintiffs’ allegations resolved by the settlement.