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Article: What is a Legal Fee Audit?

October 7, 2021

A recent article by Jacqueline Vinaccia of Vanst Law LLP in San Diego “What is a Legal Fee Audit?,” reports on legal fee audits.  This article was posted with permission.  The article reads:

Attorneys usually bill clients by the hour, in six minute increments (because those six minutes equal one tenth of an hour: 0.1).  Those hours are multiplied by the attorney’s hourly rate to determine the attorney’s fee.  There is another aspect of attorney billing that is not as well known, but equally important — legal fee auditing.  During an audit, a legal fee auditor reviews billing records to determine if hourly billing errors or inefficiencies occurred, and deducts unreasonable or unnecessary fees and costs.

Both the law and legal ethics restrict attorneys from billing clients fees that are unreasonable or unnecessary to the advancement of the client’s legal objectives.  This can include analysis of the reasonableness of the billing rate charged by attorneys.  Legal fee audits are used by consumers of legal services, including businesses, large insurance companies, cities, public and governmental agencies, and individual clients.  Legal fee audits can be necessary when there is a dispute between an attorney and client; when the losing party in a lawsuit is required to pay all or part of the prevailing party’s legal fees in litigation; when an insurance company is required to pay a portion of legal fees, or when some issues in a lawsuit allow recovery of  attorneys’ fees and when other issues do not (an allocation of fees). 

In an audit, the auditor interviews the client, and reviews invoices sent to the client in conjunction with legal case materials to identify all fees and costs reasonable and necessary to the advancement of the client’s legal objectives, and potentially deduct those that are not.  The auditor also reviews all invoices to identify any potential accounting errors and assure that time and expenses are billed accurately.  The auditor may also be asked to determine if the rate charged by the attorney is appropriate.

The legal fee auditor can be an invaluable asset to parties in deciding whether to file or settle a lawsuit, and to the courts charged with issuing attorneys’ fee awards.  The court is unlikely to take the time to review individual invoice entries to perform a proper allocation of recoverable and non-recoverable fees leaving the parties with the court’s “best approximation” of what the allocation should be.  The fee audit provides the court and the parties with the basis for which to allocate and appropriately award reasonable and necessary fees. 

Audits are considered a litigation best practice and a risk management tool and can save clients substantial amounts of money in unnecessary fees.  It has been my experience, over the past two decades of fee auditing, that early fee auditing can identify and correct areas of concern in billing practices and avoid larger disputes in litigation later.  In many cases, I have assisted clients and counsel in reaching agreement on proper billing practices and setting litigation cost expectations. 

In other cases, I have been asked by both plaintiffs and defendants to review attorneys’ fees and costs incurred and provide the parties and the court with my expert opinion regarding the total attorneys’ fees and costs were reasonably and necessarily incurred to pursue the client's legal objectives.  While the court does not always agree with my analysis of fees and costs incurred, it is usually assisted in its decision by the presentation of the audit report and presentation of expert testimony on the issues.

Jacqueline Vinaccia is a San Diego trial attorney, litigator, and national fee auditor expert, and a partner at Vanst Law LLP.  Her practice focuses on business and real estate litigation, general tort liability, insurance litigation and coverage, construction disputes, toxic torts, and municipal litigation.  Her attorney fee analyses have been cited by the U.S. District Court for Northern California and Western Washington, several California Superior Courts, as well as various other state courts and arbitrators throughout the United States.  She has published and presented extensively on the topic of attorney fee invoicing, including presentations to the National Association of Legal Fee Association (NALFA), and is considered one of the nation’s top fee experts by NALFA.

Article: Ninth Circuit Ruling Signals Scrutiny of Attorney Fees in Class Actions

September 25, 2021

A recent Law 360 article by Jason Russell, Hilary Hamilton and Adam Lloyd of Skadden Arps, “9th Circ. Ruling Signals Scrutiny of Class Settlement Fees,” reports on a recent ruling from the Ninth Circuit.  This article was posted with permission.  The article reads:

Despite the playful tone of the Briseño v. Henderson decision issued by the U.S. Court of Appeals for the Ninth Circuit in June, class action litigators should take the case seriously when structuring class action settlements.  Amid a thicket of pop-culture references, the Briseño panel held that under the revised Federal Rule of Civil Procedure 23(e)(2), federal courts must heavily scrutinize any settlement made on behalf of a class — whether pre- or post-class certification — to ensure that counsel for the defendant and the class have not colluded on an unfair distribution of settlement funds between recovery for the class and the fees for its attorneys.

Over a decade ago, in June 2011, the Briseño plaintiffs alleged that defendant ConAgra Foods Inc. misled consumers who wished to avoid consuming genetically modified organisms by placing a "100% Natural" label on its Wesson cooking oil brand, which allegedly contained GMO ingredients.  Notwithstanding the fact that the parties had been litigating the plaintiffs' false advertising claims for nearly 10 years, the Ninth Circuit rejected the parties' settlement that was negotiated after class certification, on grounds raised by a single objector.  The panel took significant issue with the class counsel's fee award, and found that the settlement "reek[ed]" of collusion.

The panel determined that the parties' settlement agreement and fee arrangement "raise[d] a squadron of red flags billowing in the wind and begg[ed] for further review," because (1) class counsel would receive disproportionately more money than the class; (2) the defendant agreed not to challenge class counsel's requested fee award (and any reduction in fees would revert to the defendant); and (3) the labeling-change injunctive relief that class counsel secured was "worthless," so it could not be used to justify class counsel's fee here.

The panel grounded its analysis in the history and text of Rule 23(e)(2), which was revised in December 2018, and requires a court to ensure that a class settlement is fair, reasonable and adequate.  Prior to the 2018 revision, however, Rule 23(e) did not provide guidance as to what was fair, reasonable or adequate.  So the Ninth Circuit filled in the gaps by providing several factors for district courts to consider, including the strength of the plaintiffs' claims and the risk and expense of further litigation at the stage of the proceedings.

The Ninth Circuit also was particularly wary of settlements reached on behalf of a class precertification — where it found that counsel may be most incentivized to maximize their own financial gain at the expense of the class members — and in 2011, provided an additional instruction for courts to watch out for what it called "subtle signs" that class counsel was putting their own self-interest before the class.

These signs included: (1) counsel receiving a disproportionate distribution of the settlement; (2) parties negotiating a "clear sailing arrangement," under which the defendant agrees not to challenge a request for an agreed-upon attorney fee; and (3) an agreement containing a "kicker" or "reverter" clause, that returns unawarded fees to the defendant, rather than the class.  In the Ninth Circuit, these are commonly known as the Bluetooth factors.

Then, in 2018, Rule 23 was amended to set forth specific factors for courts to consider when determining whether a class settlement was adequate, including "the costs, risks, and delay of trial and appeal"; "the effectiveness of any proposed method of distributing relief to the class, including the method of processing class-member claims"; and "the terms of any proposed award of attorney's fees, including timing of payment."

The Briseño panel focused on this last factor, and held that the new Rule 23(e) "indicates that a court must examine whether the attorneys' fees arrangement shortchanges the class" for all class settlements.  As a result, the panel found, district courts should apply the Bluetooth heightened scrutiny factors for both pre- and post-class certification settlements to "smoke out" potential collusion on attorney fee arrangements.

Applying the Bluetooth factors to the Briseño class counsel's fee arrangement here, the panel concluded that the fee arrangement "features all three red flags of potential collusion."  First, the panel noted the "gross disparity in distribution of funds between class members and their class counsel raises an urgent red flag," as counsel was set to receive nearly $7 million in fees, while the class received less than $1 million.

The panel found this disparity particularly problematic here because the parties knowingly structured a relatively common claims-made settlement, requiring class members to submit a claim to obtain a recovery, for a low-ticket item, which typically results in what the panel called "notoriously low" redemption rates. In this case, class members would recover 15 cents per unit of Wesson oil purchased during the class period.

Second, ConAgra agreed not to challenge the fees for class counsel, and the panel held that "the very existence of a clear sailing provision increases the likelihood that class counsel will have bargained away something of value to the class."  Third, the agreement provided that ConAgra was to receive any remaining funds if the district court reduced the agreed-upon attorney fees for class counsel, and the panel concluded that if a court determined the "full amount unreasonable, there is no plausible reason why the class should not benefit from the spillover of excessive fees."

Significantly, the panel also held that the settlement's injunctive relief component — ConAgra's agreement to no longer market Wesson oil as "100% Natural" — could not be used to justify the class counsel's excessive fee.  The panel panned the injunctive relief as "virtually worthless," "illusory" and "meaningless," because ConAgra had already decided to stop using the "100% Natural" label two years before the settlement agreement was reached — for reasons it stated were unrelated to the litigation — and no longer even owned the Wesson oil brand.

Although ConAgra's sale of the Wesson oil brand in Briseño clearly presents an uncommon circumstance, the panel made clear that going forward, courts must eliminate inflated valuations of injunctive relief "untethered to reality" that are used to justify excessive fee awards for class counsel.  Briseño's discussion of worthless injunctive relief will have significant repercussions for future settlement of many California federal class actions, as many companies often make labeling changes for business reasons before any complaints are even filed.

While the panel expressly stated that its decision did not mean that "courts have a duty to maximize the settlement fund for class members," and a "class does not need to receive much for a settlement to be fair when the class gives up very little," the practical effect of, and takeaway from, Briseño is that class counsel should expect significantly more resistance from defense counsel and courts to high attorney fee awards in class action settlements.

This will especially impact low-value and/or labeling claims arising from a plaintiff's subjective beliefs of purported harm — particularly when a defendant has already decided to make a labeling change for business reasons.  In such cases, the relief that counsel can secure for the class is likely to be limited, and Briseño plainly requires a commensurate fee award for class counsel.

Jason D. Russell is a partner, and Hillary A. Hamilton and Adam K. Lloyd are associates, at Skadden Arps Slate Meagher & Flom LLP.

Article: Absent Explicit Statutory Language? The American Rule Still Applies

September 6, 2021

A recent article by Jiaxiao Zhang, “Absent Explicit Statutory Language? The American Rule Still Applies,” reports on attorney fee entitlement in patent litigation.  This article was posted with permission.  The article reads:

The U.S. Court of Appeals for the Federal Circuit vacated a district court’s award of attorney’s fees under the prevailing party rule but affirmed the district court’s denial of the U.S. Patent & Trademark Office’s (PTO) request for expert witness fees under 35 U.S.C. § 145. Hyatt v. Hirshfeld, Case Nos. 20-2321;–2325 (Fed. Cir. Aug. 18, 2021) (Hughes, J.).  The case involved prolific inventor Gilbert Hyatt and the latest chapter in his battles with the PTO.

Mr. Hyatt is known for his prolific patent and litigation filings (including hundreds of extraordinarily lengthy and complex patent applications in 1995 alone) and for often “’adopt[ing] an approach to prosecution that all but guaranteed indefinite prosecution delay’ in an effort to submarine his patent applications and receive lengthy patent terms.”  After the PTO denied some of his patent applications, Mr. Hyatt elected to pursue a district court appeal under 35 U.S.C. § 145 to challenge the PTO’s decisions.  The district court ordered the PTO to issue some of the patents and awarded Mr. Hyatt attorney’s fees as the prevailing party.  The PTO spent millions of dollars examining Mr. Hyatt’s applications and sought, under §145, reimbursement of its expert witness fees from the case.  The district court denied the PTO’s request for expert witness fees, holding that its shifting of “[a]ll the expenses of the proceedings” to the applicant does not overcome the American Rule presumption against shifting expert fees. The PTO appealed.

The PTO challenged both the award of attorney’s fees and the denial of expert fees.  In an earlier appeal by the PTO, the Federal Circuit held that the PTO correctly asserted prosecution laches as a defense against Mr. Hyatt, which “render[s] a patent unenforceable when it has issued only after an unreasonable and unexplained delay in prosecution that constitutes an egregious misuse of the statutory patent system under a totality of the circumstances.”  Accordingly, the Court vacated the district court’s decision ordering the issuance of patents, and in this appeal, the Court vacated the district court’s holding that Mr. Hyatt is entitled to attorney’s fees—since he is no longer the prevailing party—and remanded for further proceedings.

According to the statute, in an action under § 145, “[a]ll the expenses of the proceedings shall be paid by the applicant.”  However, the Federal Circuit agreed with the district court that the statutory language was not sufficiently explicit to overcome the presumption against fee-shifting under the American Rule and that litigants pay their own fees “unless a statute or contract provides otherwise.”  In doing so, the Court looked at statutory phrasing, dictionary definitions (e.g., Black’s and Webster’s), legislative history, relevant case law and similarly phrased statutes to confirm whether expert fees were specifically and explicitly contemplated as being included by US Congress in the statute.  The Supreme Court of the United States’ 2019 NantKwest decision (that “expenses” under §145 does not invoke attorney’s fees with enough clarity to overcome the American Rule) guided the Court’s analysis as did the many statutes that explicitly list “costs and fees” separately, suggesting that the legislature could have explicitly referenced fees should they have intended.  Having found this high bar to overcome the American Rule not met, the Court affirmed the district court’s denial of expert fees.

Jiaxiao Zhang is an associate at McDermott Will & Emery in Orange County, CA.

Article: Eleventh Circuit’s New Standard for Attorney Fees in ADA Cases...at Gas Stations

September 3, 2021

A recent article by David Raizman and Paul J. De Boe, “Eleventh Circuit of Appeals Creates New Standard for Standing in Title III Cases Against Gas Stations,” reports on a recent ruling on ADA litigation in the Eleventh Circuit Court of Appeals.  This article was posted with permission.  The article reads:

For years, Scott Dinin was one of South Florida’s most prolific filers of Title III of the Americans with Disabilities Act (ADA) cases.  His run ended two years ago, when, after obtaining default judgments against two gas stations on behalf of his client, Alexander Johnson, Dinin submitted a request for attorneys’ fees whose billing entries caught the attention of Judge Paul Huck of the U.S. District Court for the Southern District of Florida.  Judge Huck’s investigation into the matter brought to light a systematic practice of filing frivolous claims, knowingly misrepresenting the time counted as billable, making misrepresentations to the court, and improperly sharing attorneys’ fees with clients.  In his August 2019 order awarding extensive sanctions, Judge Huck described Dinin’s and Johnson’s operation as “an illicit joint enterprise … to dishonestly line their pockets with attorney’s fees from hapless defendants under the sanctimonious guise of serving the interests of the disabled community.”

Judge Huck’s sanctions included:

dismissal with prejudice of Johnson’s ADA and Florida Civil Rights Act claims;

disgorgement of improperly obtained settlement funds from 26 “gas pump cases”;

additional penalties of $59,900 against Dinin and $6,000 against Johnson; and

an injunction preventing Johnson and Dinin “from filing any future ADA complaints without first obtaining the court’s written permission.”

Judge Huck’s order corroborated and confirmed the suspicions of many in South Florida’s business and legal communities about questionable practices of some plaintiffs and their lawyers in Title III access litigation.  Johnson and Dinin appealed, and on August 17, 2021, the Eleventh Circuit Court of Appeals dismissed Dinin’s appeal and affirmed the district court’s order imposing sanctions on Johnson.

The Eleventh Circuit Dilutes Standing Requirements

While the court’s affirmance of sanctions has drawn the most interest, practitioners may want to note the court’s holding regarding standing in Title III cases brought against gas stations and similar Title III defendants that are not “destination-type establishments like hotels, hospitals, or restaurants.”  The court held that standing could be established without showing a “definite intention to visit” the specific establishment “in the future,” as would be required if the defendant were a supermarket or a “destination-type establishment.”  The court reasoned that gas stations are “visited on an as-needed basis, often based on convenience, proximity, or price on a given day,” and “cars are mobile and must be serviced wherever they happen to be at the time gas is needed.”  Therefore, standing exists if “[Johnson] regularly travels in the vicinity of the particular gas station.”

As the concurring opinion pointed out, the majority opinion did not cite any support for “water[ing] down the constitutional minimum for standing.”  All the same, practitioners may want to take note of this important holding when defending cases brought against gas stations or non-destination-type establishments.

David Raizman is nationally known for his disability rights practice, specifically for his work under Title III of the Americans with Disabilities Act.  In 2012, he was recognized by the Los Angeles Daily Journal as one of the top labor and employment attorneys in California and has been recognized multiple times as a Southern California Super Lawyer.

Paul De Boe is an associate attorney in the Miami office of Ogletree, Deakins, Nash, Smoak & Stewart, P.C.  His practice focuses in the area of employment litigation including claims of discrimination, harassment, retaliation, wage and hour, and family and medical leave law violations.  Mr. De Boe also counsels and defends clients in claims brought pursuant to Title III of the Americans with Disabilities Act involving brick and mortar locations as well as website accessibility, and state and federal consumer protection laws.

More Doubt if ’Exceptional’ Patent Fees Include PTAB Work

September 2, 2021

A recent Bloomberg Law story by Matthew Bultman, “Doubts Deepen if ‘Exceptional’ Patent Fees Include PTAB Work,” reports that companies that win an “exceptional” patent lawsuit can be reimbursed for their attorneys’ fees—but they can’t count on recouping money spent fighting at the Patent Trial and Appeal Board.  Patent law allows the winning side to collect fees from the losing side when a district court judge finds that the lawsuit is “exceptional,” as outlined in Section 285 of the Patent Act.  Courts are split on how the law applies to PTAB expenses.

Some courts have found the fees can include money companies spent challenging a patent at the PTAB after being sued.  Recently, however, other judges, including a magistrate judge in Delaware, have indicated those are likely sunk costs.  The U.S. Court of Appeals for the Federal Circuit has yet to provide a definitive answer, but “it is pointing in the direction, perhaps, that awards are not going to be given for proceedings that are outside of the district court case,” Akin Gump Strauss Hauer & Feld LLP attorney Rubén Muñoz said.

While PTAB reviews are a less expensive way to challenge a patent’s validity, the proceedings can still cost hundreds of thousands of dollars. In the Delaware case, a judge said PTAB fees may account for a significant portion of the $1.1 million and $1.5 million Dish Network LLC and Sirius XM Radio Inc. spent in the litigation, respectively.  For smaller businesses, in particular, that’s not an insignificant expense.  A bar on recovering those fees could be a consideration in their litigation strategies.

‘Optional’ Proceedings

Questions about whether Section 285 allows companies to recover costs at the patent office predate the 2011 America Invents Act, the law that created the popular inter partes reviews at the PTAB.  In 1988, the Federal Circuit ruled Celanese Polymer Specialties Co. could recoup fees spent opposing PPG Industries Inc.’s reissue patent applications at the agency.  Celanese had been sued for infringement, and the court said its participation in the agency proceeding wasn’t optional.  The court also said the patent office proceeding “substituted for the district court litigation” on certain issues.

How the Federal Circuit views “the relevance of that case may drive its ultimate decision on whether or not fees can be awarded for PTAB work,” said Sandip Patel, an attorney at Marshall Gerstein & Borun LLP.  Without deciding the question, the Federal Circuit said last year in the Dish and Sirius cases it saw “no basis in the Patent Act for awarding fees under § 285 for work incurred in inter partes review proceedings that the Appellants voluntarily undertook.”

While the statement wasn’t binding, Magistrate Judge Jennifer Hall in the District of Delaware agreed. In a recent report, the judge emphasized Dish and Sirius weren’t required to challenge Dragon Intellectual Property LLC’s patent at the PTAB, but rather that they chose to do so.

Some attorneys say the realities of patent litigation mean PTAB reviews aren’t that optional.  Most of the patents challenged at the PTAB are brought by a defendant that has been sued in district court on the patent, a 2016 study found.  “Because most IPRs are filed because there’s a parallel district court action and because it’s common sense to have an inexpensive determination of validity, rather than a ridiculously expensive evaluation of it, it’s not so voluntary,” Patel said.  “It’s practical,” Patel said, “and that’s the way people proceed.  That’s the way business is conducted in patent litigation after the AIA passed.”

Substituting Work

Some district courts have been more willing to allow defendants to recover fees spent at the patent office.  A judge in the Eastern District of Texas, for example, said in 2017 that My Health Inc. owed companies almost $60,000 for work on an IPR petition because the “defendants never would have sought IPR if they had not been sued for allegedly infringing.”  In another case involving Southwest Airlines Co., a judge in the Southern District of California said the airline could recover fees for reexamination proceedings at the patent office because the proceeding “essentially substituted for work that would otherwise have been done before this court.”

Hall acknowledged the My Health and Southwest cases, but said their reasoning wasn’t persuasive.  While Dish and Sirius argued they were effectively being punished for choosing the more “efficient route,” Hall said to take it up with Congress.  “Federal courts don’t make policy,” Hall wrote, recommending the companies’ fee award be limited to what they spent in the district court.

Dish and Sirius XM have objected to Hall’s report, which will be reviewed by a district court judge.  The companies argue, among other things, that inter partes reviews aren’t optional because defendants sued for infringement have one year to file for inter partes review - “a non-extendable deadline to act.”

Revisiting PPG

Questions about PTAB fees have put a spotlight on the Federal Circuit’s decision in PPG. Some legal scholars say the court took a wrong turn in its decision, and skipped an important step by looking at whether the proceedings were optional.  Megan La Belle, a law professor at Catholic University of America who studied the subject, said the U.S. Supreme Court has established a clear framework for recovering fees for work in administrative tribunals.

The first step is to look at the language of the relevant statute.  Section 285 states that courts “in exceptional cases may award reasonable attorney fees to the prevailing party.”  Administrative proceedings, like PTAB reviews, generally aren’t viewed as “cases,” La Belle said.  “You only get to that second step if there’s an argument that administrative proceedings are captured by the language of the statute,” La Belle said.  “I think clearly they’re not under 285.”

Another avenue for companies could be to pursue fees directly at the patent office.  The PTAB has the power to sanction a party for misconduct at the board, which can include frivolous arguments.  But La Belle suggested in a 2016 article that Congress pass legislation allowing for recovery of PTAB fees in exceptional cases in district court.  “From a policy perspective, to me it seems obvious that the Congress that passed the AIA, if they thought about this and if they were asked the question, ‘Can you recover fees for AIA proceedings?,’ I don’t see why they would ever say ‘No,’” La Belle said.