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Category: Ethics & Professional Responsibility

Illinois Justices Ask Whether Rule Violation Merits Fee Award

March 25, 2024

A recent Law 360 story by Lauraann Wood, “Ill. Justices Weigh Whether Rule Violation Merits Fee Award”, reports that the Illinois Supreme Court has questioned whether two law firms should be allowed to preserve their $1.7 million fee award for their work on a family dispute that settled after they were fired, as the justices asked whether fees are appropriate if the firms never disclosed how they would split the money.

Every justice on the state high court bench offered either a question or a criticism during oral argument as they weighed whether the quantum meruit claim by Stephen J. Schlegel Ltd. and Andrew W. Levenfeld & Associates Ltd. was correctly sent back to the trial court for an award that ignores their illegal fee agreement with former clients Maureen V. O'Brien and her nephew Daniel O'Brien III.

Some justices highlighted on one hand the 3,000 hours and years of work the firms put into the O'Briens' underlying family dispute before they were fired and the case settled about two weeks later.  Other justices, including Justice Joy Cunningham, noted the firms' failure to properly disclose their fee-sharing agreement to the O'Briens and questioned whether allowing them to recover fees essentially rewards them for violating a rule of professional conduct.

"Rules exist for a reason," Justice Cunningham said.  "It seems to me from looking at the figure that … they basically got what they would have gotten anyway, so the rule means nothing, and as a Supreme Court, are we supposed to agree that it's OK not to follow our rules?"

Representing the firms, Jeremy Boeder of Tribler Orpett & Meyer PC argued that his clients should receive an equitable fee award for their work because the trial court considered their rule violation and its potential effects before awarding their fees.  Pressed by Justice Cunningham to identify the consequence they would then face for violating the state's fee-sharing disclosure rule, Boeder said there would be none.  "And it's our position that there shouldn't always be a consequence in a case like this for a violation of a rule of professional conduct," he argued.

Acknowledging Justice Lisa Holder White's suggestion that the trial court could award the firms the same amount in fees even without considering their client contract, Boeder argued that spending the time "to get to the point that we've already reached" is unnecessary.  That process would also be wrong because sending the case back would essentially tell the trial court that it "has to go with the second-best option" despite considering all the relevant evidence in a six-day bench trial, he told the justices.  "Why should that be a command upon a trial court of equity, who really was in the best position to evaluate all of the issues here?" the attorney said.

The O'Briens' counsel argued that the firms should not receive any fees even if the justices agree they should go back to the trial court for a new award. Indeed, the O'Briens believe the firms' work is worth "less than zero," partly because they advised Maureen O'Brien to resign as the coexecutor of her parents' estate, which was her "only source of leverage, or power, or control" in the underlying dispute, John Fitzgerald of Tabet DiVito & Rothstein LLC told the justices.  "It is impossible to overstate how catastrophic that legal advice was," he told the court.

The state high court has previously voided a fee agreement that violated professional conduct rules in a case between a litigation consultant and an expert search firm, and the reasoning then should still apply because "there's no public policy reason or any other reason to treat lawyers differently from anyone else who enters a contract that violates public policy," Fitzgerald argued.  "Quantum meruit means 'as much as he or she deserves. 'No one deserves anything that violates public policy," he said.

Fees are also inappropriate because although the firms litigated some issues in the O'Briens' underlying dispute and made some settlement offers, there is no proof the O'Briens' subsequent counsel relied on the firms' earlier work to eventually reach their $16.85 million settlement, Fitzgerald argued.  Any outstanding settlement offers had been withdrawn, and no new offers had been made for weeks by the time the firms were fired, so any potential numbers had gone back to zero by the time the O'Briens' subsequent counsel began handling their case, he said.  "The fact that the next lawyer was able to settle the case on certain terms, I don't think that necessarily means these plaintiffs could have gotten that deal done on the same terms or comparable terms," Fitzgerald said.

Blasting that contention on rebuttal, Boeder argued that it was the firms' settlement back-and-forth that ultimately brought the underlying litigants to their agreeable meeting points and resolve their family dispute.  The firms had made an $18.3 million demand that was met with a $16.25 offer, which then prompted a $16.75 million counter-demand the firms were prepared to send back before they were ultimately fired, he said.  "The settlement was on almost exactly the same terms as the counter-demand that my client proposed," Boeder argued.  "Why wasn't that counter-demand made?  Because Dan and Maureen O'Brien refused to allow my clients to make it on their behalf."

NJ Ethics Board: Referral Fees Only for In-State Attorneys

March 15, 2024

A recent Law 360 story by Emily Sawicki, “NJ Ethics Board Says Referral Fees Only For In-State Attys”, reports that new guidance provided by the New Jersey Supreme Court's Advisory Committee on Professional Ethics recommends against the payment of referral fees for out-of-state lawyers, reasoning that such fees, considered payment for legal services, can only be provided to attorneys licensed to practice law in the state.

The opinion on referral fees, Opinion 745, came as a response to inquiries regarding attorneys from outside New Jersey requesting referral fees, the advisory committee said, including instances in which in-state attorneys who spend their winters in Florida "present local lawyers with legal issues that involve New Jersey law," and attorneys from neighboring states represent New Jersey clients. Opinion 745 was issued March 7 and made available.

In both of these instances, it is generally not appropriate to pay out-of-state lawyers referral fees, the opinion stated, unless the attorney is eligible and licensed to practice law in New Jersey.  The opinion also detailed limitations on who should pay such fees.  "Only New Jersey lawyers who are certified trial lawyers … may pay a referral fee," according to the opinion, which clarified that the state's professional conduct rules "prohibit other New Jersey lawyers from paying referral fees."

New Jersey's Rules of Professional Conduct also detail the limited scope under which referral fees should be paid, pointing out such fees are only appropriate for attorneys who are not part of the same law firm.  Clients must consent to each of the lawyers involved and be notified of the fee division, and the fee must be "reasonable," the ethics rules dictate.  "The division is in proportion to the services performed by each lawyer, or, by written agreement with the client, each lawyer assumes joint responsibility for the representation," according to the professional conduct rules.

The ethics committee clarified that the fee is "considered payment for legal services rendered in the case," but is not payment "in proportion to actual services rendered."  Because of this distinction, only New Jersey lawyers are eligible to collect such fees.  "People who are not permitted to practice law in New Jersey may not receive fees for legal services rendered," the opinion said.

The referral fee guidance also notes that it is not appropriate to pay a referral fee to a lawyer who is unable to take up a case or must bow out of a case due to a conflict of interest.  However, if a certified New Jersey lawyer must exit because an "unforeseen conflict arises in the midst of litigation and was not foreseeable," it is appropriate to pay the lawyer for legal services rendered, the opinion stated.

"Certified lawyers may pay referral fees to lawyers who were in good standing and eligible to practice law at the time of the referral but who later were suspended or disbarred at the time the case was concluded and the referral fee was payable," the opinion stated, citing precedent set in 2008 in the New Jersey Appellate Division case Eichen Levinson & Crutchlow LLP v. Weiner.

In that case, the opinion said, "the court reasoned that the referring lawyer was not required to have performed any legal work on the referred cases to obtain the referral fee and, at the time of the referral, the lawyer was eligible to practice."

The payment and acceptance of referral fees are dictated by individual state ethics rules and, therefore, there may be instances in which a New Jersey lawyer may accept a referral fee when doing work in other states.  It is up to the lawyer to ensure such fees are permitted, and that services fit the "specific needs of the client."

Tesla Investors Weigh in on $5B Alternative Fee Proposal

March 13, 2024

A recent Law 360 story by Jeff Montgomery, “Tesla Investors Weigh In On $5B Fee Proposed For Class Attys”, reports that Tesla Inc. stockholders are sounding off to Delaware's chancellor after class attorneys sought a stock-based fee potentially worth more than $5 billion at current share prices following the Court of Chancery's reversal of Elon Musk's $55.8 billion stock-based pay plan on Jan. 30.  Chancellor Kathaleen St. J. McCormick said in a letter that the judicial code bars her from considering communications outside the case process.  But she directed attorneys for the class to come up with a method for "handling" the stockholder communications ahead of a yet to be scheduled hearing and argument on the fee.

Nothing in the chancellor's letter characterized the aims or identities of those attempting to contact the court.  Founder Elon Musk owns 20% of Tesla's shares followed by institutional investors, with individuals accounting for less than 1%.  The proposed fee seeks just over 11% of the total formerly earmarked for Musk and now available for company use, well below the 33% sometimes awarded in complex cases that proceed through a full trial.

"I have not read these communications because, as you all are aware, Rule 2.9 of the Delaware Judges' Code of Judicial Conduct prohibits me from considering ex parte communications concerning a pending proceeding," the chancellor wrote in the latest entry of a derivative action launched in 2018.  Some of the letters apparently originated with small stockholders, some of whom have gravitated to X, formerly known as Twitter, to share thoughts on Tesla, Musk, the case, the fee and letters sent to the chancellor.  Some, using the hashtag #DelawareCourt81, have proposed sending letters directly to the parties or to Tesla for forwarding.

Tesla's top five institutional holders hold about 19% of the business, led by The Vanguard Group at nearly 7%.  Blackrock accounts for 5.8%, with State Street Corp. at 3.3%, Geode Capital Management at about 1.6% and Capital World Investors at about 1.3%.  None of the top five immediately responded to requests for comment and counsel for the stockholders did not provide details.

Lawrence Hamermesh, former director of the University of Pennsylvania Carey Law School's Institute for Law and Economics and professor emeritus at Widener University Delaware Law School, said he would not be surprised if the letters Chancellor McCormick referred to were sent by larger investors opposing the requested fee.

"That'd be my guess," Hamermesh said. "Without knowing everything about it, I harbor a certain lack of sympathy with them.  The upshot of the case is they're avoiding dilution" that would have resulted had Musk won.  "The award would dilute them back in a real small way, at least in terms of proportional interest. They're way better off" with the decision.  Nevertheless, Hamermesh said, given the 29,402,900-share cut of the 266,947,208 shares freed up by Chancellor McCormick's decision, the court is certain to be pondering the billions involved.

"She has to be thinking to herself: 'There's no case, no effort, no measure of success that's worth that much to lawyers. You don't need to give them that much to incentivize them to take this case."  In the absence of precedent or clear rules, he added, "it's a gut-level, gut-check thing. How much is enough? Either they become more rich, or fabulously rich."

Chancellor McCormick put the fee in play with an order rescinding Musk's 12-tranche, all-stock compensation plan on Jan. 30 after a week-long trial in November 2022. The ruling cited disclosure failures, murky terms, conflicted director architects and Musk's own conflicted influence in Tesla's creation of a mountain of fast-triggering stock options.

At the time of the ruling, Tesla's stock was trading at more than $191 per share, putting the potential maximum award at around $5.6 billion.  Slipping since has pruned the potential maximum by hundreds of millions.  Costs for the derivative case included more than $13.6 million in attorney fees and more than $1.1 million in expenses during the multi-year Chancery action.  Requested fees would equal a $288,888 hourly rate that the fee motion said was justified by the case's complexity, results and attorney skill levels, among other factors.

Attorney Fees as Stock Options in Tesla Case?

March 4, 2024

A recent Law 360 story by Lauren Berg, “Tesla Stock for Fees? Attys Who Got Musk’s Pay Cut Say Yes”, reports that the lawyers who convinced the Delaware Chancery Court to scuttle Elon Musk's proposed $55 billion Tesla compensation package filed a request for legal fees that came with a twist — they want to be paid in Tesla stock that rounds out to about $5.6 billion.

The attorneys from Bernstein Litowitz Berger & Grossmann LLP, Friedman Oster & Tejtel PLLC and Andrews & Springer LLC, who represent the shareholders who in November 2018 challenged Musk's pay package as unfair, asked for more than 29 million Tesla shares and an additional $1 million to cover their litigation expenses, according to the motion.

They are seeking about 11% of the 267 million shares they say are now available for Tesla's use as a result of Chancellor Kathaleen St. J. McCormick's decision in January striking down Musk's 10-year compensation plan, the motion states.  She found that disclosure failures, murky terms, conflicted director architects and Musk's own hand on the tiller warranted an order to roll back the award.

"Rather than debate the value conferred to Tesla by canceling the options or the value of the underlying stock returned to the Tesla treasury free of restriction, plaintiff's counsel instead seeks a fee award in kind — a percentage of the shares returned for unrestricted use by Tesla (rather than cash)," the lawyers said.  "In other words, we are prepared to 'eat our cooking.'"

"This structure has the benefit of linking the award directly to the benefit created and avoids taking even one cent from the Tesla balance sheet to pay fees," they added. "It is also tax-deductible by Tesla."  The plan went to a week-long trial in November 2022 after it was challenged by stockholders led by plaintiff Richard J. Tornetta.  The compensation scheme included 12 tranches or performance milestones that Musk had to meet before qualifying for a portion of the total, once estimated at as much as $56 billion.

In her order squashing the plan, Chancellor McCormick found that "Musk dictated the timing of the process, making last-minute changes to the timeline or altering substantive terms immediately prior to six out of the ten board or compensation committee meetings during which the plan was discussed."  Although the defendants argued that Musk was "uniquely motivated by ambitious goals," with Tesla desperately needing him to succeed, the opinion observed, "these facts do not justify the largest compensation plan in the history of public markets."

The price was no better than the process, the chancellor concluded, observing that "Musk owned 21.9% of Tesla when the board approved his compensation plan.  This ownership stake gave him every incentive to push Tesla to levels of transformative growth — Musk stood to gain over $10 billion for every $50 billion in market capitalization increase."

In their motion for attorney fees, the shareholders' attorneys from the three firms said they collectively logged nearly 19,500 hours throughout the case, which came out to about $13.6 million in lodestar, as well as $1.1 million in out-of-pocket expenses.  And although a typical attorney fee request seeks about one-third of a settlement or verdict won in favor of their client, in this case, the attorneys said they are asking for a conservative 11% of the recovery.

"We recognize that the requested fee is unprecedented in terms of absolute size," the attorneys said.  "Of course, that is because our law rewards counsel's efforts undertaken on a fully contingent basis that, through full adjudication, produce enormous benefits to the company and subject the lawyers to significant risk."

"And here, the size of the requested award is great because the value of the benefit to Tesla that plaintiff's counsel achieved was massive," they added.  And this isn't the first time a court has awarded plaintiffs a fee of recovered shares, according to the motion.  The attorneys point to the 2000 case Sanders v. Wang, in which the Chancery Court granted plaintiffs judgment on the pleadings over the improper issuance of 4.5 million shares, approved a settlement and then awarded the plaintiffs a fee comprising 20%, or 900,000, of the 4.5 million recovered shares.

Overall, the attorneys said their fee request is supported by their history as experienced stockholder advocates, the substantial effort they put forth, the complexity of the case, and the "unprecedented result" they achieved in this case.

Former Billing Manager: Law Firm Put Legal Fees Over Clients

February 12, 2024

A recent Law 360 story by George Woolston, “Ex-Billing Manager Says NJ Firm Put Fees Over Clients”, reports that a former billing manager for the New Jersey personal injury firm Brandon J. Broderick Attorney At Law claims she was fired for insisting that the firm's clients receive the most money possible from their settlements, according to a lawsuit filed in New Jersey state court.

Monique Pruett alleged in Mercer County Superior court that she was terminated after objecting to the firm's requests that she process personal injury settlements as quickly as possible.  Pruett claimed that when she took time to ensure that medical bills and liens were properly reconciled before making settlement payments to personal injury clients and clearing medical escrow accounts, "she was told that was not her job, and her job was simply to pay the bills and get the money out of escrow," the suit claims.

Clients and medical providers would sometimes receive less money than they were owed, but the firm would tell the providers "they would be taken care of," Pruett alleges in the suit.  The difference would be made up by paying a different client less money than the client was entitled to, Pruett claimed.  "It was clear that Broderick's priority was to get the firm its fee, the medical providers their money, and the best interest of the client was not considered," the suit claims. "The client's interest was given the lowest priority, if considered at all."

She also said she was treated unfairly because she is Black.  The suit brings three causes of action under the Garden State's whistleblower and discrimination laws. Pruett is seeking compensatory damages for emotional distress, reinstatement, counsel fees and punitive damages.