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Category: Fee Cap / Fee Limits

No Arbitration for Attorney-Client Fee Dispute

August 11, 2021

A recent Law 360 story by Caroline Simson, “No Arbitration For King & Spalding Client Fight, Court Hears”, reports that a Dutch citizen who accuses King & Spalding LLP of fraudulently colluding with Burford Capital to maximize fees ​​in a treaty claim​ against Vietnam​ is fighting the law firm's efforts to send the fee dispute to arbitration, arguing that an arbitration clause in the funding agreement is inapplicable.

Trinh Vinh Binh sued King & Spalding and two of its international arbitration partners in Houston, Reggie R. Smith and Craig S. Miles, in June, alleging they made a "mockery of the fiduciary obligations an attorney owes to their clients" by "colluding" with litigation funder Burford to take more of the arbitration proceeds than Binh had agreed to.  The law firm had represented Binh in a treaty claim against Vietnam over the confiscation of certain real estate that ended in a $45 million award against the country in 2019.

King & Spalding pressed a federal court in Houston last month to send the dispute with Binh to arbitration, citing an arbitration clause in the funding agreement and alleging that Binh excluded Burford from his suit in an attempt to skirt the clause.  The law firm claims that even though it is not a signatory to the funding agreement, the broad scope of the clause provides for arbitration of any dispute arising out of the pact.

But Binh argued that the clause governs disputes only between him and Burford, and not with any third parties. He said that the engagement agreement he signed with King & Spalding when he retained the firm for the Vietnam matter makes no mention of arbitration for disputes.  "Defendants are attorneys, and they certainly know how to draft an arbitration clause.  But the engagement agreement between Binh and defendants contains no arbitration clause," Binh's attorneys said. "Try as they might, defendants have not shown — and cannot show — that they may properly invoke the [funding agreement's] arbitration clause.  Binh therefore respectfully requests that this court deny defendants' motion."

King & Spalding had represented Binh in an arbitration matter filed against Vietnam in 2015, in which Binh accused the country of improperly taking several valuable properties he says were worth an estimated $214 million.  Under their deal, the law firm agreed to hold back 30% of billings for fees and defer the payment of those amounts until work had concluded in the arbitration.  At the same time, Binh entered into a funding agreement with Burford Capital with a $4.678 million spending cap, according to the suit.

Binh claims that King & Spalding told him the firm could complete the arbitration work within that cap.  But by May 2016, the firm had already billed and been paid some $1.9 million, leaving about $1.8 million after initial costs and expenses had been paid out.

Binh alleges that at that point the firm, "motivated by securing continued, guaranteed immediate payment of their fees, colluded with Burford" to contrive a scheme to increase the amount potentially owed by Binh by increasing the cap on King & Spalding's legal fees and, consequently, increasing Burford's potential entitlement to an increased return.  The way the agreement worked was that the more King & Spalding billed against the cap amount in legal spending, the more Binh was at risk of paying a so-called success return, to be paid if Binh prevailed in the arbitration.  The success return was to be split between King & Spalding and Burford based on the relative portion of their investments in the arbitration.

Binh alleges that King & Spalding tried to make him agree to increase the cap on expenditures for legal fees — and potentially, provide more of a return for Burford — but that he refused.  Thereafter, Burford and the law firm allegedly executed a side agreement between themselves.

In addition to accusing King & Spalding of breaching its fiduciary duty, Binh's lawsuit includes claims for negligence if the overpayment of fees was due to a mistake, as well as claims of misrepresentation and fraud.  He also accuses the firm of negligence after the tribunal in the case against Vietnam rejected an expert report the firm provided stating that Binh's property was worth some $214 million.  The tribunal instead awarded $45.4 million.

Attorney Fees Capped at 15 Percent in $26B Opioid MDL

August 9, 2021

A recent Law 360 story by Mike Curley, “Atty Fees Capped at 15% in $26B Opioid MDL Settlement”, reports that an Ohio federal judge has capped contingent attorney fees in a $26 billion settlement in the sprawling opioid multidistrict litigation at 15%, saying the cap is necessary to ensure more money goes to the plaintiffs for addressing the harm opioids have done and to keep fees from being unreasonable.  U.S. District Judge Dan Aaron Polster capped the fees for individually retained plaintiff's attorneys, or IRPAs, in the suit, including both those whose cases are already in the MDL and those who opt-in to the settlement without having participated up to now.

According to the order, the $26 billion settlement reached in July already sets aside $2.3 billion, or about 8.8%, of its fund for attorney fees, and all the attorneys in the plaintiffs executive committee have agreed to waive their contingency contracts to take their fees from that fee fund.  In addition, the deal stipulates that in no event must less than 85% of the funds be spent on opioid remediation, the judge wrote, so the hard cap is already built into the settlement.  In order to collect from the attorney fee fund, IRPAs must submit an application and waive the right to enforce their own contingent fee contracts, the judge wrote.  And even if they forgo payment from the attorney fee fund, the amount they can collect on their contingent contracts is still capped at 15%, the judge wrote.

The deal with J&J, AmerisourceBergen Corp., Cardinal Health Inc. and McKesson Corp. ends the bulk of the suits levied over the opioid crisis. Up to $5 billion will come from J&J over the next nine years and $21 billion from the distributors over the next 18 years, with up to $23.5 billion of the total going toward easing the opioid epidemic, according to the deal.  Under the terms of the deal, J&J agreed to stop its opioid sales, according to a statement from the New York Attorney General's Office.  The drug distributors also agreed to share data about opioid shipments with an independent monitor.  New York was joined by the state attorneys general for California, Colorado, Connecticut, Delaware, Florida, Georgia, Louisiana, Massachusetts, North Carolina, Ohio, Pennsylvania, Tennessee and Texas in negotiating the deal.

The 15% cap represents a consensus following significant deliberation and negotiations among the parties, Judge Polster wrote Friday, and the fact that attorneys must waive their contingent contracts to collect from the fee fund will prevent the plaintiff entities from having to effectively pay their attorneys twice, and keep the amount each attorney receives fair and equitable.  Given the scale of the settlement, which Judge Polster said was among the largest in the nation's history, the lower percentage will keep the fees from growing beyond what is reasonable, adding that a disproportionately large fee could erode faith in the legal system.

Finally, the judge noted that some attorneys may well have performed extraordinary work on behalf of their clients far beyond the norm in the opioid MDL, and in those rare cases, the court will allow an IRPA who forgoes the fee fund to enforce a fee contract at higher than 15%, provided they present evidence of the exceptional work and extraordinary risk they went through in the case.  "We understand the court was faced with a difficult situation here and reached a Solomonic decision to ensure fairness for all the government clients," Hunter Shkolnik of Napoli Shkolnik PLLC, representing plaintiffs in the MDL, told Law360.

Paul Geller of Robbins Geller Rudman & Dowd LLP, also representing plaintiffs in the MDL, said those who worked the hardest on the case are the ones that are going to be alright with the cap.  "If there ever were a case where a lawyer should agree with a well-reasoned fee cap, it's this one," he said.  "There are literally hundreds of lawyers involved in opioid litigation ranging from altruistic to avaricious, and everything in between; one's reaction will largely depend on where you fall on that continuum."  Geller added that the litigation to him has always "had a higher purpose" of addressing the public health crisis

$203M Attorney Fee Request in Flint Water Settlement

March 10, 2021

A recent Law.com story by Amanda Bronstad, “Plaintiffs Counsel in Flint Water Settlement Seek $200M in Attorney Fees,” reports that plaintiffs lawyers who obtained a settlement in the Flint, Michigan, water crisis litigation are asking for more than $200 million in attorney fees.  The request, outlined in the filing in the U.S. District Court for the Eastern District of Michigan, is part of a $641.25 million settlement with the state of Michigan, former Michigan Gov. Rick Snyder, the city of Flint and several individual government defendants.

The fee request would include an estimated $40.6 million in common benefit fees to lead counsel and others who spent five years litigating both a class action and individual cases.  The fees also would provide a fee award to class counsel and cap contingency rates of individually retained counsel at 27%.  In all, the fees could total nearly $203 million, according to the motion.

“Plaintiffs’ counsel have worked on a contingency basis for more than five years now, without compensation of any kind, to achieve this remarkable result,” the fee motion says.  “The fee proposal is designed to provide reasonable and fair compensation to plaintiffs’ counsel and to ensure equitable treatment for all who make claims under the settlement.”  U.S. District Judge Judith Levy has scheduled a fairness hearing, including potential approval of the fees, for July 12.

In April 2014, state officials decided to shift Flint’s water supply from Lake Huron to the Flint River despite studies warning the corrosive nature of the river water could send lead into the drinking water.  Early on in the litigation, co-lead counsel Ted Leopold, a partner at Cohen Milstein Sellers & Toll in Palm Beach Gardens, Florida, and Michael Pitt, of Pitt, McGehee, Palmer, Bonanni & Rivers in Royal Oak, Michigan, had a protracted fight with co-liaison counsel Hunter Shkolnik, of New York-based Napoli Shkolnik, over potential fees.  Meanwhile, the Flint water cases dragged through several procedural hurdles, with the U.S. Court of Appeals for the Sixth Circuit reversing some key rulings.

The partial settlement, filed in court Nov. 17, excludes two engineering firm defendants and the U.S. Environmental Protection Agency.  On Jan. 21, Levy preliminarily approved the settlement, 79.5% of which provides a compensation fund for minors.  The settlement also includes subclasses of adult residents, businesses and property owners.  Signing the fee motion were lawyers at 20 law firms, including Leopold, Pitt, Shkolnik and co-liaison counsel Corey Stern, of New York’s Levy Konigsberg.

The motion requests a 6.33% common benefit assessment, divided equally between co-lead counsel and co-liaison counsel, with higher percentages imposed on lawyers retained after July 16, 2020.  Lead counsel said they provided $7 million upfront expenses and invested 182,571 hours of work—about $84 million in an estimated lodestar, which is the billing amount multiplied by the hourly rate.  The requested fees, which are more than double the lodestar, are justified given the length and risks of the case, the number of defendants, the complexity of the issues and litigation that involved more than a dozen appeals, Leopold said.  “The work speaks for itself,” he said.

The fee motion says lawyers with individual cases would have a 27% cap on their contingency fees.  Michigan law caps contingency fees at one-third of a recovery amount.  “For the vast majority of the cases and the lawyers who did not work on the common benefit, we didn’t think it would be fair to the clients to take 33%,” Leopold said.

The fee request also takes into account the fact that the work isn’t over.  Levy has scheduled the first bellwether trials to occur in October.  Many of the settlement’s beneficiaries also are minors who do not have lawyers and will need help from lead counsel during the claims process, Shkolnik said.  “There’s going to be a whole new round of work that’s going to be done for individual cases to process them as if we represent them,” he said.

Working Paper: Judicial Guide to Awarding Attorney Fees in Class Actions

March 7, 2021

A recent Fordham Law Review working paper by Brian T. Fitzpatrick, “A Fiduciary Judge’s Guide To Awarding Fees in Class Actions (pdf),” considers the fiduciary role of judges in awarding attorney fees in class action litigation.  This article was posted with permission.  Professor Fitzpatrick concludes his article:

If judges want to act as fiduciaries for absent class members like they say they do, then they should award attorneys’ fees in class actions the way that rational class members who cannot monitor their lawyers well would do so at the outset of the case.  Economic models suggest two ways to do this: (1) pay class counsel a fixed or escalating percentage of the recovery or (2) pay class counsel a percentage of the recovery plus a contingent lodestar.  Which method is better depends on whether it is easier to verify class counsel’s lodestar (which favors the contingent-lodestar-plus-percentage method) or to monitor against premature settlement (which favors the percentage method) as well as whether it is possible to run an auction to determine the market percentage for the contingent-lodestar-plus-percentage method.  The (albeit limited) data from sophisticated clients who hire lawyers on contingency shows that such clients overwhelmingly prefer to monitor against premature settlement, since they always choose the percentage method.  Whether the percentage should be fixed or escalating depends on how well clients can do this monitoring.  Data from sophisticated clients shows both that they choose to pay fixed one-third percentages or even higher escalating percentages based on litigation maturity just like unsophisticated clients do, and they do so even in the most enormous cases.  Unless judges believe they can monitor differently than sophisticated corporate clients can, judges acting as good fiduciaries should follow these practices as well.  This conclusion calls into question several fee practices commonly used by judges today: (1) presuming that class counsel should earn only 25 percent of any recovery, (2) reducing that percentage further if class counsel recovers more than $100 million, and (3) reducing that percentage even further if it exceeds class counsel’s lodestar by some multiple.

Brian T. Fitzpatrick is a professor of law at Vanderbilt University Law School in Nashville.

Article: The Right Retainer: Classic, Security or Advance-Payment?

February 7, 2021

A recent New York Law Journal article by Milton Williams and Christopher Dioguardi, “Retaining the ‘Right’ Retainer: Classic, Security or Advance-Payment?,” reports on different retainer types in New York.  This article was posted with permission.  The article reads:

This article evaluates which type of retainer agreement gives attorneys the best chance to preemptively shield their retainer fees before a client ends up in bankruptcy or the Department of Justice seizes and forfeits the client’s assets.

The scenario is this: A struggling business on the precipice of bankruptcy, or a criminal defendant whose property is subject to forfeiture, would like to hire you.  The prospective client has funds available to pay its legal fees, but what if you and/or the client expect that bankruptcy trustees or the Department of Justice will soon claim those funds for themselves?

At the outset of an engagement, an attorney can structure his or her retainer agreement to protect the retainer to the greatest extent possible in the event the client’s creditor comes knocking.  New York law recognizes three types of retainers: “classic,” “security,” and “advance payment.”  And under New York law, a retainer fee is shielded from attachment so long as the client does not retain an interest in the funds. See Gala Enterprises v. Hewlett Packard Co., 970 F. Supp. 212, 219 (S.D.N.Y. 1997).  For this reason, described in more detail below, it is the “advance payment” retainer agreement that will likely provide the most protection.

The ‘Classic’ Retainer

This type of retainer is typically a single, up-front payment to the lawyer simply for being available to the client—the attorney commits to future legal work for a specific period of time, regardless of inconvenience or workload constraints.  The classic retainer is not for legal services, and is therefore earned upon receipt, whether or not the attorney performs any services for the client (i.e., it is nonrefundable). See Agusta & Ross v. Trancamp Contr., 193 Misc.2d 781, 785-86 (N.Y. Civ. Ct. 2002) (general retainer compensates a lawyer for “agree[ing] implicitly to turn down other work opportunities that might interfere with his ability to perform the retainer-client’s needs” and “giv[ing] up the right to be retained by a host of clients whose interests might conflict with those of the retainer-client”).

Because the classic retainer is earned upon receipt and is nonrefundable, it without a doubt provides the most protection against would-be creditors.  However, the classic retainer is really only “classic” in the sense that it relates to antiquity.  Indeed, it is difficult to imagine a situation in the modern practice of law where a client would want to pay a classic retainer.  And attorneys would be remiss to draw up a nonrefundable classic retainer agreement unless certain specific conditions are met.

In general, under New York Rule of Professional Conduct 1.5(d)(4), “[a] lawyer shall not enter into an arrangement for, charge or collect … a nonrefundable retainer fee.” Further, under Rule 1.16(e), fees paid to a lawyer in advance for legal services are nonrefundable only to the extent they have been earned by the lawyer: “upon termination of representation, a lawyer shall promptly refund any part of a fee paid in advance that has not been earned.” See also Matter of Cooperman, 83 N.Y.2d 465, 471 (1994) (holding that nonrefundable retainer fee agreements clash with public policy and transgress the rules of professional conduct; affirming lower court decision that the use of nonrefundable fee arrangements warranted two-year suspension.); Gala Enterprises, 970 F. Supp. at 219 (narrowly construing the holding in Cooperman, and holding that only retainers with express non-refundability language are invalid per se).

The Security Retainer

While the classic retainer might offer the attorney the most security, the security retainer offers little defense against a client’s future creditors.  Typically, payments pursuant to a security retainer are placed in an escrow or trust account to be drawn upon only as the fee is earned.  In other words, the security retainer remains the property of the client until the attorney applies it to charges for services rendered.

So long as the client retains an interest in escrowed funds, the escrow account is attachable.  Under New York law, a security retainer may be attached so long as it is subject to the client’s “present or future control,” or is required to be returned to the client if not used to pay for services rendered. See, e.g., Lang v. State of New York, 258 A.D.2d 165, 171 (1st Dept. 1999); Potter v. MacLean, 75 A.D.3d 686, 687 (3d Dept. 2010) (defendant owed more than $20,000 in arrears on child support obligations and subsequently paid law firm a $15,000 retainer fee; the court found that the retainer fee, which was held in escrow, was subject to restraining order); M.M. v. T.M., 17 N.Y.S.3d 588, 599 (N.Y. Sup. Ct. 2015) (wife’s restraining notice against husband’s attorney’s security retainer was valid and enforceable); see also Pahlavi v. Laidlaw Holdings, 180 A.D.2d 595, 595-96 (1st Dept. 1992) (judgment debtor deposited $50,000 with his attorney after receipt of a restraining order and the court ordered his law firm to return them).

The Advance-Payment Retainer

Similar to the security retainer, the advance-payment retainer is a fee paid in advance for all or some of the services to be performed on a specific matter.  However, unlike a security retainer, ownership of the advance-payment retainer passes to the attorney immediately upon payment in exchange for the attorney’s promise to provide the legal services.  This type of retainer is likely the best way to ensure that the client has sufficient funds to pay for expected legal services.

Under an advance-payment retainer agreement, the law firm places the money into its operating account and may use the money as it chooses, subject only to the requirement that any unearned fee paid in advance be promptly refunded to the client upon termination of the relationship (recall Rule 1.16(e)).

A client’s contingent future interest in an advance-payment retainer, if any, that would be refunded if the firm’s services were prematurely terminated is not a sufficient basis for attachment. See Gala Enterprises, 970 F. Supp. at 219.  Therefore, the most secure option will likely be to require an advance payment for all services to be rendered, commonly referred to as a flat or fixed fee.  In other words, a creditor would not be able to seize such a retainer, even if part of the retainer may yet be refundable.  In Gala Enterprises, the court held that because a $150,000 flat fee as well as a $500,000 flat fee were subject to refund only if the legal services were prematurely terminated, the fees were therefore not attachable.

However, just because a client has paid an advance-payment retainer, does not mean that the retainer is untouchable.  Two specific possibilities come to mind.  First, Gala Enterprises illustrates that law firms might need to defend against fraudulent conveyance claims.  That being said, if the retainer is not excessive or unreasonable, the attorney is in a good position to defend against any such claims.  It goes without saying, when establishing a flat fee—or any fee for that matter—the fee must not be excessive. See Rule 1.5(a) (“[a] lawyer shall not make an agreement for, charge, or collect an excessive [] fee …”).

Second, attorneys of course must not accept funds that may have been obtained by fraud. See, e.g., S.E.C. v. Princeton Economic Intern. Ltd., 84 F. Supp. 2d 443 (S.D.N.Y. 2000) (lawyer who blindly accepts fees from client under circumstances that would cause reasonable lawyer to question client’s intent in paying fees accepts fees at his peril.).

Conclusion

In sum, we offer this advice:

  1. Review the Rules of Professional Conduct and case law cited herein, as well as the relevant New York State Bar Association ethics opinions, specifically: Ethics Opinion 570, June 7, 1985; Ethics Opinion 816, Oct. 25, 2007; Ethics Opinion 983, Oct. 8, 2013; and Ethics Opinion 1202, Dec. 2, 2020.
  1. Be transparent and direct with prospective clients regarding retainer agreements.
  2. A reasonable advance-payment retainer for all services to be rendered will give attorneys the most protection against future unknown creditors.
  3. Make clear in the retainer agreement that the client acknowledges and agrees that the advance-payment will become the law firm’s property upon receipt and will be deposited into the law firm’s operating account, not into an escrow account or a segregated bank account.
  4. Acknowledge in the retainer agreement that the client may be entitled to a refund of all or part of advance payment based on the value of the legal services performed prior to termination.

Milton Williams is a partner and Christopher Dioguardi is an associate at Walden Macht & Haran LLP in New York.

Polsinelli Sued Over Billing Issues

January 22, 2021

A recent Law 360 story by Craig Clough, “Polsinelli Says Clients’ ‘Slacking Off’ Claims are “Meritless”,” reports that Polsinelli PC urged a Pennsylvania federal judge to toss a lawsuit...

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