A recent Law 360 story by Rachel Riley, “Wash. Judges Ask If Atty Fee Split Restrains Competition”, reports that Washington state appellate judges scrutinized a fee-splitting agreement that a Seattle lawyer says illegally stifles competition, looking for ways the contract might limit the careers of departing attorneys or otherwise go against the public's interest.  Washington Court of Appeals Judge Ian S. Birk said attorney James Banks' challenge against Seattle Truck Law PLLC hinges on the question of whether the arrangement imposes "a burden on subsequent client choice" that violates the Rules of Professional Conduct.

The employment contract requires Banks to pay 40-50% of contingency fees he earns from former Seattle Truck clients back to the firm during the three years following his departure.  Banks has argued that the provision is illegal because it could potentially discourage an attorney from leaving the firm or from taking existing clients with them, given that they would have to split the fees.

Christopher L. Hilgenfeld of Davis Grimm Payne & Marra, representing Seattle Truck Law, contended Banks presented no evidence at trial that the fee split had impacted client choice.  "The clients' fee did not change in this matter," Hilgenfeld said.  "The client got to make whatever choice they wanted to make.  And they did not pay a different fee."

But Judge Birk questioned how an attorney would even get such evidence, since asking a prospective or former client to provide a declaration for their lawyer's own personal legal squabbles would be a conflict of interest.  "The attorneys would be in the position of having to get declarations from their clients about what the clients felt in order to serve the attorneys' personal interests in the resolution of this law firm dispute. That doesn't sound very normal," Judge Birk said.  "To me it looks like, in case law, the courts look at the agreement itself and judge whether they believe the terms are so onerous it creates a restraint," Judge Birk added.

According to Banks, Seattle Truck Law was founded by Tennessee-based personal injury attorney Morgan Adams of Truck Wreck Justice, who lured him in when he was a junior attorney and structured the employment contract to the Seattle firm's advantage.  Banks argues the trial court erred in granting Seattle Truck Law summary judgment in its breach-of-contract claims against him and ruled that the firm was entitled to about $200,000 of the fees he collected from settling cases for clients from the firm.

"Of course attorneys can divide up fees that have already been earned, profits that are already on the way," said Gary W. Manca of Talmadge/Fitzpatrick, representing Banks. "But here these are contingency fees that have not yet been earned."  Manca emphasized that it's not necessary to provide evidence that the agreement in fact had these limiting effects, but only that it "could have a deleterious effect on client choice and professional freedom."

But Judge David Mann, too, questioned if that's the case with this agreement, given that the half of the fees Banks was contractually entitled to after the split was actually more than his cut of fees earned on contingency cases while working at the firm. 

"No client is getting harmed here," Judge Mann said. "He's not going to cut back on his work because he's earning less. He's actually earning more.  Where is there a public injury?"  Manca responded that Banks took on new costs by leaving the firm because he had to pay overhead costs associated with starting a new practice, such as staffing and insurance.

Seattle Truck has contended that most of the work on the settlements was done while Banks was still working at the firm.  It also argues the fee split provision works in the public's favor because it incentivizes young attorneys to stick with their firms and gain experience before departing to practice on their own.  "Law firms would be greatly reduced if a big case comes in if they feel like that attorney is going to have a good relationship and the client could walk out the door," Hilgenfield said.

A recent Law 360 article by Joshua Wurtzel, “A Lawyer’s Guide To Collecting Fees From Nonpaying Clients,” reports on collecting unpaid fees.  This article was posted with permission.  The article reads:

You've done the work and sent the bill, but haven't been paid. What do you do?  This is unfortunately a question that lawyers, from solo practitioners to BigLaw partners, confront all too often.  But most lawyers struggle with the answer.  And even worse, many end up doing nothing — leaving significant receivables on the table from clients who have the ability to pay.  Struggle no longer.  Here, I offer some recommendations on how to deal with a nonpaying client. The article focuses on the law on account stated in New York.  These principles and advice are generally applicable in most U.S. jurisdictions, though you should of course consult the specific law in your jurisdiction.

Make Sure Your Retainer Agreement Gives You Adequate Protection

Good collection starts with a good retainer agreement.  There are several important clauses any retainer agreement should have.

Thirty Days to Object

Your retainer agreement should include a clause stating that if a client has an objection to an invoice, the client must make a specific objection in writing within 30 days.  Courts have upheld these types of clauses, and have further held that a client that fails to make a specific, timely objection in accordance with this clause waives objections to the invoice.

Fee Shifting

Many lawyers avoid suing clients for unpaid fees because the time spent doing so can be better spent on other, billable tasks.  But if you include a fee-shifting clause in your retainer agreement, a nonpaying client could end up being responsible for fees you incur in bringing the suit.  Make sure, however, that the fee-shifting clauses run in favor of the client as well if he or she is the prevailing party, or else it will be unenforceable.

Choice of Forum and Acceptance of Service of Process

Your retainer agreement should also include a forum selection clause in the state in which you practice so you don't have to go out of state to sue a nonpaying client.  And it should also include a clause stating that the client agrees to accept service of process by mail or email, in case you have trouble serving the client personally.

Rely on the Retaining Lien and Charging Lien

New York law strongly favors attorneys who are stiffed by their clients.  So there are some tools you can use to try to collect without having to bring a lawsuit.

Retaining Lien

When a client has an outstanding balance with his or her former lawyer, the lawyer can assert a retaining lien over the client's file. This allows the lawyer to refuse to turn over the file to the client or his or her new counsel until the outstanding balance is paid or otherwise secured.  To lift the retaining lien, the former client must either pay the amount owed to the lawyer or post a bond for that amount.

Charging Lien

Under Section 475 of the New York Judiciary Law, "from the commencement of an action," the lawyer who "appears for a party has a lien upon his or her client's cause of action," which attaches to a verdict, settlement, judgment or final order in his or her client's favor.

This section gives the lawyer a lien on the proceeds of the former client's case to the extent of the amount owed to the lawyer, with the result that no proceeds can be distributed to the former client or his or her new counsel until the former lawyer is paid.

In 1995, the New York Court of Appeals in LMWT Realty Corp. v. Davis Agency Inc. held that this lien "does not merely give an attorney an enforceable right against the property of another," but instead "gives the attorney an equitable ownership interest in the client's cause of action."

Sue for Account Stated

If all else fails and you need to sue a nonpaying client, the account stated cause of action will be your best friend.  Indeed, in New York, this cause of action allows a professional services provider to sue a client for nonpayment of an invoice if the client has retained the invoice for at least a few months and has failed to make timely, specific, written objections.  This cause of action thus provides lawyers with a substantial tool to pursue a nonpaying client.

Invoice Requirement

To state a claim for account stated, you must show only that you sent the invoices to the client and the client retained them — usually for at least a few months — without making specific, written objections.  It is thus important to maintain a record of when invoices are sent and to whom — ideally by email to an email address the client gave to receive invoices.

Oral Objections

Generally, a client must make specific, written objections to an invoice; general or oral objections will not be enough to defeat a claim for account stated. Nor will general claims by a client that he or she is dissatisfied with a particular outcome suffice.

Reasonableness of Fees

Many nonpaying clients will defend against a nonpayment suit by claiming that they were overbilled or that the quality of the work was not to their liking.  But if these objections are not made in a timely way, with specificity and in writing, courts generally hold that they are waived.

This is significant for a lawyer pursuing a nonpaying client, as most clients will defend by claiming that there was something wrong with the work done by the lawyer.  And so if an account is stated by virtue of the client's retention of the invoices, the reasonableness of the fees and the quality of the work has no bearing on the merit of the account stated claim.

Underlying Agreement to Pay

While account stated is a powerful cause of action, it works only if there is an underlying agreement to pay for the services rendered.  So a person who randomly sends out invoices without having an underlying agreement with the recipients of the invoices can obviously not rely on account stated.

But if you have a retainer agreement that properly covers the scope of the work you will be doing, you shouldn't have a problem.  Nor is there a requirement that the client has agreed to pay for the specific invoices at issue, as long as the client has agreed to pay for your services generally.

The Dreaded Malpractice Claim

Most nonpaying clients faced with a lawsuit by their former lawyer will assert counterclaims for malpractice — even if the malpractice claim has no merit.  While the lawyer must, of course, still deal with the malpractice claim, courts generally go out of their way to sever a lawyer's account stated claim from a nonpaying client's malpractice counterclaim.  This is especially so if the alleged malpractice relates to different work from what is at issue on the unpaid invoices.

Further, as a strategic matter, unless the malpractice counterclaim has merit, most nonpaying clients will drop it after the lawyer obtains a quick judgment on summary judgment at the outset of the case.

Conclusion

Suing a former client is never pleasant, and is a last resort after the attorney-client relationship has broken down. But using efficient, streamlined ways to collect from nonpaying clients can allow a law firm to provide greater value to the rest of its clients.

Joshua Wurtzel is a partner at Schlam Stone & Dolan LLP in New York.

A recent Law360 story by Jeannie O’Sullivan, “Sills Cummis Accused of Overbilling in Rock Musician Suit,” reports that the former manager for Nile Rodgers has accused Sills Cummis & Gross PC of overbilling him in connection with contract claims against the musician and then abandoning the case, according to an amended complaint filed in New Jersey state court.  In a filing, Peter Herman said Sills Cummis and firm member Joseph B. Fiorenzo failed to honor negotiated bill corrections, charged "patently unreasonable fees" for unnecessary outside work and then withdrew from the matter, leaving him to fend for himself in court.

The firm has since demanded that the $315,000 settlement in the underlying matter be held in escrow to settle its claim against Herman for fees, according to the complaint, filed in Essex County Superior Court.  "As of the date of this complaint, Herman has received nothing of the settlement proceeds," the complaint said.  Herman hired Sills Cummis under a $20,000 retainer agreement that set forth hourly fees for the lawyers assigned to the case, according to the complaint.  Herman claimed he informed the firm that he only had $100,000 for legal fees.

The firm charged Herman "in excess of" $618,000 in connection with the civil matter and sought to collect on the whole amount, despite an agreement in which the parties had negotiated reductions, the complaint said.  The rates charged "far exceeded rates for similarly situated New Jersey based law firms," the complaint said.  Herman alleged that Fiorenzo informed him that the firm would no longer work on his file and would move to withdraw, forcing Herman "to negotiate directly with Nile Rodgers and accept a settlement far less than what was reasonable."  That settlement is now tied up in escrow, the complaint said.

The seven-count complaint says that the firm violated professional conduct rules requiring attorneys "to charge fair and reasonable fees and disbursements," and that the retainer agreement, which includes an arbitration clause, is "null, void and of no force and effect."  The fact that the settlement is escrowed constitutes a breach of the firm's agreement with Herman, and the firm's failure to cap its fees amounts to converting Herman's assets for its own benefit, the complaint says.

Herman also claimed that Fiorenzo made false statements "regarding his extensive experience and personal involvement" with the matter. The bills showed Fiorenzo "spent little time on the matter," the complaint said.  The complaint goes on to say that a conflict of interest arose when the defendants demanded Herman pay the fees or face a motion to withdraw.  Their service to Herman would be "materially affected by defendants' interest in their fee claim," the complaint said.  Herman wants compensatory and punitive damages, release of the escrow funds, and attorney fees and other costs. 

A recent Law 360 story by Nick Muscavage, “McCarter & English Keeps Win in $860K Fee Suit,” reports that a New Jersey state appeals court upheld an $860,000 judgment for McCarter & English in its suit seeking unpaid fees from former client Moerae Matrix, finding that the biotech company couldn't show how the fees were unreasonable.  Moerae Matrix, a Morristown-based biopharmaceutical company that develops treatments for fibrotic and inflammatory diseases, retained McCarter & English in August 2017 to provide legal services for intellectual property and patent matters, according to court documents.

By signing the engagement letter with the Newark-based firm, Moerae Matrix agreed to its terms, "including McCarter & English's hourly rates, according to court documents.  McCarter & English "regularly" emailed its invoices to Moerae Matrix for legal fees and expenses incurred throughout the course of its representation.  The invoices detailed the work performed by the firm, the attorneys involved, how much time was spent on the tasks, the date of the tasks and the cost of the services.

Although Moerae Matrix made "certain payments" to McCarter & English, it was not current on its fees.  In September 2018, Moerae Matrix proposed converting the full amount of the outstanding balance to a promissory note, "but the parties could not agree on terms," according to court documents.  Three months later, the biotech company notified McCarter & English by email that it decided to terminate the firm's representation and to transfer its legal needs to Cooley LLP.  The email sent to the firm said, "We truly valued all your support over the years and are committed to seeing that [McCarter & English] is paid in full for past services and costs," according to court documents.

In the record presented to the appellate court, Moerae Matrix did not provide the invoices from McCarter & English, according to court documents.  Instead, the biotech company provided only a detailed statement of account, which shows the amounts billed, payments made and the balance McCarter & English claimed was owed.  "As a result, we are unable to independently assess the invoices either to confirm their contents or to render an independent determination concerning the reasonableness or fairness of [McCarter & English's] fees," the appellate court wrote in its Tuesday opinion.

Beverly Lubit, a partner at McCarter & English, served as the originating, billing and handling attorney responsible for the day-to-day representation of Moerae Matrix.  In seeking a summary judgment of $860,593, McCarter & English submitted certifications to the trial court from Lubit and Daniel P. D'Alessandro, another attorney with the firm. Lubit certified that the legal services provided, and the expenses incurred as a result, "were reasonable and necessary," according to court documents.

In an effort to escape the unpaid legal fees, Moerae Matrix relied on certifications from Moerae Matrix's founder, chairman and chief executive officer, Dr. Cynthia Lander, who asserted that Cooley was handling the very same tasks that were handled by McCarter & English "for less than half of the cost."  She argued that McCarter & English "charged too much in fees for the work that it performed" and "that [McCarter & English] filed many more patent applications and filings than necessary to protect the intellectual property interests of [Moerae Matrix]."

Moerae Matrix relied on an additional certification, one from Texas patent attorney Frank Grassler, who claimed to be an expert in patent law.  "In short, Grassler opined [McCarter & English] did a great deal of work, which was simply not necessary," the three-judge appellate panel wrote in its opinion.  However, Moerae Matrix did not disclose Grassler as an expert in its responses to McCarter & English's interrogatories prior to the conclusion of discovery, as required by state court rules, nor did the biotech company move to amend its responses to identify Grassler as an expert or supply an expert report from him.

Instead, Moerae Matrix submitted Grassler's certification in opposition to McCarter & English's summary judgment motion "well after the conclusion of discovery and unaccompanied by a certification setting forth the reason [Moerae Matrix] failed to identify Grassler as an expert in its answers to [McCarter & English's] interrogatories," the appellate panel noted.

For these reasons, the appellate panel agreed with the trial court's decision to exclude Grassler's certification.  The appellate panel also found that Moerae Matrix could not point to "competent evidence it claims establishes [McCarter & English's] fees are unreasonable or unfair," according to court documents.  There is no basis to conclude that the trial court erred by awarding McCarter & English the unpaid legal fees, the appellate panel wrote in affirming the lower court's $837,524 judgment, plus interest and costs of suit.

A recent Law 360 story by Nick Muscavage, “NJ Atty Can Pursue $126K Fee Bid Without Written Retainer”, reports that a New Jersey attorney can pursue her bid for $126,000 in legal fees for a matter she never put into a retainer agreement after an appellate panel reversed an earlier court's dismissal of the case, noting that "it is well settled that an attorney-client relationship can be found without a written agreement."  On July 9, a two-judge appellate panel reversed the summary judgment granted to the clients of Theresa C. Grabowski, who retained the Marlton-based attorney to bring claims against their insurer for not fully covering lightning damage to their home.

The couple, William and Amanda Baskay, signed a written retainer agreement for Grabowski, according to court documents.  The retainer included a provision that said, "If, after completion of the matter at the trial level, either you or the opposing party appeals the result, a new retainer agreement will be drawn which will set forth our agreement with respect to the retention of this firm on appeal."

In May 2009, Grabowski filed a 16-count complaint against the insurance company that included breach of contract and violation of the Consumer Fraud Act, or CFA, among other things.  After the trial court dismissed the CFA and punitive damages claims, a jury returned a verdict in favor of the couple against the insurer in the amount of $9,025.  The accounts of what occurred next between Grabowski and her clients "are dramatically different," the appellate panel wrote in its July 9 opinion.

Grabowski claims that as she was leaving the courthouse with the couple following the jury's verdict, they asked her to pursue an appeal seeking to overturn the trial court's dismissal of their claims for damages under the CFA, punitive damages, and additional counsel fees and costs, according to court documents.  "Grabowski alleged she agreed to represent [the couple] on appeal, and further consented to continue representing them at no additional charge," according to court documents.  "Grabowski alleged she did not insist that the parties execute a new retainer agreement because she would not be charging [the couple] any additional fees."

The couple disputed Grabowski's claims and said they did not ask her to file an appeal, but that the attorney "did so on her own," according to court documents. They also said they never signed a new retainer agreement for the appeal.  Grabowski filed a notice of appeal on the couple's behalf using the money from the jury verdict to fund the action. In response, the insurer filed a cross-appeal, challenging the verdict in the couple's favor.  Grabowski sent an email to the couple inquiring about her outstanding legal fees.

William Baskay responded by email, telling Grabowski, "As it stands now there is to be no appeal," according to court documents.  In response, Grabowski told William by email that "[t]he appeal has already been filed — which you knew, approved of and agreed to throughout (since the adverse rulings). As you know, the appeal was filed back in September, as I forwarded copies of it to you."  William did not reply to this email, according to court documents, and Grabowski continued to represent the defendants in the appeal and cross-appeal.

Ultimately, in April 2014, a state appellate panel affirmed the earlier dismissal of the couple's claims under the CFA and for punitive damages.  Three years later, Grabowski filed a complaint against the couple seeking to recover attorney fees "in excess of $126,678" for representing them against their insurance company.  William and Amanda Baskay filed separate answers to the complaint, both claiming that Grabowski's claims were barred by the six-year statute of limitations.

New Jersey state law requires that a claim for breach of contract be filed within six years from the date the cause of action accrues, but the appellate panel noted that a "contract for legal services is not like other contracts."  Previous case law in New Jersey holds that because of "the unique and special relationship between an attorney and a client, ordinary contract principles governing agreements between parties must give way to the higher ethical and professional standards enunciated by our Supreme Court."

The appellate panel, in its July 9 opinion, further noted that the "facts of this case are disputed and far from settled."  "However, the law applicable to the statute of limitations in attorney fee collection actions is not," the appellate panel added.  If the six-year statute of limitations began when the couple's appeal concluded in April 2014, then Grabowski's claims against the couple were filed within the legally-permitted timeframe, the appellate panel noted.  The panel also rejected the couple's argument that Grabowski's representation ended in 2011 when William sent the attorney the email stating that, "As it stands now there is to be no appeal."

"This email is hardly an unambiguous statement that Williams intended to terminate Grabowski's services," the appellate panel wrote. "Indeed, when Grabowski informed him the next day that the appeal had already been filed, William failed to respond."  On remand, the appellate panel instructed the trial court to consider the couple's claim that Grabowski's complaint against them should have been barred because she did not give them "pre-action notice" of their right to seek fee arbitration.

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