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Category: Fee Sharing / Referral Fees

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."

Judge Settles $21M Attorney Fee Allocation Dispute

December 20, 2023

A recent Law 360 story by Micah Danney, “Judge Divvies Up Atty Fees From $785M FCA Deal”, reports that a Massachusetts federal judge issued a more than 70-page finding of facts settling an attorney fee dispute over $21 million from a seven-year-old judgment, saying two firms earned portions of what they sought for their early work on the case.  U.S. District Judge Douglas P. Woodlock held that Sakla Law Firm in New Orleans gets 55% while the two firms, Vezina & Gattuso of Louisiana and Boone & Stone of Georgia, pushed out before a Pfizer subsidiary's $785 settlement, get 30% and 15% respectively. 

While Sakla had argued the firms were absent from eight years of litigation that followed their exit, the judge determined their efforts contributed to the federal government's intervention on behalf of one of the qui tam case's relators.  "In this respect, the work performed here to get the government to intervene, particularly after an initial declination when the original complaint was filed, was a significant and important development to the overall success of the case," Judge Woodlock said.

The judge cited U.S. Department of Justice statistics showing a 90% success rate for cases where the government intervenes, taking primary responsibility for the litigation, compared to a success rate of 25-30% without its intervention.  Vezina & Gattuso and Boone & Stone had accused Sakla of trying to take credit for the initial research and legal foundation they provided, saying they were promised a three-way fee split in a contract that was still enforceable.

Sakla had countered that it was solely responsible for convincing Wyeth Pharmaceuticals Inc. of its exposure, and said it "pinned down" witnesses, argued and won motions in court, and calculated damages in a tedious endeavor that required hospital invoices to be individually analyzed.  Relator William St. John LaCorte, a hospital physician, fired Vezina & Gattuso and Boone & Stone in 2008.

LaCorte had claimed that Wyeth overbilled Medicare and Medicaid from 2001 to 2006 in violation of the government's "best price" provisions.  Pfizer acquired Wyeth in 2009 and took over its defense and settlement.  The companies argued that Wyeth reasonably interpreted the law and believed that its rebate program was legal.

The federal government and 36 states intervened in LaCorte's suit as well as a similar claim from a hospital sales representative, Lauren Kieff. Their claims ended in the 2016 settlement, of which nearly $120 million went to the whistleblowers and about $24 million has already been paid to attorneys.  The government had initially declined to intervene in support of LaCorte's allegations but was always on board with Kieff's claims, Judge Woodland said. He also noted that the complaints were "not fighting in the same weight class."

"Nevertheless, I find Dr. LaCorte's team, including V&G and B&S, was eventually able to capture the government's attention and sufficiently present the merits of the case so that the government intervened largely because of their efforts," the judge said.

Flint Class Firms Say Fee Dispute Already Decided

October 26, 2023

A recent Law 360 story by Chart Riggall, “Flint Class Firms Say Atty Fee Dispute Already Decided”, reports that two law firms that helped negotiate a $626 million settlement over the Flint, Michigan, water crisis urged a Michigan federal judge to dismiss a suit from their former co-counsel claiming the firm had its rightful proceeds from the litigation arbitrarily slashed.  Cohen Milstein Sellers & Toll PLLC and Pitt McGehee Palmer Bonanni & Rivers PC told the court that their former ally in McAlpine PC had ample opportunities to take issue with the fee split, but the firm instead "sat on its hands for years" before bringing a claim.

"McAlpine had a full and fair opportunity to litigate the amount of any attorneys fee award in the appropriate place to do so — the federal Flint class action," the defendants said, arguing McAlpine's claims are barred under the doctrine of collateral estoppel.  A construction firm based in suburban Detroit, McAlpine filed suit — initially in state court — earlier this month claiming it had been paid a paltry sum for its contributions to the litigation.

The class action itself was settled in 2021 when U.S. District Judge Judith Levy gave final approval to a $626 million settlement, a deal expected to provide payments to more than 100,000 people affected by water contaminated by lead.  Government officials were accused of switching the city's water supply to the Flint River despite information cautioning them against doing so, and working to cover up the ensuing public health crisis.

McAlpine argued its work was instrumental to the litigation, contributing about $16 million worth of labor, or about 24% of the total lodestar figure of $84.5 million. But Cohen Milstein and Pitt McGehee offered to pay just $500,000, McAlpine said.  "Defendants breached the co-counsel agreement by failing to distribute an attorney fee award reflecting McAlpine's respective lodestar, in favor of distributing a greater share to themselves," the firm alleged.

The defendant firms, however, said McAlpine should have raised any issues with the fee split first during the negotiations before Judge Levy, which entailed "extensive additional briefing and argument" for nearly a year.  McAlpine could have also raised the issue when a group of objectors appealed Judge Levy's fee order to the Sixth Circuit, where it was later upheld, but failed to do so.

"McAlpine is precluded from asserting this separate action for increased attorneys fees for its work in the federal Flint class action," the firms said.  "McAlpine's [complaint] is, in essence, a collateral attack on the federal Flint class action's fee award order."

Judges Asks If Attorney Fee Split Restrains Competition

June 15, 2023

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.