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 story by James Mills, “Appeals Court Says Calif. Firm Must Share Fees With Ex-Atty,” reports that a California state appellate panel held that an attorney's fee sharing agreement with her former law firm was enforceable.  The panel ruled the memorandum of understanding between Los Angeles litigator Ibiere Seck and The Cochran Firm in Los Angeles was enforceable since it clearly spelled out a fee sharing agreement about cases she had worked that would remain with the firm upon her departure.  The firm had contended the MOU was not definitive enough to be enforced, despite the fact the firm had no issues with the fee sharing agreement regarding five other cases covered by the MOU.

"The material terms of the fee sharing agreement between the parties can be readily ascertained from the MOU. The Cochran Firm was required to pay Seck 25 percent of the net attorney fees for a specified list of cases," the three judges on the Second Appellate District wrote in their non-published opinion.  "We are provided with no reasonable explanation why The Cochran Firm contends that the MOU was not sufficiently definite given that it performed under the terms of the agreement on five separate occasions without incident."

Seck worked at The Cochran Firm for 10 years, departing at the end of 2018 to start her own firm, Seck Law, in downtown Los Angeles, according to her LinkedIn profile.  She represents plaintiffs in civil litigation, including catastrophic injury, wrongful death, traumatic brain injury and civil rights cases.  The MOU included a list of specific cases that Seck had worked on that were remaining with The Cochran Firm for which she would receive 25% of the attorney fees.  The court ruling detailed that in 2019, the firm paid her 25% of five cases covered by the MOU.

However, in October 2019, the John Reddick v. Los Angeles County Metropolitan Transportation Authority personal injury case settled for $5 million.  When Cochran did not share the money with Seck, she asserted a lien for 25% of the attorney fees.  Seck had started with that case in 2017, and it was specifically covered by the MOU.  The Cochran Firm filed a complaint against Seck regarding the Reddick case saying the MOU did not cover it as Reddick did not consent in writing to the fee agreement.  The Cochran Firm also sought to have the court declare that Seck had no legal right to assert a lien on the firm.  However, a trial court ruled in Seck's favor in July 2020.

After that ruling, Seck made a formal demand for payment in the Reddick case but The Cochran Firm rejected the demand. In October 2020, Seck filed a cross complaint for breach of contract for The Cochran Firm's refusal to pay her 25%.  Seck moved for summary judgment on the breach of contract claim and in April 2022, the trial court granted the motion, finding the MOU created a valid fee sharing agreement between the two parties.

In May 2022, the trial court entered a judgment in favor of Seck and awarded her $500,000, which was her 25% share of the Reddick case attorney fees plus interest.  The trial court also ruled she was entitled to receive court costs.  At the same time, the court stated that The Cochran Firm's complaint against Seck was resolved and therefore moot.  But The Cochran Firm appealed, contending that the MOU was unenforceable because it was not sufficiently definite.

In addition to ruling in Seck's favor regarding the enforceability of the MOU, the appellate court also dismissed The Cochran Firm's contention that the MOU was unenforceable because it violated the Rules of Professional Conduct, rule 1.5.1, which prohibits lawyers who are not in the same law firm from dividing a fee for legal services, unless certain conditions are met including written consent from the client.  The court noted that Seck was still employed at The Cochran Firm when the MOU was enacted, thus the fee sharing agreement was not subject to rule 1.5.1.  The appellate court further ruled the amount of time Seck spent working on any of the cases on the MOU, including the Reddick case, was irrelevant.  If a specific case was listed on the MOU, she should be paid the 25% agreed to.

A recent Law.com by Riley Brennan, “In Fee Fight, State Appeals Court Rejects Contractual Interpretation That Would Result in ‘Windfall’ to 1 Law Firm,” reports that, in a dispute over a contingency fee following a lateral move, the Kansas Court of Appeals ruled that the only reasonable interpretation of a law firm’s operating agreement with one of its now-former owners is the one that allows the firm to recover under the doctrine of quantum meruit.

The appeals court reversed and remanded a lower court’s grant of summary judgment to plaintiff Krigel & Krigel, instead siding with defendant Shank and Heinemann’s interpretation of its operating agreement with attorney Stephen Moore.  In an April 21 opinion, Judge Patrick McAnany for the Kansas Court of Appeals, ruled that the operating agreement between the Shank firm and Moore wasn’t a waiver of the firm’s right to recover in quantum meruit.

Moore originally worked at Shank, first as an associate, then later as one of three owners of the firm, according to the opinion.  Eventually, he left Shank to join Krigel.  On his exit, Moore took one of Shank’s contingent fee cases, representing client Trudi Shouse.  Shouse hired the Shank firm on a contingent fee basis to pursue her claim in an employment dispute.

According to the court, “She acknowledged in her engagement agreement with the firm that Shank would have an attorney’s lien against any award or settlement in the matter.”   Yet, two years later, Moore left Shank, taking the Shouse litigation with him.  Days later the Shouse employment litigation was settled, but Krigel refused to honor Shank’s attorney lien, according McAnany’s opinion.

Krigel sought a declaratory judgment against Shank, looking to invalidate its attorney lien claim, in an attempt to avoid sharing the contingent fee with Shank.  The firms then filed competing motions for summary judgment, with the district court entering judgment in favor of Krigel and against Shank.  This left Krigel entitled to retain the entire contingent fee from the Shouse litigation, excluding Shank, according the opinion.

But McAnany determined the district court had erred in this ruling.  “Shank represented Shouse for the majority of her case,” McAnany said.  ”It paid $2,401.68 in expenses, provided the staff needed to assist with the case, and paid the overhead costs that come with operating a law firm.  It also compensated Moore for the time he worked at the firm.  Interpreting the operating agreement as a waiver of quantum meruit recovery in the Shouse action would result in a windfall to Krigel, which has provided no consideration for the benefit.”

According to McAnany, there was “nothing in the operating agreement that could be construed as an express waiver by Shank of its right to relief through quantum meruit upon Shouse discharging Shank and retaining Krigel in its stead.” 

“Under such an arrangement, the departing senior attorney may be compensated for capital contributions to the firm and the attorney’s share of the tangible assets of the firm but not for any intangibles such as goodwill or for work in progress or a share in unrealized recoveries in pending cases.  Such an arrangement does not signal a disregard for the value of these intangibles for which a departing attorney realizes no monetary consideration,” McAnany wrote.  “Rather, the arrangement recognizes the importance of husbanding the value of these intangibles for the cultivation and development of new attorneys who will carry on the task of maintaining and expanding clients for the future health of the firm.  We fail to see how such an arrangement could ever be viewed as an abandonment of the firm’s right to seek relief through quantum meruit from clients who choose to take their legal business elsewhere.”

The district court’s interpretation of the operating agreement was also inconsistent with Shank’s actions and the concept of principal-agent relationships, according to McAnany.  “Shank took on Shouse’s case on a contingent fee basis and spelled out in the engagement agreement its right to an attorney’s lien against any recovery by Shouse if she went to another law firm,” McAnany wrote.  “And when Shouse left and Krigel settled the case, Shank asserted its attorney lien for the work done on the case before Shouse left.  None of this is consistent with waiver, but it is entirely consistent with the right to claim quantum meruit.”

The appeals court also rejected the district court’s interpretation of the agreement’s provision that valued contingency fee cases at zero.  “The district court believed that its interpretation of the operating agreement was reasonable because allowing quantum meruit in the Shouse case would allow Moore to make a quantum meruit claim in the cases that stayed at Shank and this was ‘[t]he result that the parties presumably sought to avoid when they set the contingency case book value at zero,’” McAnany said.  “Such an interpretation ignores the fact that Moore had no quantum meruit claim in cases he worked on while at Shank.  The clients were the clients of Shank and Moore was paid for his work on the firm’s clients through his compensation agreement with the firm.”  Likewise, the appeals court said Krigel’s interpretation of that provision of the operating agreement did not hold up to scrutiny when applied to different scenarios.

“[U]nder Krigel’s theory, death of one of the owners necessarily would trigger these same provisions of the operating agreement; and because the value of contingent fee matters would not be calculated in arriving at the value of the deceased owner’s equity in the firm, a contingent fee client—or all the firm’s contingent fee clients, for that matter—would be free to pick up and move to a different firm and, in the process, insulate the proceeds of any recovery in their cases from a claim under quantum meruit by Shank for legal work performed on their behalf,” McAnany determined.  “The same could be said of the other means by which an owner of the Shank firm could depart: an owner being expelled from the firm or being disbarred.  Such an outcome based on Krigel’s interpretation of the operating agreement would be an absolute absurdity.  Moreover, we cannot rewrite the operating agreement under the guise of construction in order to accommodate Krigel’s theory of waiver.”

A recent Law 360 by Chart Riggall, “Judge Says Trial Needed to Split Firms’ Fee Award,” reports that a federal magistrate judge said a trial is necessary to split the $1.8 million baby of attorney fees that two law firms have been squabbling over since their 2020 victory in a labor class action against DuPont.  In a recommendation, Pennsylvania Magistrate Judge Martin Carlson found that while there exists "no legally enforceable agreement" to split the fees between MoreMarrone LLC and Stephan Zouras LLP, the latter firm — which sued MoreMarrone shortly after the fees were awarded — had unquestionably contributed to winning the $5 million settlement.

"The undisputed evidence establishes that the Zouras firm has a valid, yet unquantified, quantum meruit claim, since it is uncontested that the plaintiff attorneys provided some value and sweat equity to the successful litigation of the Smiley case and have not yet been compensated for their efforts," Judge Carlson wrote, referring to the Bobbi-Jo Smiley v. E.I. du Pont De Nemours and Co. case resulting in the settlement.  Judge Carlson, whose recommendation will be reviewed by a federal district judge, lamented — as he has in past orders — the falling out between the firms as "a sobering parable regarding the divisive and destructive power of money."

The original lawsuit against DuPont was first filed in 2012 by MoreMarrone and Greenblatt Pierce Funt & Flores — now Weir Greenblatt Pierce LLP — on behalf of workers who said they were denied pay for off-clock work.  The Greenblatt firm eventually stepped away from the case, with Stephan Zouras joining as co-counsel in 2018.  MoreMarrone and Stephan Zouras, however, never entered into any formal agreement about how the funds would be split were they to prevail, according to Judge Carlson.  Zouras was instead assured by its co-counsel only that the terms would be "as favorable to you as possible."

After the district court awarded the roughly $1.8 million to MoreMarrone — charging the two firms with sorting out the split for themselves — Stephan Zouras sued, claiming a $573,000 figure well above the $325,000 MoreMarrone offered.  At issue before Judge Carlson were dueling motions for summary judgment.  MoreMarrone, citing the lack of a binding agreement, asked the court to toss out Stephan Zouras' breach of contract, fraud, and breach of fiduciary duty claims. That request was granted.

But Judge Carlson went on to find that contrary to MoreMarrone's claims, that lack of contract did not exclude Stephan Zouras from any and all compensation — the firm is still entitled to payment for the work done.  "There can be no question that it would be inequitable for the defendants to continue to retain the benefit of the full fees award without payment of value to the Zouras firm for its reasonable contribution to this effort," Judge Carlson wrote.

A recent Law 360 story by Rose Krebs, “Law Professor Say $150M Fee is Fair in Dell Suit Deal,” reports that a group of law professors says the Delaware Chancery Court should award less than the $285 million fee sought for stockholder attorneys who secured a $1 billion class settlement after challenging a $23.9 billion conversion of Dell Technologies stock, saying a $150 million award would "adequately" compensate counsel.  In a brief submitted to the court, five professors assert that using a "declining-percentage" fee award structure — by which the percentage of fees awarded are reduced the larger the settlement size — in this case would be prudent.

"Even under the declining-fee approach, these mega-settlements are extremely profitable, demonstrating the winner-take-all reality of shareholder litigation," the brief said.  The professors, who said they "publish extensively on representative stockholder litigation," argue that a fee award equal to 15% of the settlement amount is warranted, rather than the 28.5% class attorneys seek.

"Plaintiffs pursue large settlements because they tend to have the highest multiplier to lodestar — in other words, they're more profitable than the alternatives," the professors said.  "Thus, class counsel have adequate incentive to take risk, even on a declining-percentage fee basis.  Overcompensating class attorneys simply diminishes class recovery."  The professors said they "respectfully suggest that a declining-percentage fee award adequately compensates Plaintiff's counsel while preserving funds for the class."  A 15% award would preserve an additional $135 million for the class, while still compensating counsel at a reasonable rate for time spent working on the case, the professors said.

Earlier this month, Vice Chancellor J. Travis Laster said in a letter to Pentwater Capital Management LP and other Dell institutional investors who oppose the fee request that the Chancery Court was considering a 20% floor for an award, to be adjusted if warranted.  The vice chancellor asked for additional briefing from Pentwater, and also said it would be helpful to know what "law professors say in favor of or against the declining percentage method."

In a filing, Pentwater, citing several studies, argued that "empirical research uniformly confirms that in federal class actions, as settlement amounts rise, fee percentages fall."  "Contrary to concerns about the decreasing percentage model, scholarship indicates that lowering fee percentages does not reward lawyers marginally less compensation for the same work," Pentwater said.  Pentwater contends that the 28.5 percent award being sought "is unfair to the class."

On Tuesday, Vice Chancellor Laster allowed the professors to submit a brief as amici curiae.  In their brief, the professors also said that "a declining-fee approach may not always be best."  They gave as an example cases that sophisticated institutional investors "negotiate for a 'baseline' recovery (i.e., a settlement amount that a typical plaintiffs' firm could likely achieve given the facts known at the start of the litigation) with a relatively low fee percentage for achieving this baseline and a larger percentage for achieving a greater recovery."

"This approach, however, would require the investor to determine this baseline amount when selecting lead counsel and incorporate it into the retainer agreement," the brief said.  "There is no indication of such an ex ante agreement in this case, and it would be difficult to judicially replicate the incentives of such an agreement after the fact."

The professors added that "absent such an agreement, the declining-percentage award matches risk and return, adequately compensates contingency counsel, and preserves settlement value for the class."  They also suggested the court "should consider requesting other information before setting a fee, including any ex ante agreements Plaintiff's counsel has reached with clients and fee-sharing arrangements with any other counsel."

In an order, Vice Chancellor Laster DIRECTED each firm representing the investor plaintiffs to submit information by detailing several issues such as: how many ex ante agreements they have negotiated in the past five years, what percentage of their representations have such agreements, the nature of any such past agreements, and if any fees awarded in the Dell case will be shared with other counsel that hasn't entered an appearance in the case.

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