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Attorney Fee Request

California Supreme Court Rules Law Firm’s Fee Arbitration Clause With Its Client Unenforceable

By | Attorney Fee Request, Business Arbitration, Business Litigation

The Supreme Court of California (“California Supreme Court”), in its opinion filed on August 30, 2018, decided a case in which a large law firm agreed to represent a manufacturing company in a federal qui tam action brought on behalf of a number of public entities. During the same time period, the same law firm represented one of these public entities in matters unrelated to the qui tam suit. Both clients had executed engagement agreements that purported to waive all such conflicts of interest, current or future, but the agreements did not specifically refer to any conflict and the law firm did not tell either client about its representation of the other. This arrangement fell apart when the public entity discovered the conflict and successfully moved to have the law firm disqualified in the qui tam action. A fight over the manufacturer’s outstanding law firm bills followed, and the dispute was sent to arbitration in accordance with an arbitration clause in the parties’ engagement agreement.

The engagement agreement’s arbitration clause provided that any dispute over fees or charges that was not resolved through voluntary arbitration under the auspices of the California State Bar, and any other type of dispute between the parties, would be settled by “mandatory binding arbitration” conducted in accordance with the California Arbitration Act (CAA; Code Civ. Proc., § 1282 et seq.). The arbitration clause also stated the agreement would be governed by California law.

The arbitrators ruled in the law firm’s favor and the superior court confirmed the award, but the Court of Appeal reversed. That court concluded that the matter should never have been arbitrated because, notwithstanding the broad conflict waiver in the engagement agreement, the law firm’s undisclosed conflict of interest violated rule 3-310(C)(3) of the Rules of Professional Conduct (i.e., an attorney “shall not, without the informed written consent of each client . . . [¶] . . . [¶] . . . [r]epresent a client in a matter and at the same time in a separate matter accept as a client a person or entity whose interest in the first matter is adverse to the client in the first matter.”). This ethical violation, the court ruled, rendered the parties’ agreement, including the arbitration clause, unenforceable in its entirety. The Court of Appeal further held that the conflict of interest disentitled the law firm from receiving any compensation for the work it performed for the manufacturer while also representing the utility district in other matters.

The California Supreme Court held: “We agree with the Court of Appeal that, under the framework established in Loving & Evans v. Blick (1949) 33 Cal.2d 603, the law firm’s conflict of interest rendered the agreement with the manufacturer, including its arbitration clause, unenforceable as against public policy. Although the manufacturer signed a conflicts waiver, the waiver was not effective because the law firm failed to disclose a known conflict with a current client. But we conclude, contrary to the Court of Appeal, that the ethical violation does not categorically disentitle the law firm from recovering the value of the services it rendered to the manufacturer; whether principles of equity entitle the law firm to some measure of compensation is a matter for the trial court to address in the first instance.”

In Loving & Evans v. Blick, the California Supreme Court had held that the excess-of-authority exception applies, and an arbitral award must be vacated, when a court determines that the arbitration has been undertaken to enforce a contract that is “illegal and against the public policy of the state.” In the present case, the California Supreme Court held that “an attorney contract that has as its object conduct constituting a violation of the Rules of Professional Conduct is contrary to the public policy of this state and is therefore unenforceable” (“California law holds that a contract may be held invalid and unenforceable on public policy grounds even though the public policy is not enshrined in a legislative enactment” – “violation of a Rule of Professional Conduct in the formation of a contract can render the contract unenforceable as against public policy”).

The California Supreme Court stated in the present case: “We conclude that Sheppard Mullin’s concurrent representation of J-M and South Tahoe violated rule 3-310(C)(3) and rendered the engagement agreement between Sheppard Mullin and J-M unenforceable. Our conclusion rests on three subsidiary points: First, at the time Sheppard Mullin agreed to represent J-M in the qui tam action, the law firm also represented a client with conflicting interests, South Tahoe; second, because Sheppard Mullin knew of that conflicting interest and failed to inform J-M of it, J-M’s consent was not “informed” within the meaning of the Rules of Professional Conduct; and third, Sheppard Mullin’s unconsented-to conflict of interest affected the whole of its engagement agreement with J-M, rendering it unenforceable in its entirety.”

The California Supreme Court further stated that “[a]n attorney or law firm that knowingly withholds material information about a conflict has not earned the confidence and trust the rule is designed to protect.” In the case it was deciding, the California Supreme Court stated: “Assessed by this standard, the conflicts waiver here was inadequate. By asking J-M to waive current conflicts as well as future ones, Sheppard Mullin did put J-M on notice that a current conflict might exist. But by failing to disclose to J-M the fact that a current conflict actually existed, the law firm failed to disclose to its client all the “relevant circumstances” within its knowledge relating to its representation of J-M. (Rules Prof. Conduct, rule 3-310(A)(1).)”

The California Supreme Court went on to state: “Whether the client is an individual or a multinational corporation with a large law department, the duty of loyalty demands an attorney or law firm provide the client all material information in the attorney or firm’s possession. No matter how large and sophisticated, a prospective client does not have access to a law firm’s list of other clients, and cannot check for itself whether the firm represents adverse parties. Nor can it evaluate for itself the risk that it may be deprived, via motion for disqualification, of its counsel of choice, as happened here. In any event, clients should not have to investigate their attorneys. Simply put, withholding available information about a known, existing conflict is not consistent with informed consent … We conclude, rather, that without full disclosure of existing conflicts known to the attorney, the client’s consent is not informed for purposes of our ethics rules. Sheppard Mullin failed to make such full disclosure here.”

The California Supreme Court held: “Because Sheppard Mullin’s ethical breach renders the engagement agreement unenforceable in its entirety, the rule of Loving & Evans means that Sheppard Mullin is not entitled to the benefit of the arbitrators’ decision awarding it unpaid contractual fees. The final question before us is whether Sheppard Mullin may receive any compensation for its services at all …  contrary to the Court of Appeal, [ ] California law does not establish a bright-line rule barring all compensation for services performed subject to an improperly waived conflict of interest, no matter the circumstances surrounding the violation.”

The California Supreme Court continued: “When a law firm seeks compensation in quantum meruit for legal services performed under the cloud of an unwaived (or improperly waived) conflict, the firm may, in some circumstances, be able to show that the conduct was not willful, and its departure from ethical rules was not so severe or harmful as to render its legal services of little or no value to the client. Where some value remains, the attorney or law firm may attempt to show what that value is in light of the harm done to the client and to the relationship of trust between attorney and client. Apprised of these facts, the trial court must then exercise its discretion to fashion a remedy that awards the attorney as much, or as little, as equity warrants, while preserving incentives to scrupulously adhere to the Rules of Professional Conduct … When a law firm seeks fees in quantum meruit that it is unable to recover under the contract because it has breached an ethical duty to its client, the burden of proof on these or other factors lies with the firm. To be entitled to a measure of recovery, the firm must show that the violation was neither willful nor egregious, and it must show that its conduct was not so potentially damaging to the client as to warrant a complete denial of compensation. And before the trial court may award compensation, it must be satisfied that the award does not undermine incentives for compliance with the Rules of Professional Conduct. For this reason, at least absent exceptional circumstances, the contractual fee will not serve as an appropriate measure of quantum meruit recovery … Although the law firm may be entitled to some compensation for its work, its ethical breach will ordinarily require it to relinquish some or all of the profits for which it negotiated … By leaving open the possibility of quantum meruit compensation for the 10,000 hours that Sheppard Mullin worked on J-M’s behalf, we in no way condone the practice of failing to inform a client of a known, existing conflict of interest before asking the client to sign a blanket conflicts waiver. Trust and confidence are central to the attorney-client relationship, and maintaining them requires an ethical attorney to display all possible candor in his or her disclosure of circumstances that may affect the client’s interests. Sheppard Mullin’s failure to exhibit the necessary candor in this case has rendered its contract with J-M unenforceable and has thus disentitled it to the benefit of the unpaid contract fees awarded by the arbitrators in this case. Whether Sheppard Mullin is nevertheless entitled to a measure of compensation for its work is, along with the other unresolved noncontract issues raised by the pleadings, a matter for the trial court to consider in the first instance.”

Source Sheppard, Mullin, Richter & Hamilton, LLP v. J-M Manufacturing Company, Inc., S232946.

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USC Agrees To Pay $215M To Settle Class Action Sexual Misconduct Lawsuit

By | Attorney Fee Request, Class Action Lawsuits

The University of Southern California (USC) announced on October 19, 2018 that it has agreed to pay $215 million to victims of sexual misconduct allegedly committed by its former employee, Dr. George Tyndall, a gynecologist, at USC’s student health center during his nearly thirty years at the health center.

In announcing the proposed settlement that needs to be approved by the federal judge overseeing the class-action lawsuit, the Interim President of USC issued a statement on October 19, 2018 in which she stated, in part:

Dear USC community,

As of October 19, 2018, the university has reached agreement in principle on a $215 million class action settlement that will compensate students who received women’s health services from Dr. George Tyndall at USC’s student health center.

Our Board of Trustees supports this settlement, which was reached in collaboration with plaintiffs’ counsel, and which will provide relief to those who have been impacted by this difficult experience. By doing so, we hope that we can help our community move collectively toward reconciliation. I regret that any student ever felt uncomfortable, unsafe, or mistreated in any way as a result of the actions of a university employee.

The settlement provides all class members (former patients who received women’s health services from Tyndall) compensation of $2,500. Patients who are willing to provide further details about their experience could be eligible for additional compensation up to $250,000. Following the expected court approval, all class members will be sent a notice of their options under the settlement in the coming months. In the meantime, I encourage impacted patients to check back regularly on this site (change.usc.edu/settlement) to remain updated on new information.

A fair and respectful resolution for as many former patients as possible has been a priority for the university and for me personally since I began serving in the role of Interim President. Many sweeping changes have been made and we continue to work every day to prevent all forms of misconduct on our campuses, to provide outstanding care to all students, and to ensure we have policies and procedures that prioritize respect for our students and our entire university community.

Source

USC reportedly will pay the settlement through insurance and reserve funds, and not using tuition or donor funds. In addition, USC will pay up to $25 million in attorneys fees.

The federal sexual misconduct class action lawsuit alleges that the former gynecologist’s sexual misconduct included unnecessary pelvic examinations of students, digitally penetrating female patients, making sexually and racially inappropriate comments to students, and asking patients to remove their clothing in front of him, which allegations the former doctor denies. The former gynecologist left USC in June 2017.

Source

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Federal Appellate Court Denies Attorney Fee Petition In Its Entirety For Being “Outrageously Excessive”

By | Attorney Fee Request

In its opinion filed on September 12, 2018, the United States Court of Appeals for the Third Circuit (“Federal Appellate Court”) held that the District Court had not abused its discretion in refusing to award any attorney fee to the prevailing plaintiff in an insurance bad faith case.

The Underlying Facts

Dissatisfied with defendant NYCM’s handling of his insurance claim related to a serious car accident, the plaintiff filed suit against the company in the Court of Common Pleas of Monroe County, asserting a contractual underinsured motorist (“UIM”) claim and a claim under the Bad Faith Statute, 42 Pa. Cons. Stat. § 8371. After NYCM removed the case to federal court, the parties settled the UIM claim for $25,000. The bad faith claim, meanwhile, proceeded to a week-long trial, at the  conclusion of which a jury found that NYCM had acted in bad faith in its handling of the insurance claim and awarded the plaintiff $100,000 in punitive damages.

As the prevailing party under the Bad Faith Statute, the plaintiff then submitted a petition for attorney’s fees, in which he requested an award of $946,526.43 in fees and costs. The District Court denied this request in its entirety, reviewing every time entry submitted, performing a traditional lodestar analysis, and concluding that eighty-seven percent of the hours billed had to be disallowed as vague, duplicative, unnecessary, or inadequately supported by documentary evidence. In light of that substantial reduction, the District Court deemed the plaintiff’s request “outrageously excessive” and exercised its discretion to award no fee whatsoever. The plaintiff, through new counsel, appealed.

The Pennsylvania Bad Faith Statute

The Pennsylvania Bad Faith Statute provides that in an action arising under an insurance policy, if the court finds that the insurer has acted in bad faith toward the insured, the court may take all of the following actions: (1) Award interest on the amount of the claim from the date the claim was made by the insured in an amount equal to the prime rate of interest plus 3%. (2) Award punitive damages against the insurer. (3) Assess court costs and attorney fees against the insurer. 42 Pa. Cons. Stat. § 8371.

Because the statute uses the word “may,” the decision to award attorney’s fees and costs upon a finding of bad faith is wholly within the discretion of the trial court.

The Federal Appellate Court stated that although it was unusual for the district court to decide to award no attorney fee at all, in light of the excessive nature of the request after reducing the  requested fee by eighty-seven percent, “we cannot say that this decision was an abuse of discretion. Review of the record and the District Court’s comprehensive opinion makes clear that denial of a fee award was entirely appropriate under the circumstances of this case. Counsel’s success at trial notwithstanding, the fee petition was severely deficient in numerous ways,” including counsel did not maintain contemporaneous time records for most of the litigation but instead recreated all of the records provided as part of the fee petition, using an electronic case management system that did not keep track of the amount of time expended on particular tasks; the responsibility of reconstructing the time records was left to a single attorney, who retrospectively estimated not only the length of time she herself had spent on each individual task, but also the amount of time others had spent on particular tasks, including colleagues who could not be consulted because they had left the firm by the time the fee petition was filed; many of the time entries submitted were so vague that there is no way to discern whether the hours billed were reasonable;  some entries were, on their face, unnecessary or excessive (“Without more information, these tasks appear “purely clerical” in nature and should not be billed at a lawyer’s rate—nor for many hours at a time”); and, there are the “staggering” 562 hours that counsel billed for “Trial prep” or “Trial preparation” with no further description of the nature of the work performed (“We agree with the District Court that this is an “outrageous” number under the circumstances”).

The Federal Appellate Court noted that the district court stated  that if counsel did nothing else for eight hours a day, every day, 562 hours would mean that counsel spent approximately 70 days doing nothing but preparing for trial in this matter, yet the trial consisted of only four days of substantive testimony, and involved a total of only five witnesses for both sides (the sole issue was whether defendant NYCM had acted in bad faith in its handling of the plaintiff’s UIM claim).  The Federal Appellate Court stated: “we simply cannot fathom how they could have reasonably spent such an astronomical amount of time preparing for trial in this case, and we highly doubt they would have billed their own client for all of the hours claimed.”

The Federal Appellate Court continued: “All the more troubling is the fact that counsel’s (supposedly) hard work did not appear to pay off at trial. As the District Court explained, counsel had “to be repeatedly admonished for not being prepared because he was obviously unfamiliar with the Federal Rules of Evidence, the Federal Rules of Civil Procedure and the rulings of th[e] court.” App. 630 (emphasis omitted). Given counsel’s subpar performance and the vagueness and excessiveness of the time entries, the District Court did not abuse its discretion in disallowing all 562 hours.”

The Federal Appellate Court stated that the plaintiff’s counsel also neglected their burden of showing that their requested hourly rates were reasonable in light of the prevailing rates in the community for similar services by lawyers of reasonably comparable skill, experience, and reputation (the five billing attorneys did not even submit their own affidavits identifying their usual billing rates or describing their levels of experience, and only one of the five attorneys testified at the hearing on the fee petition about her background and experience). The District Court would have liked to disallow any hours billed by those four lawyers, and the Federal Appellate Court stated that  it would have been within the court’s discretion to do so. But the District Court was not able to because the fee petition did not indicate which attorney performed each particular task. The District Court therefore disallowed all hours billed prior to the one testifying lawyer’s arrival at the firm, those billed for multiple attorney “roundtables,” and all trial hours billed by more than one lawyer.

The Federal Appellate Court held: “Here, the District Court provided a thorough explanation of how counsel failed to fulfill their duty to the court. This failure, coupled with the other deficiencies in the petition and counsel’s substandard performance, justified the District Court’s decision to deny the fee request in its entirety. That decision was not an abuse of discretion.”

Source

Clemens v. New York Central Mutual Fire Insurance Company, No. 17-3150.

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