Fee Agreement Ethics Violation Voids $4 Million Attorney Fee

• Pages: 6-6
• Date: 01 July 2021
• Author: Susan F. Dent
• Subject Matter: Derecho Civil

Published in Litigation News Volume 46, Number 4, Summer 20 21. © 2021 by the American Bar A ssociation. Repro duced with permissi on. All rights reser ved. This informati on or any portion the reof may not be copie d or disseminated in any

form or by any means or sto red in an electronic da tabase or retrieval sy stem without the ex press writt en consent of the Amer ican Bar Associatio n.

n attorney’s failu re to advise

his clients that h e lacked

malpractice insurance

prompted the reversal and

remand of a $4. 3 mil-

lion class actio n settlement attorney

fee award. The Ca lifornia Fifth District

Court of Appeal underscored its long-

held principl e that attorneys must not

violate ethics rul es while securing their

own f‌inancial gai n. ABA Litigation

Section lead ers agree this ruling

reminds attorn eys to carefully struc-

ture their fee-splitting agreements

and to keep their clie nts advised of all

elements of representation, including

insuran ce coverage.

In John Hance v. Sup er Store

Industries et al., a n attorney referred

his client to a labor l awyer for a wage

and hour actio n against his employer.

The labor lawye r discussed the mat-

ter with the potential cli ent and con-

cluded his cas e could become a class

action. As th e labor lawyer had lim-

ited experience with c lass actions, he

brought in experi enced class action

attorneys. At no poi nt during these

discussions di d the labor lawyer men-

tion to his client, or to a ny of the other

attorneys, that he l acked legal mal-

practice insurance.

The client and a se cond class rep-

resentative signed representation

agreements in which they retained

all four attorneys to re present them

in a potential class a ction against the

employer. The representation agree-

ments provided th at attorney fees

would be shared a mong the attor-

neys according to agre ements among

them. The attorneys subsequently

reached an agreement, over email, for

the remaining fe e divisions. Under its

terms, the labo r lawyer was to receive

a 30 percent referr al fee, and the

class action at torneys were to handle

the case and pay the co sts from that

point forward.

After adding a th ird class repre-

sentative, the par ties moved for settle-

Fee Agreement Ethics Violation Voids

$4 Million Attorney Fee

ment of the action , which included

an attorney fee award of $ 4.3 million.

Thereafter, a disp ute arose between

the class actio n attorney and the labor

lawyer regardin g the share of the award

to which the labor law yer was entitled.

The trial court u ltimately ordered that

5 percent of the fees b e awarded to an

attorney brought i n by the class action

attorney, 15 percent be awa rded to

the originating at torney, 30 percent

be awarded to the labor lawyer, and

the remaining 5 0 percent be awarded

to the class action a ttorney. The court

based its reaso ning on the emailed

attorney fee agreement.

The appellate co urt reversed the

$4.3 milli on fee. It found the attorney

fee agreement unenforceable because

of the labor lawye r’s “egregious” fail-

ure to comply with forme r California

Rule of Professional Conduct 3-410

(now Rule 1.4. 2). The court held that

“contracts whic h violate the canons

of professional eth ics of an attorney

may for that reason be voi d.” It further

noted that the purp ose of the Rules

of Professional Conduct is “to protect

the public and to promote respect and

conf‌idence in th e legal profession.”

Former rule 3- 410(A) requires that,

at the time of engagement, attorneys

inform their clie nts in writing if the

attorney has no professional liability

insurance. The court found the labor

lawyer failed to dis close to any of the

class representatives that he lacked

such insurance. Neither the represen-

tation agreements nor the attorney

fee division cons ent forms, which the

class representatives signed, men-

tioned that the la bor lawyer did not

have professional liability insurance.

To allow the labor lawyer to recover

his agreed-u pon percentage of the

fee award, despite noncompliance

with the rule, would e ectively con-

done that violation.

The court then c onsidered com-

pensation alter natives in light of the

fee agreement’s unenforceability. It

By Susan F. Dent, Litigation N ews Associate Editor

noted that when a rul e violation is

not suciently se rious to warrant

a complete forfei ture of attorney

fees, allowing re covery in quantum

meruit would not d iscourage rule

compliance. H owever, the court ulti-

mately did not reach a co nclusion and

remanded the i ssue to the trial court

to determine an app ropriate fee divi-

sion under this th eory.

Litigation Section leaders agree

that a few simple prec autions can pro-

tect all attorneys , not just class action

litigators, from a s imilar fee-stripping

order. “Include an armative state-

ment in fee-splitting agreements

that each attorney c arries profes-

sional liabilit y insurance or a provi-

sion that calls on ever y attorney who

does not carr y such insurance to stay

apprised of the liti gation and notify

each client/na med plainti of his or

her lack of such in surance,” suggests

David Gevertz, Atlan ta, GA, cochair

of the Section’s Emp loyment & Labor

Relations Law Com mittee. However,

“referring coun sel can oblige day-to-

day counsel to make suc h disclosures

on their behal f, but I don’t believe that

will fully absolve th em of their ethical

obligations,” Gevertz cautions.

“Failure to comply with et hi-

cal rules can h ave far-reaching and

unforeseeable consequences. It drives

home the point th at lawyers need

to be ever mindful of the et hical rules

and diligent in compliance,” concludes

Robert E. Po undstone IV, Montgo mery,

AL, cochair of th e Section’s Ethics &

Professionalism Committee.

RESOURCES

Debra Cassens Weiss, “‘Outrageously

excessive’ reque sts for attorney fees ca n

be altogether d enied, 3rd Circuit says ,”

ABA J. (Sept . 17, 2018).

John Hanc e v. Super Store Indus. et al .,

Sup. Ct. Op. 67 3904 (Jan. 23, 2020).

6 | S ECTION OF LITIGATION

ETHICS STR UGGLES IN THE LEGAL WORLD