The venerable and yet vulnerable contingency fee is in the spotlight at the Minnesota Supreme Court, courtesy of the Faricy law firm, which claims one-third of a settlement reached a few months after it was fired by its client.
One end result might be that contingency fee lawyers have to start recording their hours. Which they should be doing anyway, in case of occasions like this, the court said during the argument in Faricy Law Firm v. API, Inc. Trust on Jan. 10.
Faricy and API Trust had a one-third contingency fee agreement for coverage litigation against several insurers. The case before the Supreme Court involves one matter, involving Home Liquidator. API Trust fired the firm and requested a bill for unpaid services. Faricy responded that it expected to be paid the contingent fee on the Home Liquidator case, which settled for $21.5 million about two months after the firm was fired. The firm says it had advised the client to settle for $22 million and that the client used its advice and work product.
A Ramsey County District Court judge determined that Faricy had worked on the Home Liquidator matter but made no quantum meruit award because Faricy had not proven the reasonable value of its services. Faricy argued that the District Court determined that the settlement was reached because of the firm’s work product, advice and strategy. The court declined to consider the contingent fee agreement, which appellant said was error.
The Court of Appeals reversed and remanded in an unpublished opinion. It said that the concept of quantum meruit does not require that attorneys be paid on an hourly basis and that the court must determine, based on the record before it, what the fee should be.
‘Grossly inadequate’ record
The standard method of compensating a fired law firm is through an equitable tool, quantum meruit, which bases an award on the reasonable value of the work provided to the client.
In this case, the court is asked to let the contingency fee inform what is reasonable. The plaintiff asserts that what is fair and reasonable is the agreement the client signed. The firm’s problem is that it doesn’t have a record of the hours worked on the particular contingent fee case, and the case was settled without requiring a lot of hours, as the its attorney, Vadim Trifel, told the Supreme Court in oral argument. “Contingency fee lawyers don’t have the same incentive to keep hours,” Trifel said. “We have the work that was done.”
The Court of Appeals recognized that the trial court felt stymied.
“In its order, the district court expressed its frustration with Faricy’s legal argument and evidentiary submissions: ‘At the close of evidence, the court implored Faricy to include in its post-trial submission a contingent-fee alternative based upon quantum meruit. Despite the court’s specific request for information permitting a calculation of the value of Faricy’s services on a non-contingent basis, Faricy provided no evidence and no alternative—only a vigorous argument in favor of a contingent fee and a contingent fee alone. Accordingly, the court has a grossly inadequate basis for an award of quantum meruit fees.’”
At the Supreme Court, Trifel at times appeared to step back from the argument that the firm was entitled to the full one-third fee of about $7 million. He referenced an $11 million offer made while the firm was representing the client and said that at the least the firm should get one-third of that amount, although the offer was rejected. He agreed that the court should consider a variety of factors in making a fee award. But the contingent fee agreement should still be in play, he told the court.
“We have to have some kind of measuring stick, and the way to do that is to consider the very agreement the client agreed to pay,” he said, especially when the settlement follows hard on the firing of the law firm and the client uses the firm’s work. “That’s only fair.”
The respondent led his argument with a discussion of the client’s right to fire an attorney. The clients must have “freedom of mobility,” said attorney Justin Weinberg, even when the case is on the verge of settlement. Then if the lawyer is fired without cause, the lawyer should be paid.
But the contingency fee is unenforceable as of the client’s discharge of the attorney, he said. Otherwise the client is restricted from changing attorneys and possibly pays fees to two lawyers. Such an outcome would cause clients to distrust lawyers, particularly contingent fee lawyers, Weinberg argued.
The fee must be reasonable, Weinberg continued. “They admittedly have done minimal work on a case and want a $7 million contingency fee. Is that reasonable?” Weinberg commented. Maybe, said Justice David Lillehaug, because the stature and creativity of the attorney matters.
Justice David Stras asked why the court should not consider the contingency fee when the lawyer is fired on the eve of settlement. Weinberg said that there has to be a bright line about when the contingency fee kicks in. “We’re not advocating that lawyers shouldn’t be paid,” he said. The lawyer just shouldn’t get a windfall and should show the reasonable value of the services through a quantum meruit analysis without reference to the contingency fee, Weinberg said.
The respondent introduced evidence to the District Court of the absolute ceiling that it thought was reasonable, which was the $41,000 worth of work that the trustee did on the Home Liquidator case. But the fee should be much less, Weinberg argued. “All we have is two or three time entries for about $1,800,” he said.
Weinberg told the court that Faricy introduced no evidence of the value of the services because he wanted to claim the contingency fee. “That was a litigation strategy decision. When a litigant makes a strategy decision he has to live with it,” Weinberg said.
Justice G. Barry Anderson commented that the court does not want to incent clients to fire lawyers on the brink of settlement. But maybe it makes sense to incent lawyers to keep books and records, suggested Chief Justice Lorie Gildea.
Lillehaug asked whether the fact that the representation agreement covered multiple matters—spreading the risk over the cases– and respondent paid contingency fees in at least one other case made the fee agreement relevant. “Not dispositive, not enforceable, just relevant.” No, because after termination equitable principles control, Weinberg replied.
Back to $7 million
Trifel doubled down on his argument in rebuttal when Gildea asked him what the reasonable value of the law firm’s services was under the record.
Trifel replied, “Up to $7 million based on the District Court’s findings [of the work the firm performed].”
“That sounds like the contingency fee amount,” responded Gildea.
“It is. The client relied on our advice and settled in the range we suggested,” replied Trifel.