Conflicts Cause Lawyers to Lose Legal Fees.
In a very unusual circumstance - I hope - the McGuire Woods law firm lost $12 million in fees for creating a conflict of interest.
The short version of the story is that the firm brought a class action against West Publishing, the parent Company of BAR/BRI, and Kaplan. BAR/BRI provided bar exam preparation services, and Kaplan provided LSAT preparation services. The two companies allegedly agreed that BAR/BRI would not provide LSAT exam services, and Kaplan would not enter the Bar Exam preparation business.
In 2007, the parties reached a settlement, whereby the Defendants would pay $49 million. However, it was discovered that 5 of the 7 named class representatives for the plaintiff class had entered into a separate agreement with the lawyers at the firm to receive a special incentive payment once any settlement or judgment was approved. Apparently the agreement was on a sliding scale and the more the case settled for the more the five would receive, up to $10,000.
Attorneys for other plaintiff's objected to the arrangement. The judge, US District Court Judge Real agreed with the objectors, and voided the incentive payments. He also denied attorney fees for the attorneys of the objecting plaintiffs. The case went to the 9th circuit, where the court approved the settlement but refused to approve the attorney fees of $12 million, and returned the case to the trial court to consider the impact of the conflict of interest.
When the case returned to Judge Real, he denied all attorney fees. He held in part:
5. Attorney's Fees
McGuireWoods, LLP (the law firm) entered into incentive agreements with five of the named plaintiffs, obligating the firm to seek payment for each of the five in amounts that hinged on the size of the settlement or a verdict secured on behalf of the Class. This arrangement was not disclosed to the Class, nor did McGuireWoods inform the Court of its existence during the class certification stage.
Upon learning of the agreements this Court found them to run afoul of the California Rules of Professional Conduct. Moreover, the agreements gave rise to a conflict of interest that tainted the McGuire Woods representation. That a fair settlement was ultimately reached does not bear upon the seriousness of the ethical violation. This is all according to, at least, the Ninth Circuit. Under California law in the absence of informed written consent, the simultaneous representation of clients with conflicting interest constitutes an automatic ethics violation that results in the forfeiture of attorneys’ fees. Image Technical Service, Inc. v. Eastman Kodak, 136 F.3d 1354 (9th Cir. 1998). Moreover, quantum meruit recovery is barred where an attorney has violated an ethical rule that proscribed the very conduct for which compensation was sought. Huskinson & Brown, LLP v. Wolfe, 32 Cal.4th 453 (2004).
Accordingly, McGuireWoods LLP Accordingly, McGuireWoods LLP is not entitled to any fees for its representation in this matter. However, because the forfeiture is predicated upon a theory that payment is not due for services not properly performed, McGuireWoods LLP may be reimbursed for the expenses it incurred during the course of its representation given that such expenses would be unaffected by any conflict.
The WSJ LawBlog finds this to be a strange result. I don't. The firm's lawyers should have known better. If they were going to do this it should have informed the class participants in the retainer. Disclosure and agreement solves most conflicts. The right to fees when there is a conflict does not depend on whether the result was a good one for the class, or the clients. Undisclosed conflicts disqualify the firm from receiving any fees for their work. This proposition is, I believe, the same in most states. It is a little hard to feel sorry for the firm, because they created their own problem and they should have known better.
The attorneys who objected, are now asking the court to approve placing the unpaid attorney fees into the amount to be paid to the plaintiff class. I am confident that the case is headed back to the 9th circuit. But the McGuire Woods law firm is not in a very good position on this one.
