An attorney named Margolin initially referred a client named John Hance to a labor lawyer named Waisbren to potentially represent Hance in a wage and hour claim against his employer, Super Store Industries. After concluding that the case had class action potential, Waisbren associated Miller and Fong. Hance, and a second class representative, Joseph Ribeiro, signed representation agreements drafted by the three attorneys providing that attorney fees would be shared according to agreements between and among the lawyers. Hance’s representation agreement additionally stated that Margolin would be paid a referral fee of 15 to 25 percent of the total attorney fees awarded, but that provision was omitted from Ribeiro’s agreement.
Under a “tentatative agreement” between and among the attorneys, Waisbren was to receive a 30% referral fee, Miller was to pay Margolin’s 15% referral fee, and Miller was to handle the case and pay the costs from that point forward.
Later, a third class representative, Helfgott, was added by Miller, but his representation agreement did not mention Waisbren, Fong, or Margolin.
Ultimately, the proposed class action was settled by Miller and Fong, who moved for an award of attorney fees. Because a dispute had arisen, Waisbren filed his own separate motion for approval of fees.
Miller argued that the purported fee division agreement with Waisbren was unenforceable for a variety of reasons, including: (1) there was never a final agreement to terms because Waisbren did not clearly accept all terms of the September 27, 2012 proposal; (2) any agreement for division of fees among the attorneys required the written consent of all the clients, per former California Rule of Prof. Conduct 2-200 (similar to current California Rule Rule 1.5.1), and, while Waisbren initially obtained a written consent from each class representative, Helfgott subsequently retracted his consent; and (3) if the fee division agreement was valid, it was rendered invalid by Waisbren’s breach. Miller also contended the consents to the fee division agreement, which Waisbren obtained from the clients, were invalid because Waisbren failed to advise the clients that he lacked professional liability insurance, in violation of former California Rule 3-410 (similar to current California Rule 1.4.2).
The Court of Appeal invalidated the agreement, and remanded the matter for consideration of quantum meruit.
“Former rule 3-410(A) required that the class representatives be informed in writing, at the time of engaging Waisbren as their attorney, that he had no professional liability insurance. It was undisputed that Waisbren failed to disclose to any of the class representatives in writing that he lacked professional liability insurance. Neither the representation agreements nor the attorney fee division consent forms, which the class representatives signed, mentioned that Waisbren did not have professional liability insurance. To allow Waisbren to recover his agreed upon percentage of the attorney fee award, despite noncompliance with the requirements of the rule, would effectively condone that violation, contrary to the purpose behind the rules – to protect the public and to promote respect and confidence in the legal profession. It would bind the clients to an agreement they might not have entered into, or to a consent to fee division they might not have given, if the required disclosure had been made. It would send an implicit message to attorneys that former rule 3-410 (and its successor, rule 1.4.2), despite being phrased in mandatory language and being included in the Rules of Professional Conduct that bind all members of the State Bar, lacks sufficient importance for courts to enforce compliance…. Uninsured attorneys would have an incentive to fail to disclose the lack of insurance to their clients, if they were permitted to benefit from an uninformed consent to representation and fee division. Enforcing the agreement would appear to elevate the interests of the attorney above the interests of the client. It would also give the appearance of condoning a violation of the Rules of Professional Conduct, which would adversely affect the public’s confidence in the commitment of the legal profession to ethical conduct by its members.”
At the same time, the invalidation of a contract based on a violation of the Rules of Professional Conduct does not automatically mandate forfeiture of all compensation for the work the attorney performed. “The court quoted section 37 of the Restatement Third of Law Governing Lawyers: ‘A lawyer engaging in clear and serious violation of duty to a client may be required to forfeit some or all of the lawyer’s compensation for the matter.’ Although every violation of attorney conflict of interest rules is serious to some degree, the Restatement did not impose a categorical rule of forfeiture in every case; ‘the egregiousness of the attorney’s conduct, its potential and actual effect on the client and the attorney-client relationship, and the existence of alternative remedies’ were identified as factors to be considered in determining whether and to what extent forfeiture of compensation might be warranted…. When the rule violation that invalidates a fee agreement or a fee division agreement is not sufficiently serious to warrant a complete forfeiture of attorney fees, allowing recovery in quantum meruit would not discourage compliance with the applicable ethical rules. Attorneys understandably prefer to receive their negotiated fees rather than the typically lesser amounts representing the reasonable value of the work performed. Consequently, even if quantum meruit is available as a means of compensating an attorney when a fee division agreement is invalidated due to violation of ethical rules, the attorney still has ample incentive to comply with the Rules of Professional Conduct.”
Miller argues that, in a class action, an award of attorney fees must be tied to the attorney’s actual efforts to benefit the class, and hence Waisbren’s recovery of quantum meruit must be limited to the hours reflected in his time records, multiplied by a reasonable hourly rate. The California Court of Appeal, however, rejected such a strict rule: “We must construe the attorney’s ‘contribution’ and ‘services rendered’ to include the service of referring the matter to an attorney experienced in the field relevant to the representation or experienced as a class action attorney. Under this construction, in assessing the value of an attorney’s services to the client or the class for quantum meruit purposes, the trial court may consider the reasonable value to the client or the class of the referral. We note that, in the fee division agreement, all counsel agreed to a 15 percent referral fee for Margolin, who referred Hance to Waisbren and did not claim to have performed any other work on the case. Miller never disputed Margolin’s entitlement to that amount, even though Margolin performed no work in the case. In his motion for approval and division of an award of attorney fees to class counsel, Miller included a request that Margolin be awarded 15 percent of the requested $4.3 million in fees, or $645,000. The court awarded Margolin that amount. This indicates Miller and the other class counsel assigned value to the referral of the case to an experienced labor law attorney.
“The trial court did not reach the issues of whether Waisbren should recover compensation for his attorney services on a quantum meruit basis, despite invalidation of the fee division agreement for violation of former rule 3-410 and, if so, how much he should recover. We must remand the matter to the trial court to make those determinations.”
Hance v. Super Store Industries, 44 Cal.App.5th 676, 257 Cal.Rptr.3d 761 (2020).