Plaintiffs hired law firm to pursue a putative class action for violations of Title VII and California State Law.
Under Title VII, a prevailing plaintiff is entitled to seek a statutory fee award from the defendant, which is the property of the client; under California State Law, counsel for a prevailing plaintiff is entitled to seek a statutory fee award from the defendant, which is the property of the attorney.
The contingency fee agreement in question provided that: “All attorneys’ fees recovered pursuant to any statutory or common law fee-shifting provisions, Federal and California, for work done in connection with this litigation are property of the attorneys, as provided by California law (Flannery v Prentice) and shall not be regarded as property of the client…. Client has been given the choice of paying monthly for attorneys’ fees on an hourly rate basis and for costs, as an alternative to a contingent fee. Client understands that if she chooses to pay fees on an hourly rate basis, rather than a contingent fee basis, she must pay all fees and costs even if the claims are lost. Clients knowingly and voluntarily agrees to pay fees on a contingent fee basis , or have statutory fees paid at a rate that is a multiple of Attorneys’ then-current non-contingency hourly rate (Ketchum v. Moses), because fees are not paid before any amount is recovered and Client will not owe any attorneys’ fees if she does not prevail against defendants…. It is agreed that no settlement of these claims may be made without Client’s prior agreement. If, in settlement of this litigation , Client waives the right to recover attorneys’ fees, costs or expenses (including partial waivers or compromises) without the consent of Attorneys, Client agrees to pay Attorneys: for waiver of fees, Attorneys’ lodestar amount (their then-current hourly rate, as stated in section 5, as of the date of recovery times the number of hours expended on the case) times a contingent-risk multiplier of 2.0; and for waiver of costs, all of the costs advanced by attorneys in this case, whether or not a positive recovery is made by Client. Client understands that this agreement may give rise to potential disputes and conflicts between Attorneys and Client at the time of settlement, and in particular, where the defendants offer a settlement conditioned on the waiver, partial waiver or compromise of fees or costs and Attorneys are unwilling to agree to the waiver, partial waiver or compromise. Client understands that this agreement to pay the difference between Attorneys’ statutory fees and costs and the amount of fees and costs paid in settlement may limit, or even nullify Client’s recovery, and dissuade her from agreeing to a settlement with the defendants. Client has been advised of the option of seeking additional legal counsel on the topic. Client expressly agrees to this provision because she knows that otherwise Attorneys would be unwilling to enter into this agreement…. The Court may order , or the parties to the litigation may agree , that the defendants will pay some or all of attorneys’ fees , costs , or both. Any such order or agreement will not affect Client’s obligations under this agreement except as stated in this Section regarding calculation of the amount of attorneys’ fees owed under this agreement and as stated in Section 6. Client agrees that any attorneys’ fees that may be recovered from defendants in this case shall belong to Attorneys, to whom Client assigns her rights. Client understands that, under California law, the assignment of these rights may raise a potential conflict of interest between Client and Attorneys in the context of settlement agreements. This includes Attorneys right to claim, negotiate and settle any claim to statutory fees simultaneously with the representation of Client in the prosecution of her claims. Client has been advised of this potential conflict, of her option of seeking additional legal counsel in connection with this conflict, and Client expressly agrees to this assignment.”
Plaintiffs brought a motion pursuant to Rule 16 of the Federal Rules of Civil Procedure and the Court’s inherent powers to control the conduct of attorneys who appear in proceedings before it, to Order that: (i) during any settlement discussions with defendants, the parties negotiate plaintiffs’ damages separate from statutory attorney fees; and (ii) if the parties’ reach an agreement on plaintiffs’ damages but are unable to reach an agreement on reasonable statutory attorneys’ fees, the attorneys’ fee issue will be submitted to the Court for resolution.
The Court denied the motion, and found that proposed Class Counsel could not adequately represent the class under Rule 23(a) due to the inherent conflict between such counsel and the named plaintiffs, as well as the putative class.
The Court starts from the proposition that “only a client may decide whether to make or accept an offer of settlement” and observes that “it is generally held that the lawyer may not burden the client’s ability to make settlement decisions by structuring the representation agreement so as to allow the lawyer to withdraw, or to ratchet up the cost of representation, if the client refuses an offer of settlement.” The Court also notes that, in the wake of Evans v. Jeff D., 475 U.S. 717 (1986), the California State Bar has issued Formal Ethics Opinions concluding that: (1) a lawyer is ethically obligated to inform a client that the client possesses, and can waive, the right to seek an award of statutory attorney’s fees as a condition of settlement even though it may result in the lawyer not receiving remuneration for services performed; and (2) a lawyer is ethically obligated to consummate a settlement in accordance with the client’s wishes and cannot veto a settlement simply because it includes a fee waiver.
In this particular case, characterizing a statutory fee amount as property of the attorney, regardless of whether the fees are awarded under State or Federal law, is contrary to Jeff D.
Next, the retainer agreement’s assignment of rights to any statutory attorneys’ fee award appears unlawful under Jeff D. and ineffective per Pony v. City of Los Angeles, 433 F.3d 1138 (9th Cir. 2006).
Third, and more critically, the retainer agreement’s penalty for exercising the right to settle for a lump sum that waives a statutory fee award – paying twice the attorney’s lodestar regardless of whether it leaves the client with no recovery – does not appear on its face to be lawful under either Jeff D. or Flannery v. Prentice, 26 Cal.4th 572 (2001). The California Supreme Court in Flannery suggested that a waiver of statutory fees in furtherance of a settlement was permissible, even though an actual fee award was the vested property of the attorney. Flannery did not hold that a settlement of claims in which statutory fees could have been obtained entitled the attorney to be paid all such fees from the settlement proceeds.
“Moreover, the notion that the attorney may reject a settlement offer because the attorney fees are insufficient is contrary to California ethics rules. The California Court of Appeal has recognized an inherent conflict of interest where a plaintiff’s attorney insists on negotiating the amount of damages payable to the plaintiff separately from the award of attorneys’ fees. The conflict arises from the attorney’s duty of loyalty because it permits an attorney to take an approach to settlement negotiations that maximizes the attorneys’ fees at the expense of the client’s recovery…. The retainer agreement requires that plaintiffs allow settlement of attorneys’ fees to be negotiated separately from their damages, or else they forfeit the ability to pay fees on a contingency basis, instead owing their attorney double his full hourly rate. In the absence of evidence confirming the clients knowingly consented to such a penalty, the Court presumes the clients here would be prejudiced by the conflict. Moreover, the Court has considerable doubt that such a provision would be deemed ‘fair and reasonable’ even if consent was given. Regardless, the apparent conflict raises serious concerns as to Counsel’s adequacy.”
Gamble v. Kaiser Foundation Health Plan, No.17-06621 (N.D.Cal. July 19, 2019).