The WSJ Law Blog details an unfortunate predicament for McGwuireWoods. In short, after five long years of litigation in a massive class action suit, McGuireWoods will not, according to the district court's latest order, recover any of its $12 million fee. I'm not convinced the decision was fair.
The problem arises from a conflict of interests due to a provision in the original retainer agreement among the firm and five of the seven representative plaintiffs.
Via the WSJ Law Blog:
In early 2007, a $49 million settlement was reached. But before the settlement was approved, it emerged that five of the seven plaintiffs acting as class representatives had an agreement with their lawyers at McGuireWoods which provided that they’d each receive so-called incentive payments after the settlement was approved.
The agreement stipulated that the five would get payments on a sliding scale; the more taken in by the class, the more they’d each get. Specifically, the agreements provided that if the case settled for $500,000 or more, the representatives would get $10,000. The payments would go up as the settlement figure went up, but were capped if the settlement figure reached $10 million.
According to the Ninth Circuit, the incentive agreements created a conflict of interests among the parties, and under well established rules of ethics, law firms may not represent parties, with presently conflicting interests, without written informed consent. To do otherwise, is an automatic ethics violation and grounds for disqualification.
To that end, the Ninth Circuit reversed Judge Real's original award of attorney's fees, and "remanded it for consideration of the effect, if any, of the incentive agreements on entitlement to fees." Rodriguez v. West Publishing Corp., 563 F.3d 948, 969 (9th Cir. 2009).
On remand, Judge Real decided McGuireWoods is not entitled to any fees because of the ethics violation.
- A debatable decision at best
When a law firm violates ethics rules in other situations, as for example, agreeing to fee splitting without disclosure and client consent, a law firm may still recover in quantum meruit for the reasonable value of its services. Oftentimes, the reasonable value of the services is going to be far lower than the firm's full fee, but at least the firm doesn't walk away entirely empty handed.
In the present case, the court interpreted California law to bar quantum meruit recovery as well. However, the Ninth Circuit still left open the possibility for an order granting attorney's fees to McGuireWoods. While the Ninth Circuit certainly implicated that the award should be reduced, it did not hold that an absolute bar was necessarily the right outcome. Thus, the district court still had some room to determine whether some award of attorney's fees to McGuireWoods would be reasonable under the circumstances.
Considering that Judge Real found the $49 million settlement agreement to be fair, and the Ninth Circuit found no abuse of discretion in his doing so, it appears that the conflict of interests, although real, had little impact on the overall outcome of the case. (Also note, incentive agreements in class actions are not unethical per se. In fact, they are quite common.)
While I certainly do not condone unethical behavior, I also think that any measure taken by the court that is clearly punitive, such as reducing an award of attorney's fees, should be balanced against the actual harm that the ethics violation caused.
Where is the harm in this case?