May 15, 2017 / 8:10 PM / 3 months ago

4th Circuit: In fee awards, judges must consider risk and results

(Reuters) - In 2010, the law firm Gilbert, working on contingency, went to trial and won a $26 million judgment for Alpha, a specialized U.S. tire maker suing foreign competitors for stealing its trade secrets. Before Gilbert could attempt to enforce the judgment, Alpha fired the firm, replacing Gilbert with a new firm co-founded by two former Gilbert lawyers. The new firm went on to defend Alpha’s judgment on appeal and, eventually, to reach a $15.5 million settlement with the defendants.

How much money does Alpha owe Gilbert?

The 4th U.S. Circuit Court of Appeals on Monday awarded Gilbert $3.1 million in fees. The award, as I’ll explain, is not a contingency fee – but it is a stern reminder to trial judges that when lawyers assume risk in contingency fee cases, they deserve a fair reward for successful results.

Under the terms of Gilbert’s engagement agreement with Alpha, had the firm represented Alpha all the way through settlement, Gilbert would have been due a 40 percent contingency fee. But if Alpha fired Gilbert before any recovery, the contract said, the law firm was entitled only to its hourly billings.

Before U.S. District Judge T.S. Ellis of Alexandria, Virginia, Gilbert claimed its lawyers worked nearly 11,000 hours on the case, at hourly rates ranging from $375 to $900, for a total lodestar of about $4.5 million. That did not fly with Judge Ellis, to say the least. The judge said that under Virginia state law, the fee award must be based on quantum meruit, or “as much as deserved.” Judge Ellis said Gilbert had inflated its hours and charged unreasonable hourly rates. He ended up awarding the firm only $1.2 million.

In January 2016, the 4th Circuit vacated and remanded the award, reminding Judge Ellis that decades-old precedent from Virginia’s highest court requires judges to consider, among several other factors, the size of the case, the risk borne by lawyers working on contingency and the results obtained. The appeals court instructed the judge to re-analyze the fee question with those considerations in mind.

On remand, Gilbert cut its claimed hours to 6,700 (perhaps mindful of Judge Ellis’ extremely skeptical assessment of the firm’s billing records). It nevertheless said it was entitled to twice or three times its lodestar billings because of the contingency fee risk of its engagement with Alpha and the $26 million judgment it won.

The judge held his line. He declined to apply a multiplier, in part because he said Gilbert had not reported fees he considered excessive in its engagement letter with Alpha. The judge once again slashed Gilbert’s rates and hours and calculated the same award as in his previous ruling: just $1.2 million.

That was an abuse of his discretion, 4th Circuit Judges Roger Gregory, Allyson Duncan and Henry Floyd held Monday in an unpublished opinion by Judge Gregory, the circuit’s chief judge.

“The district court focused on the engagement letter when it should have concentrated its efforts on determining the reasonable value of Gilbert’s services given the contingent nature of the representation,” the 4th Circuit said. “The lodestar fee the district court awarded is inappropriate under the circumstances of this case and inadequately explained.”

The 4th Circuit said contingency fee lawyers, under Virginia precedent, are entitled to consideration for betting on a successful result. “We cannot ignore the amount of work that Gilbert did without any guarantee of recovery, and the district court’s sharp reduction of Gilbert’s rates simply did not reflect that risk,” the court said. “The facts in this case justify awarding Gilbert’s customary rates without reduction.”

Rather than send the case back to Judge Ellis for a third go-round, the 4th Circuit made its own calculations, crediting Gilbert with its reported 6,700 or so hours and an average hourly rate of about $460, for a total of about $3.1 million in fees. (The firm has also been awarded about $1.7 million in costs.)

The opinion is unpublished and the circumstances of Gilbert’s dispute with Alpha are unusual. But it’s heartening to see an appellate court recognize that entrepreneurial lawyers who get good results deserve to be compensated for their enterprise.

I emailed Gilbert partner Richard Shore, who represented the firm at the 4th Circuit, and Alpha counsel William Copley of Weisbrod Matteis & Copley, the firm that succeeded Gilbert in the trade secrets case. Neither got back to me.

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