Wednesday, September 1, 2010
C.A. Upholds $7.5 Million Award in Attorney-Fee Dispute
Justices Say Amount Not Unconscionable for Litigating Complex Environmental Suit
By KENNETH OFGANG, Staff Writer
An arbitration award requiring real estate developer to pay more than $7.5 million in fees to a Northern California law firm that represented it in complex environmental litigation was neither unconscionable nor against public policy, the First District Court of Appeal ruled yesterday.
Div. Five affirmed San Francisco Superior Court Judge Peter Busch’s order confirming the award in favor of Cotchett, Pitre & McCarthy, based in Burlingame in San Mateo County.
The firm was retained by Universal Paragon Corporation to develop a litigation strategy regarding the onetime Schlage Lock factory site in the Brisbane area of San Francisco. UPC, developer of the 20-acre, $500 million Brisbane Baylands project, purchased property adjacent to the site in 1989.
The Schlage Lock site was contaminated with acid used in metal works and with fuel from nearby railroad operations, and the contamination was migrating to the property acquired by UPC, which wanted to acquire the Schlage site for its project.
UPC, not represented by the Cotchett firm, sued Ingersoll-Rand, the owner of the Schlage site, in 1996, but the parties agreed to dismiss the action and toll the statute of limitations in order to consider a joint remediation plan or an arrangement for UPC to buy the site. Those discussions failed, and UPC cut off talks in 2005 when Ingersoll-Rand insisted that it would not sell without complete indemnity for future litigation related to the contamination, secured by a $200 million line of credit.
UPC then hired the Cotchett firm, paying a limited retainer while longer-term arrangements were discussed. After months of discussion, a retainer agreement was signed granting the firm a 16 percent contingency fee, plus an hourly rate—below the firm’s usual rates—provided that one-half of fees billed on an hourly basis were to be deduced from the contingency.
The agreement also recognized the possibility that real estate might be exchanged as part of a settlement of the action, in which event it was agreed that the 16 percent contingency would be applied to “the greater of (i) the Fair Market Value of the Property, or (ii) the Total Damages as contained in [UPC]’s most recent damages assessment made for settlement purposes.”
The parties also agreed that any dispute regarding fees would be submitted to JAMS in San Francisco for binding arbitration, following statutory non-binding arbitration if requested by the client.
The environmental litigation was eventually settled, with Ingersoll-Rand giving UPC the property plus $6 million, along with an assignment of any claims that Ingersoll-Rand might have against the railroad.
The law firm, based on estimates that the settlement value of the case was between $86.5 million and $155.7 million, requested legal fees of over $19 million, or 16 percent of the midpoint, and invoked its right to JAMS arbitration. UPC invoked its right to non-binding arbitration before the San Mateo County Bar Association, whose panel awarded less than $4.9 million.
UPC rejected the award, and the case was submitted to JAMS. Rebecca Westerfield, a retired Kentucky trial judge who serves on the JAMS San Francisco panel, was selected as the arbitrator.
The law firm argued that the case was worth, at a minimum, the $45 million settlement value that UPC’s general manager had put on the case at an early stage, plus the $6 million received in cash, and that it should receive at least 16 percent of $51 million. UPC responded that the contingency agreement was unconscionable and unenforceable due to a lack of mutual assent, mistake, and misrepresentation and that the fee, based on the firm’s original hourly rates or quantum meruit, should be between $1 million and $2.2 million.
Westerfield, after a two-day hearing, issued a 36-page decision setting the firm’s fees at $7.554 million.
She reasoned that the company’s estimate that it had suffered $86.5 million or more was inflated as part of a negotiating strategy, but that a letter from the company to the law firm in 2006, estimating damages at between $50 million and $80 million, was the “most recent damages assessment” as used in the fee agreement.
She thus awarded the firm 16 percent of $50 million, or $8 million, less half of what it had already billed at an hourly rate, and less costs. She denied the firm’s request for prejudgment interest.
The arbitrator rejected the company argument that the contingency agreement was unconscionable, finding that the firm did not have superior bargaining power, that the client was sophisticated and represented by independent counsel, and that 16 percent was a reasonable contingency in comparison to those usually charged. She also noted that the company had called the settlement “stupendous.”
Busch rejected the company’s unconscionability and public policy arguments and granted the petition to confirm the award, and Justice Harry Needham, writing for the Court of Appeal yesterday, said that was the correct result.
Needham questioned whether the prohibition on unconscionable fees in the Rules of Professional Conduct opens a binding arbitration award to judicial review. While an unconscionable fee agreement may be unenforceable, the justice explained, “it does not necessarily follow that public policy requires the court, rather than an arbitrator, to finally determine whether a fee is unconscionable under the Rules of Professional Conduct.”
Assuming that an unconscionable fee award in binding arbitration is subject to judicial review, the justice went on to say, a finding of unconscionability would not be appropriate in this case, either under the Rules of Professional Conduct or the general standard applied in contract cases.
The jurist acknowledged that the fee was several times the firm’s usual hourly rates. But other factors justified it, including the value of the services to the client, the extraordinary complexity of the case and the skill of the lawyers in achieving the result, and the fact that the client—negotiating from a position of equal strength—had given informed consent to the fee arrangement.
He distinguished past excessive-fee cases, noting that they involved individuals who were unsophisticated in legal matters and who agreed to fee arrangements that left them with little money after attorney fees. Nor, he said, did the use of a damages assessment as the basis for a fee calculation create an impermissible conflict of interest, concluding that the court was bound by the arbitrator’s finding that the structure of the fee agreement did not impact the representation.
The case is Cotchett, Pitre & McCarthy v. Universal Paragon Corporation, 10 S.O.S. 5164.
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