Friday, July 5, 2013
C.A. Overturns Fee Award for Prevailing on Arbitration Petition
Bid to Compel Arbitration Is Not an ‘Action,’ Justices Rule
By KENNETH OFGANG, Staff Writer
A law firm that successfully forced its former clients to arbitrate their claims that the firm breached its retainer agreement should not have been awarded attorney fees or costs, the Court of Appeal for this district ruled Wednesday.
Div. One overturned Los Angeles Superior Court Judge Ronald Sohigian’s award of nearly $68,000 in fees and costs in favor of the law firm of Packard, Packard & Johnson.
Presiding Justice Robert Mallano, writing for the court, explained that the fee agreement between the law firm and clients Neal Roberts and Norman Rille contained a fee-shifting provision, implicating Civil Code Sec. 1717. Because the statute authorizes a fee award in favor of the party that prevails in an “action,” and the winner of the action will not be determined until the underlying claim is arbitrated, Mallano wrote, fees and costs cannot be awarded for the proceedings on the petition to compel.
The dispute stems from the firm’s representation of the two men in a series of whistleblower suits brought in federal district court in Arkansas under the federal False Claims Act. According to the complaint, the law firm was to receive 43.5 percent of any recovery, plus 100 percent of statutory fees, plus costs and expenses as awarded.
In addition, plaintiffs were responsible for any fees and expenses not recovered from the defendants.
False Claims Act
Under the FCA, a private citizen who has personal knowledge of a fraudulent claim by a government contractor may sue on behalf of the public and keep a share of any damages or penalties that are awarded, in addition to recovering attorney fees and costs.
Roberts and Rille alleged that the Packard firm negotiated settlements in the FCA cases that required the defendants to pay about $2.6 million in fees, costs, and expenses, without differentiating which fees were costs. The firm then allocated over 95 percent of that money to fees, and demanded that the plaintiffs pay $1.338 million in “unrecovered” costs, that amount being withheld from the plaintiffs’ recovery.
Roberts and Rille then sued the firm for the $1.338 million, and the law firm filed its petition to compel arbitration. Sohigian ruled that the claim fell under the retainer agreement’s broad arbitration clause, rejected the plaintiff’s contentions that the agreement was void because it did not describe “how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery” and that the defendants waited too long to move to compel arbitration, and agreed with the law firm that the petition to compel was an “action” to enforce the contract and that they were therefore entitled to a fee award and costs.
Mallano, in his opinion for the court, disagreed.
“Because only one side—plaintiffs or their former attorneys—can prevail in enforcing the contingency fee agreement, we conclude the determination of the prevailing parties must await the resolution of plaintiffs’ causes of action by an arbitrator,” he wrote. “Then, the trial court can determine which parties, if any, prevailed in the ‘action’ and award attorney fees as permitted by the fee provision in the parties’ contingency fee agreement. The trial court therefore erred in awarding defendants attorney fees for filing a successful petition to compel arbitration.”
Mallano reasoned that the petition to compel was filed in a pending action, and was thus part of that action, not an action in and of itself. “If the Legislature intended to allow an award of attorney fees when a trial court rules on a petition to compel arbitration filed in a pending lawsuit, it could have done so expressly,” the presiding justice reasoned.
He cited, by way of example, the anti-SLAPP statute, which expressly provides for an award of fees and costs to a defendant, and in some cases to a plaintiff, who prevails on an anti-SLAPP motion, even though that party might not ultimately prevail in the action as a whole.
A number of other courts, he noted, have held that proceedings to compel arbitration are part of the underlying action, rather than a separate action, for purposes of shifting fees and costs.,
He cited Frog Creek Partners, LLC v. Vance Brown, Inc. (2012) 206 Cal.App.4th 515, which dealt with a building dispute that the contractor sought to bring before an arbitration panel. There were two separate contracts, and the first petition to compel arbitration was denied by the trial court in a ruling that was affirmed on appeal.
On remand, however, the contractor brought a second petition to compel arbitration, based on the other contract. The trial court again denied the petition, but the Court of Appeal reversed, and the case went to arbitration, with the contractor prevailing.
In the confirmation proceedings, the trial court ruled that the contractor was entitled to attorney fees for the arbitration proceedings and for the second petition to compel arbitration, but granted the property owner an offset for fees incurred in connection with the first arbitration proceeding.
The Court of Appeal, however, reversed, holding that the entire dispute constituted one action, and that the contractor, having prevailed in that action, was entitled to its fees and costs for the entire dispute, including the proceedings on its initial, unsuccessful arbitration petition, and that the property owner was not entitled to shift any of its fees or costs.
Attorneys on appeal in yesterday’s case were Neil M. Soltman, Matthew H. Marmolejo and Ruth Zadikany of Mayer Brown for the plaintiffs and Ronald E. Mallen, Kendra L. Basner and Daniel Sanchez-Behar of Hinshaw & Culbertson for the defendant.
The case is Roberts v. Packard, Packard & Johnson, 13 S.O.S. 3386.
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