Money, Money, Money

As the recession drags on, more and more lawyers are suing for their unpaid fees. Cotchett, Pitre & McCarthy v. Universal Paragon Corporation (2010 Cal.App. LEXIS 1711) is an interesting new take on when a fee is excessive, and thus in violation of Rule 4-200 of the Rules of Professional Conduct.

In that case, Universal Paragon Corporation (UPC) hired the Cotchett firm to represent it in a complex environmental litigation matter. UPC is a real estate development firm that had purchased property in the Brisbane area adjacent to property owned by Ingersoll-Rand. Contamination from the Ingersoll property was migrating to UPC’s property. Undaunted, UPC decided to acquire the Ingersoll property anyway, clean it up and develop it. As you can imagine, problems ensued with that plan.

Carol Langford

UPC wanted to avoid paying expensive attorney’s fees in battling Ingersoll so it proposed a hybrid fee agreement with the Cotchett firm. UPC had its general manager and outside counsel participate in the fee agreement negotiations. Cotchett initially proposed a reduced hourly rate, plus costs, and a 16% contingency minus “one half of hourly billed subtracted from 16%.” Worried about how they would value a property only (non-cash) settlement for the contingency fee portion, the parties came up with a formula that was a percentage of the last settlement offer made to Ingersoll. They went back and forth for approximately two months and finally settled on a formula that was composed of a complicated contingency fee element that, upon this writer’s review, was almost incomprehensible.

Of course, the fee agreement became the subject of a fee arbitration even though Cotchett had done a great job. Rebecca Westerfield’s 36-page decision awarded over seven million dollars in fees to the law firm. She flat out rejected any unconscionability argument by UPC in regard to the fee because there was no disparity in bargaining power between the law firm and a sophisticated client like UPC who was represented by independent counsel in the fee agreement negotiations.

Unsatisfied with Westerfield’s decision, UPC took the case to court. To the judge’s credit, he boldly took on a discussion of the often confusing topic of what makes a fee unconscionable. The case discusses both procedural and substantive unconscionability. Procedural unconscionability refers to unequal bargaining power between the lawyer and client, and substantive unconscionability refers to results that are overly harsh, or one-sided. The court said that, generally, you have to have both for a court to refuse to enforce a fee agreement, but that the two elements play off each other. “The more substantively oppressive a contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa.” The court emphasized that a fee contract is just an allocation of risk between the parties and that not all unreasonable risk allocations are unconscionable.

The court also held that the fee contract was not a contract of adhesion; UPC could have employed another law firm if it did not like what was offered by Cotchett. In addition, the fee was not excessive or substantively unconscionable. The parties’ decision to base the contingency fee on the Ingersoll property in its best and highest value after remediation was appropriate in light of the very low value of the property in its unremediated state. The court said, “This is a private business transaction between equally matched parties, pure and simple,” even where the contingency fee would be far above what would have been earned on an hourly basis.

The moral of this story is that lawyers can be creative in their fee agreements if they get the informed consent of the client to the fee- and that holds true even if the fee appears high. I would advise having writings outside of the fee agreement evidencing discussions with the client about how your fee will be calculated, especially where you know the nature of the settlement might make it hard to determine your contingency fee.u

— Carol M. Langford is an attorney in Walnut Creek specializing in ethics advice and counsel and representing lawyers before the State Bar. She is also an adjunct professor at the University of California Hastings College of the Law.