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September 21, 2010

Cotchett, Pitre & McCarthy v. Universal Paragon Corp. (2010)187 Cal.App.4th 1405

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The First District holds that a substantial fee earned under a complex contingent fee agreement with a sophisticated client represented by independent counsel is not unconscionable

Universal Paragon Corporation (UPC) owned real property next to a contaminated site.  UPC initially retained Cotchett, Pitre & McCarthy (CP & M) on an hourly basis to develop a litigation strategy for acquiring the adjacent site.  UPC recognized the risks of litigation and sought a contingent fee agreement.  Each party was represented by counsel over a complicated and protracted contingent fee negotiation.

The parties recognized that the resolution could involve UPC’s acquisition of the contaminated property, which was difficult to value.  The final agreement awarded a fee based on the fair market value of the property at its best and highest value after remediation and a reduced hourly fee.  The agreement also provided for binding arbitration after statutorily required Mandatory Fee Arbitration Act non-binding arbitration.

CP & M performed its services and the case against the adjacent landowner settled for cash, transfer of the unremediated property, and an assignment of the adjacent landowner’s rights against a third party.  In addition the adjacent landowner dropped a prior demand for indemnification in the event a third party sued to remediate the contamination.

UPC disputed CM & P’s calculation of its fee and the parties completed to non-binding arbitration.  CP & M instituted binding arbitration under the retainer agreement.  The arbitrator awarded a fee based on 16% of damages estimated by UPC’s general manager offset by a portion of the hourly fees paid.  Essentially this fee awarded damages based on the remediated value of the real property.

The arbitrator rejected UPC’s argument that the contingency fee agreement was unconscionable.  The parties were of equal bargaining power; UPC was a sophisticated client represented by independent counsel; and CP&M had done an excellent job for UPC.  Contingent fees of up to 50% were not unconscionable.

The Court of Appeal first considered if the arbitrator’s award was subject to judicial review.  Review is limited due to the strong public policy favoring private arbitration.  Courts may not review an arbitrator’s decision for errors of fact or law.  However, Code of Civil Procedure § 1286.2 permits a court to vacate an award if the arbitrator exceeds her powers and the award cannot be corrected without affecting the merits of the decision.  An arbitrator may exceed her powers by issuing an award that violates an explicit legislative expression of public policy.  The Court of Appeal found that it was within the province of the arbitrator to determine the conscionablity of the fee.  Otherwise the strong public policy favoring private arbitration would be thwarted.

Nonetheless the Court of Appeal addressed the merits of UPC’s argument.  UPC argued that the contingent fee violated Rule of Professional Conduct 4-200(A) which precludes an unconscionable fee.  UPC asserted the award was unconscionable because it because it exceeded the actual value of the settlement and was based on UPC’s estimated damages rather than on what it actually received.

The Court of Appeal determined the award was not unconscionable.  Pursuant to Rule 4-200(B) the relevant factors are the amount of the fee in proportion to the value of the services performed; the relative sophistication of the member and the client; the novelty and difficulty of the questions involved and the skill required to perform the legal service properly; the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the member; the amount involved and the results obtained; the time limitations imposed by the client or the circumstances; the nature and length of the professional relationship with the client; the experience, reputation, and ability of the member or members performing the services; whether the fee is fixed or contingent; the time and labor required; and the informed consent of the client to the fee.

These eleven factors include both procedural and substantive aspects of unconscionability.  The procedural element of an unconscionable contract generally takes the form of a contract of adhesion imposed and drafted by the party of superior bargaining strength requiring the other party only the opportunity to adhere to the contract or reject it.  Substantively unconscionable terms are generally unfairly one-sided.

The prevailing view is that procedural and substantive unconscionability must both be present in some degree for a court to exercise its discretion to refuse to enforce a contract.  The more substantively oppressive the 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 of Appeal held this approach applies to claims that a contract violates the attorney’s duties under Rule 4-200(B).  The rule provides a nonexclusive list of procedural and substantive factors that may be relevant in determining whether a legal fee is unconscionable.

A predecessor to Rule 4-200(B) conflated an unreasonable fee with an unconscionable fee which are two different standards.  The State Bar has no power to regulate the amount of fees charged by its members unless the fee is so outlandish as to merit discipline.  This is best judged by examining both its procedural and substantive aspects.

UPC could show neither procedural nor substantive unconscionability.  UPC is a sophisticated corporate client that initiated the litigation to acquire the adjacent property for development.  It employed outside counsel to negotiate the fee agreement and wielded equal bargaining power.  There was no contract of adhesion; UPC could have retained another law firm.  The agreement was the result of a private business transaction between equally matched parties.

The 16 percent contingency awarded by the arbitrator was not substantively unconscionable since it is less than half of the typical 33 to 40 percent rate.  The parties agreed to use the fair market value of the real estate at its best and highest value after remediation.  This was appropriate in light of the very low value of the property in its unremediated state.  Even using UPC’s estimate of damages rather than the fair market value of the property as remediated the contingency was about 30 percent of the total settlement value, well within the range of reasonable contingency fees.

Other Rule 4-200(B) factors also supported the fee.  The value of the services to UPC was great, given that it needed to obtain the property to proceed with its planned development.  The parties were of equal sophistication.  The litigation was extraordinarily complex and required a high level of legal skills.  CP&M was an experienced litigation firm that obtained a “stupendous” result.  The disputed portion of the fee was contingent in nature, which always presents the possibility that the attorney will be entitled to greater fees than would be recoverable under an hourly fee agreement.  The basis for the contingency had been specifically negotiated by UPC with the assistance of counsel.  UPC gave informed consent to the fee.

UPC urged the court to consider only the actual value of the property at the time of settlement in its unremediated state.  Adding this value to the cash settlement, the fee exceeded the actual recovery.

In a State Bar discipline case the Supreme Court held that a claimed fee that exceeded the value of a client’s monetary award was unconscionable.  That case was distinguishable because the client was an individual pursuing an employment discrimination claim; a different position than a sophisticated corporate client that agreed to a specific fee arrangement after arms-length negotiations through independent counsel.

A contingent fee based on a damages assessment rather than the actual amount of recovery is not unconscionable because it creates a conflict of interest.  Many fee agreements contain provisions that could lead to a conflict.  A flat fee creates an incentive to dispose of a case as quickly as possible, to the client’s disadvantage.  An attorney on an hourly fee has an interest in prolonging the case.  Contingent fees create a conflict when either the attorney or the client needs a quick settlement while the other’s interest would be better served by pressing on in the hope of a greater recovery.  Most attorneys nonetheless serve their clients honorably.  The arbitrator found that CP & M was not influenced by the structure of its fee agreement

Nor was the fee unconscionable because it effectively applied a multiplier of more than seven times the lodestar based on CP&M’s regular hourly rates.  There is no support for the argument that a contingent fee that significantly exceeds hourly fees is unconscionable.  Such a proposition would render any contingency fee agreement in which the attorney procures an early settlement of a substantial claim unenforceable.

Comment: The court recognized that attorneys who bear the risk in high stakes litigation do so for the benefit of an enhanced fee.  The sophisticated client who sought to transfer the risk to the law firm could not use the Rules of Professional Conduct as a sword to deprive the law firm of the benefit of its assumption of the risk.

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