Legal Malpractice Law Review : Professional Responsibility Case Summaries & Commentary : Bennett J. Wasserman : LegalMalpractice.com : Lawyer Malpractice & Legal Ethics

Szaferman, Lakind, Blumstein, Blader & Lehman v. Parise, Superior Court of New Jersey, Appellate Division, February 24, 2010

Facts:  Defendants retained Plaintiff attorneys in an underlying residential construction matter.  Upon the submission of summary judgment motions in the underlying matter, defendants instructed their attorneys to cease all legal work.  The attorneys advised of the need to prepare for upcoming court events and trial. 

Prior to trial, however, the underlying litigation was dismissed upon entry of a mutual release, which included the parties' agreement to satisfy their respective counsel fees and costs.  Despite this agreement, defendants paid only half of the outstanding legal fees and costs.  In response to Plaintiff's efforts to collect the remainder of their fees, Defendants filed an action for malpractice.  Specifically, Defendants disputed the reasonableness of certain time entries, cited to alleged billing irregularities, and asserted that the fees charged were excessive for the work performed. 

The lower court dismissed the malpractice claim for failure to obtain an expert report.  Defendants appealed.

Issue:  Is the reasonableness of attorney's fees an issue of  "common knowledge," or is an expert opinion necessary? 

Ruling:  An expert opinion is necessary: 

Expert testimony is required in cases of professional malpractice where the matter to be addressed is so esoteric that the average juror could not form a valid judgment as to whether the conduct of the professional was reasonable.  This is because the duties a lawyer owes to his client are not known by the average juror.

The Court concluded that Defendants' alleged dissatisfaction with the amount of legal fees charged, supported only by their personal experience in paying other attorneys was not a sufficient factual basis for their malpractice claim.  The Court also rejected Defendants' argument that the jury ought to disallow all contested charges, unless Plaintiff provides sufficient justification.

Lesson:  An expert opinion is necessary to successfully dispute the reasonableness of attorney's fees.

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Cole v. Cole, N.J. App. Div. February 8, 2010

Facts: Defendant allegedly failed to pay his attorneys for services rendered, and the attorneys sought to impose a lien under N.J.S.A. which attaches to a verdict, report, decision, award, judgment, or final order in the client's favor.  The trial court made a determination as to the proper amount of the lien and ordered its judgment to be paid.  Defendant argued that the trial court should not have decided the issue while a malpractice action was pending.

Issue:  Can the Court enter and enforce an attorney's lien while a separately filed legal malpractice action is pending? 

Ruling:  Yes.  Holding a plenary hearing to determine the amount of the attorney's lien within the underlying action is in accordance with the generally accepted procedure regarding attorney's liens in the absence of a motion to stay: 

While arguably a client may be entitled to a stay of the adjudication of any attorney's lien issue pending the outcome of a legal malpractice case, the record does not indicate that defendant sought such a stay. 

***

Ordinarily, an attorney will not be able to collect fees for services that were negligently performed.  As a result, a fee arbitration award will be stayed pending the outcome of a related legal malpractice case provided the court finds a 'substantial basis' for the legal malpractice action.

While defendant sought to vacate the judgment in his motion for reconsideration, he did not, in the alternative, seek a stay of its enforcement.  Under these circumstances, we find no error in the trial court's action determining the amount of the attorney's lien, and entering and enforcing a judgment for the attorney fees owed.

Lesson:  In the absence of a motion to stay pending resolution of a separately pending legal malpractice action, courts may properly determine and enforce attorney's liens in the underlying matter.

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Johnson v. Brewer & Pritchard, P.C., 73 S.W.3d 193 (Tex. 2002)

TX: Underlying referral of a personal injury case to another law firm

Student Contributor: Anna Ford (J.D. ( 2011) Texas Tech University School of Law; B.B.A. (2008) Emory University)

FACTS:  After a helicopter crash, James Chang, an associate with the firm of Brewer & Pritchard, recommended that the firm take the personal injury cases for the victims of the crash. Chang personally knew one of the victims, Herbert King, because he was Chang’s close friend’s father. After a partner at the firm recommended that the case be referred to another firm, Chang scheduled a meeting for King with Nick Johnson, a personal injury lawyer and close friend of Chang’s. Johnson referred the case to the firm of Jamail & Kolius, who made an agreement to pay Johnson a referral fee. A year after the case settled, Chang and Johnson formed a partnership together. Chang never told his employer about the referral but defendants’ facts support their contention that Chang did not receive any compensation as a result of the King suit or Johnson’s referral to Jamail & Kolius.  Thereafter, the firm sued its former associate, Chang, and Johnson, alleging breach of fiduciary duty, actual and constructive fraud, conversion, and negligence.
The district court entered summary judgment for defendants on all causes of action. The appellate court reversed and remanded the breach of fiduciary duty and constructive fraud causes of action against both defendants and affirmed the remaining causes of action. The Supreme Court affirmed the appellate court’s holding, disagreeing with its reasoning.
On appeal, the firm asserts that Chang had breached a fiduciary duty that he owed to the firm and that Johnson had knowingly assisted Chang in committing that breach. The firm contends that Chang violated the policies in place forbidding associates to refer cases without securing a referral fee for Brewer & Pritchard.
Defendants argue that as a matter of law Chang owed no fiduciary duty to plaintiff, mainly because there was no employment agreement to that effect.

ISSUE:  Does an associate of a law firm breach a fiduciary duty to his employer when gainfully referring a matter to another firm or lawyer without the employer’s permission?

RULING:  Yes. The associate owes a fiduciary duty to his employer not to personally profit or realize any gain or advantage from referring a matter to another law firm or lawyer, absent the employer’s agreement otherwise. However,

“an associate may participate in referring a client or potential client to a lawyer or firm other than his … employer without violating a fiduciary duty to that employer as long as the associate receives no benefit, compensation, or other gain as a result of the referral.”

LESSON:  The employee of a law firm should not profit from a referral to another firm or lawyer without the consent of his employer. The employee should disclose to his employer when he has referred a case to another lawyer or firm.   A lawyer should not share a fee with a lawyer who is not in the same firm without permission of his client.
 

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Shaw v. Manufacturers Hanover Trust Co.,  68 N.Y.2d 172, 499 N.E.2d 864(App. Div.1986)

NY: Underlying  Personal Injury Action--Fee Dispute

Student Contributor: Candice L. Deaner

Facts: The Plaintiff brought a personal injury claim and retained the law firm  on a contingent fee basis. The agreement did not mention appeals. After the trial ended in a verdict for the defendant, the Plaintiff wanted to appeal. The law firm agreed, on the condition that Plaintiff advance the litigation expenses. Plaintiff refused and retained new counsel and eventually obtained an award of $1.5 million in the retrial. The original law firm then sought to collect on the award and the client objected.

Issue: Whether an attorney can collect on a contingency fee agreement when the terms of representation were not clearly stated?

Ruling: The New York State Court of Appeals denied the fee request.

1)  Retainer agreements should be clear on the scope of representation. The Court said,

"The importance of an attorney's clear agreement with a client as to the essential terms of representation cannot be overstated. The client should be fully informed of all relevant facts and the basis of the fee charges, especially in contingent fee arrangements.”

2) The contract should be viewed in a light most favorable to the client. The court held “Had the client maintained that the retainer agreement required respondent's representation through conclusion of the matter, that would have been the mandated interpretation. But here, the client has asserted that the contract terminated upon entry of an adverse judgment. We hold that the agreement must be construed so to provide."

3) The court found that the agreement only spoke of adjudicating the claim. Even if the contract applied to an appeal, the law firm breached the contract by insisting on an additional term for handling the appeal; namely, advancing  expenses. The retainer agreement only addressed the computation of the ultimate fee, it made no provision for expenses.

The Lesson: Retainer agreements should contain clear language stating the legal services to be provided. The attorney should be sure that the client understands the scope of the attorney’s representation.. Attorney’s can safeguard themselves by including any and all limitations in writing, so that there is no question as to what the scope of employment was from the beginning of the attorney/client relationship.

Note: From a malpractice viewpoint, a clear "scope of the engagement" clause is critical to protecting the lawyer from liability for services that are beyond the scope of the engagement.

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Guarantee Insurance Co. v. Saltman, 217 N.J. Super. 604 (App. Div. 1987)

NJ Underlying Insurance Action  

Student Contributor: Colleen Gaedcke  

Facts: A few months after obtaining professional malpractice coverage from the plaintiff, one of the partners at the defendant law firm was served with a legal malpractice complaint. The defendant submitted the complaint to the plaintiff who provided a defense under a reservation of rights to disclaim, pending an investigation of any misrepresentation by the law firm on its application for coverage. This investigation ultimately revealed that the defendant law firm did not have knowledge of the malpractice claim at the time it submitted its application.

Despite the results of its own investigation, however, plaintiff moved to disclaim its duty to defend and indemnify the firm for alleged fraudulent misrepresentations and intentionally withholding information concerning the malpractice action. Additionally, plaintiff sought reimbursement for all defense costs.

The law firm, in turn, filed a counterclaim against the plaintiff arguing that it owed a defense and indemnity for the pending malpractice claim, and furthermore, sought indemnification for all legal fees incurred in defending the plaintiff’s declaratory judgment action. The court found that the plaintiff’s policy with the defendant was valid and required plaintiff to provide a defense and indemnity in the malpractice action. Moreover, under Court Rule 4:42-9(a)(6), the law firm was awarded a significant portion of the legal fees it incurred in defending the declaratory judgment action.  

Issue: Can an insured recover counsel fees from an insurer for costs and expenditures incurred in defending an insurer’s disclaimer of coverage?  

Ruling: Under the American Rule, a prevailing party cannot collect attorney’s fees from the losing party. The New Jersey Supreme Court has, however, carved out an exception to this Rule in R. 4:42-9(a)(6) for an insured who is forced to litigate for its policy benefits against an insurer who erroneously disclaims coverage under a liability or indemnity policy of insurance.  

Lesson: New Jersey Courts recognize that counsel fees must be awarded to insureds in order to make certain that they are receiving the full value of the coverage afforded by liability and indemnity policies in instances where an insurer’s disclaimer is not supported by the policy’s exclusions, conditions, or limitations on coverage.

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Lawrence v. Miller 48 A.D.3d 1, 853 N.Y.S.2d 1 (1st Dept., 2007)

Student Contributor: Maninder (Meena) Saini

NY Underlying Estate Litigation-Attorney fees

Facts: A husband passed away and left the estate to respondent-wife and their three children. The will was admitted to probate in January 1982. The respondent (Lawrence) retained the Graubard law firm on an hourly basis to represent her in connection with the estate. Respondent was billed over $18 million in legal fees over a 22-year lengthy dispute over the estate. Throughout the years, more than $350 million in distributions were made to the beneficiaries. To conclude the litigation, a $60 million settlement was offered but the respondent declined. The respondent then renegotiated the existing agreement with the law firm. The law firm would continue to get an hourly rate, but there was an annual cap of 1.2 million. In addition, the agreement contained a 40% contingency fee provision for any additional monies that were distributed to the beneficiaries. Months later, the law firm reached a settlement agreement for approximately $104.8 million. The respondent refused to pay the law firm the 40% of the additional $40 million it obtained. The law firm filed a petition to compel payment. The respondent then brought a lawsuit for, inter alia, breach of fiduciary duty.

Issue: Whether the revised contract that contained a contingency fee of 40% of any future monies distributed to the beneficiaries is unconscionable on its face.

Ruling: The court found that a 40% contingent legal fee of $40 million for five months work was not unconscionable on its face, especially following years of litigation. Thus, the law firm did not breach any fiduciary duties.

 “Any determination of unconscionability generally requires a showing of both procedural and substantive unconscionability, requiring an examination of the contract formation process and the alleged lack of meaningful choice.”

Lesson: Should it be unconscionable for an attorney to place high contingency fees in the retainer agreement when the attorney is investing his time and risking collecting nothing in the event of a loss? The attorney must demonstrate that he did not exploit the situation and that the client understood the terms of the agreement. Even though it may seem excessive at first blush, the circumstances underlying the agreement must be fully evaluated. Agreements are to be enforced when no deception is involved in making the contract between competent adults. 

Editor's Note: The "bottom line" is given all the circumstances, the fee must be reasonable. RPC 1.5 (a). 

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Distefano v. Greenstone, 357 N.J. Super. 352, 815 A.2d 496 (2003)

NJ Underlying personal injury action; statute of limitations

Student Contributor: Evan Hess

Facts: Defendants represented Plaintiff in a personal injury action where, Defendants did not pursue the Plaintiff’s claim in a timely matter. As a result, Plaintiff was time barred from filing the matter by the statute of limitations. At the time of appeal, Plaintiff and Defendants had partially settled the malpractice claim for $90,000 in compensatory damages. Defendants claimed they should receive a reduction in the settlement based upon the pre-existing contingency agreement. That terms of the agreement set forth that one-third of the total recovery by the Plaintiff would be paid to the Defendants, thus entitling the Defendants to a $30,000 reduction in total payout based upon the settlement figure of $90,000.

Issue: Can a Plaintiff receive the sum of their settlement without a deduction for contingency fees in a legal malpractice action, and can the Plaintiff recover the amount that would have otherwise been awarded to the Defendants as a fee for damages?

Ruling: Based upon the Supreme Court’s holding in Saffer v. Willoughby, 143 N.J. 256 (1996), the Appellate Division held that:

1) Attorneys cannot recover contingency fees based upon settlements or judgments against them in an action for legal malpractice;
2) The Plaintiff may recover fees based upon the settlement as malpractice damages even though in doing so the Defendant is subjected to duplicate recovery;
3) A Plaintiff may not recover hourly fees under the “lodestar” method that were not contemplated if a contingency fee agreement exists with Plaintiff’s attorney in the malpractice action.

Lesson: A Plaintiff may recover the total sum of the value of the underlying case without offset for the fees the negligent attorney would have received in that case. In addition, under NJ law, the fees and expenses paid to the attorney who prosecuted the malpractice action are recoverable as compensatory damages. 

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Wallenstein v. Cohen, 45 A.D.3d 674, 845 N.Y.S.2d 428 (App. Div. 2007)

NY Underlying  Fee Arbitration

Student Contributor: Maninder (Meena) Saini

Facts: Defendant-attorneys represented the plaintiff-client in a matrimonial action that resulted in a judgement for divorce pursuant to a stipulation of settlement. The plaintiff then complained to the grievance committee that the defendants over-charged her for their services and did not protect her interests. The case was transferred to Fee Arbitration. During the arbitration, it was found that defendants were entitled to the fees, which they sought. Two years later, the plaintiff commenced an action, alleging that defendants charged excessive fees and committed legal malpractice in representing plaintiff.

Issue: Can plaintiff re-litigate the issue of excessive attorney’s fees that was formerly resolved in arbitration?

Ruling: The Appellate Division held in this case that the action was barred by fee arbitration award and by collateral estoppel because all of the allegations in the complaint were “reasonably and plainly comprehended to be within the scope of the dispute submitted to arbitration.”

[T]he determination fixing the value of the defendants' services necessarily determined that there was no malpractice.

Lesson: If the excessive fee allegation in the complaint was resolved by previous arbitration, the fee awarded to the attorney during arbitration may ultimately conclude that there is no malpractice. This is a fact sensitive ruling.  The  jurisdiction of the Fee Arbitration Committees in New Jersey, however, does not extend to deciding issues of legal malpractice, even if they are raised in the fee arbitration proceeding. 

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Campagnola v. Mulholland, Minion & Roe, (pdf)
76 N.Y.2d 38 (N.Y. 1990); 555 N.E.2d 611

N.Y. Underlying personal injury action

Student Contributor: Jason Klein

Facts: Plaintiff was struck by a car while working as a crossing guard and was permanently disabled. Plaintiff retained Defendant to pursue a claim for personal injuries and agreed to a contingency fee of one third for any money recovered. The owner of the car that struck Plaintiff was insured for only  $10,000. Plaintiff herself was insured under a Government issued policy for underinsured benefits for $100,000. The Government policy required consent prior to the settlement of any claim against the person deemed responsible for the insured’s injuries. Defendant failed to notify the Government insurance company before settling with the car owner for $10,000, of which $3,150 was deducted as a fee and $550 for expenses. When Plaintiff submitted a claim under the Government issued policy, her claim was denied because the settlement with the car owner was made without consent. Plaintiff commenced this action against Defendant seeking $100,000 in damages for malpractice and Defendant asserted an affirmative defense to reduce any recovered damages by the amount Defendant would have received as attorneys’ fees and expenses in the personal injury action.

Issue: In a malpractice action against an attorney, can the attorney deduct the “hypothetical” fee that would have been payable to the attorney in the underlying action?

Ruling: No. An attorneys’ malpractice constitutes a failure to honor faithfully the loyalty owed to a client. Thus, the plaintiff’s recoverable damages are not limited by a deduction for the fee that she would have paid the defendant had the defendant  properly performed the contract of representation.

The Lesson: A reduction in the plaintiff’s recovery  equal to what the attorney would have earned but for his negligence, is impermissible because a negligent attorney is precluded from collecting a fee. 

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Bailey v. Pocaro & Pocaro, 305 N.J.Super. 1, 701 A.2d 916 (App. Div.1997). 

Student Contributor:  Todd Feinstein

NJ: Underlying Litigation

Facts:   This case found its way back to court after it was initially dismissed under the “entire controversy” doctrine which required plaintiffs to "present all claims, even those against different parties, that stem from the same transactionally related facts in one controversy before one court." A later NJ Supreme Court decision, Olds v. Donnelly,150 N.J. 424 (1997)  held that the entire controversy doctrine does not compel joinder of legal malpractice claims in underlying actions.

This court was called on to address Plaintiffs argument, that they were entitled to be reimbursed for their legal expenses, which included costs and attorneys' fees incurred in pursuing the legal malpractice action against defendant, and the trial Judge erred by not including these expenses as an element of consequential damages. Plaintiffs also contend that prejudgment interest was not properly calculated.

Issues:  (1) In determining damages, is it proper to include legal fees that were incurred in pursuing the legal malpractice action against the defendant?
    (2) What is the correct way to peg prejudgment interest in a legal malpractice claim?

Ruling:   (1) Under Saffer v. Willoughby, 143 N.J. 256 (1996),  a client may recover for all losses which are proximately caused by the attorney's negligence or malpractice, including the legal fees and expenses incurred in successfully prosecuting a legal malpractice action.

 The purpose of a legal malpractice claim is 'to put a plaintiff in as good a position as he or she would have been had the attorney kept his or her contract.       

(2) In awarding prejudgment interest, such an award, represents payment for use of money, and in another sense is compensatory, to indemnify claimant for loss of what moneys due him would presumably have earned if payment had not been delayed.

The award of prejudgment interest in a legal malpractice action should not be limited to the tort recovery rule, but should be guided by equitable principles with the concept of making the victim whole of paramount significance.

Editor's Note: New Jersey is purported to have been the only state that recognizes the primacy of making the victim whole in legal malpractice cases, by treating legal fees and costs of the legal malpractice action as being consequential damages.  The Texas Supreme Court has recently similarly so held. See our blog posts from Paul M.Koning  of November 2, 2009  regarding Akin Gump v. NDR.

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The Editorial Board of the

Legal Malpractice Law Review

is pleased to invite you to an online discussion starting on

Monday morning November 2, 2009

led by:

Paul M. Koning  of K & L Gates, LLP

on the  Texas Supreme Court's new decision awarding Attorney's Fees as compensable damages in a legal malpractice action:

Akin, Gump, Strauss , Hauer &  Feld, LLP  vs. National Development and Research Corp.  decided October 30, 2009:

"The Hidden Issue in Akin Gump v. NDR"

and

"Akin Gump v. NDR:

Practicial Consequences of Allowing Attorney's Fees as Damages"

With this new decision in  Akin Gump,  has Texas joined New Jersey, (with its Saffer v. Willoughby,) in recognizing the prevailing malpractice plaintiffs' right to be made whole again with an award of attorney's fees when they prove that they have been  damaged by their lawyer's malpractice? What implications does this have for the practicing lawyer?  Does this signal a trend that we might see in yet other states?

 Paul is the Texas Law Contributor to the Legal Malpractice Law Review and is a renowned expert in the field. He has served as: 

• Co-Chair of the American Bar Association's Professional Liability Litigation Committee (2006-2009)
  
• Designer and Project Coordinator of its "50 State Survey of Legal Malpractice Law"
  
• Co-Chair, Attorneys' Liability Subcommittee (2005).
  

We look forward to your joining us in what will prove to be a lively and timely discussion. Visitors are encouraged to post their Comments to both of Paul's blog posts. 

Just scroll down to  Paul's 2 blog posts immediately below. 

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The Texas Supreme Court’s new opinion (October 30, 2009) in Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. National Development and Research Corporation  holds that

1. “collectibility” must be determined no earlier than the time of the underlying judgment, and
2. “a malpractice plaintiff may recover damages for attorney’s fees paid in the underlying case to the extent the fees were proximately caused by the defendant attorney’s negligence.”

The first holding seems non-controversial, whereas the second may or may not open Pandora’s box (more on that in a separate comment posted immediately below this one).  Yet there is another consequence of the Akin Gump decision – hidden and significant – that reporters and commentators may have missed.

Because the holding on the first two issues required reversal, the Texas Supreme Court declined to review the lower court’s ruling regarding contingent fee offsets. The contingent fee offset issue is simple: If a lawyer’s malpractice results in the loss of a collectible judgment of $1,000, but the client had a 40% contingent fee agreement with the lawyer, is the client entitled to recover $1,000 or $600? If one applies a pure “but for” causation analysis the answer should be $600, because even if the case had been handled perfectly, the client would only have netted $600. Yet, the Dallas Court of Appeals held that the client’s damages are not to be offset by the amount of the lawyer’s contingent fee. Because the Supreme Court declined to review this issue, the Dallas Court’s ruling remains the law.

The Dallas Court observed:

Akin Gump was entitled to its contingency fee only if NDR prevailed in the [underlying] Panda lawsuit. Due to Akin Gump's negligence, NDR did not prevail and thus Akin Gump did not earn its contingency fee. To give the firm a credit for a contingency fee it failed to earn would be to reward its wrongdoing.

Is this logical? Does it conform the Texas Supreme Court’s reaffirmation of the “but for” standard for causation in Akin Gump? Are there any other reasons to disregard a lawyer’s contingent fee interest in determining the amount of damages?

The Dallas Court also held:

To secure the damages it would have been awarded in the Panda lawsuit, NDR was required to pay two sets of lawyers and endure the aggravation of a second lawsuit and a second appeal. The attorney's fees and expenses incurred to prosecute a legal malpractice suit are not recoverable as damages, absent some statute or agreement not applicable here. Simply put, NDR must pay attorneys twice to be in the same position it would have been in absent Akin Gump's malpractice. It should not be forced to “pay” a contingency fee that Akin Gump never earned. (citation omitted).

Does the Texas Supreme Court’s new ruling that attorneys’ fees may be recovered as damages remove the logical underpinning for the Dallas Court’s ruling on the contingent fee offset?

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The Texas Supreme Court’s new opinion in Akin, Gump, Strauss, Hauer & Feld, L.L.P. v. National Development and Research Corporation holds that

a malpractice plaintiff may recover damages for attorney’s fees paid in the underlying case to the extent the fees were proximately caused by the defendant attorney’s negligence.

Prior to this holding, Texas courts had generally disfavored the recovery of attorneys’ fees qua damages unless allowed by statute or contract.

At first glance, the Akin Gump Court’s holding appears straightforward and logical, and in some cases will be easy to implement. For example, if a lawyer fails to file an answer, resulting in a default judgment, the plaintiff should be able to recover the fees it must pay a second attorney to have the default set aside. In this example, 100% of the extra fees are attributable to cleaning up the first lawyer’s mistake. Most cases, however, are not so cut and dried. 

I fear several unintended consequences from the Court’s ruling: 

• First, will there be a new class of cases in which there are no damages but attorneys fees? For example, if a lawyer obtains a total victory for the client, will the client (perhaps hoping to bargain for a fee reduction) comb the record for inconsequential errors that nevertheless may have increased the total fee by some amount?
• Second, will the new rule be used to avoid summary judgment in cases in which the undisputed facts prove the negligence caused no damages? Take appellate malpractice. If a trial court decides as a matter of law that the client would have lost the appeal regardless of the malpractice, will the client’s claim now survive based on a “fact issue” regarding increased appellate costs due to the negligence?
• Third, how much will the rule expand the number and costs of mandatory expert witnesses? Expert testimony is needed to prove causation in all but the most obvious situations. Alexander v. Turtur & Assocs., Inc., 146 S.W.3d 113 (Tex. 2004).(PDF) Doesn’t this mean a new set of experts will be needed in every malpractice case in which the plaintiff seeks attorneys’ fees as damages? The experts will need to review the record and opine whether the malpractice proximately caused an increase in attorneys’ fees and, if so, how much.

Question: Does Akin Gump open Pandora’s box or is it simply a logical extension of “but for” causation? Are there any special rules or limits that should apply?

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Akin Gump Strauss, etc. v. National Development and Research Corp. (07-0818).

Supreme Court of Texas- Decided October 30, 2009

The Supreme Court of Texas took a giant step  closer to  New Jersey's rule in Saffer v. Willoughby, which permits a prevailing plaintiff in a legal malpractice action to recover as consequential damages attorneys' fees and expenses from the negligent attorney, in order to make the plaintiff whole again.

The case involved an underlying trial and botched jury verdict questions caused by the attorney's malpractice and then an appeal to correct the damage it caused.

Here's what the High Court in Texas said:

A negligence claim, unlike a fee forfeiture claim for breach of fiduciary duty, is about compensating an injured party. See Douglas v. Delp, 987 S.W.2d 879, 885 (Tex. 1999) (“[W]hen the injuries caused by an attorney’s negligence are economic, the plaintiff can be fully recompensed by the recovery of any economic loss. Restoration of the pecuniary interest suffices to return a plaintiff to her prior circumstances.”); Thomas D. Morgan, Lawyer Law: Comparing the ABA Model Rules and the ALI Restatement (Third) of the Law Governing Lawyers 98 (2005) (“A key distinction between fee forfeiture and the malpractice remedy is that the amount forfeited need have no relation to actual damages suffered by the client.”) (emphasis omitted); Restatement (Second) of Torts § 903 cmt. a (1977) (“When there has been harm only to the pecuniary interests of a person, compensatory damages are designed to place him in a position substantially equivalent in a pecuniary way to that which he would have occupied had no tort been committed.”).

We see little difference between damages measured by the amount the malpractice plaintiff would have, but did not, recover and collect in an underlying suit and damages measured by attorney’s fees it paid for representation in the underlying suit, if it was the defendant attorney’s negligence that proximately caused the fees. In both instances, the attorney’s negligence caused identifiable economic harm to the malpractice plaintiff. The better rule, and the rule we adopt, is that a malpractice plaintiff may recover damages for attorney’s fees paid in the underlying case to the extent the fees were proximately caused by the defendant attorney’s negligence. See Alexander v. Turtur & Assocs., Inc., 146 S.W.3d 113, 119 (Tex. 2004); Knebel v. Capital Nat’l Bank, 518 S.W.2d 795, 799 (Tex. 1974); 3 Ronald E. Mallen & Jeffrey M. Smith, Legal Malpractice § 21:19 (2009). 

In Saffer, the New Jersey Supreme Court similarly held:

A client "may recover for losses which are proximately caused by the attorney's negligence or malpractice." Lieberman v. Employers Ins., 84 N.J.325, 341, 419 A.2d 417 (1980)...The purpose of a legal malpractice claim is "to put a plaintiff in as good a position as he [or she] would have been had the [attorney] kept his [or her] contract."

                                                         * * *

...,[the prevailing plaintiff] is nonetheless entitled to reasonable expenses and attorney fees, as consequential damages, incurred in a successful malpractice prosecution.

143 N.J.256, 272, 670 A.2d 535.

According to one Texas blogger:

So, in a later malpractice action, the additional portion of fees attributable to the original lawyer’s negligence — added hearings, procedures, or appellate procedures — might be recoverable.

Question: The "later malpractice action" is  an "added procedure". So, aren't  the additional fees that a client has to pay to another lawyer to prosecute the later legal malpractice  action also "attributable to the original lawyer's negligence"? The Texas Court made clear in the Akin Gump case, as did New Jersey in Saffer, that these cases  do not involve the "American Rule" nor fee shifting. They involve compensating the damaged client for his losses and making the client that is  damaged by his lawyer's negligence whole again-- even if doing that requires bringing a later legal malpractice action against the negligent lawyer.

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Kamaratos v. Palias, 360 N.J. Super. 76 (App. Div. 2003)

Student Contributor:  Melissa Goldberg

NJ Underlying Commercial Action

Facts: The Plaintiff was a minority shareholder in a corporation and retained Defendant attorney to represent its interests in  a dispute with the majority shareholder. The retainer agreement included an arbitration provision whereby  Plaintiff agreed that any dispute regarding fees would be resolved by binding arbitration between the parties in accordance with the New Jersey Uniform Arbitration Act. As litigation continued, Plaintiff challenged bills submitted by the attorney. Defendant filed an attorney’s lien to recover the unpaid legal fees. Plaintiff filed for fee arbitration  provided by NJ Court Rule 1:20A, but the fee arbitration committee declined  to hear it given the amount in controversy (usually more than $100,000.)  Plaintiff then argued that the retainer clause mandating arbitration of a fee dispute was against public policy and unenforceable.

Issue: Is a mandatory arbitration clause for fee disputes in a retainer agreement  enforceable?

Ruling: Yes. The attorney-client relationship does not inherently mandate a blanket preclusion of the arbitration of fee disputes. However, in the instant case, the arbitration clause was not binding on the Plaintiff, since the court did not believe that the retainer agreements clearly articulated the consequences of an agreement to arbitrate a dispute over legal fees.

Lesson:  In making a decision concerning the enforceability of arbitration clauses in retainer agreements, courts will consider:

•  the circumstances in which the agreement was made;
• the parties’ past practices and agreements
• the extent to which the parties actually negotiated the agreement; and 
• the client's level of sophistication or experience in retaining and compensating lawyers.

In addition, the prospective effect of an agreement to arbitrate must be clear to the client before it will be held to be binding upon him, e.g.,

• no right to a jury trial,
• no right to appeal,
• the binding nature of the arbitration award.

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