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Tuesday, October 05, 2004

The dangers of firing your contingent-fee lawyer

In a recent short post on PointofLaw.com, The Manhattan Institute's Walter Olson (who also frequently writes on Overlawyered.com) poses this question:

Client hires lawyer on contingency fee in insurance dispute. Client fires lawyer and subsequently settles suit for no cash payment. Law firm seeks payment of substantial fee (under quantum meruit doctrine) even though there was no award to take a contingency share from. Held (by Second Circuit panel, overruling district judge): law firm entitled to fee unless client discharged it for good cause. Fair result?

Mr. Olson's pithy but accurate post links to an article from the New York Law Journal that discusses in more detail the facts of the case, the rationale of the federal district court in denying recovery, and the rationale of the Second Circuit in reversing the district court's decision.

Although this case was decided in the federal court system, both the district court and the Second Circuit panel were interpreting and attempting to apply the substantive contract law of the state of New York; although I'm neither licensed to practice in New York nor deeply familiar with its relevant caselaw, I know that there is Texas caselaw that roughly parallels the New York state-court cases cited by the Second Circuit panel.  I'm certainly not prepared to say that the Second Circuit either misinterpreted the relevant New York law or that the relevant New York law is unfair on its face.  And I don't want to turn this post into an in-depth discussion of the nuances of either Texas or New York law on the subject; I don't pretend to have done the kind of research needed to speak with confidence on those topics here, much less the research I'd be obliged to do for an actual case and client.

However, Mr. Olson's question impliedly argues that it's unfair for a client — who thought that by retaining a law firm on a contingent fee basis, he'd immunized himself from having to pay that firm on any basis other than as a percentage of any collected proceeds from the firm's representation — to be subjected to out-of-pocket liability for the law firm's work.  I would agree that this argument has considerable superficial appeal.  From the client's point of view, the whole point of hiring a contingent-fee lawyer is to avoid paying the lawyer unless he wins a recovery (by way of settlement or verdict) for the client.

It's important to keep firmly in mind, however, that the client is only going to have to come out of pocket if it's first determined that the client lacked good cause for firing his contingent-fee lawyer.  In other words, the client will only end up having to pay if it's determined that the client first breached the contingent fee contract with his lawyer; if instead the client had "good cause" to fire his lawyer, he won't be held to have breached the agreement through the firing. 

In short, one can fire his lawyer at any time; but the consequences of that firing depend on whether it was contractually justified or not.  And if it's decided that the firing was not justified, the consequences may be quite surprising, and indeed beyond what the client subjectively anticipated — but that's true in a great deal of contract litigation.

It's for precisely this reason that before agreeing to represent any client on a contingent fee basis, I insist upon having explicit discussions with my prospective client about what may happen if he fires me or if I "fire" him (that is, withdraw from continuing to represent him).  Texas requires that contingent-fee contracts — unlike other agreements for legal representation — be in writing, and the standard forms that I use are designed to address the various possibilities up front.  I discuss the notion of "good cause," and hypothetical examples of what might or might not be "good cause" for the client to fire me and "good cause" for me to withdraw.  I always point out to prospective clients (both orally and in writing) that on this subject, my and my firm's prospective interests may be quite adverse to his, and that he's obliged to consider that prospective conflict — and that indeed, he's entitled, and may be wise, to seek independent legal advice from another lawyer on it before we execute the contingent fee agreement.  With respect to lawyer-client fee disputes, an ounce of prevention is worth many, many pounds of cure.

So the moral of the story is:  It's dangerous to fire your contingent fee lawyer unless you have "good cause" to do so.  And whether you have or lack that "good cause" is certainly something on which you should seek independent legal advice before acting.

*******

An illustrative "war story" from my personal experience about the dangers of firing your contingent fee lawyer without "good cause": 

About twenty years ago, I defended a large industrial client on a sizeable docket of personal injury cases arising out of its construction of a huge facility in a rural Texas county.  There was an on-the-job fatality — a tragic accident — in which a two-ton steel plate, improperly rigged for hoisting by a crane, had broken loose and dropped on top of the ironworker who'd been serving as the flagman for the lift.  He'd been killed instantly, but as a licensed journeyman with a steady employment history, leaving behind a widow and several small children, his survivors' economic damages alone were very substantial — easily into a seven-figure range — and my client's total potential damages exposure, particularly in this venue, could realistically run into a low eight-figure range.  I'd been awakened in the middle of the night to rush to the accident scene and start preserving evidence and taking sworn statements.  And very predictably, this accident resulted in a very serious multi-party lawsuit, in which my client was  the "target defendant." 

The widow of the man who'd been killed had immediately retained an experienced and well-connected local firm that specialized in personal injury contingent-fee representation; she'd been referred to the firm, at her request, through her husband's union, with whom it had long-standing ties, and she'd signed a standard contingent-fee contract.  Within a few days after hiring that local firm, however, and before the lawsuit had even been filed, she decided that she wanted her brother's law firm — which was based in Washington, D.C. and specialized in labor-relations cases, not personal injury work — to take over the case.  So she fired the local firm, and her brother's firm took its place.

I immediately recognized that the appearance of the Washington firm was a huge boon for my client from both a strategic and a practical, tactical point of view.  Its lawyers were practicing both outside their area of specialty and outside of their regular geographical area.  The normal disadvantages that I faced as a Houston lawyer representing a deep-pocket and unsympathetic defendant in a rural, heavily unionized, and historically hostile and pro-plaintiff county were suddenly neutralized.  As a consequence, we defended the case very aggressively, and we pushed for and got an early trial date. 

My Washington-based opposing counsel compounded their errors.  They chose to rely on out-of-state expert witnesses whose qualifications were diluted by their foreignness.  They never grasped the relationship between the defendants they'd sued, nor exploited the potential conflicts among them; even less did they grasp or exploit the relationship among the various defendants' layers of insurers and surplus insurers.  Their rapport with their own witnesses (the decedent's co-employees) was minimal; their understanding of and ability to assess the local jury pool was nonexistent.  On the rest of my docket, against local lawyers, I was the regular, goodnatured whipping boy before the two local judges; but when pitted against a team of out-of-state lawyers, my own small-town Texas roots easily overcame my big-city Houston office address, and I of course had hired my own savy local counsel to assist in the trial.  During voir dire examination of the jury, I was able to chat with the jury pool about the previous year's state high school basketball finals in which their team had whipped my home town's team.  In short, the widow's rash decision had, in effect, converted me and my client into the "hometown team" with all of the "home-court advantages." 

For all these reasons, whether the widow knew it or not, by firing her original counsel and hiring her brother's firm, she'd slashed the reasonable settlement of the case to a fraction of what it would otherwise have been.  And as it happened, the case settled on the second day of trial, shortly after we'd picked what I considered to be a very favorable jury — for a sum that, while still large, was almost certainly less than a quarter of what she otherwise probably would have received through a negotiated settlement had she kept her original counsel. 

Given her then-current counsel, it was still a wise settlement:  There was a contributory negligence defense (the deceased flagman had been standing where he knew he shouldn't have been), and I thought I had a realistic shot at winning the case outright against her brother's firm — in which event she and it would have gotten nothing at all.  My client also could afford and was eager to take that gamble:  Although it was the most serious of these cases on my docket, this case also had the best potential for a high-profile and convincing win that would have a very salutory effect on the settlement value of the other cases I was handling for that client.  (The really knowledgeable local lawyers would have treated my winning the case as a fluke, but not all of my opponents were that knowledgeable.)  But by changing lawyers unwisely, the widow had in effect left a huge amount of money — a seven-figure sum — "on the table." So there's no doubt that my client benefited enormously from the widow's and her brother's firm's foolishness, and my recognition and exploitation of it.

*******

But the widow's and her brother's law firm's problems weren't over by any means.  The local firm whom she'd originally retained had, upon being fired, intervened in the case to enforce its contingent fee interest based on an allegation that it had been discharged "without good cause."  I bemusedly observed those proceedings from the sidelines — my client's exposure had already been fixed and limited, and the question had simply become to whom the agreed-upon settlement proceeds would be distributed.  But in a short bench trial, the Washington firm was simply hammered by the local firm, and the judge decided — correctly, I think, on the facts and the law — that the local firm had been discharged without good cause. 

The local firm ended up collecting a full third of the settlement proceeds — unquestionably a net windfall in comparison to the work it had done before being fired (and more than it would have recovered on a "quantum meruit" or unjust enrichment theory), but also (because of the relatively smaller settlement) considerably less than the one-third of a far larger pot of money that it likely would have collected had it not been wrongfully fired.  The Washington firm, to its moral credit but financial distress, ended up waiving the one-third contingent fee that the widow had also agreed to pay it. 

I suspect that the brother's partners were not at all happy with him; whether it affected the brother's relationship with his sister, I have no way of knowing.  Could the widow have sued her brother's firm for malpractice?  Perhaps.  But even though it was (to me or any observer knowledgeable about these kinds of cases in this particular venue) a monumental error in judgment for them to take the case, I don't know whether that firm warned the widow of the practical risks she was taking in discharging her initial counsel.  Perhaps they did so and she proceeded anyway.  And in any event, tactical and strategic errors in judgment (as opposed, say, to missing filing deadlines) are very hard to turn into a successful legal malpractice case.  From the fact that I was never called to be a witness in such a case, I presume that one was never filed.

But this particular war story — as a corollary to the case cited in Mr. Olson's post — illustrates that firing your contingent fee lawyer "without good cause" can have unanticipated and very ugly consequences, potentially both for you and for your new counsel, even if you technically have "won" a sizeable recovery in the case through the efforts of the new counsel.

Posted by Beldar at 03:40 AM in Law (2006 & earlier) | Permalink

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Comments

(1) qcifer made the following comment | Oct 5, 2004 9:01:29 AM | Permalink

NY state and federal courts enforce an important extension of the Sixth Amendment, by which every indigent lawyer is entitled to a client

(2) Steel made the following comment | Oct 5, 2004 9:02:40 AM | Permalink

The dueling lawyers hasn't been my misfortune
but much the same can be said re Real Estate
brokers. Someday, a lottery winner will go find
another financial rep and can the first and find out the same thing. It is a CONTRACT.

(3) A Hunny made the following comment | Oct 5, 2004 9:37:22 AM | Permalink

A little bit like, your country's into a nasty and confusing war, it might be best not to change commanders-in-chief because of media-fuelled whim....

(4) PDN made the following comment | Oct 5, 2004 3:55:08 PM | Permalink

Discharged within a few days-----and still the contingency firm sued? Wow, the letter of the law seems to be worshipped over the trajedy of the ignorant, distraught, and most certainly confused widow. A few days.

Where is common decency

PDN

(5) Beldar made the following comment | Oct 6, 2004 12:50:37 AM | Permalink

PDN, it was a windfall for the original firm, no doubt about it, in comparison to the effort they'd expended on that particular case. The windfall to them, however, didn't end up costing the widow anything — she was going to pay the same one-third to someone. They felt like they'd been shafted, like an opportunity they'd earned to hit a huge home run on this case — through years of practice, cultivation of their union contacts, and representation of other union members on less lucrative cases — had been snatched away from them. They were ready, willing, and eager to do the additional work and invest the additional out-of-pocket funds that would have developed the case properly; they did nothing wrong. So I do understand their viewpoint; and as between them and the brother's firm, I think they were more entitled. But still, it was a windfall; they made out like bandits, if they weren't sitting on their hands waiting for other business in the meantime.

The horribly unjust result would have been if the brother's firm had also insisted on collecting a third, and I do credit them for doing the right thing by waiving that claim. Even so, the widow's remaining two-thirds was of a smaller total pot than if she hadn't fired the original firm; and I hold the brother's firm morally responsible both for its own wasted investment of time and money and for the far worse sin of permitting the widow to lose out on the genuine settlement value of her case.

(6) Maria made the following comment | Jan 25, 2005 7:18:01 PM | Permalink

I think someone should be able to fire their lawyer. I have an attorney that I feel isn't
doing his job. It has one week since I"ve seen him and I stressed at that meeting, how important it was for him to be able to get me money for my car . His assistant hasn't done anything, hasn't even talked to the other
insurance company . They haven't helped me
get a rental car or anything, and I'm
either walking, on the bus, or driving
my wrecked car that they say is totalled.
Plus being in bad pain, is that a good attorney?
I don't think so .......

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