By Carole J. Buckner
Where an engagement agreement does not specifically address attorney’s fees awarded pursuant to statute awarding fees to the “prevailing party,” who owns those fees, the client or the lawyer? The recent appellate court decision in Aerotek v. Johnson Group Staffing Co., Inc. 2020 WL 5525180, 20 Cal. Daily Op. Serv. 9782 (9/15/2020), addresses this question, holding that to the extent that such fees exceed the fees the client already paid to the lawyer, in the absence of a contrary agreement, the fees awarded belong to the lawyer.
The law firm represented the defendant in litigation matters involving misappropriation of trade secrets. The firm withdrew following non-payment of legal fees, but later agreed to continue representation on an alternative pro bono basis, pursuant to a new retainer agreement. The new agreement provided that if the court awarded fees to the defendant in the future, all fees would be reimbursable to the firm. After two jury trials, the defendant prevailed and the court ultimately awarded over $700,000 in fees. The firm claimed entitlement to the fee award and the court modified the fee award to reflect the firm’s joint entitlement to the award. The court then scheduled a jury trial on the issue and ultimately ordered the funds placed in a blocked account. Ultimately, the court handled the fee dispute as a law and motion matter.
Prevailing Party Attorney’s Fees Belong to Attorneys
The Aerotek decision followed the California Supreme Court’s decision in Flannery v. Prentice (2001) 26 Cal.4th 572, in which the court held that under Government Code section 12965, part of the California Fair Employment Housing Act (“FEHA”), which permits an award of attorney’s fees and costs to the prevailing party in the court’s discretion, the fees belong to the lawyer absent agreement to the contrary. The Aerotek court reasoned, based on Flannery, that by definition, “attorney’s fees” are payable to lawyers. The court further examined legislative history and public policy, finding support in both for the conclusion that a prevailing party’s attorney’s fees are the property of the attorney, not the client. Among other rationales, vesting ownership of fees in favor of attorneys would avoid unjust enrichment by avoiding a windfall to the client. Further, the court wanted to assure adequate compensation for meritorious claims, while discouraging frivolous claims. In addition, vesting statutory claims in the attorney insures fairness.
The Aerotek court also followed Flannery in determining that vesting ownership of fees in the attorney would avoid the ethical concern of illegal fee sharing that might otherwise arise. Rule 5.4 of the California Rules of Professional Conduct provides that an attorney cannot share legal fees, directly or indirectly, with a non-lawyer. Vesting ownership of prevailing party fees in the client would “implicate in some measure the policy our fee-splitting prohibition is designed to advance.”
The Parties’ Pro Bono Contract Modification Did Not Alter the Result
The parties in the Aerotek matter had altered their fee arrangement during the representation, after the firm had withdrawn from representation, and later agreed to a “pro bono” representation. The Aerotek court held, again following Flannery, that even attorneys who provide services on a pro bono basis are entitled a “reasonable” award of attorney’s fees under a fee-shifting statute. Ultimately, the court refused to admit extrinsic evidence, and the client did not appeal that determination. The client also failed to raise on appeal any alleged uncertainty of the contract language. The court found that the contract language was not ambiguous and could not be construed to provide that the firm had waived its right to fees awarded pursuant to a fee-shifting statute. Therefore, the court rejected the client’s claim.
Ultimately, the court held that the attorney’s fees belonged to the “attorneys who labored to earn them” and that the client had failed to show that the parties had made any agreement inconsistent with that default disposition.
Failure to Offer Fee Arbitration Did Not Void the Right to Fees
The client in Aerotek argued that the firm’s failure to provide written notice of the client’s right to arbitrate the fee dispute under California’s Mandatory Fee Arbitration Act, Bus. & Prof. Code §§ 6200 et seq. (the “MFA Act”), voided the firm’s right to fees. Disputes concerning fees, costs, or both, charged by lawyers for professional services may, at the option of the client, be submitted to arbitration by a local bar association. However, the MFA Act provides an exception for disputes concerning fees to be paid pursuant to statute or court order. On appeal, the Aerotek court found that the fees in question were fees “determined pursuant to statute,” and such fees fell within the MFAA exemption. Accordingly, the failure to give MFA Act notice to the client did not invalidate the right to fees.
State Bar Approved Provision Regarding Statutory Fees
The firm in the Aerotek matter contended that its fee agreement was based on a form suggested by the California State Bar. The California State Bar publishes approved Sample Fee Agreement Forms. These Sample Agreements address the recovery and allocation of court awarded statutory or contract fees and costs. Using the recommended language can help avoid misunderstandings. The recommended language makes it clear that the client agrees “that any award of fees and costs that may be awarded pursuant to contract or statute will belong exclusively to Attorney.” Further the approved language provides that “any payment of court-awarded fees and/or costs by a third party will be credited against the amount of fees and/or costs owed by Client under this Agreement.” Finally, the recommended language provides that “the attorney’s fees and costs payable to Attorney pursuant to this Agreement shall be the greater of: (i) the amount otherwise owed to the Attorney under this Agreement if the award of attorney’s fees and costs were disregarded; or (ii) the amount of the court ordered award of attorney’s fees and costs.”
Conclusion
Careful attention to the language of a fee agreement, including any modification, can help avoid misunderstandings with clients, including downstream disputes between lawyer and client regarding statutory attorney’s fees.
Carole is a Partner & General Counsel at Procopio, Cory, Hargreaves & Savitch, LLP. The views expressed are her own.