Big Attorneys’ Fee Award Highlights The Risk Of Fee Provisions

October 14th, 2008

Do your business contracts have an attorneys’ fee provision awarding reasonable fees and costs to the prevailing party? Many do. The common view on these provisions is that they promote fair outcomes (loser pays) and may deter lengthy ltigitation, since each side wants to avoid having to pay the other side’s attorneys. I haven’t seen any empirical evidence to back this up. I recently obtained $3.4 million in attorneys’ fees for a client, pursuant to a contract, and the case highlights some of the risks involved in attorney fee provisions. (For details of the case, read The Recorder article about the Duane Morris case posted on this website.)

Consider at least two situations in which the fee provision may drive unnecessary litigation: consumer contracts and complex transactions. Most consumers, including those who enter into residential leases, obtain legal representation on a contingency basis. The economics of paying hourly attorneys fees doesn’t work for most consumers involved in contract disputes.

The existence of an attorney’s fee provision in a consumer contract/lease does two things. First, it makes it easier for the consumer to retain counsel on a contingency basis, even for a small case, since counsel will be paid a reasonable hourly rate if the consumer plaintiff prevails. Second, it encourages many counsel to over-lawyer a case. That is because a “reasonable fee” is based on a loadstar calculation: the number of hours worked times the market hourly rate. The loadstar in many cases will turn out to be more than the amount at issue in the lawsuit. For example, it’s not unusual to see a $10,000 fee award (or more) in a case resulting in a $1,000 judgment for the prevailing party.

The same thing can occur in complex commercial cases. Though business entities involved in large scale litigtation can ususally afford to hire hourly counsel, where there is a fee provision, hourly counsel may agree to work on a contingency basis. In these cases, multiple the numbers above by one thousand and you can predict the result: the law firm will very soon have a larger stake in the litigation than the client. Cases that might otherwise have settled or resolved between entities may be driven to trial by lawyers chasing a fee.

Attorneys and their clients should evaluate their contracts and experience with past disputes and decide whether the client may be better served by the default American rule: each side pays its own attorneys.

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