I want to discuss a new decision from the Fourth Circuit, which Rob Hoskins brought to my attention last week on ERISABoard. The case involves the reasonableness of attorney’s fees in general, and a substantial contingency fee in particular.

The facts in In re Abrams & Abrams, P.A.; St. Martin, Williams and Bourque, 2010 WL 1971240 (4th Cir. 2010) are particularly tragic. On December 31, 2005, 26-year-old Mark Pellegrin was struck by a company vehicle driven by an intoxicated co-worker. As a result, he sustained a traumatic brain injury, which has made him completely dependent on others for all his care. His medical care, calculated through his full life expectancy, will cost $17 million.

Jerry Pellegrin, Mark’s father, hired counsel from his home state of Louisiana, who then associated with counsel in North Carolina, where the accident occurred. Pellegrin’s retainer agreement with Louisiana counsel provided for a one-third contingency fee, which would be split equally between both sets of lawyers.

National Union Fire Insurance Company of Pittsburgh, Pennsylvania, which had issued a $21 million insurance policy to the employer, KCI Technologies, first denied coverage on the grounds that Kelly McKiernan, Mark Pellegrin’s co-worker, violated company rules by driving while intoxicated. But under North Carolina law, because those rules were not incorporated in the insurance policy, they could not be used to deny coverage.

Pellegrin filed suit, and National Union still denied coverage and refused to defend McKiernan, forcing him to represent himself during the litigation, although he did not appear for trial, resulting in a $75 million judgment being entered against him.

Pellegrin then sued National Union and sought a declaration that it was responsible for the entire $75 million judgment due to its failure to defend the earlier suit against McKiernan. National Union removed the lawsuit to federal court based on diversity jurisdiction. The parties then held a one-day mediation, which resulted in National Union agreeing to pay $18 million to resolve all claims.

The settlement was divided into three $6 million portions: the first would go into a special needs trust to pay for Mark Pellegrin’s care; the next $6 million was used to purchase an annuity that would make monthly payments and pay a total of at least $12.1 million and as much as $29.9 million, depending on Mark’s life expectancy; and the last $6 million was to be paid to counsel to satisfy the retainer agreement.

The parties sought court approval for the settlement because Mark Pellegrin was incompetent. At the hearing, District Judge Terrence W. Boyle asked the lawyers how much time they had in the case. North Carolina counsel estimated that his firm had a thousand hours, and Louisiana counsel estimated his firm’s time as in excess of a  thousand hours. Jerry Pellegrin asked that the court approve the attorney’s fees.

But the district court reduced the attorney’s fees from the $6 million provided by the retainer agreement to $600,000, or three percent of the settlement. The court reasoned that the lawyers had speculated about their time in the case, and so multiplied their estimate of 2,000 hours by $300 per hour, which the court described as "a high hourly rate for a similarly-situated lawyer in North Carolina." Not surprisingly, Pellegrin’s counsel appealed the decision.

The opinion, written by Judge Wilkinson for a unanimous panel, had some harsh words (by federal court standards) for the district court. And I expect that this opinion will become a fixture in motions seeking to uphold or establish the reasonableness of an attorney’s fee, particularly a contingency fee, which can sometimes seem to be disproportionately generous to the lawyer. 

After some initial skirmishing by the parties (Pellegrin’s counsel and amicus counsel appointed by the court to defend the district court’s decision) as to whether the appropriate standard for reviewing attorney’s fees is a state or federal question and whether it is procedural or substantive in nature, the court concluded that the appropriate standard was reasonableness — after acknowledging that the differences between the standards didn’t make much of a difference.

The court looked to Johnson v. Georgia Highway Express, Inc., 488 F.2d 714 (5th Cir. 1974), a Fifth Circuit decision adopted by the Fourth Circuit in Barber v. Kimbrell’s, Inc., 577 F.2d 216 (4th Cir. 1978) and Allen v. U.S., 606 F.2d 432 (4th Cir. 1979). Johnson established a 12-factor test to assess the reasonableness of attorney’s fees.

The court acknowledged that not all 12 factors may apply in a given case, but noted that the district court’s explanation of the factors it relied on was important: "Particularly when such a steep and indeed drastic reduction from the fee provided in the retainer agreement was ordered, some care in explanation might be expected." But the district court "neglected to consider several critically important factors in its analysis[,]" and so the Fourth Circuit focused on three factors from Allen: the contingency of the fee, the award involved and the results obtained, and the fee awards made in similar cases.

  •  The contingency of the fee

The court found that the district court failed to recognize the significance of the contingency fee in this action, as Jerry Pellegrin did not have the funds to pay for his son’s care nor did he have the funds to pay lawyers on an hourly basis to pursue a recovery: "The contingency agreement was, as the saying goes, the key to the courthouse that allowed Jerry Pellegrin to retain the attorneys who eventually provided for his son’s ongoing needs."

The court also pointed out that the contingency fee transfers a significant portion of the risk of loss to the attorney, and provides a corresponding incentive to the attorney to obtain a recovery, as the attorney’s and client’s interests are aligned. The court identified a number of "sticky problems" that Pellgrin’s counsel had to overcome in order to obtain a recovery, such as National Union’s position regarding coverage and North Carolina law involving contributory negligence and co-employee immunity. Because a contingency fee is intended to account for such risks, the district court erred in failing to consider them.

  • The award involved and the results obtained

Noting that the most critical factor in determining the reasonableness of a fee is the degree of success obtained, the court concluded that "It was error therefore for the district court to fail to recognize that an $18 million settlement served the client well by any standard and particularly in light of National Union’s $21 million policy limit." 

The district court also failed to account for the hurdles that Pellegrin’s counsel faced:

Successful outcomes often make risks seem less risky in hindsight than they were at the time, and the court should not have ignored those risks merely because at some later point in litigation the defendant found it in its interests to settle.

  • The customary fee for such work

The court found that the district court did not engage in any analysis by finding that $300 per hour was an appropriate fee, which ignored that the case was a contingency fee case and that several North Carolina and Louisiana lawyers who submitted affidavits in support of Pellegrin’s lawyers’ position had stated that they would have charged 40% instead of one-third, making the actual fee even more of a bargain.

The court closed by describing the district court’s reduction as "much too steep a decease," and stating that on remand, the district court’s discretion would have to be guided by "a more rigorous analysis of the applicable Barber/Allen factors, and especially by a recognition of the important role played by contingency fees in this type of litigation."

The court vacated the district court’s judgment and remanded the case for further proceedings.