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Pennsylvania Supreme Court Confronts Fee Sharing Issues When Client Changes Firms

By: Gaetan J. Alfano
November 21, 2015

Personal injury plaintiffs typically enter into contingent fee agreements and many may change attorneys before recovering any funds. Despite this dynamic, there is little guidance on the circumstances under which a successor firm must share a contingent fee with a predecessor firm that was terminated before the contingency occurred. Last term, the Pennsylvania Supreme Court heard arguments in Meyer Darragh Buckler Bebenek&Eck v. Malone Middleman, 8 WAP 2015, a dispute over a contingent fee where the client was originally represented by Meyer Darragh but elected to be represented by Malone Middleman, which later settled the case. A decision in the case should resolve several questions concerning fee sharing, including whether a former firm, which did not secure a recovery, is limited to a quantum meruit recovery and if so, whether a quantum meruit recovery lies against the successor firm as opposed to the client.

BACKGROUND

The underlying facts are less than straightforward. In October, 2002, Richard Eazor died in a motor vehicle accident. In March, 2005, attorney William Weiler, Jr. began representing the Eazor estate in a wrongful death action pursuant to a contingent fee agreement with the Estate. Later that year, Weiler signed an employment agreement with Meyer Darragh in which he agreed that fees for legal services on behalf of his clients would be the property of Meyer Darragh. Importantly, Meyer Darragh did not enter into its own contingent fee agreement with the Eazor estate.

Weiler resigned from Meyer Darragh almost two years later. Before leaving, Weiler amended his employment agreement to provide that Meyer Darragh would receive two-thirds and Weiler would receive one-third of any fees recovered in the Eazor case. Meyer Darragh continued to represent the estate.

Weiler next affiliated with Malone Middleman and the Eazor estate chose to be represented by Mr. Weiler and the new firm. Meyer Darragh promptly notified Malone Middleman that the latter was bound by Weiler's employment agreement. Malone Middleman responded that "at best, [Meyer Darragh had] a quantum meruit claim for actual time expended." Malone Middleman eventually entered into its own fee agreement with the Eazor estate, entitling it to a one-third contingency of the net proceeds of any settlement. The Eazor case ultimately settled, resulting in a maximum possible attorney fee of approximately $78,000. Meyer Darragh then sued Malone Middleman for two-thirds of the fee.

TRIAL COURT

After a trial on stipulated facts, the lower court's decision left both sides unhappy. The court rejected Meyer Darragh's claim that Weiler's agreement to pay two-thirds of the Eazor estate fee was binding on Malone Middleman. The Court recognized that because Weiler was not a partner at Meyer Darragh when he left, the Eazor estate litigation could not be considered "unfinished business" within the meaning of the Uniform Partnership Act, and that Meyer Darragh was not entitled to a recovery on that basis. The court also declined to enforce Weiler's employment contract against Malone Middleman, as Malone Middleman was not a party to it. The trial court, however, did award Meyer Darrah $14,721 against Malone Middleman on a quantum meruit basis. In doing so, the court rejected Malone Middleman's argument that a quantum meruit recovery lies only against the client and not against the successor firm. The trial court reasoned that Malone Middleman had benefited from Meyer Darragh's earlier work on the case and that it would be unjust to allow Malone Middleman to retain that benefit without payment.

SUPERIOR COURT

On appeal, the Superior Court disagreed with the trial court's application of quantum meruit, noting that "[t]here is no Pennsylvania appellate court case holding that an attorney who initially represents a client and is dismissed can maintain a quantum meruit action against the attorney who ultimately settled the case. Rather, the initial attorney has to proceed against the client." Meyer, Darragh, Buckler, Bebenek & Eck, P.L.L.C. v. Law Firm of Malone Middleman, PC, 95 A.3d 893, 897 (Pa. Super. Ct. 2014), reargument denied (Aug. 18, 2014), appeal granted, 113 A.3d 277 (Pa. 2015). The Superior Court then enforced the Weiler/Meyer Darragh employment agreement against Malone Middleman. The Superior Court reasoned that although Malone Middleman was not a party to Weiler's agreement to pay Meyer Darragh two-thirds of the Eazor estate's attorney fee, Malone Middleman could only take its share of the attorney fee "subject to" the terms of Weiler's employment agreement. On this basis, the court held that Meyer Darragh was entitled to two-thirds of the attorney fee.

SUPREME COURT

The Pennsylvania Supreme Court granted allocator. Before the Supreme Court, Malone Middleman has focused on the fact that the firm was not a party to Weiler's employment agreement and that the agreement could not be enforced against it. Meyer Darragh has countered that Weiler, in bringing the Eazor estate to Malone Middleman, acted as the firm's agent and Malone Middleman, as the principal, should be bound by Weiler's employment agreement.

It is expected that the Supreme Court will address the circumstances under which a successor firm may be liable to a predecessor firm where a plaintiff has changed firms before a recovery. The Court could affirm the Superior Court and agree that Weiler's employment agreement with Meyer Darragh effectively reduced Malone Middleman's contingency fee when the latter accepted the case. Alternatively, it could conclude that the contract was unenforceable against Malone Middleman as a non-party and that the proper remedy is quantum meruit. If so, the Court may decide whom that remedy is enforceable against – the client or the successor law firm. If the former, then clients may be placed in the unfortunate position of potentially paying both the predecessor firm's quantum meruit claim and the successor firm's contingency fee claim.

TAKEAWAYS

1. Confirm the Retention Terms with the Clients

In the interim, the tortured history of the case may provide useful guidance to practitioners in contingent fee matters, particularly when dealing with cases brought to a firm through a lateral attorney. There was nothing in the Meyer Darragh case from which a court could conclude that the clients had any contractual relationship with Meyer Darragh, as opposed to Weiler. In accepting existing contingent fee representations through lateral attorneys, practitioners should consider confirming in writing the clients' understanding that they now are represented by the new firm on the same terms as they were previously represented by the lateral attorney at his or her former firm.

For instance, when a firm adds a lateral attorney with existing business, the firm should inform the lateral's clients that it is continuing to represent them on the same terms contained in their original contingency fee agreement. Typically, this disclosure is provided in an election letter to the clients. While it may not be practical for the new firm to ask clients to sign "new" contingency fee agreements, albeit on the same terms, the new firm should make certain that clients understand and consent to representation by the new firm on the same terms as with the lateral in his or her former firm.

2. Perform Due Diligence on the Lateral's Fee Arrangements

As the case presently stands, Malone Middleman is liable to Meyer Darragh for two-thirds of the Eazor case fee. Under these circumstances, would it have made economic sense for Malone Middleman to have accepted the Eazor case if the firm's only upside, including after a trial, was one-third of the fee?

That question reinforces a firm's need to perform basic due diligence on existing contingent fee agreements when accepting a client that has terminated the predecessor firm. This caution applies even more so when acquiring contingent cases through a lateral. Firms should pay particular attention to the lateral's cases and determine whether there are referral fee obligations in the lateral's contingent fee agreements or fee concessions with particular clients that may influence the decision whether to accept a case in light of a potentially reduced fee.

3. Examine Other Possible Restrictions

Finally, if the Supreme Court upholds Weiler's employment agreement to reduce Malone Middleman's fee, will courts be more willing to enforce other restrictions on a lateral's ability to transfer clients from a prior firm? While the obligations of shareholders and partners generally are defined through formal agreements, associates may be bound only by employee handbook provisions. These provisions may require an associate to acknowledge that fees in contingency cases, whether originated by the associate or not, are the property of the firm as a condition of employment. Some provisions also may impose a formula, either a sliding scale based on the age of the case or an actual "days in office" calculation, to determine the prior firm's fee interest in the case. If Weiler's employment agreement is enforced to reduce Malone Middleman's fee, then it may be logically consistent for courts to enforce handbook provisions or other employment conditions against a successor firm.

While the Supreme Court's decision in Meyer Darragh v. Malone Middleman may shed light on these and other issues, the decision inevitably will impact a practitioners' calculus in accepting any case in which a fee may be shared with the predecessor firm.

 

"Upon Further Review, Copyright 2015, Philadelphia Bar Association, All Rights Reserved."