Litigating Attorney Fee Claims Practical and Ethical Issues March 27, 2018 Presented by: David P. Bender, Jr. Haynes and Boone, LLP Yasser A. Madriz

TODAY’S PRESENTATION Early assessment re fee claims Ethical issues in fee claim litigation Practical considerations in fee claim litigation Questions/Discussion For many years, lawyers billed their clients in one of two ways – through billable hours or contingency fees. There are ethical issues that come into play with both of those, but at least those are two arrangements that most lawyers and clients understand the other side’s incentives. [3 bullet points] Many of the ethical considerations Dave will talk about are the same in hourly and contingency, but the key to thinking through the ethical issues is understanding how each fee structure shifts financial risks between the client and outside counsel, and potentially affects the incentives of the law firm in how it staffs and manages a case. Alternative fee arrangements have been around for decades, but as we will see their use has spiked in recent years. As lawyers face increasing pressure to cut expenses and in-house counsel seek more predictability in their outside counsel spend,

WHY? Over 100 Federal statutes provide for an attorney’s fee award State statutes also a basis for making a fee claim Private Attorney General Statutes Unfair Business Practice Statues Contracts Prevailing party clauses Indemnification provisions Insurance Coverage Litigation Recovering costs of defense Bad faith based fee recovery For many years, lawyers billed their clients in one of two ways – through billable hours or contingency fees. There are ethical issues that come into play with both of those, but at least those are two arrangements that most lawyers and clients understand the other side’s incentives. [3 bullet points] Many of the ethical considerations Dave will talk about are the same in hourly and contingency, but the key to thinking through the ethical issues is understanding how each fee structure shifts financial risks between the client and outside counsel, and potentially affects the incentives of the law firm in how it staffs and manages a case. Alternative fee arrangements have been around for decades, but as we will see their use has spiked in recent years. As lawyers face increasing pressure to cut expenses and in-house counsel seek more predictability in their outside counsel spend,

TEXAS: CORPORATION V. LLC OR LP Tex. Civ. Prac. & Rem. Code Ann. § 38.001 “A person may recover reasonable attorney’s fees from an individual or corporation . . .” Alta Mesa Holdings, L.P. v. Ives, 488 S.W.3d 438, 452- 455 (Tex. App. Houston [14th Dist.] 2016, pet. denied) (no fee recovery from limited liability company) Choice! Power, L.P. v. Feeley, 501 S.W.3d 199, 214 (Tex. App. Houston [1st Dist.] 2016, no pet.) (no fee recovery from limited partnership) The “rule is that a party cannot use the [Declaratory Judgment Act] as a vehicle to get otherwise impermissible attorney’s fees.” TEPCO, L.L.C. v. Reef Exploration, L.P., 485 S.W.3d 557, 569-70 (Tex. App.-Houston [14th Dist.] 2016, no pet.). “But when a claim for declaratory relief is merely tacked onto a standard suit based on a matured breach of contract, allowing fees under Chapter 37 would frustrate the limits Chapter 38 imposed on such fee recoveries. And granting fees under Chapter 37 when they are not permitted under the specific common-law or statutory claims involved would violate the rule that specific provisions should prevail over general ones.” MBM Financial v. Woodlands Operating Co., 292 S.W.3d 660, 670 (Tex. 2009).

EARLY CASE ASSESSMENT Early case assessment re attorney’s fees Claim often overlooked When prosecuting a claim What is the legal basis of claim What fees/costs are recoverable What is the cost of prosecution Is the fee to be recovered reasonable What is the ROI Not an exhaustive list; these are building blocks that can be combined and sequenced in many ways. Association of Corporate Counsel – Guide to Value Based Billing Each of these allocates risk and affects law firm incentives in different ways. Will talk about each of these in detail, but first, want cover why so many companies are turning to alternative fee arrangements.

EARLY CASE ASSESSMENT When defending a claim What is the legal basis What is the potential exposure What is the strategy for defeating a fee claim No basis for an award Limiting the amount of the award

ETHICAL ISSUES Fee must be reasonable ABA Model Rule 1.5 Texas Rules of Professional Conduct/Arthur Anderson & Co. v. Perry Equip. Corp., 945 S.W. 2d 812 (Tex. 1997) AFAs offer a number of advantages to both clients and law firms. Chief among these is predictability. By agreeing to fees in advance, client can budget more accurately and law firm can predict its income more accurately. I would say the need for predictability is one of the biggest changes I’ve seen in my career. The importance to our clients that law firms accurately predict their legal spend cannot be overstated. Clients concerned that billable hours do not promote efficiency, -- that lawyers are incentivized to bill as many hours as possible and not seek early resolution.. Encourages innovation, and outside the box thinking. When lawyers have skin in the game, more of a partnership.

ETHICAL ISSUES Factors The time and labor required The novelty of the issues The skill required Does acceptance of the matter preclude accepting other engagements Fee customarily charged in the locality of similar services

ETHICAL ISSUES Additional Factors The amount involved and results obtained Time limitations imposed by the client or circumstances The nature and length of the professional relationship with client The experience, reputation and ability of the lawyers Type of fee (fixed; contingent etc.) Proper staffing—appropriate levels of experience and competency Conflicts Independent counsel

ETHICAL ISSUES Disclosure Issues Model Rule: When Prosecuting a claim--Disclosure required re reasonableness Informed consent requirement re attorney testifying Right to independent counsel disclosure Privilege issues Talk now about types of arrangements, how they are used and what the risks and incentives are. More in context of litigation, but many comments applicable to deals too. Fixed fee is set at outset of matter to cover cost of legal work instead of hourly billing. A lot of work: Established based on mutually agreed projections of “what work should cost” vs. “what matter is worth” to client. If you get them wrong: Flat fee through summary judgment.

ETHICAL ISSUES Specific Examples Lawyer as a witness No conflicts of interest Issues regarding staffing (competency; experience) Management of non-attorney staff Discovery disputes, Model Rules 3.1/3.4 Alternative fee arrangements (flat fee/fixed fee/contingent fee hybrids) Talk now about types of arrangements, how they are used and what the risks and incentives are. More in context of litigation, but many comments applicable to deals too. Fixed fee is set at outset of matter to cover cost of legal work instead of hourly billing. A lot of work: Established based on mutually agreed projections of “what work should cost” vs. “what matter is worth” to client. If you get them wrong: Flat fee through summary judgment.

Impact on Privilege In re Nat’l Lloyds Ins. Co., 532 S.W.3d 794 (Tex. 2017) As a whole, billing records are work product. We acknowledge that an opposing party may waive its work-product privilege through offensive use–perhaps by relying on its billing records to contest the reasonableness of opposing counsel’s attorney fees or to recover its own attorney fees. When a party uses its “own hours and rates as yardsticks by which to assess the reasonableness of those sought by [the requesting party]” or seeks to shift responsibility for those expenditures, the party places its own attorney-billing information at issue, making the information discoverable.

PRACTICAL CONSIDERATIONS Who is the decision maker Know your audience (Judge/Jury/Arbitrator) When do judges vs. juries decide fee reasonableness Attorney's-fees-as-compensatory-damages cases Post-trial prevailing party fee shifting cases Litigation overkill is unprofitable, while collar gives firm more incentive to increase intensity of work if necessary. Structured mechanism for evaluating whether to revisit budgeted fee Collar acts as a buffer in the event there are unexpected developments in either direction. Administering a collar requires a commitment by client and law firm to the periodic true-up process. May require more time and attention by in-house counsel, but time well spent

HOW COURTS EVALUATE FEE REASONABLENESS State Courts vs. Federal Courts: what are the usual standards or criteria? ABA Rule 1.5 Factors (all 50 states) Johnson Factors (federal court) Judges may scrutinize legal bills more closely in fee-shifting cases than attorney's-fees-as-damages cases Not an exhaustive list; these are building blocks that can be combined and sequenced in many ways. Each of these allocates risk and affects law firm incentives in different ways.

SPECIFIC ISSUES FOR FEE LITIGATION Top 10 billing issues for either a fee claimant expert or fee opponent expert: Core attorney case staffing Appropriate mix of core attorneys Sufficient delegation of work How much duplication of effort Junior attorney training time Purely clerical work and law firm overhead Block billing Quarter-hour minimum billing increments Overly vague time entries Recycled written work product Success may be early resolution at or below a particular total cost, winning a dispositive motion, defending through trial, but reducing overall economic cost of case below an agreed threshold

Questions?