The 4th Circuit holds that district courts should not employ "lodestar" analysis in contingency-fee cases.

by Kirsten E. Small

Only one published opinion from the Fourth Circuit yesterday (there were none Monday). In In Re Abrams & Abrams, P.A., the court vacated and remanded a district court order that reduced an award of attorney's fees from $6 million to $600,000. Primarily, the panel concluded that the district court had erred in calculating a "lodestar" hourly fee when the plaintiff and counsel had agreed to a 33% contingency fee.

Mark Pellegrin was severely brain damaged when a co-worker, driving a company truck while intoxicated, ran into him. Pellegrin's father ("Mr. Pellegrin"), as his guardian, sued the co-worker with the aid of two law firms. The firms and Mr. Pellegrin agreed to a 33% contingency fee, to be divided equally between the firms.

Counsel obtained a $75 million verdict after the company's insurer denied coverage and refused to provide a defense. Thereafter, counsel sought a declaration from the court that the insurer was liable for the entire amount pursuant to North Carolina law. The insurer removed the action to federal court, and the parties eventually reached a mediated settlement of $18, of which $6 milllion was intended to satisfy the 33 percent contingency arrangement between plaintiff and counsel.

Because the plaintiff was incompetent, the district court was required to approve the settlement. During the hearing, Mr. Pellegrin specifically approved the amount of the settlement allocated to counsel. Unimpressed, the court reduced the fee to $600,000, reverting the remaining $5.4 million to Pellegrin.

The Fourth Circuit reversed. Initially, the court rejected counsel's contention that fee awards in contingency cases should be enforced unless the resulting fee is "clearly excessive." Instead, the court adhered to the traditional standard of reasonableness, on the theory that if it ain't broke, don't fix it. (Judge Wilkinson did not phrase it quite that way, but that's the jist.)

Nevertheless, the panel concluded that the district court had abused its discretion, holding that "[t]he chief error in the district court's analysis was its failure to recognize the significance of the contingency fee in this case." The panel noted that contingency fee arrangements provide plaintiffs access to court they would not be able to afford if charged on an hourly basis; they do so by transfering the risk to the attorneys, who would be disinclined to accept such a risk if compensated on only an hourly basis. The court compared the attorney in a contingency-fee case to the realtor on commission, who knows that not every effort will result in a commission.

The panel next concluded that the district court had discounted the various difficulties involved in the merits of the case (including a strong contributory negligence defense) and the value of the results obtained (an $18 million settlement where the insurer had a $21 million policy limit). Further, the district court should have considered Mr. Pellegrin's satisfaction and specific approval of the award (an approval he felt so strongly about that he hired his own lawyer to seek reversal of the district court's fee decision on counsel's behalf).

Finally, the panel concluded that the district court erred in deciding that the "customary fee" for the case should be based on an hourly rate. Rather, the panel said, the proper analysis required the court to consider whether the 33% contingency fee arrangement was reasonable. In this vein, the panel noted that several North Carolina lawyers had submitted affidavits stating that they would have insisted on a 40% contingency fee for the case.

The panel did not specifically approve the fee as reasonable but rather vacated and remanded for "a more rigorous analysis" of the applicable factors, including a recognition of the value of contingency-fee arrangements.

Commentary: This decision surprises me a bit, especially given that the opinion was written by Judge Wilkinson. However, I think the panel got it entirely right. Lawyers who practice plaintiff-side personal injury work take cases knowing that they will lose some cases and win others, and that the fees in the cases that they win must be sufficient to offset their losses. This requires prudent case selection on the part of the attorneys, but it also mandates that courts respect reasonable fee arrangements between clients and counsel. Were it not for the fact that Pellegrin was rendered incompetent by the accident, the court would not have had a say in the reasonableness of the fee; that being so, the court should have given greater respect to Mr. Pellegrin's adamant support of the award.