August 30, 2013 Top Story

Contingent Fee Permissible When State Hires Private Counsel

No conflict of interest to pursue consumer protection claims for the state

Robert T. Denny

No conflict of interest exists where private attorneys prosecuting civil actions are compensated solely through a fee contingent upon the attorneys’ success in the case. State ex rel. Discover Fin. Servs., Inc. v. Nibert. Therefore, the Supreme Court of Appeals of West Virginia concluded that the state’s attorney general had the authority to engage private counsel and to compensate them on a contingent basis.

Appointing Special Assistant Attorneys General

In several consumer protection actions, the West Virginia attorney general appointed private attorneys to prosecute cases on behalf of the state as “special assistant attorneys general.” The complaints sought up to $5,000 in civil penalties per violation of the West Virginia Consumer Credit and Protection Act based on allegations of unfair and deceptive practices.

The private attorneys were required to pay all upfront expenses necessary to prosecute the action. If they lost, they would receive nothing. If they prevailed, they would receive reasonable and customary fees, subject to the trial court’s approval. Like a typical contingency fee case, this “chance” to receive such fees likely incentivized the private attorneys to enter into this arrangement as fees in at least one other case amounted to one-third of the ultimate recovery.

Several defendants in these actions, including large financial institutions and GlaxoSmithKline, challenged the fee arrangement under “the conflict of interest provision of Rule 1.7(b) of the West Virginia Rules of Professional Conduct.” Specifically, they argued the contingency fee arrangement materially limited the private attorneys’ ability to represent the state of West Virginia’s interests and “would irrevocably taint the [underlying] proceedings.” The trial court rejected their challenge.

No Conflict Created by the Contingency Fee Arrangement

At the West Virginia high court, these corporate defendants raised three main arguments. First, they argued that due to the civil penalties at stake, their cases should be treated like criminal cases where prosecuting attorneys are generally prohibited from maintaining a financial stake in the outcome. The court rejected this argument because even if the actions were “quasi-criminal,” the private attorneys only recommended penalties, which the attorney general could ignore.

Second, the court rejected the defendants’ argument that the private attorneys would “seek[] penalties based on their own financial interests, rather than . . . on an impartial sense of justice or the public’s interest.” The court reasoned that there was nothing to suggest that potential fees were “inextricably tied to the nature of the relief obtained.” Moreover, the court emphasized that the private attorneys were monitored by the attorney general, did not have absolute control over the case, and would only be awarded fees subject to the trial court’s discretion.

Lastly, the court found support in County of Santa Clara v. Superior Court, a California case that upheld a similar arrangement. In that case, no conflict existed because both private and public counsel represented the governmental entity and the private attorneys were subject to supervision by government attorneys. The court found that situation analogous. Accordingly, the court determined there was no basis on which to find the fee agreement violated Rule 1.7(b), and suggested the conflict only existed in “the imagination of opposing counsel.”

Should the Public Be Concerned?

Whether fee arrangements like that addressed by the West Virginia court should raise concerns among the bar and the public is a matter of debate. On the one hand, there are those who believe appointments of special assistant attorneys general in situations like this almost automatically “raise significant issues.” When a lawyer “agrees to advance costs and have no recovery whatsoever unless a court ultimately orders it, that puts a significant incentive in the works to make sure that there is a recovery for a court to review, because otherwise . . . there is no money going to the lawyers,” states Gregory Hanthorn, Atlanta, cochair of the ABA Section of Litigation’s Ethics and Professionalism Committee.

Conversely, there are those who assert this fee arrangement should not be viewed any differently than any other contingency fee agreement in civil litigation. “I would certainly argue that the public benefit is just as important as the private interest in a situation like this, and I don’t think that the possibility of a large verdict potential will negatively impact the representation at all,” concludes Oran F. Whiting, Chicago, cochair of the Section of Litigation’s Ethics and Professionalism Committee. “I think the argument places too much emphasis on money when it’s convenient for the argument, and then puts too much emphasis on ethics” when ethics are not at issue.

Oversight of the Attorney General

Even if a desire for a large verdict in some way negatively impacted the private attorneys’ representation of the state, Whiting believes that such impact would be minimal because “the attorney general is maintaining or retaining control over the matter anyway.” In response to that theory, Hanthorn questions whether “in practice, this will end up shifting far too much authority to the specially appointed assistants.” He notes that while the attorney general is often still involved in these situations, as a practical matter, “the playing field looks fundamentally different once somebody representing the government will only get paid if certain things occur.” Attorneys are “incentivized to do the appropriate thing by the rules and by their professionalism” and they should be treated like professionals and given the benefit of the doubt, responds Whiting.

From a practical perspective, however, Whiting questions the defendants’ motivations for raising and vigorously fighting this issue. Contrary to the court’s suggestion that the defendants’ concerns are imagined, “their concerns are real because they may be concerned that these attorneys may do a very good job in prosecuting their cases and that they may be in some trouble,” Whiting suggests.

Robert T. Denny is a contributing editor for Litigation News.

Keywords: contingency fee, attorney fees, consumer protection, Rule 1.7(b), conflict, ethics

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