Billionaire activist investor Carl Icahn attends the Leveraged Finance Fights Melanoma charity event in New York on May 19, 2015. Photo: Victor J. Blue/Bloomberg

Raising the stakes in its long-running legal malpractice suit against Wachtell, Lipton, Rosen & Katz, CVR Energy is now alleging the elite law firm engaged in unethical billing practices by basing its legal fees on the amount charged by investment banks.

“This Kafkaesque method of billing was never disclosed to CVR and Wachtell has gone to great lengths to avoid scrutiny, by clients, the bar and the public of its billing practice,” CVR alleged in a proposed amended complaint that would seek punitive damages against the law firm.

CVR, a refining and fertilizer business controlled by Carl Icahn, is suing Wachtell for legal malpractice in the Southern District of New York. In the 2013 suit, which Wachtell has strongly contested, CVR alleges the firm failed to advise that CVR would face claims by Deutsche Bank AG and The Goldman Sachs Group Inc. for $36 million under the terms of engagement letters with the banks. CVR hired the banks as financial advisers in an unsuccessful attempt to fend off a 2012 acquisition by Icahn.

Late Tuesday, CVR's counsel, Herbert Beigel, wrote to U.S. District Judge Richard Sullivan, seeking permission to add claims for breach of contract and breach of the covenant of good faith and fair dealing and to seek punitive damages. He said the additions stem from information “we learned late in discovery.”

As American Lawyer previously reported, Wachtell has a unique billing structure. Instead of charging by the hour, the firm charges fees for deals that range from 1 percent to 0.1 percent of the transaction amount, according to the 2012 fee agreement at issue in the malpractice case brought by CVR against Wachtell.

A “Billing and Retention Policies” document sent to CVR—and cited in CVR's proposed new complaint—states that Wachtell provides a “distinctive service,” marked by extraordinary expertise and sophistication that doesn't lend itself to hourly fees.

“We must base our fees not on time but on the intensity of the firm's efforts, the responsibility assumed, the complexity of the matter and the result achieved,” the firm asserts.

The document adds: “While our fees are not based on the amount involved in a matter, experience indicates that merger and acquisition and takeover fees have typically ranged [from] 1 percent or more on matters under $250 million and 0.1 of 1 percent or less on matters over $25 billion.”

But CVR, in its new court papers, said contrary to the terms of its engagement letter, Wachtell billed CVR $6 million based on the amount of the success fees invoiced by Goldman and Deutsche in connection with the company's response to Icahn's 2012 tender offer, “resulting in a much larger fee than the law firm promised to charge or it was otherwise entitled to—and the firm did so without informing CVR.”

Under CVR's argument, a $6 million fee would represent 16 percent of the banks' $36 million fees to CVR. However, this formula does not appear in CVR's publicly filed court papers. CVR's amended complaint and Beigel's letter to the court are redacted.

CVR's court papers do say that Wachtell's fees, like the fees of Goldman and Deutsche, were higher for failing than succeeding. “Even though Wachtell is hired by its client to, among other things, get the best deal for its client when engaging investment bankers … for takeover 'defense' assignments, Wachtell is perversely incentivized to negotiate engagement letters that benefit the investment bankers, not its client, which is exactly what happened with CVR,” Beigel alleges.

CVR argues that the basis for Wachtell's fee was unethical and in violation of the attorney ethics rules in that it was excessive and not aligned with CVR's interests. The more fees Goldman and Deutsche would receive, the higher Wachtell would bill for its services, “thus creating a material conflict of interest on the part of Wachtell,” the company claims.

CVR also claims Wachtell's fee was not based on “the amount involved” in the Icahn tender offer, and contrary to the terms of its engagement letter, the fee was not based on “the result achieved” or the “responsibility assumed.”

The company said it's entitled to the return of fees paid to Wachtell and to recover from Wachtell punitive damages, as its conduct “constituted gross, wanton or willful fraud.”

Sullivan of the Southern District of New York has ordered Wachtell to respond by Friday. An attorney for Wachtell, Michael Shuster, a partner at Holwell Shuster & Goldberg, did not respond to a request for comment. Other representatives for the firm also had no immediate response.

In the last year, the parties have been in heated discovery disputes, including when Wachtell's deposition with Icahn was abruptly halted last month over the firm's questioning of renewable energy policy. Sullivan ordered Icahn to resume the deposition.

Wachtell has fought the malpractice allegations since the 2013 suit was first filed and even brought a state court suit against CVR and Icahn for abuse of process and breach of protective order. In federal court last month, Wachtell's counsel, Shuster, said the firm believes Icahn brought the case out of animosity. “He does not like Wachtell. It was brought as payback.”