Clemens v. N.Y. Central Mutual Fire Ins. Co.

Attorneys' bills must be “reasonable” to comport with New Jersey's Rule of Professional Conduct 1.5(a). Unfortunately, some attorneys have been known to “pad” their bills, especially when they have represented a prevailing party in a case based on a fee-shifting statute where an adverse party is likely to be the payer of the inflated invoice. Whether they inflate their billing to compensate for an anticipated possible reduction by the court or simply to try to “milk the system” to get what they can out of a party who is not their client, submitting an inflated bill is an act of dishonesty and constitutes more than one RPC violation, especially when the padded amount is extreme.

The recent U.S. Court of Appeals for the Third Circuit case, Clemens v. N.Y. Central Mutual Fire Ins. Co. (decided Sept. 12, 2018), disallowing the entirety of an “outrageously excessive” $946,526.43 fee claim, should make attorneys think twice before inflating their fee-shifting bills. In Clemens, a law firm sought fees from an adversary insurance company under Pennsylvania's Bad Faith Statute which provided that if a finding is made that the insurance company acted in bad faith in denying coverage to an insured, the court “may” award punitive damages, assess court costs and attorney's fees, and award interest on the claim. The Clemens plaintiffs settled their UIM claim for $25,000 and later obtained punitive damages of $100,000 in a jury trial. Thereafter, plaintiffs' attorneys applied for an award of $946,526.43 in fees and costs from the defendant.

The district court court's 100-page opinion that was affirmed and found to be “well-reasoned,” analyzed and reviewed every time entry of the billing. Based on this review, the court held that 87% of the hours billed were unjustified, finding them to be vague, duplicative, unnecessary, or unsupported.

Significantly, the Third Circuit made clear that even though this particular case concerns a Pennsylvania statute, the principles of billing and fee-shifting involved also apply to many federal statutes authorizing fee-shifting. For example, the lodestar method is applied in awarding fees under both the Pennsylvania and federal statutes as is the requirement that an attorney bear the burden to show that his or her fees are reasonable. Accordingly, Clemens cites and relies on much federal case law. Citing such federal law, Clemens reminds us that courts “have a positive and affirmative function in the fee fixing process, not merely a passive role” to exclude hours that are “excessive, redundant or otherwise unnecessary.”

The fee petition in Clemens was especially outrageous in multiple ways. First, the attorneys did not keep contemporaneous time records and so had to recreate them well after the time when the work was done. This task was delegated to one attorney who had not done most of the work herself and who could not consult with attorneys who had done the work but since left the firm. Remarkably, the firm tried to collect $27,090 for 64.5 hours spent in reconstructing these records, an expenditure of time that the court said was due to the firm's own neglect in not keeping time records in the first place. Second, the fee application was deficient because it was so vague that the court could not tell if the hours billed were reasonable. Too-vague entries included those totaling 562 hours for “trial prep” with no further description. Third, the court found some time entries, on their face, to be unnecessary or excessive. Fourth, entries for “file maintenance” “file management,” and “document management” were found to be clerical in nature and not billable at lawyer's rates. Fifth, the Third Circuit commented on the “troubling” fact that counsel's performance was “sub-par” and that all of the hours billed did not pay off at trial, commenting on the fact that counsel was “repeatedly admonished for not being prepared.” Finally, said the court, counsel failed to show that their rates were reasonable in light of prevailing rates “in the community for similar services by lawyers of reasonably comparable skill, experience, and reputation.”

Finding the fee petition to be so deficient and the amount sought so excessive, the Clemens court affirmed the district court's decision to exercise its discretion “to award no fee at all.” It justified its affirmance saying that without such discretion, attorneys could make unreasonable demands, knowing that the only consequence “would be a reduction of their fee to what they should have asked for in the first place.”

While the facts in Clemens present the “perfect storm” for the complete denial of any fees, its lessons apply broadly to all billing, both that presented to an attorney's own clients and fee petitions seeking fees from adversaries. One lesson is that attorneys should keep contemporaneous time records, which Clemens described as the “preferred practice.” A second lesson is that attorneys should bill honestly and accurately. Although Clemens does not explicitly discuss ethics rules, it seems clear that the court found the fee petition submitted to it to be not only unreasonable but also dishonest and misleading. Such findings if made in New Jersey could subject an attorney to discipline for violating RPCs 8.4(c) and 1.5(a). In short, attorneys have an ethical obligation to bill honestly and accurately regardless of who is paying their bills. Clemens is a stark reminder of that obligation.

Young v. Smith

In yet another appellate opinion regarding excessive billing practices, the Third Circuit has affirmed the district court's order denying a fee petition in its entirety, imposing a monetary sanction, and referring counsel for disciplinary sanctions. Young v Smith, Nos. 17-3190 and 3201 (3d Cir. Sept. 25, 2018). The decision is the first in this circuit to hold that a 42 U.S.C § 1988 fee application on behalf of a prevailing party can be denied for counsel's misconduct in claiming fees. Attorneys should read the precedential opinion and take heed.

The underlying civil rights case against a school district, a principal and a teacher went through two trials and two appeals over approximately 10 years. A $300,000 plaintiff's verdict in the first trial was set aside because of the inflammatory misconduct of plaintiff's counsel, including repeated references to facts not in evidence and attempts to introduce inadmissible lay opinion. A second trial before another judge resulted in a defendants' verdict on all claims but one, which had been dismissed on summary judgment. That claim ultimately settled for $25,000 after a second appeal and an offer of judgment under Fed. R. Civ. P. 68.

Undaunted by this limited success on the merits, plaintiff's counsel submitted a 44-page fee petition for $733,023, which consisted in large part of fees for the first trial—set aside because of counsel's misconduct—and the second, unsuccessful trial. The supporting exhibits were time records duplicated in 6 or 8 point font. Counsel rejected the court's invitation to correct deficiencies in the petition. Instead, she took the position—which the district court characterized as “utterly ridiculous—that it was the burden of her adversary and the court to find and correct any improper, excessive or fraudulent fee claims. At a hearing on the petition, plaintiff's counsel put her adversary on the stand and cross-examined him. The trial judge, after attempting a line-by-line review of the petition, concluded that this effort was a “fool's errand” and denied the entire application. The Third Circuit affirmed.

To be sure, this is an egregious case. It is nevertheless a reminder to counsel who have prevailed only in part that their lodestar should be reasonably related to the result actually obtained, and that the fee request should be presented in clear, accessible format that allows the court to compare effort with result. It is also a reminder of the need to step back and view one's own efforts in the clear light of hindsight with a dispassionate and critical eye.

We hope that these two recent decisions are not a sign of the times but only drastic remedies for extraordinary misconduct imposed by courts whose patience has been abused.  That being said, we believe it would be desirable for ICLE and the other CLE providers to offer more “ethics credit” courses which focus on, and emphasize, appropriate preparation of retainers and the Rules of Professional Responsibility related to billing and fee applications.