Clay Flaherty, Anapol Weiss

In service to financial efficiency and vigorous representation of the public interest, municipalities and political subdivisions in Pennsylvania increasingly rely upon the expertise and acumen of outside counsel to assist them in their legal endeavors. Oftentimes, agreements retaining private counsel to assist in litigation arise in the context of major proceedings that are socially vital, complex and substantial-in-scope (e.g., tobacco, lead paint, opioids). Private firms so-retained regularly provide their services on a contingency basis, allowing the municipality to secure experienced representation while defraying litigation costs without burdening taxpayers. While this trend is reflective of the regular practice of government's reliance upon private contractors, the use of these contingency agreements has recently attracted increased scrutiny from the defense bar. In particular, defendant-corporations have begun to regularly levy third-party assaults seeking to undermine the legitimacy of such contracts under the guise of alleged federal due process violations. In reality, such gambits seem calculated to forestall political subdivisions from prosecuting valid, good-faith civil claims, altogether.

The Pennsylvania Supreme Court's holding in Commonwealth v. Janssen Pharmaceutica, 8 A.3d 267 (Pa. 2010) touched upon this very issue in addressing the propriety of a contingency fee between the Pennsylvania Office of General Counsel and an outside law firm. In Janssen, the defendant-corporation argued that “the agreement deprives the defendant of its due process rights because those who exercise the government's powers in adjudicative proceedings must have no financial interest in the outcome, must be impartial, and must maintain the appearance of impartiality.” Ultimately, the Supreme Court declined to address the merits of the challenge due to operation of 71 P.S. Section 732-103, which provides that “no party to an action, other than a commonwealth agency …, shall have standing to question the authority of the legal representation of the agency.” Relying upon Janssen, the Pennsylvania Commonwealth Court has issued more-recent precedent along similar lines. See, e.g., GGNSC Clarion v. Kane, 131 A.3d 1062, 1073-74 (Pa. Commw. 2016) (no standing to challenge contingency fee agreement between the Pennsylvania Office of Attorney General and private firm due to Section 732-103).

By contrast, challenges to contingency fee agreements executed by municipal plaintiffs present a potentially novel question. The question of whether municipal contingency fee agreements are covered by the limitation set forth at Section 732-103 is currently unanswered under existing Pennsylvania caselaw, but it is unclear whether municipalities qualify for coverage under the definitions of the statute. See, e.g., 71 P.S. Section 732-102 (defining commonwealth agency as “any executive or independent agency.” Generally speaking, municipalities and political subdivisions are not regularly considered an agency of the commonwealth for such purposes. See, e.g., 101 Pa. Code Sections 21.3, 23.221. Given the profligacy of these challenges and in the absence of a statutory prohibition, it seems inevitable that Pennsylvania courts will eventually have to engage in merits-based assessments of such fee agreements.

Challenges to governmental fee agreements are not be considered per se illegitimate under existing precedent (aside from Section 732-103). The gravamen of such challenges can vary, but typically alleges that reliance upon contingency counsel undermines due process by granting private counsel an improper financial interest in the outcome of the litigation. Of course, legal actions carried out by governmental entities in the service of the public trust must be prosecuted and managed with that ultimate purpose in mind. Yet, opportunistic challenges to governmental fee agreements seem violative of the privity between clients and attorneys, raising significant questions as to whether a defendant should have standing with regard to “dictating” the identity of his opponent's representation. Tellingly, the majority in Janssen evinces a dim view of such proceedings on this very point, with then-Chief Justice Ronald D. Castille writing: “Aside from the legislation, and as a general matter, it is difficult to see how a party-opponent in active litigation with the commonwealth could be said to have a substantial, direct and immediate interest in the authority or identity of the legal representation the commonwealth has chosen. This is true in legal matters generally: one's opponent generally cannot dictate the choice of otherwise professional qualified counsel.”

If this issue arises in a procedurally proper manner, it may be that now-Chief Justice Thomas G. Saylor's dissent in Janssen will provide a potential framework for such an assessment. Of particular note, Saylor's dissent finds out-of-state precedent from the California Supreme Court (and, by extension, the Rhode Island Supreme Court) persuasive in suggesting a method by which such agreements should be evaluated (and, thereby, ensure that contingency lawsuits serve only the interests of the represented governmental entity). See, e.g., County of Santa Clara v. Superior Court, 50 Cal.4th 35, 64 (Cal. 2010) (citing State v. Lead Industries, Association, 951 A.2d 428, 477 (R.I. 2008)). In particular, this proposed rubric states that contingent fee agreements executed with private law firms by governmental entities “must provide: that the public-entity attorneys will retain complete control over the course and conduct of the case; that government attorneys retain a veto power over any decisions made by outside counsel; and that a government attorney with supervisory authority must be personally involved in overseeing the litigation.” The touchstone of this proposed adjudicative framework concerns itself primarily with litigation control. See, e.g., Santa Clara, 50 Cal. 4th at 63 (holding that while “these practical concerns do not require the barring of contingent-fee arrangements in all public prosecutions,” public attorneys should “exercise real rather than illusory control over contingent-fee counsel”).

These collateral attacks on fee agreements are also representative of a much more serious potential harm. Many of the arguments leveled against contingency fee agreements by third-party litigants seek to invalidate them upon the basis that they cause an appearance of impropriety (i.e., thereby rendering any involvement of private attorneys in the litigation of public matters impermissible). Such a holding would eviscerate traditional notions regarding legal representation and contingency agreements, and would additionally restrict municipalities from being able to secure adequate legal representation in safeguarding public concerns (e.g., securing attorneys with adequate expertise and ameliorating concerns regarding litigation funding). Fortunately, the Pennsylvania Supreme Court's skeptical view is echoed by both the California and Rhode Island Supreme Courts' treatment of these same issues. See, e.g., Santa Clara, 50 Cal.4th at 62 n. 14 (“contingent-fee arrangements are deeply entrenched as a legitimate and sometimes prudent method of delegating risk in the context of civil litigation, and in the absence of evidence of wrongdoing or unethical conduct we decline to impugn this means of compensating counsel in the context of civil litigation.”); Lead Industries, 951 A.2d at 475 (“[I]t is our view that the ability of the attorney general to enter into such contractual relationships may well, in some circumstances, lead to results that will be beneficial to society—results which otherwise might not have been attainable.”).

If the dissent in Janssen is someday revisited or taken up as persuasive in this context, its doctrinal foundations carry strong presumptions in favor of permitting contingency fee agreements between private attorneys and municipalities. Such a presumption is also evident from prior jurisprudence of the Pennsylvania Supreme Court. See, e.g., Richette v. Solomon, 187 A.2d 910, 919 (Pa. 1963) (Musmanno, J.) (“If it were not for contingent fees, indigent victims of tortious accidents, would be subject to the unbridled, self-willed partisanship of their tortfeasors … Being in a superior economic position, the injuring person could force on the his victim, desperately in need of money to keep the candle of life burning in himself and his dependent ones, a wholly unconscionably meager sum in settlement, or even refuse to pay him anything at all.”). While state and local governments are not “indigent,” the necessary budgetary and personnel limitations created by taxpayer funding often creates a marked disparity in representation between corporate tortfeasors and the governmental units seeking to hold them responsible at law. (“Any society, and especially a democratic one, worthy of respect in the spectrum of civilization, should never tolerate such a victimization of the weak by the mighty.”).

As a matter of prudence, both private firms and municipalities pursuing contingency fee agreements of this nature should heed the above precedent in drawing up and defining their contractual relationships. The emerging litigation strategy of leveling third-party challenges to representation agreements will likely continue to increase as municipalities look to private firms for legal assistance. However, absent a demonstration of actual unethical conduct, even courts that have entertained challenges to existing fee agreements have manifested a ready willingness to permit the amendment of potentially deficient contracts. See, e.g., Santa Clara, 50 Cal.4th at 65 (“Assuming the public entities contemplate pursuing this litigation assisted by private counsel on a contingent-fee basis, we conclude they may do so after revising the respective retention agreements to conform with the requirements set forth in this opinion.”).

Clay Flaherty is an associate in Anapol Weiss' class action practice group, focusing on civil and appellate advocacy. He can be reached at [email protected] and 215-735-1130.