Law firms dispute sharing of $12 million fee award in class action. Bench verdict for defense.

Facts and Background

• Facts and Background:

  In the summer of 2005, BCFZ (plaintiffs herein) a sophisticated business law firm was contacted by Meredith, an acquaintance of one of the partners of BCFZ. Meredith said he had been defrauded by EquiCo. Meredith claimed that EquiCo agreed to market his company to international buyers but first it needed to have a complete appraisal of the company performed at the cost of $42,000. After paying the money for the appraisal, EquiCo told him the value of his company was worth much less than anticipated. Meredith believed the offer to sell his company was a ploy by EquiCo to obtain money for an appraisal. The partner at BCFZ turned the case down because the damages were limited.
  In September 2005, one of the partners of BCFZ told the other partners that he was representing a whistle blower in a wrongful termination case against EquiCo. The whistle blower was an executive at EquiCo and the whistle blower objected to the scheme of contacting business owners with an offer to assist them in selling their businesses when in fact it was only a way to get the business owners to pay for an appraisal.

  When the other partners of the BCFZ heard this, they contacted Meredith and suggested that he could be a class representative in a class action against EquiCo. There were approximately 4,000 business owners who had paid for an appraisal and were never marketed or sold.

  In September 2005, BCFZ met with defendant attorney Jerome Ringler and introduced him to Meredith and the EquiCo matter. Ringler was interested but thought the case had numerous problems including getting the class certified and establishing that the fraud was authorized or ratified by the parent company of EquiCo, which held the assets.

  Ringler told BCFZ that if he did agree to file a class action, he would be willing to enter into a fee sharing agreement for one-third. Ringler explained that BCFZ would have to do one-third of the work to receive one-third of the fee.

  In March 2006, BCFZ advised Ringler that the partner who represented the whistle blower against EquiCo had entered into a confidential settlement agreement with EquiCo. As part of that settlement the whistle blower and the law firm, BCFZ, signed a non-disclosure agreement preventing either of them from disclosing information or allegations of any alleged wrongdoing on the part of EquiCo.

  BCFZ advised Ringler that because of this confidential settlement agreement, they could not be involved in the class action case. Ringler advised BCFZ that, if a fee for their services performed before the non-disclosure agreement was signed could ethically be paid, he would support their claim for such in court.

  Ringler, who at this time was a partner of defendant Ringler, Kearney & Alvarez (RKA), having lost BCFZ as a partner decided to partner up with defendant McNicholas and McNicholas (M&M) to prosecute the class action case.

  In July 2006, RKA and M&M filed a class action lawsuit on behalf of approximately 4,000 people. Meredith was not used as a class action representative.

  The class action survived numerous summary judgment motions. Depositions were conducted throughout the United States, and discovery was enormously expensive and time intensive.

  In January 2009, BCFZ asked for a meeting with RKA and M&M. BCFZ demanded that RKA and M&M give BCFZ a referral fee. BCFZ demanded that it be listed as attorney of record. Ringler and McNicholas told BCFZ that they would not do so because the Non Disclosure Agreement (“NDA”) created an insurmountable conflict of interest which prevented BCFZ from participating in the class action.

  In April 2009, the class was certified, thereafter BCFZ filed a declaratory relief action asserting its right to one-third of the attorney fees.

  In the fall of 2011, the class action case was settled and $12 million in fees were awarded.

  The Declaratory Relief case was heard before Judge Kim Dunning. Judge Dunning granted a nonsuit because BCFZ had not obtained the written informed consent of the class representatives as required by California Rules of Professional Conduct, Rule 2-200.
  BCFZ appealed.

  Because the case was decided on a nonsuit, the appellate court was required to accept as true everything BCFZ alleged. BCFZ had argued that Defendants had accepted Meredith as a class representative and thereafter switched him out for class representatives BCFZ had never met. BCFZ argued that the sole reason for this “switcheroo” was to prevent BCFZ from obtaining the required 2-200 consent.

  The Appellate Court, after accepting all of BCFZ’s allegations as true, overturned the decision on the basis that in a class action setting an attorney may be equitably estopped from claiming that a fee sharing contract is unenforceable due to noncompliance with Rule 2-200 where the attorney responsible for such noncompliance has unfairly prevented another lawyer from complying with the rule’s mandates.

   

• Plaintiff's Contentions:

  BCFZ argued that it referred not only the idea of a class action to Ringler but also Meredith, an ideal class representative. BCFZ argued that Ringler told them he accepted Meredith as a class representative and promised to pay BCFZ a one-third referral fee.

  BCFZ argued that Ringler decided to co-venture the case with M&M without telling BCFZ and decided to avoid paying a referral fee by switching Meredith out as the class representative for individuals Plaintiff had no relationship with.

  In January 2009, BCFZ finally demanded that defendants make them co-attorneys of record in the class action and obtain the 2-200 consent. BCFZ claimed that further research led them to believe the Non Disclosure Agreement “NDA” was not as preclusive to their involvement in the class-action lawsuit as they earlier believed it to be. Defendants refused BCFZ’s demand so BCFZ filed suit.

• Defendant's Contentions:

  BCFZ had referred Ringler personal injury cases in the past and worked on those cases with Ringler. Ringler had always obtained the clients rule 2-200 consent and shared the fees with BCFZ.

  That in September 2005, when BCFZ presented the idea of a class action to Ringler, he was not particularly interested. Ringler told BCFZ that if he did file a class action, he would be willing to share the fee based on the work each firm performed.

  That Ringler explained to plaintiff, a sophisticated business litigation firm, that in class actions there are no referral fees. Fees are determined by the court and the court looks at the number of hours each firm puts into the case in deciding how to split the fees between the attorneys representing the plaintiffs.

  That in December 2005, Ringler told plaintiff that if they wanted to do one third of the work, he was willing to share one-third of the fee dependent upon court approval.

  That in March 2006, BCFZ told Ringler that one of the partners at BCFZ settled the whistle blower case against EquiCo and as part of the confidential settlement, a non-disclosure agreement (NDA) was entered into. The NDA was so strict it prevented BCFZ from showing Ringler a copy of it or discussing it. BCFZ did tell Ringler that BCFZ could not do any work on the class action and could not take any action that could be detrimental to EquiCo. EquiCo was the company who was going to be the defendant in the class action case.

  Having lost BCFZ as its partner, RKA brought M&M into the case. The two law firms strenuously prosecuted the case. During the next few years, BCFZ would ask how things were going but BCFZ never did any work on the case. Ringler would generally discuss what was happening; that he told BCFZ that if he could ethically find a way to get BCFZ a fee, he would.

  That Ringler asked three ethicists if and how he could share a fee with BCFZ. Each ethicist told Ringler he could not ethically share a fee with BCFZ, due to the Non Disclosure Agreement signed by BCFZ.
  After Ringler told BCFZ that he could not find a way to share a fee, BCFZ demanded a meeting.

  At the January 2009 meeting, Ringler and McNicholas reiterated that no fee could be shared. BCFZ insisted on being included as an attorney of record. BCFZ was told that because of the NDA that was impossible and if BCFZ was an attorney of record not only could EquiCo disqualify BCFZ, but it could disqualify RKA and M&M. BCFZ suggested to Ringler that he pay BCFZ a fee without disclosing it to the Court. Ringler refused.

  Ringler told BCFZ that if the class action case was settled or was won at trial, he would not object to BCFZ going into Court to seek a fee based on the fact it had developed the idea for the class action, had obtained some materials and had provided services on behalf of the nacient class before the NDA was signed.

  BCFZ refused this offer. Ringler told BCFZ that he would bring them in as counsel of record to work on two large cases and they could earn a fee from those cases. BCFZ again refused. Thereafter, BCFZ sued defendants for declaratory relief which resulted in a defense judgment by Judge Dunning and the appeal.

  Defendants argued that there was no “switcheroo” of class representatives as BCFZ alleged. That Meredith was never selected as a class representative, and therefore he could not have been switched out.

  Also, that Meredith could not have been a class representative because he was not similarly situated as the other members of the class. Many of Meredith’s claims were time barred by the statute of limitations. Meredith, unlike the other class members had been represented by counsel in his dealings with EquiCo. Meredith, unlike the other class members had made material changes to the EquiCo contract. One of these changes included an attorney fee clause that would have subjected him to huge financial risk if he had been a class representative if the case were lost. This fee provision also created a potential conflict of interest between him and the other class members if he had been chosen as a class representative.

  Because of the conflict of interest created by the NDA that BCFZ entered into with EquiCo when it settled the whistle blower case, defendant could not allow BCFZ to be attorney of record and could not take any action that would allow BCFZ to share in a fee. To do so would be a conflict of interest and taking such action could lead to the disqualification of not only BCFZ but of RKA and M&M.