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The dark side of alternative fee agreements

Alternative fee agreements have received a lot of favorable press in recent years, with the praise usually coming in tandem with criticism of the billable hour.

However, there is a dark side to alternative fee agreements.  Because a law firm's obligations to its clients extend beyond mere contractual duties, the law firm which undertakes matters under an alternative fee agreement can be exposed to wildly disproportionate risks. 

Some of these risks are illustrated by the recent decision in Cunningham & Associates v. ARAG, LLC, No. 11-1983 (D.D.C. Jan. 31, 2012), in which a law firm brought suit against an insurance company providing pre-paid legal services. As recounted by the District Court, the law firm alleged that under its agreement with ARAG, it undertook the legal representation of four of the defendants' insureds in four different matters which collectively demanded over 900 hours of attorney time, but for which the defendants allegedly only paid $2,300.00 to date.  The defendants then terminated their contract with the plaintiff law firm, which termination was in the law firm's view due to defendants refusal to reimburse the firm for reasonable fees and expenses incurred.

The law firm recently filed suit against the defendants, alleging fraud, negligent misrepresentation, breach of the implied contractual duty of good faith and fair dealing, quantum meruit, unjust enrichment, and violations of the D.C. Consumer Protection Act.  In its complaint, the law firm sought damages of $140,715.00 in compensatory damages plus interests and costs, $422,145.00 in compensatory and treble damages under the consumer protection statute, attorney's fees, and $500,000 in punitive damages.  The attachments to the complaint included the ARAG Attorney Network Application, the ARAG Attorney Agreement, and the ARAG North America, Inc. Attorney Reimbursement Fee Schedule (which are all available through PACER for anyone interested).

In its opinion, the District Court granted the defendants' motion to compel mediation, and stayed the action for 45 days so that mediation could take place.  The contract between the parties required four hours of non-binding mediation in Des Moines, Iowa.