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.

 


En banc decision from D.C. Court of Appeals in Grayson v. AT&T requires injury-in-fact for CPPA action

The Court today issued a 92 page decision.  See page 49: "Thus, without a clear expression of an intent by the Council to eliminate our constitutional standing requirement, we conclude that a lawsuit under the CPPA does not relieve a plaintiff of the requirement to show a concrete injury-in-fact to himself." 

That answers a troubling question about the D.C. Consumer Protection Procedures Act.

Another interesting thing in the opinion is in footnote 16, where the Court says, "this court has not yet decided whether it will follow the facial plausibility standard enunciated in Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009)." 

A more detailed analysis of the Grayson case is available here.

 


4th Circuit Offers Ideas To Brake FACTA Truncation Class Actions

It seems unusual for the 4th Circuit to write a 21 page opinion, accompanied by a 20 page concurrence, but then designate it only as "unpublished" and "not binding precedent in this circuit."  That's what happened in Stillmock v. Weis Markets, Inc.  The Court's action in not publishing the opinion seems to be an indication that it does not want to do anything to encourage suits of this type.

Stillmock v. Weis Markets is a "FACTA Truncation" case.  FACTA is an acronym for the Fair and Accurate Credit Transactions Act of 2003.  Among other things, this statute provides that "no person that accepts credit cards or debit cards for the transaction of business shall [electronically] print more than the last 5 digits of the card number . . . upon any receipt provided to the cardholder at the point of the sale or transaction."  The statute also says that the merchant cannot print the card's expiration date on the customer receipt.  The statute provides for statutory damages of not less than $100 and not more than $1,000 against any person who "willfully fails to comply with" the foregoing truncation requirements, punitive damages as the court may allow, and attorney's fees and costs.   However, the Supreme Court has interpreted the phrase "willfully fails to comply" in the preamble sentence of 15 U.S.C. sec. 1681n(a), as reaching not only knowing violations of FACTA, but reckless ones as well.  Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 57 (2007).  A reckless violation for this purpose is one "entailing an unjustifiably high risk of harm that is either known or so obvious that it should be known."  Id. at 68.

The FACTA provision for statutory damages, the possibility of punitive damages, and the ability to recover attorney's fees and costs, is a combination that has sparked a flurry of FACTA truncation class actions in Maryland.   The typical scenario is that an individual makes a credit card purchase at a store or restaurant, and discovers that the customer receipt is not truncated per the requirements of FACTA.  The customer then retains an attorney who does FACTA litigation, who files a class action against the merchant seeking statutory damages, punitive damages, and the recovery of attorney's fees and costs.  The suit is filed, and discovery is taken from the merchant as to the point-of-sale terminals at the establishment, and the number of transactions those terminals have processed during the relevant time period.  The class action complaint will be carefully drafted to seek only statutory damages, not actual damages which would require too much of an individualized inquiry to allow for class certification. 

The potential exposure can be quite significant even for a relatively modest business.  For example, if there were 1,000 credit card transactions within the relevant window of time,  that would mean a potential exposure to statutory damages in the range of $100,000 to $1,000,000, plus attorney's fees and costs, plus the possibility of punitive damages.  The merchant may also receive reservation of rights letters from its insurer, since insurance typically does not cover intentional wrongdoing or punitive damages.  All of these factors create a powerful incentive on the part of the merchant to settle the FACTA class action. 

It seems clear that the Courts do not like FACTA truncation class actions, but this dislike doesn't appear to boil over except when a large merchant is caught in this snare.  Stillmock v. Weis Markets is such a case, but despite that, the 4th Circuit vacated the District Court's denial of Plaintiffs' motion for class certification.  The Stillmock case has varying estimates of the number of customer receipts that were issued in violation of FACTA.  One estimate was that at least a million of such receipts were provided to a hundred thousand or more individual customers.  Weis Markets estimated that it printed over 14 million FACTA violative receipts during the relevant time frame.

 [T]he district court denied class certification on two grounds. First, the district court denied class certification on the ground that determining the quantum of damages with respect to each class member would be too individualized for class-wide treatment under Rule 23(b)(3). Second, the district court denied class certification on the ground that a class action as requested by Plaintiffs "would not be superior and, indeed, would be inferior to having the Plaintiffs herein proceed on their individual claims and, if they prevail, having them obtain whatever statutory and punitive damages might be awarded together with their costs, including reasonable legal fees."

The 4th Circuit rejected the plaintiffs contention on appeal that a consumer is entitled to statutory damages under 15 U.S.C. sec. 1691n(a)(1) on a per violation basis, as opposed to a per consumer basis as implicitly held by the District Court.  Rather, the 4th Circuit agreed that statutory damages under section 1681n(a)(1)(A) are to be awarded on a per consumer basis.  However, the 4th Circuit agreed with the plaintiffs that the District Court erred in concluding that individual issues of damages would predominate over issues common to the class.

Here, the putative class members were exposed to the identical risk of identity theft in the identical manner by the repeated identical conduct of the same defendant, and none suffered actual damages from identity theft. Under these circumstances, it strains credulity to conclude that the individual damages issues presented by the purported class which Plaintiffs seek to certify would be anything other than simple and straightforward. Pragmatically, the only substantive difference between putative class members for purposes of affixing the statutory damages figure within the statutory damages range of $100 to $1,000 or in awarding punitive damages is the number of receipts received by a single class member during the approximately eighteen months at issue. And indeed, this difference does not complicate matters very much at all given that the class can be broken down into subcategories based upon the number of violating receipts received per putative class member.

 Judge Wilkinson wrote a concurring opinion containing many trenchant comments about FACTA class actions.

Specifically, neither this court nor the district court has yet addressed the real possibility that the suggested class could bankrupt an entire chain of supermarkets, and the district court retains wide discretion in deciding whether to certify a class in light of that problem.

I worry that the exponential expansion of statutory damages through the aggressive use of the class action device is a real jobs killer that Congress has not sanctioned. To certify in cases where no plaintiff has suffered any actual harm from identity theft and where innocent employees may suffer the catastrophic fallout could not have been Congress's intent. Indeed, the relatively modest range of statutory damages chosen by Congress suggests that bankrupting entire businesses over somewhat technical violations was not among Congress's objectives.

 Judge Wilkinson subsequently expressed concern that FACTA class actions raise constitutional issues:

Certifying a class action that would impose annihilative damages where there has been no actual harm from identity theft could raise serious constitutional concerns, as plaintiffs themselves admit. . . . . Other courts have noted that "the potential for a devastatingly large damages award, out of all reasonable proportion to the actual harm suffered by members of the plaintiff class, may raise due process issues." Parker, 331 F.3d at 22. See also Spikings v. Cost Plus, Inc., No. CV 06-8125-JFW (AJWx), 2007 U.S. Dist. LEXIS 44214, at *9, 13 (C.D. Cal. May 25, 2007)(same). Indeed, this principle has some salience in the punitive damages context, where the Supreme Court has noted that "[t]he Due Process Clause of the Fourteenth Amendment prohibits the imposition of grossly excessive or arbitrary punishments on a tortfeasor." State Farm Mut. Auto. Ins. Co. v. Campbell, 538 U.S. 408, 416 (2003)

 Judge Wilkinson suggested that to avoid the constitutional issues, it would be preferable for a district court to address them in the context of Rule 23(b(3)'s superiority requirement.

Judge Wilkinson warned that the risks of allowing FACTA class actions in cases like this are high:

 The risk of financial ruin as a result of class certification is far from illusory. Weis Markets estimates that it printed 14,578,600 receipts with improperly truncated account numbers between the time FACTA became effective on December 4, 2006 and the time the company brought its systems into compliance on June 7, 2007. Because FACTA establishes statutory damages between $100 and $1,000, under plaintiffs' per-receipt approach,Weis Markets would thus be subject to a massive payout of between $1.4 and $14 billion.

The court's per-consumer calculation, while less astronomical, is no less annihilating to Weis Markets . Both plaintiffs and Weis Markets  have estimated that "there are potentially over one million Class members." Multiplying that estimate by the statutory damages range results in total liability of between $100 million and $1 billion dollars, without even accounting for the possibility of punitive damages, attorney's fees, and costs, 15 U.S.C. § 1681n(a)(2), (a)(3).

It is no exaggeration to say that a judgment within this range would devastate Weis Markets.  As counsel for Weis Markets  put it, "a hundred million dollars sinks my client." The company is traded on the New York Stock Exchange, and its market capitalization at current prices is just over $900 million dollars. . . .

Nor is the destruction ofWeis Markets   a loss only to shareholders. If plaintiffs are successful, a substantial number of people will be left unemployed in one of the toughest job marketsin generations. Weis Markets currently owns and operates one hundred sixty-four retail grocery stores in Pennsylvania, Maryland, New York, New Jersey, and West Virginia as well as twenty-five pet supply stores. Weis Markets, Inc., Annual Report (Form 10-K), at 1 (Mar. 11, 2010). Approximately 17,600 individuals work for the company in either a full- or part-time capacity. Id. at 2. It is doubtful that Congress intended to cause these thousands of innocent employees to lose their jobs and paychecks by bankrupting their employer, in a situation where no plaintiff suffered identity theft.  

Judge Wilkinson also pointed out why, in FACTA truncation class actions, the critical decision point for the defense is whether the Court will grant certification to the plaintiff class.  Once that happens, the exposure to risk all but forces a settlement:

 Companies may be forced to settle in the face of such annihilating liability, even if they have a strong defense. In such an event, the substantial costs associated with settlement will inevitably be passed on to consumers — the very ones whom Congress sought to protect.

As the Seventh Circuit explained, there is a serious concern with forcing these "defendants to stake their companies on the outcome of a single jury trial, or be forced by fear of the risk of bankruptcy to settle even if they have no legal liability." Matter of Rhone-Poulenc Rorer Inc., 51 F.3d 1293, 1299 (7th Cir. 1995). Indeed, "[t]he risk of facing an all-or-nothing verdict presents too high a risk, even when the probability of an adverse judgment is low." Castano v. Am. Tobacco Co., 84 F.3d 734, 746 (5th Cir. 1996); see also Coopers & Lybrand v. Livesay, 437 U.S. 463, 476 (1978)(same). "[O]nce a class is certified, a statutory damages defendant faces a bet-the-company proposition and likely will settle rather than risk shareholder reaction to theoretical billions in exposure even if the company believes the claim lacks merit." Sheila B. Scheuerman, Due Process Forgotten: The Problem of Statutory Damages and Class Actions, 74 Mo. L. Rev. 103, 104 (2009). At least the plaintiffs in Rhone-Poulenc and Castano alleged substantial actual damages; here we face the risk of forcing a defendant to settle in the face of billions in liability for actions that resulted in not a single instance of identity theft.

With those high stakes in mind, it is interesting to review Weis Market's 40 page brief in opposition to class certification which was filed in the Stillmock case, following remand from the 4th Circuit.  They gave it all they had, and then subsequently the case settled. (Courtesy of Recap).

 

 

 


D.C. Landlord's Liability for Lead-Based Paint Poisoning Expanded By Court of Appeals

The D.C. Court of Appeals has held that a landlord can be sued in negligence for lead-based paint poisoning of a child even if the landlord had no notice of the presence of lead-based paint on the premises, or notice of the presence of chipping, flaking or peeling paint --  provided that the landlord knew that a child under the age of 8 years old lived there. Childs v. Purll.

The Court based its decision on a D.C. regulation which creates an affirmative duty on the landlord to remediate lead paint hazards in an apartment where such young children live.

The Court stated, in pertinent part, as follows:

Although the Purlls and their management company may not have known there was lead paint in the premises, “actual knowledge [of the defect] is not required for liability; it is enough if, in the exercise of reasonable care, appellee[s] should have known that the condition . . . violated the standards of the Housing Code.” Whetzel, 108 U.S. App. D.C. at 393, 282 F.2d at 951. “Ordinarily, the landlord will be chargeable with notice of conditions which existed prior to the time that the tenant takes possession,” RESTATEMENT § 17.6 cmt. c, and the creation in § 707.3 of an affirmative duty to furnish lead-free premises implies a concomitant, antecedent duty to ascertain whether the premises in fact are lead-free.

Upon notification that the prospective tenants of 1411 Ridge Place would include children under eight years of age, § 707.3 imposed a specific, affirmative duty on the owners and their agents to provide those premises to the Childs family in a lead-free condition or not at all.

(footnotes omitted, emphasis added).

In this case, the landlord was notified of the age of the children in the lease agreement.

Citing a New York case, the Court further stated that, " In effect, § 707.3 presumptively serves to put the landlord on constructive notice of any lead paint hazard in premises occupied by children under eight."

One way to try to defend against the statutory presumption of negligence is to show that the landlord did all that all reasonable person would do to establish that the premises were free of lead paint and to comply with the regulation.

This is a major expansion of the liability of landlords for lead-based paint poisoning in the District of Columbia, in the same vein as recent lead poisoning cases in Maryland

The end result is that any child under 8 years old in the District of Columbia who sustains lead-based paint poisoning in an apartment has a cognizable cause of action in negligence against the landlord, even if the landlord had no knowledge that there was lead-based paint on the premises and had no knowledge that there was flaking, peeling, or chipping paint there.  The focus of lead poisoning litigation in the District will necessarily be on the proof that the child got the lead poisoning on the premises, rather than from other sources such as the municipal water system.

The Court's opinion, however, rejected the argument that a lead poisoning claim could be the basis for a claim under the D.C. Consumer Protection Act.


D.C. Consumer Protection Act Held Not To Apply Where Plaintiff Purchased Item On Ebay In Order To Resell It

There is a recent pro-defense decision on the D.C. Consumer Protection Act, albeit only from a Magistrate Judge of the Superior Court.

In Nicely v. Jones, No. 9270-03 (D.C. Super. Ct. May 28, 2004), Magistrate Judge Ronald A. Goodbread held that the plaintiff, who purchased a fifty-dollar automatic stapler on eBay, was not entitled to claim damages due to the defective condition of the stapler under the D.C. Consumer Protection Act because (1) the plaintiff was not complaining of "illegal trade practices"; and (2) he was not a "consumer as defined in D.C. Code sec. 28-3901(a)(2). The plaintiff did not purchase the stapler for his personal use, but instead to resell it. Merchants are excluded from the protections of the CPA.

The plaintiff had sought return of his purchase money ($50), plus his lost profit on the resale of the stapler ($16), plus $1500 damages under the CPA due to unfair trade practices, plus punitive damages. The defendant was the individual who had sold the plaintiff the stapler via eBay.

This opinion is not available on line, but was published in The Daily Washington Law Reporter, Vol. 132, Number 208, page 2101 (Monday, Oct. 25, 2004).


Maryland Court of Special Appeals Holds That Real Estate Appraiser Can Be Liable Under Maryland Consumer Protection Act

In Hoffman v. Stamper, the Court of Special Appeals of Maryland issued a 115 page opinion concerning a fraudulent real estate "flipping" scam in Baltimore. The buyers were awarded a total of $129,020.03, in economic damages, and $1,305,000, in non-economic damages, against all the defendants. The appellants were three defendants who had a more peripheral role: a mortgage company, a loan officer, and a real estate appraiser. The plaintiffs cross appealed the dismissal of their punitive damages claims against these same defendants. The court affirmed the verdicts in favor of the plaintiffs, but reversed and remanded on the cross appeal, finding that punitive damages should have gone to the jury.

Among other things, on appeal the Court held that a real estate appraiser was properly found liable under the Marland Consumer Protection Act, even though he did not directly engage in selling the property. The Court reasoned:

Hoffman's appraisals were so vital to the sales of consumer realty here that his conduct in performing them was the equivalent of conduct committed “in” the sale, for purposes of the MCPA. Unlike the defendants in Morris, who produced the plywood to be used for any purpose for which plywood is suitable, and who in no way participated in influencing the plaintiffs' decisions to purchase consumer realty, Hoffman knew, from his familiarity with FHA regulations, that his appraisals were critical to effectuate the sales. Moreover, the evidence showed that, without the inflated appraisals, the sales would not have transpired. Accordingly, the evidence was sufficient to support a reasonable finding that Hoffman engaged in unfair and deceptive trade practices in making material misrepresentations about value in the appraisals.

Slip. op., page 72.

The trial court had also awarded the buyers' lawyers $195,591.26 in fees and expenses under the Maryland Consumer Protection Act. The Court of Special Appeals vacated this order, while affirming the jury verdict, because it found that the case had to be remanded for consideration of punitive damages against the real estate appraiser and the two other defendants based on the evidence before the jury.

In sum, the appeal turned out badly for the appellants, who not only failed to disturb the main verdicts but who are now also exposed to punitive damages on remand.

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U.S. District Court Dismisses Class Action Under D.C. Consumer Protection Procedures Act Because Plaintiffs Suffered No Injury And Therefore Lack Standing

In Williams v. The Purdue Pharma Co., No. 02-0556, U.S. District Judge Rosemary Collyer has granted the defendants motions to dismiss a class action under the D.C. Consumer Protection Procedures Act, seeking a refund of all monies paid by plaintiffs and class members of OxyContin, a pain medication. The suit expressly excluded plaintiffs with personal injury claims. The suit alleged that the defendants engaged in deceptive advertising and that their over-promotion of OxyContin inflated the price of the drug so that all class members paid a higher price.

The Court noted that the amendment to the CPPA effective Oct. 19, 2000, removed the requirement of injury in fact from the statute, but that that amendment is not applied retroactively.

The Court granted the defendants' motions to dismiss, on the grounds that standing to assert a claim requires a showing of actual or threatened injury redressable by the court, and that standing requires individualized proof of both the fact and the extent of the injury. The Court reasoned that:

The complaint before the Court fails in two respects. While it asserts that defendants engaged in false and misleading advertising, it does not plead that these defendants were in any way deceived – or even saw – any of that advertising. It also fails to allege any particularized and specific injury-in-fact suffered by these plaintiffs.

Application of D.C. Consumer Protection Procedures Act To An Insurer

In Athridge v. Aetna Casualty & Surety Co., No. 02-7134, the D.C. Circuit affirmed the trial court's dismissal of a claim under the D.C. Consumer Protection Procedures Act against Aetna. In this case, the plaintiff had been struck and injured by a car driven by a family member of an Aetna insured. Plaintiff brought suit against Aetna both in his own right and as as assignee of the at-fault driver. Among other things, Plaintiff claimed misrepresentations and omissions under the D.C. Consumer Protection Procedures Act (CPPA). The trial court granted summary judgment to Aetna on the CPPA count, finding that the Plaintiff could not maintain such a claim because the family member of the Aetna insured was not a "consumer" within the meaning of the Act, because Aetna's potential coverage of the family member was not a "trade practice" under the Act, and because the family member did not sustain damages.

The D.C. Circuit affirmed, but did so in a way that suggests that insurers do have potential liability under the CPPA.

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Clearinghouse for Recalls

I turned on CSPAN tonight, and saw Hal Stratton, the head of the Consumer Product Safety Commission, giving a press conference on a new government website that is meant to be a central place where all recall information can be found: www.recalls.gov

I hope that they will fit the site with an excellent search engine on the home page that searches all recalls and nothing but recalls.

(Hal Stratton is no relation to me, at least, not within the last 150 years.)

Later: The Aussies beat us to the punch on this one.


Virginia Supreme Court Decides That Plaintiff Does Not Have To Elect Between Fraud Claim and Claim Under Virginia Consumer Protection Act

In Wilkins v. Peninsula Motor Cars, Inc., No. 022983 (Va. Oct. 31, 2003), the Virginia Supreme Court held that a plaintiff cannot be required to elect between his fraud claim and his claim under the Virginia Consumer Protection Act ("VCPA"), Code secs. 59.1-196 to -207.

Under the fraud count, the jury had awarded the plaintiff $1,862.86 in actual damages and $100,000 in punitive damages (a multiple of about 50). Under the VCPA, the jury awarded $4000 in actual damages, which were trebled to $12,000, plus the plaintiff could recover $34,183 in attorney's fees.

The trial court required the plaintiff to elect between the two verdicts, on the grounds that the plaintiff had advanced two alternative theories of recovery based on a single transaction or occurrence, and that allowing plaintiff to receive both verdicts would permit a double recovery. The trial court also reasoned that the punitive damages of the fraud claim and the trebled damages under the VCPA claim amounted to punishing the defendant twice.

Plaintiff appealed, arguing that no election between the two verdicts should be required and that he should receive $4,000 in compensatory damages under the VCPA claim, $100,000 in punitive damages under the fraud claim, and attorney's fees under the VCPA claim.

The Supreme Court agreed with plaintiff's argument, and reversed. It reasoned that the only election of remedies issue presented here was whether the bar against double recovery justified the trial court's ruling. The trial court erred in requiring the plaintiff to choose between causes of action, when all that was required was supervision of the damage awards to avoid double recovery.

The Court rejected the defense argument that an award of attorney's fees and costs under the VCPA is duplicative of punitive damages. The Court found that the statutory language did not support that view, and also that the purpose of the attorney's fees and costs provision is to encourage private enforcement of the VCPA, while punitive damages are designed to punish and deter offensive conduct.

This precedent certainly raises the stakes in cases involving both fraud claims and VCPA claims.

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