By Patrick M. Maloney, Esq., The Maloney Firm, APC

On September 15, 2020, the Court of Appeal published the decision in Aerotek, Inc. v. Johnson Group Staffing Company, Inc., which held that attorneys’ fees awarded under the California Uniform Trade Secrets Act belong to the lawyer, not the client.  The dispute on appeal in Aerotek was whether the law firm had waived its right to any fee award via pro bono language in its fee agreement and whether a fee award under the California Uniform Trade Secrets Act belonged to the lawyer or to the client.  After Porter Scott, P.C. represented the Johnson Group through two jury trials and in the appellate court on a modified pro bono basis, the Johnson Group claimed it should receive the entirety of an award of attorneys’ fees in the amount of $735,781.27, notwithstanding that it had not paid the lawyers for the bulk of their services.  Ultimately, the Court of Appeal held that, unless the parties had a different agreement, the lawyers should receive the award of statutory attorneys’ fees to the extent those fees exceeded amounts already paid to them. 

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Aerotek presented a unique set of circumstances.  The client, Johnson Group, had fallen behind in paying fees.  The law firm, Porter Scott, sought, and was granted leave, to withdraw due to nonpayment.  After the Court granted the withdrawal motion, Porter Scott agreed to represent Johnson Group on a modified pro bono basis.  Porter Scott agreed to waive the past due legal fees of approximately $92,000, in exchange for a one-time payment of $25,000, and agreed that Johnson Group would not be required to pay any further legal fees.  A footnote in the new fee agreement stated that Porter Scott’s waiver of the past due fees would not apply in the event of a fee award.  Additionally, Johnson Group would be required to pay costs going forward.  Johnson Group claimed the footnote concerning the waiver should be interpreted to mean the lawyers had waived their right to any fee award in excess of the past due amount they had written off.  Likely incensed by the client’s attempt to deprive their former counsel of compensation for its tremendous and successful efforts over an extended period of time, the Court of Appeal soundly rejected each of Johnson Group’s arguments.

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The lesson in Aerotek goes beyond its express holding that legal fees awarded in trade secret cases belong to the attorney.  Beneath the surface, Aerotek teaches that poorly drafted legal fee agreements can pose significant problems for lawyers.  Simply put, had the lawyers in Aerotek prepared a fee agreement that clearly and unambiguously stated that the entirety of any fee award would belong to the law firm, they would have avoided substantial litigation and delay. To put this into perspective, the underlying suit was filed in 2007, the new fee agreement executed in 2009, judgment was entered in 2014, and the appeal on the fee entitlement issue spanned from 2015 to 2020.  Further, the fee dispute resulted in multiple depositions and other litigation activities for which the lawyers were not compensated. 

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When representing clients in matters where there is even a remote possibility of a prevailing party fee award, counsel should be careful to articulate in the fee agreement whether the client or the lawyers will be entitled to receive the fee award.  This is true even if the lawyer intends to follow the holding of Aerotek, namely, that the fee award will belong to the lawyers to the extent the award exceeds the amounts that the client already paid to the lawyers.  This, alone, will go a long way to avoid disputes by creating clear expectations about how the fee award will be treated, since most clients are unlikely to have read the Aerotek decision.

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Also worthy of consideration is the treatment of legal fee awards in contingent fee matters.  Some considerations include:

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1) Whether the lawyer is entitled to both the contingent fee and the fee award;

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2) Whether the lawyer should receive the greater of the contingent fee or the statutory fee award; and

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3) Whether the fee award should be included in the total recovery when calculating a contingent fee award. 

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Where there is a lack of clarity in the fee agreement, clients often feel their lawyer has taken advantage of them.  When counsel proposes to receive both a contingent fee and the fees awarded to the prevailing party, the lawyer should also assess whether the proposed fee may be deemed unconscionable.

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Another issue to address includes what will happen if the Court does not award the full amount claimed by counsel as prevailing parties’ fees.  This may occur because the Court determines that the fees charged were excessive or otherwise improper.  Or, more benignly, because a portion of the fees claimed are outside the scope of the statute authorizing the prevailing party to recover fees.  In the first example, the client may have a legitimate dispute with the attorney for overcharging.  In the latter example, the client may make an unwarranted claim it is not required to pay the full amount of fees. 

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The fee agreement should also cover the handling of sanction awards.  In contingent fee matters, the awarded sanctions likely should be paid and belong to the attorney.  In hourly matters, the client likely should receive a credit against the outstanding balance or, in some instances, a refund. 

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About the Author:

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Patrick Maloney is the founder of The Maloney Firm, APC, a boutique law firm that represents clients in business litigation and related matters.   Mr. Maloney has represented both lawyers and clients in a number of legal fee disputes and legal malpractice matters.  Mr. Maloney may be reached at pmaloney@maloneyfirm.com or 310-540-1505.

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