Settlement in OC Register's Wage & Hour Case
Legislature in Special Session

Always Disclose Fee Splitting Deals in Class Actions

A fee splitting agreement amongst class counsel must always be disclosed to the court as part of the class action settlement process. In Mark v. Spencer (2008) 166 Cal.App.4th 219, there was a legitimate fee splitting agreement, but it was not disclosed to the court. The court awarded attorney fees in conformity with the declarations, rather than the fee splitting agreement. The attorney who got less the agreement provided then sought to enforce the agreement, but was bound by the order establishing the distribution of fees.

Plaintiff Ronald H. Mark appeals from a judgment of dismissal entered after the trial court sustained a demurrer to his first amended complaint without leave to amend. The complaint sought enforcement of an agreement between Mark and defendant Jeffrey P. Spencer to divide fees awarded to them as cocounsel representing plaintiffs in an earlier class action lawsuit. Mark contends his failure to disclose the fee-splitting agreement to the court in the class action, as required by California Rules of Court, rule 3.769, did not preclude him from bringing a separate action to enforce the agreement.

We conclude the trial court did not err in sustaining the demurrer without leave to amend. Rule 3.769 was designed to protect class members from potential conflicts of interest with their attorneys by requiring the full disclosure of all fee agreements in any application for dismissal or settlement of a class action. Rule 3.769 would be effectively nullified if attorneys could conceal a fee-splitting agreement from the court in seeking approval of a class action settlement and later enforce the agreement in a separate action.

As a separate and independent basis for upholding the trial court's action, we conclude Mark's claims are barred by res judicata. Mark was provided a fair opportunity to litigate the fee-splitting agreement before the court in the class action. Because the class action court fully and finally determined the attorneys' respective entitlement to fees, Mark may not relitigate the issue here. We therefore affirm the judgment.

The pertinent facts: Mark brought Spencer in to help with a labor law class action against GNC (Capelouto v. General Nutrition Corp.), and the two attorneys agreed to split fees, along these terms: (a) Mark and Spencer would evenly split any attorney fees generated in the action; (b) the 50-50 split shall “be in effect even if counsel are required to submit fee applications individually”; (c) in the event “either attorney or firm fails to perform their reasonable share of the joint representation,” the parties “shall renegotiate the fee split set forth above”; (d) Mark and Spencer “will both have equal duties and responsibilities in the litigation . . .”; and (e)  their respective firms would split the costs evenly. The case settled, and the attorneys sought $600,000 in fees. At no time, in the filings or in open court, did the attorneys disclose the existence of the fee-splitting agreement.

Spencer appeared at the final fairness hearing; Mark, apparently, did not. Orange County Superior Court Judge Ronald Bauer entered an order approving attorney fees in the amount of $401,275.43 to Spencer and $76,470 to Mark, to be paid within 30 days. Mark then asked Spencer to honor the fee-splitting agreement by transferring enough money to make their receipt of fees equal. Spencer refused, and Mark responded by suing to enforce the fee-sharing agreement.

The morals of the story: (i) always disclose your fee-splitting agreement to the court, and make sure you ask that the court award the fees in accordance with that agreement; (ii) always personally attend the final fairness hearing, even if there will be another half-dozen attorneys there for the class; and (iii) be careful about entering into fee-splitting deals with Jeffrey Pincock Spencer.

After a minor modification to the opinion, a petition for review was filed, and on Wednesday, the Supreme Court denied review. You can download the full text of Mark v. Spencer here in PDF or MS Word format.

[Update: A representative of Mr. Spencer sought to comment upon our list of morals, but, as Typepad puts it, Some users are experiencing issues with the comment form on their weblogs. We are working on this currently, so we'll give him the ability to comment a different way:

Mr. Spencer's counsel, Jeffrey Wilens, responds.

I am Mr. Spencer's appellate counsel. Mr. Walsh's characterization of the facts of this lawsuit is a ridiculous distortion in a lame effort to be funny.  The fee agreement between Mark and Spencer required each side to do half of the work or the fee arrangement would be modified; it did not require each attorney to get paid equally under all circumstances.  Mark shirked his responsibilities (which was the opinion stated by Superior Court Judge Ronald L. Bauer).  He did not bother showing up at the first fees hearing or (after being put on notice his fees were in jeopardy) at the second hearing and ended up with a much lower fee award which also lowered the aggregate fee award.  In Judge Bauer's opinion, Mr. Mark's effort was "short of the mark."  Accordingly, Judge Bauer did not award much to Mark.

Here are the morals of the story.  Yes, attorneys should disclose a fee splitting agreement but should not expect it will necessarily be upheld.  Yes, attorneys should attend the hearing on their requess for fees, especially when the Judge states at the first hearing that the fees request is excessive.  Finally, attorneys should always take care drafting fee-splitting agreements with anyone but there was no call for the cheap shot against Mr. Spencer.  The fact is Mr. Spencer attempted to honor the fee splitting agreement by re-negotiating the allocation as contemplated in the agreement if both sides did not do equal amounts of work.  Mr. Mark refused to accept anything less than half of the fee even though Judge Bauer thought his work was not even worth 20 percent of the aggregate fee award.  Instead, Mr. Mark decided to sue, but he lost in the trial court and then in the appellate court.

We reply:

We did not characterize the facts, much less (with the exception of initially crediting Judge McEachen for the underlying fee order) distort them. We just pulled the facts from the appellate opinion. We did characterize the lessons to take from the case, but we were being more serious than Mr. Wilens assumes. We've had co-counsel arrangements go south, too, and we've always honored the fee split. We would have disclosed the arrangement to the court and requested that fees be awarded and divided evenly between the firms. If the case had originated with another lawyer, we wouldn't have ever considered aiming for a larger split. Obviously, the courts have determined that what Mr. Spencer did was lawful, but nonetheless, if we were entering into an agreement with an attorney we knew to hold such a different view of joint venturing cases, we'd be very careful about doing business with him.]

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