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Court Decisions Regarding the Subject of Contingency Fees

authors: David Axelrad and Lisa Perrochet

Syllabus

Private attorneys hired to prosecute public nuisance actions must be, and must appear to be, neutral. Nonetheless, government plaintiffs frequently seek to augment their prosecutorial resources by retaining private outside counsel on a contingent fee basis to pursue public nuisance claims. This type of retention gives the government's attorney a financial stake in the outcome of litigation that creates an appearance of impropriety affecting the integrity and neutrality of the government's prosecution.

This module examines the case law that has developed in this area.

 

Index

1. Introduction and Definitions
2. Private Counsel Cannot Represent the Government on a Contingent Fee Basis
3. Impropriety of Government Contingent Fees
4. The "Control" Exception
5. Decision That Hiring on a Contingent Fee Basis Does Not Impede Neutrality of Government Attorney
6. Contingent Fee Accused of Being "Unconstitutional"
7. View on Contingency Fees Still Developing
8. Legitimate Examples of Government Contingency Fee Hiring
9. Examples of the Occasional Propriety of Government Hiring on a Contingency Fee Basis

 

1. Introduction and Definitions

A contingent fee is "[a] fee charged for a lawyer's services only if the lawsuit is successful or is favorably settled out of court...Contingent fees are usually calculated as a percentage of the client's net recovery."1

When the government hires attorneys on a contingent fee basis, the attorney's financial interest in the outcome of the litigation compromises the prosecutor's neutrality and reduces public confidence in the government's exercise of its prosecutorial discretion. Thus, for example, "the contingent fee is generally considered to be prohibited [in] the prosecution and defense of criminal cases...[T]he contingent element [is] against public policy because it tend[s] to bring about conviction regardless of the prosecutor's primary duty to see that justice [is] done."2 As explained below, the better-reasoned case law applies the same principles to the government's retention of contingent fee counsel to prosecute a public nuisance claim where neutral, unbiased prosecution, both in appearance and in reality, is essential to public confidence in the integrity of the administration of justice.

 

2. Private Counsel Cannot Represent the Government on a Contingent Fee Basis

The leading case in this area is ''People ex. rel. Clancy v. Superior Court,'' where a city government hired a private attorney on a contingent fee basis to bring public nuisance abatement actions.3

The California Supreme Court held the contingent fee agreement is improper. “When a government attorney has a personal interest in the litigation, the neutrality so essential to the system is violated.”4

“It is true that the retainer agreement [here] provides that [the private attorney] is to be ‘an independent contractor and not an officer or employee of the City.’ However, a lawyer cannot escape the heightened ethical requirements of one who performs governmental functions merely by declaring he is not a public official. The responsibility follows the job: if [the private attorney] is performing tasks on behalf of and in the name of the government to which greater standards of neutrality apply, he must adhere to those standards.”5

“[T]he abatement of a public nuisance involves a delicate weighing of values. Any financial arrangement that would tempt the government attorney to tip the scale cannot be tolerated.”6 “Public nuisance abatement actions share the public interest aspect of eminent domain and criminal cases . ...A suit to abate a public nuisance can trigger a criminal prosecution of the owner of the property. This connection between the civil and criminal aspects of public nuisance law further supports the need for a neutral prosecuting attorney.”7

“Thus we hold that the contingent fee arrangement between [the government and the private attorney] is antithetical to the standard of neutrality that an attorney representing the government must meet when prosecuting a public nuisance abatement action.”8

The record before the Clancy court showed Mr. Clancy was hired under agreements between the government and their outside counsel that provided the government and their City Attorneys or District Attorneys retain final authority over all aspects of the Litigation. Despite the government’s stated control over Mr. Clancy, the California Supreme Court held that the contingent fee arrangement between the City and Mr. Clancy was improper.9

Clancy represents the strongest statement in support of the need for strict black¬and-white rules prohibiting government entities from hiring private attorneys on a contingent fee basis so as to ensure confidence in the neutrality of the attorneys prosecuting enforcement actions on behalf of the public.

 

3. Impropriety of Government Contingent Fees

The principles announced in Clancy are reinforced by a United States Supreme Court decision affirming the paramount importance of a disinterested prosecutor. In Young v. U.S. ex rel. Vuitton et Fils S.A., petitioners were found guilty of criminal contempt and sentenced to jail terms.10 Petitioners claimed the District Court should not have approved respondent’s attorneys to prosecute the contempt.

The U.S. Supreme Court held that “counsel for a party that is the beneficiary of a court order may not be appointed to undertake contempt prosecutions for alleged violations of that order.”11

The Court noted that while “courts possess inherent authority to...appoint a private attorney to prosecute [a] contempt,”12 “[p]rivate attorneys appointed to prosecute a criminal contempt action represent the [government], not the party that is the beneficiary of the court order allegedly violated. ...The prosecutor is appointed solely to pursue the public interest in vindication of the court’s authority. A private attorney appointed to prosecute a criminal contempt therefore certainly should be as disinterested as a public prosecutor who undertakes such a prosecution.”13

In terms that demonstrate the corrosive effect of retaining contingent fee counsel to prosecute public nuisance claims, the Supreme Court stated that “[a] prosecutor may be tempted to bring a tenuously supported prosecution if such a course promises financial or legal rewards.”14 “Regardless of whether the appointment of private counsel in this case resulted in any prosecutorial impropriety ..., that appointment illustrates the potential for private interest to influence the discharge of public duty.15 “In short, as will generally be the case, the appointment of counsel for an interested party to bring the contempt prosecution in this case at a minimum created opportunities for conflicts to arise, and created at least the appearance of impropriety.”16

In short, “appointment of an interested prosecutor creates an appearance of impropriety that diminishes faith in the fairness of the criminal justice system in general.”17

 

4. The "Control" Exception

Recently, an intermediate appellate court in California severely weakened the categorical rule announced in Clancy, by announcing a “control” exception. In County of Santa Clara v. Superior Court,18 a group of public entities initiated a public nuisance action against manufacturers of lead paint and pigment, seeking an order requiring the defendants to abate lead hazards in millions of residential and commercial structures throughout the state. The public entities retained private counsel on a contingent fee basis to prosecute the action.

Clancy unequivocally holds that private counsel representing government entities in actions on behalf of the public may not have a personal profit motive in the outcome of the case, and therefore may not represent the government on a contingent fee basis. However, the intermediate Court of Appeal in Santa Clara concluded that because the contingent fee counsel in this case claimed they “have been engaged to play a limited, subordinate role,” and the public entities said they would “‘retain final authority over all aspects of the Litigation.’”19 The contingent fee agreement does not impermissibly impair the neutrality required of counsel representing public interests. “The public entities have ...established that their private counsel serve in a subordinate role in which private counsel merely assist in-house counsel and lack any authority to control the litigation.20 “[The California Supreme Court decision in People ex rel. Clancy v. Superior Court,21 does not bar ...public entities from engaging private counsel under a contingent fee arrangement to assist in ...[public nuisance] litigation, so long as the public entities’ in-house counsel retain control over all decision-making.”22

The Santa Clara court justified its holding on the theory that the trial court can review the proceedings after they are concluded to determine as a factual matter whether contingent fee counsel was adequately supervised by the government and sufficiently neutral to justify any contingent fee that may be earned. But no amount of supervision by the government and no amount of post hoc review of contingent fee counsel’s performance can cure the appearance of impropriety that exists from the moment private contingent fee counsel become government lawyers. The profit motive that necessarily drives contingent fee representation irrevocably casts doubt on the impartiality and neutrality of the government’s case.23 “Appointment of an interested prosecutor is also an error whose effects are pervasive. Such an appointment calls into question, and therefore requires scrutiny of, the conduct of an entire prosecution, rather than simply a discrete prosecutorial decision. Determining the effect of this appointment thus would be extremely difficult. A prosecution contains a myriad of occasions for the exercise of discretion, each of which goes to shape the record in a case, but few of which are part of the record.”24

 

5. Decision That Hiring on a Contingent Fee Basis Does Not Impede Neutrality of Government Attorney

Unfortunately, the “control” exception to the rule against permitting contingent fee attorneys to prosecute public nuisance actions has gained traction in other jurisdictions. In City of Grass Valley v. Newmont Mining Corp.,25 a city hired outside counsel on a contingent fee basis to litigate claims that included a request for abatement of a public nuisance. Defendants moved to disqualify plaintiffs’ outside counsel on grounds that outside counsel’s contingent fee arrangement violated a government attorney’s duty of neutrality.

The federal district court concluded that because the City Attorney acts “as co¬counsel in this action and the City retains ‘ultimate decision-making authority in the case,’” the City’s retention of outside counsel on a contingent fee basis did not violate the government attorney’s duty of neutrality.26

 

6. Contingent Fee Accused of Being "Unconstitutional"

In Sherwin-Williams Co. v. City of Columbus, Ohio,27 three cities entered into contingent fee agreements with private counsel to prosecute public nuisance actions. The district court had directed the cities to amend their fee agreements “based upon a finding that the contingency fee agreements between private counsel and the three cities were unconstitutional insofar as the agreements reposed an impermissible degree of public authority upon retained counsel, who have a financial incentive not necessarily consistent with the interests of the public body.”28

The federal district court initially concluded that “an agreement between a municipality and private counsel in a public nuisance action which purports to vest in private counsel authority to prevent a settlement or dismissal of a suit is unconstitutional.”29 However, the court found the contingent fee agreements are permissible if they provide that the cities retain control over the litigation, including authorization of settlement, with the private attorneys working under the direction and at the discretion of the city governments.30

 

7. View on Contingency Fees Still Developing

Finally, in State of Rhode Island v. Lead Industries Assoc., Inc., et al.,31 the State brought a public nuisance abatement action against lead pigment manufacturers. After first deciding that the action should have been dismissed at the pleading stage because defendants' alleged actions as lead pigment manufacturers did not constitute public nuisance as a matter of law, the Supreme Court of Rhode Island addressed the contingent fee issue. Although “reluctant to opine on an issue that has become moot," the Court addressed the validity of the contingent fee arrangement because "this particular subject is one of extreme public importance.”32

The Rhode Island court concluded that the state Attorney General, as a constitutional officer of the State, was "not precluded from engaging private counsel pursuant to a contingent fee agreement" so long as the Attorney General maintained absolute and total control over the decision making.33 The Court cautioned, however, that the law in this area is unsettled, stating that “the propriety vel non of contingent fee agreements in the public sector is a much controverted and still developing area of the law.”34 Indeed, the Court noted that its own views on the subject might later change based on further analysis by others:

Given the continuing dialogue about the propriety of contingent fee agreements in the

governmental context, we expressly indicate that our views concerning this issue could

possibly change at some future point in time.35

The Grass Valley, Sherwin-Williams,and Lead Industries decisions assume that the government’s assertion of control eliminates the appearance of impropriety created by the retention as prosecuting attorneys of outside counsel with a financial stake in the outcome of public nuisance actions. The problem these decisions fail to confront is that (a) whether the professed control over the litigation is actually asserted is impossible to determine, (b) the appearance to the public of an improper financial motive is not eliminated by government reassurance that “we’re still in charge,” and (c) regardless of the extent of government control, the contingent fee counsel’s profit motive necessarily colors, and therefore corrupts, the day to day decision-making required in any public nuisance prosecution. When all is said and done,noamountof “control” can maskthe fact that, unlike the prosecuting attorney, contingent fee counsel are “in it for the money.”

 

8. Legitimate Examples of Government Contingency Fee Hiring

This is not to say that the government can never hire attorneys on a contingent fee basis. The need for an absolute prohibition against the government hiring counsel to prosecute public enforcement actions does not exist in cases where the government acts in the traditional role of a plaintiff seeking damages to compensate for an injury. In this situation, where the government is not acting as a prosecutor or seeking enforcement of public rights, the courts rightly tolerate the government’s hiring of contingent fee counsel to pursue the litigation.

Thus, for example, in City of San Francisco v. Philip Morris,36 eleven California counties retained private attorneys on a contingent fee basis to litigate claims that tobacco manufacturers, by misleading consumers concerning the dangers of smoking, caused and should therefore compensate plaintiffs for their damages, be enjoined to disclose their research on smoking, fund both remedial education and smoking cessation programs, and pay restitution.

The federal district court held that the contingent fee arrangement was permissible because (a) “[T]he civil tort nature of this action meaningfully distinguishes it from [the California Supreme Court decision in People ex rel.] Clancy [v. Superior Court37]. This lawsuit, which is basically a fraud action, does not raise concerns analogous to those in the public nuisance or eminent domain contexts discussed in Clancy. Plaintiffs’ role in this suit is that of a tort victim, rather than a sovereign seeking to vindicate the rights of its residents or exercising governmental powers. [¶] . . . [p]laintiffs’ attorneys simply will be arguing, ...that a tort has been committed against their clients”, and (b) unlike the situation in Clancy, “plaintiffs’ respective government attorneys retai[n] full control over the course of the litigation.”38

Similarly, in Philip Morris Inc. v. Glendening,39 the State Attorney General entered into a contingent fee agreement with a private law firm to represent the State of Maryland in litigation against the tobacco industry seeking costs and damages arising from the sale and distribution of tobacco products.

The Maryland Court of Appeals cited People ex rel. Clancy v. Superior Court,40 with approval for the proposition that because public nuisance actions require a “‘neutral prosecuting attorney,’ . . . ‘any financial arrangement that would tempt the government attorney ...to tip the scale cannot be tolerated.’”41 Nonetheless, the court held the contingent fee contract was permissible in part because of the nature of the claims asserted by the government; unlike the situation in Clancy, “there are no constitutional or criminal violations directly implicated here."42

 

9. Examples of the Occasional Propriety of Government Hiring on a Contingency Fee Basis

Aside from questions of impropriety, the government’s power to retain contingent fee counsel must be considered. The final group of cases noted here addresses the propriety of hiring contingent fee counsel solely on the basis of whether or not the government has authority to hire private attorneys under an agreement giving them a financial interest in the outcome of litigation. These decisions serve as a reminder that whenever the contingent fee issue arises, there is a threshold question of the government’s authority to give private attorneys a financial stake in the outcome of public enforcement actions.

In State v. Hagerty,43 the State retained private attorneys on a contingent fee basis to prosecute a declaratory relief action against W. R. Grace to determine Grace’s rights and duties with respect to “construction products containing asbestos, designed, manufactured or sold by Grace and installed in public buildings owned or operated by the State.”44

The North Dakota Supreme Court held that “[a]bsent express constitutional or statutory limitations” the Attorney General has inherent authority to retain private attorneys on a contingent fee basis to prosecute an action on behalf of the State concerning asbestos in state-owned buildings, subject to judicial supervision of the reasonableness of the contingent fees.45

Meredith v. Ieyoub46 reached the opposite conclusion. There, the State Attorney General hired private law firms to investigate and prosecute environmental damage claims on a contingent fee basis.

The Supreme Court of Louisiana held that neither the State Constitution nor any state statute authorizes the Attorney General to hire counsel on a contingent fee basis. “Until the Legislature enacts a statute authorizing the Attorney General to enter into contingency fee contracts, the contract is invalid.”47

Button’s Estate v. Anderson,48 is consistent with the specific authorization requirement in Meredith. The State of Vermont retained private attorneys on a contingent fee basis to recover from the United States Government military expenses incurred by the State of Vermont during the War of 1812. The Supreme Court of Vermont held the contingent fee agreement was authorized by and consistent with a specific legislative resolution authorizing the Governor to contract for the services of special counsel on a contingent fee basis to recover damages for expenses the state incurred during the War. See also Philip Morris, Inc. v. Glendening49 (approving contingent fee contract in part because a state statute permitted employment of outside special counsel on a contingent fee basis).

Finally, in Town of Mannford v. Watson,50 a law firm sought to recover a contingent attorney fee for representing a town in negotiations with the Corps of Engineers concerning damages caused by construction of a dam.

The Oklahoma Supreme Court held that the contingent fee contract with the outside attorneys for the purpose of seeking damages on behalf of a town is authorized by the general statute permitting attorneys to contract for a percentage of the proceeds of a client’s cause of action.

Significantly, Hagerty, Meredith, Button’s Estate and Mannford all dealt with government appearing in its role as a traditional litigant seeking damages, rather than as prosecutor of public nuisance claims. Accordingly, these courts had no occasion to consider the appearance of impropriety that arises where the government’s attorney has a financial interest in the outcome of public enforcement actions.

 

Resources

1. Black's Law Dictionary (8th ed. 2004) p. 338.
2. People ex. rel. Clancy v. Superior Court, 703 P.2d 347, 351-352, 218 Cal. Rptr. 24, 28-29 (Cal. 1985).
3. 703 P.2d 347, 218 Cal. Rptr. 24 (Cal. 1985).
4. 705 P.2d at 351, 218 Cal. Rptr. at 28.
5. Id.
6. Id. at 352, 218 Cal. Rptr. at 29.
7. Id. at 352-53, 218 Cal. Rptr. at 29-30.
8. Id. at 353, 218 Cal. Rptr. at 30.
9. Id.
10. 481 U.S. 787 (1987).
11. Id. at 790.
12. Id. at 793.
13. Id. at 804.
14. Id. at 805.
15. Id.
16. Id. at 806. The Supreme Court noted that “counsel for the beneficiary of the court order [who] may often be most familiar with the allegedly contumacious conduct,” may use his knowledge to assist the prosecutor so long as counsel for the beneficiary is not given any control over the litigation. Id. at 806 n. 17.
17. Id. at 811.
18. 74 Cal. Rptr. 2d 842 (Ct. App. 2008).
19. Id. at 848.
20. Id. at 849.
21. 705 P.2d 347, 218 Cal. Rptr. 24 (1985).
22. 74 Cal. Rptr. 2d at 853. The Court of Appeal found a basis for this “control” exception in the Clancy court’s citation to Sedelbauer v. State, 455 N.E.2d 1159 (Ind. App. 1983), where the trial court allowed a private attorney from an anti-pornography citizens’ group to serve pro hac vice as counsel to appear with and aid the State’s attorney in prosecuting charges of distributing obscene matter. The Indiana court held that retention of the private attorney was within the inherent power of the prosecuting attorney to appoint attorneys to assist in the trial of criminal cases because the private attorney appeared with and not in place of the prosecuting attorney. Because Sedelbauer is not a contingent fee case, it does not address the limits on government retention of private attorneys to prosecute public enforcement actions on a basis that gives the attorneys for the government a financial interest in the outcome of the litigation. Sedelbauer therefore provides no support for the “control” exception announced in the Santa Clara decision.
23. Cf. Young v. U.S. ex rel. Vuitton et Fils S.A., 481 US 787, 812-813 (plurality opinion).
24. A petition for review of the Santa Clara decision by the California Supreme Court is currently pending.
25. No. 2:04-cv-00149-GEB-DAD, 2007 WL 4166238 (E.D. Cal. Nov. 20, 2007).
26. 2007 WL 4166238, at *1.
27 No. C2-06-829, 2007 WL 2079774 (S.D. Ohio July 18, 2007).
28. 2007 WL 2079774, at *1.
29. Id. at *3.
30. See also Philip Morris v. Glendening, 709 A.2d 1230, 1243 (Md. Ct. App. 1998). Approving contingent fee in part because the contingent fee agreement provided for oversight by “an elected State official, who ‘shall have the authority to control all aspects of [outside counsel’s] handling of the litigation.’”
31. No. 2007-121-Appeal (R.I. July 1, 2008).
32. Opinion, p. 64.
33. Opinion, p. 72.
34. Id. at p. 72, n.50, emphasis added.
35. Id. at p. 73, n.50.
36. 957 F. Supp. 1130 (N.D. Cal. 1997).
37. 705 P.2d 347, 218 Cal. Rptr. 24 (1985).
38. 957 F. Supp. at 1135.
39. 709 A.2d 1230 (Md. Ct. App. 1998).
40. 705 P.2d 347, 218 Cal. Rptr. 24 (1985}.
41. Philip Morris, 709 A.2d at 1242.
42. Id. at 1242-43.
43. 580 N.W.2d 139 (N.D. 1998).
44. Id. at 142.
45. Id. at 147.
46. 700 So. 2d 478 (La. 1997).
47. Id. at 484.
48. 28 A.2d 404 (Vt. 1942).
49. 709 A.2d 1230, 1240, 1243 (Md. Ct. App. 1998).
50. 394 P.2d 506 (Okla. 1964).