Fifth Circuit Upholds Arbitration Panel’s Award in Legal Fees Dispute

The Fifth Circuit Court of Appeals has overturned a district court’s order vacating an arbitral panel’s award in a legal fees dispute. In Campbell Harrison & Dagley v. Hill, No. 14-10631 (5th Cir., April 2, 2015), a couple, the Hills, sought legal representation in 2008 in connection with the husband’s claimed interest in a number of trusts that were established by his father. The couple retained two law firms and executed a hybrid fee agreement with each that provided for both hourly rates and a 15 percent contingency fee in their gross recovery resulting from a final judgment or settlement. According to the contract, the contingency fee was payable to the firms unless the couple terminated their legal representation for good cause. The fee arrangement also included an arbitral provision that required any fee disputes to be settled through binding arbitration before a panel of three arbitrators under the terms of the Texas General Arbitration Act (“TGAA”).

In 2009, the Hills terminated their legal representation with the firms and retained new counsel. In 2010, the couple settled all of their claims for $188 million. After the couple refused to pay the legal fees that were owed to their prior counsel, the firms sought arbitration before a panel of three neutrals. According to the Hills, the legal fee agreements they signed were unconscionable and violated public policy. The panel disagreed and awarded the law firms a combined total of about $3.3 million in hourly fees. In addition, the firms received $25 million in contingency fees and more than $6.6 million in reasonable legal and other fees.

In response to the panel’s decision, the couple asked the Northern District of Texas to vacate the award. The Hills claimed the arbitrators were not impartial and did not act within the scope of their authority. The district court rejected the couple’s evident partiality claims but vacated the arbitral panel’s contingency fee and legal expenses award due to the unconscionability of the fee agreement. The firms then appealed the Northern District of Texas’ decision to the nation’s Fifth Circuit Court of Appeals.

On appeal, the court first stated Texas law controlled the dispute. The Fifth Circuit then said a Texas court’s review of an arbitral award is extremely narrow. The appellate court stated the TGAA requires a court to confirm an arbitration award unless it demonstrated a manifest disregard of the law, a gross mistake, or violated public policy.

Next, the Fifth Circuit turned to the firm’s claim that the district court “failed to apply properly the highly deferential standard of review for arbitration awards under the TGAA” and instead substituted its own judgment for that of the arbitrators when it vacated portions of the arbitration award. The appellate court held:

The district court misapplied that standard. In particular, it rejected the arbitrators’ determination that “the prospect of recovery [was] plenty uncertain”, finding instead that “[t]here was nothing contingent about [the firms’] recovery of their attorneys’ fees”. Hill, slip op. at 24. The court specifically rejected the total-fee amount based on its inclusion of the contingency-fee portion. As the court interpreted the fee agreement, the contingency fee constituted an “unearned payment” in the light of the non-contingent nature of the hourly-rate fees, and, as a result, made the fee agreement unconscionable. Id. at 22, 24 (emphasis in original) (“The Hills would owe high hourly rates regardless of whether they ultimately prevailed in any litigation”.); see also id. at 22 (“Permitting a fifteen percent contingency fee [in this instance] flies in the face of the well established legal principles that authorize contingency fees, as the attorneys’ fees do not compensate [the firms] for any risk that they [would] receive no payment whatsoever.”).

The arbitrators, on the other hand, specifically determined: recovery of any fees was uncertain; a reasonable attorney could find the fee arrangement reasonable; and the total fee was not unconscionable. (“There is nothing about a relatively high hourly rate schedule, uncertain to time of payment, and/or a relatively low contingent percentage, when the prospect of recovery is plenty uncertain, that should be offensive to a competent lawyer, a reasonable client, or an overall traditional public policy of fairness.”). This determination likewise comports with the plain language of the fee agreement, which allows for payment of the hourly-rate fees “as soon as is financially practicable”. (Emphasis added.)

In rejecting the arbitrators’ determinations regarding the uncertainty of recovery, the reasonableness of the total fee, and unconscionability, the court “substitute[d][its] judgment for that of the arbitrators merely because [it] would have reached a different decision”. Perlman, 424 S.W.3d at 790 (citation omitted). As a result, it erred in vacating the contingency-fee-portion of the award and related awards (for the arbitration, the firms’ attorney’s fees, other fees, expenses, and arbitrators’ compensation; and pre-judgment interest on the contingency-fee portion).

Because the district court committed error when it substituted its own judgment in place of that of the arbitral panel, the Fifth Circuit Court of Appeals reversed the lower court’s vacatur of the contingency and related fees award and affirmed the court’s order regarding hourly fees.

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