Contingent, ‘PI’ Firm’s Dearth of Time Records Dooms Attorneys’ Fee Award in Real Estate Spat

A personal injury firm’s (Goldberg, Weisman and Cairo) failure to properly document its attorney time records resulted in an almost 88% fee reduction after the defendants appealed from a real estate dispute bench trial verdict.

The plaintiffs – one of whom is a GWC attorney – in Kroot v. Chan, 2019 IL App (1st) 181392 sued the former property owners for violating Illinois Residential Real Property Disclosure Act, 765 ILCS 77/1 et. seq. (the Act) after they failed to disclose known property defects to the plaintiffs.

The trial court found for the plaintiffs on their Act claims and common law fraud claims and assessed nearly $70,000 in attorneys’ fees and costs against defendants. The defendants appealed citing the plaintiffs’ dearth of competent fee support.

Reversing, the First District emphasized how crucial it is for even a “contingent fee law firm” like GWC to sedulously document its attorney time and services.

Under Illinois law, a plaintiff seeking an attorney fee award had the burden of proving entitlement to fees. Additionally, an attorneys’ fee award must be based on facts admissible in evidence and cannot rest on speculation, conjecture or guess-work as to time spent on a given task.

Unless there is a contractual fee-shifting provision or a statute that provides for fees, an unsuccessful litigant is not responsible for the winner’s fees. And while the Act does provide a “hook” for attorneys’ fees, the common law fraud claim did not. As a result, the First District held that the fraud verdict against one defendant wasn’t properly subject to a fee petition.

“Reasonable attorneys’ fees” in the context of a fee-shifting statute (like the Act) denotes fees utilizing the prevailing market rate. The Act’s fee language differs from other statutes in that it provides that fees can be awarded to a winning party only where fees are incurred by that party. “Incurred,” in turn, means “to render liable or subject to” [⁋⁋ 11-12 citing Webster’s Third New International Dictionary 1146 (1981)]. As a consequence, unless attorneys’ fees have actually been incurred by a prevailing party, the trial court has no authority to award fees under the Act.

At the evidentiary hearing on plaintiff’s fee petition, three GWC attorneys admitted they didn’t enter contemporaneous timesheets during the litigation and that a document purportedly summarizing GWC’s attorney time was only an estimate. The lawyers also conceded that plaintiffs didn’t actually pay any legal fees to GWC. Still another attorney witness acknowledged she tried to reconstruct her time nearly 8 months after the underlying work was performed. [⁋ 19]

The appeals court noted the record was devoid of any evidence that (1) plaintiffs ever agreed to pay for legal services, (2) plaintiffs were ever billed for GWC’s legal services, (3) plaintiff ever paid for those services, or (4) that GWC expected plaintiffs’ to pay for its services. The court also found that the supporting affidavits submitted in support of the fee petition were inadmissible hearsay documents. (It’s not clear from my reading of the opinion why the affidavits and billing record did not get into evidence under the business records hearsay exception.)

In the end, the Court found the absence of either simultaneous time records or testimony that the attorney working on the matter had an independent recollection of the time and tasks incurred/performed rendered the fee petition too speculative.

Kroot provides a useful gloss on the governing standards that control when a plaintiff can recover attorneys’ fees. Aside from stressing the importance of making contemporaneous time records and offering proper supporting fee evidence, the case’s lesson is that in the context of a statute like the Act that only provides for fees actually incurred, the plaintiff must actually pay attorneys’ fees to merit a fee award. Since the evidence was that the prevailing plaintiffs never actually were billed or paid any fees to their attorneys, the plaintiffs’ lawyers failed to carry their burden of proof on the fees issue.

Actuarial Firm Owes No Independent Legal Duty to Health Plan; Lost Profits Claim Lopped Off – 2nd Cir.

The Second Circuit appeals court recently examined the contours of New York’s economic loss rule in a dispute involving faulty actuarial services.

The plaintiff health care plan provider in MVP Health Plan, Inc. v. Optuminsight, Inc., 2019 WL 1504346 (2nd Cir. 2019) sued an actuary contractor for breach of contract and negligence when the actuary fell short of professional practice standards resulting in the health plan losing Medicare revenue.

The plaintiff appealed the district court’s bench trial verdict that limited plaintiff’s damages to the amounts it paid the actuary in 2013 (the year of the breach) and denied the plaintiff’s request for lost revenue.

The plaintiff also appealed the district court’s dismissal of its negligence count on the basis that it was duplicative of the breach of contract claim and the actuary owed the plaintiff no legal duty outside the scope of the contract.

Affirming, the Second Circuit first addressed the dismissal of plaintiff’s negligence claim. In New York, a breach of contract claim is not an independent tort (like negligence) unless the breaching party owes a legal duty to the non-breaching party independent of the contract. However, merely alleging a defendant’s breach of duty of care isn’t enough to bootstrap a garden variety contract claim into a tort.

Under New York law, an actuary is not deemed a “professional” for purposes of a malpractice cause of action and no case authorities saddle an actuary with a legal duty to its client extraneous to a contract. In addition, the court found the alleged breach did not involve “catastrophic consequences,” a “cataclysmic occurrence” or a “significant public interest” – all established bases for a finding of an extra-contractual duty.

Next, and while tacitly invoking Hadley v. Baxendale, [1854] EWHC Exch J70, the seminal 19th Century British court case involving consequential damages, the appeals court jettisoned the plaintiff’s lost revenues claim.

Breach of contract damages aim to put the plaintiff in the same financial position he would have occupied had the breaching party performed. “General” contract damages are those that are the “natural and probable consequence of” a breach of contract. Lost profits are unrecoverable consequential damages where the losses stem from collateral business arrangements.

To recover lost revenues as consequential damages, the plaintiff must establish (1) that damages were caused by the breach, (2) the extent of those damages with reasonable certainty, and (3) the damages were within the contemplation of the parties during contract formation.

To determine whether consequential damages were within the parties’ reasonable contemplation, the court looks to the nature, purpose and peculiar circumstances of the contract known by the parties and what liability the defendant may be supposed to have assumed consciously.

The court found that plaintiffs lost revenues were not damages naturally arising from defects in actuarial performance. Instead, it held those claimed damages were twice removed from the breach: they stemmed from plaintiff’s contracts with its member insureds. And since there was no evidence the parties contemplated the defendant would be responsible for the plaintiff’s lost revenues if the defendant breached the actuarial services agreement, the plaintiff’s lost profits damage claim was properly dismissed.

Afterwords:

MVP provides a useful primer on breach of contract damages, when lost profits are recoverable as general damages and the economic loss rule.
The case cements the proposition that where there is nothing inherent in the contract terms or the parties’ relationship that gives rise to a legal duty, the non-breaching party likely cannot augment its breach of contract action with additional tort claims.

Class Plaintiffs’ Consumer Fraud Claim Against Headphone Maker Survives Motion to Dismiss

The class action plaintiffs in Zak v. Bose Corp., 2019 WL 1437909 (N.D.Ill. 2019) sued the Massachusetts-based headphone behemoth claiming its mobile application (“App”) secretly intercepted plaintiffs’ music selections and sold the information to a third party.

Plaintiffs sued under the Federal wiretap act, and lodged state law claims under Illinois’s eavesdropping and consumer fraud statutes. Bose moved to dismiss the entire Complaint.

Partially granting and partially denying Bose’s motion, the Northern District provides a useful summary of the overlap between Federal wiretap and State law eavesdropping claims and engages in a creative and decidedly post-modern application of the Illinois Consumer Fraud Act, 815 ILCS 505/2 et seq. (the “CFA”).

Plaintiffs alleged that when they selected music to be streamed to their smartphones, Bose’s App “recorded” the selected song, artist and album while in transit to Spotify (or similar music streamers) and sold that data to a data miner.  According to plaintiffs, Bose used the recorded information to create detailed user profiles without his/her consent.

Federal Wiretap and State Eavesdropping Claims

The Federal Wiretap Act (18 U.S.C. s. 2511(a) and Illinois’s Eavesdropping statute, 720 ILCS 5/14-2(a) outlaw the interception (or attempts to intercept) of any electronic communication.

Liability under each statute only attaches to intercepted electronic communications by someone who is not party to the communication.

There is no wiretap or eavesdropping liability for a person who is party to a communication or where a party gives prior consent to the interception of the communication.

The Court rejected plaintiffs’ wiretap and eavesdropping claims as Bose was a party to the communication. The Court found that Bose “participated” in the user-to-streamer communication by first conveying the user’s song selection to the streamer and then processing the streamer’s song information back to the user.

Since the main purpose of the App was to facilitate communication between a headphone consumer and Spotify, the plaintiff failed to sufficiently allege that Bose was not a participant in the underlying communications.

Illinois Consumer Fraud Act

The plaintiffs’ consumer fraud claim survived.  The CFA prohibits “unfair or deceptive acts or practices” including the misrepresentation, omission or concealment of a material fact. 815 ILCS 505/2.

To state a CFA claim, the plaintiff must allege: (1) a deceptive act or practice by defendant, (2) defendant’s intent that plaintiff rely on the deception, (3) the deception occurred in the course of conduct involving trade or commerce, and (4) actual damage to the plaintiff as a result of the deception.

A colorable CFA claim also requires that the plaintiff actually be deceived by a defendant’s statement or omission – a plaintiff must actually receive a communication from the defendant.

For an omission to be actionable, it must involve a “material fact.”  A fact is material where it is information a reasonable buyer would be expected to rely on in deciding whether to purchase a product or one that would have led a buyer to act differently had it known of the omitted fact.

The Court found the plaintiffs sufficiently stated a CFA claim.  Plaintiffs pled a deceptive act by alleging that Bose advertised the headphones and App on its packaging and website, and omitted that the App secretly collected user data which was then sold to a third party.

The plaintiffs also adequately pled that the deceptive act was material as plaintiffs would not have purchased Bose products and installed the App had they known defendants were going to secretly collect and transmit plaintiffs’ streamed music choices.

Finally, according to the Court, plaintiffs adequately alleged both Bose’s intention that Plaintiffs rely on the omission “because it knew that consumers would not otherwise purchase their products” and actual damages – that Bose charged a higher price for its products and plaintiffs wouldn’t have bought the products had they known the App would collect and disclose their information. [*6]

The Court rejected Bose’s arguments that the alleged deceptive act didn’t relate to a material fact and the plaintiffs’ failed to plead actual damages since they did not ascribe a value to the “free and optional” App. The Court held that whether an alleged statement or omission is material is not properly decided on a motion to dismiss.

On the damages question, the Court credited class plaintiffs’ allegations that they paid $350 for the headphones in part because of the App and would not have done so had they known about the App’s information tracking.

Take-aways:

Zak and cases like it lie at the confluence of consumer law, tort law and cyber security. Aside from presenting a useful summary of the Illinois consumer fraud act as well as the Federal wiretap law, the case showcases the liberal pleading plausibility standard that governs Rule 12(b)(6) motions.

While it is unclear whether plaintiffs will ultimately win, Zak demonstrates that so long as a consumer fraud plaintiff pleads at least some facts in support of its omission claim, it can likely survive a motion to dismiss.