Tag: litigation

Missing Contingent-Fee Term Doesn’t Doom Law Firm’s Quantum Meruit Claim

Reversing a trial court’s dismissal of a law firm’s quasi-contract claims against a former client, the First District recently considered the enforceability of a contingency fee contract that was missing a material term.

The plaintiff law firm in Seiden Law Group, P.C. v. Segal, 2021 IL App (1st) 200877 sued the defendant, an ex-client, for quantum meruit and unjust enrichment to recover the value of its fees and costs incurred in a prior lawsuit.

Key Facts

In 2013, the client defendant hired the plaintiff law firm to petition the U.S. government in Federal court for the return of personal property the government confiscated after her ex-husband’s 2004 criminal racketeering conviction.

The contingent fee contract, drafted by the plaintiff firm, was silent on the percentage of recovery that would go to the firm if the suit was successful. It read: “_____% of recovered funds…. pursuant to a forfeiture resulting from a matter concerning [defendant’s ex-husband].” The contract also provided that in the event of discharge, the firm could recover pre-firing accrued fees and expenses advanced in the lawsuit.

In 2016, the client fired the law firm. At the time of its firing, the law firm had not recovered any property on the defendant’s (then, the plaintiff’s) behalf.

The law firm then sent defendant a bill for nearly $100,000 based on its assessed value of the legal services provided to the plaintiff in the case against the government. Plaintiff sued when defendant refused to pay under quantum meruit and unjust enrichment theories of recovery.

The basis for plaintiff’s claims was that since the underlying fee agreement was unenforceable since it was missing an essential price term, it could sue alternatively for quantum meruit and unjust enrichment.

The trial court dismissed the suit. It found that the existence of an express contract – the contingency agreement – precluded the law firm’s quantum meruit and unjust enrichment claims. That the contingent-fee contract was missing a recovery percentage, did not render the contract unenforceable. The trial court noted that courts routinely supplied missing price terms in a variety of contexts. And since the contract was enforceable, it defeated plaintiff’s claims.

Reversing, the First District first noted that under Illinois law, a contract’s material terms must be definite enough so that its terms are reasonably certain and able to be determined.

Where a contract lacks a term, a court can supply one where there is a reasonable basis for it. But where the absent term is essential or so uncertain that there is no basis for deciding whether an agreement has been kept or broken, there is no contract.

Illinois courts routinely scrutinize the reasonableness of attorney fees and contingent-fee contracts to ensure that collected fees are not excessive. Illinois courts have found contingency fees ranging from 25% – 40% to be reasonable. There are even statutory benchmarks for certain fee agreements. Code Section 2-1114 (735 ILCS 5/2-1114), for example, caps contingent agreements at 33.3% of total recovery in a medical malpractice case.

However, the Court held that in an arcane case involving recovery of assets seized by the government, there is no industry standard contingent fee amount. Because of this, the Court held that the trial court could not supply a missing percentage recovery term. [19-20]

The First District also noted the contingent-fee contract ran afoul of Illinois Rule of Professional Conduct 1.5(c) which requires that contingent-fee agreements specify the method by which the fee is to be determined, and the percentage accruing to the lawyer after trial or settlement. RPC 1.5(c) [21]

The Court ultimately found that the trial court should not have dismissed the plaintiff’s quantum meruit and unjust enrichment claims.

Quantum Meruit

In Illinois, a plaintiff can sue for quantum meruit where there is no enforceable contract between the parties. But quantum meruit is not available where the underlying contract is unenforceable as a matter of public policy; such as where a contract is illegal or violates a statute. The rationale is that a party to a contract that violates public policy should not be able to circumvent the offending contract by relying on quantum meruit.

But where a contract is unenforceable for violating an ethical rule that does not involve public policy, it will not bar quantum meruit recovery.

A contract only violates public policy where it “has a tendency to injure the public welfare.”  Here, the court found the omission of the percentage recovery an “innocuous omission” that was the product of “carelessness and sloppy contract formation.”  In the Court’s view, this did not rise to the level of a public policy violation. [28]

Because the contract’s missing percentage recovery term did not implicate public policy concerns, the First District held that the law firm could assert a successful quantum meruit claim. [24]

Unjust Enrichment

The Court then considered the Plaintiff’s unjust enrichment complaint count. To state a valid unjust enrichment claim in Illinois, a plaintiff must allege (1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and impoverishment, (4) absence of justification and (5) the absence of a remedy provided by law. [31]

While similar in that they both aim to provide a plaintiff with restitution where no contract exists, quantum meruit and unjust enrichment differ in their respective recoverable damages. The former measures recovery by the reasonable value of work and material provided while the latter considers the benefit received and retained because of the improvement provided.

The Court sustained plaintiff’s unjust enrichment claim for the same reason it found plaintiff’s quantum meruit cause was prematurely dismissed.

Afterwords:

Seiden Law’s lessons are many for commercial litigators. For one, a missing contractual term cannot always be supplied by a court; especially if contract involves specialized subject matter.

The case also makes clear that a breach of RPC 1.5’s contingency fee strictures will not automatically void a contract. It is only when an ethical violation rises to the level of a public policy breach, that a court will nullify a contract.

This case also solidifies the proposition that, when faced with an unenforceable contract that does not implicate public policy concerns, a plaintiff can still bring alternative and equitable claims for quantum meruit and unjust enrichment.

 

 

When The Unconscionability Doctrine Can Void A Contractual Provision – Illinois Law

I recently litigated the enforceability of a contractual arbitration provision contained in an electrical subcontract for work on a high-end residential project in the Chicago suburbs.  The subcontractor fighting arbitration argued that the clause, drafted by the general contractor, was so one-sided against it, that it was unconscionable under Illinois law. [Among other things, the arbitration provision shifted all costs exclusively to the subcontractor.]. The Court disagreed and found that the challenged clause was neither procedurally nor substantively unconscionable.

Two cases – one in Illinois, the other in Arizona [and discussed at length in the Illinois case] – figured prominently in the Court’s granting our motion to enforce the arbitration provision and compel arbitration.  Together, the cases (Kinkel v. Cingular Wireless, LLC, 223 Ill.2d 1 (2006), Maxwell v. Fidelity Financial Services, 907 P.2d 51, 58 (Ariz. 1995) provide a useful gloss on what constitutes procedural and substantive unconscionability in the context of a business-to-business contract.

How many Factors: One, Two or ‘Sliding Scale?’

Earlier case law on unconscionability found that a party had to show both procedural and unconscionability in order to void a contract term.  Other cases apply a “sliding scale” approach – where if a contract term is heavy on substantive unconscionability, it can be light on procedural unconscionability and vice versa.  Kinkel makes clear that either procedural or substantive unconscionability can defeat a given clause.  [The case is silent on whether the sliding scale test is still viable.]

Procedural Unconscionability

The procedural unconscionability question turns on whether the challenged term is so difficult to find or read that the party is essentially unaware of it.  To determine procedural unconscionability, the Court considers, among other things, the disparity in bargaining power between the drafter of the contract and the party contesting a given term, the circumstances surrounding the formation of the contract and whether a clause is “hidden in a maze of fine print.” [Kinkel at 23 citing to Frank’s Maintenance & Engineering, Inc. v. C.A. Roberts Co., 86 Ill.App.3d 980, 989-90 (1stDist. 1980)]

A court’s procedural unconscionability calculus also looks at the conspicuousness of the challenged clause, the negotiations relating to the contract, and whether the parties had an opportunity to understand the terms of the contract.

In our case, the Court found that the Subcontract’s arbitration clause was not hard to find, read or understand and appeared prominently in the contract’s text.  As a result, the Court found ruled that the arbitration clause was not procedurally infirm.

Substantive Unconscionability

Substantive unconscionability occurs where the cost of vindicating a claim is so steep that a plaintiff’s only reasonable cost-effective means of obtaining legal relief is as a member of a class action.  The Court’s substantive unconscionability analysis considers [a] the relative fairness of the obligations assumed, [b] whether terms are so one-sided “as to oppress or unfairly surprise an innocent party,” [c] whether there is “an overall imbalance in the obligations and rights imposed by the bargain, and [d] a significant cost-price disparity.” [Kinkel at 24]

When determining substantive unconscionability, Illinois courts also looks to the secrecy of a contractual arbitration term – that is,  can parties disclose the existence or result of an arbitration proceeding?  Where a party is contractually obligated to keep arbitration results private, it tips the scale towards substantive unconscionability since this ensures that the pro-arbitration litigant can deny its opponents access to precedent.

In addition, courts are more likely to find unconscionability where a consumer is involved, there is a disparity in bargaining power, and the clause is on a pre-printed form.  Moreover, where a party seeks to invalidate an arbitration provision on the ground that the arbitration would be prohibitively expensive, that party has the burden to show the likelihood of incurring those costs.

According to the Seventh Circuit, to meet her burden, the party contesting arbitration must provide some individualized evidence to show she will face prohibitive costs in the arbitration and is financially incapable of meeting those costs. [Livingston v. Associates Finance, Inc., 339 F.3d 553, 557 (7th Cir.2003)]

In our case, the Court did find that the arbitration provision in question was one-sided in our favor and against the opponent. [I disagreed; there were multiple pro-subcontractor provisions in the contract as it was exhaustively negotiated prior to its consummation.]  The Court even said that it would never advise a client to agree to it or even itself assent to it. However, the Court quickly [and rightly] noted that its subjective opinion that a contractual clause is perhaps unwise or risky was not the test for substantive unconscionability.

Instead, the crucial question was whether the provision was oppressive, unfairly surprising to the party contesting the term, portrayed an imbalance in obligations and rights or was cost-prohibitive to enforce.  The Court did not find that any of these substantive unconscionability hallmarks applied and granted our motion to compel arbitration. [The subcontractor’s Motion to Reconsider is pending.]

Still another factor leading the court to reject our adversary’s substantive unconscionability argument was the freely bargained-for nature of the arbitration clause.  This was illustrated by the Subcontract’s multiple line-outs and handwritten notes.  The presence of multiple, manual changes revealed that the parties heavily negotiated the terms of the contract.

Take-aways:

Kinkel and the cases it relies on – including Maxwell’s substantive unconscionability formulation, collectively stand for the proposition that a party claiming a contract provision is procedurally or substantively unconscionable bears the burden of establishing the existence of either or both.

Where the parties stand on an equal bargaining footing and there is no consumer nexus to the underlying contract, it is all the more difficult for the party challenging a contract term on the basis of unconscionability.

In the business-to-business setting, assuming the contract at issue isn’t hard to find or understand [and therefore not procedurally unconscionable], the best chance a litigant has of vitiating a contractual arbitration provision is to argue substantive unconscionability: that the term is so one-sided in that it portrays a stark imbalance in rights and obligations and is cost-prohibitive for the party challenging to term to enforce it.  An additional plus-factor is where the arbitration clause is subject to non-disclosure such that neither party can reveal the results of arbitration –  depriving future litigants from accessing precedent.

 

Statement Assailing Lawyer’s Appearance and Competence Not Factual Enough to Sustain Defamation Claim – Ind. Appeals Court

In Sasser v. State Farm Insurance Co., the Indiana appeals court addressed the contours of defamation law in the context of two statements that variously impugned an attorney’s physical appearance and professional abilities.

The plaintiff, an in-house lawyer for the insurance giant defendant, had a years’ long personality clash with a non-attorney claims adjuster.  The plaintiff alleged the adjuster made many disrespectful comments about the plaintiff including the two statements that drove plaintiff’s defamation suit.

The challenged statements consisted of one concerning the plaintiff’s appearance; the other, her competence as a lawyer.  The Court focused mainly on the latter claims agent’s assertion that “any competent attorney could get a defense verdict” after the plaintiff advised against taking a case to trial to company brass.  The plaintiff argued that the adjuster’s statement was per se defamation since it imputed the plaintiff’s ability to perform as a lawyer.

The trial court disagreed and entered summary judgment for the defendants.  Plaintiff appealed.

Affirming, the court first set forth the general principles of Indiana defamation law.

Defamation requires proof of a factually false statement about the plaintiff, published to a third party that tends to lower one’s reputation in the community or that deters others from associating with the person.

Defamation includes written (libel) and oral (slander) statements.  Two species of defamation law include per se defamation and per quod defamation.  The former applies to statements that are naturally harmful on their face and don’t require a plaintiff to prove special damages.

The four categories of per se defamation are statements that a plaintiff (1) committed a crime, (2) has a communicable disease, (3) is incompetent in trade or profession, and (4) exhibits a lack of integrity in performing employment duties.

Defamation per quod involves a statement that isn’t obviously defamatory but requires extrinsic evidence to establish its defamatory meaning.  To succeed on a defamation per quod claim, the plaintiff must prove actual monetary harm attributable to the challenged statement.

For a statement to be actionable as defamation, it must contain objectively verifiable facts about the plaintiff.  But where the speaker is merely expressing his/her subjective view, interpretation, or theory, the statement is not actionable.  In addition, “[j]ust because words may be insulting, vulgar or abusive words does not make them defamatory.” [22]

Here, the appeals court agreed with the trial court that the two statements under attack did not directly convey a per se defamatory statement about the plaintiff.  While allowing that individual defendant’s comment concerning the plaintiff’s appearance may be offensive, it wasn’t verifiably true or false and so didn’t rise to suable slander.

And while the adjuster defendant’s “any competent attorney” statement arguably implicated per se category (3) – by attributing an inability to perform employment duties – the court found the statement too nebulous to be verified as either true or false.  The Court viewed this statement as the claims agent’s subjective opinion that a competent attorney could secure a certain result after a hypothetical trial.

Rhetorically, the Court asked how would one demonstrate the truth or falsity of such a statement?  It then cited to a late-90s Seventh Circuit decision (Sullivan v. Conway, 157 F.3d 1092 (7th Cir. 1998)) where the Court opined that “to say [plaintiff] is a very poor lawyer is to express an opinion that is so difficult to verify or refute that it cannot feasibly be made a subject of inquiry by a jury.”

The Sullivan case relied on by the Indiana appeals court noted that the caliber of legal representation is inherently uncertain: it noted that excellent lawyers may lose most cases because they take on only challenging ones.  Conversely, according to Sullivan, poor lawyers could win all their cases by only taking easy cases. [25].

What’s more: lawyers have strengths and weaknesses: some are good at some things, while poor at others.   There simply isn’t a way to factually test an opinion concerning a lawyer’s aptitude.  Here, since there was no way to corroborate the statement’s truth or falsity, it wasn’t factual enough to support a defamation claim.

The court also rejected plaintiff’s attempt to bootstrap the “any competent attorney’ statement into a claim that the plaintiff violated Indiana Rule of Professional Conduct 1.1 which specifically speaks to lawyer competence in representation.  The Court found that since the plaintiff didn’t allege either the individual or corporate defendant didn’t say the plaintiff acted unprofessionally or improperly with respect to a specific, discrete legal matter, the plaintiff’s reliance on Indiana’s professional conduct rules fell short.

The court also rejected plaintiff’s per quod argument: that the statement’s defamatory content was established when the  court considered extrinsic evidence.  Because the statement did not impute anything false about the plaintiff that would tend to harm the plaintiff’s reputation, the statement was not defamatory per quod.

Afterwords:

This case illustrates in sharp relief the challenges a defamation plaintiff faces in a culture that vaunts freedom of expression and gives latitude for citizens to “blow off steam” in the private, employment setting.

Sasser also demonstrates that while a statement may be mean, offensive, and vulgar, it still will not rise to the level of actionable defamation if it cannot be objectively tested as true or false.

Qualitative, subjective statements about a lawyer’s abilities do not lend themselves to objective testing.  As a result, in Indiana at least, such statements generally cannot support a defamation claim.