On April 20th, a petition for a writ of certiorari was filed with the U.S. Supreme Court in Parallel Networks v. Jenner & Block, No. 16-1271, in a case which will ask the nation’s highest court to determine whether arbitration awards should be upheld when such awards are in violation of fundamental state public policy. Respondent Jenner & Block filed a waiver stating that the firm didn’t intend on filing a response to Parallel Network’s petition for writ. The case involves a patent licensing company – Parallel Networks – which is fighting a multi-million arbitration award given to a law firm – Jenner & Block – which agreed to represent Parallel Networks in two patent infringement cases in Delaware District Court pursuant to a contingency fee agreement (CFA). The CFA used arbitration for the resolution of disputes with Texas as the governing law of the agreement.
Jenner & Block represented Parallel Networks for 18 months and then lost one of the cases on summary judgment of non-infringement. Four weeks after losing summary judgement, Jenner & Block decided the cases were no longer economically viable, refused to handle the appeal of the adverse summary judgment and advised Parallel Networks that it was terminating its representation in both cases. Parallel Networks retained new legal counsel for the appeal and these new lawyers undid Jenner & Block’s loss when the Federal Circuit vacated the summary judgement order of non-infringement and remanded the case back to Delaware. Parallel Networks eventually settled both cases, including an eight-figure settlement in one of those cases.
Incredibly, more than two and a half years after Jenner & Block determined that these cases weren’t economically viable and then decided to abandon its client, Jenner & Block sent a demand letter to Parallel Networks claiming it was entitled to payment of $10.2 million in hourly fees based on the successful outcomes of the cases achieved by a different law firm. Jenner & Block apparently interpreted the CFA to allow it to terminate its representation of Parallel Networks if the firm unilaterally determined the cases were not in its economic self-interest and then to retroactively convert the CFA from a contingency fee agreement to an hourly fee agreement (see Exhibit L of this reply in support of motion for rehearing filed with the Supreme Court of Texas). Although Parallel argued that the payment of any fees to Jenner & Block, which had lost one of the cases and then abandoned its client, would be unconscionable under Texas law and violate core Texas public policies designed to protect clients from egregious and unethical attorney conduct, an arbitrator awarded Jenner & Block millions of dollars in contingency fees.
Parallel Networks appealed the adverse arbitration award through the Texas court system arguing that the award violated Texas public policy and, therefore, had to be vacated. The Texas courts, however, interpreted the U.S. Supreme Court’s decision in Hall Street Associates, LLC v. Mattel, Inc. as preventing vacatur of arbitration awards under the FAA for violations of public policy and they confirmed the arbitration award. Parallel Network’s petition for certiorari asks the U.S. Supreme Court to confirm that public policy still exists as a basis to vacate egregious arbitration awards under the FAA which violate fundamental state public policies. In addition, the petition seeks to have the U.S. Supreme Court vacate the arbitration award and remand the case back to the Texas courts so that they can finally undertake a review of the public policy violations alleged by Parallel Networks.
If the allegations made by Parallel Networks in its arbitration and subsequent appellate court pleadings and briefs are borne out – that Jenner & Block engaged in unethical conduct in pursuing unconscionable fees – this case has the potential to make Jenner & Block the poster child for greedy, unethical contingency fee lawyers whose economic self-interest overshadowed their ethical responsibilities and obligations. This multi-part series will examine the dispute between Parallel Networks and Jenner & Block (including Jenner & Block’s conduct during and after the arbitration), the law governing attorney-client contingency fee representation and fees as well as the interplay between the FAA and state public policy in the context of attorney regulation. This arbitration dispute is very unique because Parallel Networks refused to allow the arbitration to be conducted under any sort of confidentiality designation (with the exception of the settlement amounts it received in the two cases). As a result, these articles will link to the actual emails of the parties, Jenner & Block’s internal memoranda and deposition and arbitration testimony of Parallel Network’s and Jenner & Block’s witnesses wherever applicable so readers can see what actually happens in the normally closed world of high-stakes arbitration.
In the United States, the use of arbitration proceedings to handle disputes between parties is either governed by state arbitration statutes (e.g. the Texas Arbitration Act) or by the Federal Arbitration Act (FAA), with the latter typically applying when the dispute involves interstate commerce or is between parties domiciled in different states. The FAA was first enacted in 1925 and was originally meant only to govern disputes between merchants engaged in interstate commerce by creating procedures for use solely in federal courts. (The author of the article linked in the previous sentence also provided an amicus brief to the Supreme Court of Texas in this case.) Under the terms of the FAA and subsequent court precedent construing the FAA, parties which elect to engage in arbitration proceedings under the FAA for resolving disputes lose a great deal of their right to appeal adverse arbitration awards to federal or states courts, even when those appeals are based on substantive grounds. The rationale for that extremely limited right of appeal is that the parties knowingly chose a method of private dispute resolution outside of the federal or state court system when they elected to use arbitration.
Many times, however, there are parties who aren’t aware that they’ve bound themselves to private arbitration particularly when mandatory arbitration clauses are buried in the finer details of consumer contracts. In recent years, The New York Times has provided ample coverage of efforts from corporate interests to introduce arbitration clauses into consumer contracts, often to limit the corporation’s exposure to class-action lawsuits. Once a dispute triggers an arbitration clause, parties often fight out the dispute in front of arbitrators who are more inclined to decide cases in the favor of the corporations writing arbitration clauses into their contracts for various reasons, including the desire to keep business coming back to the arbitration firm. In November 2015, the editorial board of The New York Times went as far as to opine that “America’s corporations have created a private system for handling disputes that benefits them greatly while denying customers their day in court.”
Under the terms of the FAA, codified in 9 U.S.C. §10, there are four statutory grounds under which federal or state courts may vacate an arbitration award: (1) where the award was procured by corruption, fraud or undue means; (2) where there was evident partiality or corruption in the arbitrators; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing upon sufficient cause, refusing to hear evidence pertinent and material to the controversy, or any other misbehavior which has prejudiced the rights of any party; or (4) where the arbitrator either exceeded his powers or imperfectly executed them such that a mutual, final and definite award was not made. If a party has a cause for action based on any of these statutory grounds, they’re able to bring suit in the district court for the district within which the arbitration decision was made to have the arbitration award vacated or modified.
However, a string of decisions by the U.S. Supreme Court have largely foreclosed any realistic chance for court review by parties to arbitration proceedings under the FAA. For example, in 2008, the U.S. Supreme Court in Hall Street v. Mattel held that the statutory grounds set forth in the FAA are the exclusive grounds under which an arbitration award may be modified or vacated, notwithstanding any agreement between the parties to contractually expand the basis for review. In 2011, the U.S. Supreme Court in AT&T Mobility v. Concepcion held that the FAA preempted California state law and, therefore, class-action waivers in arbitration agreements are enforceable despite California statutes holding otherwise. Then in 2013, the U.S. Supreme Court in American Express Co. v. Italian Colors Restaurant held that the FAA precludes courts from invalidating a contractual waiver of class arbitration even if the plaintiff’s costs of individually arbitrating a federal statutory claim exceeds the potential recovery. Despite any issues raised by state law, the nation’s highest court has continued to interpret the FAA’s statutory authority as the sole and exclusive law of the land regarding arbitration.
For individual inventors and small operating companies, contingency fee arrangements give them the ability to seek compensation for the unauthorized use of their intellectual property from larger (and significantly more deep-pocketed) infringers without requiring them to have to pay hourly fees for litigation counsel. For these patent owners, contingency fee arrangements are often the only avenue they have available to obtain recourse against infringers and to obtain any value for their intellectual property. Abuses of contingency fee arrangements by unethical lawyers (as allegedly exemplified by Jenner & Block’s conduct in pursuing first hourly and then contingency fees against a former patent client on cases that Jenner & Block lost and then abandoned) negatively impact the larger conversation surrounding alternative fee structures as some organizations that advocate limiting or even doing away completely with contingency fee arrangements argue that they encourage abuses of the legal system by facilitating the filing of frivolous lawsuits or by gamesmanship against clients by unethical contingency fee lawyers.
Under Texas case law, contingency fee lawyers retain a right to seek compensation when the lawyer has been terminated without ”good cause”. That rule comes from the 1966 decision by the Supreme Court of Texas in Mandell & Wright v. Thomas. In Mandell, a law firm working under a contingency fee arrangement represented a client in a wrongful death suit. The client terminated the relationship with the law firm before a successful result in that case. The Supreme Court of Texas held that a lawyer hired on a contingency fee basis, who is discharged without good cause before the representation is completed, may seek compensation in quantum meruit or in a suit to enforce the contingency fee agreement.
However, a lawyer’s right to seek compensation under a contingency fee arrangement when the representation has been terminated is not absolute. The U.S. Court of Appeals for the Fifth Circuit’s (5th Cir.) 1996 decision in Augustson v. Speiser, Krause, Madol and Mendelsohn denied compensation to a lawyer who terminated his representation of a client prior to the resolution of a lawsuit because the lawyer disagreed with the client over the extent of discovery and the settlement value of the case. The court noted that a lawyer holds a fiduciary duty to implement a client’s wishes despite the economic interest of the lawyer and that abandoning a client without “just cause” precludes the lawyer from seeking any compensation. The 5th Circuit gave several examples of what constituted “just cause” which could be summarized as culpable client conduct so egregious as to basically preclude the lawyer from being able to prosecute the case. In 2006 the Supreme Court of Texas issued its opinion in in Hoover Slovacek v. Walton which held that contingency fee agreements including provisions imposing termination fees in the event that the client wishes to terminate a lawyer’s services impede upon a client’s unfettered right to terminate counsel, and such provisions are unenforceable because they are contrary to public policy.
In Texas, attorney conduct is prescribed by the Texas Disciplinary Rules of Professional Conduct (Texas Disc. R. Prof’l. Conduct) which are viewed as “an expression of [Texas] public policy” in light of the Texas appellate court’s 2008 decision in Cruse v. O’Quinn. In the arbitration and in subsequent court proceedings to vacate the arbitration award, Parallel Networks argued that the arbitration award violated Texas Disc. R. Prof’l. Conduct 1.04 and 1.15 and, therefore, the award was void as against Texas public policy. Texas Disc. R. Prof’l. Conduct 1.04 permits lawyers to enter into contingency fee arrangements provided the fee is dependent upon the outcome of the case. Parallel Networks argued that giving a contingency fee to Jenner & Block – where the only outcome achieved by that law firm was a summary judgment loss – was a violation of Rule 1.04. Texas Disc. R. Prof’l. Conduct 1.15 permits lawyers to withdraw from representation based upon a client’s failure to fulfill its contractual obligations, provided that the lawyer had informed the client of the breach and given the client an opportunity to cure. Parallel Networks argued that Jenner & Block’s purported “just cause” excuse which was first raised in the arbitration that they withdrew from the representation due to Parallel Networks breach of the CFA as a result of late repayment of litigation expenses failed as a matter of law because Jenner & Block never gave Parallel Networks notice of any breach and an opportunity to cure as required by Rule 1.15.
If this fee dispute had been litigated in Texas state or federal court it is quite likely that it would have been disposed of quickly and in favor of Parallel Networks given these alleged violations of the Texas Disc. R Prof’l Conduct and violations of Texas public policy. However, because the dispute was heard in arbitration, violations of the Texas Disc. R Prof’l Conduct and established case law on when contingency fee attorneys can recover compensation apparently doesn’t matter any more in Texas. This is evidenced by the abject failure of the Texas courts to engage in any substantive review of the merits of Parallel Networks’ arguments on why the arbitration award violates well-established Texas public policy governing the conduct of lawyers. This is an extremely important issue for patent owners who are contemplating filing patent infringement cases in the popular Eastern District of Texas. Namely, the Parallel Networks v Jenner & Block dispute shows that courts in Texas will delegate the regulation of lawyers in Texas to private arbitrators (who are themselves lawyers) and will not engage in any review of any alleged ethical violations or arbitration awards that are in direct conflict with the Texas Disc. R. Prof’l. Conduct or well-established Texas law and precedent governing attorney conduct.
This dispute also allows unethical lawyers to game the contingency fee system by allowing them to walk away from litigation, leaving their clients at their darkest hour, and then return to collect a share of the recovery when the client finally recovers money through the efforts of new counsel. This failure by the Texas court system effectively condoning this type of conduct damages the reputation of the legal profession and leaves reputable lawyers facing criticisms which they don’t deserve. Patent owners should be aware of the current state of the law in Texas surrounding contingency fee arrangements along with the reality that their legal counsel might be incentivized by the outcome in the Parallel Networks v Jenner & Block dispute to terminate representation in the face of adverse case developments and then come back years later and poach what they can from an eventual settlement secured by other lawyers. In the interest of our readers, we’ll provide an in-depth look at the issues raised in Parallel Networks v. Jenner & Block in a series of articles published on this website.