Arbitrator’s ‘interpretation’ of unconscionable fee agreement gives Jenner & Block millions in unearned contingency fees

[This article is the fourth part of a series looking at the legal issues raised in Parallel Networks v. Jenner & Block, a case for which petition for writ of certiorari has been filed at the U.S. Supreme Court. To read part 1, see: Parallel Networks asks SCOTUS to overturn unconscionable arbitration award. To read part 2, see: Did Jenner & Block breach its fiduciary to Parallel Networks with an unreasonable contingency fee? To read part 3, see: Money For Nothing: An arbitrator awards Jenner & Block millions for losing case, abandoning its client.]

At least up until the Parallel Networks v. Jenner & Block dispute, the Supreme Court of Texas took a very dim view of attorney-client fee agreements that violated ethical rules. In its 2006 opinion in Hoover Slovacek v. Walton, the Supreme Court of Texas even went so far as to caution attorneys that they could not contract around their ethical obligations to clients. The prohibition on attorneys attempting to contract around their ethical duties was underscored by the Court’s pronouncement that when interpreting and enforcing attorney fee agreements, it was “not enough to simply say that a contract is a contract because ethical considerations overlay the contractual relationship [between an attorney and client].” In essence, the Supreme Court of Texas held that an attorney’s ethical obligations to his or her client superseded the contractual agreement and that all fee arrangements between attorneys and clients must first and foremost be viewed through an ethical lens when determining whether or not an attorney client fee agreement was unconscionable.

It cannot be seriously disputed that there were significant ethical issues with Jenner & Block’s interpretation of the CFA and its attempt to collect what are almost certainly unconscionable fees under that agreement. As evidenced by multiple internal Jenner & Block emails, Jenner & Block’s management believed that they could lose the Oracle case on summary judgment and then avoid the risk of not getting paid a contingency fee (because they had recovered nothing for their client) by retroactively (and in their sole discretion) changing the terms of the representation to force Parallel Networks to pay an arguably suspect demand of $10.2 million in hourly fees. According to Jenner & Block’s interpretation of the CFA, the (apparently misnamed) contingency fee agreement with Parallel Networks allowed them to pick and choose which course of action resulted in the best outcome for Jenner & Block: Win the Oracle case and get a huge contingency fee or lose the Oracle case on summary judgment, and get full hourly fees.

Jenner & Block’s interpretation of the CFA contravenes state ethics rules which permit attorneys to enter into fee arrangements with clients where payment for the legal services rendered is “contingent” upon the attorney obtaining a recovery for the client. Texas follows that rule pursuant to Texas Disciplinary Rule of Professional Conduct 1.04(d) which mandates that the contingency fee must be dependent on the outcome of the case. The Supreme Court of Texas noted that there must be risk attendant with contingency fee arrangements because  this justifies the attorney’s potential for a greater return (in excess of hourly billing rates) from a contingency fee and also incentivizes lawyers to work diligently and to obtain the best results possible for their clients. The CFA – which Jenner & Block interpreted to allow them to unilaterally switch from a contingency fee agreement to an hourly fee agreement – unequivocally violated Texas Disciplinary Rule 1.04 because payment to Jenner & Block was not dependent upon the outcome of the Delaware Cases (including, the Oracle case which Jenner & Block lost on summary judgment). As a practical matter, that meant that Jenner & Block never had any risk of not getting paid under their interpretation of the terms of the CFA. And, if the CFA violated Texas Disciplinary Rule 1.04, then it also unquestionably violated Texas public policy because courts in Texas look to the Texas Disciplinary Rules of Professional Conduct to determine whether or not an attorney-client fee agreement comports with Texas public policy.

The requirement that a contingency fee attorney must bear the risk of non-recovery in order to justify a contingency fee arrangement is also the reason why Texas law has been clear that unilateral option provisions in fee agreements — where the attorney transforms the fee structure from a contingency fee arrangement to an hourly fee arrangement, or vice versa, at the attorney’s sole discretion — are unenforceable. The Supreme Court of Texas has held that these types of unilateral option provisions are unenforceable as a matter of law because the attorney’s fee is no longer contingent, and because it subverts the purpose served by contingency fee agreements by shifting all the risk of the representation to the client. The Texas Committee on Professional Ethics echoed that view in Texas Ethics Opinion 518 which stated:

“An agreement obligating a client to pay the attorney the greater of (a) a fee that is reasonable if determined and collectable strictly on a contingent basis or (b) the highest fee that would be reasonable based strictly on an hourly rate appears to violate DR 1.04 because (1) the uncertainty of collection normally would not be considered in arriving at a fee for services on an hourly rate and (2) a higher fee payable only out of a recovery on a contingent fee basis normally would be justified due to the uncertainty of collection.”

Notwithstanding well-settled Texas law prohibiting unilateral option provisions in attorney-client fee arrangements, that is exactly the position that Jenner & Block took in the arbitration: That the CFA allowed them – unilaterally and in their sole discretion – to convert the contingency fee agreement with Parallel Networks to an hourly fee agreement. That allowed Jenner & Block to shift all the risk of the Delaware Cases to Parallel Networks which was forced to pay successor counsel hourly fees to undo Jenner & Block’s summary judgment loss and to get the Oracle case ready for trial.

Putting aside for a moment any violations of Texas Disciplinary Rule 1.04, and Texas public policy governing contingency fee arrangements, it is also difficult to understand how Jenner & Block believed it’s interpretation of the CFA comported with its ethical obligations to its client. Remember, once representation had commenced, Jenner & Block became a fiduciary to Parallel Networks which meant that Jenner & Block had to put Parallel Network’s interests ahead of its own interests. Jenner & Block’s interpretation of the CFA was unquestionably in Jenner & Block’s best interests and unquestionably in Parallel Networks’ worst interests.   

The requirement that an attorney put his client’s best interests ahead of his or her own is also the reason why the Supreme Court of Texas held in the Hoover Slovacek case that attorneys cannot contract around these public policies. That means that an attorney, as a fiduciary, cannot allow the client to enter into an unconscionable fee agreement – even if the client insists. Throughout this dispute, Jenner & Block made much of the fact that Parallel Networks’ president – Terry Fokas – was an attorney who had experience in negotiating contingency fee agreements. According to Jenner & Block, Fokas was a sophisticated client who knew exactly what he was agreeing to. In effect, Jenner & Block argued that Fokas knowingly agreed to a contingency fee arrangement where Jenner & Block could lose the Delaware Cases, quit and then be entitled to more than $10.2 million hourly fees. Stated another way, Jenner & Block’s argument was that they could enter into a fee agreement to collect unconscionable fees because the contract allowed them to and because Fokas had agreed to it (notwithstanding that Fokas testified during the arbitration that he had a significantly different interpretation of the CFA – an interpretation that was never challenged by Jenner & Block). Jenner & Block’s implication – that their ethical considerations and fiduciary obligations were somehow different or even inapplicable because Parallel Network’s president was an attorney is difficult to reconcile with the fact that not a single state has attorney disciplinary rules (including Texas or Illinois – where Jenner & Block’s partners are admitted) which contemplate different standards of ethical duties based upon the alleged sophistication of the client.

As previously discussed, during the arbitration Jenner & Block retreated from seeking hourly fees and instead asked the arbitrator for an award of contingency fees for whatever amount that arbitrator Jerry Grissom thought was “fair”. However, Jenner & Block’s argument to the arbitrator for a contingency fee award under the CFA had a really big problem. The provision in the CFA that Jenner & Block relied upon in asking for contingency fees expressly noted that Jenner & Block could receive a fair portion of any settlements achieved by Parallel Networks but only based upon Jenner & Block’s “contribution to the result achieved as of the time of termination” of the CFA (emphasis added). The really big problem for Jenner & Block was that the only result they “achieved” at the time they terminated the CFA was an adverse summary judgment ruling in the Oracle case which resulted in a take nothing judgment against Parallel Networks.

In order to overcome the express contractual language of the CFA which foreclosed  awarding contingency fees, arbitrator Jerry Grissom “interpreted” the CFA so that Jenner & Block was entitled to contingency fees but not based on Jenner & Block’s “contribution to the result achieved at the time of termination” (as the CFA expressly stated). Instead arbitrator Jerry Grissom opined that the CFA really meant that Jenner & Block was entitled to contingency fees based on the results achieved by Parallel Networks’ successor counsel. Notwithstanding the fact that the settlement with Oracle took place more than two and one-half years after Jenner & Block unilaterally terminated the CFA. A termination which was made by Jenner & Block (and despite Parallel Network’s pleas for Jenner & Block to stay in the Oracle case) because firm management had concluded that the Delaware Cases were no longer in Jenner & Block’s economic interests. Adding insult to the injury of this perverse “interpretation” of the CFA, arbitrator Jerry Grissom also awarded Jenner & Block as additional contingency fees 16% of the net proceeds of any settlement obtained by Parallel Networks from a future arbitration (the settlement with Oracle had an up-front payment plus an additional payment based upon the results of a future arbitration between Oracle and Parallel Networks).

Oracle and Parallel Networks settled that arbitration in January 2013. So, more than four years after Jenner & Block lost the Oracle case and abandoned its client, they received nearly $500,000 in additional contingency fees from Parallel Network’s settlement with Oracle – despite the fact that they were not representing Parallel Networks when this January 2013 settlement with Oracle was negotiated and concluded (in point of fact, in January 2013 Jenner & Block was suing Parallel Networks in arbitration). While arbitrator Jerry Grissom’s rationale for awarding millions of dollars to Jenner & Block in contingency fees under his “interpretation” of the CFA is absurd, his acceptance of Jenner & Block’s “just cause” excuse which allowed Jenner & Block to abandon Parallel Networks and still retain a right to get paid, is truly bizarre.

The rule governing attorney compensation under a contingency fee representation is that, absent “just cause”, a lawyer who terminates the representation prior to recovering money for their client is not entitled to any compensation (not contingency fees, not hourly fees, not even quantum meruit). The bar in Texas for finding “just cause” is so high that during the arbitration Jenner & Block could not locate a single published opinion in the entire history of Texas jurisprudence where a contingency fee lawyer voluntarily walked away from a case and got paid.

Notwithstanding that nearly insurmountable bar, Jenner & Block claimed that it had “just cause” to quit because they alleged that Parallel Network’s had been late in paying litigation expenses in the past (even though all litigation expenses had been paid in full by the time Jenner & Block terminated the CFA). And that this previous course of conduct supposedly concerned Jenner & Block that Parallel Networks would be late in paying expenses in the future.

Arbitrator Jerry Grissom accepted that “just cause” rationale despite two glaring factual inconsistencies. First, back in January 2009, when Jenner & Block partner, Paul Margolis, emailed Jenner & Block’s termination letter to Parallel Network’s president, Terry Fokas, the letter merely referenced Paragraph 9 of the CFA (the provision which allowed Jenner & Block to quit if they determined the Delaware Cases were no longer in their economic interest and then get hourly fees). No mention in the termination letter that Jenner & Block was quitting because of any issues regarding Parallel Network’s alleged history of being late in paying litigation expenses and no mention about Jenner & Block’s purported concerns about Parallel Network’s ability to timely pay expenses in the future.  

Second, on June 17th, 2011 (four weeks after Parallel Network’s successor counsel settled the Oracle case), Jenner & Block partner and general counsel Russell Hoover sent a demand letter to Parallel Network which unequivocally stated that Jenner & Block had quit because they had determined the Delaware Cases were not in the firm’s economic interest. The demand letter by Jenner & Block’s general counsel flatly contradicted Jenner & Block’s post-hoc arbitration “just cause” excuse that they had quit because of issues regarding Parallel Network’s payment of past litigation expenses or Jenner & Block’s purported concerns about the payment of future litigation expenses. The relevant portion of Hoover’s demand letter noted:

“Pursuant to Paragraphs 9(b) and 9(a)(i) of the Agreement, Jenner’s fee entitlement for that representation totals $10,245,492. Jenner terminated the Agreement effective February 9, 2009, and since then has received no payment against the fee obligation at all.

The Agreement is a Contingent Fee Agreement, with the contingency applicable up to the date of the Agreement’s termination. Jenner was given the option to terminate the Agreement on 30 days prior written notice if we determined at any time that it was not in Jenner’s “economic interest to continue the representation pursuant to the Agreement.” Upon such termination, Jenner was to receive compensation for all time expended by Jenner & Block [up to the termination date] on any Enforcement Activity undertaken on behalf of [Parallel] at the regular hourly billing rate charged by Jenner & Block for its attorneys and legal assistants” with that to be “in lieu” of the Contingent Fee applicable to such services.

This is a very large receivable, which is now more than two years past due. Parallel Networks has made no payments whatsoever against this liability and we have received no explanation of why. . . . Our position is quite simple: The contract specifically spells out that to which we are entitled on termination of the Agreement.” (emphasis added)

In addition to these two letters from Jenner & Block, the discovery obtained by Parallel Networks during the arbitration clearly showed that Jenner & Block had quit because the firm’s management had concluded that the Delaware Cases were no longer in Jenner & Block’s economic interest. For example, on December 12th, 2008, December 17th, 2008, and December 31st, 2008, Jenner & Block partner, Terri Mascherin sent internal emails to the firm’s management that if they determined the Delaware Cases were no longer in the firm’s economic interests they could terminate the CFA and then get their full hourly fees. And for 16 out of the 17 months of the arbitration that is exactly what Jenner & Block demanded and pursued from Parallel Networks, its fully hourly fees. It is difficult to reconcile the evidence from Jenner & Block’s own letters and internal emails and its relentless pursuit of hourly fees for almost the entire duration of the arbitration with Jenner & Block’s purported “just cause” excuse that they had actually quit because of their concerns about Parallel Network’s payment of expenses in the past and the client’s ability to pay expenses in the future.       

Even more troubling, what exactly were Parallel Network’s anticipated future expenses that caused Jenner & Block so much heart-ache that they decided to walk away from two patent infringement cases in which they had expended more than $10.2 million in hourly billable time? Since the adverse summary judgment was going to be appealed to the CAFC, the only possible future expenses in the Oracle case consisted of printing costs for the appellate briefs, which would have been around $5,000. But what about Mascherin’s email of December 12th, 2008, which she sent to Jenner & Block’s managing partner, Susan Levy – four weeks before Jenner & Block terminated the CFA? In that email Mascherin stated that, as a result of settling two patent infringement suits in the Eastern District of Texas, Parallel Networks “should also have enough money to pay us a retainer to cover the expenses for a trial if that trial (on the remaining issues – i.e. Oracle’s declaratory judgment claim of invalidity) has to proceed in January.” In that email, Mascherin estimated expenses for the Oracle trial would be between $157,000 and $365,000, depending on the scope of the case. Given Jenner & Block’s own assessment that Parallel Networks had enough money to pay a retainer for trial expenses which were estimated to be in the low to nearly mid six-figure range, how could they legitimately claim in the arbitration that they had terminated the CFA because of concerns that Parallel Networks wouldn’t be able to come up with $5,000 in estimated future expenses for the CAFC appeal?

Finally, there are two ethical/legal problems with Jenner & Block’s purported “just cause” excuse. First, Texas Disciplinary Rule 1.15 (b)(5) (Illinois Rule of Professional Conduct 1.16 is nearly identical) notes that a “lawyer shall not withdraw from representing a client unless…the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer’s services, including an obligation to pay the lawyer’s fee as agreed, and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled.” (emphasis added) If Jenner & Block truly believed that Parallel Networks had breached the CFA in the past by being late in paying litigation expenses and that Parallel Networks would breach the CFA in the future by paying late future litigation expense, then Jenner & Block violated Texas Disciplinary Rule 1.15 (and the analogous Illinois Rule of Professional Conduct 1.16) by failing to give Parallel Networks any warning (as required by both Texas and Illinois ethics rules) and opportunity to cure any past or anticipated breach of the CFA. Second, it is difficult to believe that an attorney’s purported subjective concerns about a client’s possible future behavior meets the extraordinarily high bar that Texas courts had historically set for a finding of “just cause”. Even worse, there is a case directly on point whether an attorney’s speculation about a client’s future behavior satisfies the “just cause” standard. In Staples v McKnight, the Fifth Court of Appeals of Texas at Dallas (the “Dallas Court of Appeals”) (the same appellate court that denied Parallel Network’s appeal to vacate this arbitration award), rejected a lawyer’s attempt to recover fees after the lawyer quit because of concerns that the client was going to perjure himself during upcoming testimony. The Dallas Court of Appeals held that an attorney’s speculation about a client’s possible future behavior was not “just cause” sufficient to quit a case and still retain a right of payment.

Notwithstanding the overwhelming evidence and these ethical and legal impediments, arbitrator Jerry Grissom accepted Jenner & Block’s purported “just cause” excuse and concluded that Jenner & Block’s supposed concern about Parallel Network’s future behavior (and the only evidence which Jenner & Block could marshal on that issue was Mascherin’s unsupported arbitration testimony) was sufficient “just cause” to entitle Jenner & Block to abandon its client and still get paid. In effect, arbitrator Jerry Grissom’s finding of “just cause” wrote out the express requirements of notice of breach and opportunity to cure set forth in Texas Disciplinary Rule 1.15 and overruled the Dallas Court of Appeals’ holding that “crystal-balling” a client’s future behavior is not a basis for an attorney to quit a case and still get paid.

Arbitrator Jerry Grissom issued his arbitration award on January 13th, 2013. Two weeks later, Parallel Networks filed a petition and motion to vacate the arbitration award in the 101st District Court for Dallas County (the “101st District Court”). The petition asked the 101st District Court to vacate the arbitration award because of the many errors committed by arbitrator Jerry Grissom, including exceeding his powers  by rewriting the terms of the CFA and granting Jenner & Block an award which wasn’t based on the express contractual language of the CFA, excluding evidence pertinent to Parallel Network’s claims of legal malpractice as well as manifestly disregarding Texas law, ethical rules and public policy regarding contingency fee agreements.

On April 29th, 2013, the presiding judge of the 101st District Court,  Martin “Marty” Lowy held a hearing on Parallel Network’s motion to vacate the arbitration award and Jenner & Block’s competing motion to confirm the arbitration award. After informing the parties off the record that he didn’t have the time or clerical staff to review the voluminous arbitration record, Judge Lowy confirmed that arbitration award without issuing an opinion or articulating (on or off the record) any rationale why he was rejecting Parallel Network’s arguments for vacatur. Bizarrely, Judge Lowy then went on the record and stated that the arbitration award was “well-reasoned”.  

The very next day, and without any notice or warning, Jenner & Block garnished and seized all the money in Parallel Network’s bank accounts, money which Parallel Networks used for operating its business. On May 13th, not content with the harm it had already caused Parallel Networks by forcing its former client to expend nearly $2 million in legal fees to defend against its arbitration demands, Jenner & Block filed an application for turnover relief with the 101st District Court seeking to have the court appoint a receiver to seize and liquidate Parallel Network’s patent portfolio and pending patent infringement lawsuits to satisfy the millions of dollars awarded by arbitrator Jerry Grissom. On May 24th, in order to suspend enforcement of the 101st District Court’s order confirming the arbitration award and to forestall Jenner & Block’s attempt to seize its patents and pending cases, Parallel Networks posted a supersedeas bond and cash with the 101st District Court which fully secured the contingency fees and pre and post-judgement interest awarded to Jenner & Block in the arbitration.

Still not satisfied with its campaign against its former client, several months later (and after forcing Parallel Networks to engage in extensive post-judgment discovery, including, another deposition of Fokas), Jenner & Block filed a motion for an injunction seeking to prevent, among other things, Parallel Networks from dissipating its assets. The crux of Jenner & Block’s argument for an injunction against its former client was that Parallel Networks was likely to dissipate assets to avoid paying the $1.394 million in attorney’s fees that arbitrator Jerry Grissom had awarded to Jenner & Block (in addition to the nearly $3.5 million in contingency fees). Jenner & Block’s argument for an injunction against its former client could only be charitably characterized as rather far-fetched given that: (a) After the arbitration award was confirmed by the 101st District Court, Parallel Networks investors had actually put money back into the company to fully secure Jenner & Block’s arbitration award notwithstanding the fact that fully securing the contingency fees and interest wasn’t even required under Texas Rule of Appellate Procedure Section 24.1; and (b) the Supreme Court of Texas had held earlier that year that attorney’s fees did not need to be secured. Incredibly, Jenner & Block’s motion for an injunction included the following pejorative language about Parallel Networks:

“Parallel Networks is a non-practicing entity, a/k/a ‘patent troll.’ It has no assets to speak of other than patents and patent lawsuits.”

Apparently, in Jenner & Block’s eyes, Parallel Networks somehow went from being a legitimate patent licensing company (when Jenner & Block was representing Parallel Networks) to being a patent troll (when Jenner & Block was suing Parallel Networks).  

So, to summarize and recap the Parallel Networks v. Jenner & Block fee dispute up to this point in time: Jenner & Block terminated their relationship with Parallel Networks because they determined that the representation was not in Jenner & Block’s economic interest. That’s a termination which was almost certainly a breach of that firm’s fiduciary duty to its client. Jenner & Block terminated the relationship within a few weeks of losing a motion for summary judgment of non-infringement in the Oracle case which, if not vacated, would have been fatal to Parallel Network’s entire patent licensing program. Parallel Networks’ had to retain and pay hourly fees to successor counsel who got Jenner & Block’s summary judgment loss overturned on appeal to the CAFC and the Delaware Cases eventually settled. More than two and one-half years after they abandoned their client, Jenner & Block reappeared seeking $10.2 million in hourly fees, based on Jenner & Block’s interpretation of the CFA that they could convert the contract from a contingency fee agreement to an hourly fee arrangement. After harassing Parallel Networks for 16 out of the 17 months of the arbitration for hourly fees, Jenner & Block decided at the arbitration hearing on Parallel Networks’ motion for summary judgment that they were really entitled to contingency fees after all (on cases they lost and abandoned). So, Jenner & Block urged the arbitrator to rewrite (“interpret”) the express terms of the CFA and accept Jenner & Block’s unsupported concerns about Parallel Network’s anticipated future behavior as a “just cause” excuse. After obtaining a contingency fee award of millions of dollars, Jenner & Block garnished Parallel Network’s bank accounts and tried to get a trustee appointed to seize and liquidate Parallel Network’s patent portfolio and pending patent infringement actions. Not done yet, Jenner & Block pursued an injunction against its former client based on an unsupported argument that Parallel Networks would dissipate its assets – even after Parallel Networks provided evidence that it’s investors had actually put money back into the company (which is the exact opposite of dissipating assets).

Based on the evidence presented during this arbitration and the history of this dispute, it wouldn’t be a stretch to summarize Jenner & Block’s actions as obtaining unconscionable contingency fees of millions of dollars using dubious legal and factual grounds and then trying to destroy Parallel Networks’ patent licensing business. Nor would it be a stretch to characterize this course of conduct by Jenner & Block as anything other than a shocking vendetta against a former client. One has to really wonder whether Jenner & Block’s management and the firm’s partnership really care about the public’s perception of their behavior, their ethics or how they treat their clients. In light of all this, it is ironic that Jenner & Block’s website brags that “our culture demands dedication to excellence and ethics…”

The next and final article in this series will review the post-arbitration appeals brought by Parallel Networks, the grievance complaints filed with the State Bar of Texas against several Jenner & Block partners who spearheaded the arbitration against Parallel Networks in Texas and the implications that this fee dispute will certainly have on clients entering into attorney-client fee agreements which utilize arbitration for dispute resolution.