[This article is the second 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.]
The origin of this dispute dates back ten years ago to May 2007 when Terry Fokas, president of Parallel Networks, contacted Harry Roper, chair of Jenner & Block’s patent litigation and counseling practice group, seeking contingency fee counsel for two patent cases in Delaware District Court. Oracle Corporation and QuinStreet, Inc. had filed declaratory judgment actions against Parallel Networks (collectively, the “Delaware Cases”) that they didn’t infringe Parallel Networks’ U.S. Patent Nos. 5,894,554 and 6,415,335 and that both patents were invalid. After reviewing Parallel Networks’ infringement analysis that showed that both Oracle and QuinStreet products/services infringed the ‘554 and ‘335 patents, Roper informed Fokas that Jenner & Block would represent Parallel Networks in the Delaware Cases pursuant to a contingency fee arrangement. On June 27th, 2007, the parties entered into the CFA, which, among other things, required disputes arising out of the CFA to be resolved in arbitration with Texas law as the governing law of the agreement .
The CFA under which Jenner & Block agreed to represent Parallel Networks wasn’t drafted by Jenner & Block or by Parallel Networks. Instead, Jenner & Block adopted a contingency fee agreement which was originally drafted by Texas-based Baker Botts LLP, which, at the time, was Parallel Networks’ legal counsel in the Eastern District of Texas asserting the ‘554 and ‘335 patents against several accused infringers. The only change which Jenner & Block made to the CFA before signing it was to change the firm name on the agreement from Baker Botts to Jenner & Block and update the execution date. The CFA required Jenner & Block to “represent [Parallel] as its legal counsel to initiate, prosecute and conclude [the Oracle and QuinStreet cases…” (emphasis added)
On behalf of Parallel Networks, Jenner & Block pursued a counter-claim of infringement against Oracle and QuinStreet. In the QuinStreet case, Parallel Networks accused QuinStreet’s Apache web server software platforms of infringement. These platforms were used by both of QuinStreet’s business lines: a web hosting business (the “DSS Business”); and a lead generation business (the “DMS Business”). The DMS Business generated much larger revenues for QuinStreet than did the DSS Business. In the Oracle case, Parallel Networks accused Oracle’s application server software and a database product of infringing the ‘554 and ‘335 patents. Parallel Networks’ damages expert estimated that damages in the Oracle case would reach nine figures.
From June 2007 through the fall of 2008, the trial team at Jenner & Block (initially consisting of Jenner & Block partners, Harry Roper, George Bosy, Pat Patras, David Bennett and Jenner & Block associates Paul Margolis and Ben Bradford) prosecuted the Delaware Cases. During that time, Parallel Networks paid Jenner & Block for litigation expenses that had been advanced by the firm as settlements came in from other cases. This was not controversial as Roper admitted during his arbitration testimony that at the time that Parallel Networks was in discussions with him to retain Jenner & Block, Terry Fokas had informed him that Parallel Networks’ source of funds (i.e. ability to pay expenses) was based solely on settlements from other Parallel Networks’ patent infringement lawsuits.
However, by the fall of 2008, as unpaid litigation expenses began to increase, largely as a result of the costs of outside expert witnesses, Jenner & Block management became concerned about the time commitment that these cases were taking as well as the amount of the outstanding expenses that were unpaid. Jenner & Block partner, Terri Mascherin, was assigned to the trial team to ostensibly handle the damages component of these cases but also to keep an eye on the cases on behalf of Jenner & Block management, to whom she reported. Mascherin was a rather curious choice for these tasks for two reasons: First, at the time she joined the trial team, Mascherin’s patent litigation experience consisted of two patent cases (one of which was a patent arbitration). It’s difficult to imagine how an attorney with a total of two patent cases under her belt would be able to make accurate assessments to Jenner & Block’s management of complex patent law and technical issues regarding infringement, patent validity, damages, etc. This lack of experience and limited understanding of technical infringement issues would soon come to haunt the Oracle case and cause significant problems for Parallel Networks. Second, earlier in 2008, Judge Sue Robinson (who was presiding over the Delaware Cases) informed the parties that she would almost certainly bifurcate liability and damages (as was her customary practice), thus obviating the need for any expenditure of Mascherin’s time on damages issues as well as the costs for a damages expert.
Almost immediately upon joining the trial team, Mascherin began to report back to Jenner & Block management about the status of the cases and the firm’s management began having internal discussions regarding Jenner & Block’s own economic interests in the Delaware Cases. Strikingly absent from all of these internal discussions about Jenner & Block’s interests was any mention about Parallel Networks’ interests. This is a rather curious omission given the fact that once representation has commenced, an attorney is deemed to be a fiduciary of his/her client and is, therefore, ethically obligated to put the client’s best interests ahead of the attorney’s own self-serving interests.
For example, Mascherin wrote and distributed to Jenner & Block management a “Settlement Strategy” memo dated October 21st, 2008, in which she urged Jenner & Block to “re-examine the Contingent Fee Agreement with [Parallel Networks] and determine whether it is in the firm’s strategic and financial interests to continue its engagement with [Parallel Networks] and to pursue additional lawsuits.” Mascherin took all of the information she knew about Parallel Networks and its litigation position into account when considering which course of action was the better financial outcome for Jenner & Block: either to terminate Jenner’s & Block’s relationship with Parallel Networks or to continue the representation. No one informed Fokas that Jenner & Block’s management was internally debating whether or not to continue its representation of Parallel Networks in the Delaware Cases
During the fall of 2008, Fokas was under the belief that all was fine with the matters being handled by Jenner & Block. This belief was underscored by the fact that on October 24, 2008 (three days after Terri Mascherin’s aforementioned “Settlement Strategy” memo), Jenner & Block partner (and senior trial team attorney) George Bosy drafted a memo to the firm’s contingency fee committee seeking approval to handle additional contingency fee matters for Parallel Networks. Bosy’s memo to Jenner & Block’s contingency fee committee (a copy of the memo was sent to Fokas) was done at the same time that Jenner & Block management was internally debating whether they should even remain in the Delaware Cases, a discussion which occurred unbeknownst to Parallel Networks.
Later, during the arbitration and in what was likely an attempt to create a “just cause” excuse to still retain a right to seek payment after it had abandoned Parallel Networks, Jenner & Block would argue that Parallel Networks’ unpaid litigation expenses which accrued during this period of time constituted a breach of the CFA and that breach was the reason why Jenner & Block terminated the CFA. If indeed Jenner & Block believed that Parallel Networks was in breach of the CFA as a result of accrued litigation expenses, it is truly bizarre that during this entire period, no one at Jenner & Block ever complained to Fokas about Parallel Networks litigation expenses. This was not surprising since many large firms don’t focus on getting paid until year-end. In fact, Jenner & Block partner Bosy, who was the senior litigation partner on Parallel Networks’ trial team, testified that it was common for Jenner & Block to contact clients only at the end of the year to try to collect on bills; Jenner “did that with everybody.”
On September 30, 2008, an unexpected development arose which complicated the QuinStreet case. Quinstreet filed a third-party complaint against Microsoft alleging that QuinStreet’s use of Microsoft software in its web-hosting business triggered Microsoft’s indemnification obligations. Microsoft’s counsel reached out to the Jenner & Block trial team which informed Microsoft (pursuant to instructions from Fokas) that Parallel Networks was not aware of QuinStreet’s use of Microsoft software, was not accusing and would not accuse Microsoft’s products of infringement in the QuinStreet case and that Parallel Networks had no interest in getting involved in litigation with Microsoft. Notwithstanding that information, Microsoft inexplicably, filed a declaratory judgment action against Parallel Networks in Delaware district court on November 19, 2008, seeking a judgment of non-infringement and/or invalidity of the ‘554 and ‘335 patents. What made Microsoft’s decision to file a declaratory judgement against Parallel Networks even more inexplicable was that when Microsoft eventually filed an answer to QuinStreet’s third-party complaint, Microsoft denied that it even owed any indemnification obligations to QuinStreet. Regardless of Microsoft’s motivation in filing suit, the CFA expressly covered exactly this type of scenario where Parallel Networks was sued by a third-party for declaratory judgment relief as a result of the Oracle or Quinstreet cases and clearly obligated Jenner & Block to defend Parallel Networks in the case filed by Microsoft. The CFA also provided that Jenner & Block would be compensated for its representation of Parallel Networks in the Microsoft case pursuant to the same contingency fee arrangement applicable to the Delaware Cases.
On December 4th, 2008, Judge Robinson issued a Markman order in the Oracle case along with a memorandum opinion and order granting Oracle’s motion for summary judgment of non-infringement of the ‘554 and ‘335 patents. This summary judgment order stunned both the Jenner & Block trial team and Parallel Networks because in Judge Robinson’s Markman order, she accepted all of Parallel Networks’ claim construction arguments and interpretations. It was inconceivable to both the Jenner & Block trial team and Parallel Networks that they could get an extremely favorable Markman order and then lose the case on summary judgment of non-infringement.
The effect of the summary judgment ruling was devastating to Parallel Networks’ patent licensing program. According to Kevin Meek, the senior patent litigation partner from Baker Botts who argued Parallel Networks’ appeal of the adverse summary judgment order in the Oracle case at the Federal Circuit, unless the summary judgment ruling was reversed, Parallel Networks’ entire patent licensing “program [was] comatose. It’s dead.”
To Jenner & Block’s management, however, the adverse summary judgment order in the Oracle case (coming a few weeks after the Microsoft declaratory judgment action) was further damaging to the firm’s economic interests. Within just three hours of receiving the adverse summary judgment ruling, Terri Mascherin emailed Jenner & Block’s managing partner Susan Levy and Jenner & Block’s chairman Anton Valukas to discuss how much longer Jenner & Block wanted to continue its representation of Parallel Networks and how best to recoup Jenner & Block’s investment in the Delaware Cases. Mascherin told Levy and Valukas:
“Once we know what happens tomorrow, we will have a decision to make regarding how much longer Jenner & Block will continue the representation. Our contingent fee agreement allows us to terminate the engagement for any reason on 30 days notice, so long as that is consistent with our ethical obligations. In the event we terminate and the client ultimately succeeds in recovering money in a judgment or settlement of its claims, we remain entitled to be compensated at a minimum for our fees incurred, based upon our regular hourly rates, plus expenses incurred as of the date we withdraw, minus any cost that the client incurs in bringing new counsel on board.”
On December 12, 2008, Mascherin sent a longer status report and analysis to Levy. She stated Parallel Networks had informed Roper it would pay then-outstanding expenses owed to Jenner & Block by the end of the year. Mascherin noted that Parallel “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.” She also estimated expenses for the January trial would be between $157,000 and $365,000, depending on the scope of the trial.
Apparently, Jenner & Block was more interested in figuring out how to get paid than in overturning the adverse summary judgement order in the Oracle case, continuing to expend effort in the QuinStreet case or living up to its obligations under the CFA to represent Parallel Networks in the Microsoft case.
For example, the following day on December 13, 2008, Mascherin again emailed Levy noting that damages in the QuinStreet case ranged “from a few million (in which case [Jenner] would not recoup [its] investment in the case) to approximately $20-30 million (at which level [Jenner] would probably recoup [its] investment, perhaps plus a small bonus).” This email and Jenner & Block’s damages assessment for the QuinStreet case were never shared with Parallel Networks. Mascherin also reiterated to Levy that in the event Jenner & Block terminated its representation and Parallel Networks recovered any monies from these cases that Jenner & Block remained entitled to be paid its “fees incurred up to the time of termination, at [its] regular hourly rates; . . . [and] a fair portion of the contingent fee award based upon [Jenner’s] contribution to the result achieved at the time of termination, to the extent that [Jenner has] not yet been paid for all of [its] fees incurred.” Stated another way, Mascherin apparently believed that Jenner & Block legally (and ethically) had the right to abandon its client after losing the Oracle case and then come after Parallel Networks for payment (of hourly fees PLUS contingency fees!) after successor counsel had undone Jenner & Block’s summary judgment loss and Parallel Networks was able to recover money from Oracle and Quinstreet.
Jenner & Block interpreted the termination provisions in the CFA to give it the right to convert the CFA from a contingency fee agreement to an hourly fee agreement, at its discretion, depending upon which course of action would be more advantageous to Jenner & Block’s economic interests. This interpretation seems to fly in the face of Jenner & Block’s ethical obligation to act as a fiduciary to its client, which requires Jenner & Block to place Parallel Network’s interests before its own. It is difficult to see how Jenner & Block’s interpretation of the CFA did anything other than place Jenner & Block’s interests ahead of its client’s interests. Not surprisingly, both Fokas, who is an attorney licensed to practice law in Texas, and Baker Botts, which had drafted the original contingency fee agreement that Jenner & Block had adopted in its entirety had a much different interpretation of the CFA.
The basis for Jenner & Blocks’ “Head’s-I-Win-Tails-You-Lose” interpretation of the CFA is based on Paragraph 9.a of the CFA which provides that if Parallel Networks terminates the CFA, it shall:
“(i) compensate Jenner & Block for all time expended . . . at the regular hourly billing rates charged by Jenner & Block for its attorneys and legal assistants (in lieu of the Contingent Fee Award applicable to such Enforcement Activity . . .; (ii) reimburse Jenner & Block for all previously unreimbursed Enforcement Expenses incurred by Jenner & Block under this Agreement; and (iii) at the conclusion of any Enforcement Activity, pay Jenner & Block an appropriate and fair portion of the Contingent Fee Award based upon Jenner & Block’ [sic] contribution to the result achieved as of the time of termination of this Agreement (to the extent that Jenner & Block has not already been compensated under Section 9.a(i) hereunder).” (Emphasis added).
Paragraph 9.b of the CFA provides that if “Jenner & Block determines at any time that it is not in its economic interest to continue the representation” then it may terminate the CFA upon 30 days written notice and that Jenner & Block “shall continue to be entitled to receive compensation from [Parallel Networks] pursuant to (i), (ii), and (iii) in the preceding paragraph up to the date of such termination.” Jenner & Block selected Texas law to govern the CFA but did not research whether it’s interpretation of Paragraph 9 was enforceable (or ethical) under Texas law.
At a time when Parallel Networks most needed its counsel to fight to overturn the catastrophic summary judgment ruling, Jenner & Block was instead having internal discussions on which course of action would allow Jenner & Block to recover the maximum amount, whether that was to continue or terminate the representation. No one from Jenner & Block told Parallel Networks that the firm was considering terminating its representation based on which course of action would be most advantageous to Jenner & Block’s own economic interests.
Arguably, these internal discussions at Jenner & Block regarding what course of action to undertake based solely on the firm’s own economic interest breached Jenner & Block’s ethical duties to Parallel Networks. Specifically, Texas Disciplinary Rules of Professional Conduct Rule 1.06 prevents lawyers from representing persons if that representation appears to be adversely limited by the law firm’s own interest. In addition, the Texas Supreme Court in 1999 decided Burrow v. Arce and affirmed that a court can order an attorney to give up all fees or part of their fees when that attorney has breached their fiduciary duty to their client.
On December 16th, (less than two weeks after the adverse summary judgment ruling in the Oracle case), Bosy emailed Fokas to inquire when Parallel Networks would be able to pay $547,000 in expenses incurred by Jenner & Block in the QuinStreet and Oracle cases. Terry Fokas responded that he was “painfully aware” of these expenses and that he was working on settling two cases to repay these expenses. The next day, Mascherin sent an email to Bosy (which he forwarded to Fokas) that stated “that the firm’s position is that expenses must be paid by year end or we will not proceed with any further work, and that if the trial is going ahead we require a retainer to cover the out of pocket expenses.” See Ex. C, Dec. 17, 2008, email from T. Mascherin to G. Bosy. This was the first and only time (i.e. shortly after the adverse summary judgment ruling in the Oracle case) that Jenner & Block had ever complained to Fokas about the payment of litigation expenses.
On December 18, 2008, Mascherin telephoned Fokas. Jenner & Block attorneys Bosy and Margolis were also on the call. During that call, Mascherin reiterated to Fokas that Jenner & Block expected Parallel Networks to pay in full all litigation expenses before year-end. Mascherin also advised Fokas that it was Jenner & Block’s recommendation that Parallel Networks try to settle the Oracle case for “whatever it could get” because Jenner & Block’s trial and appellate teams had estimated Parallel Network’s chance of overturning the adverse summary judgment order on appeal at only 30 to 50 percent.
Mascherin made this recommendation to Fokas despite the widespread internal belief by the Jenner & Block trial and appellate teams that the summary judgment ruling would be overturned on appeal. Multiple Jenner & Block attorneys who were members of the trial team, including Harry Roper, George Bosy, David Bennett, and Paul Margolis, all testified in their depositions and during the arbitration that they all thought it was a very winnable appeal. They believed that the adverse summary judgment ruling in the Oracle case was wrong and inconsistent with the claim construction opinion upon which summary judgment of non-infringement had been granted. Bosy, who was the senior patent litigation partner on the trial team, believed that the ruling was “wholly erroneous” and that it would get reversed. The trial team believed it was “probably one of the best [appeals they’d] seen.”
Despite Jenner & Block’s strong belief in the merits of the appeal, Jenner & Block withheld that vital information from Fokas. What would motivate Mascherin to tell Fokas that Parallel Networks’ chances of winning the appeal were so low and that he should settle with Oracle for “whatever he could get” and withhold information that Jenner & Block’s trial and appellate teams had such a diametrically different perspective? Possibly, it was an attempt by Jenner & Block to convince Fokas to enter into settlement discussions with Oracle so that Jenner & Block could get paid from such a settlement.
Supporting that possibility is an email that Mascherin sent to Levy the same day that Mascherin spoke to Fokas which stated that “[d]epending on what [Parallel Networks] decides to do re. pursuing settlement or prosecuting [its] appeal, the firm will need to decide whether to terminate [its] engagement with the client . . . .” Troublingly, at the time that Jenner & Block was continuously weighing whether it should fulfill its contingency fee agreement or terminate and seek hourly fees, it did not tell Parallel Networks that its settlement advice during this time was tainted by Jenner & Block’s own financial considerations.
As it turns out, however, if Fokas had followed Mascherin’s advice (and as explained further below) and Parallel Networks had settled with Oracle for “whatever it could get,” Jenner & Block would have walked with a contingency fee from the Oracle case of approximately $35,000. Instead, because Fokas chose to ignore Mascherin’s advice, Jenner & Block would ultimately end up with a contingency fee award from an arbitrator of millions of dollars (from a case it lost and abandoned) after Parallel Networks paid hundreds of thousands of dollars in hourly fees to Baker Botts to handle the ultimately successful appeal of Jenner & Block’s adverse summary judgment order.
A little over a week after the call between Mascherin, Bosy, Margolis and Fokas, Parallel Networks sent a bank wire to Jenner & Block paying in full all of the litigation expenses that had been incurred in the Delaware Cases. To the extent that Jenner & Block’s allegation in its Demand for Arbitration that Parallel Networks had breached the CFA by failing to pay litigation expenses, that breach was cured. Mascherin even noted in an email to Levy that after Parallel Networks paid the outstanding expenses on December 24, 2008, there was no active breach by Parallel Networks, and any prior breach was cured.
On December 30, 2008, Paul Margolis, one of the Jenner trial attorneys working on the pending cases, sent an e-mail to Levy and Mascherin with the subject line: “Outstanding issues relating to the firm’s representation of Parallel Networks.” Margolis noted that Parallel Networks “has now paid all of [its] outstanding obligations to Jenner and Block,” but the “question of what the firm wishes to do with the Oracle case and with the pending litigation against Microsoft and QuinStreet remain open.” Margolis advised that he believed Jenner & Block should handle the Oracle appeal. In contrast to Mascherin’s representation to Fokas only 12 days earlier that Jenner’s appellate lawyers estimated Parallel’s chances on appeal were 30-50% and therefore Parallel should settle, Margolis wrote:
“Not only does the appellate group feel strongly about the merits of our appeal, but much of the work is already done based on the motion for reconsideration that we prepared. Additionally, we have been personally involved in three prior appeals of patent cases where [District Judge] Robinson was reversed in the Federal Circuit.”
Margolis also stated that “[l]ast [he] had heard,” Jenner & Block did not want to continue its representation in the QuinStreet case. That raised the issue of whether Jenner & Block was willing to give up the Oracle appeal because Parallel Networks was concerned it could not “find a qualified firm to undergo the risk and expense of handling the [QuinStreet] case if the appeal in the Oracle case is not part of the package.” Margolis informed Levy and Mascherin that Parallel Networks was “eager to get our answers” to these questions, “as are the attorneys that have been working on these cases over the past 16 months.”
On December 31st, Fokas had a call with Roper and Margolis. During that call, Roper informed Fokas that Jenner & Block would be willing to continue to represent Parallel Networks in the Oracle appeal and that Jenner & Block would also continue to represent Parallel Networks in the QuinStreet case but only if Parallel Networks settled the QuinStreet case. Roper further informed Fokas that if Parallel Networks did not settle and instead chose to continue with the QuinStreet case, Jenner & Block would terminate its representation of Parallel Networks in that matter (even though the CFA encompassed both the Oracle and QuinStreet cases and did not contemplate a severing of representation). In addition, Roper told Fokas that Jenner & Block would not represent Parallel Networks in the Microsoft case (notwithstanding that the CFA expressly required Jenner & Block to undertake that representation).
Jenner & Block’s offer placed Parallel Networks in an untenable position at the worst possible time: if Fokas didn’t agree to Jenner & Block’s demands, Parallel Networks would lose its contingency fee counsel in the Oracle case with a notice of appeal that had to be filed at the Federal Circuit in less than a month. In addition, Parallel Networks would have no counsel to represent it in the Quinstreet and Microsoft cases which were both in danger of also being tossed out on summary judgment of non-infringement on the same grounds set forth in Judge Robinson’s order in the Oracle case. Further exacerbating the problem was that Parallel Networks had just wired Jenner & Block several hundred thousand dollars for litigation expenses in the Delaware Cases which significantly reduced Parallel Networks available cash on hand.
In other words, given the adverse summary judgement order in the Oracle case (which would also negatively impact the QuinStreet and Microsoft cases) and the fact that Parallel Networks didn’t have enough money to pay for new legal counsel on an hourly basis, Jenner & Block’s unilateral change to the CFA and the scope of the firm’s representation of Parallel Networks (i.e. terminate its representation in the Quinstreet case and refuse to honor its contractual obligation to represent Parallel Networks in the Microsoft case) threatened to destroy Parallel Networks’ entire patent licensing program. In an effort to maintain the relationship with Jenner & Block and to have representation in all of the pending cases, Fokas proposed to Roper that Jenner & Block continue its representation of Parallel Networks in the Oracle case and that they work together to get QuinStreet and Microsoft to agree to a stay in their respective cases pending Parallel Networks’ appeal to the Federal Circuit in the Oracle case.
As it would turn out, Fokas’ idea to offer a stay to Microsoft pending resolution of the appeal in the Oracle case was sound as Parallel Networks and Microsoft would eventually agree to exactly that kind of stay several months later. Fokas also told Roper that if Jenner & Block was successful in the appeal in the Oracle case it would be likely that case could be settled for a reasonable amount of money and that Jenner & Block could, at that time, make a decision whether it wanted to continue to represent Parallel Networks in the QuinStreet and Microsoft cases. Roper told Fokas that he thought that this course of action made sense and that he would discuss it with Jenner & Block’s management.
Levy, Mascherin, Roper, and Margolis discussed Fokas’ proposal. According to Mascherin, Parallel Networks’ proposal was “not attractive,” in part because “given the size of our existing investment, it is unlikely a settlement could be achieved that would allow us to recoup our full investment, while under the existing fee agreement we retain that right.” Later that day on December 31st, 2008, Mascherin prepared a memorandum at Levy’s request summarizing Jenner’s & Block’s recent discussions with Fokas and its decision to terminate the engagement. Mascherin again started with the premise that:
“The Agreement permits us to terminate the representation at any time, consistent with our ethical obligations. If we terminate and the client later achieves a recovery through trial or settlement, we are entitled to be paid all unpaid expenses, as well as to be compensated for the time we devoted to the representation through termination, at our regular hourly rates.”
Mascherin further noted that following the adverse summary judgment ruling in Oracle, Jenner & Block had advised Parallel Networks to settle but that Fokas had declined to engage in settlement talks at that time. Mascherin noted that Jenner & Block’s outstanding fee investment in Oracle was approximately $10 million and Parallel had recently paid all past-due expenses. Mascherin also recounted that the firm’s fee investment in QuinStreet was approximately $1 million and she believed the case could be settled for $750,000 in the near future, but Parallel did not authorize Jenner to continue such settlement discussions. Mascherin concluded that during the Jenner attorneys’ discussion that morning, “we agreed that the firm should terminate the existing engagement at this time.”
Two days later on January 2nd, 2009, Margolis called Fokas and informed him that Jenner & Block had decided to terminate its representation in the Delaware Cases. No reason was given by Margolis for Jenner & Block’s decision to abandon Parallel Networks as contingency fee counsel with a fast approaching appeal deadline in the Oracle case, in the middle of the QuinStreet case and in the face of a new case that had just been filed by Microsoft.
Following that call, Margolis emailed a termination letter to Fokas. The termination letter did not state any cause for termination, referencing only Paragraph 9.a of the CFA which (according to Jenner & Block’s interpretation) permitted the firm to terminate its representation of Parallel Networks based solely upon Jenner & Block’s economic interests. In Jenner & Block’s Demand for Arbitration, however, the firm claimed that it had really terminated the CFA due to Parallel Networks’ failure to pay litigation expenses which Jenner & Block alleged were still outstanding at the time of termination. Jenner & Block would later drop that false allegation when Parallel Networks introduced into evidence Jenner & Block’s own internal emails which noted that Parallel Networks had paid all outstanding litigation expenses prior to termination.
In an email exchange between Fokas and Margolis that took place after the transmittal of the termination letter, Margolis remarkably continued to withhold from Fokas what Jenner & Block’s trial and appellate teams believed about the merits of an appeal of the adverse summary judgment ruling in the Oracle case. In direct contradiction to what members of Jenner & Block’s trial and appellate teams would testify in their depositions and in the arbitration, Margolis would go so far as to write Fokas, “In this case, we think that the arguments and circumstances that would lead the Federal Circuit to uphold the decision are relatively stronger than the arguments and circumstances that would lead to reversal.”
Given Jenner & Block’s intimate familiarity with the Oracle case and the summary judgment arguments, Parallel Networks continued to try to convince Jenner & Block to represent it at the Federal Circuit appeal in the Oracle case. Mascherin testified that pursuing the appeal on a contingent fee basis was Jenner & Block’s contractual responsibility under the CFA. However, following its termination of the CFA, Jenner & Block instead refused to represent Parallel Networks in the appeal unless Parallel Networks agreed to a different financial arrangement with Jenner & Block, including payment of hourly fees for the appeal and a substantial retainer. The parties could not agree on revised financial terms, and Jenner & Block ultimately abandoned its client instead of fulfilling its obligations under the CFA.
Because the adverse summary judgment ruling in the Oracle case also negatively impacted the QuinStreet and Microsoft cases, Parallel Networks could not find substitute counsel to take on these cases pursuant to a contingency fee arrangement. Instead, Parallel Networks was able to retain Baker Botts as substitute counsel but only under an hourly fee arrangement. To fund the hourly fees for the Oracle appeal, Parallel Networks quickly settled the QuinStreet case based upon the information it had been given by Jenner & Block that QuinStreet’s DMS Business (which generated the lion’s share of QuinStreet’s revenues) did not infringe the ‘554 and ‘335 patents and that only the DSS Business (which generated significantly less revenue) infringed these patents. Parallel Networks later alleged, based on discovery obtained in the arbitration, that Jenner & Block had failed to properly prosecute the QuinStreet case and that both the DMS Business and the DSS Business infringed the asserted patents, and that this misinformation caused Parallel Networks to agree to settle with QuinStreet at much lower amount for a license to those patents.
During the pendency of the Oracle appeal, the Federal Circuit ordered Oracle and Parallel Networks into mediation. During the mediation, Oracle offered to settle the dispute for a license to Parallel Networks’ entire patent portfolio (which, in addition to the ‘554 and ‘335 patents, included at that time 15 issued patents and six pending patent applications) in exchange for $1 million. Parallel Networks promptly rejected that offer. After a full day of mediation, and with Oracle refusing to budge from that $1 million settlement offer, the mediator terminated the proceedings without an agreement being reached.
If Fokas had followed Mascherin’s advice on their December 18th call to settle with Oracle for “whatever it could get,” Parallel Networks would have received $1 million from the resolution of the Oracle case. After deducting $900,000 in litigation expenses (the CFA contemplated that Jenner & Block’s contingency fee would be computed after those deductions), Jenner & Block would have received a 35% contingency fee from the net settlement amount of $100,000, or $35,000. Instead, because Fokas ignored Mascherin’s advice and Parallel Networks expended millions of dollars in fees to successor counsel to overturn Jenner & Blocks’ summary judgment loss and to prepare the case for trial, Jenner & Block obtained an arbitration award in excess of $3.5 million in contingency fees against its former client. Not a bad return for a law firm that lost a case on summary judgment, pressured its client to settle by withholding information about the merits of the appeal and then abandoned its client right before a bet-the-company appeal.
On April 28th, 2010, as predicted by Jenner & Block’s trial and appellate teams and as expected by Fokas (notwithstanding contradictory information from both Mascherin and Margolis), the Federal Circuit vacated the adverse summary judgment ruling in the Oracle case and remanded that matter back to the Delaware district court for further proceedings. On May 13, 2011, just three days before the commencement of trial, Parallel Networks and Oracle settled. The settlement with Oracle included an up-front cash payment and a provision for an additional payment based on a future arbitration proceeding between Parallel Networks and Oracle that would decide whether Oracle infringed new or amended claims that came out of then-pending patent reexamination proceedings of the ‘554 and ‘335 patents at the U.S. Patent & Trademark Office (these reexamination proceedings were handled exclusively by Baker Botts). Jenner & Block had no role in the re-examinations or in negotiating the settlement with Oracle.
On June 17th, 2011, a little more than a month after Parallel Networks settled the Oracle case and more than two-and-a-half years after Jenner & Block abandoned its representation of Parallel Networks, Jenner & Block partner and general counsel, Russell Hoover, sent a demand letter to Parallel Networks for $10,245,492 in hourly fees, which Jenner & Block claimed were “more than two years past due” from when Jenner & Block terminated its representation of Parallel Networks. Hoover stated that Jenner & Block’s demand was for payment in full at the time of termination and was not contingent on anything:
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.
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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 Networks] 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 . . . .
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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.
Parallel Networks’ counsel responded by informing Hoover that the provision of the CFA pursuant to which Jenner & Block was seeking its hourly fees was unconscionable and unenforceable under Texas law and that, given the significant injury that Jenner & Block’s abandonment had caused to Parallel Networks, any payment to Jenner & Block was unwarranted.
When Parallel Networks refused to pay Jenner & Block more than $10.2 million in hourly fees in accordance with this demand letter, Jenner & Block filed its demand for arbitration with JAMS, in Dallas, Texas, asserting three claims: (1) breach of contract, (2) quantum meruit, and (3) promissory estoppel.
In the next article of this series, readers will see how the arbitration proceedings at JAMS led to an arbitration award in favor of Jenner & Block which, despite arguably having no colorable basis in law or fact, resulted in millions of dollars in contingency fees to that firm. This is an arbitration award which has been upheld by three Texas state courts because of their erroneous interpretation of the Federal Arbitration Act and a strange reading of a U.S. Supreme Court case on the scope of judicial review available for arbitration awards issued under the FAA.