[This article is the third 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?]
The arbitration between Parallel Networks and Jenner & Block was held at JAMS in Dallas with Jerry Grissom serving as the arbitrator for this dispute. Representing Jenner & Block in this arbitration were Jenner & Block partners Joel Pelz, David Jimenez-Ekman, Paul Margolis and associate Brienne Letourneau. Jenner & Block’s local Texas counsel was Paul Koning, a partner in Koning Rubarts, LLP. Testifying on behalf of Jenner & Block at the arbitration were Jenner & Block partners Harry Roper, Terri Mascherin, Paul Margolis and Susan Levy.
Jenner & Block’s demand in the arbitration was for more than $10.2 million in hourly fees, which amounted to more than 70% of the net recovery obtained by Parallel Networks in the Oracle case and more than 110% of the net recovery obtained by Parallel Networks in the QuinStreet case. Jenner & Block justified this extraordinary amount by claiming that it had expended more than 24,000 billable hours in the Delaware Cases during the 18 months that it had represented Parallel Networks. Accepting Jenner & Block’s claim at face value would mean that Jenner & Block attorneys were purportedly billing Parallel Networks at a rate of nearly 44 hours per day, seven days a week, 365 days per year for the entire 18 months period of the representation. This was a rather startling claim given that the Oracle case was lost at the summary judgement stage and that the QuinStreet case never progressed much beyond the discovery phase.
Even after Parallel Networks disclosed the amount of the settlements in the Delaware Cases (which clearly showed that these hourly fees amounted to the vast majority of Parallel Networks’ net recovery in the Oracle case and more than the entire amount of Parallel Networks’ net recovery in the QuinStreet case), Susan Levy, Jenner & Block’s managing partner, continued to insist that it was Jenner & Block’s position that Parallel Networks owed more than $10.2 million in hourly fees. That was a truly incredible position for Jenner & Block to take in light of the fact that they had agreed to represent Parallel Networks on a contingency fee basis which under the terms of the CFA would have given Jenner & Block a contingency fee of approximately 35% of any money that it recovered for its client. However, according to Levy and Jenner & Block, after they lost the Oracle case and abandoned Parallel Networks, they were then entitled to hourly fees which came out to more than 70% of the client’s recovery in the Oracle case and which came out to more than 110% of the client’s recovery in the QuinStreet case. Stated another way, Jenner & Block’s unilateral conversion from a contingency fee arrangement to an hourly fee arrangement resulted in that firm doubling what they would have received under a contingency fee arrangement in the Oracle case and tripling what they would have received under a contingency fee arrangement in the QuinStreet case (assuming that Jenner & Block had actually recovered any money for Parallel Networks, which they did not).
In response to Jenner & Block’s arbitration claims, Parallel Networks asserted counterclaims against Jenner & Block for breach of the CFA, breach of fiduciary duty, and legal malpractice. In its breach of contract claim, Parallel Networks asserted that Jenner & Block prematurely terminated its representation of Parallel Networks, forcing Parallel Networks to find substitute counsel to represent it on an hourly basis and to settle the QuinStreet case at a substantially reduced valued in order to fund the Oracle appeal.
After obtaining discovery during the arbitration, Parallel Networks learned that Jenner & Block had failed to determine the true extent of QuinStreet’s infringement. Based upon that discovery, Parallel Networks Jenner & Block’s claims to Parallel Networks during the QuinStreet case that there was not enough information to determine whether QuinStreet’s DMS business (which generated the majority of QuinStreet’s revenues) infringed the ‘554 and ‘335 patents, were false. QuinStreet had in fact produced in discovery (as early as the fall of 2007) sufficient information to Jenner & Block to show that the DMS Business did in fact infringe. Parallel Networks alleged in its counterclaim for malpractice that if it had known the true extent of QuinStreet’s infringement, it would have sought a much higher settlement amount than it received from QuinStreet. Parallel Networks amended its counterclaim of legal malpractice against Jenner & Block to seek $19 million in damages.
On June 1st, 2012, Parallel Networks filed a motion for summary judgment in the arbitration arguing that Jenner & Block’s pursuit of hourly fees was unconscionable and flatly prohibited by Texas law and public policy. On September 11th, 2012, Grissom held a hearing on Parallel Networks’ motion for summary judgment. During the summary judgment hearing and in response to questions from Grissom, Jenner & Block switched course and informed the arbitrator that it was no longer seeking its full hourly fees even though Jenner & Block partner David Jimenez-Eckman continued to insist that Jenner & Block was still entitled to seek hourly fees (and notwithstanding that Jenner & Block had forced Parallel Networks for the preceding 16 months to defend against a demand of more than $10.2 million). This concession implied that Jenner & Block’s pursuit of hourly fees had been unconscionable after all. And if that implication was correct, then Jenner & Block’s retreat from seeking hourly fees was a tacit acknowledgement that their lawyers had violated Texas Disciplinary Rule 1.04 when they interpreted the CFA to allow them to seek $10.2 million in hourly fees because that Rule 1.04 flatly forbids a lawyer from “entering into an arrangement for, charge, or collect an illegal or unconscionable fee” (emphasis added).
On September 14th, three days after the summary judgment hearing (and a month before the scheduled commencement of the arbitration hearing), Jenner & Block’s local counsel sent a new demand letter to Parallel Networks, now seeking contingency fees of $4,439,270 (computed as a percentage of Parallel Networks’ recovery in the Delaware Cases) plus 23% of any settlement that Parallel Networks received from a future, and not yet filed, arbitration with Oracle once the claims of the ‘554 and ‘335 patents emerged from reexamination at the USPTO. It bears noting that Jenner & Block was apparently so certain of a favorable award from Grissom and success at the arbitration that it was willing to risk having to potentially pay a $19 million counterclaim of malpractice against a potential recovery of $4.4 million.
Putting aside for a moment the ethical propriety of how Jenner & Block – which had recovered absolutely nothing for Parallel Networks (and even worse, lost the Oracle case on summary judgment and then abandoned its client) – could argue for contingency fees, there were three impediments to Jenner & Block obtaining an arbitration award of contingency fees (in lieu of the hourly fees Jenner & Block had initially sought). First, the CFA required Jenner & Block to “initiate, prosecute and conclude” the Oracle case. Clearly, Jenner & Block had not concluded the Oracle case as it was required to do under the terms of the CFA in order to be entitled to a contingency fee. Jenner & Block’s failure to “conclude” the Oracle case was even admitted by Mascherin and Roper in their arbitration testimony when they agreed that it was Jenner & Block’s responsibility under the CFA to handle the appeal in the Oracle case. Second, the terms of the CFA expressly noted that Jenner & Block was entitled to a contingency fee but only “based upon the results achieved at the time of termination.” Since the only result achieved by Jenner & Block at the time they unilaterally terminated the CFA was a take nothing judgment in the Oracle case, Jenner & Block’s contingency fee under the express terms of the CFA was clearly and undisputably zero. Third, Tom Cunningham, who was designated in the arbitration as Jenner & Block’s ethics expert, when presented at the arbitration with Jenner & Block’s September 14th demand letter and questioned whether Jenner & Block was entitled to contingency fees, Cunningham testified that he had not expressed the opinion that $4,439,270 plus 23% of any settlement that Parallel Networks may receive from a future arbitration with Oracle is a number that should be paid to Jenner & Block under any circumstances that existed at that time, an incredible admission by Jenner & Block’s own ethics expert.
From October 15th, 2012, through October 25th, 2012, the parties engaged in the arbitration proceedings. During the arbitration, Grissom ruled that Parallel Networks could not present Keith Lowery, an inventor of the ‘554 and ‘335 patents, to give testimony as an expert witness regarding QuinStreet’s configuration files (which had been sent to Jenner & Block in discovery during the QuinStreet case) which would have conclusively proven false Jenner & Block’s previous statement to Fokas that there wasn’t sufficient information to determine whether QuinStreet’s DMS Business infringed the ‘554 and ‘335 patents. The effect of this ruling essentially gutted Parallel Networks’ ability to present its legal malpractice claim against Jenner & Block.
During the arbitration proceedings, Jenner & Block again changed its position as to how much it was seeking in damages. Jenner & Block requested Grissom to rewrite the express contractual language in Paragraph 9 and award Jenner & Block a contingency fee for whatever amount the arbitrator thought was “fair.” As discussed in the next article, Grissom complied with this request and “interpreted” Paragraph 9 in a manner completely at odds with the language of the CFA and then used that “interpretation” as his basis to award Jenner & Block contingency fees on cases that Jenner & Block lost and then abandoned.
On January 18th, 2013, Grissom issued his arbitration findings and award. For Jenner & Block’s breach of contract claim, the arbitrator awarded Jenner & Block contingency fees of $3,000,000 and 16% of the net proceeds of any settlement or recovery paid to Parallel Networks from any future arbitration or settlement with Oracle (that 16% ultimately translated into an additional contingency fee award of nearly $500,000). Likely fearing that awarding contingency fees under the CFA to Jenner & Block wouldn’t pass judicial review, Grissom awarded that same exact amount, in the alternative, under Jenner & Block’s quantum meruit claim. Grissom’s alternative quantum meruit award was devoid of any analysis of how he determined how $3 million plus 16% of any future recovery from Oracle was the benefit conveyed to Parallel Networks by Jenner & Block. Because Grissom found for Jenner & Block on its quantum meruit claim, Jenner & Block’s promissory estoppel claim was denied. Grissom denied all of Parallel Networks’ counterclaims, finding that Parallel Networks was not entitled to recover any damages from Jenner & Block. Finally, Grissom awarded Jenner & Block its attorneys’ fees in the amount of $1,394,000 and pre- and post-judgment interest.
The aggregate amount of the arbitration award consisting of contingency fees (or, in the alternative, quantum meruit), attorneys’ fees and pre and post-judgment interest comes out to more than $6 million (not counting the more than $3 million that Parallel Networks alleges to have expended to date in fighting off Jenner & Block’s claims for compensation). This is a shocking award by an arbitrator who gave millions of dollars to Jenner & Block whose only substantive result for its client was a take nothing judgment in the Oracle case.
The next article in this series will review the arguments raised by Jenner & Block during the arbitration and how such arguments stand up in the face of Texas ethics rules, Texas and Fifth Circuit precedent and law on attorney client fee agreements and Texas public policy.