[Posted May 19, 2010] Yesterday’s published opinion in In re: Abrams & Abrams, P.A. begins with this sentence:

After winning their disabled client an $18 million personal injury settlement that will pay for his care for the rest of his life, the attorneys in this case saw their compensation slashed by the district court from the thirty-three percent provided in their contingency fee agreement to a mere three percent.

If that sentence leaves you with any doubt as to who wins this appeal, read on.

The quoted sentence encapsulates much, but not all, of the issue in this ancillary litigation. Employed by a client with catastrophic injuries, a law firm agreed to a one-third contingency fee and filed suit against a tortfeasor who acknowledged that he was negligent. The defendant was driving a company truck, but the company’s insurer refused coverage and even a defense because the operator was admittedly drunk at the time.

When an insurer refuses even to defend a suit, it’s taking a big risk. “Under North Carolina law [the situs of the injury], if an insurer improperly refuses to defend a claim, it is estopped from denying coverage and must pay any reasonable settlement—even if it made an honest mistake in its denial.” Facing a pro se defendant, the plaintiffs got a $75 million award that clearly exceeded the individual defendant’s assets.

At this point, the insurer found out that it had a problem. The employer’s company policy prohibited operating company vehicles while intoxicated, but the insurance policy didn’t incorporate that company policy. Under the North Carolina precedent I quoted above, that could leave the insurer liable for “any reasonable settlement.” The company quickly headed to the bargaining table and agreed to pay $18 million, just sort of its $21 million policy limits, to settle the claim.

My readers, mathematical sophisticates all, will have quickly done the math and determined that the attorneys just got a $6 million payday. Lest you belittle their effort for that sum, keep in mind that they spent two years on the case and went into the litigation with no assurance of getting paid, especially since there were a few potential landmine defenses. Fortunately for the lawyers and the client, those defenses largely went by the wayside when the insurer unwisely declined to defend.

Since this settlement called for payment to an incompetent – the injured person will be forever unable to care for himself, so suit was brought by his father as guardian – the district court had to approve the fee award. That’s when the lawyers got a rude shock. Instead of honoring the contingent arrangement, the judge started asking questions about how many hours the lawyers had worked on the case. The lawyers, no doubt surprised by this inquiry, guesstimated that they had put in a couple thousand hours. The judge then took that figure, multiplied it by $300 an hour, which he reckoned was “a high hourly rate for a similarly-situated lawyer in North Carolina,” and with apparently little other explanation, fixed the fee at $600,000.

Now, I don’t know about you, but having a judge hack 90% off your agreed fee is going to send most lawyers scurrying off to an appellate court, and that’s what happened here. The lawyers faced some tough sledding in the Fourth, since the district judge’s decision is reviewed for abuse of discretion, a reasonably deferential standard of review. But the lawyers win on appeal, and get a remand to the district court for a recalculation of the fee based on the 12-part Georgia Highway Express calculus.

The appellate court was clearly impressed with what the lawyers had done. As it came to the law firm, the case wasn’t exactly a sow’s ear; but it had warts, including a potential contributory-negligence defense. The lawyers took that problematic set of facts and turned it into a wonderful result for the family of the injured man; the court notes that there was “no dispute that the settlement agreement will provide amply for [the injured man] throughout his life.” In the wake of that success, the district judge more or less perfunctorily disregarded the contingent nature of the undertaking and set a fee commensurate with the hourly rate that he figured a lawyer would charge if he were assured of getting payment.

That isn’t how contingent fees work, Judge Wilkinson, writing for a unanimous panel, notes in the opinion. Contingent fees are favored arrangements because they represent “the key to the courthouse door” for plaintiffs who otherwise lack the resources to hire lawyers by the hour. A lawyer who accepts the risk of not getting paid at all deserves to be rewarded for taking that risk when he does an excellent job and gets a correspondingly excellent result; it’s unfair of a court to employ hindsight and retroactively set a fee based on the knowledge that the plaintiff already has a good result.

The appellate court doesn’t reinstate the 1/3 fee agreement; it remands for reconsideration of the amount to be awarded, so the same judge will take another look at things, and presumably will spell out his views a bit better. (One of the court’s key criticisms of the district court’s decision is the lack of a detailed analysis of the factors in the 12-part test, particularly the ones the panel found most compelling in supporting a healthy fee award. Trust me; the district judge will get the message.)

This opinion is required reading for all plaintiff’s lawyers who take cases on a contingency. To the extent that you may ever have to face a court to justify your fee, you’ll want to have this opinion in your pocket, if not in your briefs (ahem). The language in it includes powerful rhetoric in support of the very premise of contingent-fee arrangements, and will sharply limit the discretion of judges to, in the words of yesterday’s opinion, slash those fees. In defending these arrangements, the decision is a solid win for the plaintiffs’ side of the aisle, since the district court’s ruling, if it had stood, would have served as a strong disincentive for lawyers to take contingent-fee cases.