Just three weeks ago, the New York Court of Appeals, in Albunio v. City of New York, issued a ruling on a question that has long bedeviled civil rights and employment lawyers - and their clients. The scenario it addresses is very common. A lawyer takes on a matter, such as a false arrest or employment discrimination case, where a statutory fee award is available, in addition to any damages the client might be awarded. The lawyer's fee agreement provides for payment of one-third of "the net sum recovered after deducting taxable costs and disbursements." Does the "net sum recovered" include just the damages award, or the additional attorneys' fee award as well?
In Albunio, the attorney argued that "net sum recovered" included both the damages award ($986,671) and the attorneys' fee award ($296,826.04), which would have led to an approximate $400,000 recovery on the trial fees alone. The Court of Appeals disagreed. After reiterating the well-established principle that the attorney has the burden to show that fee contracts (and particularly contingent fee contracts) are "fair, reasonable, and fully known and understood by their clients," the Court held the attorney had not met that burden, and indeed had not even mentioned the possibility of a statutory fee award in the retainer. As a result, the Court concluded that the client could not have been on notice that the term "net recovery" would include a statutory fee award. Thus, the attorneys' contingent fee was limited to one-third of the damages award, approximately $330,000.
But what of the attorneys' fee award? How should that be divided up? The Court ruled that "absent a contract term expressly providing for a different distribution, an attorney is entitled to the greater of either the contingent fee or the statutory award." (Emphasis added.) Thus, the attorney gets the greater of one-third of the damages award (approx. $330,000) or the statutory fee award ($296,000), not some combination of the two. This ruling is consistent with that of other federal and state courts which have ruled on the question.
Can the attorney vary this by being more explicit about the fee award in his or her retainer agreement, even going so far as to get the full court-awarded counsel fees plus a share of the damages? The answer is clearly yes. But the Court cautioned attorneys "that such an arrangement would be subject to requisite scrutiny under applicable laws and rules controlling the reasonableness of attorney compensation." In some ways, this is not much of a limitation at all, since courts rarely interfere with contractual fee arrangements. But we do urge lawyers who do this kind of work to exercise caution in making these rich arrangements, especially when dealing with less-educated or less-sophisticated clients. Moreover, arrangements which simply make clear that the attorney is entitled to one-third of the statutory fee award and one-third of the damages will probably be considered acceptable.
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