Recent developments in the world of contingency fee business litigation and commercial arbitration

Bad news for Jeff Skilling

Former Enron CEO Jeff Skilling lost his most recent appeal to the 5th Circuit. He was originally sentenced to 24 years and $45 million in restitution. His convictions were affirmed, although he is still to be resentenced because of a sentencing enhancement that had been misapplied by the trial court. U.S. v. Skilling, ___ F.3d ___. 2011 WL 1290805, (5th Cir. 2011). Unless the U.S. Supreme Court agrees to revisit Mr. Skilling’s case again, it appears that he will remain in federal prison for a very long time.

Investors receive surprisingly large arbitration award.

According to The Wall Street Journal, Citigroup has been ordered to pay $54.1 million to two wealthy investors (a venture capital investor and a retired patent attorney) for losses they sustained on risky municipal bond funds that lost 77% of their value in the financial crisis. “The award by an industry arbitration panel is the largest ever levied against a major Wall Street brokerage in favor of individual investors . . . .” (Larger awards have been made to corporate investors.) The award included $17 million in punitive damages and $3 million in legal fees. Citigroup’s municipal bond funds are the subject of an SEC probe into whether the bank misled investors by failing to disclose the funds’ risks. The investors were neighbors, and the former Smith Barney broker testified on behalf of his former clients. Arbitration is mandatory in most Wall Street customer agreements, and this result appears to substantially exceed any previous award to individuals is such an investment advice dispute. It is good to see a case in which a FIRA arbitration worked out so well for the investors!

Lieck is out of luck!

The written contract for local counsel (Ed Lieck) provided that he would receive 10% of the first $50 million and 5% above $50 million of “recovered judgments awarded” in a lawsuit. As a result of an arbitration and settlement of a related action in Sweden, the lawsuit was dismissed. Local counsel sued for a fee. He wanted his percentages of the fair market value generated from the business deal. The trial court awarded him approximately $13.5 million. The appellate court reversed and he recovered nothing. The contract was unambiguous. Lieck was to get his percentage of “any and all recovered judgment(s) awarded in [the lawsuit].” The judgment in the lawsuit simply dismissed all claims and ordered each party to bear its own costs. Since the parties were awarded nothing, Lieck recovered nothing. U.S. Denro Steels, Inc. v. Lieck, ___S.W.3d___, 2011 WL 1252090 (Tex. App. Houston [14th Dist.] 2011). Whether fair or not, this appears to be consistent with the view that attorneys’ fee contracts will be construed like any other contracts, and possibly for a further view that they will usually be construed against the attorney.

MME Launches New Website

McCanahan Myers Espey is proud to announce a new firm website today and express thanks to Steve Matthews, Laurel Fulford, and others at Stem Legal who created and implemented the site's changes. 

Please drop by and see our new online home.


Patent Infringement Litigation: Risks of Notifying the Infringer Before Filing a Lawsuit


           In “Patent Litigation – Four Steps to Patent Royalties,” the author suggests that after collecting evidence of patent infringement, the patent owner should “notify the infringer” before filing suit, because they “may begin to negotiate right away.” Not so fast. You may be about to have a suit filed against you in a court chosen by the defendant.

            In 2007 the U.S. Supreme Court decided  MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118. The Court discussed circumstances in which the sending of a letter by a patent owner might present grounds for the recipient of the letter to file a suit seeking a declaration that, among other things, there is no infringement and the patent is invalid. Since the MedImmune decision, many cases have fine-tuned the circumstances in which a declaratory judgment action may, or may not, be filed. A recent post by Professor Lisa Dolak of Syracuse University (and a former Federal Circuit Law Clerk) provides an excellent summary of many of those cases. For example, a statement that the patent owner “does not intend to sue” is likely not sufficient to end the suit for declaratory judgment. Similarly, a stated “continued willingness to negotiate” might be useless in preventing or stopping the declaratory judgment action. 

            It is clear that MedImmune has altered the world in which a patent owner may safely initiate communication with a potential infringer or licensee of the patent. Before sending any letters, the patent owner should be working with patent litigation counsel to make sure that the risks of a hostile declaratory judgment action are carefully evaluated and a fully informed decision made about how to go about enforcing the patent.


Business Method Patents: Challenges for Patent Infringement Cases

As attorneys involved in patent litigation, our firm has received several inquiries lately about whether we might take, on contingent fee, a case for infringement of a business method patent.  The answer is “maybe!” “A business method is simply one kind of ‘method’ that is, at least in some circumstances, eligible for patenting.” Bilski v. Kappos,130 S.Ct. 3218 (U.S. 2010). Great care must be taken in evaluating such a case, however, because method patents are not broadly patentable.

Bilski made its way to the highest court via an administrative route rather than by private litigation. An applicant tried to patent a method of hedging risk in commodities trading in the energy market. The PTO rejected the patent, which was affirmed by the Board of Patent Appeals and the Federal Circuit (en banc).   The Supreme Court granted certiorari.            

Methods of doing business are not necessarily non-patentable. In Bilski, the claimed invention was a mathematical formula, an “abstract idea,” and thus not a patentable “process.” Significantly, however, the Court rejected any limitation that a method patent must satisfy a “machine” or “transformation” test. That is, a claimed process is not patent eligible only if: (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing.  Although a useful tool, the Supreme Court held that the “machine or transformation” test is not the sole test for determining whether a method is patent eligible.   While the “machine or transformation” test might have worked well in the Industrial Age, it does not work as well in the Information Age.             

In the Supreme Court’s decision, four Justices concurred in one opinion (strongly disagreeing with the Court’s disposition of the case) and two in another (believing that business methods are not patentable). The Federal Circuit’s decision produced five opinions. This led Justice Kennedy to note, “Students of patent law would be well advised to study these scholarly opinions.”             

This has led some to suggest reexamination as an alternative to patent litigation or a license and that “defendants and potential licensees are using reexaminations more frequently than in the past to challenge the validity of the claims in issued patents.  So what’s the bottom line? Business method patents, while perhaps alive, will be difficult to successfully litigate by a plaintiff.   Perhaps the patent owner can best prepare his case for successful litigation by seeking re-examination himself before it is sought by a defendant, potential licensee or other third-party. We would be much more likely to take a business method case on contingency fee after the patent has survived re-examination in light of the substantial, though perhaps somewhat ambiguous, discussion of the higher and highest courts in Bilski.


Oops! Plaintiffs want a jury to award them money, but end up with arbitrators making them pay!


            This should be of interest to plaintiffs and attorneys who hope to conduct business litigation or arbitration with a contingent fee.

            Homeowners hired a construction company to build an 8000 square foot house, 2000 square foot guest house, pool and pool house, tennis court, pavilion and multi-car garage on their 12 acre property. The project was to cost $11.3 million. About 2 and ½ years into the project the builder stopped work, alleging the homeowners breached their contract by failing to pay for increased construction costs due to a design change. The homeowners claimed that the builder had delayed work and overrun costs. 

            The homeowners wanted the case heard in court. The builder wanted to arbitrate.  The case was ultimately heard by a three member arbitration panel.  The homeowners were ordered to pay the construction company $5.75 million in legal fees and arbitration costs.

The homeowners believed that they would have won with a jury and that the arbitrators were biased because they had formerly represented construction companies. 

            Obviously, it can matter a great deal to a contingent fee plaintiff whether his case gets tried by a jury or arbitrators. In either case, however, it is very important to pick the right audience, whether they are jurors or arbitrators!


Insurer faces counterclaim in STOLI case


In 2009, the Penn Mutual Life Insurance Company sued a trust and its trustee in a Delaware federal court, alleging the life insurance policy issued to them was part of an impermissible “stranger oriented life insurance” or “STOLI” scheme. Penn Mutual sought to rescind the policy because of “material misrepresentations” it relied upon when it placed the coverage.

The trust filed a counterclaim against Penn Mutual, essentially arguing that any misrepresentations in the policy application were made by Penn Mutual’s agents and should therefore be imputed to Penn Mutual itself. Penn Mutual asked the Delaware court to dismiss the counterclaim. But the court refused.  On July 30, 2010 it held the trust’s allegations “implicate legal and factual issues related to agency” and allowed the counterclaim to proceed further. The case is styled civil action number 09-677, Penn Mutual Life Insurance Company v. Barbara Glasser 2007 Insurance Trust, in the United States District Court for the District of Delaware.


Federal Court refuses to dismiss STOLI suit


Penn Mutual Life Insurance Company sued two insurance agents, Kevin Bechtel and Steven Brasner, alleging they unlawfully initiated a “stranger originated life insurance” or “STOLI” policy. Penn Mutual claimed Bechtel and Brasner contacted a seventy-one-year-old woman, encouraged her to participate in a STOLI scheme, and then submitted an “Agent's Underwriting Report” which falsely stated the policy was not intended for sale in the secondary market and the premiums would not be paid with borrowed funds. Brasner was to receive 60% of the policy’s sales commission. Bechtel was to receive 40% of the commission

Bechtel moved to dismiss the case, arguing that the Illinois federal court did not have jurisdiction over him because he did not: (1) do business in Illinois, (2) speak with the woman insured by the policy while he was in Illinois, or (3) sign the underwriting report. The Court was not persuaded. It denied Bechtel’s motion and noted he carefully crafted his statements to leave the misleading impression that he did not engage in any conduct with regard to the policy, but did not actually deny any of the essential claims against him. The Court concluded it had jurisdiction because Bechtel had an Illinois insurance agent’s license and was therefore subject to suit in Illinois. Bechtel also asked the Court to dismiss the case because Penn Mutual had not “stated a claim” against him. The Court refused, stating Bechtel’s arguments “merit little discussion.” It denied the motion on a procedural matter and also restated the obvious sufficiency of Penn Mutual’s allegations.  

Notably, Bechtel’s co-defendant Brasner has been accused in other civil actions alleging the same type of STOLI scheme, including suits filed by Axa Equitable Life Insurance Company and West Coast Life Insurance Company. He was also indicted in Florida on charges of grand theft, insurance fraud, creating an organized scheme to defraud, and aggravated white-collar crime for allegedly inflating the income and net worth of several senior citizens on life insurance applications to foster STOLI transactions.

Florida Supreme Court hears "dead peasant" insurance case

        On May 4, 2010, the Florida Supreme Court heard argument in the case Wayne Atkinson v. Wal-Mart Stores, Inc. (Click here to watch the argument). The case concerned Wal-Mart’s policies of “corporate-owned” life insurance, sometimes called “dead peasant” insurance, on the lives of its Florida employees.   Michael Myers of McClanahan Myers Espey argued on behalf of the families of the Wal-Mart employees. Wal-Mart was represented by Eileen Tilghman Moss of the firm Shook, Hardy & Bacon in Miami, Florida.

        In the case, Mr. Atkinson and others sued Wal-Mart, seeking to recover life insurance benefits Wal-Mart was paid after the deaths of their relatives, who had worked for Wal-Mart as rank-and-file employees.  The company received $66,048 after the death of Rita Atkinson and $72,820 after the death of Karen Armatrout.  A federal judge ruled the women's families did not have the right to sue under Florida law.  The United States Court of Appeals for the Eleventh Circuit then asked the Florida Supreme Court whether Florida law allows such a lawsuit.

Why not use a Board Certified lawyer?


            I just perused a lawyer’s website. His firm had several lawyers. He was from a small town, adjacent to a metropolis. He handled business litigation and probate litigation. His firm worked by the hour and on contingent fee. Then I noted the disclaimer: “He is not licensed by the Texas Board of Legal Specialization.”

            How do people find a competent trial lawyer? I suspect it is the same way they find doctors, dentists and other professionals – they ask a friend if she knows one! There are, of course, better ways, but most ordinary folks don’t know about them. That’s where the Board of Specialization comes in.

            Would you want a general practitioner physician to perform your heart surgery? Of course not. You would want a Board Certified heart surgeon. Then why would you want a non-board certified trial lawyer to handle your important patent or business litigation?   High hourly rates are not an excuse. If your case is right, you can probably get a highly qualified attorney to handle it on a contingent fee basis.

            Board Certification is a mark of excellence and a distinguishing accomplishment.Within the Texas legal community, Board Certification means an attorney has substantial, relevant experience in a select field of law as well as demonstrated, and tested, special competence in that area of law. There are more than 70,000 attorneys licensed to practice in Texas. Only 7,000 are Board Certified. 

           About 1100 Texas lawyers are Board Certified in Civil Trial Law. That is the specialized area that deals with litigation involving contracts, businesses and business owners, negligence, creditors and debtors, fair debt collection, landlord and tenant, and deceptive trade practices act. 

           You can easily find a Board Certified Trial Lawyer by going to the Texas Board of Legal Specialization’s on-line directory.  It has a "search" page. That allows you to search the database using a variety of criteria, including name, city, county, or zip code.  Alternately, call the TBLS at 800-204-2222, ext. 1454 or at 512-453-7266, or e-mail TBLS.

           It behooves you to insist on the best. Make sure your contingent fee lawyer is Board Certified in Civil Trial Law. Why do anything else? 

Bankruptcy Attorney Fees: Make them contingent


             A company files for bankruptcy. Millions of dollars are lost by unsecured creditors. There is no cash to pay lawyers to go after third parties. What do you do? 

            It’s simple. Find a competent firm willing to take the case on a contingent or hybrid fee basis. 

            Take theHeller Ehrman bankruptcy as an example. The 750-member international law firm filed for bankruptcy, in part it says, because its main two lenders -- Bank of America and Citibank -- refused to renegotiate the terms of a $5.7 million debt the banks say the firm owes as part of a long-term loan. 

            According to a recent court filing, the unsecured creditors' committee has asked the bankruptcy judge to approve the hire of a litigation firm for a pending case against Bank of America and Citibank. Under the proposed contract, the 11-lawyer firm would be paid $1 million up front, plus a contingency fee based on the net benefit to the estate if they win. “It’s BIG, You’re in Charge! Firm Picked for Pending Case Against BofA, Citi,” The Recorder, April 9, 2010. 

            When such a bankruptcy gets underway, counsel for the debtor should investigate potential claims against third-parties. They should then work with the unsecured creditors’ committee to search for special counsel – typically contingent fee business litigators who frequently represent plaintiffs against powerful companies. Once they negotiate a contract with the law firm that will undertake the case, the contract can be presented to the bankruptcy judge for approval. 

            Of course, the firm chosen for the task must possess entrepreneurial spirit and courage, as big third-party defendants such as B of A and Citi will have excellent counsel who are highly motivated by their substantial hourly fees. But such is the case in major, contingent fee business litigation. 

            In the end, it should be a win-win for everyone. Enough money may be generated to pay back all or part of what is due the unsecured creditors. Counsel for the debtor and the creditors will be heroes. The Court will be happy. The contingency fee lawyers, who get paid if they win, will be happy. The only unhappy people will be the third-party defendants who pay. 

            If the right lawyer agrees to take the case, it’s a no-brainer for the debtor and creditors!