Judge Who Took Axe to Lawyers’ Rates Says Size (of Firm) Matters

Welcome back to the Big Law Business column. I’m Roy Strom, and today we look at how a judge decided against paying a small law firm “Big Law” rates. Sign up for Business & Practice, a free morning newsletter from Bloomberg Law.

A case waiting for a ruling from the US Court of Appeals for the Ninth Circuit asks a controversial question: Should judges award smaller fees to lawyers working at small law firms than those working at large firms?

Let me cut to the chase: I don’t think I can find a single person who would reasonably argue the answer to that question is: “Yes.” (If you are that person, please let me know.) Law firm headcount is simply not a proxy for what clients are willing to pay their attorneys—just look at the myriad boutique firms founded by highly paid Big Law veterans.

I’m also not sure the judge who wrote the order, Michael Fitzgerald of the Central District of California, would agree that he presented the question so squarely.

There were plenty of caveats in Fitzgerald’s order, which is the subject of the appeal. He explicitly said firm size was not the only issue at hand when he cut a law firms’ fee request by more than half after the firm won an antitrust ruling.

But Fitzgerald came back to the idea that Big Law lawyers are paid more than small firm lawyers a few times. Here is perhaps the most conclusive part of his text: “it is simply unreasonable to award big law rates to a four-person firm representing mom-and-pop warehouses.”

The ruling creates a “troubling incentive problem,” said Eric Chaffee, a law professor at Case Western Reserve University School of Law.

“If experienced attorneys at boutique firms know they’ll be paid less for fee-shifting cases involving smaller clients, they have less economic incentive to take those cases,” Chaffee said. “This could leave ‘mom-and-pop’ clients with less access to top-tier legal talent—the opposite of what fee-shifting statutes intend.”

If the Ninth Circuit writes a published opinion on the question—and there are some indications that it will—I think it’s likely to reject the premise that firm size should factor into attorneys’ fees awards.

Nancy Rapoport, a law professor at University of Nevada, Las Vegas, said she hadn’t seen a prior case that docked lawyers’ fees based on the size of their law firm, and said it sets a “dangerous precedent.”

“A solo lawyer who’s the best in the country at what he or she does shouldn’t be penalized because he or she decided not to work at Big Law,” Rapoport said.

The law firm involved is San Francisco’s Gaw Poe, which is actually a five-attorney firm. Gaw Poe regularly files antitrust cases under the Robinson-Patman Act, which requires suppliers to sell products to all wholesalers at the same price. The law also allows plaintiffs’ lawyers to be paid by defendants in successful cases.

Gaw Poe’s founders are former lawyers at big law firms (Morrison Foerster for Mark Poe, O’Melveny and Wilson Sonsini for Randolph Gaw), and its website boasts it is “cost-effective” insofar as its partners charge comparable rates to Big Law associates. That’s roughly true. Poe’s hourly billing rate in the case was $1,314. Some Big Law associates today charge more than $1,500 an hour, while senior partners may add thousand more than that. Still, the court reduced Poe’s hourly rate to just over $1,000 an hour.

The defense argued Gaw Poe was not efficient because partners were handling associate level work—seeking a 10% haircut in its fee as a result. Fitzgerald wrote he was “somewhat persuaded” the firm was efficient: the partners did associate-level work more effectively than associates would have. But he still applied a 5% haircut to its fee for that work.

Gaw Poe’s case was against Prestige Brands, which owns the maker of Clear Eyes, the eye drop product long endorsed by comedian Ben Stein, alleging it was giving Costco an illegal discount. The case won at trial, securing about $1.2 million in tripled, collective damages for a group of plaintiffs who buy Clear Eyes. The ruling also forced the product to be sold to the plaintiffs at the same price as Costco’s and required a semi-annual report of the prices companies are paying for the product. Prestige also said it stopped the discounting practices that led to the lawsuit.

Gaw Poe asked for $7.65 million in attorneys’ fees, or more than six times the damages the plaintiffs were awarded. Judges sometimes look sideways at legal fees that are larger than the amount the lawyers’ clients will receive in a case.

But Fitzgerald rejected a defense argument seeking to limit Gaw Poe’s fees for “limited success,” noting that the amount the plaintiffs recovered was more than an offered settlement and also included injunctive relief.

The judge awarded Gaw Poe $3.1 million in attorneys’ fees, with much of his analysis focused on the fact that the firm was small.

A panel of appellate judges tried to weigh all this during a July oral argument. The Ninth Circuit doesn’t write opinions on every case it decides, and the fact that it has taken more than three months to decide this case suggests they are writing something. The law firm size issue is the most likely subject.

A back-and-forth from that argument shows just how much the judges were struggling with the economics of law firms.

“I think what [Judge Fitzgerald] was thinking was not that [large law firms] were being paid by large corporations, but that they have higher overhead,” Judge Kim McLane Wardlaw said.

Poe responded: “I wouldn’t see how a firm’s decision to rent the top floor at the US Bank building should weigh in its favor when it comes to fee awards.”

Judge Anthony Johnstone weighed in: “Well, usually economies of scale would point in the other direction, right? You would expect whatever overhead a large firm has is spread over more people for their output.”

Poe didn’t seem to know exactly what to say to that, but he got back to his overall argument: “I don’t see anywhere in the existing precedent setting rates on skill, experience, and reputation, how that would be a permissible factor.”

That’s probably all that needs to be said.

Worth Your Time

On North Carolina: Big Law firms are flocking to Charlotte, vying for structured finance and private credit work in the state’s largest city and banking center, Tatyana Monnay reports.

On M&A: State attorneys general are preparing to challenge more M&A deals, stepping further into the role of antitrust watchdog that they say the Trump administration is abandoning, Kate Arcieri reports.

On Legal fees: JPMorgan Chase & Co. was hit with $115 million in lawyers’ bills for defending Charlie Javice, an executive convicted of defrauding the bank and sentenced to seven years in prison, Bob Van Voris and Jef Feeley report. Quinn Emanuel and Kobre & Kim were part of Javice’s defense team.

That’s it for this week! Thanks for reading and please send me your thoughts, critiques, and tips.