The State Supreme Court's Rejection of Federal Limits in Fee-Shifting Cases is a Win for All Californians, page 2

The State Supreme Court's Rejection (continued)

Page 2

The court of appeal in Ketchum distanced itself from Serrano III and its progeny and instead sought to follow the federal rule of Dague, ruling that it lacked the authority to add a multiplier to the successful trial counsel's lodestar. Opponents of the multiplier have long-argued that it unfairly penalizes the loser. For example, they observe that under the lodestar-adjustment method, the more difficult the case, the higher the multiplier; yet, the fact that a case is more difficult might meant that the wrongful nature of defendant's conduct is less clear. Opponents therefore argue that a defendant whose liability is less clear should not be burdened with paying a higher attorneys' fee to opposing counsel than a defendant whose liability is readily apparent. Relying on this and other arguments, the appellate court in Ketchum found that the trial court erred when it added a multiplier of 2 to a trial counsel's lodestar when setting the fee.

By its having granted review, many speculated that the California Supreme Court would allow the court of appeal and adopt the federal rule. In a unanimous decision, however, the Supreme Court re-affirmed the lodestar-adjustment method it first articulated 24 years ago in Serrano III and expressly rejected Dague as the rule in California.

What is most striking about the Supreme Court's opinion is its acknowledgment and clear recognition of the realities of contingent litigation practice. The court explained that the purpose of the Serrano III lodestar-adjustment method was to "fix a fee at the fair market value for the particular action. In effect, the court determines, retrospectively, whether the litigation involved a contingent risk or required extraordinary legal skill justifying augmentation of the unadorned lodestar in order to approximate the fair market rate for such services."

The court explained the "economic rationale" for fee enhancement as follows: "‘A lawyer who both bears the risk of not being paid and provides legal services is not receiving the fair market value of his work if he is paid only for the second of these functions. If he is paid no more, competent counsel will be reluctant to accept fee award cases.'" Quoting from Judge Richard Posner's Economic Analysis of Law, the California Supreme Court explained, "‘[t]he contingent fee compensates the lawyer not only for legal services he renders but for the loan of those services. The implicit interest rate on such a loan is higher because the risk of default (the loss of the case, which cancels the debt of the client to the lawyer) is much higher than that of conventional loans.'" The court concluded that the "purpose of the fee enhancement, or so-called multiplier, for contingent risk is to bring the financial incentives for attorneys enforcing important constitutional rights . . . into line with incentives they have to undertake claims for which they are paid on a fee-for-service basis."

In affirming Serrano III and maintaining California's "independent state rule," the California Supreme Court plainly recognized the economic realities of a contingent fee practice and the incentives necessary for competent counsel to agree to perform such work. The court acknowledged that contingent litigation is different, that being paid one's lodestar in such case necessarily means being paid less than one's market rates. Further, according to the court, the expressed will of the California Legislature to have lawyers represent needy persons whose civil or public rights have been violated, or to have lawyers serve as private attorneys general, requires that lawyers have sufficient economic incentive to do so.

1 | 2 | 3