What’s On Their Minds: Should the Supreme Court of Ohio Update its Analysis for Calculating Attorney Fees? Phoenix Lighting Group LLC v. Genlyte Thomas Group LLC.

“So, what would be the basis for a multiplier of the lodestar? What would be an example?”

Justice Stewart, to counsel for DCO

“Why is the fee award in this case not arbitrary as your opponent describes?”

Justice Donnelly, to counsel for Phoenix Lighting

On September 10, 2019, the Supreme Court of Ohio heard oral argument in Phoenix Lighting Group LLC v. Genlyte Thomas Group LLC, 2018-1076. At issue in this case is whether the Supreme Court of Ohio should update and clarify its attorney fee jurisprudence by adopting the United States Supreme Court’s guidance in Perdue v. Kenny A., ex rel. Winn,559 U.S. 542 (2010).

Case Background

Phoenix Lighting Group, L.L.C. (“Phoenix”) and Jack Duffy & Associates, Inc. (“JDA”) are both lighting sales agencies that sold Acuity products. Although both were owned by Jack Duffy, the two businesses operated separately. Each had separate tax identification numbers, filed taxes separately, kept separate financial records, employed different people, and, with a few exceptions, operated in different geographical markets. Also, Phoenix was an L.L.C. while JDA was an S corporation.

In early 2008, two at-will Phoenix employees became interested in purchasing Phoenix. After beginning negotiations, the two employees and Phoenix entered into a mutual confidentiality agreement because Phoenix had to disclose its confidential financial information during the negotiations.

Meanwhile, the two employees also considered opening their own lighting sales agency, representing products manufactured by Genlyte Thomas Group, LLC dba Daybrite, Capri, Omega (“DCO”), a competitor of Acuity. After informing the regional sales manager at DCO of their interest in starting a DCO agency, the two at-will employees created a draft business plan for DCO. The new business plan included information that the two employees had gained while working for Phoenix and from their negotiations with Phoenix. The business plan identified several Phoenix employees as the future employees of the new agency. Furthermore, the business plan included confidential information about Phoenix’s sales, workforce implementation, and marketing strategies.

Jack Duffy eventually found out about these plans and asked the two employees to sign a non-compete agreement. They refused, resigned from Phoenix, and formed their own lighting sales agency, which represented DCO in an agency capacity. The new sales agency borrowed $600,000 from DCO and hired several former Phoenix employees.

After these actions, Phoenix’s business was essentially destroyed. Duffy consolidated Phoenix with JDA. Phoenix then sued the two ex-employees and DCO, alleging various business-related torts. A first lawsuit was voluntarily dismissed without prejudice by Phoenix on the eve of trial, and refiled two months later. During the second trial, a settlement was reached with the two employees, who were dismissed from the case.

After the dismissal of the first lawsuit, Phoenix and its counsel switched from an hourly rate fee agreement to a hybrid hourly/contingent fee arrangement, and then about a year later, another hybrid agreement in which the hourly rate was cut in half to $120/hour, plus a contingency fee if the case succeeded in which Phoenix and the firm would split any recovery after recoupment of all expenditures by Phoenix.

At the conclusion of the second trial, the jury returned a verdict against DCO, finding that DCO had tortiously interfered with Phoenix’s business relationships and had misappropriated Phoenix’s trade secrets. Further, the jury found that DCO had participated in a civil conspiracy to tortiously interfere with Phoenix’s business relationships, to breach a duty of loyalty owed to Phoenix, and to misappropriate Phoenix’s trade secrets.

The jury awarded compensatory damages of $1,680,970 and an additional $7,000,000 in punitive damages upon a finding of malicious conduct by DCO. Summit County Court of Common Pleas Judge Alison McCarty reduced the punitive damages to $2,761,940 pursuant to the Ohio statute capping the amount of punitive damages.

The jury also determined that Phoenix could recover attorney fees. Judge McCarty held a hearing on this issue, at which experts testified for both sides. Judge McCarty found that in addition to the lodestar (the number of hours expended multiplied by a reasonable hourly rate) amount of $1,991,507, an enhancement of the lodestar was justified by a multiplier of two. She awarded Phoenix a total of $3,983,014 in attorney fees. Read her decision here.

DCO’s post-trial motions for judgment notwithstanding the verdict, or in the alternative, for a new trial or for remitter were denied.

Appeal

In a split decision, on the issue pertinent to this appeal, the majority found no abuse of discretion by the trial court in awarding a multiplier of two times the lodestar amount for the attorney fees because of the factual and legal complexity of the case, the favorable outcome, the financial risk involved and the necessity of plaintiffs’ counsel having to turn away other cases.

Read the oral argument preview of the case here.

Key Statutes and Precedent

Bittner v. Tri-County Toyota, Inc., 58 Ohio St.3d 143 (1991) (The lodestar amount is calculated by multiplying the number of hours reasonably spent on the case by a reasonable hourly fee. The trial court should decide whether to adjust the amount based on factors such as the time and labor involved in the litigation; the novelty and difficulty of the questions involved; the professional skill required to perform the necessary legal services; the attorney’s inability to accept other cases; the fee customarily charged; the amount involved and the results obtained; any necessary time limitations; the nature and length of the attorney/client relationship; the experience, reputation, and ability of the attorney; and whether the fee is fixed or contingent.)

City of Burlington v. Dague, 505 U.S. 577 (1992) (lodestar enhancements based on risks associated with contingent fees are inappropriate.)

Landis v. Grange Mutual Ins. Co, 83 Ohio St. 3d 339 (1998) (just because a contingency fee agreement was normal and customary to the parties who entered into it does not mean it can be enforced against a party that did not agree to it.)

Perdue v. Kenny A., ex rel. Winn,559 U.S. 542 (2010) (presumption that lodestar yields a sufficient fee; enhancements are for rare and exceptional cases and must be supported by specific evidence.)

Ohio Prof. Cond. Rule 1.5(a)(1)-(8). (Factors to be considered in determining reasonableness of attorney fee.)

At Oral Argument

Arguing Counsel

Benjamin C. Sassé, Tucker Ellis LLP Cleveland, for Appellant Genlyte Thomas Group LLC dba Daybrite, Capri, Omega (“DCO”)

Jeffrey T. Witschey, Witschey Witschey and Firestine Co. LPA, Akron, for Appellee Phoenix Lighting Group LLC

DCO’s Argument

The overall key here is to bring reviewability and objectivity to fee awards in Ohio. An attorney is entitled to a reasonable fee, not a windfall. The lower courts here approved a multiplier of two based on factors fully reflected in the 9000 hours the firms involved billed that were included in the lodestar. This court should adopt the guidance from the U.S. Supreme Court decision in Perdue, and clarify that a lodestar fee award may be enhanced only if specific evidence supports an enhancement that accounts for a relevant factor not already included within the lodestar. No such evidence exists here. Therefore, the doubling of the lodestar should be vacated. And while admittedly DCO never raised the Perdue case to the trial court, DCO consistently and repeatedly argued that the enhancement was improper and that the award should not have been doubled. So, this issue was definitely preserved for appeal.

Under Perdue, to obtain an enhancement, there has to be an extraordinary outlay of expenses in the context of a long delay in receiving any compensation. Here, though, under its hybrid fee agreement, counsel received over 1 million dollars during the pendency of the litigation. Because counsel were compensated at what their expert concluded was the current hourly rate, the lodestar fully compensated them for their time, whether it was on this case or another.

There were three different fee agreements in this case. The initial agreement was a straight hourly rate agreement. After the case was voluntarily dismissed the first time on the eve of trial, there was then a second fee agreement, which for the first time included a contingent component to it. In the second agreement the lawyers billed at full hourly rates but said the client only had to pay half those rates and then if they recovered more than 800,000, they would get double the amount that they had not yet collected. There was then a third fee agreement in which they received half of their hourly rates in exchange for the ability to recover half of the amount of any ultimate judgment that exceeded the costs and attorney fees. So, again, this is not the case where the lawyers were left uncompensated during the pendency of the proceeding. While they may not have gotten their straight hourly rate throughout the case, the overall fee received was a reasonable one. And factors such as complexity and skill are fully reflected in the lodestar amount.

Perdue does allow for enhancements in three scenarios, none of which is present in this case. First is that in some locales, and this may only exist in the federal system, an attorney’s rates are set by one factor, such as the number of years out of law school. If that is the case, that may not reflect the attorney’s skill and an enhancement could be awarded. Second, Perdue allows for an enhancement when there has been an extraordinary outlay of expenses over exceptionally protracted litigation. The Perdue context involved 1.7 million advanced by counsel over 5 years. But even in this scenario, the enhancement must be objectively based. And finally, Perdue allows for an enhancement when there is an extraordinary delay in any compensation. In all three situations, though, there must be objectivity and reviewability.

In the Bittner case itself, the court vacated the fee award because it was not reviewable. The court said trial courts need to include a statement that allows appellate courts to conduct a meaningful review of that fee award. Perdue also requires trial courts to offer a “reasonably specific” explanation of any enhancement and confines enhancements to those situations where specific evidence supports an objective enhancement that reflects a factor not included in the lodestar. In this case there was absolutely no explanation of why a factor of two was used to increase the lodestar amount.

Nor should there be an enhancement for the risk associated with losing and having a contingent fee arrangement. The risk of loss in any given situation with that kind of arrangement is not reviewable, is too subjective, and just encourages further litigation.

Phoenix’s Argument

Bittner, the existing precedent in this area, has worked successfully for thirty years, produced a fair result in this case, and should not be disturbed. Perdue has an actual presumption that the lodestar itself is a fair fee. Bittner is completely different from Perdue in that regard. In this case the trial court properly considered the factors listed in Bittner and the ethics code which determine whether a fee is fair or not.

A multiplier of two has been used in other commercial cases, but more importantly, the expert witness for Phoenix testified that two would be a correct multiplier in this case. One big factor for this multiplier was the contingency risk that existed in the case. Plaintiff’s counsel was not compensated for that. This contingency fee agreement was forced upon plaintiff’s counsel by the opposing party when they pretty much told us they were going to try to expense us into submission. This was a finding by the trial court. The trial court found we were forced into the more expensive contingency fee arrangement in the event of success. Our firm had dropped our fee to $120 per hour from $240 per hour, and went 7 years at that lowered rate. The firm only had six lawyers, and three of us were pretty much devoted to this case full time.

The trial judge here looked at the prevailing rate in the community. The uncontested evidence was that the prevailing rate in the community was $325/hour. Before the contingency agreement, we were only charging $240 per hour. So that is a substantial portion of the enhancement that the trial court gave. Had plaintiff’s counsel been given the prevailing hourly rate, that would drop the enhancement down to about 1.3.

Additionally, in this case, neither novelty nor complexity were built into the lodestar amount. If an attorney is paid the prevailing rate in the community, some of those complexities could be included in that. In this case, that is not the way it happened.

Perdue does allow for an enhancement for the actual performance, the true market value of the performance, as demonstrated in the litigation. While Perdue wasn’t applied here, since no one argued that it should be, part of the enhancement by the trial court was probably based on this factor. If Perdue were to be applied, the court would start with the prevailing rate, and then look at the performance of the attorney as demonstrated during the trial and might offer an enhancement in that regard.

Even if some of the factors are removed from the enhancement and moved into the lodestar, the lodestar would go up, and the enhancement would go down, but the result would be the same.

Nor should this court be concerned about prevailing attorneys receiving a windfall. Abuse of discretion review allows an appellate court to be sure that the trial court has not lost its way.

What Was On Their Minds

Why A Multiplier of Two?

Was there any justification or explanation as to why the factor of two was employed, asked Chief Justice O’Connor? Where did the multiplier of two come in? How was that arrived? Why two? Did the trial judge determine what gross amount would have been due fee-wise based on the fee arrangement, risk, and some other things, and then determine that in order to reach that number, look at the lodestar and what number should be pulled to reach the big number at the end?

What evidence did plaintiff’s expert rely on to come to a multiplier of two, asked Justice Donnelly?

Why is a multiplier of two not arbitrary, asked Justice Stewart? Why two, and not one or three or five?

Evidence Supporting an Enhancement

Was there any evidence presented to the trial court to support an enhancement, asked Justice Donnelly? Was there evidence of monies expended and expenses advanced in advance of the litigation? What about the inability to accept other cases because of the time spent on this litigation? What about the fact that Phoenix dismissed the case instead of going to trial the first time? Couldn’t it be argued that Phoenix’s counsel brought some of these expenses on themselves? Was any evidence presented at the hearing of cases that were turned down because of the complete focus on this litigation?

Because the lawyers could only work on one case at a time, each hour was dedicated and compensated, noted Chief Justice O’Connor. No matter how many clients they had, didn’t they have a source of compensation for every hour they worked? Was the enhancement here just whimsical? Was this plaintiff’s counsel’s only case for seven years? Was there other income coming into the firm?

What about risk associated with losing and having a contingent fee arrangement, asked Justice Stewart?

One of the issues that concerns me is the novelty or complexity of a problem, noted Justice French. Isn’t that already built into the hourly rate? I can see that counsel would want a prevailing hourly rate, but why would we want to have those extra factors? Doesn’t the novelty of the question and the complexity of the problem go into the lawyer’s hourly rate and the number of hours expended? Why would we allow an attorney an extra amount because the problem was complex if presumably you’re spending more hours if the problem is complex?

The Various Fee Agreements

Wasn’t the agreement with Phoenix based on an hourly rate to begin with, asked Chief Justice O’Connor? Was there any reference to a hybrid arrangement in that agreement? She commented that the agreement was a complicated one.

Compensation Received During Trial

Even if plaintiff’s counsel received something at all points, was that compensation always adequate for the work being performed at a given time in this case, asked Justice Stewart? For what was plaintiff’s counsel not compensated?

Lodestar Amount

Should the consideration of giving the award of the lodestar take into consideration the complexity of the matter or the expertise of the attorneys or the ultimate judgment, or in this case was all that considered in the lodestar amount and was appropriate, asked Justice Stewart?

Was $325 per hour the prevailing rate for all the lawyers in the firm who worked on this case, asked Justice Fischer?

Windfall to the Attorney

Justice French stated she had a long-term concern about allowing windfalls. That doesn’t seem to benefit anybody except lawyers potentially, so how do we prevent that, she asked? We’re not bound by Perdue, so we are going to write something that says here are the factors that we think you need to follow. How do we prevent just getting windfalls?

Perdue

Was Perdue raised below, asked Justice French? Didn’t the defendants use Bittner as precedent?

How It Looks From The Bleachers

To Professor Emerita Bettman

Mr. Sassé gave an elegant and flawless argument, while Mr. Witschey’s was scrappy and mostly on the defensive. I predict a remand on this case because Mr. Witschey was never able to answer the many questions about why the trial judge chose a multiplier of two to enhance the lodestar amount, or why she granted an enhancement at all. That said, I am also going to predict that the trial judge may still award some multiplier of the lodestar, as DCO de-emphasized what sounded like overbearing trial tactics that nearly frayed a small law firm, which I suspect the trial judge fully appreciated, but which did not effectively come across in the oral argument. While the court may not specifically adopt Perdue (which Mr. Sassé conceded was not specifically relied on below), the court is very likely to require more specificity to justify any enhancements to the lodestar and give guidance on when enhancements would be appropriate.

The case is also complicated by the fact there were three different fee agreements, and one dismissal of the case without prejudice. While I agree with Mr. Sassé that the hybrid contingency fee agreement was not literally forced on Phoenix, I can see why Mr. Witschey argued that the necessity of it was. It seemed driven by a small firm hanging on by its fingernails by the tactics of the opposition.

To Student Contributor Maria Ruwe

Throughout his argument, DCO’s counsel stayed true to his theme: the multiplier by two enhancement was arbitrarily determined and lacked specific evidence to support it. This theme remained in the Justices’ minds during Phoenix’s argument. The Justices asked Phoenix’s counsel five separate times about the specific basis for determining the multiplier by two, but Phoenix’s counsel struggled to provide a satisfactory answer. By repeatedly asking this question, it seemed that the Justices were grasping for the specific evidence that Perdue requires to justify an enhancement. I think the Justices will remand the case and specify that Perdue applies when determining attorney fees. Even if applying Perdue will result in the same gross amount that the trial court initially determined (as Phoenix argued), requiring specific evidence seems like a better method for calculating attorney fees and will also prevent the appearance of windfalls.