Fee fight blights $1.3 billion Chinese drywall case

July 14, 2016

(Reuters) – The litigation over allegedly defective Chinese-made drywall should be a triumphant emblem of the American tort system.

After seven years of wrestling with scores of defendants, many of them based in China, a bellwether trial in federal district court in New Orleans and more than a year of settlement negotiations, plaintiffs’ lawyers negotiated a series of five complex, interconnected settlements that will deliver about $1.3 billion of value to thousands of property owners, many of them Florida, Mississippi and Louisiana residents rebuilding after hurricane devastation. As the lawyers who led the case explained in their June 7 fee allocation proposal, the settlements will allow homeowners either to receive cash compensation or remediation to get rid of construction materials that supposedly emit toxic fumes and corrode light fixtures.

Plaintiffs’ steering committee member Russ Herman of Herman Herman & Katz told me Thursday that the challenge of litigating against (and negotiating with) so many foreign defendants, as well as dealing with hundreds of distributors, contractors, subcontractors and insurers, made the drywall case the most complex litigation he has ever been involved in. He said the billion-dollar outcome is a credit to the handful of lead lawyers who conducted discovery, tried the bellwether cases and pushed five defendants into a deal.

For their contribution to the case, the dozen or so lawyers who did the bulk of the work on behalf of all the property owners who benefit from the settlements have asked for about $114.6 million in fees and expenses. That money is less than 10 percent of the value of the compensation property owners will receive. What’s more, the lead lawyers said, their fees and costs will not come from the pot of money and other benefits available to property owners. At the direction of the judge presiding over the case, U.S. District Judge Eldon Fallon of New Orleans, plaintiffs’ lawyers negotiated a separate fee agreement with the defendants in order to assure that homeowners could afford to remove all of the supposedly defective drywall from their property.

Sounds like a great deal all around, right?

But not to as many as 100 lawyers who signed contingency fee contracts with homeowners in the drywall case but were not part of the leadership group. Many of these lawyers, including the big plaintiffs’ firms Baron & Budd and Parker Waichman have filed opposition to the fee allocation plan proposed by Herman and lead Chinese drywall plaintiffs’ counsel Arnold Levin of Levin Fishbein Sedran & Berman. Parker Waichman’s brief called the proposal “unprecedented, unwarranted, unfair and patently inequitable.”

Objectors’ big problem with the fee allocation stems from the limited fund available for all of the lawyers in the case. In a typical multidistrict product liability case like the drywall litigation, plaintiffs pay a percentage of their recovery as legal fees to the lawyers with whom they signed contracts. Those lawyers, in turn, pay a percentage of their fees to the lead counsel group to compensate the lawyers who invested their time and money for the common benefit of all claimants.

But in the drywall case, legal fees are not coming from plaintiffs’ pockets but from a capped fund of about $193 million, negotiated separately with the defendants and approved by Judge Fallon in May. If the lead lawyers get $114.6 million, there’s only about $78 million left for all of the scores of lawyers whose contingency fee contracts called for them to receive much more. By Parker Waichman’s calculation, instead of the 40 percent contingency fee the firm negotiated with its drywall clients, it would receive less than 12 percent under the allocation proposed by lead counsel. “It is patently unreasonable,” the firm said, “to now request that privately-retained counsel absorb a 60-70 percent reduction in their contractual fee agreements with their clients.”

More diplomatically, Baron & Budd said that because the $193 million fee fund approved by Judge Fallon isn’t big enough to pay any of the lawyers in the case what they would ordinarily earn from a big settlement, both the lead counsel group and the other contingency fee lawyers should take a discount. Baron & Budd argued that in the allocation proposed by lead counsel, lawyers outside of the leadership group would take a disproportionate hit – a particularly inequitable consequence, the firm said, because it was lead counsel who negotiated the size of the fund for legal fees. Baron & Budd, according to the brief, should not be penalized disproportionately for the failure of the plaintiffs’ steering committee to obtain enough money to pay all of the lawyers in the case.

Russ Herman, who, with lead counsel Levin, submitted the proposal to allocate the lion’s share of fees to steering committee lawyers, said the firms most responsible for winning more than $1 billion for plaintiffs deserve bigger fees. Steering committee lawyers, all of whom have individual clients as well, accounted for 70 to 80 percent of the billable hours that contributed to the outcome of the litigation, he said, citing submissions to an independent auditor of the lawyers’ time. By contrast, lawyers who only represented individual clients and did not work for the common benefit of all plaintiffs were responsible for less demanding work, such as arranging for home inspections and verifying which defendant manufactured the drywall used in their clients’ properties.

“Am I resentful? No, I’m not resentful,” Herman said when I asked if he minded that the drywall case, like so many other successful MDLs, has devolved into a fee fight. “But I am adamant, as I am in every case, that those who carried the load are compensated.”

Russell Budd of Baron & Budd declined to comment beyond the brief the firm submitted. Judge Fallon will hold a hearing on fee allocation on July 27. It promises to be lively.

For more of my posts, please go to WestlawNext Practitioner Insights

Follow me on Twitter

No comments so far

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/