U.S. District Court ruling dramatically reducing a lawyer’s “unethically excessive” fee request in a whistleblower case sends the bar a clear message that the federal courts will not rubber-stamp contingency agreements if they appear to exploit clients, attorneys say.

After the 12 whistleblowers in the case were awarded $437,000 each for notifying authorities that their employer had illegally dumped oil in the ocean, the attorney for two of the plaintiffs sought $288,000 in fees. The maximum that the other lawyers in the case had applied for was $10,000.

In response to a challenge by the government, U.S. Magistrate Judge Robert B. Collings in Boston denied the $288,000 request, instead awarding Texas attorney Zack Hawthorn $50,000 — or $25,000 for each of his clients.

Hawthorn argued that his fee request was not excessive because the record did not adequately reflect the amount of work he did, the risk of his clients going uncompensated, or the fact that neither client expressed disagreement with the fee.

But Judge Richard G. Stearns disagreed.

“Like [Collings], I consider a $25,000 award under the contingent fee agreements between Hawthorn and [the two whistleblowers] to approach, if not exceed, the limits of reasonable compensation under the circumstances,” said Stearns, affirming Collings’ award for the first whistleblower.

Meanwhile, the judge found that Hawthorn “violated the spirit, if not the letter” of multiple disciplinary rules in securing the second whistleblower as a client and denied him any fee for that representation.

James L. Sultan of Rankin & Sultan in Boston, who represented one of the other whistleblowers in the case, said the decision “reflects a realization that there’s a line of outrageous excessiveness, and when a case clearly falls on the wrong side of the line, the courts have the equitable power and duty to rectify injustice.”

Hawthorn, however, said the ruling sends a more ominous message that “citizens can freely contract with attorneys, be unhappy with the performance and have a third party or the court intervene.”

The 19-page decision is United States v. Overseas Shipholding Group, Inc.

A push too far?

U.S. Attorney Carmen Ortiz in Boston applauded the ruling.

“Although the government’s highly successful prosecution of [the defendant in the underlying dumping case] was complete when it learned about Hawthorn’s contingent-fee arrangement, this office refused to remain silent while witnesses who came forward at great risk to themselves were being exploited, regrettably by their own attorney,” Ortiz said. “This U.S. Attorney’s Office believes that it is incumbent upon us to assure the public that witnesses who come forward at their own risk will not be abandoned.”

Roy A. Bourgeois, a Worcester, Mass., attorney who represents lawyers in disciplinary matters, said he was not surprised by the decision.

“If you read between the lines, the lawyer, in the eyes of every judge involved, had pushed too far [in making the initial request] and pushed too far on appeal,” said Bourgeois, a partner at Bourgeois, Dresser, White & Beard. “There’s an old Wall Street expression that bulls make money, bears make money and pigs get slaughtered. In other words, quit while you’re ahead. Fifty thousand dollars was a pretty good fee for the little amount of work involved, and to continue to appeal in light of [Collings’] ruling was a mistake that cost him half his fee.”

Bourgeois also said the case provides two additional lessons for lawyers to take away.
“First, contingent-fee agreements are going to get looked at not only on the basis of how likely you are to win or lose, but also the amount of work that will be involved in determining whether you win or lose,” he said. “In this case, it was far from clear whether [Hawthorn’s clients] were going to get anything, but the lawyer also wasn’t going to have a big impact on that question.”

In addition, Bourgeois said, Hawthorn was already representing one of the whistleblowers in the underlying criminal investigation of the defendant when they entered their contingent-fee agreement.

“A contingency fee with an existing client is a contract between fiduciary and beneficiary,” Bourgeois said. “This case reiterates that such contracts will be presumptively invalid unless the lawyer can justify it.”

Hawthorn, however, insists that his fee request was not out of line.

Under a strict reading of the whistleblower statute, he said, his clients were not entitled to any portion of the whistleblower award, since the information they provided only indirectly led to a conviction.

“So my clients faced legal hurdles [in securing an award] that [the other attorneys’ clients] did not,” he said.

Hawthorn also said the lawyers for the other whistleblowers were being paid hourly. “They were already getting paid no matter what,” he said. “I stated that all along in my pleadings, and to my knowledge nobody has disputed it.”
Hawthorn said he plans to file notice of further appeal.

Stepping forward

In September 2005, Benedict Barroso, a Philippine national working as an engineer on a tanker owned and operated by defendant Overseas Shipholding Group, reported to the U.S. Coast Guard that the ship’s chief engineer was illegally dumping oil in the ocean.
Other crewmen, including fellow Philippine national John Altura, stepped forward as corroborating witnesses. The ensuing investigation resulted in Overseas Shipholding Group and the chief engineer being indicted in federal District Court in Texas for multiple criminal offenses, including violation of the Act to Prevent Pollution from Ships — APPS.
During the investigation, Hawthorn, an attorney on the Criminal Justice Act panel, was appointed to represent Barroso in response to the whistleblower’s reservations about being represented by a lawyer hired by Overseas Shipholding Group. Altura was assigned different CJA counsel.

After the government expanded the APPS case against Overseas Shipholding to include 10 more whistleblowers and a dozen more ships, the government announced a global plea agreement. Under the agreement, Overseas Shipholding agreed to pay a $27.8 million fine, including $10.5 million for APPS violations.

Three days after the agreement was announced, Hawthorn notified prosecutors that he intended to pursue a whistleblower claim on behalf of Barroso. Shortly afterward, he sent Barroso an e-mail offering to represent him in the whistleblower suit on a one-third contingency basis, explaining that this was a separate matter from his engagement in the underlying criminal investigation. Barroso agreed to the contract.

Meanwhile, Altura had e-mailed Hawthorn a day earlier about possible representation, since he was having trouble reaching his own attorney. Instead of attempting to contact the other attorney, Hawthorn sent Altura a contingency-fee contract while securing a waiver of conflict of interest from Barroso.

U.S. District Court Judge Reginald C. Lindsay eventually authorized $437,500 for each of the 12 whistleblowers, including Barroso and Altura. He also stipulated that any proposed legal fees above $10,000 had to be approved by the court.

Hawthorn subsequently filed a motion requesting a contingency award of 33 percent. Lindsay referred the matter to Collings, who found the bulk of Hawthorn’s work to consist of filing a nine-page boilerplate memorandum with the court, meeting with local counsel, and speaking briefly at the plea and sentencing hearing. Accordingly, Collings ruled that the fee was excessive in light of the amount of work performed, awarding instead a $50,000 fee that he described as the “outer limit of reasonableness.”

Unreasonably excessive

Stearns, who was assigned the case last spring after Lindsay’s death, rejected Hawthorn’s argument that the court lacked authority to reform contingency-fee agreements.

“[T]he court simply disagrees,” said the judge, citing appellate rulings from 10 federal circuits, as well as decisions from the Massachusetts Supreme Judicial Court and the Texas Court of Appeals clearly supporting such judicial power.

Additionally, Stearns described Collings’ fee award of $25,000 for each client as possibly exceeding the limits of reasonable compensation under the circumstances but said he would “defer to [the magistrate judge’s] judgment” in setting that figure as a baseline for an award.

However, the judge expressed reservations about the fee award in Altura’s case, due to the circumstances in which Altura came to Hawthorn while represented by other counsel.

Stearns observed that, under Rule 4.2 of the Massachusetts Rules of Professional Conduct, an attorney, in representing a client, shall not communicate about the subject
of the representation with anyone that he knows to be represented by another lawyer in the matter without that other lawyer’s consent.

And if Hawthorn could not determine whether Altura was actually represented by other counsel, and Altura’s interests could potentially come in conflict with those of Barroso, Rule 4.3 barred him from advising Altura other than to suggest he secure counsel, Stearns concluded.

“That Hawthorn understood the potential of a conflict is reflected by the fact that he immediately sought a waiver from Barroso,” Stearns said. “That Altura understood the meaning of a potential conflict or the significance of his signing the contingent fee contract (given his reliance on Barroso and a single [e-mail] from Hawthorn) is extremely doubtful.”

Accordingly, Stearns affirmed the $25,000 fee award with respect to Barroso but vacated the fee award with respect to Altura.