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Attorney Fees Class Action Defense Cases–Mark v. Spencer: California State Court Affirms Dismissal Of Lawsuit Seeking Damages Under Fee-Splitting Agreement Underlying Class Action Following Class Action Court Fee Award Inconsistent With Agreement

Trial Court Properly Dismissed Lawsuit Seeking Recovery under Fee-Splitting Agreement underlying Class Action because Attorney-Plaintiff Failed to Disclose Fee Agreement to Class Action Court as Required by California Law and because Attorneys’ Respective Rights to Fees were Finally Determined by Class Action Court, thus Barring Subsequent Action under Doctrine of Res Judicata, California State Court Holds

Plaintiff, attorney Ronald Mark, was retained by an individual to commence a labor law class action against his former employer, General Nutrition Corporation (GNC); prior to filing the class action complaint, plaintiff asked defendant, attorney Jeffery Spencer, to serve a co-counsel in the class action litigation, and the attorneys signed a written agreement that proposed to split any fee award 50-50, subject to renegotiation in the event that one of them fails to perform an equal share of the work. Mark v. Spencer, ___ Cal.App.4th ___ (Cal.App. August 22, 2008) [Slip Opn., at 3.]. The attorneys filed the class action complaint in November 2001; the class action was settled in 2004, obtaining final court approval in December 2004. Id. The attorneys filed a motion requesting “a $600,000 lump sum for attorney fees and expenses” to “Class Counsel,” and Mark and Spencer filed separate declarations in support thereof. Id. Neither Mark nor Spencer notified the trial court of their written fee-splitting agreement, and only Spencer appeared at oral argument on the attorney fee application. Id. Ultimately, the trial court awarded Spencer about $401,000 and Mark about $76,500, and the class action defendant wired these sums to Spencer and Mark, respectively. Id., at 4. Mark filed a lawsuit against Spencer seeking “his share” of the class action attorney fee award; the trial court granted Spencer’s motion to dismiss the complaint ruling (1) Mark failed to comply with California law requiring disclosure of fee agreements in class action cases, and (2) Mark was precluded from collaterally attacking the attorney fee award based on an agreement not provided to the trial court at the time it determined the class action attorney fee award. Id. The Court of Appeal affirmed.

First, the appellate court held that Mark was required to disclose the fee-splitting agreement in the class action. After summarizing the potential conflict of interest created by such agreements, see Mark, at 5, and the Rules of Professional Conduct governing such agreements, see id., at 5-6, the Court of Appeal held that “ [t]o fulfill its role in protecting absent class members, the class action court must consider the potential effect of a fee-splitting agreement before approving a proposed settlement,” id., at 8. Put simply, “Rule 3.769 [of the California Rules of Court] was designed to protect class members from potential conflicts of interest with their attorneys by requiring the full disclosure of all fee agreements in any application for dismissal or settlement of a class action.” Id., at 2. The Court rejected plaintiff’s invitation to enforce the fee agreement despite potential harm to the class: “In essence, Mark urges us to sanction the concealment of material information from the class action court, even if it harms the absent class members. The integrity of the judicial system demands we not do so.” Id., at 8. The class action court’s decision to approve the class action settlement could have been affected by the disclosure of the fee-splitting agreement, and “attorneys would have little incentive to disclose the agreement if they could simply enforce it in a separate action.” Id., at 9.

Second, the Court of Appeal agreed with the trial court that plaintiff’s claim was barred by the doctrine of res judicata. Plaintiff claimed that the class action court never considered the fee-splitting agreement or Mark’s and Spencer’s respective rights under their agreement. Mark, at 9. The appellate court rejected the claim because (1) Mark “had an opportunity to litigate the same matter in a former action,” which is all California law requires, see id., at 9-10, and (2) the fee-splitting agreement cannot be separated from the request for an award of attorney fees in the class action lawsuit, see id., at 10-11. The Court concluded at pages 11 and 12, “Because the trial court in the [class action] fully and finally determined the attorneys’ respective entitlement to attorney fees, the court in the present action correctly concluded the doctrine of res judicata barred Mark’s first amended complaint.” Accordingly, it affirmed the judgment.

NOTE: The appellate court found unpersuasive plaintiff’s claim that he was unaware of the requirement to disclose the fee-splitting agreement and “relied on Spencer, who held himself out as a class action expert.” Mark, at 9. The reason given was to be expected, “Courts do not excuse nonlawyers for their ignorance of the law…. We see no reason to carve out an exception for attorneys.” Id. (citation omitted).

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