Roy Reardon and William T. Russell Jr.
Roy Reardon and William T. Russell Jr. ()

This month we discuss a matter in which the Court of Appeals adopted the approach used by federal courts in determining the proper measure of attorney fees in contingency fee cases where the client is also awarded statutory attorney fees. We also address a case which determined that lost profits from sales to third parties under a distribution agreement can constitute general—rather than consequential—damages, and one concerning substantial modifications in products liability actions.

Attorney Fees

In Albunio v. City of New York, the court considered a situation in which a lawyer took on a case on a contingency fee basis and was also awarded statutory attorney fees. The court, in a unanimous decision by Chief Judge Jonathan Lippman,1 adopted the approach taken in federal cases and ruled that unless the contingency fee agreement provides otherwise, a lawyer in this situation is entitled to the greater of the statutory fee award or the contingency fee.

Appellants Lori Albunio and Thomas Cronin are former New York City police officers who retained non-party respondent Mary Dorman to represent them in an action against the City of New York and the New York City Police Department arising under the New York City Human Rights Law. Appellants and Dorman entered into a retainer agreement for work through and including trial which provided that Dorman would receive 33 1/3 percent “of the sum recovered, whether by suit, settlement or otherwise.” This trial retainer agreement further provided that “[s]uch percentage shall be computed on the net sum recovered after deducting taxable costs and disbursements,” and that other than certain specifically identified items, “there shall be no deduction in computing such percentages.” There was no mention of what would happen in the event that statutory attorney fees were awarded even though the Human Rights Law provisions under which appellants were suing provide a court with discretion to award fees to the prevailing party. Dorman and appellants also entered into two additional retainer agreements for the appeals in which they agreed that if Dorman obtained a fee award as a result of a successful appeal, she could keep that fee in its entirety. If Dorman were successful on appeal but was awarded no fees or fees in an amount less than $20,000, appellants would pay her the difference between any award and $20,000.

Appellants obtained a jury verdict at trial in the amount of $986,671. Dorman made an application for fees and was awarded $296,826. The trial verdict and the fee award were upheld on appeal. Dorman was subsequently awarded an additional $233,965 by the trial court for her fees on appeal.

Dorman asserted that she should be paid a one-third contingency fee by her clients calculated based on the total of the trial verdict plus the attorney fees awarded for her trial work. In other words, she claimed one-third of the $986,671 jury verdict and one-third of the $296,826 trial fee award. She also asserted that her statutory appellate fees should not offset the contingency fee owed for her trial work. Her clients disagreed and Dorman commenced a proceeding seeking a declaratory judgment to enforce the retainer agreements. The Supreme Court granted Dorman’s motion and the Appellate Division, First Department affirmed. The Court of Appeals granted leave to appeal.

The Court of Appeals disagreed with the Supreme Court’s and the First Department’s conclusion that the trial retainer agreement was clear and unambiguous. The court further noted that the general rule of construction that “equivocal contracts will be construed against the drafters” should be applied with particular rigor in the context of attorney retainer agreements. Although the construction of attorney retainer agreements is an issue of state law, the court noted that this was an issue of first impression in New York and looked to cases involving federal statutes that provide for attorney fees to the prevailing party.

Most federal cases have found that, absent an agreement to the contrary, statutory fees are not considered part of the total recovery for purposes of determining the contingency fee and counsel is generally entitled to the larger of the statutory fee or the contingency fee (calculated based on the amount of the client’s recovery without any awarded fees). The court adopted this approach.

As to the appellate retainer agreements, appellants acknowledged that the agreements are not ambiguous, but appellants argued that they are unenforceable because the appeals should be considered part of the same action as the trial and, accordingly, the fee awards for the trial and the appeals should all be offset against the contingency fee that appellants owed Dorman under the trial agreement.

The court rejected this argument and found that the appellate retainer agreements plainly entitled Dorman to the statutory fee awarded for the appeals and should be enforced as written. Therefore, Dorman was entitled to the statutory fees on appeal and to the larger of the statutory fees awarded at trial or one-third of the jury verdict. Although the court has clarified the law in New York on this issue, lawyers handling cases on a contingency fee basis where there is a possibility of a statutory fee award should still consider specifically addressing the issue in their retainer agreements.

Lost Profits

In a 4-3 decision written by Judge Jenny Rivera in which Judge Lippman and Judges Victoria Graffeo and Robert Smith concur, the court ruled in Biotronik v. Conor Medsystems Ireland, that lost profits for sales to third parties under a distribution agreement can constitute general damages recoverable in a breach of contract action despite a prohibition on recovery of consequential damages.

Biotronik manufactures and distributes medical devices. Conor Medsystems developed and manufactured a medical stent called CoStar. In May 2004, Conor and Biotronik entered into a contract providing Biotronik with the exclusive right to distribute CoStar worldwide with the exception of the United States and certain other countries. The contract provided that it would expire on Dec. 31, 2007, but would automatically renew for an additional one-year term unless either party provided contrary notice before July 1, 2007.

The contract was complicated but essentially required Conor to supply and Biotronik to purchase a specified minimum quantity of the stents each quarter. Biotronik agreed to pay Conor a negotiated purchase price per stent that was determined 30 days before the end of each quarter based on the actual sales and sale price of the stents sold by Biotronik in the previous quarter. Accordingly, the payments Conor received under the contract were directly related to the prices at which Biotronik sold the stents provided by Conor. Moreover, Conor remained involved in the sales process by, inter alia, providing supply training support and sales and technical literature. The contract also contained a limitation of liability provision that precluded liability for consequential damages sustained by either party and the contract provided that it was governed by New York law.

Conor was subsequently acquired by Johnson & Johnson in February 2007 and when Conor received the results of a disappointing clinical drug trial it recalled the stents it had delivered and discontinued the manufacture and sale of CoStar in May 2007. As required by the contract, Conor reimbursed Biotronik for the amounts Biotronik had paid for the stents that remained in its inventory and for other costs associated with the recall. In November 2007, Biotronik sued Conor for breach of contract and sought damages in excess of $100 million for lost profits as a result of Biotronik’s inability to sell the stents through the duration of the contract.

Conor moved for summary judgment on liability and damages. The Supreme Court found that there were disputed issues of material fact and denied summary judgment on the question of whether Conor breached the agreement, but it concluded that the lost profits that Biotronik sought were consequential damages barred by the contract’s limitation of liability provision. The court entered judgment dismissing the action. The Appellate Division, First Department, affirmed but granted Biotronik leave to appeal.

The court reversed and remitted the case to the Appellate Division for further proceedings. Rivera, writing for the majority, found that the lost profits in this instance constituted general—not consequential—damages because they “are the natural and probable consequence of the breach” of the parties’ contract rather than losses sustained on business arrangements that are collateral to the contract. In construing the existing jurisprudence on this issue, the court focused on a distinction between cases where the lost profits flowed directly from the contract itself or were the result of a separate agreement with a nonparty.

The court noted that this distinction requires a case-specific analysis rather than the application of any bright-line rule. Conor argued that any lost profit damages here were the result of Biotronik’s sales arrangements with third parties and that the contract did not require any payments at all from Conor to Biotronik. The majority rejected this argument and noted that the parties’ contract actually used Biotronik’s resale price as the benchmark for determining what Biotronik had to pay Conor for the stents. Biotronik’s resale of the stents thus represented the “very essence” of the contract and any lost profits resulting from an alleged breach represented the “natural and probable consequence” of that breach.

The dissent, in an opinion written by Judge Susan Read and joined by Judges Eugene Pigott and Sheila Abdus-Salaam, concluded that any future profits lost by Biotronik as a result of a breach by Conor were consequential damages barred by the contract because they were profits to be earned on third-party transactions—even if those collateral transactions were contingent on Conor performing its obligations under the parties’ contact. Indeed, the dissent noted, there were no circumstances under which Conor had to pay any money to Biotronik for the purchase of stents and any profits Biotronik earned as a result of its resale of the stents were contingent on the sales price Biotronik negotiated with its own customers. Accordingly, Biotronik’s profits could not be deemed to flow directly from its contract with Conor.

As the majority and dissenting opinions demonstrate, there are no bright-line tests here and a determination of whether lost profits constitute general or consequential damages can be a close question dependent on the specific facts of each case.

Products Liability

The court recently held that a third party’s modification of a piece of equipment to remove a safety shield did not relieve the seller or distributor from liability under the substantial modification doctrine. The majority decision in Hoover v. New Holland North American, prompted a strong dissent from Judge Smith.

Plaintiff Jessica Bowers was severely injured when her arm was caught in the driveline of a tractor-driven post hole digger being operated by her stepfather, Gary Hoover. Hoover borrowed the hole digger from a friend, Peter Smith, and was using it to dig holes for a backyard fence. Bowers was assisting Hoover by holding the digger’s gear box in order to steady the digger so that it would dig a straight hole. Bowers’ jacket apparently got caught on a protruding nut and bolt on the digger and her arm was dragged into the machine. Her right arm was severed above the elbow and she suffered numerous fractures. Bowers commenced a products liability action against, among others, the distributor CNH America and the seller Niagara Frontier Equipment Sales. Bowers also brought a negligence action against Smith that was consolidated with her products liability action.

The protruding nut and bolt on which Bowers’ jacket became caught were originally covered by a plastic safety shield that would have prevented the accident had it remained intact. Smith testified at his deposition that when he used the digger, the plastic shield and driveline would sometimes hit the ground. Smith was apparently unaware that the digger’s operating manual warned against this practice. After several years of use, Smith removed the safety shield because it kept breaking and falling off the digger. Although Smith replaced other parts on the digger as they became worn, he did not replace the safety shield until after Bowers’ accident and admitted that he probably did so only because of the accident. The replacement safety shield cost $40 and only took Smith 15 to 30 minutes to install.

The defendants moved for summary judgment asserting, among other arguments, that as a matter of law, Smith’s post-sale modification of the digger rendered the digger defective and was the proximate cause of plaintiff’s injuries. Plaintiff argued in response that the protruding nut and bolt and the safety shield represented design defects. The Supreme Court granted summary judgment as to certain causes of action, but denied defendants’ motion as to the design defect claims. At trial, the jury returned an $8.8 million verdict in favor of plaintiff which apportioned 35 percent of the liability to CNH, 2 percent of the liability to Niagara, 30 percent of the liability to Smith, and the remaining liability to other defendants who settled during the trial.2 Defendants appealed, and the Appellate Division, Fourth Department affirmed. The Court of Appeals granted leave to appeal.

In a 6-1 decision written by Judge Abdus-Salaam, the court affirmed the order of the Appellate Division. The court noted that in order to make out a prima facie case for design defect, a plaintiff must establish that the defendant sold or marketed a product designed so that it was not reasonably safe and that the defective design was a substantial factor in causing injury to the plaintiff. On the other hand, a manufacturer that has designed a safe product will not be liable for injuries resulting from substantial alterations or modifications made to the product by a third party that render the product defective or unsafe.

The defendants here argued that Smith’s removal and failure to replace the safety shield constituted just such a substantial modification. The majority, however, rejected this argument and found that there were at least questions of fact as to whether the safety shield itself was defectively designed because it broke and fell off the digger. Accordingly, the majority concluded that plaintiff had submitted sufficient proof to justify submitting this issue to the jury.

As noted above, Smith issued a strong dissent in which he noted that the digger was in a safe condition when it was sold and that it contained multiple warnings not to remove any safety shields. Therefore, according to Smith, application of the substantial modification doctrine entitled defendants to summary judgment. Smith complained that the jury’s verdict and apportionment of liability against the distributor represent an example of “soak-the-rich fact-finding” designed to obtain recoveries from deep pocket defendants.

Roy L. Reardon and William T. Russell Jr. are partners at Simpson Thacher & Bartlett.

Endnotes:

1. Judge Abdus-Salaam did not take part in the decision.

2. Smith also settled during the trial.