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A firm may only recover fees for the hours its former associate worked on a case while employed there, the Pennsylvania Superior Court has ruled. Even though an associate at Mager Liebenberg & White took a client with him to his new firm and won a contingent fee of $864,000 under the False Claims Act, the court held that Mager Liebenberg was not entitled to a pro rata share. As a result, the plaintiffs in Mager v. Bultena will receive $6,000 for the 30 hours attorney Michael J. Salmanson worked on a qui tam case while he was employed with Mager Liebenberg, which is now defunct. Salmanson and his former law partner, Linda D. Falcao, will receive $864,000, or 18 percent, of the qui tam recovery. In explaining the decision to limit Mager Liebenberg’s damages to the actual hours Salmanson worked on the whistleblower case while he worked at the firm, Judge Stephen J. McEwen said, “No Pennsylvania appellate court has ever awarded a proportionate share of a contingency fee to a firm discharged by the client well prior to the occurrence of the contingency, for the simple reason that a client may discharge an attorney at any time, for any reason.” Judges Michael T. Joyce and William F. Cercone also heard the case. Joyce filed a concurring opinion. Lynn Bultena, who formerly headed the Medicare fraud unit of Blue Shield, was directly referred to Salmanson as a client in March 1996, when Salmanson was an associate at Mager Liebenberg. The fee agreement called for Bultena to pay an hourly rate of $200. Mager Liebenberg, in turn, allowed Salmanson to receive 15 percent of all fees collected from Bultena as a fee for originating the client. In February 1997, Mager Liebenberg entered into a new compensation agreement that was on a contingent fee basis. This agreement related back to June 1996. Salmanson left Mager Liebenberg in 1997, and Bultena sent a letter to Mager Liebenberg stating that he wanted Salmanson as his attorney and requesting that the firm transfer his file to Salmanson & Falcao, the firm Salmanson formed when he left Mager Liebenberg, which has since dissolved. In August 1998, nine months after Mager Liebenberg’s representation of Bultena had ended, Blue Shield made a global settlement with the federal government of $38.5 million. Sixteen million dollars’ worth of the government’s recovery was attributed to the allegations in Bultena’s complaint. The government negotiated a relator’s fee of $2.88 million to Bultena, representing 18 percent of the $16 million allocated to his claim. Under the contingent fee agreement between Salmanson & Falcao and Bultena, Salmanson received an $864,000 fee. Mager Liebenberg sought the entire amount of the fee in its complaint or, in the alternative, a pro rata portion of this amount. Mager Libenberg claimed that in a qui tam case under the False Claims Act, most of the essential work is done at the time of filing, and the case was filed while Mager Liebenberg represented Bultena. But McEwen said that reasoning was contrary to settled law. Once the contractual relationship has been severed between a firm and a client, “any recovery must necessarily be based on the work performed pursuant to the contract up to that point,” McEwen wrote. “Where the contingency has not occurred, the fee has not been earned.” Moreover, the opinion said, it was undisputed that Salmanson was the only attorney at Mager Liebenberg to work on the case. Under the law, a client may terminate his relationship with an attorney at any time, notwithstanding a contract for fees, McEwen said. But if he does so, making performance of the contract impossible, the attorney is not deprived of his right to recover on a quantum meruit basis “a proper amount for the services which he has rendered.” VALUATION But what is “a proper amount”? The trial court found that the damages amounted to 25 percent of the contingency fee, or $216,000, reduced by the 15 percent origination fee owed to Salmanson. It then entered an award of $183,600 for Mager Liebenberg and against Bultena and Salmanson & Falcao, jointly and severally. McEwen said the verdict awarded by the trial court was unsound because it failed to take into consideration that upon Bultena’s discharge of Mager Liebenberg, the contingent fee agreement “no longer existed and could not be revived, in whole or in part, by the court.” In the appeal, Mager Liebenberg argued that its quantum meruit compensation should be “the greater of (a) the regular hourly rate for all time expended or (b) the pro rata share of calculation of the total hours worked.” But McEwen said this had been already specifically rejected by the Superior Court in 1993. In Hiscott and Robinson v. King, as here, McEwen said, the attorney-client contract was terminated “at a time when, under its terms, there was nothing due to Hiscott and Robinson as compensation.” In the Mager case, McEwen said, although “the termination of the contract by Mr. Bultena created an immediate right in [Mager Liebenberg] to compensation for all work performed and costs incurred pursuant to that contract, that right included only quantum meruit compensation which is to be calculated based on the number of hours worked multiplied by a fair fee. [Mager Liebenberg] itself set the ‘fair fee’ at $200 per hour.” Therefore, that should be used for the calculation, McEwen said. McEwen said timesheets showed that Salmanson worked for approximately 30 hours on the Bultena case while at Mager Liebenberg. McEwen said Mager Liebenberg’s claim against Salmanson and Falcao as individuals was “patently meritless,” because an attorney who initially represented a client and is dismissed does not have a quantum meruit action against the attorney who ultimately settles the case. The dismissed attorney only has an action against the client, he said. The trial court was, therefore, correct to sustain Salmanson and Falcao’s preliminary objections dismissing each from the complaint, McEwen said. “But for the corporation’s request that it be substituted for Mr. Bultena as a result of the indemnity agreement, the trial court probably would have also dismissed the corporation as a defendant,” McEwen said. “Contrary to the arguments of [Mager Liebenberg], any other ruling would have constituted reversible error.” Mager Liebenberg disputed that Salmanson had properly documented the hours he worked on the case while at the firm, but the court said that “the accuracy of [Mager Liebenberg's] records is immaterial to the measure of compensation which may properly be awarded to a discharged attorney in a contingency fee case.” CONCURRENCE While Joyce said he agreed with the majority’s decision to remand the case for the entry of judgment on the quantum meruit claim, he disagreed with the majority’s computation of the damages. Quantum meruit is an equitable remedy, Joyce said; its definition is “as much as deserved.” He noted that in Hiscott, the case upon which the majority relied, the court awarded compensation for the former counsel “outside the scope and terms of the contingent fee agreement.” “My reading of Hiscott does not set forth a bright-line rule that quantum meruit actions instituted by discharged attorneys are only to be determined by a mathematical equation,” he said. In a 1986 Superior Court decision, Dorsett v. Hughes, Joyce said, the court delineated 10 factors to be used in determining quantum meruit damages, including “the character of the services rendered” and “the professional skill and standing of the attorney in his profession.” Joyce noted the district court’s observation in the 1993 federal decision Mullholland v. Kerns that “Pennsylvania does not have a specific method for determining attorney’s fees quantum meruit, per se, but it does have a standard for determining reasonable attorney’s fees.” Calculating the amount by using the number of hours worked multiplied by the hourly rate is “too narrow,” Joyce said. “A more reasonable approach is for the finder of fact to conduct a case-by-case analysis utilizing the equities of that case to determine the reasonable value of services rendered by an attorney.” REACTION According to attorney Larry Fox of Dechert, who represents attorneys Carol A. Mager, Roberta D. Liebenberg and Ann D. White in the matter, the court’s decision is “obviously very disappointing.” “The issue of how predecessor counsel and successor counsel get compensated is an issue that should be resolved in a way other than the Superior Court did,” he said. “This was an unfortunate and unfair result.” Fox said his clients had not discussed yet whether they would seek allocatur on this issue of first impression for the Pennsylvania Supreme Court. “I think they have great grounds for an appeal,” he said. Salmanson, who now is a solo practitioner, said he is “glad the Superior Court affirmed what we always thought the law was — that absent extraordinary circumstances, a predecessor law firm claim in quantum meruit against a prior client should be based on the hours worked.” Salmanson said the opinion also “vindicates the client’s choice [of counsel], which should be paramount.”

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