McDermott Will & Emery thought it had given its client Eastman Kodak Co. a picture-perfect ending to a long-running tax case. After more than 10 years of work, McDermott scored a $581 million tax refund for Kodak related to an unsuccessful business venture the company had made.
But when it came time to collect a $24 million contingency fee, the firm says, Kodak balked.
McDermott has filed a lawsuit in District of Columbia Superior Court, alleging that Kodak has breached its contract with the firm.
In a written statement, Alan Rutkoff, a Chicago-based McDermott partner and the firm’s general counsel, said the firm “rarely has to litigate against a client” and only does so as “the last resort.”
He added: “Kodak requested the firm to undertake this assignment on a partial-contingency basis. We agreed, and helped to achieve a very successful result. Now, the firm strongly believes that it is entitled to full payment under the terms of the written agreement that was negotiated.” McDermott is being represented by Williams & Connolly partners Michael Sundermeyer and Enu Mainigi and associate Jessica Rydstrom.
For its part, Kodak contends that the case is a simple contract dispute in which the two parties have interpreted the terms differently. Kodak spokesman David Lanzillo said in a written statement: “We are confident that Kodak has acted honorably, and we will continue to do so.” Kodak is being represented by Crowell & Moring and Ward Greenberg Heller & Reidy, he said.
According to the July 30 complaint, Kodak asked McDermott in January 1997 to propose what actions the photographic equipment giant should take to recover a tax refund on the $1.6 billion the company lost when it sold its shares in Sterling Winthrop Inc., a prescription drug company that Kodak bought in 1988 to expand into the pharmaceutical industry. The complaint says that Robert Dobreski, then a member of Kodak’s corporate tax department, asked McDermott to outline an alternative billing structure should the firm be hired to represent Kodak.
According to the complaint, McDermott responded with a 21-page memorandum arguing that the Treasury Department’s loss-disallowance regulations were invalid. The memo outlined a multipronged legal strategy to challenge the regulations based on the financial loss Kodak suffered as a result of the enforcement of those regulations. The memo said that McDermott was willing to work on an alternate billing arrangement but that the firm was not willing to take on the case as a “straight contingent fee basis.” According to the complaint, the firm proposed discounts to its lawyers’ hourly billing rates, with “upward adjustments depending on results.”
From July until September 1997, Kodak and McDermott went back and forth on the terms of the alternate fee arrangement, finally settling on a 25% discount off the McDermott lawyers’ hourly rates in exchange for a contingent payment based on a percentage of the ultimate recovery.
There were only two exceptions to the contingency agreement. The first was if the IRS changed its position on the regulations and allowed Kodak to deduct its losses. The second was if the regulations were declared invalid in a separate court case involving another company in which McDermott participated on Kodak’s behalf, and the IRS agreed to allow the losses to be deducted without further effort.
McDermott and Kodak agreed to the terms of the arrangement on Sept. 17, 1997, according to the complaint. For the next nine years, McDermott lawyers worked on the matter, logging more than 3,500 hours at a time when the area of loss-disallowance law was “rapidly shifting,” the complaint said.
The firm lobbied Treasury officials on behalf of Kodak and had a sit-down meeting in 2003 to discuss changes to the disallowance regulations. “At no point did Kodak protest, offer to pay a nondiscounted rate, or suggest that the fee arrangement be changed,” the complaint says.
In 2006, McDermott submitted an amended tax return for Kodak for 1994, the year the company reported losses related to the sale of Sterling Winthrop. The amended return claimed a deduction for the entire value of the loss on the ground that the original loss-disallowance regulations were invalid.
In June 2008, Kodak received a $581 million refund, according to the complaint. Despite that outcome, Kodak has “refused to pay the contingency fee.”
Although alternate billing arrangements, including contingency fees, have been around for a while, Rees Morrison, a consultant who advises in-house legal departments, said that in 1997 it was unusual for firms to offer a 25% discount to their lawyers’ hourly rates.
Morrison, who is not involved in the litigation, said that, these days, discounts of 10% to 15% are common but a 25% discount was “pretty big back then.” He added that a case as long-running as the McDermott’s can “really affect the bottom line.”
Kodak has yet to file a response to the complaint. Judge Alfred Irving Jr. has scheduled a hearing for Oct. 29.
“We regret having to file a lawsuit against Kodak,” Rutkoff said. “[W]e remain hopeful that a fair and amicable resolution can be reached promptly as discussions to resolve the dispute continue.”
Jeff Jeffrey can be contacted at email@example.com.