An Eastern District of Pennsylvania federal judge has found that Philadelphia-based Mitts Law is not entitled to nearly $2 million in attorney fees it is seeking from former clients it represented in a RICO class action against IBM.

The court previously found that the firm, which already received a $4 million flat fee for its work on the case, was not entitled to additional fees because it breached its fee agreement with its former clients when it failed to pay third-party vendors.

In his Dec. 20 ruling in Devon IT v. IBM, U.S. District Judge Joel H. Slomsky of the Eastern District of Pennsylvania denied the Mitts firm’s motion for a stay of his Nov. 21 order barring the firm from asserting an attorney charging lien for additional fees from its former clients—Devon IT Inc., Devon Ad Tech Inc. and Devon (Europe), collectively referred to as “Devon” in the opinion—in the IBM litigation.

In denying the firm’s motion for a stay, Slomsky ordered $4.1 million in settlement proceeds that had been held in escrow pending the resolution of the attorney charging lien to be distributed to Devon, as well as to three third-party legal services vendors who intervened in the case after claiming that they hadn’t been paid.

Slomsky said in a Nov. 21 opinion that the Mitts firm breached its fee agreement with Devon when it kept a $250,000 advance that was earmarked to pay Kroll Ontrack, the company that performed document review in the IBM case.

Slomsky said the firm also breached the agreement by failing to pay three other outside vendors from the $4 million flat fee it received.

The Mitts firm argued following the Nov. 21 ruling that Devon had attempted to dupe the court by arguing in the Eastern District litigation that the Mitts firm should have paid Kroll while arguing in separate litigation against Kroll in Minnesota federal court that the document review company was not entitled to any money because it provided poor quality service.

Slomsky, however, said in his Dec. 20 opinion that Devon’s arguments in the two cases were not inconsistent and noted that the Mitts firm had a clear obligation under the fee agreement to forward the money given to it by Devon to pay Kroll.

“When a client advances funds to a law firm for a specific purpose and the law firm agrees to use the money for that purpose, the law firm has an obligation to follow the instructions to the letter,” Slomsky said in the Dec. 20 opinion.

In Devon IT, according to Slomsky’s Nov. 21 opinion, Devon sued IBM over unpaid royalty payments and the parties settled for $13.5 million.

Upon learning that Devon intended to use a portion of that money to pay its creditors, rather than the Mitts firm or its third-party vendors, a fee dispute arose between the firm and Devon, according to Slomsky.

That fee dispute led the court to place in escrow $4.1 million of the settlement proceeds Devon was to receive, according to Slomsky.

The Mitts firm and three intervening third-party vendors—EconLit, ParenteBeard and FranklyLegal—asserted a charging lien against the funds, but Slomsky ruled Nov. 21 that a charging lien would not be applied.

Slomsky did, however, find that EconLit, ParenteBeard and FranklyLegal were all entitled to be paid under the law of equitable estoppel for work they performed between certain dates.

Following that order, EconLit and Devon stipulated that EconLit was owed about $340,000; FranklyLegal and Devon stipulated that FranklyLegal was owed about $277,500; and ParenteBeard and Devon stipulated that ParenteBeard was owed about $450,000, Slomsky said.

Per Slomsky’s Dec. 20 order, the remaining approximately $3 million will be distributed to Devon Ad Tech.

The Mitts firm, meanwhile, had argued that it was entitled under its fee agreement to nearly $2 million in attorney fees from Devon, including more than $1 million in outstanding hourly fees, along with $675,000 in contingency fees from the $13.5 million settlement proceeds and more than $240,600 in contingency fees from the royalty payments IBM made to Devon. Slomsky, however, said in his Nov. 21 opinion that the firm was not entitled to any of that money because it had breached its fee agreement with Devon by failing not only to pay Kroll the $250,000 but also to pay EconLit, ParenteBeard and FranklyLegal from the $4 million flat fee.

According to Slomsky’s Nov. 21 opinion, the Mitts firm had received the $4 million pursuant to the fee agreement to handle several cases, including the IBM litigation, and was supposed to pay all litigation expenses using that money.

The fee agreement also provided for a 5 percent “bonus” contingency fee from any recovery in the IBM litigation, Slomsky said.

Instead, Slomsky said in the Nov. 21 opinion, the firm used the $4 million to pay its own invoices rather than the outside vendors and, despite also keeping $720,000 of that money as fees earned, represented to Devon that it had exhausted the entire $4 million on litigations costs.

When Devon fronted the firm an additional $250,000 to pay Kroll, Slomsky said, the firm again failed to pay the vendor.

The Mitts firm filed a motion seeking to stay the Nov. 21 order, alleging that Devon perpetrated a fraud on the court by taking opposite positions in the Eastern District litigation and in a separate suit against Kroll in Minnesota federal court, according to Slomsky’s Dec. 20 opinion.

But Slomsky said these arguments were not inconsistent.

“In both cases, Devon took the position that because of Kroll’s substandard work product, it was not entitled to be paid,” Slomsky said in the Dec. 20 opinion, adding, “The second position was that if Kroll is entitled to payment, it was the responsibility of the Mitts firm to make the payment. These positions do not change the court’s view that in October 2011, Kroll was still working on Devon’s behalf and was entitled to be paid by the Mitts firm for its services and to be sent the $250,000 that Devon gave to the Mitts firm specifically to pay Kroll. They also do not change the fact that the Mitts firm retained the $250,000 that was earmarked for Kroll, which the Mitts firm fails to mention in its motion and memorandum of law and reply brief.”

While the Mitts firm had argued that because Devon’s position in the Minnesota case was that Kroll was not entitled to any payment, the firm’s failure to pay Kroll the $250,000 from Devon was not a breach of the fee agreement, Slomsky disagreed.

“Here, the Mitts firm even sought additional money from the client to pay Kroll, and Devon agreed to the $250,000,” Slomsky said. “Accordingly, the Mitts firm’s failure to pay Kroll is a serious breach of the fee agreement.”

The Mitts firm also argued that it had been fraudulently induced to enter the fee agreement because Devon exaggerated its damages and concealed its alleged fraud on IBM, the International Data Corp. and the state of Pennsylvania, according to Slomsky.

Slomsky, however, said the firm learned of this alleged fraud during discovery and didn’t raise the issue at the time.

“The Mitts firm only sought to withdraw after the fee dispute arose,” Slomsky said. “Thus, the fact that the alleged fraud was not advanced beforehand as a reason to set aside the fee agreement undermines the credibility of the position now taken. In addition, to the extent that the Mitts firm raises as a new argument that it was fraudulently induced to enter into the fee agreement, this is inappropriate in a motion for reconsideration.”

Devon’s attorney, Gary M. Samms of Obermayer Rebmann Maxwell & Hippel in Philadelphia, said Slomsky’s ruling was correct.

“Unfortunately, we had to wait a year and a half for our settlement proceeds because there was a non-meritorious motion filed by the Mitts firm, as the judge found,” Samms said.

Mitts firm principal Maurice R. Mitts said in an email that the firm plans to appeal to the U.S. Court of Appeals for the Third Circuit and is “confident that we will receive a favorable ruling before that court.”

(Copies of the 16-page opinion in Devon IT v. IBM, PICS No. 13-3401, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)

Zack Needles can be contacted at 215-557-2493 or Follow him on Twitter @ZNeedlesTLI. •