In an opinion released on October 20, the U.S. Court of Appeals for the First Circuit reduced two lawyers’ contingency fee from $292,000 to $50,000 — a positive, and rather ironic, message against excessive attorneys’ fees.

The ruling (U.S. v. Hawthorn) emanates from a whistleblower case in which four employees of the Overseas Shipholding Group, Inc. (“OSG”) reported incidents of the company’s pollution violations to the United States Cost Guard.  When discovered that the employees could potentially receive whistleblowing payments, two of them — Benedict Barroso and John Altura — contracted attorney Zack Hawthorn for representation.  Barroso and Altura agreed to pay Hawthorn the standard 33 percent contingency fee if successful in the suit.

Barroso and Altura won their whistleblowing claim and reward.  The U.S. government filed a motion with the district court judge for a reduction in Hawthorn’s attorney fee, arguing it was unethically excessive.  The district court agreed with the government, and instead of being rewarded $292,000, Hawthorn could only collect $25,000 from Barroso and nothing from Altura.  The court reasoned that the full 33 percent fee was excessive considering the limited effort and risk involved in the case.  Furthermore, the court found Hawthorn’s fee so significantly reduced the payment to the whistleblowers that it would erode the financial incentive Congress enacted to encourage whistleblowing.

Hawthorn appealed the ruling to the First Circuit.  The court unanimously upheld the district court’s ability to limit the excessive fee (although the court did allow Hawthorn to collect $25,000 from Altura as well), and Judge Timothy Dyk (sitting by designation from the Federal Circuit court) reiterated some of the district court’s reasoning, both concerning the amount of effort involved in the case — “he intended to largely piggyback on the government’s efforts and . . . he was aware that substantial effort on his part would not be required” — and the fee’s effect on incentives — “The amount of the fee that will be siphoned off by the lawyer significantly affects the size of that award and the power of the incentive.”

As the First Circuit itself said limitations on fees are to be “only imposed in exceptional circumstances,” so the district court judge’s ruling, and the appellate court’s affirmance, are rather significant under any circumstances.  But what makes this case particularly interesting and rather ironic is that the court reduced the fee to uphold the intent of creating whistleblower incentives.

Plaintiffs’ lawyers have consistently fought to expand private whistleblower claims, and succeeded again recently in the Dodd-Frank financial services reform law where Congress expanded a Securities and Exchange Commission whistleblower program for fraud, bribery, and other offenses (for more on that see this WLF video).  But in Hawthorn, a whistleblower provision was cited as the reason for dramatically reducing the lawyer’s fee — a rare example of the hand that feeds you coming back to bite you.  Plaintiffs’ lawyers who make millions representing whistleblowers should be troubled by the First Circuit precedent, which the government will no doubt cite in future attempts to shift more money from lawyers to whistleblowers.