Case Title: McQUEEN, RAINS & TRESCH, LLP v. CITGO PETROLEUM CORP.

Citation: 

Docket Number: 105553

State: oklahoma

Court: Oklahoma Supreme Court

Date: 2008-07-01T00:00:00Z

Document:
McQUEEN, RAINS & TRESCH, LLP v. CITGO PETROLEUM CORP.  McQUEEN, RAINS & TRESCH, LLP v. CITGO PETROLEUM CORP. 2008 OK 66 195 P.3d 35 Case Number: 105553 Decided: 07/01/2008 THE SUPREME COURT OF THE STATE OF OKLAHOMA McQUEEN, RAINS & TRESCH, LLP, Plaintiff, v. CITGO PETROLEUM CORPORATION, Defendant. Certified Questions of Law from the United States District Court for the Northern District of Oklahoma. ¶0 The United States District Court for the Northern District of Oklahoma certified three questions under the Revised Uniform Certification of Questions of Law Act, "Whether, considering Oklahoma jurisprudence and the Rules of Professional Conduct, 5 O.S. Supp. 2008, Ch. 1, App. 3-A, contracts between attorneys and clients containing liquidated damages provisions in fixed-fee, fixed-term agreements are enforceable under Oklahoma law?" The second inquiry is: "Whether, if the facts warrant the enforcement of a liquidated damages provision between attorneys and clients, the general contractual provisions regarding the viability of liquidated damages provisions are applicable to contracts between attorneys and clients containing such clauses?" Under the unique facts presented, we answer both questions "yes". CERTIFIED QUESTIONS ANSWERED. Oliver S. Howard, John Henry Rule, Mason Guy Patterson, Gable & Gotwals, Tulsa, Oklahoma, for the Plaintiff. R. Brent Blackstock, James R. Lieber, Susan Hilary Stava, Hartman & Blackstock, Tulsa, Oklahoma, for the Defendant. WATT, J.: ¶1 The United States District Court for the Northern District of Oklahoma certified three questions of Oklahoma law to this Court under the Revised Uniform Certification of Questions of Law Act, "Whether, considering Oklahoma jurisprudence and the Rules of Professional Conduct, 5 O.S. Supp. 2008, Ch. 1, App. 3-A, contracts between attorneys and clients containing liquidated damages provisions in fixed-fee, fixed-term agreements are enforceable under Oklahoma law?" Here, the client is a large corporation sophisticated both in the commercial and the legal environment and was represented by its Vice President of Legal Affairs and General Counsel during contract negotiations. There are no allegations that the terms of the liquidated damages provisions are ambiguous. At a minimum, the firm altered its position to the extent that it equipped an office and provided legal counsel in an out-of-state location. Further, the liquidated damages provisions ¶2 The answer to the first question necessitates that we address a second inquiry asking: "Whether general contractual provisions regarding the viability of liquidated damages provisions are applicable to contracts between attorneys and clients containing such clauses?" Our answer to the second consolidated and reformulated question is also "yes." CERTIFIED FACTS ¶3 L. Dru McQueen, Stuart A. Rains, and W. Kyle Tresch (attorneys) were employed as in-house counsel for the defendant, CITGO Petroleum Corporation (CITGO/client), in Tulsa, Oklahoma. In April of 2004, CITGO announced it would be moving its headquarters to Houston, Texas. Rather than relocate, the attorneys formed the plaintiff law firm, McQueen, Rains & Tresch, LLP (firm). Following CITGO's move, the client and the firm executed a series of engagement agreements. ¶4 The original engagement agreement is a letter retainer entered on August 2, 2004. Two additional supplemental engagement agreements were entered in December of the same year. The supplemental engagement agreements pertain to environmental representation and litigation management services. On February 2, 2005, the parties amended the retainer agreements. These contracts are referred to as the amended engagement agreement and the amended supplemental engagement agreements. All the agreements were negotiated between the firm and CITGO's Vice-President of Legal Affairs and General Counsel. ¶5 The amended engagement agreement provides for the handling of certain legal matters on a fixed-fee basis during the four-year term of the engagement running from September 1, 2004 through August 31, 2008. During this period, the firm was to render services including: 1) counseling and contract review for over twenty of CITGO's client groups; 2) administration and payment of outside counsel fees for specified routine litigation; 3) management of employment litigation for Houston, Lemont, and CARCO excluding responsibility for payment of attorney fees for local counsel of such litigation; 4) maintenance of an office in CITGO's Houston headquarters with an attorney available during the work week; and 5) the provision of additional legal services for special projects or assignments outside the scope of the arrangement at agreed rates plus expenses. ¶6 Under the amended engagement agreement, CITGO obligated itself to pay the firm $7.5 million annually in monthly amounts of $625,000.00, to be billed by the firm on or before the first of each month. The parties agreed that the fixed fee was based on an evaluation of anticipated costs of current CITGO litigation expenses and anticipated new litigation arising during the ordinary course of business throughout the contractual period. In part, the determination of fixed fees was calculated taking into consideration representations of third-party law firms that they would assist the firm with the client's matters on a fixed-fee basis. Each quarter, the firm was to provide CITGO with a "raw" time report reflecting hours devoted to each operating group or client. If the actual litigation and related legal services differed significantly from anticipated costs, the parties agreed to adjust the fixed fee or handle the matters outside the agreement. ¶7 The amended supplemental engagement agreements incorporated the terms and conditions of the amended engagement agreement and became effective on January 1, 2005 with expiration dates of December 31, 2008. CITGO agreed to pay annual amounts of $500,000 and $450,000 respectively, under the two supplemental agreements with the firm to bill the client on or before the first of each month for an amount representing 1/12th of the agreed annual total. Under these agreements, the firm was to provide legal counseling, advice and assistance to CITGO's employees, management, and outside counsel relating to routine environmental matters other than litigation and administratively contested proceedings. The firm also contracted to provide direct and indirect administrative and management services, general legal advice, and consultation in connection with all litigation matters in which the client was represented by outside counsel other than the firm. ¶8 The amended engagement agreement and the amended supplemental engagement agreements form the basis of the firm's federal suit against CITGO, filed on June 1, 2007, alleging that the client breached the three fixed-fee, fixed-term retainer agreements. These agreements contain virtually identical liquidated damages clauses providing: CITGO acknowledges that in reliance on this [Agreement], the Firm [MRT] has undertaken and continues to undertake costs and expenses to provide optimal legal representation to CITGO and acknowledges that a premature termination of this [Agreement] would result in losses and damages to the firm that may be impossible to quantify. Consequently, in the event CITGO terminates this [Agreement] prior to the end of the initial term, CITGO will pay the Firm, as liquidated damages, the lesser of all monthly installments for the Initial Term remaining under the contract or 12 months of installments, in lieu of other direct, indirect or consequential damages. Such liquidated damages will be due and payable within 30 days after termination of this [Agreement]. ¶9 With approximately twenty-one months left in the contractual period or roughly halfway through the term of the contracts, on April 5, 2007, CITGO informed the firm that it was terminating the relationship created by the letter agreements. It is agreed that CITGO prematurely terminated the amended engagement agreement and the supplemental engagement agreements. Nevertheless, the parties dispute whether the termination was excusable. Although CITGO contends that the attorneys were discharged based on their inferior performance, the firm argues that the contracts were breached without cause. In filing the federal lawsuit, the firm did not seek recovery for services performed prior to its discharge. Rather, it claims that CITGO owes it termination payments required by the liquidated damages clauses contained in the various agreements. ¶10 Under the liquidated damages clauses, CITGO's premature termination of its attorney-client relationship with the firm requires it to pay up to twelve monthly installments of each fixed fee in lieu of other direct, indirect, or consequential damages. The liquidated damages sought exceed $4.6 million. ¶11 The parties stipulated that the issues turn on Oklahoma law. In response to various motions from both parties seeking judgment on their behalf, the district court filed an opinion and order on January 22, 2008. The district court concluded that there was no clear answer as to whether liquidated damages clauses similar to those at issue were enforceable under Oklahoma law. It ordered the parties to confer and agree on language to be included in the proposed certified question by January 28, 2008. On February 14, 2008, the federal court certified questions to this Court pursuant to the Revised Uniform Certification of Questions of Law Act, 20 O.S. 2001 §§1601, et seq. We set a briefing cycle which was concluded with the simultaneous filing of the parties' answer briefs on April 30, 2008. ¶12 A) UNDER THE UNIQUE FACTS PRESENTED, WHERE THE CLIENT IS A LARGE CORPORATION SOPHISTICATED BOTH IN THE COMMERCIAL AND THE LEGAL ENVIRONMENT AND IS REPRESENTED BY A SKILLED NEGOTIATOR, THERE ARE NO ALLEGATIONS THAT THE LIQUIDATED DAMAGES PROVISIONS ARE AMBIGUOUS, THE FIRM ALTERED ITS POSITION TO THE EXTENT OF EQUIPPING AN OFFICE AND PROVIDING LEGAL COUNSEL IN AN OUT-OF-STATE LOCATION, AND THE LIQUIDATED DAMAGES PROVISIONS ACKNOWLEDGE THAT THE FIRM WILL NECESSARILY FURTHER ALTER ITS POSITION TO MEET THE CONTRACTUAL DEMANDS, A LIQUIDATED DAMAGES CLAUSE IN A FIXED-FEE, FIXED-TERM CONTRACT BETWEEN ATTORNEYS AND CLIENTS IS ENFORCEABLE IN OKLAHOMA. ¶13 The firm argues that we should refuse to answer the issue of whether the liquidated damages provision is enforceable asserting that the cause is governed by Roxana Petroleum Co. of Oklahoma v. Rice, 1924 OK 1042, 235 P. 502, upholding an attorneys fee contract not unlike the one presented here. Should the Court determine it appropriate to revisit the question of the validity of such contracts, the firm asserts that Roxana should govern the cause presented. CITGO insists that Roxana, which preceded our adoption of the Oklahoma Rules of Professional Conduct, 5 O.S. Supp. 2008, Ch. 1, App. 3-A (Rules of Professional Conduct) by twenty years,5 is no longer good law. It contends that the Rules of Professional Conduct and the comments thereto preserve the client's unfettered right to discharge an attorney at any time, with or without cause, subject only to liability for payment of the lawyer's services actually rendered. ¶14 Arguments presented by CITGO and noted by the federal court in its opinion and order6 make it clear that there is a legitimate question as to whether Roxana continues to be viable considering the Rules of Professional Conduct along with other Oklahoma persuasive authority. Resolution of the issue may be determinative of the cause before the certifying court.7 Therefore, we disagree with the firm that the question presented concerning the contract's viability should not be answered. Nevertheless, under the unique facts presented, the position advocated by CITGO is unpersuasive. 1) Oklahoma's historical perspective on fee contracts between attorneys and clients. ¶15 In Mellon v. Fulton, 1908 OK 238, 98 P. 911, an attorney sued his client under terms of a general retainer agreement.8 The attorney was retained by the client for a period of five years at the rate of $60.00 per year. At the end of the retainer period, the attorney sued on the account. Mellon differs from the situation presented here in that the services sued upon were provided throughout the entire period of the contractual term. There was no premature termination of the retainer contract. Nevertheless, in upholding a referee's award of the $60.00 per year for a total compensation of $300.00, the Mellon Court made the following statement: "It goes without saying that an attorney is as free to make any contract with his client on the subject of compensation for his services as is any other individual."9 [Emphasis provided.] ¶16 Two cases which are particularly informative were decided by this Court in 1924. In White v. American Law Book Co., 1924 OK 123, 233 P. 426,10 an attorney sought to enforce a "contingency fee" contract against a former client. Like CITGO, the client prematurely discharged the attorney. Under the contract at issue, the client was to pay the attorney a fifty percent commission upon collection of the $100.00 due and owing on the payment for books or on the return of the books. The White Court held that if the attorney was discharged without fault and prevented from fully performing by the client, he was entitled to his fee under the contract. ¶17 In reaching its conclusion, the White Court disregarded a quantum meruit11 argument applied by other courts. It recognized that an attorney-client relationship is one of reliance, trust, and confidence, noting that when any one of the three is destroyed, the client has the absolute right to discharge the attorney. In holding in the attorney's favor, the White Court stated at ¶5 providing in pertinent part: ". . . Where one employs an attorney and makes an express valid contract for his services, such contract is, generally speaking, conclusive as to the amount of such compensation. If the attorney fully performs his agreement until discharged without cause, the measure of his damages should be the compensation named in the contract. The client, in such case, breaks his contract and at least makes it difficult, and in some cases practically impossible, for an attorney to show the amount of his injury under the rule of quantum meruit. If the client prevents the performance which entitled the attorney to specific recompense, it would seem, that such amount and interest from the time it became due may be recovered in an action which sets forth such state of facts. . . ." [Emphasis provided.] ¶18 The second and more instructive case is Roxana Petroleum Co. of Oklahoma v. Rice, 1924 OK 1042, 235 P. 502. The facts in Roxana are strikingly similar to those presented here. Like CITGO, the oil-company client in Roxana retained a group of attorneys as its representatives in 1912 on an outsourcing basis. Six years later, the oil company decided to consolidate its in-house legal department. Pursuant to agreement of the parties, the attorneys took over the oil company's legal department for an annual $15,000.00 retainer fee. In response to this agreement, the attorneys gave up all other existing clients. In 1919, the parties amended the agreement providing that the attorneys were to continue representing the company in Oklahoma and Texas, billing the oil company monthly on an hourly basis. Thereafter, the oil company discharged the attorneys based on assertions that the monthly billings were unreasonable. ¶19 Similar to CITGO here, the oil company in Roxana asserted that there could be no recovery for breach of contract based on the premise that a client may discharge an attorney at any time, with or without cause, incurring liability only for services up to the date of discharge. The Roxana Court found the argument unpersuasive. It determined that the premise would not apply to a case where an attorney, in entering into the contract, changed positions or incurred expenses or in a situation where an attorney was employed under a general retainer for a fixed period to perform legal services arising during the time frame. ¶20 Although not necessarily denominated as "liquidated damages provisions," contractual provisions between parties containing provisions for pre-set attorney fees have traditionally been upheld in Oklahoma.12 Nevertheless, Melton, White, and Roxana all precede the adoption of the Oklahoma Rules of Professional Conduct in 1988.13 ¶21 Rule 1.16(a)(3), 5 O.S. Supp. 2008, Ch. 1, App. 3-A14 preserves the client's right to discharge an attorney while subsection (d) of the same rule requires the terminated attorney to take steps to protect the client, including "refunding any advance payment of fee or expenses that has not been earned or incurred." Comment 415 to Rule 1.16 preserves the right recognized in Roxana that a client has the authority to discharge a lawyer at any time, with or without cause, subject to liability for payment for the lawyer's services. Rule 1.5 requires that an attorney "not make an agreement for an unreasonable fee or an unreasonable amount for expenses."16 Comment 4 to Rule 1.5 instructs a lawyer that a demand for advance payment may be made, but provides for the return of any unearned portion of the collected fee.17 ¶23 Two other comments made on attorney fees contracts should also be considered, one persuasive in nature ¶26 2) The unique facts presented warrant enforcement of the contact between the firm and CITGO. ¶27 Courts considering contractual relationships between attorneys and clients similar to the one presented here disagree as to whether the contracts should be enforced. In a majority of jurisdictions, the contracts have been determined to be unenforceable, ¶28 A significant number of courts uphold contracts containing either non-refundable fee or liquidated damages provisions executed between clients and their attorneys.24 Non-refundable retainer fees and other non-refundable provisions have been upheld where: the fees set out are reasonable;25 the contract is negotiated with a sophisticated client and the retainer agreement contains an agreement by the client to compensate the lawyer if the client terminates the relationship;26 the contract is in writing with a clear statement of the consequences of the provision;27 or where the attorney, in entering the contract, has changed positions or incurred expenses to meet the needs of the client.28 At least one court has determined that non-refundable contractual provisions should be enforced if the client's desire to have a particular attorney as a representative necessitates an immediate commitment at the risk to the attorney of forgoing or losing other potential business.29 Another acknowledges that fees paid to a lawyer that the client has agreed are not refundable are not prohibited per se.30 ¶30 ¶31 Our holding that the liquidated damages clauses are not per se unenforceable under the unique facts presented necessitates that we answer a second question: whether the same provisions should be measured by the principles announced in Sun Ridge Investors, Ltd. v. Parker, ¶32 We are not convinced that the opinion released by order of the Court of Civil Appeals in Lasalle Bank Nat'l Ass'n v. Shephard Mall Partners, L.L.C., ¶33 An attorney, like any other individual, may contract with a client regarding compensation. ¶34 Contractual terms imposing a penalty for the nonperformance thereof are void generally.35 Nevertheless, Oklahoma law allows contractual, non-penal, liquidated damages provisions.36 In Sun Ridge, this Court acknowledged that such clauses would not be upheld where they were in effect a penalty. In recognizing this premise, we also set out the criteria under which a liquidated damages provision would be upheld. Under Sun Ridge, a liquidated damages provision will not be considered a penalty if: 1) the injury caused by the breach is difficult or impossible to estimate accurately; 2) the parties intend to provide for damages rather than a penalty; and 3) the sum stipulated is a reasonable pre-breach estimate of the probable loss. ¶35 CITGO asserts that Sun Ridge was expanded by the Court of Civil Appeals in Lasalle by adding the requirement that the amount denominated as liquidated damages must be related to the damages actually suffered at the time of the breach. The argument is unpersuasive. In Lasalle, the appellate court states that "in order to be enforced, the amount of liquidated damages must not be an excessive amount" and refers to ¶13 of Sun Ridge providing in pertinent part: In reviewing the case at bar, we find that the $5.00 per day "additional rent" sought to be imposed for late-payment or non-payment of rent is a penalty, in the absence of any evidence to the contrary showing actual costs incurred by the Landlord. The Court found that the provision in Sun Ridge for "additional rent" of $5.00 per day combined with a $20.00 late fee constituted an unenforceable penalty provision where no evidence existed to rebut the finding by showing the actual costs incurred as a result of the breach. Plainly, the requirement that damages must be reasonable is encompassed within the requirement enumerated in Sun Ridge that the pre-breach estimate bear some relationship to the estimate of probable loss. ¶36 We are not asked to determine whether the liquidated damages clauses should be denominated as penalty provisions under the criteria announced in Sun Ridge.37 We resolve only the narrow question of whether the Sun Ridge factors are applicable to determine whether the liquidated damages provisions constitute an unenforceable penalty provision. Just as general contract law is applicable to contracts executed between lawyers and clients,38 we determine that the factors outlined in Sun Ridge may be utilized, if necessary, to evaluate liquidated damages provisions appearing in attorney fee contracts.39 CONCLUSION ¶37 Courts should be reluctant to disturb fee arrangements freely entered into by knowledgeable and competent parties.40 However, a contract between a lawyer and a client is not an ordinary contract because of the existence of a fiduciary relationship.41 Nevertheless, we recognize that fixed-fee structures may often be beneficial to large corporations. They may allow the corporation to quantify and control its litigation expenses on an ongoing basis. Clients who regularly retain lawyers bargain for innovative fee arrangements that limit the right of discharge in exchange for lower fees. It would be counterproductive, in an era of increasing concerns over the cost of legal services, to preclude a client from bargaining for a reduction in fees in exchange for a reasonable limitation on the right of discharge.42 ¶40 Here, there is no question that CITGO has an understanding of the commercial business world and is a highly sophisticated consumer of legal services. It is admitted that the client's Vice President of Legal Services and General Counsel negotiated the letter agreements. There are no allegations that the terms of the liquidated damages provisions43 are ambiguous. At a minimum, the firm altered its position to the extent that it equipped an office and provided legal counsel in an out-of-state location. Further, the liquidated damages provisions contain CITGO's express acknowledgment that the firm further changed its position by undertaking certain costs and expenses to meet the demands of the contractual relationship. ¶41 We resolve this cause by applying established contract principals, while at the same time showing appropriate deference to the fiduciary nature of the attorney-client relationship and the supervisory role of the courts over members of the bar. Within this legal framework, the unique facts of this case compel the conclusion that the liquidated damages clauses are not prohibited by our jurisprudence or the Rules of Professional Conduct. The determination of whether the same clauses may constitute prohibited penalty provisions should be guided by the factors announced in Sun Ridge Investors, Ltd. v. Parker, 1998 OK 22, 956 P.2d 876 . CERTIFIED QUESTIONS ANSWERED. WINCHESTER, C.J., EDMONDSON, V.C.J., HARGRAVE, OPALA, KAUGER, WATT, TAYLOR, COLBERT, JJ. concur in the answer to the first question. WINCHESTER, C.J., EDMONDSON, V.C.J., HARGRAVE, WATT, TAYLOR, COLBERT, JJ. concur in the answer to the second question. OPALA , KAUGER, JJ. concur in result in the answer to the second question. REIF, J. not voting. FOOT