Opinion ID: 522231
Heading Depth: 2
Heading Rank: 1

Heading: Whether a fee based on a contingency agreement is reasonable.

Text: Section 206(b) of the Social Security Act (the Act), codified at 42 U.S.C. Sec. 406(b), governs the award of attorney's fees under Title II of the Act and limits them to twenty-five percent of past-due benefits. The relevant part of the section provides: (1) Whenever a court renders a judgment favorable to a claimant under this title who was represented before the court by an attorney, the court may determine and allow ... a reasonable fee for such representation, not in excess of 25 percent of the total of the past-due benefits ... and the Secretary may, notwithstanding the provisions of section 205(i), certify the amount of such fee for payment to such attorney out of, and not in addition to, the amount of such past-due benefits. 42 U.S.C. Sec. 406(b) (1982) (emphasis added). Attorney's fee awards under Title XVI of the Act are not governed by any statutory provision, but courts have interpreted 42 U.S.C. Sec. 405(i) (1982) (which directs the Secretary to certify payment of benefits), to authorize district judges to set attorney's fees. See, e.g., Celebrezze v. Sparks, 342 F.2d 286, 288 (5th Cir.1965). See also Howard v. Bowen, 823 F.2d 185, 186 (7th Cir.1987) (finding that even though the district court did not have authority to order the Secretary to withhold benefits, the court was empowered to set them). 2 The gist of the Secretary's argument is that the starting place for a reasonable fee is the figure arrived at by multiplying the hours of legal work by a reasonable hourly wage (which yields the lodestar rate) and that the attorney's fees awarded in the cases before us are not reasonable in light of the number of hours of work expended. In contrast, the district court in each case relied substantially on the contingent fee contract in effect between the clients and Mr. Fobes. The Secretary asserts that the district judges abused their discretion, because they ignored the lodestar calculation and thereby render[ed] the Sec. 406(b) requirement that the court determine a reasonable fee a nullity and ignore[d] the fundamental purpose of the SSI program to provide subsistence level income to beneficiaries. Brief of Defendant-Appellant at 19-20. The Secretary relies upon several Supreme Court and Seventh Circuit cases decided in the context of fee-shifting statutes as support for his argument that the lodestar fee should only rarely be upwardly adjusted. He cites Blum v. Stenson, 465 U.S. 886, 898-99, 104 S.Ct. 1541, 1548-49, 79 L.Ed.2d 891 (1984), in which the Court held that the complexity, the novelty of legal issues and the special skills of counsel are not appropriate factors favoring an increase in the basic fee award. However, the Blum Court also wrote that  'reasonable fees' under Sec. 1988 are to be calculated according to the prevailing market rates in the relevant community, id. at 886, 104 S.Ct. at 1547, which must also include contingency rates. The Supreme Court addressed the question of whether the lodestar rate should be enhanced because of the risk of nonpayment in the context of fee-shifting statutes in another case cited by the Secretary, Pennsylvania v. Delaware Valley Citizens' Council, 483 U.S. 711, 107 S.Ct. 3078, 97 L.Ed.2d 585 (1987). The Secretary relies on the opinion of the four justice plurality for his argument against enhancement. Nevertheless, the majority holding of Delaware Valley is that the lodestar may be enhanced for contingency. Skelton v. General Motors Corp., 860 F.2d 250, 257 (7th Cir.1988). In Skelton, we wrote: Justice O'Connor, casting the deciding vote, agreed with the plurality that the circumstances of Delaware Valley did not warrant the award of a risk multiplier. She agreed with the dissent, however, that Congress did not intend to foreclose a consideration of contingency in setting a reasonable fee under fee-shifting provisions. 107 S.Ct. 3089 (O'Connor, J., concurring in part and concurring in judgment). 1 Ibid. Justice O'Connor argued in her concurrence that there had been no findings of fact in the case before the Court to support an enhancement. She wrote that such findings would include the degree to which contingency is compensated in the relevant market. Id. at 3089. She noted, in addition, that the district court had based the enhancement on the novelty of legal issues in the case, the type of risk which does not justify enhancement. To justify enhancement, she agreed with the plurality that no enhancement for risk is appropriate unless the applicant can establish that without an adjustment for risk the prevailing party 'would have faced substantial difficulties in finding counsel in the local or other relevant market.'  Id. at 3091. 2 An even stronger case for enhancement can be made for social security fee awards than for fee awards pursuant to fee-shifting statutes. We have recognized that in a common fund case where the fee is taken from the plaintiffs' award and, therefore, there is no direct or immediate danger of unduly burdening the defendant, a court has more latitude in exercising its equitable powers to determine whether the plaintiff class should compensate its attorneys for their risk of nonpayment than it would under the stringent Delaware Valley requirements. Skelton, 860 F.2d at 254. In the same way, in social security attorney's fee requests such as the ones before us, the fees come out of the claimant's benefits. We find support from the Third Circuit which distinguished fee-shifting cases from social security requests. Coup v. Heckler, 834 F.2d 313, 324 (3rd Cir.1987). Accord Rodriguez v. Bowen, 865 F.2d 739, 745-46 (6th Cir.1989) (en banc). 3 The contingency agreements entered into in the cases before us provide an additional reason in favor of enhancement. Unlike a fee-shifting case or a social security case where there is no fee agreement and where the task of monitoring the attorney is shifted to the judge in separate litigation over fees if the plaintiff wins, Delaware Valley, 107 S.Ct. at 3085, the contingency percentage taken from the successful claimant's benefit award is negotiated privately between the attorney and the claimant who has an incentive at the time she seeks representation to find the best value in attorney services (the lowest percentage for good representation she can find given the difficulty of her case). The claimant and attorney place a value on the attorney's risk of nonpayment. The percentage of the award agreed to by the parties should take account of the risk, as well as the ability of the attorney and estimated hours of legal work that the claim will require. 4 In the everyday contingency situation, the contract is normally enforced without modification, unless the clients are especially vulnerable to overreaching such as children or poorly equipped to protect their interests, as in class actions. See Dunn v. H.K. Porter Co., 602 F.2d 1105, 1111 (3rd Cir.1979); Rodriguez, 865 F.2d at 748 (Wellford, J., concurring). However, Sec. 406 and the common law both require that the district court review the reasonableness of the award requested by the claimant's attorney. Mr. Fobes does not dispute this. 5 A fee pursuant to a contingency contract is not per se reasonable. McKittrick v. Gardner, 378 F.2d 872, 875-76 (4th Cir.1967). Therefore, courts have reviewed social security fee requests according to a factor analysis which was originally taken from the fee-shifting context, 3 such as the Blankenship v. Schweiker, 676 F.2d 116 (4th Cir.1982), analysis. The six factors must be weighed differently, however, when a contingency contract exists between the client and attorney. The Blankenship court noted that where a contingency contract exists, the court should not place primary emphasis on the hourly rate. Blankenship, 676 F.2d at 118. In McKittrick, the court wrote: 6 [t]he contingency of compensation, whether it stems from an employment contract or results from the claimant's indigency, is highly relevant in the appraisal of the reasonableness of any fee claim. The effective lawyer will not win all of his cases, and any determination of the reasonableness of his fees in those cases in which his client prevails must take account of the lawyer's risk of receiving nothing for his services. Charges on the basis of a minimal hourly rate are surely inappropriate for a lawyer who has performed creditably when payment of any fee is so uncertain. 7 McKittrick, 378 F.2d at 875. See also Rodriguez, 865 F.2d at 746; Coup, 834 F.2d at 324; In re Horenstein, 810 F.2d 73, 75 (6th Cir.1986). 8 Where there was no contingency contract, we have found that the lodestar rate is the proper starting place, Lightfoot v. Walker, 826 F.2d 516, 520 (7th Cir.1987), but the rate may be enhanced by a risk factor. Skelton, 860 F.2d at 258. We have also held that [t]here is no one correct formula for determining a fee award, and therefore the district court's calculation is anything but an arithmetical exercise. Tomazzoli v. Sheedy, 804 F.2d 93, 97 (7th Cir.1986). If courts regularly invalidated reasonable contingency agreements in favor of a lodestar fee, then attorneys would no longer enter into such agreements. Without the greater incentive for attorneys to take these cases stemming from the potential for an enhanced fee payment, claimants who have difficult cases and who cannot afford to guarantee payment might not be able to secure representation. Coup, 834 F.2d at 325; Dunn, 602 F.2d at 1111-12. 9 We recognize that other courts have determined that the lodestar rate is the proper starting place in analyzing social security fee requests and therefore have emphasized the reasonableness of the hourly rate of compensation from the award over the contingency agreed to by the parties. See, e.g., Starr v. Bowen, 831 F.2d 872, 874 (9th Cir.1987); Rohrich v. Bowen, 796 F.2d 1030, 1031-32 (8th Cir.1986); Bailey v. Heckler, 777 F.2d 1167, 1170 (6th Cir.1985). Nevertheless, we follow the McKittrick court's reasoning that simply determining a reasonable hourly rate is inappropriate when an attorney is working pursuant to a reasonable contingency contract. A court may award a fee up to that provided in the contract so long as the court has reviewed its reasonableness. McKittrick, 378 F.2d at 875-76. Therefore, in reviewing social security fee applications where there is a contingency contract in effect, whether or not the proper starting place is a lodestar hourly rate, the contingency amount agreed to by the client should also be considered and a reasonable amount determined so long as it is no more than twenty-five percent. 4 10 The Sixth Circuit en banc has recently addressed the question which is now before us and has decided that twenty-five percent of past-due benefits should be the starting place for all social security fee awards in order to reduce the court time spent reviewing fee requests. Rodriguez v. Bowen, 865 F.2d 739, 746 (6th Cir.1989) ([o]ur aim is to provide a clearer and therefore more efficient framework for guidance ... in determining fee awards in social security cases). In addition, when an attorney and client have entered into a contingency agreement, due deference should be given to this expression of the intentions of the parties and therefore if the agreement states that the attorney will be paid twenty-five percent of the benefits awarded, it should be given weight ordinarily accorded a rebuttable presumption. Ibid. If the district court chooses not to give effect to the terms of the agreement, it should state for the record the deductions being made and the reasons therefore. Ibid. The court divided the potential deductions into two categories: 1) those occasioned by improper conduct of ineffectiveness of counsel; and 2) situations in which counsel would otherwise enjoy a windfall because of either an inordinately large benefit award or from minimal effort expended. Ibid. 11 As an example of the first category of cases in which fees should be reduced, the Rodriguez court raised the issue of delay caused by the procedural missteps of an attorney which had resulted in an inflated award. Id. at 747. With regard to the second category, the court wrote: 12 [w]here a case has been submitted on boilerplate pleadings, in which no issues of material fact are present and where no legal research is apparent, the benchmark twenty-five percent of awards fee would obviously be inappropriate. The reviewing courts should not hesitate to make reductions in such situations, and at the other end of the spectrum should only allow maximum fees for extensive effort on the part of counsel who have overcome legal and factual obstacles to the enhancement of the benefits awarded to his client. 13 Ibid. 14 Although we do not go as far as the Rodriguez court in finding a presumption in favor of a twenty-five percent contingency agreement, we agree with that court's reasoning that we should follow a more efficient system for fee analysis and should defer to the parties' intentions where reasonable. We agree that the fee agreement entered into by the parties should be the starting place for a court's review but that amount may be reduced if appropriate. If the fee award amounts to a windfall, the court must carefully review the reasonableness of the contingency agreement. In all cases, the court should consider the reasonableness of the contingency percentage to make sure the attorney does not receive fees which are out of proportion to the services performed, the risk of loss and the other relevant considerations. 15 Although the courts below, in each case, did not blindly enforce the contingency contracts, it is not clear that they reviewed the extent of the contingency entered into in each case. The court must look for evidence of overreaching or failure to inform the client of her options. If, for instance, there is evidence that the client did not know she could negotiate other terms than a twenty-five percent contingency, then the contract should not be enforced. In addition, the court must review the strength of the claimant's case in order to determine whether the percentage is reasonably related to the risk of loss before the Secretary. 16 We admitted, in Skelton, 860 F.2d at 258, the difficulty of objectively evaluating risk in light of the successful result already achieved, but found this factor insufficient to preclude risk enhancement in all cases. Since district judges review many of these cases, their experience should make it possible to recognize categories of easy and difficult cases. The deference to the contingency contract would be overcome, for example, by evidence that an attorney accepted an easy case pursuant to a full twenty-five percent contingency contract. The Blankenship factor approach should aid in determining the fairness of the contingency agreement, because absent a change in the law or the revelation of new evidence in favor of the claimant's case the number of hours actually devoted to the case and the result obtained show whether or not a reasonable prediction was made. 17 In light of our understanding that contingency contracts are an important means for securing representation for social security claimants, we address the Secretary's other arguments. He argues that a twenty-five percent contingency is unfair, when the attorney is fully compensated for his time under the lodestar approach. Brief of Defendant-Appellant at 24. Since we find that a contingency award also compensates an attorney for taking the risk that he will not be paid, this argument has no weight. The Secretary also argues that contingency arrangements penalize[ ] the Social Security [Title II] and SSI [Title XVI] claimants with the strongest cases, because they effectively subsidize other unsuccessful claimants who may not pay attorney fees at all. Id. at 25. However, assuming that twenty-five percent contingency agreements are used as they should be, only for difficult cases, claimants with stronger cases should receive better terms. In addition, successful claimants who pay reasonable fees do not subsidize unsuccessful ones, but pay for the risk of loss in their own cases. 18 The Secretary cites in his favor several cases in which courts have refused to make awards based on contingency agreements, because the amount of disability benefits to which a claimant is entitled on winning a case does not necessarily depend upon and frequently is not related to the skill or efforts of an attorney. Brief of Defendant-Appellant at 16-17 (citing Bailey v. Heckler, 777 F.2d 1167, 1170 n. 3 (6th Cir.1985); Webb v. Richardson, 472 F.2d 529, 537 (6th Cir.1972); McKittrick v. Gardner, 378 F.2d 872, 874 (4th Cir.1967)). See also Rodriguez, 865 F.2d at 743 (distinguishing social security from personal injury cases). 19 The Secretary argues that the amount of benefits are determined by characteristics of the plaintiff that the attorney cannot change such as the amount of past wages. See 20 C.F.R. Secs. 404.201-468, 416.401-435 (1988). However, although the rate at which the benefits are paid is determined by factors beyond the attorney's control, the right to entitlement and the length of entitlement determine the total amount of the award. Several factors go into the determination of this length, including the date of onset of the disability, the date of application and the ending date of the disability. See 20 C.F.R. Secs. 404.315, 404.316 (1988). Each of these factors must be proven. As a result, the length of disability period found by the Secretary will depend in part on the skill of a claimant's attorney. A good attorney may, for example, be able to get an earlier unsuccessful application for benefits reopened, as was done in the Gruber case, so that the claimant will be entitled to more accrued benefits. Although we agree with Rodriguez that there is less potential for an attorney to enhance a social security award than a personal injury award (with punitive damages, pain and suffering, etc.), we do not agree that the social security award is not increased in many cases due to the skill of the attorney. 20 The Secretary also argues that the contingency fee arrangement is an abuse of discretion, because it rewards dilatory attorneys. He noted that a rule was established [in the Sixth Circuit] to address this problem of windfalls to attorneys as a result of delay, regardless of fault. Dearing v. Secretary of Health and Human Services, 815 F.2d 1082, 1083 (6th Cir.1987). Brief of Defendant-Appellant at 17. In Dearing, the court vacated a twenty-five percent contingency judgment because much of the award was due to the district court's four-year delay in deciding the plaintiff's motion for summary judgment. The reviewing court found that the twenty-five percent award should be based on the amount the client would have been awarded three months after the case was ready for submission. There is no evidence of such delay in any of the four cases we are reviewing. 21 The Secretary also argues that these fee awards should not be upheld, because clients may not realize they have a choice in attorney fee matters or may not be aware how little time may actually be devoted in a given case. Brief of Defendant-Appellant at 19. In support of this argument, the Secretary cites the finding of the court in McKittrick, 378 F.2d at 874, that claimants usually give their lawyers credit for the success in winning an award of benefits. As we have noted, we do not propose a blind approval of contingency fees. A district judge must review the risks in particular cases. In addition, we have no reason to believe, based on the record, that claimants are always uninformed as to their choices in fee arrangements. 22 The Secretary makes a final argument against the need for contingency based on the alleged availability of attorneys. He cites the existence of legal clinics, legal aid societies, and [attorneys] from the private sector who will take on these cases at far more modest fees than the court authorized here. Brief of Defendant-Appellant at 29. However, the Supreme Court in Blum v. Stenson, 465 U.S. 886, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984), held that legal aid offices are entitled to market rate fees. The Secretary cites an Office of the Inspector General study which found that ninety-six percent of the interviewed claimants had no trouble hiring an attorney. However, neither the large number of attorneys nor the fact that claimants now do not have difficulty getting attorneys provides any evidence that claimants would be able to get attorneys if we were regularly to invalidate contingency agreements. Moreover, in the cases here involved, there is evidence that some of the claimants, at least, did have difficulty in securing counsel. 23