BY:
Neil J. Rosini, Michael I. Rudell(Originally published in the Entertainment Law column of the New York Law Journal, August 24, 2007)
Entertainment law firms in California commonly charge the talent they represent on a percentage basis rather than an hourly one. The typical arrangement requires the client to pay 5% of gross income derived from contracts entered into during the course of the representation. Earlier this year, a Superior Court judge in Los Angeles addressed the enforceability of this fee structure in the context of an acrimonious dispute between two entertainment firms.
The case [1] involved a prominent attorney and allied partners who left one firm to create a new one, taking a large number of clients with them. The two firms then brought numerous claims against each other, invoking a long list of legal theories. The principal issue in that case, and the focus of this article, is whether clients who had departed for the new firm had a continuing obligation to pay that 5% fee to the old firm as a matter of contract law. (This article does not deal with additional ethical questions that may be raised by such arrangements.)
The case was subsequently settled and the Court’s unpublished decision did not advance beyond the “tentative” stage. Nevertheless, the rationale of this decision is of interest to any entertainment lawyer who has adopted, or even considered, this alternative to billing by the clock. The Court held that under the facts presented, contractual principles (and to a lesser degree, ethical rules) blocked the older firm from collecting because the arrangement was unenforceable.
Would the result be the same in New York? As further discussed below, a 56-year old Court of Appeals decision seems to be the only reported appellate case with comparable facts, and a pure attorney-client relationship was not presented.
THE HIRSCH JACKOWAY CASE
Over the years, the 5% fee structure described above had become normative at the prestigious and prosperous Los Angeles entertainment law firm of Hirsch Jackoway Tyerman Wertheimer Austin Mandelbaum & Morris. Partner Barry Hirsch brought the concept to the firm when he joined in 1980 and it was applied to talent involved in film studio and television contracts, music production contracts, writer contracts, and music producer contracts worked on by the firm.
In August, 2004, after Hirsch’s partners urged him to accept retirement, which he did not want, he and allied partners departed the Hirsch Jackoway firm to establish a new firm named Hirsch Wallerstein Hayum Matlof & Fishman LLP (“Hirsch Wallerstein”). Without notice, they packed up their offices, moved to a new location, and were followed by more than 200 clients. The new firm, Hirsch Wallerstein, and the old firm, renamed Jackoway Tyerman Wertheimer Austen Mandelbaum & Morris (“Jackoway Tyerman”) then sued each other.
The principal issue in the case was whether clients who had left for the new firm were still obligated to pay that 5% fee to Jackoway Tyerman based on continuing compensation derived from contracts made during their representation. Mr. Hirsch and his partners sued for declaratory relief that no money was due to their former firm and the Jackoway Tyerman firm cross-claimed for relief that included money damages, an order requiring the new firm to cooperate in collecting fees from those former clients, and the creation of a constructive trust “as to the monies and property alleged to have been wrongfully taken.”
The Court began its analysis by describing two categories of fee arrangements with the 5% structure at the former Hirsch Jackoway firm:
In the first category were contracts between the departing attorneys and their clients. With limited exceptions, these were oral contracts which, according to the Hirsch Wallerstein partners, required the clients to pay 5% of all compensation received from contracts worked on by the firm, but only during the time they remained firm clients. Once their relationship with the firm ended, so would their obligation to pay. Mr. Hirsch – whose clients comprised the bulk of those the plaintiffs took with them – testified that he told them their obligation ended when they left the firm. His clients Sean Penn, Francis Ford Coppola and Richard Donner each testified that their intent with respect to the duration of their obligation to Hirsch Jackoway matched Mr. Hirsch’s.
In the second category were alleged to be “standard” agreements in which clients agreed, either orally or in writing, to pay the firm in perpetuity 5% of “all compensation received” on projects worked on by the firm for them. Only one written agreement in the record stated specifically that the obligation continued after the client left the firm. Nevertheless, Jackoway Tyerman took the position that the perpetual obligation was made apparent in all of these contracts by phrases such as “all compensation” or “regardless of when the compensation is actually received” and it was unnecessary to spell out a post attorney-client relationship obligation. One witness also testified that entertainment clients did not understand “articulated terms” and it would have been useless to spell out the continuing obligation. The result of the 5% arrangement, according to partner Barry Tyerman, was that the attorneys and clients became “partners ‘forever’” and a Jackoway Tyerman client, Sally Jesse Raphael, confirmed that her interpretation of her agreement with the firm matched that of the firm’s partners.
Mr. Tyerman also testified that “ancillary services” were provided to clients by the firm as part of the 5% fee arrangement without extra charge. These services, offered as “part of the enticement to clients to enter the contract,” included real estate, estate planning, tax and corporate work. Partner James Jackoway indicated, however, that the services would not be afforded to former clients who had departed for the Hirsch Wallerstein firm.
THE COURT’S HOLDING
The Court held that Hirsch Wallerstein had no obligation to pay Jackoway Tyerman any part of fees they received, or to cooperate in collecting fees based on fee agreements made before the breakup, because there was no enforceable agreement that required Jackoway Tyerman’s clients to pay fees to the firm after they left. Citing the following reasons, the Court found that a contract tethering a client to a firm “in perpetuity” by requiring a 5% fee after the attorney-client relationship ended, was unconscionable and unenforceable:
• The defendants’ reliance on phrases like “all compensation” and “regardless of when received” in oral or written contracts, “does not alert the client to a post-termination obligation to continue paying 5% of their compensation to the firm, and it was “highly questionable” that clients would have a “reasonable expectation that if they changed lawyers they would still be forever tethered” to Jackoway Tyerman.
• The plaintiffs’ clients had been told their representation agreements provided for no post-termination obligation.
• Jackoway Tyerman did not feel obligated to promise ancillary services in perpetuity, which in any event was “antithetical to the undisputed right of anyone to choose and be represented by counsel of their choice.”
The Court further held that terms like “in perpetuity” or “forever” were themselves unreasonable and against public policy, which requires contracts to be “reasonable, certain and understandable.” Moreover, requiring a client to be “forever” attached to a firm “would severely undermine the sacrosanct attorney-client relationship and privilege” and “put the client between two competing lawyers”; it was also contrary to “the clients’ basic right to choose his/her own lawyer.” Moreover, in this instance, the arrangement would require a client of Hirsch Wellerstein to go to Jackoway Tyerman to receive, as part of the contract, those promised ancillary services, which inconsistently could be cut off by the firm in its discretion. Accordingly, the Jackoway Tyerman version of the 5% future fee contracts was void as a matter of law. (The Court cast doubt on, without deciding, the enforceability of the plaintiffs’ version of oral contracts and non-conforming written contracts, under California statutory law and the statute of frauds.)
Under this decision, could a client with a script to sell to a film studio avail herself of a law firm’s services to negotiate an option agreement, pay the firm a 5% fee based on the relatively small option payment, and then avoid paying any share of the purchase price by quitting the firm before the option is exercised? The decision does not say otherwise. [2]
NEW YORK PRECEDENT
New York’s precedent governing enforceability of an ongoing percentage interest by entertainment attorneys in the proceeds of their clients’ contracts is a Court of Appeals decision in Mandel v. Liebman,[3] but it involves only some of the variables at play in the Hirsch Jackoway decision and is 56 years old.
In that case, the plaintiff attorney devoted himself” to the business of acting as personal representative, advisor and manager for persons engaged in the entertainment world” and the defendant author, writer and director was his client. The two entered into a written contract in 1946 in which the defendant agreed to employ the plaintiff for five years as “personal representative and manager.” (The plaintiff previously had been acting for defendant “as lawyer, manager and advisor.”)
In return for those services, the defendant promised to pay the plaintiff 10% of all his earnings during the term of their contract, and then 10% of earnings from employments commenced during their term of the contract and continued or renewed or resumed beyond the term. Accordingly, unlike the lawyers in Jackoway Tyerman, this attorney was not rendering purely legal services and his percentage was double theirs, but as in their case, his fee entitlement extended beyond the term of his services.
Almost from the start, the relationship of Mandel and Liebman was rocky. Several months into the term, the client brought an action against the lawyer to recover some business papers that the lawyer withheld when the client refused to “pay the percentage of earnings agreed upon.” Special Term ordered the papers returned after finding that they had come into the lawyer’s possession in the course of an attorney-client relationship. After a similar dispute erupted soon after, the plaintiff and defendant agreed in November, 1947 to resolve their differences. The defendant released the plaintiff from his obligations to render further services and by “recogniz[ing] the ‘validity’” of their 18-month old contract. The plaintiff agreed not to collect any fee from the first $20,000 earned annually by the defendant and to turn over all contracts and documents in his possession belonging to the defendant. However, the following year, the defendant client again failed to pay the percentage fee allegedly due to the plaintiff, who brought the action in question to collect.
The trial court dismissed the action on the ground that the 1946 contract had created an attorney-client relationship, and a client who signs a retainer agreement with respect to a controversy may discharge the attorney and relegate him or her to a quantum meruit action. The Appellate Division affirmed on a different ground: that the 1946 agreement, as modified by the settlement agreement, was void and unconscionable and against public policy. Among the reasons was that the defendant was “required to pay to plaintiff ‘what might be called a tribute in perpetuity.’”
The Court of Appeals reversed and remanded for a new trial to scrutinize the entire transaction and disagreed with the Appellate Division that the 1946 agreement, as amended, was unconscionable. Among other reasons, the Court said the parties’ agreement did not “shock the conscience” when measured against the “mores and business practices of the time and place” because it was “similar in most respects to contracts in current and general use in the entertainment industry.” Accordingly, the Court did not question the measure of compensation due to the plaintiff, except to note that contrary to the agreement, there could be no conclusive presumption that employments obtained by the defendant during the term of the contract, and any continuance or renewal afterward, were due to the plaintiff’s efforts.
The Court also rejected the notion that the 1946 agreement was a retainer agreement between attorney and client, under which the client could discharge the attorney at any time. For one thing, plaintiff’s job as a “personal representative and manager” could have been filled by a nonlawyer, and an attorney “like any other man” may enter into an enforceable contract of employment even if it “may envisage the exercise of his legal skills and ability.” No rule of professional responsibility was addressed. [4]
CONCLUSION
A client’s obligation under contract to pay “perpetual” percentage fees beyond the duration of an attorney-client relationship may be frowned upon in California as inconsistent with that relationship. The enforceability of such contracts under New York case law also awaits a definitive answer.
ENDNOTES
[1] Hirsch Wallerstein Hayum Matlof & Fishman LLP et al. v. Hirsch Jackoway Tyerman Wertheimer Austin Mandelbaum & Morris, Superior Court, Los Angeles County, Case No. BC 320128; Tentative Decision filed January 3, 2007.
[2] The California Rules of Professional Conduct played a smaller part in the Court’s decision. The Court held that a perpetual obligation, in any event, had to be consented to in writing under Rule 3-300 and that the Hirsch Wellerstein attorneys could not be expected to “cooperate” in pursuing contracts that were unenforceable under both of Rules 3-300 and 4-200, which prohibits unconscionable fees. However, the Court specifically disclaimed any suggestion that “there has been any breach of ethics by defendants or plaintiffs” because “[t]his type of contract is unique and specialized to the entertainment industry and even if unenforceable does not necessarily imply that a client cannot morally agree to such a fee arrangement.”
[3] 303 N.Y. 88 (1951)
[4] C.f., DR 2-106 (22 NYCRR Section 1200.11) which states: “A lawyer shall not enter into an agreement for, charge or collect an illegal or excessive fee.”