When Brian Williams received his cut of fees after his law firm, Heins Mills & Olson (HMO), won a $2.65 billion class action settlement against AOL Time Warner, the payday in the securities fraud case made the Minneapolis attorney a multimillionaire. Yet there was something that didn't quite sit well with him. His $4.5 million before taxes didn't seem like the 5 percent of the firm's net income that Williams thought its owners promised him when they made him a partner in March 2004. And Williams' payday, it turns out, paled in comparison to principal owners Sam Heins and his wife, Stacey Mills, whose cuts from the case were $48 million and $32 million, respectively.
Two months after receiving his big paycheck, the 41-year-old father of three resigned from HMO. Several months later, he sued the firm, alleging that HMO had intentionally misrepresented its compensation system and shortchanged him millions in legal fees from the Time Warner case and other class action settlements the law firm had won since he became a partner.
An eight-day civil trial in Hennepin County District Court last summer showed what happens when a law firm's division of fees to its members turns ugly.
A Rare Public Fight
"I think that [law firm fee disputes] happen, but it is rare when we see this in public,'' says Sally Schmidt, a St. Paul legal marketing consultant.
Williams' attorney, Vince Louwagie, agrees, noting, "I have been involved in representing attorneys in a number of these cases and they usually get resolved confidentially.''
It wasn't easy for Williams to sue HMO and see the case to trial. "It was emotionally difficult,'' says Louwagie, of Anthony Ostlund Baer Louwagie & Ross of Minneapolis. "[Williams] had been with the firm for six or seven years and he was friends with those people.''
As the legal profession grows increasingly competitive, Schmidt expects there could be more law firm fee fights bubbling to the surface, especially as more legal shops face the specter of closing due to a sluggish economy. She says the growing trend of lawyers moving laterally to other firms could potentially create fee disputes, too, particularly when attorneys leave in the middle of a big case and legal fees are awarded later.
At the end of Williams' trial, jurors awarded him $1.6 million. They rejected his claim that HMO had fraudulently misrepresented its compensation system but concluded the firm had misrepresented, by concealment, its system for calculating and paying bonuses.
Louwagie was pleased with the jury's award. "It was a complicated case and a lot of testimony on fairly dry accounting procedures. The jury had to sift through a lot of conflicting and complicated testimony," he says.
But attorneys for Heins Mills & Olson emphatically deny that the law firm shortchanged Williams.
"This jury verdict should cause considerable concern to small-business owners throughout Minnesota," William Pentelovitch, an attorney representing HMO in the Williams' lawsuit, said in a press release. "The jury's decision imposes a standard upon businesses for disclosing information to their employees about discretionary raises and bonuses which goes far beyond anything that has been permitted by Minnesota courts in the past.''
Pentelovitch and Lewis Remele, who represented Heins and Mills individually, expect further proceedings. If necessary, the defendants will appeal the jury's verdict after Judge Denise Reilly rules on additional claims in the case.
As this issue went to press, Judge Reilly had yet to rule on Williams' claims against HMO for unjust enrichment and breach of fiduciary duty. Following her decision on those issues, the parties will be free to file post-trial motions.
Complicated Process, High Stakes
At the Williams' trial, Heins testified that litigating the AOL Time Warner lawsuit took about four years, with his law firm footing millions of dollars of expenses for expert witnesses and discovery. Altogether, that case generated more than 10 million documents, he says.
Taking on these kinds of cases is "a high-risk business,'' Heins said in court. "We roll the dice and sometimes we have enormous results and sometimes we get zero.''
Larry Bodine, a Chicago legal marketing consultant, says that when law firms hit the jackpot in a class action case, dividing up the attorney fees can be tricky. That's particularly true when law firms give special credit to lawyers who "originate," or bring a client or case into the firm, he says.
When senior attorneys who originate those cases get a bigger chunk of the legal fees in a settlement than colleagues who have done most of the work on the case, that scenario can be a recipe for dissension, Bodine says.
"It is a problem I see in a lot of firms where there are 60-year-old partners and they are living off their origination credit, which causes a huge split between the older and younger generations," Bodine says.
The Williams Fight
When Williams joined HMO as an associate attorney in 2000, he already was a seasoned lawyer who had worked at a number of Minnesota law firms in general practice and construction law. But it was at HMO where he sharpened his skills as a class action attorney.
Williams steadily gained favor at HMO for his work. Williams testified that Heins and Mills called him and two other attorneys into a meeting in March 2004 and told them they were being promoted to "nonequity partners." Each would receive 5 percent of the firm's net income or distributions from future case awards or settlements, with the chance to increase their percentage of distribution income. He also said that the promotion, which was to be governed by a new "master control agreement," spurred him to work harder and longer than ever for the firm. He logged as many as 50 billable hours per week from working 60- to 70-hour weeks at the office. "In doing so, I gave up numerous weekends, evenings and meal times with my wife and my family," Williams said in court.
But when HMO won a $150 million settlement in 2005 in a securities class action suit against Broadcom and received $37.5 million in attorneys' fees, Williams claimed he only got $335,000 and not the $1 million he had expected, even though he worked about 4,440 hours on the case.
HMO's attorney says the firm passed out only $6.7 million in net income from the Broadcom fees. But Williams said he wondered, "How is it even possible that the firm could be distributing only $6.7 million when in fact we had received almost $40 million and our firm's take of it had to have been $20 million to $30 million? It just didn't make any sense.''
Williams was equally baffled with HMO's payouts to him in other settlement cases, including one, in early June 2006, where he received $11,000 out of a $1.2 million distribution in legal fees. "Eleven thousand dollars is clearly not 5 percent of $1.2 million," he said in trial.
Trying to Clear the Air
While Heins and Mills testified that Williams hadn't complained to them about his share of fees from the settlements, they knew another attorney, Alan Gilbert, who questioned the payouts.
At trial, however, Williams said he also shared Gilbert's concern that the firm had not disclosed to them in March 2004 that their share of fees from the firm's net income from future settlements would be offset by their salaries; that they were not entitled to recovered expenses like other partners, whose names were on the firm's bank line of credit; and that their fee awards could be limited by so-called "allocation periods."
Meanwhile, Williams said HMO leaders assured him and the other new partners that they were drafting a new master control agreement, governing them and the firm's shareholders. But during the course of more than two years, despite several requests to see this document, the firm never made good on its intentions, Louwagie says.
Heins convened a meeting on June 8, 2006, to "clear the air" on the subject.
In calling this meeting, Heins and Mills say they looked back with a bit of anger over how things seemed to be transpiring. They considered themselves generous in making Williams and two other attorneys "nonequity members," giving them an incentive to stick with the firm and partake in potentially big case settlements, including the Time Warner case.
"We could have said, as the owners, "‘OK, we're going to take our money, we're going to shut the firm down. Thanks, it's been fun,'" Heins said in court. "We thought that would be not a good thing to do. We have wonderful employees and they've worked with us for many years."
But there was little good will as the June 8 meeting got rolling. After the firm's attorney, Neil Weikart, reiterated how the nonequity members were to be paid, one of the attorneys, Al Gilbert, questioned the deal, contending he was entitled to some additional money under the existing member control agreement, Williams testified.
Soon, Heins and Mills were challenging Gilbert. Williams: "It was completely angry on one side. Mr. Heins and Ms. Mills completely lost their composure. They were swearing at Al Gilbert. They were yelling at him. They were pounding their fists on the table.
"Heins said, ‘Al, the member control agreement was never intended to apply to you. You didn't sign it.'"
Heins (on direct examination): "Stacey Mills and I had walked a very long mile to see to it that these three employees were going to make a lot of money when we made a lot of money. And they were entitled to get what we said they were going to get. But they were not entitled to engage us in a kind of discussion and negotiation for more."
As the conversation continued, tensions mounted. Gilbert said he thought he was entitled to a share of recovered expenses from the settlements. Heins said no.
"How do you know?" Gilbert asked.
Heins: "Because it's my goddamn law firm." The following Monday, Gilbert was gone from the firm.
The Time Warner Settlement
Despite the blow-up at the June 8 meeting, Williams testified that he was willing to give Heins and Mills the benefit of the doubt. "I still felt we were on the cusp of receiving $100 million [as a law firm from the Time Warner case]," Williams said in court. In early November 2006, the law firm paid him slightly more than $4 million from out of its settlement distribution, he claimed.
Ultimately, however, Williams decided to resign from HMO on Jan. 1, 2007, after he read depositions from a lawsuit that a former partner had brought against the firm. In those papers, Heins and Mills made statements that contradicted what he had been told about becoming a nonequity partner in March 2004, Williams says.
"I basically came to the conclusion that I had enough and I wasn't going to work with people that I couldn't trust," testified Williams, now a partner at Gustafson Gluek in Minneapolis. He cleaned out his office, and on Jan. 2 left resignation letters on the chairs of Heins and Mills.
Shocked by Resignation
Heins, who was then vacationing with Mills in Europe, was surprised when he learned of Williams' resignation. "[Williams] never told me he was unhappy," Heins said in court. "He had become a multimillionaire before the age of 40. I assumed that was pretty big news for him."
But Louwagie says the case was about more than whether Williams had become rich. "If you have a job that pays $10 an hour and your boss says, ‘We need somebody to work on Saturday. I will pay you 5 percent of the profits it you work on Saturday.' But when the big fee came, they paid you the $10 an hour. And your boss never intended to pay you the 5 percent of the profits."
In their closing arguments, Pentelovitch and Remele insisted Williams wasn't being reasonable to expect bigger distributions when the law firm needed to repay its bank loans and taxes and reimburse partners who had borne the upfront costs of the Time Warner case and other class action lawsuits.
In the final analysis, Bodine believes the Williams' lawsuit was sparked by "bad lawyering" on the part of HMO. (During their testimony, Heins and Mills said the law firm had worked on several draft versions of a new member control agreement, but blamed a heavy load of class action lawsuits for their putting off finalizing the agreement.)
"Mr. Heins and Ms. Mills weren't as careful as they should have been in documenting this arrangement with Mr. Williams," Remele admitted in his closing argument. "That's the old adage that the shoemaker's shoes are the ones that have holes in them.''
A Better Way?
So, how can law firms avoid internal fights over fees?
Law firm managing partners said there is no one cure, but the foundation begins with mutual respect among members.
"We have a collegial attitude and approach" to compensating lawyers, says Clark Opdahl, managing partner at Henson & Edron. "It is through a function of having all partners having input in the process," Opdahl says, adding that those partners must then also recognize that some lawyers may have made extraordinary contributions on a case, and their level of compensation should reflect that.
Meanwhile, Bodine suggests that Schwabe Williamson & Wyatt in Portland, Ore., has come up with a novel approach in paying its attorney: origination credits.
Mark Long, managing partner at Schwabe Williamson, says one criteria the firm uses to decide compensation for its lawyers is calculating "origination credits," awarding them equally to any attorney who has played a "significant role" in either bringing in the clients or working on their cases.
Initially, many of his law firm members were skeptical about the program, Long says, but after eight years in effect, the system has helped foster teamwork and collaborative marketing.
Fights Between Parties Over Legal Fees
Meanwhile, fights over legal fees can also occur between opposing parties. Take Zelle Hofmann Voelbel Mason & Gette, which as lead counsel has fought Microsoft in class action antitrust cases in Wisconsin, Iowa and Minnesota.
Since 2004, the Minneapolis law firm has obtained more than $600 million in out-of-court settlements for businesses and consumers who bought Windows and other office software at allegedly artificially inflated prices. Its share of the pie: more than $60 million in legal fees.
Zelle Hofmann has been paid for its work in class action settlements in Minnesota and Iowa, says Rick Hagstrom, a Zelle Hofmann attorney and lead plaintiffs' counsel in the two states. But as this issue went to press, the law firm was waiting for resolution of its fee request in Wisconsin, where it helped obtain a $223 million class action settlement, says Hagstrom, lead plantiffs' attorney in that suit too.
Zelle Hofmann originally sought about $20 million in legal fees or about 20 percent of the class recovery. But a Wisconsin state court circuit judge awarded the law firm only $4.2 million, contending it did limited work in that case.
Hagstrom disagreed, blaming Microsoft for allegedly making "frivolous and unfounded allegations" about his firm's efforts in the class action case.
"Microsoft had sweetheart deals in the two other settlements," Hagstrom says. "We went and challenged that. This cost Microsoft an additional $100 million out of pocket."
Hagstrom said his firm is appealing the $4.2 million fee award and is seeking fees and costs from its challenge in any new award.
"I would rather be able to move on to other things than dwell on something already settled," Hagstrom says. "It is unfortunate to have these fee disputes."
—Scott Carlson is a business journalist whose career spanned nearly 30 years at the St. Paul Pioneer Press, where his beats included retail, manufacturing, regulatory affairs, law and workplace. He is currently a business staff writer at the Sioux Falls Argus Leader and is also pursuing book writing.