The State Attorney General inquires as to the ethical propriety of seeking and receiving awards of attorney's fees to the State based on prevailing market rates, in amounts exceeding the actual costs to the State for providing the legal services.
In Formal Ethics Opinion 84-F-67, the Board of Professional Responsibility concluded that a Federal Deposit Insurance Corporation (FDIC) salaried staff attorney was ethically prohibited from requesting or permitting a court to award attorney's fees in excess of the amount necessary to reimburse the FDIC for the actual attorney salary and legal expenses involved in obtaining a judgment on delinquent promissory notes of which the FDIC had become owner and holder.
Subsequent to the issuance of the Board's Opinion, the United States Supreme Court in Blum v. Stenson, 465 U.S. 886, 104 S.Ct. 1541, 79 L.Ed.2d 891 (1984) made clear that an assessment of what constitutes a "reasonable fee" is not determined by the profit or nonprofit status of the attorney, by the lack of historical billing rates of the attorney, or by he actual cost of providing the legal services. In examining the issue of a fee award to a nonprofit legal services organization under 42 U.S.C. E 1988, the Court held that "reasonable attorney's fees" are to be calculated according to the prevailing market rates in the relevant community, regardless of whether the prevailing party was represented by private profit-making attorneys or nonprofit counsel. Id. at 895, 104 S.Ct. at 1547. The Court squarely rejected the proposition that awards of reasonable attorney's fees are restricted to a cost-based standard. Id. at 892-94, 104 S.Ct. at 1546-47.
The rationale central to Formal Ethics Opinion 84-F-67 is reliance on DR 3-102(A), which prohibits an attorney from dividing legal fees with a nonlawyer. The underlying purposes of the rule against sharing legal fees with nonlawyers are two-fold: to discourage the unauthorized practice of law by lay persons and to prevent a nonlawyer from having a vested pecuniary interest in an attorney's disposition of a case that could possibly take preeminence over a client's best interest. It is the latter of these purposes that has come to be recognized as predominant. In the Model Code of Professional Responsibility, the fee sharing prohibition is in the Disciplinary Rules of Canon 3, dealing with the unauthorized practice of law. In assessing the applicability of DR 3-102(A) to an award of fees to salaried State attorneys, it must also be recognized that a construction is to be placed on the Disciplinary Rules that gives due consideration to the realities of the unique position of the government lawyer and the operation of his office.
Unlike private attorneys, who act primarily as advocates, the Attorney General is a constitutional officer who has a unique combination of roles as advocate, advisor to quasi-judicial and judicial bodies, advisor to state officials, defender of the Constitution and statutes, interpreter of the laws, and defender of the public interest. See generally, Article VI, Section 5, Constitution of Tennessee; Tenn. Code Ann. E 8-6-109. The Attorney General possesses the independent responsibility, based upon an assessment of the public interest, to decide such matters as the commencement and conduct of litigation [T.C.A. E 8-6-109(b)(1)]; whether or not a matter should be appealed (T.C.A. E 8-6-109(b)(2)]; whether or not to defend the constitutionality of a statute [T.C.A. E 8-6-109(b),(10)]; and whether or not settlement of a matter is appropriate [T.C.A. E 20-13-103]. In addition, the Attorney General possesses a wide range of common law powers of office which may be exercised in furtherance of his obligation to protect the public interest, and has very broad discretion to determine what matters are, in fact, of public interest. See State ex rel. Inman v. Brock, 622 S.W.2d 36, 41 (Tenn. 1981), cert. denied 454 U.S. 941 (1981); State of Tennessee v. Robert Heath, et al and Tennessee State Bank, Court of Appeals, Eastern Sect., No. 178 (November 9, 1990)(slip opin. pp. 3-4).
Applying the analytical guidelines provided by the underlying purposes of DR 3-102(A) and the realities of the unique position of the Attorney General, it becomes clear that the evils that the prohibition against division of fees with nonlawyers is meant to prevent are not implicated by the disposition that would be made of attorney's fees awarded to the State for the legal services of the Attorney General's Office, if those fees were based on a prevailing market rate rather than a cost-based standard. Amounts awarded as attorney's fees would be deposited in the State general fund, and the monies in excess of the actual cost of rendering the legal services would be available to be expended for general government purposes. In the strictest, most literal sense, funds from attorney's fee awards would, therefore, be shared with the State. But "the State" is an amorphous entity that cannot realistically be said to pose any risk of engaging in the unauthorized practice of law. It is a set of institutions through which society is governed and the public interest is pursued and protected. No person, department, agency, or other instrumentality of the State stands to derive any direct pecuniary benefit from the deposit of such monies into the general fund, so no such entity can be said to be aided or encouraged, by the prospect of financial gain, to engage in the unauthorized practice of law. Similarly, the deposit of such funds will give rise to no vested pecuniary interest on the part of any individual, department, or agency that might create a risk that pressures would be exerted that would jeopardize the ability of the State's attorney to exercise independent professional judgment. Moreover, that risk must be assessed in view of the fact that the responsibility of the Attorney General is not limited to serving or representing the particular interests of State agencies, but embraces representing the broader interests of the State and the public, in the discharge of which responsibility the Attorney General may exercise a broad range of independent discretion. Connecticut Commission on Special Revenue v. Connecticut Freedom of Information Commission, supra, 387 A.2d at 537. In short, any benefit to be derived by "nonlawyers" in this context is too remote and attenuated to give rise to the perceived dangers that form the underlying rationale of DR 3-102(A).
In contrast, instances of prohibited fee-splitting typically involve payments that accrue to the direct benefit of a layman or lay organization, based on a percentage of the legal fees generated in a particular matter, often as to which the layman or lay organization played some role or rendered some service.
Only a rigid allegiance to form over substance, ignoring the realities present in the context of government practice, would support a construction of DR 3-102(A) in a manner to restrict, to a cost-based standard, the award of fees to the Attorney General. The deposit of attorney's fees in the State general fund will not accrue to the direct pecuniary benefit of any individual, department, agency, or other instrumentality of the State. Any benefit to be derived is too remote, indirect, and removed from the matters that gave rise to the fees to create any realistic risk of aiding or encouraging the unauthorized practice of law or compromising the independent professional judgment of the State attorney. The underlying purposes and policies of DR 3-102(A) are not violated by the award of attorney's fees at a rate in excess of cost. Moreover, in the specific contexts in which fee awards may be sought by the Attorney General's Office, overriding policy considerations warrant the application of a prevailing market rate standard.
In determining what constitutes a "reasonable attorney's fee" to a state in the antitrust context, the Seventh Circuit in State of Illinois v. Sangamo Construction Co., 657 F.2d 855 (7th Cir. 1981) expressly rejected the argument that such fees should be limited to the actual cost to the state of the attorneys involved. The Court held that in calculating an award of reasonable attorney's fees to a state represented by its Attorney General, the use of prevailing market rates is appropriate. Id. at 861. The Court "fail[ed] to see any reason to distinguish between public counsel and private counsel in determining what is a 'reasonable’ fee." Id. Indeed, the same policy considerations of encouraging enforcement and deterrence that compel the award of reasonable attorney's fees to a state in the first instance, require that such fees be calculated on the same basis as would be applicable in cases involving private plaintiffs. The assessment of attorney's fees in favor of the state based on market rate imposes no additional burden or penalty on antitrust defendants, since prevailing market rates have been awarded in cases where states have chosen to be represented by private counsel, rather than by their Attorneys General. More importantly, there can be no justification, particularly from the perspective of deterrence, for lessening the penalty imposed on antitrust violators by using the significantly lower cost basis for calculating fees, simply because, by chance or design, their anticompetitive activities injure the state in its proprietary capacity, rather than a traditional private party, or give rise to an action brought by the state as parens patriae.
The same policy considerations - encouragement of enforcement actions and deterrence - which are applicable in the context of antitrust actions brought by the State, also provide compelling justification for the ward of reasonable attorney's fees based on prevailing market rates in civil actions brought by the Attorney General under the Tennessee Consumer Protection Act, E 47-18-109(e)(1), on behalf of the State as a consumer-victim; under the federal Racketeer Influenced and Corrupt Organization Act (RICO), 18 U.S.C. EE 1962 and 9164(c); and under the State RICO Act, Tenn. Code Ann. EE 39-12-206(3) and (k).
In cases brought under the tax procedure statutes set out in Tenn. Code Ann. EE 67-1-1801 et seq, governing litigation between taxpayers and the State, it is provided that "[t]he court shall award to the prevailing party attorney's fees and expenses of litigation up to twenty percent of the amount assessed or denied . . . ." E 67-1-1803(d). This provision for the award of attorney's fees to the prevailing party in tax cases was intended to equalize the risk of litigation to both taxpayers and the State. The Statute was designed to be revenue-neutral; that is, the State should neither gain nor lose money by its implementation, assuming that the State prevails in as many tax cases as does the taxpayer. That revenue-neutral character of the provision is destroyed, however, by an imbalance between the amount of the attorney's fee awards to the State and those to taxpayers' private attorneys, resulting from the calculation of fee awards to the state based only on cost, compared to the significantly higher prevailing market rate applied to private attorneys for the taxpayers. To allow recovery by taxpayers' attorneys at prevailing market rates, while restricting the State, represented by the Attorney General, to significantly lower cost-based fee awards would undercut the intent of the statute and would pose an unwarranted and unintended financial burden on the State.
On January 14, 1991, the Tennessee Supreme Court in Nutritional Support Services, Ltd., v. Dudley Taylor, Commissioner of Revenue, Davidson Chancery, Appeal No. 01-S-01-9001-CH- 00009, expressly found that the Commissioner of Revenue, when the prevailing party, is entitled to an award of attorney's fees calculated on the basis of the same factors as are applicable when the taxpayer, represented by a private attorney, prevails. Specifically, the Court found that the State is entitled to a fee based upon DR 2-106 of the Code of Professional Responsibility and the factors set forth in Connors v. Conners, 594 S.W.2d 672 (Tenn. 1980) as those appropriate to be used in determining a reasonable attorney's fee in Tennessee. Nutritional Support Services, p.10. The Court explained:
The fact that his lawyers are employed on salary by the State does not prevent application of the factors of the experience, reputation and ability of the lawyer, or the fee customarily charged in the locality for similar legal services. In applying all of the factors the Commissioner should be accorded the same status as though he was a private party litigant, employing lawyers in the private sector. Id.
The goal of deterring plaintiffs from filing frivolous, harassing claims cannot legitimately be said to be less compelling when it is the State that is the target of such suits and is subjected to the cost, burden, and diversion of scarce public resources that results from their defense. Nevertheless, the deterrent purpose of the allowance of attorney's fees to prevailing defendants will be thwarted if the penalty imposed for frivolous lawsuits is significantly lessened when the State is the defendant. That significant lessening of the penalty will inevitably result if fee awards imposed against plaintiffs in frivolous actions against the State are restricted to a cost-based standard.
In a variety of contexts, the State may be entitled to an award of sanctions in the form of reasonable attorney's fees under Rule 11, Fed.R.Civ.P., and Rule 11, Tenn.R.Civ.P. (sanctions for frivolous claims and pleadings in abuse of the litigation process); Rule 37, Fed.R.Civ.P. and Rule 37, Tenn.R.Civ.P. (sanctions for discovery abuses); Rule 38, Fed.R.App.P. (sanctions for frivolous appeals); 28 U.S.C. E 1927 (sanctions for unreasonably and vexatiously multiplying the proceedings in a case); and a district court's inherent power to impose sanctions when the losing party has acted in bad faith by willfully abusing judicial processes. Roadway Express, Inc. v. Piper, 447 U.S. 752, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980). The purposes of such sanctions include not only compensation, but deterrence and punishment,as well. Thomas v. Capitol Security Service, Inc., 836 F.2d 866, 879 (5th Cir. 1988); Rule 11, Fed.R.Civ.P., Notes of Advisory Committee on Rules. Again, policy considerations mandate that the State be afforded the same degree of protection against frivolous, bad faith conduct warranting sanctions as is enjoyed by private litigants. That policy is significantly diluted by lessening the financial consequences of such improper conduct in cases against the State. There is no reason why State officials should be harassed by bad faith litigation at less risk to the plaintiff than would be present in such cases brought against a private defendant.
The evils at which DR 3-102(A) are directed are not implicated by the disposition that would be made of attorney's fees awarded to the State for the legal services of the Attorney General's Office, if those fees were based on prevailing market rates rather than a cost-based standard.
Accordingly, the Board recognizes the ability of the Attorney General, in all cases in which an award of reasonable attorney's fees to the State is appropriate, to request and receive attorney's fees based on prevailing market rates, unrelated to a cost-based standard.
To the extent that the prior opinions cited herein conflict with this interpretation they are overruled.
This 8th day of March , 1991.
Harris A. Gilbert
Barbara J. Moss
Cecil D. Branstetter
APPROVED AND ADOPTED BY THE BOARD