Q: Do I have to subtract from my damages in the legal malpractice case the attorney fees I would have had to pay my first lawyer if we had won the case?
The answer to this question in Washington is "definitely not," and in Oregon is "maybe."
Under Washington law, there is no deduction from one’s damages in the legal malpractice case for unpaid attorney fees that would have been paid in the underlying case. Shoemaker v Ferrer, 143 Wn.App. 819, 182 P.3d 992 (2008); Schmidt v Coogan, 173 P3d. 273, 162 Wn2d. 488 (2007). The rationale is that the client should not have to pay two lawyers to recover for the same damage.
Suppose a lawyer accepts a case with $1 million in damages, on a contingency fee such that the lawyer would earn 40% of the total amount recovered. Suppose that due to various mistakes of counsel the case is dismissed before trial. Suppose the former client hires a malpractice attorney on a similar 40% contingency fee and initiates a malpractice lawsuit. It is true that the client never stood to gain the full $1 million because the client would have had to pay his first lawyer 40%, resulting in a net recovery of $600,000. Therefore, using traditional damages analysis, the client would only be entitled to a judgment in the malpractice case of $600,000, since that is the net amount that he stood to gain. However, consider that the client must then pay his malpractice lawyer 40% of $600,000, so he would net only $360,000 out of the original $1 million of damage. Washington courts hold that this is going too far, and that paying your malpractice lawyer should be enough.
Washington courts could have accomplished a similar result by creating an exception to the "American rule" in legal malpractice cases. The "American rule" is that each side pays its own legal expenses regardless of who wins or loses, except in certain specific kinds of cases where statutes provide a "loser pays" rule instead. Washington courts could have allowed the prevailing plaintiff in a legal malpractice case the right to recover attorney fees against the other side. Under that arrangement, the plaintiff could get a judgment against the losing defendant for the fees he has to pay his own malpractice lawyer. In the example above, that would result in a base judgment of $600,000, supplemented by another $400,000, for the same total $1 million.
Possibly the reason Washington courts did not go that route is because doing so could open the door to pressure to make that prevailing party attorney fees reciprocal. This would increase the downside risk for the plaintiff, which was not the intended consequence of a rule seeking to relieve the plaintiff of having to pay two lawyers for the same damage.
Oregon appellate courts have not addressed this issue. They have ruled against legal malpractice plaintiffs seeking to recover fees paid to malpractice counsel, but have expressly left the door open to allowing the judgment to reflect an award, in the underlying case, of prevailing party attorney fees when such fees would have been available. Rivera-Martinez v Vu, 245 Or App 422, 263, P3d 1078 (2011); Rowlett v Fagan, 283 Or App 1, 388 P3d 407 (2016). It would appear that the latter point hardly required express authority from the appellate courts, since any part of the underlying judgment that was lost should be fair game as damages in the malpractice case.
One could say that the Oregon courts passed on an opportunity to announce a rule similar to that in Washington under Shoemaker, signifying something. However, the question of deduction of unpaid fees was never raised in these cases. Short-sightedly, the plaintiffs simply failed to include a likely award of fees against the other side in the underlying case, and instead sought fees incurred in the malpractice case. This would have been a very awkward way to address the concerns addressed in Shoemaker, and would have constituted a more direct assault on the "American rule," with the potentially adverse consequences discussed above.
Thus, it would appear that Rivera-Marinez and Rowlett signify little or nothing in regards to this question. The argument in Oregon that unpaid fees in the underlying case should not be deducted is still available. It remains to be seen how the courts would rule, but citation to the Washington cases as persuasive, yet not binding, authority would be prudent in the attempt to get Oregon to adopt a similar rule.
C. What about hourly fee representation in the underlying case?
An interesting question arises in jurisdictions which hold that unpaid attorney fees in the underlying case are not deducted from the damages. Suppose the fee arrangement in the underlying case was hourly, and the client paid them. Should they be added back to the base damages?
Washington and Oregon cases have not specifically addressed these issues. The cases do not speak in terms of fees paid in the underlying case being an element of damages. However, following the logic and purpose of the rule that unpaid fees should not be deducted, it seems a plaintiff ought to be able to include paid fees as part of the damages. The whole point is to prevent the client from paying twice to recover the same damages . Also, to fail to allow a plaintiff to add the underlying fees to the total could discriminate against clients who have paid and those who have not, favoring the latter for no good reason.
Suppose that the client who did not pay had an hourly fee arrangement also, not a contingency fee, so the lack of payment was not simply because the client lost the underlying lawsuit (in which case no contingency fee would be owed), but instead because the client was a deadbeat, and at the end of the trial owed his lawyer a lot of money – let’s say $200,000. Based on the express language of Shoemaker and Schmidt, the deadbeat client would not have to deduct $200,000 from the amount of the likely underlying judgment. Arguably, the end result should be no different just because the other client dutifully paid his lawyer. From this perspective, the paid fees should be added to the judgment.
A counterargument would go something like this. The rule applies only to fees that are unpaid because they are un-owed – ie, to contingency fees whose condition for payment (winning the case) never came to pass, not to hourly fees which are owed regardless of result pursuant to a fee agreement voluntarily entered into by the client. So in the example of the two hourly fee clients, the one who paid will not be facing a counterclaim or offset for fees by the lawyer in the malpractice action, whereas the "deadbeat" client likely will. So viewed from that context, the "deadbeat" client really enjoys no advantage.
Still, while this addresses the supposed unfair discrimination between the paying hourly fee client and the deadbeat hourly fee client, it fails to address the unfair discrimination between hourly fee clients and contingency fee clients, at least to the extent that the policy behind the no-deduction rule is to prevent clients from having to pay two lawyers to recover the same damage. If unpaid and paid hourly fees in the underlying case are not added to the damages, hourly fee clients in the underlying case will end up paying two sets of lawyers to recover the same damage, and contingency fee clients will not.
This conundrum might have been avoided if the courts in Washington had addressed the stated concerns about paying two lawyers by making an exception to the American rule and allowing recovery of attorney fees in malpractice cases, instead of providing a no-deduction rule relating to fees incurred in the underlying case. However, as explained above, there are potential pitfalls with that approach also.