Protecting the Contingency Fee in IRS Whistleblower Representation (12/24/16)

The issue I discuss today is how an attorney may protect his contingency fee in an IRS Whistleblower case.  The background is the substantial awards available under § 7623(b), here.  Based on my experience and anecdotal information from others, contingency fees with respect to IRS whistleblower claims is the norm.  I have not heard of any hourly rate representations.  The reason, I think, is that there are too many contingencies involved in the representation that encourages the client to avoid the financial cost of hourly representation that may not produce any award.  For more on the contingency fees in legal representation, see Adam Shajnfeld, A Critical Survey of the Law, Ethics, and Economics of Attorney Contingent Fee Arrangements, 54 NYLS Law Rev. 774 (2009/2010), here.

In Begelman & Orlow, P.C. v. Ferara, 2016 U.S. Dist. LEXIS 169788 (D NJ 2016), here, the attorney firm had a 1/3 contingency fee, but apparently the agreement had no protection mechanisms if the client received an award.  The attorney firm could sue the client and, provided there were no debilitating problems in the representation, presumably obtain a judgment in some amount.  But, in Begelman, the client fired the attorney firm and withdrew its power of attorney when, according to the facts, she was on the verge of obtaining a recovery.  Thinking that the client had obtained a recovery, the attorney firm sued the client and the client countersued.  (It is an oft encountered phenomenon that a suit against a client for fees will provoke a counter-action -- either separate suit or, more likely, a counterclaim alleging attorney skullduggery or malpractice.)  The case, filed in 2012, has been pending for some time now.  The docket entries as of 12/9/16 are here.  The decision resolves cross motions for summary judgment.  The decision notes that the defendant denies that she has received an award and limits the attorney firms' recovery to quantum meruit -- value of services received -- which will take into consideration defendant's claims of inappropriate representation.

One of the problems in Begelman is that, because of the withdrawal of the POA, the IRS Whistleblower Office could not tell the attorney firm whether an award had been given and discovery against the IRS was unavailing.  And the client insisted that she received no award.  Her insistence raises a credibility issue (because other proof is stymied unless discovery fleshes it out), so the matter will go to trial and could be resolved because there was no award (if the judge, at trial, finds her a credible witness).

I won't try to summarize the factual intrigues reflected in the decision.  (It is a good read.)  Instead, I want to ask readers the question of how an attorney protects his fees from this type of client gambit?  I have represented whistleblowers and have entered a rather plain vanilla contingency fee arrangement.  I have not protected my fees against this type of client gambit but, fortunately, have not had a client go rogue.  The issue, though, is that the client can fire the attorney midstream or even on the cusp of an award and withdraw the POA.

So, what to do?  One solution I have heard is to make the attorney a joint whistleblower on the Form 211.  A POA would still be required to represent the other filing whistleblower (the client) and the client can withdraw the POA.  But, the attorney's personal interest in the claim would then give him access to the status of the claim and a share of the award.  That will not protect against the client making claims of deficient representation as presented in the Begelman case, but the client would have to institute that suit to recover the fee from the attorney.  Or the client desiring to withdraw midstream could perhaps sue the lawyer seeking inter alia that the client withdraw with respect to the original claim and cede the interest to the client.

I would appreciate hearing from readers how they deal with this possibility.  Please do that by comment or by email to jack@tjtaxlaw.com.