High Risks of “Contingency Contract”

2013/3/7By Doris Li, China IP,[Trademark]

Apple is clearly worthy of its title as the world’s leading trend-setting company, and its iPad trademark dispute has bought turmoil to China’s intellectual property field. In the annual selection of China’s Top IP Events in 2012, the iPad trademark case would share equal light with the Wong Lo Kat trademark case.

 

iPad Serial Cases

On July 2nd, the iPad trademark case between Apple and Shenzhen Proview finally came to an end. The dispute lasted two years and procedurally required three court hearings. Apple paid 60 million U.S. dollars as a settlement fee to Shenzhen Proview and the No.1590557 iPad trademark was transferred to Apple on July 27th.

With the reconciliation between Shenzhen Proview and Apple, the identity of the Grandall Law Firm turned from counsel for Shenzhen Proview into a plaintiff itself against its former clients.

On July 30th, Partner of Grandall Xie Xianghui disclosed to the media that the law firm had filed a complaint to the Yantian District People’s Court of Shenzhen, claiming compensation for 2.4 million U.S. dollars as attorneys’ fees from Shenzhen Proview.

It has been revealed that Grandall and Shenzhen Proview entered into what is commonly referred to as a “contingency agreement.” Under such agreement, the attorneys will receive a percentage of the earnings if they win the case. In this case the agreement stipulated that attorneys’ fees would be 4% of the settlement amount. According to the civil mediation letter, Apple agreed to pay 60 million U.S. dollars as settlement fees to Shenzhen Proview, and thus the attorney’s contingency fee should have been 2.4 million U.S. dollars, or about 15 million yuan. Xie Xianghui, who participated in the whole process of the iPad trademark case, said: “The contract signed with Shenzhen Proview was a contingency contract, i.e. Grandall would not be entitled to contingency fees unless it won the case. Throughout over two years of litigation, Grandall bore the litigation costs, customs registration fees, trademark renewal fees and various expenses. After the settlement agreement went into effect, Grandall communicated with Shenzhen Proview on this issue for several times, but it has not received a clear reply whether Proview would pay the contingency fees.”

With regard to the prosecution by Grandall, Chairman of Shenzhen Proview, Yang Rongshan, stated in a media interview that the contract did provide for contingency fees as 4% of the settlement amount, but he did not think that the Grandall was entitled to payment from Shenzhen Proview for the money. The 60 million U.S. dollars settlement paid by Apple was not transferred to the account of Shenzhen Proview. It was in court’s escrow and would be distributed to creditors.

Proview’s position was that Grandall should apply for contingency fees from court rather than Shenzhen Proview. He felt Grandall had no basis for suing Proview directly since Proview was never in possession of the settlement money. Only the court had authority to authorize distributions from the settlement amount and consequently Grandall’s only remedy was to seek the 4% contingency fee from the court.

Records indicate that Shenzhen Proview’s debts exceed the 60 million U.S. dollars paid by Apple. In addition to Grandall, GH Law Firm of Guangdong also brought the Shenzhen Proview to court, asking for attorneys’ fees of 4.8 million U.S. dollars.

Grounds of Grandall and GH

The pleading filed by GH Law Firm against Shenzhen Proview shows that the two sides formally signed the contingency agreement on August 11th, 2010 and agreed that Shenzhen Proview entrusts GH Law Firm to engage in all litigations on iPad trademark (excluding litigation in Hong Kong) and Lawyer Xiao Yuancai of GH was entrusted to resolve the trademark dispute using any legal means including litigation and non-litigation procedures. Shenzhen Proview was willing to commission GH Law Firm by contingency contract, i.e. the attorneys’ fees will be paid according to the work results under priority, and the proportion was provided as 15%.

Later, the Beijing Hejun Vanguard Group brought in the Wuwei Law Firm, Grandall Law Firm and others to handle this case in December 2010. In order to protect the priority claims of GH, Hejun and Grandall without increasing the operating costs, and to fully protect the future interests of ordinary creditors without affecting the litigation process, Shenzhen Proview altered the contracts under the guidance of the enforcement court and the coordination of chairman of the defendant’s creditor banks group, Shenzhen Branch of Bank of China in May 2011. The ratios for contingency fees of, GH Law Firm and the Junhe Group, were decreased to 8% and 10% respectively.

 

After alteration, the contracts provided that: “(i) The litigation affairs on iPad trademark of Party A (Shenzhen Proview) shall be concentrated within the range of Guangdong Province. Litigation affairs within Guangdong Province, i.e. all of the civil proceedings, including but not limited to respondent litigation of Party A with Apple (U.S.) and IP Application Development Limited (United Kingdom), counterattack litigation by Party A against Apple (U.S.), Apple sole dealer in China (sole distributor), Apple (China), common distributors and manufacturers, are entrusted to Party B (GH Law Firm). Lawyer Xiao Yuancai shall be the organizer and Grandall Law Firm, Wuwei Law Firm shall assist in the case… (v) A Legal Union shall be established for Proview’s iPad and Lawyer Xiao Caiyuan of Party B shall serve as the President. The members of the legal union shall include but not be limited to GH, Grandall and Wuwei. (vi) The attorney fees for Party B shall be charged according to the principle of risk attorney: eight percent (8%) of the interests gained from Apple by Party A (including affiliates of Party A) should be paid to Party B as attorneys’ fees…Party A promises to make every effort to pay Party B at the earliest time.” During a telephone interview, Xiao Yuancai said that it was the first lawsuit he has had to file against any of his clients in many years of practices. “Objectively speaking, we did not get attorneys’ fees this time, because the money was under supervision of the court. So far, none of the creditors have received money.” Xie Xianghui, a lawyer for Grandall, said that he had never encountered such a situation in over 20 years of practice. He said, “Since all the properties of Shenzhen Proview were sealed by the creditor banks in 2010 and the banks were reluctant to use the settlement to pay the attorneys’ fees, Shenzhen Proview made agreements with all the intermediary teams on terms of contingency fees.”

Xie Xianghui said, “In the process of handling this case, Shenzhen Proview did not spend a penny. Even the costs of the renewal fees of the iPad trademark, customs IPR filing fees, infringement litigation costs in Shanghai were paid by us in advance. Lawyers handling the case spent over 100,000 yuan on litigation fees and business trips. Our client never had any doubts about our work and our law firm was highly recognized. In accordance with the practice of contingency fees, the client, upon the request of law firm, shall pay the attorneys’ fees in accordance with the agreed proportion within seven days after receiving the litigation proceeds or settlement amount. In this case, Shenzhen Proview should pay the fees immediately after receiving the reconciliation money (with an estimated date of June 21st), or they have a duty to apply to the court for the payment of attorneys’ fees to the intermediary teams.”

Records indicate that the contingency contract was signed with the understanding that the creditors’ meeting composed of eight major banks as Shenzhen Proview’s major creditor approved of Shenzhen Proview’s payment of a commission to the law firms via a contingency fee that would come from the final settlement. The enforcement court oversaw the approval and the contracts were filed at both the creditor banks and the court. Therefore, the real intentions of the interested parties were recognized and witnessed by court. “We believe that the creditor banks will respect the facts and the agreement and attempt to back out of the agreement.” Xiao Caiyuan said, “In fact, without the intermediary teams, Shenzhen Proview’s trademark could not have been maintained in the face of Apple’s litigation team. Both the enforcement court and creditor banks should know that the settlement value of the iPad trademark, as high as 400 million yuan, was created by the legal team.” Xie Xianghui also said, “We believe that the priority payment rights of attorneys’ fees in litigation represent the interests of the legal profession. Priority payment in contingency fees is a common practice in the industry and it is fair and impartial. The court will protect the rights and interests of lawyers in accordance with the law, protect the interests of all the interested teams, and will never support harmful conduct, such as breach of contract or violation of social values.”

According to Xiao Yuancai, the difference here is that the litigation taken by the law firms was for the common benefits of all creditors. There are clear provisions on common benefit debts in bankruptcy proceedings. The problem is that Shenzhen Proview had already complied with the bankruptcy conditions but had not actually entered the bankruptcy proceedings. However, the court should attribute the issues and goals sought by the law firms, as well as the final interests, as definite, which was to act for the benefits of all of the creditors. In other words, Xiao Yuancai claims that the attorneys’ were not working for Proview, they were working for all of Proview’s debtors and the time and money the law firms spent should not come first and should not be based on the 60 million U.S. dollars settlement fee they obtained. Instead the attorneys’ fees should be deemed as a common benefit debt from the perspectives of fairness and social integrity. Although China does not make specific provisions outside of bankruptcy, it is indeed a case regarding the common benefits of all the creditors.

At Contingency Contract

By definition, a contingency contract means that the client and the law firm enter into a contract, in which the client does not pay service fees to law firms until the client wins the case or the legal affairs achieve certain results as specified in the contract The client and the law firm agree on the terms and conditions of the contingency fees. Generally, the client does not pay at all, or pays only a very small amount of the attorneys’ fees when signing the contract. The two parties then determine a proportion in the contract. After the law firm successfully handles the legal affairs, the client will pay the agreed percentages of contingency fees according to the completion of the case and the specific earnings from the case. More earnings lead to more contingency fees. However, if the law firm loses the case, it does not receive any money. Contingency contract usually apply to contract dispute, debt collection dispute or other litigation and non-litigation cases with large sums of money at issue. Generally, cases of this type have clear legal facts and issues involving these sums. However, costs, including the court’ s litigation fees, security fees and appraisal fees will be borne by the interested parties regardless of the outcome.

Different industry associations have different charging standards for contingency fees. Under normal circumstances, the maximum amount of fees shall not exceed 30% of the final judgment.

The Environment for contingency contract Is Not Optimistic

Reporters found that though partners of different law firms hold different views, contingency contracts are an inevitable part of the legal system and will continue to be for a long period of time.

In the intellectual property industry, more and more right holders prefer contingency contracts, considering the high cost of litigation and the low amount of compensation. On one hand, they can bundle their expectations with lawyers; on the other hand, they can reduce the upfront costs. Thus, in recent years, contingency contracts have become an increasing trend in the field of intellectual property.

However, according to a reporter’s survey, insiders generally believe that the domestic environment for contingency contracts is not optimistic. The use of contingency contracts commonly leads to the followings disputes between the clients and law firms: (i) The prerequisite that clients bear certain costs is not clear and hard to estimate in advance. This uncertainty generates controversy between the two parties, especially if the risk attorneys lose and the court costs and other fees are higher than the client expected; (ii) The clients receive the settlement and refuse to pay after the contingency fee; (iii) The contingency fee is higher than the standard 30% and clients regret paying higher percentages of the final judgment; (iv) The clients enter into bankruptcy proceedings and attorney’s fees can not be given priority in payment; (v) The law firm is only partially successful and the contingency fee then becomes difficult to calculate.

 

With regard to the potential factors of instability, Senior Partner of Co-effort Law Firm Ma Yuanchao said, “To regulate or prevent risks, the first step is to clarify the payment conditions and avoid ambiguity in any sense. Secondly, the proportion should not exceed 30%. Then law firms should carefully assess the credibility of clients. Finally, lawyers should know about the legal risks, for example, whether the customer will enter bankruptcy proceedings or whether the assets can afford the attorneys’ fees.”

(Translated by Li Guanqun)

 

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