Friolo v. Frankel

WILNER, J. Maryland statutes permit a court, in certain actions to collect wages allegedly due an employee or former employee, to award “reasonable counsel fees” to the plaintiff if he or she is successful in the action. The issue before us is whether, in calculating such fees, the court is required to use what has become known as the “lodestar” approach — that is, to start by multiplying the reasonable number of hours expended by the attorney on the litigation by a reasonable hourly rate and then to consider appropriate adjustments to the product of that multiplication. 1 We shall hold generally that, in actions under fee-shifting statutes, including the two at issue here — Maryland Code, §§ 3-427 and 3-507.1 of the Labor and Employment ⁵⁰⁵ Article (LE) — the lodestar approach is ordinarily the appropriate one to use in determining a reasonable counsel fee. We stress, however, that the approach we approve is broader than simply hours spent times hourly rate but also includes careful consideration of appropriate adjustments to that product, which, in almost all instances, will be case-specific. Under that approach, it is necessarily incumbent upon the trial judge to give a clear explanation of the factors he or she employed in arriving at the end result.

Unfortunately, the judge did not do so in this case. We shall remand the case for a further proceeding and a better explanation. BACKGROUND The issue presented to us arises from an action filed in the Circuit Court for Montgomery County by appellant, Joy Friolo, and her husband, Victor Salazar, against Douglas Frankel and the Maryland/Virginia Medical Trauma Group, appellees. Friolo and Salazar alleged that, in February, 1998, Dr. Frankel, a physician, hired Friolo as a medical biller, responsible for billing and collections, at a base salary of approximately $30,000.

She averred that the practice, at the time, was a “failing venture,” that, at some point, Frankel offered all of his employees a percentage interest “in the practice,” that she accepted his offer, and that, as a result, she and Frankel agreed that she would get a 5% ownership interest in the medical practice in exchange for her participation in “evaluating and developing the practice.” The goal, she said, was to make the practice worth $1 million by the end of 1999, to open four satellite offices within five years, and then to sell the entire practice in 2004. She was to get 5% of the sales price. Friolo claimed that she worked more than 40 hours a week to maximize the recovery of receivables but that she never received any overtime pay, that she often worked at home on monthly, quarterly, and annual reports but was not paid for that time, and that she and Salazar attended strategic planning meetings and made various recommendations with respect to the practice. Salazar, though not formally employed ⁵⁰⁶ by Frankel, asserted that he frequently worked on Frankel’s behalf by attending marketing meetings, assisting in the preparation of reports, and doing clerical work.

Friolo claimed that, as part of her 5% ownership interest, she was to receive, on a monthly basis, 5% of all medical insurance reimbursements and collections received, but that she did not receive full payment of those amounts. Frankel, she said, had agreed to put this arrangement in writing by December 15, 1998, but failed to do so. Friolo went on bereavement leave from March 9 to March 25, 1999, but worked from March 26 to April 2. On Sunday, April 4, Frankel called her at home, complained that she had been rude to two patients and had not been doing her job properly, and discharged her.

He denied at the time (and has continued to deny) that she had any ownership interest in the practice. Friolo claimed a right to 417 hours of overtime pay, and Salazar claimed an entitlement to compensation for his work. On these basic allegations, Friolo and Salazar made the following claims. In Count One, Friolo alleged that she and Frankel had an express contract for her to receive a 5% ownership interest in the medical practice, that pursuant to that contract, she was to receive, in addition to her base salary, 5% of the monthly receivables collected, that Frankel breached that contract by withholding $3,365 from her monthly entitlements for the period March, 1998 through February, 1999, $2,637 for March, 1999, and the entire sums for April and May, 1999.

In Count Two, she alleged the existence of a similar implied contract and sought the same damages. Count Three charged Frankel with unjust enrichment — that he benefited from Friolo’s labor and failed to pay the promised consideration. Count Four charged that Frankel had fraudulently induced her to perform services by promising to give her an interest in the practice — a promise he never intended to keep. Count Five alleged that Frankel’s withholding of her percentage of the receivables she collected constituted a violation of the Wage Payment and Collection Law (LE, §§ 3-503 and 3-505) (Payment Law).

Count Six alleged that, by failing ⁵⁰⁷ to pay her time-and-a-half for her overtime hours, Frankel violated the Maryland Wage and Hour Law (LE, §§ 3-415 and 3-420) (Wage and Hour Law) and claimed that she was entitled to $9,070 for 417 hours of overtime. Counts Seven through Ten were on behalf of Salazar. Count Seven was for breach of express contract and sought recovery for approximately 200 hours that Salazar claimed he worked for Frankel from February, 1998, through February, 1999. He averred that he performed this work without compensation upon Frankel’s representation that he would be compensated through the value of his wife’s ownership interest in the corporation.

Count Eight alleged breach of an implied contract to the same effect; Count Nine charged Frankel with unjust enrichment of the value to Salazar’s 200 hours of work; and in Count Ten Salazar sought recovery of $1,030 in wages (200 hours times the minimum wage of $5.15/hour) under the Wage and Hour Law and the Payment Law. In addition to these various sums alleged in the specific counts, Friolo and Salazar sought punitive damages, prejudgment interest, and attorneys’ fees and costs. Toward the end of trial, after Frankel testified, Friolo withdrew her claim to 5% of the practice and focused instead on the bonus arrangement she claimed she and Frankel had. Frankel testified that he never agreed to give Friolo an interest in his medical practice or to pay her 5% of all sums collected.

He admitted to a bonus arrangement but claimed that there was a base amount that had to be met and that her entitlement was to a percentage of each $500 collected over that amount. He said that he had paid all bonus sums that were due under that arrangement. Frankel also contended that Friolo was exempt from the overtime requirements of the Wage and Hour Law because she was in an administrative or managerial position. The issues as to the overtime claim were (1) whether Friolo was, in fact, in a managerial position and therefore exempt from the overtime requirement, and (2) if not, how much she was owed. ⁵⁰⁸ At the end of the plaintiffs’ case, all of Salazar’s claims were dismissed on the ground that there was insufficient evidence to show any employment relationship between him and the defendants.

Salazar conceded that he had failed to prove Counts Eight and Nine and consented to the dismissal of those counts. Counts Two, Three, and Four of Friolo’s action were also dismissed, with her consent. The only claims submitted to the jury were those embodied in Counts One (breach of express contract to give her a 5% bonus on monthly collections), Five (failure to pay the bonuses and the overtime pay in violation of the Payment Law), and Six (failure to pay overtime rate in violation of Wage and Hour Law). With respect to the monthly bonuses, Friolo claimed an entitlement to $6,841.

That was based on gross receivables of $528,320, 5% of which amounted to $26,415. Frankel had paid $19,574 of that amount under his view of what the arrangement was, leaving a balance allegedly due of $6,841. She also claimed an entitlement to $5,237 in overtime pay for 240 hours of overtime work, down from the 417 hours she had alleged in her amended complaint. LE § 3-507.1(b), which is part of the Payment Law, provides that if, in an action under that Act, a court finds that an employer withheld the wage of an employee in violation of the Act and not as a result of a bona fide dispute, the court may award the employee an amount not exceeding three times.the wage and reasonable counsel fees and costs.

In Admiral Mortgage, Inc. v. Cooper, 357 Md. 533 , 745 A.2d 1026 (2000), we held that any counsel fee to be awarded under that section was for the judge, not the jury, to determine. The court instructed the jury that, if it found that Frankel withheld wages due Ms. Friolo and that such withholding was not the result of a bona fide dispute, the jury could award her extra compensation up to three times the amount she was entitled to receive, but, in accordance with Admiral Mortgage, Inc., said nothing to the jury about counsel fees. The jury found that Frankel had failed to pay $6,841 in bonuses and $4,937 in overtime pay but determined specifically that no amount of enhanced damages should be awarded ⁵⁰⁹ with respect to either amount. Accordingly, on July 3, 2001, judgment was entered in Friolo’s favor in the aggregate compensatory amount of $11,778.

It does not appear that any amount was added for pre-judgment interest. Two weeks later, Friolo filed a motion seeking attorneys’ fees of $55,012, nearly five times the amount of the recovery. That amount was calculated according to the lodestar approach, as follow. Attorney Hourly Rate Hours Lodestar Amount Leizer Goldsmith $305 164.4 $47,733.50 Karen Bower 250 31.6 7.911.00 Julie Martin 250 33.2 4,202.50 Regina Schowalter 90 34.1 1.278.00 TOTAL 263.3 $61,125.00 The hourly rates for Goldsmith, Bower, and Martin were taken from a “matrix” maintained by the U.S. Attorney for the District of Columbia, which, in turn was taken from one used by the U.S. District Court in Laffey v. Northwest Airlines, Inc., 572 F.Supp. 354, 371 (D.D.C.1983), rev’d in part on other grounds, 740 F.2d 1071 (D.C.Cir.1984), cert, denied, 472 U.S. 1021 , 105 S.Ct. 3488 , 87 L.Ed.2d 622 (1985).

From the gross amount, Friolo deducted 10%, or $6,112.50, to reflect the fact that not all of Friolo’s claims were successful. That produced a net claim of $55,012.50. She asked, in addition, for post-judgment interest and reimbursement for other costs of $392.45. In a supplement filed July 31, 2001, Friolo raised the requested amount of fees and costs.

The supplement reduced the number of hours expended by Ms. Martin from 33.2 to 18.1 and by Ms. Showalter from 34.1 to 14.2 but nonetheless increased the gross lodestar amount to $63,399.50 based on a total of 228.3 hours. With a 10% reduction, the net fee request became $57,059, to which was added $1,201 in costs. The supplement explained that Ms. Showalter, whose time was billed at the rate of $90/hour, was ⁵¹⁰ a third year law student, and that Ms. Martin, whose time was billed at $250/hour, had been practicing law for'seven years. Nowhere, in either the motion or the amendment, did Friolo allege what arrangement she had with her attorneys with respect to a fee — whether they had accepted the case on an hourly basis, whether there was a set fee for the litigation, whether there was some sort of contingency fee arrangement, whether they had agreed not to charge her any fee at all but accept only what the court may award under the statutes, whether any fee awarded by the court was to be in addition to or applied as a credit against any fee charged to her.

Frankel responded that, as the jury failed to find that the withholdings were not the result of a bona fide dispute, there was no occasion for any attorneys’ fee to be awarded. He also noted that the so-called Laffey matrix had never been accepted by any Maryland court and that the cases in which it had been used involved gross misconduct on the part of the defendant, which was not the case here. This dispute, he urged, was simply the product of a disagreement over the terms of the employment and that most of Friolo’s claim and all of Salazar’s claim had been rejected, either by the court as a matter of law or by the jury as a matter of fact. Frankel urged that the requested fees, being more than five times the amount of recovery and 20 times what a normal one-third contingency fee would produce, were unreasonable.

After listening to argument and having considered the memoranda filed by the parties, the court concluded first that attorney fee awards need to be “appropriate and fair,” even when “punitive.” It then noted that, under the lodestar analysis, two of the factors the court must consider are the novelty and difficulty of the litigation, but it made no finding with respect to either factor. It observed that the jury had returned a verdict of $11,778, which the court said was. not inappropriate, and then stated: “What the Court is going to do by way of award is considering the [lodestar] language and the record in this matter, I deem it appropriate to — this case is interesting in looking at ⁵¹¹ the computations awarding 40 percent of the judgment plus the $1,500 in court costs so that comes out to $4,712.00 plus $1,500.00 — $6,212.00 is the counsel fees and costs.” The judgment order more or less reflected that decision. It granted Friolo’s motion and directed Frankel to pay to Friolo or her counsel forty percent of the amount of judgment, which was calculated to be $4,711, for statutory attorneys’ fees, plus $1,552 in costs. Aggrieved, Friolo appealed, complaining, in essence, that the trial court erred in failing to calculate the fees in accordance with the lodestar approach, despite what she regards as her “high degree of success before the court.” We granted certiorari before any proceedings in the Court of Special Appeals.

DISCUSSION Friolo points out, correctly, that, in applying Federal fee-shifting statutes, the Federal courts have adopted the lodestar approach for determining the amount of fee to be paid by the loser and have created a set of criteria for measuring the fee. See Hensley v. Eckerhart, 461 U.S. 424 , 103 S.Ct. 1933 , 76 L.Ed.2d 40 (1983). She asserts that, in Admiral Mortgage, Inc. v. Cooper, supra, 357 Md. 533 , 745 A.2d 1026 , we “strongly suggested” that Maryland courts use that approach in awarding fees under the State wage collection laws and complains that the trial court, though mentioning the word “lodestar” in its brief remarks from the Bench, failed to consider the established criteria and thus failed to apply the lodestar approach. Frankel responds that the allowance of any fee is discretionary — that the two statutes merely permit the court to award a reasonable fee and that there is no entitlement to one.

Indeed, he reads LE § 3-507.1 as allowing the award of counsel fees only upon a finding that the withholding was not the result of a bona fide dispute which, he claims, was not made in this case. In his view, no fee was appropriate and certainly not one five times greater than the amount of recovery. Frankel contends that the trial judge was aware of ⁵¹² the Federal criteria, as he mentioned two of them, but that he was not required by Admiral Mortgage, Inc., or any other law, to adhere rigidly to the lodestar approach. Standard of Review A preliminary disagreement exists over the standard of review that we should apply.

As noted, Friolo believes that, in disregarding the lodestar approach, the court erred as a matter of law, and that, accordingly, we should conduct a de novo review and are free to substitute our judgment for that of the trial court. Frankel, keying on the statutes, urges that both the allowance of a fee and its calculation are discretionary with the trial court and that the only issue is whether the court abused its discretion in setting the fee equivalent to 40% of the recovery. Frankel is correct in arguing that the decision whether to allow any fee is discretionary, although, as we shall explain, that discretion is to be exercised liberally in favor of allowing a fee. A fee was allowed here, and no cross-appeal was taken from that decision.

That issue, therefore, is not before us, either as legal error or abuse of discretion. The only issue is whether, in determining the amount of the fee, the court was required, as a matter of law, to use the lodestar approach and failed to do so. That is a threshold issue of law. If we conclude, as we shall, that the lodestar approach is the appropriate one to use and that the record does not support a conclusion that the trial court actually used that approach, there would be an error of law.

The result of such a conclusion is not a direction to enter judgment for the amount claimed by Friolo, however, which appears to us, even under a lodestar approach, not to be a reasonable fee, but rather a remand for a further proceeding, in which the court can apply the lodestar approach and determine a reasonable fee. The setting of a fee under that approach is largely discretionary. The Statutes in Question We begin our response to the various arguments with a brief analysis of the current state of Maryland law. As noted, ⁵¹³ there are two statutes at issue.

Title 3, subtitle 4 of the Labor and Employment Article constitutes the Wage and Hour Law — the State parallel to the Federal Fair Labor Standards Act. It requires, in relevant part, that employers pay the applicable minimum wage to their employees and, in LE §§ 3-115 and 3-420, that they pay an overtime wage of at least 1.5 times the usual hourly wage for each hour over 40 that the employee works during one workweek. Section 3 — 103 excludes from the Act individuals employed in a capacity that the Commissioner determines, by regulation, to be administrative, executive, or professional, or who are paid on a commission basis. The Commissioner of Labor and Industry is given general authority to enforce the statutory requirements by administrative action, subject to judicial review.

See LE §§ 3-408 and 3 — 126. LE § 3-427 provides as well for individual enforcement. It authorizes an employee who has been paid less than the required wage to bring an action against the employer to recover the difference between the wage paid and the wage required to be paid. Recognizing that many of these claims may be small ones and that employees may be unfamiliar with how to file and prosecute a lawsuit, § 3-427(b) permits the Commissioner, at the request of the employee, to take an assignment of the claim in trust for the employee and ask the Attorney General to file the action on the employee’s behalf.

Subsection (d), which is most at issue, states that, “[i]f a court determines that an employee is entitled to recovery in an action under this section, the court may allow against the employer reasonable counsel fees and other costs.” (Emphasis added). There is no provision in the Wage and Hour Law for enhanced damages; the only recovery allowed, aside from costs and reasonable counsel fees, is the difference between the wage due and the wage paid. Subtitle 5 of title 3 constitutes the Payment Law. That law does not concern the amount of wages payable but rather the duty to pay whatever wages are due on a regular basis and to pay all that is due following termination of the employment.

Section 3-502 requires employers to establish regular pay ⁵¹⁴ periods and to pay wages in currency or by check or direct deposit that is convertible to currency. Section 3-503 prohibits employers from making unauthorized deductions. Section 3-505, dealing with the situation in which there is a termination of employment, requires employers to pay employees all wages due for work performed before the termination, on or before the day on which the employee would have been paid had employment not been terminated. As with the Wage and Hour Law, the Commissioner of Labor and Industry is given some enforcement power.

The Commissioner is authorized to attempt to resolve any issue involved in the violation informally by mediation and, with the consent of the employee, to request the Attorney General to bring an action on the employee’s behalf to collect any amounts that may be due. See § 3-507. Section 3-507.1 permits a separate action by the employee if the employer fails to pay wages due within two weeks after the wages were due to be paid. Subsection (b) of that section provides: “If, in an action under subsection (a) of this section, a court finds that an employer withheld the wage of an employee in violation of this subtitle and not as a result of a bona fide dispute, the court may award the employee an amount not exceeding 3 times the wage, and reasonable counsel fees and other costs.” (Emphasis added).

As noted, Friolo sued under both statutes. The instructions to the jury did not mention either statute in particular, and the special verdicts returned by the jury did not mention either of them. At least with respect to the bonuses, it would appear that Friolo had no claim under the Wage and Hour Law. Her base salary was well above the required minimum wage, and the bonuses were purely a matter of contract.

In this case, they would thus be recoverable only under Count One, for breach of contract, as to which there is no fee-shifting authority, or, because they constituted part of her wage and ⁵¹⁵ remained unpaid after termination of her employment, under the Payment Law. The claim for overtime pay is a bit more confused. Friolo seemed to imply in her amended complaint that her overtime work was part of the consideration for the 5% ownership interest that she was promised, and it was only when Frankel terminated her employment and denied her ownership claim that the overtime pay seemed to become an issue. In her testimony, she said that she had raised the issue of overtime with Frankel, that he had denied her entitlement to it on the ground that she was a salaried or managerial employee, and that, until her employment was terminated, she accepted that explanation.

Clearly, she was entitled to sue under both statutes to recover any overtime pay that remained due after termination of her employment. In both § 3-427(d) and § 3-507.1(b), the Legislature provided that the court “may” award reasonable counsel fees. There is no statutory requirement that it do so. Nonetheless, it is clear to us that the Legislature intended that discretion to be exercised liberally in favor of awarding fees, at least in appropriate cases.

The Wage and Hour Law shares the benevolent purpose of its Federal partner, the Fair Labor Standards Act. The Legislature declared its intent in § 3-402 — to set minimum standards (1) to provide a maintenance level consistent with the general health and well-being of the population, (2) to safeguard employers and employees against unfair competition, (3) to increase the stability of industry, (4) to increase the buying power of employees, and (5) to decrease the need to spend public money for the relief of employees. The standards, are, indeed, minimal ones, and it is critical, if the legislative purposes are to be attained and preserved, that those standards be vigorously enforced. The substantive provisions of the Payment Law were first enacted in 1966. 1966 Md. Laws, ch. 686.

The law allowed the Commissioner of Labor and Industry to file suit on behalf of employees to collect wages that were unlawfully withheld ⁵¹⁶ and provided minor criminal penalties for violations, but it provided no statutory action for the individual employee. The employee was presumably free to file a breach of contract action against the employer if the employee either was knowledgeable enough to do so on his or her own or could find a lawyer willing to take the case. Over the years, the law was amended, first to provide for civil penalties of up to 10%, later 20%, of the wages due, and, in 1983, to substitute for the civil penalties a provision that permitted a court, in an action by the Commissioner, to award to the employee up to three times the amount of wage unlawfully withheld if the court found that the withholding was not a result of a bona fide dispute. The law said nothing about counsel fees.

The Attorney General, of course, represented the Commissioner in any suit filed under the statute. What apparently led to § 3-507.1, in 1993, was the crippling of the Commissioner’s ability to enforce either the Payment Law or the Wage and Hour Law due to budget cuts in his office. The enforcement function, apparently under both statutes, was centered in the Wage and Hour Section of the Division of Labor and Industry, which was eliminated as of November 1,1991, due to a lack of funding. In reaction to the demise of that unit, two bills (SB 274 and HB 1006) were introduced into the 1993 session to permit employees to file their own action for unpaid wages under the Payment Law.

That ability already existed under the Wage and Hour Law, so neither bill addressed that statute. The House Bill provided for automatic treble damages and counsel fees if the court determined that the employee was entitled to recovery; the Senate Bill had no such provision. In testimony on the House Bill, the Division of Labor and Industry reported that, in the five years preceding the elimination of the Wage and Hour Section, an average of 3,000 unpaid wage claims had been filed annually with the Division, that, after investigation, about 45% of them were found to be legitimate, and that the Division had collected about $550,000 annually on those claims. Other evidence indicated that about 1,500 claims were referred annually to the Attorney General, ⁵¹⁷ that most of the referred cases settled, and that only about 240 suits were filed in Circuit Court.

Most of those cases, about 180, were resolved in the Commissioner’s favor on summary judgment, and in 80% of them, treble damages were awarded. The Executive Director of the Maryland Volunteer Lawyers Service reported that the majority of the claims were on behalf of low income people and involved between $150 and $200. Concern was expressed by proponents of the bills that these employees often had no other resource available to assist them in pursuing their claims, and the proponents therefore supported both the treble damage and counsel fee provisions in the House Bill. Business groups noted that, in an action filed by the Commissioner under § 3-507, there was no provision at all for counsel fees, and up to treble damages could be awarded only if there -was a finding that the wage was not withheld pursuant to a bona fide dispute, and they opposed the provision in the House Bill for an automatic award of counsel fees and treble damages merely in the event the court found the wage was due.

The Legislature gave some credence to that objection and amended both bills (1) to permit counsel fees to be awarded in an action by the Commissioner under § 3-507, and (2) to allow counsel fees and up to treble damages in an action by the employee only upon a finding that the wage was not withheld pursuant to a bona fide dispute. With those, and certain other, amendments, both bills passed. The Governor signed the House Bill (1993 Md. Laws, ch. 578) and vetoed the Senate Bill as being unnecessary. Although the 1993 Act dealt only with the Payment Law, it was clear that the problem sought to be remedied — the inability of the Commissioner to continue to pursue claims for unpaid wages — existed as well under the Wage and Hour Law, which, as noted, also provided for employee suits and the award of counsel fees.

Unquestionably, the provisions for counsel fees in § 3-427(d) and § 3-507.1(b) are remedial in nature and should therefore be given a liberal interpretation. Coburn v. Coburn, 342 Md. 244, 256 , 674 A.2d 951, 957 (1996); Harrison v. Pilli, 321 Md. 336, 341 , 582 A.2d 1231,1234 (1990). ⁵¹⁸ Courts must keep that in mind when