Punitive damages and lawyers fees would be up to the judge to decide if they award them or (not).
When I got divorced in 1981, my lawyer added his lawyers fees for my EX to pay, which got lucky and my EX had to pay. But, I had to pay the lawyers fees (myself, up front) since as he told me there is no guarantee the judge would allow, or for that matter to collect from my EX. So (after) awarded and (after) my EX paid my lawyer, then my lawyer (refunded) my fees back to me.
So no, your friend’s lawyer would not take this client on the promise/expectation that you would pay/owe, since like stated above is no guarantee, thus this guy has found the funds (somewhere) to hire this lawyer.
But the question is why are they suing you for $650 plus punitive damages of $1,300? Then lets add the cost of legal fees which are $4,500, which base on the cost of damages is a lot to pay for a lawyer in small claims court, which usually don’t need a lawyer.
Now my guess is that they can only collect $5,000 max since in small claims court and they may prefer since it is quick vs waiting for months/years to be held in a higher court. So, if they collect the max of $5,000, then the in effect the loss of $1,450 could be the cost for (less) legal fees/hours spent to sue in small claims.
Let me guess, you have not talked to a lawyer to see if you have any defense or not? Look, if someone is suing me for $650 and asking for $5,800 more in punitive and legal fees, I would make a appointment asap for my legal rights.