June 2017 | Earn one hour of MCLE Credit in Legal Ethics
By Andrew Dilworth
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Attorneys enter into fee agreements on a daily basis. In the haste to sign up a client, errors can be made that significantly impact an attorney's rights and obligations downstream. This article looks at some of the key ethical concepts to keep in mind when putting together a fee agreement.
Subject to certain limitations concerning duress, unconscionability and the like, attorneys are entitled to negotiate the terms on which they will accept employment. Ramirez v. Sturdevant (1994) 21 Cal.App.4th 904, 913. One rule to be aware of in negotiating a fee agreement is California Rule of Professional Conduct 3-300. This rule deals with situations in which an attorney enters into a business transaction with a client or knowingly acquires an ownership, possessory, security, or other pecuniary interest adverse to a client.
The rule requires that the terms of the transaction or acquisition be fair and reasonable to the client and fully disclosed and transmitted in writing to the client in a manner that can be reasonably understood. It also requires that the client be advised in writing that he or she may seek the advice of an independent lawyer regarding the transaction and be given a reasonable opportunity to do so. Finally the client must consent in writing to the terms of the transaction. CRPC 3-300.
Failure to comply with the provisions of rule 3-300 when applicable does not automatically invalidate an attorney-client transaction, but it does render the transaction "voidable" at the client's option. See BGJ Assocs., LLC v. Wilson (2003) 113 Cal.App.4th 1217, 1226. Non-compliance with the rule also triggers a presumption of undue influence under Prob. C. §16004. In situations where the rule 3-300 violations pervade the entire relationship between the attorney and client, the attorney may not be entitled to any compensation at all, whether in the form of financial gains from the transaction or in the form of quantum meruit for the value of services rendered. Fair v. Bakhtiari (2011) 195 Cal.App.4th 1135, 1169.
Whether rule 3-300 applies to a fee agreement depends on the content of the agreement. Typically, the rule does not apply to an initial fee agreement (which is considered an arms-length negotiation) unless the agreement provides the attorney with a security or other pecuniary interest adverse to the client. CRPC 3-300, Discussion; Matter of Silverton (Rev.Dept. 2001) 4 Cal State Bar Ct.Rptr. 252, 261. A provision in an initial fee agreement, for example, that gives the attorney an interest in a client's property to secure payment of fees, would be an "adverse pecuniary interest" under rule 3-300 requiring compliance. An attorney's lien against a client's future recovery to secure hourly fees (i.e., a "charging lien") is also an adverse interest requiring compliance with rule 3-300. Fletcher v. Davis (2004) 33 Cal.4th 61, 69. A loan by the client to an attorney in lieu of fee payment is another example of a pecuniary interest adverse to the client that requires compliance. Sugarman v. State Bar (1990) 51 Cal.3d 609, 616. A client's agreement to assign their statutory fee recovery to an attorney is yet another example. Matter of Yagman (Rev.Dept. 1997) 3 Cal. State Bar Ct.Rptr. 788, 796, fn. 7. The renegotiation or modification of an existing fee agreement can also require rule 3-300 compliance if the attorney obtains a pecuniary interest adverse to the client as a result of the renegotiation. In re Silverton (2005) 36 Cal.4th 81, 84-87.
Another rule to keep in mind is 3-310(F). This rule may apply to a fee agreement, depending on who is paying for the attorney's services. The rule provides that where a non-client pays an attorney's fees for representing a client the third party payment must not interfere with the attorney's independent professional judgment or the attorney-client relationship, confidential information relating to the client must be protected, and the client must give informed written consent to the arrangement. CRPC 3-310(F).
The payment of the attorney's fees by a non-client does not create an attorney-client relationship between the payor and the attorney where no attorney-client relationship otherwise exists. See Strasbourger Pearson Tulcin Wolff Inc. v. Wiz Technology, Inc. (1999) 69 Cal.App.4th 1399, 1404-1405. The requirements of rule 3-310(F) are imposed on the attorney as a form of protection to prevent counsel's loyalty to the client from being potentially compromised by virtue of the third party payment relationship.
An attorney who is negotiating a fee agreement in which a portion of the fees will be shared with another attorney who is not a partner, associate or shareholder in the same firm must also be aware of, and comply with, the provisions of Rule 2-200. Huskinson & Brown, LLP v. Wolf (2004) 32 Cal.4th 453, 463.
Under the rule, there must be written disclosure to the client that a division of fees will be made and the terms upon which the fee will be divided. The client must also consent in writing after such written disclosure has been made. The total fees charged to the client cannot be greater than the fees would have been absent the fee splitting arrangement (in other words there can't be a "mark-up" because of the fee split). And, the total fee charged by all lawyers to the fee-splitting arrangement must not be "unconscionable" under rule 4-200. CRPC 2-200(A)(2). Rule 2-200 does not apply to a division of fees among partners, associates and/or shareholders of the same law firm. CRPC 2-200(A).
Failure to comply with rule 2-200 renders the fee-sharing agreement void as a matter of public policy. Chambers v. Kay (2002) 29 Cal.4th 142, 156-161. However, as between the attorneys, there may still be a claim for quantum meruit recovery for the reasonable value of legal services rendered in reliance on the fee-sharing agreement. Huskinson & Brown, LLP, supra, 32 Cal.4th at 459. A referral fee paid to another attorney is an example of a common fee-splitting arrangement where compliance with rule 2-200 is required.
The mechanics of a fee agreement are also important, and are statutorily regulated under the Business & Professions Code. See Bus. & Prof. C. §6146 et seq. The purpose of the statutes is to protect clients and to ensure that fee agreements are fair and understood by clients. Alderman v. Hamilton (1988) 205 Cal.App.3d 1033, 1037. A fee agreement must be in writing if it is a contingent fee case. Bus. & Prof. C. §6147. It must also be in writing in non-contingent fee cases if the client is not a corporation and it is reasonably foreseeable that the total fees and expenses will exceed $1000. Bus. & Prof. C. §6148(a), (d)(4). Where a written fee agreement is required, it must be signed by the client or the client's representative or guardian. Bus. & Prof. C. §6147(a) (contingent fee contract), 6148(a) (written fee contract).
There are some exceptions in which the requirement of a writing in non-contingent fee cases may not apply. These include in emergency contexts to avoid foreseeable prejudice to the rights or interests of the client or where a writing is otherwise impractical, fee agreements that are implied by the fact that the attorneys' services are of the same general kind as previously rendered to and paid for by the client, situations where a client knowingly states in writing, after full disclosure of the provisions of section 6148, that a written contract is not required, and when an attorney is retained to represent the personal representative of a decedent's estate in ordinary probate matters. Bus. & Prof. C. §6148(d)(1)-(3). Lawyers looking for samples of rule compliant fee agreements, with alternative clauses, and instructions and comments for their use can obtain such on the forms page of the State Bar's website.
At the time a fee agreement is entered into, the attorney must provide a duplicate copy of the signed agreement to the client. Bus. & Prof. C. §6148(a). Failure to comply with this requirement renders the fee agreement voidable at the client's option. Bus. & Prof. C. §6148(c). What's more, when the fee agreement is negotiated primarily in Spanish, Chinese, Tagalog, Vietnamese or Korean, the attorney must deliver an unexecuted copy to the client in the language in which the agreement was negotiated before the client executes the agreement – unless the client negotiated the terms of the agreement through his or her own interpreter (as that term is defined by statute). Civ. C. §1632(b)(5), (h). If an attorney fails to provide the translation required by statute, the client may rescind the contract. Civ. C. §1632(k).
The content of a fee agreement also matters, and is statutorily regulated. Non-contingent fee agreements required to be in writing must contain several components. First, any basis for compensation including, but not limited to, hourly rates, statutory or flat fees, and other standard rates, fees and charges applicable to the case, must be included. The general nature of the legal services to be provided to the client must also be identified. Finally, the respective responsibilities of the attorney and the client as to the performance of the contract must be set forth in the agreement. Bus. & Prof. C. §6148(a)(3). Failure to comply with any of these statutory requirements renders the fee agreement voidable at the client's option, in which case the attorney is entitled to collect only a "reasonable fee." Bus. & Prof. C. §6147(b), 6148(c); Flannery v. Prentice (2001) 26 Cal.4th 572, 589.
Contingent fee agreements also have a number of special requirements. First, such agreements must be in writing, signed by both the attorney and the client (or the client's guardian or representative). Upon execution, counsel must give a duplicate signed copy to the client. Bus. & Prof. C. §6147(a). The agreement must contain a statement of the contingent fee rate that the client and attorney have agreed upon. Bus. & Prof. C. §6147(a)(1). It must also contain "a statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client's recovery." Bus. & Prof. C. §6147(a)(2). The agreement must further disclose the "extent, if any, (to which) the client could be required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by their contingency fee contract," including any amounts collected by the attorney for the client. Bus. & Prof. C. §6147(a)(3). Finally, unless the claim is subject to the MICRA fee limitations, the fee agreement must contain a statement that the fee is not set by law and is "negotiable" between the attorney and the client. Bus. & Prof. C. §6147(a)(4).
Another issue to bear in mind is whether you have malpractice insurance. Attorneys who know or should know that they do not have professional liability insurance are required to inform their clients of that fact, in writing, "at the time of the client's engagement" of the attorney, whenever it is reasonably foreseeable that representation will exceed four hours. CRPC 3-410(A). While such a disclosure is frequently contained in the engagement agreement itself, it may be made by way of a separate writing. CRPC 3-410(A) & Discussion, ¶2. Government lawyers or in-house counsel who do not represent clients other than their employer are exempted from this disclosure requirement, as are legal services that are rendered in an emergency to avoid foreseeable prejudice to the client's rights and situations where the attorney has previously made the required disclosure to the client (for example, in an earlier representation). CRCP 3-410(C)-(E). If an attorney's insurance terminates during the course of the attorney-client relationship the attorney must inform the client of that fact, in writing, within thirty days of the date the attorney knows or should know that the insurance has terminated. CRCP 3-410(B).
Finally, an attorney's fee may not be unconscionable. CRPC 4-200. An "unconscionable" fee has been defined by case law as one "so exorbitant and wholly disproportionate to the services performed as to shock the conscience." Bushman v. State Bar (1974) 11 Cal.3d 558, 563. Unconscionable fees may also involve fraud, overreaching or other misconduct by an attorney that effectively constitutes an appropriation of the client's funds, in the guise of fees. Warner v. State Bar (1983) 34 Cal.3d 36, 43. CRPC 4-200 sets forth non-exclusive factors in assessing whether a fee is unconscionable. CRPC 4-200(B)(1)-(11).
Keeping these issues in mind when crafting an engagement agreement will help an attorney stay in compliance with his or her ethical obligations and avoid situations where his or her fee agreement may be void, voidable or unenforceable.
Andrew Dilworth is a litigation partner at Cooper, White & Cooper LLP in San Francisco, where he focuses his practice on the law governing lawyers and risk management counseling. Dilworth also teaches legal ethics as an adjunct professor at the University of San Francisco School of Law and is vice chairman of the State Bar of California's Standing Committee on Professional Responsibility and Conduct.
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