Fees, Fee Agreements & Arbitrations
It’s time to review new ethics issues that will require changes in certain practice areas for 2010
By Ellen R. Peck
©2009. All rights reserved.
“Cali!” greeted the familiar gravelly voice of Dan Doorite. “It’s time for our annual chat about recent ethics developments in the areas of fees, fee agreements, fee arbitrations and liens. I want to be prepared for 2010!”
California Joan, scrambling for her list of recent authorities, asked, “Dan, shall we start with new ethics issues which may require changes in your fee agreement for all new clients?”
“Perfect. I carry legal malpractice insurance. I heard there was a new Rule of Professional Conduct (“CRPC”) requiring me to disclose legal malpractice insurance information to my clients,” Dan replied.
“Yes, new CRPC 3-410 requires written disclosures regarding legal malpractice insurance. However, the rule is limited,” Cali explained. “It does not apply to (1) lawyers that have professional liability insurance (CRPC 3-410(A)); (2) those employed as a government lawyer or in-house counsel when representing or providing legal advice to a client in that capacity (CRPC 3-410(C); Comment ); (3) legal services rendered in an emergency to avoid foreseeable prejudice to the rights or interests of the client (CRPC 3-410(D); or (4) where a lawyer has previously advised a client under the rule that the lawyer does not have professional liability insurance (CRPC 3-410(E)).”
Dan asked, “What would I need to do if I do not have legal malpractice insurance?”
“At the time when a new client engages you, you would have to inform that client in writing, that you do not have professional liability insurance whenever it is reasonably foreseeable that the total amount of your legal representation of that client in the matter will exceed four hours,” Cali responded.
“What if my insurance company cancels my insurance and I am not aware of it?” Dan queried.
“CRPC 3-410(A) requires that you know or should know that you do not have professional liability insurance, in order to trigger the written disclosure obligations,” Cali responded. “But be careful! You might have to prove that you never received cancellation notices or otherwise had no reasonable means of determining that you were unaware of the cancellation.”
“What if a client calls me for a telephone consultation that lasts less than an hour, but then decides to retain me for a longer engagement related to the first telephone consultation?” Dan inquired.
“In order to trigger the disclosure requirement of CRPC 3-410(A), it must be reasonably foreseeable that the total amount of time for your representation will exceed four hours. The safest risk management position, of course, is to have the disclosure in all written fee agreements for all clients, or to e-mail or fax the notice to limited engagement clients.” Hearing Dan’s shock, Cali added, “However, the rule would suggest that if you did not reasonably foresee an engagement for longer than four hours, no written disclosure is needed. At the time when the same client actually retains you for a longer engagement, you can provide the written notice.”
Cali added, “Remember, CRPC 3-410’s disclosure obligation applies with respect to new clients and new engagements with returning clients. (Comment .)”
“Right now I have professional liability insurance. But what if it does get cancelled by me or my carrier? Do I have any obligations then?” Dan questioned.
“Yes!” Cali exclaimed. “CRPC 3-410(B) requires that if you have not given the requisite written notice to a client, within thirty (30) days of the date that you know or should know that you no longer have professional liability insurance, you must give the required written disclosure to the client.”
“What should my written notice say?” Dan asked.
“There is currently no prescribed form. But Comments  and  contain language which a lawyer may use either in a written fee agreement or in a separate written document.
“For Rule 3-410(A): ‘Pursuant to California Rule of Professional Conduct 3-410, I am informing you in writing that I do not have professional liability insurance.’ For Rule 3-410(B): ‘Pursuant to California Rule of Professional Conduct 3-410, I am informing you in writing that I no longer have professional liability insurance.’”
“Cali, sometimes I handle class action cases,” Dan moved to a new topic. “The class representatives that have retained me to initiate a class action have asked me to agree in writing that if there is a settlement that I will request that the judge give an incentive award to these class representatives. Is it ethical to do so?”
“Incentive awards are intended to compensate class representatives for work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general. Incentive awards may be awarded by a court, but are discretionary and generally sought after a settlement or verdict has been achieved,” Dan’s partner, Eve Ethical, who had joined them on the speaker phone, added. (Rodriguez v. West Publishing Corp. (9th Cir. 2009) 563 F3d 948, 958-959 (“Rodriguez”.)
Cali responded, “According to the recent Rodriguez case, incentive agreements entered into between named plaintiffs in a class action as part of a fee or retainer agreement create a conflict of interest — an unacceptable disconnect between the interests of the contracting representatives and class counsel, on the one hand, and members of the class on the other — where the interests should otherwise be congruent. Therein, the court held that a lawyer’s retainer agreement, which bound class counsel to apply for an incentive award tied to any ultimate recovery, which was not reflective of work done, risks undertaken or time spent in litigation, created a conflict with other class members from the inception of the relationship.”
“We’ll just say ‘no’!” Dan and Eve responded in unison.
Cali added a note on anther recent case regarding interest on past due fees: “You should also check any provision for interest payments and your method of calculation of the interest payments. In Karton v. Dougherty (2009) 171 Cal.App.4th 133, 138, fn. 1, an attorney sued to collect past due attorneys fees and costs and the fee agreement provided for payment of 10% simple interest per annum. The lawyer’s submissions to the court for interest on unpaid amounts quoted interest calculated on the basis of a 360-day year as ‘per annum.’ The court noted that calculating interest on the basis of a 360-day year, rather than 365 or 366 days, constitutes a violation of Bus. & Prof. C., §17500.”
Eve asked if there had been any new developments relating to the Mandatory Fee Arbitration Act (“MFAA”). “Yes!” Cali exclaimed. “In 2009, the California Supreme Court decided Schatz v. Allen Matkins Leck Gamble & Mallory LLP (2009) 45 Cal.4th 557 (“Schatz”), which may have a continuing effect upon the entire landscape of MFAA fees and costs dispute resolution. The court held that a pre-dispute agreement for binding fees/costs arbitration is enforceable either after MFAA nonbinding arbitration fails to resolve the dispute or if the client waives MFAA nonbinding arbitration.” (Id., at 574-575.)
Dan pondered, “I’m confused. Why is this a big change?”
“Under the MFAA, before a dispute arises, the parties may not agree to binding arbitration. They must wait until after such a dispute has arisen, and then may agree to be bound by the award of arbitrators appointed under the State Bar rules. (Bus. & Prof. C. §6204(a).) Many others also argued that no pre-dispute agreement for binding arbitration under the California Arbitration Act (“CAA,” CCP §1280 et seq.) to take place after waiver or failure of the MFAA could be entered into because this would negate the client’s right to trial by jury,” Cali explained. “The court confirmed that a pre-dispute contractual provision for binding arbitration of attorney fees/costs is enforceable under the CAA where the client has waived his or her rights under the MFAA or the CAA. It also held that after the MFAA arbitration fails to resolve the dispute, either party may pursue judicial action unless the parties had previously agreed to binding arbitration, finding that this result supports the strong public policy in favor of binding arbitration as a means of resolving disputes. (Id., at 574-575.)
Dan wondered, “Why would clients and attorneys spend the resources and time for a non-binding MFAA arbitration, followed by further expenditures for a binding CAA arbitration? Won’t people just waive MFAA arbitration and proceed to a binding CAA arbitration?”
“Bingo!” Cali affirmed. “Many people are concerned that there will be a future trend toward only CAA arbitrations. We shall have to see what develops.”
Practical Eve asked, “Is there a sample fee agreement provision which complies with the Schatz decision?”
“Yes!” Cali responded. “There is a sample form published on the net by the California State Bar. (See Sample Fee Agreement forms, at “Other Clauses of Interest in Fee Agreements,” section 1, pp. 28-29 [http://www.calbar.ca.gov/state/calbar/calbar_home_generic.jsp?cid=10113].)
Eve broached a new subject, “Is it ethically proper for Dan and I to include a general release and Civil Code section 1542 waiver in any settlement agreement with our clients concerning a dispute about fees and costs?”
“And,” Dan chimed in, “can we still have a general release and section 1542 waiver if there may be a lurking legal malpractice claim against us?”
“The State Bar Standing Committee on Professional Responsibility and Conduct (‘COPRAC’) recently issued Formal Opinion No. 2009-178 which answered that question,” Cali replied. “The opinion concluded that a lawyer must promptly disclose to a client any facts giving rise to any legal malpractice claim against the lawyer. The lawyer must consider the propriety of withdrawing from any representation when the lawyer contemplates entering into a settlement agreement with a current client which would limit the lawyer’s liability to the client for the lawyer’s past professional malpractice. If a lawyer does not withdraw, the lawyer must (1) comply with rule 3-400(B) and advise the client of the right to seek independent counsel about the settlement and give the client an opportunity to do so; (2) advise the client that the lawyer is not representing or advising the client as to the settlement of the fee dispute or the legal malpractice claim; and (3) fully disclose to the client the terms of the settlement agreement, in writing, including the possible effect of the provisions limiting the lawyer’s liability to the client, unless the client is represented by independent counsel.”
“The opinion concludes that if a lawyer completes all of these steps, the settlement agreement may contain a general release and section 1542 waiver,” Cali finished.
“Dan and I heard that there was new legislation regarding legal services in the loan modification area,” Eve asked.
“Yes!” Cali cried. “S.B. 94 was effective on Oct. 11, 2009. New Business and Professions Code Section 6106.3(a) provides for the imposition of discipline if a lawyer violates Civil Code Section 2944.6 or 2944.6. Generally, this new legislation prohibits a lawyer from charging, collecting, or receiving any advance fees or other compensation until after the lawyer has fully performed each and every service for the client. The State Bar’s Office of the Chief Trial Counsel has indicated that it will enforce the statutory language consistent with the State Bar’s interpretation of the new statutory language. Please consult this interpretation and the new legislation at http://admissions.calbar.ca.gov/calbar/pdfs/ethics/Ethics-SB94-FAQs.pdf.”
“Thanks, Cali! Our ethics sensors are on overload. We’ll be back for more real soon,” Dan and Eve concluded as they scurried off to change their firm fee agreement and other procedures.
• Ellen R. Peck, a former State Bar Court judge, is a sole practitioner in Escondido and a co-author of The Rutter Group California Practice Guide: Professional Responsibility.
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- A new rule of professional conduct requires that all California lawyers have professional liability insurance.
- A California lawyer carrying professional liability insurance must disclose the amount of the policy limits to his or her client in writing.
- Lawyer Amy Able, a private practitioner, informs her clients orally that she does not have professional liability insurance in all of her big cases. Amy is in compliance with her professional obligations.
- Private practitioner Brent Barrister provides written disclosure to all new clients that he does not have professional liability insurance after he performs four hours of legal services for them. Brent is in compliance with his professional obligations.
- Gerry General, an in-house counsel with BIGG CORP, renders legal services only to BIGG CORP and has no legal malpractice insurance. Gerry has no duty to make a written disclosure to BIGG CORP that he has no professional liability insurance.
- Darla Defender is a Euphoria city attorney. She obtains the permission of her office to represent her friend, Polly Plaintiff, in a personal injury action pending in an adjacent county. Darla does not give Polly a written disclosure that Darla does not have professional liability insurance. Darla will not be subject to discipline because she falls within the government lawyer exception to the disclosure rule.
- Larry Lawyer represents Harry Homeowner for 4.5 hours in an emergency to stave off the foreclosure of Harry’s home. Larry failed to advise Harry orally or in writing that Larry had no legal malpractice insurance. Larry is not subject to discipline.
- Small Business consulted Anthony Advocate in anticipation that it would be served with an action for wrongful termination by an employee. At the time of the consultation, Anthony gave Small a written notice that he did not have legal malpractice insurance. After being served with the action, Small formally retained Anthony. If Anthony does not give Small an additional written disclosure, he may be subject to discipline.
- Sara Solo’s firm was not doing well. In mid 2010, she cancelled her legal malpractice insurance policy to save money. When her policy lapses, Sara has a duty to notify all new clients in writing that she has no legal malpractice insurance.
- Assume the same facts as in question 9. Sara knows that her legal malpractice insurance lapsed on May 31, 2009. Within the next 30 days, Sara must give a written disclosure that she has no legal malpractice insurance to all existing clients that have not received such a notice.
- Assume the same facts as in questions 9 and 10. Sara’s written disclosure to her clients that she has no legal malpractice insurance must be contained in a separate written document from her written fee agreements.
- In class action matters, incentive awards are intended to compensate class representatives for work done on behalf of the class, to make up for financial or reputational risk undertaken in bringing the action, and, sometimes, to recognize their willingness to act as a private attorney general. Incentive awards may be awarded by a court.
- A lawyer’s retainer agreement, which bound class counsel to apply for an incentive award tied to any ultimate recovery, which was not reflective of work done, risks undertaken or time spent in litigation, did not create a conflict of interest with other class members.
- A lawyer may calculate interest on past due legal fees on the basis of a 360-day year.
- Under the Mandatory Fee Arbitration Act, before any dispute arises, an attorney and client can agree that any fee dispute will be resolved by binding arbitration.
- A pre-dispute agreement for binding fees or costs arbitration is enforceable either after MFAA nonbinding arbitration fails to resolve the dispute or if the client waives MFAA nonbinding arbitration.
- It is ethically improper in all cases for a lawyer to include a general release and Civil Code section 1542 waiver in any settlement agreement with a client concerning a dispute about fees and costs.
- A lawyer must promptly disclose to a current client any facts giving rise to any legal malpractice claim against the lawyer.
- A lawyer wishing to resolve a fee dispute with a current client that involves a potential issue of legal malpractice need not advise the client of the right to seek independent counsel about the settlement and give the client an opportunity to do so.
- Effective Oct. 11, 2009, lawyers that provide loan modification legal services to homeowners are permitted to charge and collect advance legal fees with the written agreement of the client.