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Nonrefundable Fees And Toxic Fee Provisions

California Joan investigates fee provisions that can lead to lawyer liability

By Ellen R. Peck
© 2006. All rights reserved.

Ellen R. Peck
Peck

“For fifteen years, my clients and I have agreed in writing that $5,000 of my fees are non-refundable and deemed earned when received. Why can’t a lawyer and a client agree to this kind of a provision?” Dan queried, continuing his dialogue with California Joan after returning from his vacation.

“There may be some support for your theory,” Cali conceded, “under Code of Civil Procedure §1021:

“Except as attorney’s fees are specifically provided for by statute, the measure and mode of compensation of attorneys and counselors at law is left to the agreement, express or implied of the parties.

“The legislative policy permits attorneys and clients to contract about attorney compensation, subject to express provisions in other statutes,” Cali said.

“And there are no express statutes or Rules of Professional Conduct that prohibit non-refundable fees,” Dan noted quickly.

“Yes, Dan, and although CRPC 3-700(D)(2) requires that unearned fees be refunded upon termination, it also expressly recognizes that a true retainer is nonrefundable,”  Cali supported Dan’s theory.

“I hear a ‘but’ coming,” Dan winced.

“Yes, the unanswered question is:  Is contracting with a client to deem a fee which is otherwise refundable under CRPC 3-700(D)(2) going to be held void as against public policy, especially since all of the case law has heretofore found some fault with the specific nonrefundable  fees? It is a risk,”  Cali countered.

“Cali, the law has got to go in a different direction! Every time I take a new client, I incur all of the elements of a true retainer:

“First, I become ineligible to represent the opposing party in any, even unrelated, matter during the pendency of my representation of the client. ” Flatt v. Superior Ct. (1995) 9 Cal.4th 275, 284-290,  36 Cal.Rptr.2d 537, 542-546.)

“Second, I become ineligible to represent any party in a substantially related matter adverse to my client for the rest of my career, unless the client consents, which is completely unlikely.” (CRPC 3-310(E).)

“Third, since part of competent performance of legal services involves my application of the diligence reasonably necessary for the performance of the legal services, I have to have the time and resources to complete the matter. This means that I cannot take other clients’ cases, so that I have the time to be diligent with this client.” (CRPC 3-110(A) and (B).)

“Fourth, some part of taking on a new client involves work by me and my staff, which diverts us from working for other clients and earning fees during the time we set up a new client file. These tasks involve but are not limited to setting an initial appointment, having an initial interview, running a conflict check, setting up a new file, working out a fee agreement with the client, and in some circumstances collecting sufficient information to determine whether a lawyer may ethically accept the matter. For example, a lawyer may have to make conflicts disclosures and obtain client consent  (CRPC 3-310 (A),(B)) or to investigate probable cause or whether the claim or defense is warranted under law.” (CRPC 3-200).

When Dan paused to draw breath, Cali interjected, “Yes, and all of these things would support your charging a nonrefundable true retainer. Why can’t you calculate the value of that and charge a true retainer?”

“Quite simply, because clients believe that a nonrefundable true retainer is unfair. They do not perceive they are getting any service for a lawyer taking their case and do not understand the factors I have cited above. They simply will not pay it,”  Dan answered.

“Therefore, given these factors and my willingness to not charge a true retainer, I do not understand why the law cannot support a client/lawyer agreement that some part of my fees for services are nonrefundable,” Dan argued.

“I agree with you that the law should be changed for appropriate nonrefundable fees,” Cali conceded, “but the problem is that the lawyers who are the subject of the cases, and others, take advantage of clients through the use of nonrefundable fees! The perception that nonrefundable fees are abusive creates problems for legitimate use.”

“Cali, I understand that when I accept representation of a client, I have a fiduciary relationship with that client of the highest character.   (Neel v. Magana, Olney, Levy, Cathcart & Gelfand (1971) 6 Cal.3d 176, 189-190[ 98 Cal.Rptr. 837]; Clancy v. State Bar (1969) 71 Cal.2d 140, 146-148 [177 Cal.Rptr. 657].) However, many clients have learned, or learn from their new lawyers ,how to manipulate and abuse the system to take advantage of lawyers. 

“My fellow lawyers and I experience the following scenario: Client X agrees to pay me a nonrefundable fee of $5,000 and also agrees that it is  deemed earned when paid. After I have done some work, it may be half of the value of the $5,000 or all of it, Client changes his or her mind about either the dissolution or wants a different lawyer. Client terminates my services and demands, orally or in writing that I return all of the nonrefundable fee. 

“When I advise the client that I have already earned one-half (and return the one-half that was supposed to be non-refundable) or all of it, the Client says my services are valueless. I state that I will hold the money in trust as is required by CRPC 4-100(A)(2) until we can resolve the matter in fee arbitration under the MFAA (Bus. & Prof. C., §§6200 et seq.). 

“Client rejects fee arbitration, because that costs money and threatens a State Bar disciplinary complaint, which costs no money,” Dan finished.

“And the State Bar would probably investigate your refusal to return an unearned fee under CRPC 3-700(D)(2). But you don’t have to be blackmailed with a State Bar complaint. You would be able to defend yourself by showing that you had earned the fee and get a dismissal,”  Cali exclaimed.

“Cali, for a $2,500 or $5,000 advance fee, I can’t afford to have a State Bar complaint against me, even one that is dismissed, because I can demonstrate that I had earned every penny of the ‘nonrefundable’ fee that I charged. Here’s why:

“First, I would have to prepare a response to the State Bar myself, which takes time from my practice that I could otherwise spend on other client matters earning more fees. I know that some of my colleagues do not take much time, but to do a proper job, it takes about 10-20 hours of my time.

“Second, I could hire a member of the respondent’s defense bar to represent me, but I would then pay that lawyer about the same amount of fees as are challenged and I would still have to put in some time giving my lawyer documents and information.

“Third, by the time that the State Bar dismisses the matter, I have had all of the worry that distracts me from my practice and my quiet enjoyment of my personal life, because I take State Bar complaints so seriously. 

“Finally, even if I get a dismissal, I would still have to expend more time and expense in chasing Client to get some entitlement to take the fees which Client still disputes.”

“Clients and their lawyers know that the cheapest and surest risk management choice for me under the current state of the law, is to capitulate, to pay every penny back, to take the loss and to go on with my life,” Dan sighed, resigned.

“I’m sorry. I agree that that is unfair. But from a risk management position, it is the cheapest choice.”  Cali felt depressed for Dan.

“Cali, thanks for discussing the risks of a nonrefundable advanced fee with me. I will continue to use my ‘nonrefundable-deemed-earned-when-received’ language and I will keep trying to manage the risk by refunding nonrefundable fees when necessary. However, I hope the law changes to provide for the ethical use of a nonrefundable advanced fee.”

Later that afternoon, Cali got a call from Tessa Tort, a personal injury lawyer, who had gone to law school with Cali.

“Cali,” Tessa greeted her former classmate, “I need to hire you to help me with my fee agreement. I  got most of the provisions from experienced and successful colleagues in the personal injury business. Can you look it over and tell me if I have any ethical problem?”

“Sure, Tessa. One of the biggest mistakes innocent lawyers make is in adopting the toxic provisions used by other lawyers, without researching whether the provision is ethically improper or subjects the lawyers to risk of ethical challenges. You might have to revamp your entire agreement,” Cali warned.

“You go, girl!”  Tessa agreed.

Cali telephoned Tessa a week later. Cali explained that she had found a few “toxic” provisions in her fee agreement.

1. “Lawyer and Client agree that lawyer will receive a contingency fee of 35% of all gross amounts recovered by attorney as a result of the representation, whether by settlement, judgment, arbitration award  including medical reimbursement recoveries, medical lien reductions or any award of attorney fees.”

“What’s wrong with a 35% contingency fee?” Tessa asked.

“Nothing. A State Bar Court Review Department case has recognized that a 35 percent contingency fee is not an unconscionable fee per se.” (Matter of Van Sickle (Review Dept. 2005) 4 State Bar Ct. Rptr. 756, 763, rev. gtd, remanded on issue of discipline.)

“The problem is entering into a fee agreement for or collecting a 35% fee of medical payments clients receive from their insurance carrier may be unconscionable if there is no dispute as to the client’s entitlement or the amount of the medical payments. In such cases, where there is no risk, the fee can be so large, in comparison with the slight service performed that the fee may be unconscionable.” (See In re Silverton (2005) 36 Cal.4th 81, 84, fn. 2. 29 Cal.Rptr.3d 766, 768, fn. 2–questioning propriety of lawyer charging a one-third contingency on medical payments received from clients’ insurers where no dispute as to clients’ entitlements or amount; Goldstone v. State Bar (1931) 214 Cal. 490, 499.) 

“You should change the language to charge 35% only for disputed medical payments and a much lower fee for assisting the client with non-disputed medical payments, if you charge any fee at all. These changes should prevent challenges to unconscionability of fees for medical payments,” Cali recommended. 

2. “Client agrees that she will not settle nor dismiss her case without the approval of attorney.” 

“Any agreement between a client and lawyer which prohibits the client from settling the action without the attorney’s consent is against public policy and void. (Calvert v. Stoner (1948) 33 Cal.2d 97, 103.) Dump this toxic provision,” Cali advised.

“Can I change this provision to require that if the client dismisses or settles the case without my consent, the client has to pay me a minimum fee of $5000?” Tessa asked.

“That,” Cali answered, “would also be against public policy because it would constitute a penalty for the client’s unilateral right to control the outcome of the client’s case,” (Hall v. Orloff (1920), 49 Cal.App.745; LACBA Formal Op. No. 505 (2000).). 

3. “Client and Lawyer agree that Client will not substitute in another attorney in place of Lawyer without cause, unless Lawyer consents.”

“What is wrong with that?”  Tessa queried.

“This violates a fundamental public policy of California, since the client’s power to discharge an attorney, with or without cause, is absolute. (Fracasse v. Brent (1972) 6 Cal.3d 784, 790.)

“I’ll dump that toxic provision!” Tessa exclaimed.

4. “Termination of legal services.  Client may discharge Lawyer at any time. Lawyer may withdraw without Client’s consent for good cause.”

“This provision correctly recites that the client has the absolute right to discharge an attorney at any time.  However, it is inconsistent with the ethical requirement of obtaining the court’s permission to withdraw in litigation (CRPC 3-700(A)(1)) or requiring you to take reasonable steps to avoid foreseeable prejudice prior to withdrawing from representation.  (CRPC 3-700(A)(2)). Your provision that ‘Client expressly authorizes Lawyer to substitute out of Client’s case without further notice’ also violates CRPC 3-700(A)(2), which requires a lawyer to give the client notice of termination of employment.”

Cali suggested that Tessa review her fee agreement annually for changes in the law which might make continued use of certain provisions toxic, infecting the entire agreement or creating liability for Tessa.

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.

Certification

  • This self-study activity has been approved for Minimum Continuing Legal Education credit by the State Bar of California in the amount of one hour of legal ethics.

  • The State Bar of California certifies that this activity conforms to the standards for approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education.

SELF-ASSESSMENT TEST

Indicate whether the following statements are true or false after reading the MCLE article on non-refundable fees. Use the answer form provided to send the test, along with a $25 processing fee, to the State Bar. If you do not receive your certificate within four to six weeks, call 415-538-2504.

  1. Unless otherwise unlawful, the measure and mode of a lawyer’s’ compensation is left to express or implied agreement between lawyer and client.
  2. A lawyer may ethically decline a client demand for refund of a true retainer upont termination of the lawyer’s services.
  3. Any part of a fee paid in advance that has not been earned must be refunded promptly upon termination of a lawyer’s legal services.
  4. Lawyer represents Client A against B. During this time, B requests that Lawyer represent B in a completely unrelated matter which involves no confidential information of A. Lawyer can ethically accept B’s representation without obtaining A’s consent.
  5. Lawyer represents Client A against B regarding A’s purchase of Blackacre.  Fifteen years later, Developer hires Lawyer to represent it in the purchase of Blackacre from A.  Because of the passage of time, Lawyer may represent Developer without A’s consent.
  6. Part of competent performance of legal services involves application of the diligence reasonably necessary for the performance of the legal services.
  7. A lawyer has a duty to determine whether a claim or defense to be brought on behalf of a client is warranted under existing law. 
  8. A lawyer that learns that there is no probable cause to bring an appeal and that the client’s objective is to harass the prevailing party may nevertheless file the appeal.
  9. Upon acceptance of an engagement, a lawyer accepts a  fiduciary relationship with a client of the highest character.  
  10. Lawyer charges Client a $2000 advance fee, which Lawyer keeps in a clients’ trust account.  Before Lawyer bills Client for ten hours of work done at $200 per hour on the  matter, Client terminates Lawyer’s services.  After Client demands return of the $2,000. Lawyer is entitled to keep the $2000 in Lawyers trust account pending resolution of the dispute as to whether Lawyer has earned the entire amount.
  11. Clients can be unwilling to initiate a MFAA fee arbitration (Bus. & Prof. C., §§6200 et seq.). to resolve disputes about fees and costs with their lawyers, since it costs additional money to start the process.
  12. Even though a lawyer-client dispute about whether an advanced fee has been earned after termination of the lawyer-client relationship is a fee dispute, the State Bar may investigate whether the lawyer has refused to return unearned fees.
  13. Innocent lawyers can risk of liability and ethical challenges by copying fee provisions from other lawyers’ fee agreements, without researching whether the provisions are ethically proper.
  14. Charging a 35% contingency fee in a personal injury case is unconscionable per se.
  15. A one-third contingency fee for collecting a medical payments a client receives from Client’s insurance carrier may be unconscionable where there is no dispute regarding Client’s entitlement or the amount of the medical payments.
  16. A one-third contingency fee for collecting medical payments from Client’s insurer where the insurer challenges Client’s entitlement or where the insurer challenges the amounts of the medical payments Client claims, may be proper.
  17. Any agreement between a client and lawyer which prohibits the client from settling the action without the attorney’s consent is consistent with public policy and not void.
  18. A fee agreement provision whereby Client agrees that if Client dismisses or settles the case without Lawyer’s consent, Client will pay Lawyer a minimum fee of $5000.00 is not against public policy or void because it does not interfere with the client’s absolute right to control the outcome of the client’s case.
  19. Lawyer can ethically agree to the following provision:  “Client and Lawyer agree that Client will not substitute in another attorney in place of Lawyer without cause,  unless Lawyer consents.”
  20. A lawyer may withdraw from a litigated matter without a client’s consent as long as it is for good cause.
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