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.
 |
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.
- Unless otherwise unlawful, the measure and mode of a lawyer’s’ compensation
is left to express or implied agreement between lawyer and client.
- A lawyer may ethically decline a client demand for refund of a true retainer
upont termination of the lawyer’s services.
- 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.
- 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.
- 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.
- Part of competent performance of legal services involves application of
the diligence reasonably necessary for the performance of the legal services.
- 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.
- 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.
- Upon acceptance of an engagement, a lawyer accepts a fiduciary relationship
with a client of the highest character.
- 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.
- 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.
- 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.
- 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.
- Charging a 35% contingency fee in a personal injury case is unconscionable
per se.
- 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.
- 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.
- 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.
- 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.
- 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.”
- A lawyer may withdraw from a litigated matter without a client’s
consent as long as it is for good cause.
|