LEGAL ETHICS OPINION 1812 CAN LAWYER INCLUDE IN A FEE AGREEMENT A
PROVISION ALLOWING FOR ALTERNATIVE FEE ARRANGEMENTS SHOULD CLIENT TERMINATE
REPRESENTATION MID-CASE WITHOUT CAUSE
You have presented a hypothetical
in which an attorney who regularly represents plaintiffs in personal injury
cases wants to include the following language in her standard fee agreement:
Either Client or
Attorney has the absolute right to terminate this agreement. In the event
Client terminates this agreement, the reasonable value of Attorney’s services
shall be valued at $200 per hour for attorney time and $65 per hour for legal
assistant time for all services rendered. In the alternative, the Attorney
may, where permitted by law, elect compensation based on the agreed contingency
fee for any settlement offer made to Client prior to termination.
Based on the facts presented, you
have asked the committee to opine as to whether the provision in the third
sentence of that language is ethically permissible and legally enforceable.
First, the committee notes that the issue of legal enforceability would involve
an application of contract law to this provision and, as such, is outside the
purview of this committee. The committee will limit its response to the
question of ethical permissibility. The Committee further limits its response
to situations where the client has terminated the attorney’s services without
cause. While the committee notes that this request does not
specifically ask about the permissibility of the second sentence of the
proposed language, the committee nonetheless will address that provision as
well.
The attorney in this hypothetical
would insert the above language in contingent fee contracts for personal injury
plaintiffs. The proposed language purports to establish alternative fee
arrangements if the client terminates the representation prior to the natural
conclusion of the matter. When a client terminates a contingent fee agreement
before the contemplated services are fully performed, and the fee agreement
does not contain an alternative fee arrangement applicable upon early
termination by the client, the discharged attorney is entitled to a fee based
upon quantum meruit (the reasonable value of the attorney’s services up
to the date of termination). Heinzman v. Fine, Fine, Legum, & Fine, 217
Va. 958 234 S.E. 2d 282 (1977). The Heinzman decision holds that the
discharged attorney, under the circumstances of that case, is not entitled to
recover the contractual contingent fee, but rather the discharged attorney is
limited to recovery on a quantum meruit basis. As noted in LEO 1606,
the Heinzman decision explained that:
When, as here, an
attorney employed under a contingent fee contract is discharged without just
cause and the client employs another attorney who effects a recovery, the
discharged attorney is entitled to a fee based upon quantum meruit
for services rendered prior to discharge…
Heinzman at 964.
The committee notes, however,
that the court in Heinzman did not have before it a termination or
conversion clause of the type presented in your inquiry. Thus, the Heinzman
court did not have an opportunity to consider whether an attorney and
client may properly agree upon alternative fee arrangements in the event the
client elects to terminate the contingent fee agreement before the contemplated
services have been fully performed. However, the Supreme Court did state the
following in Heinzman:
We
agree that, absent overreaching on the part of the attorney, contracts for
legal services are valid and when those services have been performed as
contemplated in the contract, the attorney is entitled to the fee fixed in the
contract . . . .
Heinzman
at 962 (footnote omitted).
While an attorney may consider
including discharge conversion clauses in the contingent fee agreement, he or
she must be mindful of the court’s characterization in Heinzman of
contracts between lawyer and client:
Seldom does a client
stand on an equal footing with an attorney in the bargaining process.
Necessarily, the layman must rely upon the knowledge, experience, skill, and
good faith of the professional. Only the attorney can make an informed
judgment as to the merit of the client’s legal rights and obligations, the
prospects of success or failure, and the value of the time and talent which he
must invest in the undertaking. Once fairly negotiated, the contract creates a
relationship unique in the law. The attorney-client relationship is founded
upon trust and confidence, and when the foundation fails, the relationship may
be, indeed should be, terminated.
Heinzman at 963.
As indicated by this committee in
LEO 1606, Heinzman stands for the proposition that contracts between
attorney and client are unique and not governed solely by principles that
govern ordinary commercial contracts.
Other states’ ethics opinions
have held that a lawyer may ethically include in a contingent fee agreement
what he is to receive as a fee in the event he is discharged by the client. Kansas Bar Ass’n Ethics Op. 93-03 (lawyer may included in contingent fee agreement his
entitlement to a quantum meruit recovery which could include a stated
percentage of the client’s ultimate recovery); Colo. Bar Ass’n Ethics Op. 100
(1997) (lawyer not ethically precluded from using “conversion clause” providing
for alternative fee, so long as the fee charged does not unreasonably interfere
with client’s absolute right to fire lawyer); Miss. Bar Ethics Op. 144 (1988)
(discharge clause entitling lawyer to $60 per hour or 20% of any recovery is
permissible as long as it does not result in an excessive fee); New Mexico Bar
Ethics Op. 1995-2 (1995) (approving contingent fee agreement that proposes a quantum
meruit recovery if lawyer is fired without cause or if client gives lawyer
cause to withdraw); Nassau County Bar Ass’n Op. 90-24 (1990) (discharged lawyer
may charge contingent fee if it is reasonable and represents reasonable value
of services rendered prior to discharge); cf. Kirshenbaum v. Hartshorn,
539 So. 2d 497 (Fla. Dist. Ct. App. 1989) (lawyer loses right to any fee when
contingent fee contract did not specify compensation in event client elected to
discharge lawyer before recovering anything).
The committee opines that such
alternative fee arrangements are permissible in contingent fee contracts so long
as the alternative fee arrangements otherwise comply with the Rules of
Professional Conduct. For example, the alternative fee arrangement must be
adequately explained to the client (Rule 1.4 and 1.5(b)), be reasonable (Rule
1.5(a)), and not unreasonably hamper the client’s absolute right to discharge
his lawyer, with or without cause, at any point in the representation (Rule
1.16).
Given these parameters, the committee believes that when determining
reasonableness, the reasonableness of the alternative fee must be evaluated and
judged not only in the context of when the fee agreement was signed, but also
as of the time that the lawyer’s services were terminated, as well as when the
recovery, if any, was obtained. An example is in order. Client retains Lawyer
A on a one-third contingent fee, with an alternative hourly fee arrangement to
apply if the Client terminates Lawyer A’s services before recovery. After
discovery is completed, Lawyer A concludes that the insurance coverages
available total $25,000.00 and the defendant has no means to satisfy a judgment
in any amount. Given the expenses involved in trying the case and the risks
associated with litigation, Lawyer A recommends to the Client that the Client
accept the defendant’s last and final offer of $22,500.00. The Client not only
rejects the offer, but terminates the relationship with Lawyer A. Employing
the alternative hourly fee arrangement, Lawyer A sends Client a bill for
$20,000.00, which is properly calculated by Lawyer A by multiplying his stated
hourly rate by the number of hours worked on the file. Lawyer A also claims a
lien in this amount on any recovery in the case and notifies Lawyer B, who now
is reviewing the case to determine whether he will represent Client. The
committee believes that while the alternative hourly fee arrangement may have
been reasonable at the time the fee agreement was signed, it is not reasonable
when viewed at the time of discharge. Under this scenario, the alternative
hourly fee arrangement is impermissible and, therefore, Lawyer A would only be
left with a quantum meruit claim.
With these general principles in
mind, the committee will address the second and third sentences of the
alternative fee provision presented in your hypothetical.
Second Sentence of the
Proposed Language
The second sentence states as
follows:
In the event Client
terminates this agreement, the reasonable value of Attorney’s services shall be
valued at $200 per hour for attorney time and $65 per hour for legal assistant
time for all services rendered.
In the committee’s view, this
provision is unclear. The committee cannot determine whether the language is
attempting to establish an alternative contractual hourly fee arrangement or is
attempting to establish an agreed upon hourly rate to be used in employing a
quantum meruit calculation. Rule 1.5(b) requires that the fee arrangement be
adequately explained to the client, preferably in writing. The committee
opines that the second sentence of the proposed language fails to meet this
requirement of Rule 1.5(b).
Furthermore, this provision is
misleading if it purports to establish a quantum meruit fee. An
attorney stating in a fee agreement that a particular hourly rate meets quantum
meruit standards does not in fact make it so. Quantum meruit is a
common law concept, with case law presenting appropriate factors for
determining the fee in a particular case. See County of Campbell v. Howard,
133 Va. 19, 112 S.E. 876 (1922) (discussing the pertinent factors). See
also Virginia Rule 1.5 which sets out the factors used to determine whether
a lawyer’s fee is reasonable. Significantly, neither Howard nor Rule
1.5 employs the attorney’s usual hourly rate or “lodestar” as a factor in
determining the reasonableness of the fee. If an attorney states a rate in the
agreement that would not be reasonable under the quantum meruit concept,
such a provision would be misleading to the client. Rule 1.5 places an
affirmative obligation on an attorney to adequately explain his fee to the
client. While the committee believes that an attorney is not required to do
so, some attorneys may want to advise their clients that if the attorney is
terminated without cause before completion of the attorney’s services, the
attorney will present evidence of her normal hourly rate in determining an
appropriate quantum meruit amount. It is not impermissible for the
attorney to state that her normal hourly rate is $200 an hour, if that is so,
and to indicate to the client that in the event the client prematurely
terminates the representation, the attorney will seek quantum meruit compensation
based on that hourly rate for services performed up to the date of termination.
Unfortunately, the second sentence of the proposed language goes too far and
actually appears to attempt to set an hourly rate for quantum meruit
analysis, which is misleading and, therefore, impermissible.
Based on the foregoing, the
committee opines that the second paragraph of the termination clause in the
proposed contract is improper as it is misleading and fails to fully inform the
client of the basis of the attorney’s fee when a contingent fee representation
is terminated by the client before its completion. See Virginia Rules 1.4 and
1.5.
Third Sentence of the Proposed
Language
The third sentence states as
follows:
In the alternative,
the Attorney may, where permitted by law, elect compensation based on the
agreed contingency fee for any settlement offer made to Client prior to
termination.
The committee is of the opinion
that this provision is likewise improper as it is misleading and fails to fully
and properly inform the client of the lawyer’s entitlement to compensation in
the event the client terminates the representation prior to a recovery from the
defendant. The committee notes that the provision does state that it applies
“where permitted by law.” However, the contract does not explain under what
circumstances law may permit the attorney to elect compensation based on the
agreed contingent fee or any settlement offer made to client prior to
termination. As stated by the Supreme Court in the Heinzman case,
contracts for legal services are not the same as other contracts. The client
actually retains the lawyer for the purposes of explaining the client’s legal
rights and to advise the client as to what actions are “permitted by law.” In
this hypothetical, the lawyer’s contract does not fully explain when the lawyer
would be entitled to elect to receive a contingent fee “where permitted by
law.”
The Committee concludes that the
agreement does not fully and adequately explain to the client the fee
arrangement and, in fact, contains language that, without more, is likely to be
confusing for and misunderstood by the client.
This opinion is advisory only, based
only on the facts you presented and not binding on any court or tribunal.
Committee
Opinion
October
31, 2005