ATTORNEY CLIENT AGREEMENTS GETTING PAID AND STAYING OUT OF TROUBLE THE ACTUAL CLIENT

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1 ATTORNEY CLIENT AGREEMENTS GETTING PAID AND STAYING OUT OF TROUBLE THE ACTUAL CLIENT James King is a sole practitioner in San Diego, CA and has been practicing law for more than 30 years. His trial testimony as a legal expert has been praised by juries and judges for his unique ability to distill complex legal issues into understandable concepts. A graduate of Stanford Law School (Order of the Coif, Law Review), Mr. King has consistently qualified as an expert whenever his testimony has been offered. Jim's practice is focused on the following areas: Legal Ethics Attorney Fee Disputes Standards of Practice in Litigation and Trials Legal Malpractice and Professional Liability Attorney Professional Responsibility. He can be reached at jking1737@gmail.com or (858) DISCLAIMER: The following materials and accompanying Access MCLE, LLC audio program are for instructional purposes only. Nothing herein constitutes, is intended to constitute, or should be relied on as, legal advice. The author expressly disclaims any responsibility for any direct or consequential damages related in any way to anything contained in the materials or program, which are provided on an as-is basis and should be independently verified by experienced counsel before being applied to actual matter. By proceeding further you expressly accept and agree to Author s absolute and unqualified disclaimer of liability. 1

2 TABLE OF CONTENTS A. The Fee Agreement Statutory Requirements B. Relevant Common Law, or Practice, Rules or Considerations C. Effect of Fee Agreements D. Multiple Clients E. Pre-signed Substitution of Counsel F. Modifications of Attorney Client Agreements 2

3 A. The Fee Agreement Statutory Requirements: These vary from state to state; they are usually explicitly addressed. In California, B & P Code 6146 governs medical malpractice cases, B & P Code 6147 contingent fee cases, and B & P Code 6148 governs hourly rate cases. For other jurisdictions, consult applicable statutes, see also ABA Model Rules of Professional Conduct, Rule 1.5 (Fees); Restatement Third, the Law Governing Lawyers, Section 18 (Client-Lawyer Contracts). In general, under these statutes, the agreement must state: 1) The Scope of the Representation. Pointer Make sure you state what you are not handling. For example, a litigator will (and should) usually disclaim tax advice; a transactional lawyer will disclaim litigation; and a contingent fee agreement may provide that the attorney is retained to prosecute the case through judgment, but a new agreement would need to be made for any appeal. Joseph E. Di Loreto, Inc. v. O Neill (1991) 1 Cal.App.4 th 149. It is in the lawyer s interest to be as narrow as possible. However, if drafted too narrowly the limitation on scope may be invalidated as either creating an illusory retention agreement, or constituting an unethical waiver of potential legal malpractice claims. 2) Fees Pointer Be as clear as possible and handle all foreseeable possibilities. 3) How costs are handled. Pointers In a contingency situation, the dispute is usually whether the attorney s percentage is calculated based upon the overall recovery, or the recovery net of costs. Obviously, it is better for the attorney to take his/her percentage from the overall recovery. The agreement must clearly set this forth. It is best to use an example in the agreement. 4) In a contingency situation, in at least California the agreement must state that the fee is negotiable, or is covered by Section 6146 (if medical malpractice). 5) A requirement that the fee agreement disclose the existence, or lack, of legal malpractice insurance, has gone into and out of the California rules. This is an example of the need to stay current with them and a good reason to have the insurance and disclose it in any event. 6) All applicable rules (e.g., ABA 1.5; see above for the California Rules) require periodic bills that clearly state their bases. The best practice is to send the bills monthly. It is key to avoid sticker shock, which is more likely to occur when bills pile up for a few months. 3

4 B. Relevant Common Law, or Practice, Rules or Considerations. 1) A provision giving the attorney the right to withdraw at will is enforceable. Ramirez v. Sturdevant (1994) 21 Cal.App.4 th 904. Pointer it is critical to have such a provision in your agreement. 2) Any lien, to be enforceable, must be expressly stated. Also, at least in California, it is an interest adverse to the client Fletcher v. Davis (2004) 33 Cal. 4 th 61, and hence the attorney must comply with the applicable conflicts rules. (Cal. Rule Prof. Conduct 3-300). Pointers This should be in any fee agreement certainly any contingency fee. (Although counsel for a defendant rarely thinks of a lien, it should be in an hourly, defense agreement as well. There may be an award of costs, or possibly fees, in such a case and you want a right to access them.) Also, make sure if you need to use it (i.e., if you withdraw), it is promptly filed in the court file. 3) In an hourly case, for annual rate increases to be valid, the existence of them needs to be expressly agreed and notice in at least California. Severson & Werson v. Bolinger (1991) 235 Cal.App.3d ) In California, provisions in a fee agreement which require binding arbitration of both fees or malpractice claims (after the client exercises its rights to nonbinding arbitration under the Mandatory Fee Arbitration Act) are valid. Allen Matkins Leck Gamble & Mallory LLP (2009) 45 Cal. 4 th 557. C. Effect of Fee Agreements 1) A written fee agreement is valid unless it is unconscionable. Relevant considerations are set forth in C.R.P.C Look primarily at the attorney s expertise, rates for equivalent services in the relevant community, non-refundable retainers (which are generally the State Bar finds to be utterly improper). Evidence of over-reaching would be unusual provisions such as liens on cars, trust deeds, or other interests adverse to the client (especially if they fail to comply with RPC 3-310). Incidentally, entry into an unconscionable fee agreement, alone, is a valid basis for State Bar Discipline. Note also that the determination of unconscionability is reached at the time that the agreement is formed, not in hindsight at the time of dispute. American Software, Inc. v. Ali (1996) 46 Cal.App.4 th 1386 (1996). 2) There is a split in law in different states as to whether an attorney who has charged an unconscionable fee is even entitled to collect a reasonable fee.. Compare New York N. H. and H. R. Co. v. Iannotti 567 F.2d 166 (2d Cir. 1977); Chicago & West Town Railways v. Friedman 230 F.2d 364 (7 th Cir. 1956); In re: Eastern Sugar Antitrust Litigation 697 F. 2d 524 (3d Cir. 1982) w/ White v, McBride (Tenn. 1996) 937 S.W.2d 796; Rice v. Perl (Minn. 1982) 320 N.W.2d 407; White v. Roundtree Transport, Inc. (Fla. 1980) 386 So. 1287; Maritrans v. Pepper, Hamilton & Scheetz (Pa. 1992) 602 A.2d 1277; In re: Estate of Lee (1943) 214 Minn. 448 (1943). 4

5 3) It is legitimate to have a classic retainer, by which the attorney is paid simply to be available. These are rare. They are earned when paid, and are not segregated The agreement providing for such a retainer must be clear, and must go beyond stating that the retainer is nonrefundable, or the attorney may be disciplined for retention of unearned fees. California law on point is Matthew v. State Bar (1989) 49 Cal.3d 784; Baranowski v. State Bar (1979) 24 Cal.3d ) The more common retainer is really an advance. There is no such thing as a nonrefundable retainer. Unearned amounts must be refunded at the termination of the attorneyclient relationship. Pointers the attorney should try to have either an evergreen retainer, by which the retainer is always kept at a certain point (see T & R Foods, Inc. v. Rose (1996) 47 Cal.App.4 th Supp. 1), or have the client agree to fund the retainer to a certain point at a specified day prior to trial (i.e., 45 days before the Trial Readiness or Pretrial Conference). The agreement should provide that the attorney may seek, and the client will not oppose, immediate withdrawal if the client fails to honor this agreement. But be aware that if the client fails to do so, however, the Court might hold that withdrawal is not allowed because it would be too prejudicial at that time. - the attorney needs to have the agreement specify that the client s initial retainer is a condition precedent to any representation. If not, the client can argue that the retainer provision is a separate covenant. In that case, the attorney s fiduciary status arises upon signing the agreement, regardless of whether the client has paid the retainer. If the client has not paid, the attorney must do whatever work is necessary to protect the client, and then sue the client for failure to make the retainer (yet the attorney may not violate the attorney-client privilege in doing so?!). See Bernstein v. State Bar (1990) 50 Cal.3d do not take trust deeds, liens, etc. If you must take them, comply with RPC to the letter. Even if you take them at the start of the attorney-client relationship, you are taking an interest adverse to the client, and entering into a transaction which is expressly disapproved by the California Supreme Court. Hawk v. State Bar (1988) 45 Cal.3d ) The failure to have a valid written fee agreement allows the attorney to receive no more than a reasonable fee. However, even with a written fee agreement, the attorney is not allowed to charge a fee above that which is reasonable. Calif. State Bar Arbitrator Advisory (1993); also State Bar Arbitration Advisory (1998). The bases of this rule are the implied covenant of good faith and fair dealing, as well as the attorney s fiduciary status. Thus, it seems that the only true effect of a written fee agreement is to establish a presumption in the attorney s favor that the attorney s time is worth the agreed rate, and arguably the client might have the burden to show that the fees billed were unreasonable. 5) Attorney-client fee agreements are strictly construed against the attorney. Alderman v. Hamilton (1988) 205 Cal.App.3d

6 D. Multiple Clients 1) In all cases in which there are more than one client, including an individual and that individual s wholly-owned corporation, there is at least a potential conflict. 2) It is ethically required that the existence of such conflict be disclosed to the clients and waived. 3) If the conflict is not waived, the attorney s ability to recover fees is jeopardized. The most recent case summarizing the older ones and being a Ninth Circuit case would carry weight anywhere 4) If there is an actual conflict, the attorney cannot represent both clients. No waivers can suffice. 5) In the multiple client situation, there is also a conflict between the fiduciary duties of full disclosure and confidentiality. Hypothetical: Attorney represents clients A and B, who have no actual conflict. Then, just before depositions, client A tells the attorney something relevant to the case, but tells the attorney that it is told in confidence and the attorney may not tell anyone. At this point, the attorney has conflicting duties: an absolute duty of full disclosure (a fiduciary duty) to client B, yet an absolute duty (as an attorney) of confidentiality to client A. Pointers the conflict waiver should also state that both clients agree that if they tell something to the attorney in confidence it will not be disclosed to the other client, although merely stating that may itself create an actual conflict which forces the attorney to withdraw. (Alternatively, the agreement could say that anything said by either client to the attorney may, under all circumstances, be disclosed to the other client but that might inhibit the representation.) - The conflict waiver may state that in the event of an actual conflict, the attorney may still represent a particular client. (Note that this may not be enforceable, particularly if challenged by the other client. But since it was entered into while everyone was at arms length, there is a good argument that it is valid.) 6) Where a person or entity other than the client is paying the attorney s fees, the attorney needs to disclose that fact to the client and obtain the client s approval. There is arguably a potential conflict in such a situation. 6

7 F. Pre-signed Substitution of Counsel 1) This occurs when the attorney, at the start of the representation, has the client or potential client sign a substitution of counsel allowing the attorney to substitute out of the case, and substituting in pro per, with the agreement that it will not be used immediately but the attorney will keep it and has the right to use it to leave the case under certain circumstances. 2) This is ethically highly questionable and should be done rarely, if at all. 3) To be subject to a strong argument of legitimacy, the presigned substitution should: (1) have been entered into while the parties were at arms length; (2) the terms of the substitution should be fully stated and signed separately from the fee agreement; (3) it should provide for specific events and timing for its usage, which are reasonable. The events should probably disallow attorney discretion (i.e., if the client fails to pay within 5 business days of receiving the bill, the attorney will (not may) present it to the Court; (4) full disclosure should be made to the Court to avoid the argument that the attorney is misleading the Court by implying that the client now agrees to this withdrawal. (This is also the reason why the terms of the filing of the substitution should be separate from the fee agreement, as those terms can be shown to the Judge in camera whereas the fee agreement may be privileged.) 4) A key point is to avoid the doctrine that an attorney should not be able to take any action adverse to the client without judicial scrutiny. Hawk v. State Bar (1988) 45 Cal.3d 589. E. Modifications of Attorney Client Agreements. 1) First, the common law of fiduciary duty creates a presumption against the attorney. Probate Code Section 16004; Ramirez v. Sturdevant (1994) 21 Cal.App.4 th ) Second, any change in fee structure or status is an interest which the attorney takes adverse to the client. Hence, RPC applies. Under that rule, any modification must (1) be fully disclosed in writing in a manner which the client should understand; (2) the client must be advised of his/her right to independent counsel to review it and be given a reasonable opportunity to consult such counsel; (3) the client must consent in writing; and (4) in hindsight, the transaction must be fair to the client. Pointers even where an attorney is revising a fee agreement to benefit the client, these rules apply. - the attorney may want to actually hire the independent counsel. (Similar to paying for adverse counsel for a prenuptial agreement.) 7