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Ethics of Attorneys Fees
MCLE Self Study
Ethics of Attorneys Fees
By Gerald G. Knapton

Edited by Barbara Kate Repa


Ethics is the study of the general nature of morals and of the specific moral choices a person must make. In our context, it is the rules and standards governing the professional conduct of lawyers. This article explains how those rules and standards apply to the fees lawyers charge.

California has developed a body of law that reduces or denies fees for certain serious breaches of its Rules of Professional Conduct (RPC). Though this delivers a just result in many instances, some clients are likely to exploit this opportunity, so it is prudent to learn about and comply with the legal dictates.

The Initial Agreement
Before creating an attorney-client relationship, it is worthwhile to put some effort into identifying and waiving conflicts and clarifying how charges will be calculated. First, setting out the role of counsel and how charges for services will be made will avoid a great many problems. Also, the negotiations at the outset of the relationship are less suspect and the terms more likely to survive a legal challenge than arrangements made long after a relationship is formed.

At the start of the discussions, the lawyer-client relationship is generally considered to be "at arm's length." (Setzer v. Robinson, 57 Cal. 2d 213, 217 (1962) (based on Civil Code § 2235) and Baron v. Mare, 47 Cal. App. 3d 304, 311 (1975).) As a result, an attorney has limited obligations to advise a prospective client about the proposed fee agreement and, because the attorney is not on both sides of the transaction, the presumption of undue influence under California Probate Code section 16004 (and its predecessor, Cal. Civ. Code. section 2235) does not apply. (Ramirez v. Sturdevant, 21 Cal. App. 4th 904, 917 (1994).)

However, for a business transaction with a client or securing payment of a past or future fee, Rule 3-300 will apply to the initial fee agreement and any subsequent modifications. It requires that the client must be informed in writing of:
1. terms that are fair and reasonable in a manner he or she should reasonably understand, and
2. the possibility of seeking the advice of an independent lawyer of choice, along with a reasonable opportunity to seek it.

The client must also consent in writing to the terms of the transaction or acquisition.

Regardless of the timing and wording of the retainer agreement and whether or not outside counsel was consulted, all fee agreements must be in keeping with RPC 4-200, which states simply that an attorney may not charge an unconscionable fee. The unconscionability test of Rule 4-200 is whether it "shocks the conscience." (Tarver v. State Bar, 37 Cal. 3d 122, 134 (1984).) The eleven factors that may result in a fee being deemed unconscionable are enumerated in Rule 4-200. (Serrano v. Priest, 20 Cal. 3d 25 (1977).) The most important items on that list are: value for money, amount in dispute, results, and time involved. An attorney's lien for fees must be in writing and in compliance with RPC 3-300, (Fletcher v. Davis, 123 S. Ct. 289 (2004).)

The unconscionability determination is based on the facts that exist when the fee contract is formed, not whether it is unconscionable in light of subsequent events. (American Software, Inc. v. Ali, 46 Cal. App. 4th 1386 (1996).) Charging an unconscionable fee may be grounds for disbarment or a finding of moral turpitude. (Blair v. State Bar, 49 Cal. 3d 762 (1989).) Taking a fee without performing services also is dishonest and can result in discipline. (Hulland v. State Bar, 8 Cal. 3d 440 (1972).) Attorneys must repay a fee taken under such circumstances. (In re Fountain, 74 Cal. App. 3d 715 (1977).) At the termination of the relationship, the unearned portion of an advance fee must be promptly refunded. (RPC 3-700 (D)(2); In re Roger M. Lindmark, 2004 DJDAR 3514 (#00-O-12736, 3/15/04).)

Fee agreements are evaluated based on conditions and matters reasonably foreseeable when they are made and must be "fair, reasonable, and fully explained to the client." (Alderman v. Hamilton, 205 Cal. App. 3d 1033, 1037 (1988).) An "utmost strictness" standard is used to scrutinize for any unfairness. (Hunniecutt v. State Bar, 44 Cal. 3d 362, 372 (1969).)

Any ambiguities in a fee agreement are construed against the lawyer. (Hollingsworth v. Lewis, 93 Cal. App. 526, 528 (1928). This rule of construing against the drafter applies with extra force when it is the attorney's own contract. (Mayhew v. Benninghoff, 53 Cal. App. 4th 1365, 1370 (1997).) An attorney has a professional responsibility to ensure that a fee agreement is neither unreasonable nor written in a manner that may discourage a client from asserting any rights against the attorney. (Ojeda v. Sharp Cabrillo Hosp., 8 Cal. App. 4th 1, 14 (1992).)

The Rules, Illustrated
A number of cases help illustrate how rules on the ethics of fees are applied.

OK I Am For Sale
The violation in the Cal Pak case is probably about as egregious as one could devise. It arose out of an attorney's offering to "sell out" his client and an entire class of plaintiffs for a payment of $8 million to $10 million to the lawyer; the class would get nothing. After rejecting this proposal, the opposing litigant moved to disqualify the lawyer and got an order barring him from receiving class action fees either before or after this ethics violation.

The First Appellate District upheld the disqualification because the violation of duty "shakes the foundations of the judicial process." Though the court does not specifically refer to any of the RPC, it based its holding on the breach of the duty of loyalty, the conflict of interest over the payment of fees (see, RPC 3-300, Avoiding Interests Adverse to a Client), and the breach of the fiduciary duty to the client. The appellate panel denied fees for work done after the violation. But because the underlying class action was not resolved, the panel reversed as premature the part of the trial court's order precluding the lawyer from collecting fees for three years of work performed before the violation. So this lawyer might conceivably get some fees, since even such extreme conduct would not reach back to bar a claim, at least not as a matter of law. (Cal Pak Delivery, Inc. v. United Parcel Serv., Inc., 52 Cal. App. 4th 1 (1997).)

I Can Show You The Money
In A.I. Credit, the lawyers accepted a collection case on a contingency fee basis against a former client. The client moved to have the firm disqualified due to a conflict of interest because the lawyers had confidential information on the client's assets-information likely to be of much use in a collection case. There were two theories for the disqualification. The first was RPC 3-310(E), which states that unless a lawyer has a client's informed written consent, he or she shall not "accept employment adverse to the client or former client where, by reason of the representation of the client or former client, the member has obtained confidential information material to the employment." The second argument for disqualification was based on the "corrupt motive of passion or interest" to encourage the lawsuit. (Cal. Bus. & Prof. Code § 6068 (g).) The trial court granted the disqualification motion. After this ruling-using other lawyers-the client and the creditor settled the dispute for $675,000.

The disqualified lawyers then sought a $213,000 fee (one-third of the settlement amount) from the former client, and this was litigated in a second lawsuit. The client's motion for summary judgment was granted on the grounds that an attorney disqualified due to a conflict of interest is not entitled to any fees after the breach. The lawyers had not contested the order in the first suit to disqualify them but sought to have evidence heard in the second suit on the claimed ethics breach and thereby avoid the preclusive effect of the ruling in the first suit that occurred after the firm was out of the case and had no opportunity to contest the finding. The court held that the lawyers "cannot argue now that there was no evidence that an ethical violation occurred" and should have appealed the order in the first lawsuit, because they had standing to do so. The court also found that the record demonstrated that the disqualification in the first lawsuit was due to a serious conflict of interest based on the lawyer's disclosing confidential information about the client's assets, and was "no mere technical violation of ethical rules asserted after the fact." Because no services were rendered before the violation, no fees were proper. (A.I. Credit Corp., Inc. v. Aguilar & Sebastinelli, 113 Cal. App. 4th 1072 (2003).)

No Harm, No Foul
Pringle is a Second Appellate District opinion based on a claim for attorneys fees by counsel to a corporation and two of its officers. The company did not have an appropriate person sign a conflicts waiver (RPC 3-310), but the corporation did not raise that point. The technical but valid problem was asserted only by the CEO, who had signed off on a conflicts waiver as an individual-and was then sued for fees. The jury found the waiver procedure acceptable and awarded fees against the individual. Affirming the award, the panel reviewed the seminal case of Clark v. Millsap (197 Cal. 765 (1926)) and concluded that there was no case law holding that a violation of RPC automatically precludes an attorney from obtaining fees. Rather, there must be a serious violation of the RPC causing some harm to the client before fees are forfeited, and such harm had not been shown here. (Pringle v. La Chapelle, 73 Cal. App. 4th 1000 (1999).)

In Huskinson & Brown v. Wolf (32 Cal. 4th 453 (2004)), the court considered a dispute between two lawyers in which the client was not involved in any way and the lawyers might get nothing, a substantial fee if the written agreement between the lawyers was honored, or perhaps-and very probably-a much lower amount if the fee was determined on a quantum meruit basis. A unanimous court reviewed the opinions that disallowed fees because of violations of the RPC. But it remanded for a determination of the quantum meruit fee because the rule that was undoubtedly violated, RPC 2-200, entitled Financial Arrangements Among Lawyers, did not involve "violations of a rule that proscribed the very conduct for which compensation was sought, i.e., the rule prohibiting attorneys from engaging in conflicting representation or accepting professional employment adverse to the interests of a client or former client without the written consent of both parties." That appears to be a new "no harm to the client and some harm only to counsel-who should know better" standard with a new formulation and test for disallowing all fees in some circumstances.

Fraud or Unfairness Wellspring
The basis for all these opinions is the early case of Clark v. Millsap, which arose from a "hide the assets" case in which an attorney took an assignment of assets and then refused to return the client's property after the threat to levy on those assets had passed. The court held, "Fraud or unfairness on the part of any attorney will prevent him from recovering for services rendered; as will acts in violation or excess of authority, and acts of impropriety inconsistent with the character of the profession, and incompatible with the faithful discharge of its duties."

No Benefit Of The Bargin
Although the RPC are not supposed to create new causes of action, it is clear that they often do affect the right to fees. There are currently 43 RPCs to consider. Those that concern the professional and financial relationships between lawyers and clients are so fundamental to the services to the client that breaches are similar to per se violations of law and are not subject to a separate serious qualification. Even entirely interlawyer rules are at risk. For example, Chambers v. Kay (29 Cal. 4th 142, 156 (2002)), interpreted RPC 2-200 to be a complete bar to a claim under a written, fee-sharing agreement between lawyers not signed by the client even though the client would not pay any of the fees and knew about the division agreement between her lawyers. The court held, "Rule 2-200 unambiguously directs that a member of the State Bar 'shall not divide a fee for legal service' unless the rule's written disclosure and consent requirements and its restrictions on the total fee are met. Yet Chambers, in effect, seeks the aid of this court in dividing the fees of a client without satisfaction of the rule's written consent requirement. We decline such aid." The proposed agreement was held invalid, but this same court two years later allowed a quantum meruit claim under similar circumstances because the fees sought were not for the very activities prohibited by the RPC. Though it might be appropriate to deny the firm the benefit of the bargain, it was not fair to deny all fees by a perhaps less generous method. (Huskinson & Brown v. Wolf, 32 Cal. 4th 453 (2004).)

Defending in the Future
During the past few years the courts have indicated that attorneys fees can be reduced or eliminated for serious or per se ethics violations. With the recent statutory amendment allowing attorneys to disclose confidential information to prevent some criminal acts (Cal. Bus. & Prof. Code § 6068), the new Model Rule 1.13 of the American Bar Association on "reporting up or out," and the advent of Sarbanes-Oxley reporting, more attorney-client conflicts are certain.

If you find yourself in the unhappy position of defending yourself on this issue, be ready to waive the claim for fees after a serious violation, but you may be able to collect the reasonable charges up to the time of the breach. And you may be able to avoid any reduction if the violation was minor and technical-not serious and not for work that directly conflicts with certain Rules of Professional Conduct.

Finding the Rules
The most important blackletter sources for ethics rules governing attorneys fees in the state are the California Rules of Professional Conduct and State Bar Act (Cal. Bus. & Prof. Code § 6000-6238.) Secondary sources include the State Bar and local bar association ethics opinions. The Committee on Professional Responsibility and Conduct and the State Bar Committee on Mandatory Fee Arbitration also periodically offer opinions on ethics and fee issues. These are available online at www.calbar.ca.gov.

Attorneys may also call the State Bar's ethics hotline, which strives to respond to ethics questions within one hour, 9 a.m. to 5 p.m. (Pacific Time) on weekdays at 800/238-4427 within California or 415/538-2150 outside California.

Gerald G. Knapton, a partner at the Los Angeles office of Ropers, Majeski, Kohn & Bentley, has testified many times as an expert on legal fees and ethics.

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