Don’t jeopardize your fee

The importance of adhering to statutory and ethical rules regarding attorney’s fees cannot be overstated. Aside from giving rise to malpractice and breach of fiduciary duty liability, the failure to comply with rules governing attorney’s fees can have drastic consequences ranging from State Bar discipline to fee forfeiture. Although there are several statutes and rules of professional conduct that apply to attorney’s fees, lawyers and law firms at a minimum should become familiar with ethical rules related to three subjects: contracting for fees, fairness of fees and collecting fees.

Contracting For Fees

Business & Professions Code section 6147 and 6148 govern fee agreements. Under Section 6147, contingency fee agreements must be in writing and include the contingency fee rate; a statement about how disbursements and costs incurred with the prosecution and settlement of the claim will affect the contingency fee agreement; and a statement about any additional compensation the client could be required to pay the attorney. Unless the contract is for representation of a person seeking damages against a health care provider for professional negligence, the contract also must include a statement explaining to the client that the fee is not set by law but is negotiable between the attorney and client. The failure to comply with any of the provisions of Section 6147 renders the agreement voidable at the option of the plaintiff. For example, if an attorney contracts for a 30% contingency but fails to include the statement regarding the fee being negotiable in the attorney-fee agreement, the fee may be limited to “a reasonable fee” instead of the agreed upon contingency.

Section 6148 applies to most non-contingent agreements. With some exceptions, it requires that any contract for services be in writing and contain the basis of compensation, including rates, fees, and charges; the general nature of the legal services to be provided to the client; and the attorney’s and client’s responsibilities as to the performance of the contract. Failure to comply may render the agreement voidable.

Fairness of Fees

California Rule of Professional Conduct (CRPC) 1.5 prohibits a lawyer from charging an unconscionable or illegal fee. Unconscionability is determined at the time of the agreement (unless the parties contemplate it will be affected by later events). Rule 1.5 provides thirteen factors to be considered. They include, but are not limited to, the lawyer’s conduct in negotiating the fee; the amount of the fee in proportion to the value of the services performed; the amount involved in the representation and the results obtained; the experience, reputation, and ability of the lawyer; and whether the fee is fixed or contingent.

Unlike many other states, California allows for a pure referral fee, i.e., a lawyer may be compensated for referring a matter to another lawyer without requiring the referring lawyer to remain involved in the matter. For pure referral fees or any other matters where attorney’s fees will be split with another lawyer or firm, the handling attorney must enter into a written agreement to divide the fee and advise the client of the division of fees, identity of the lawyers that are parties to the division, and the terms of the division. The client must thereafter consent in writing to the division. Unlike its predecessor, California Rule of Professional Conduct 1.5.1 requires the fee agreement to be in writing and the lawyer to obtain the client’s consent to the fee division either at the time the lawyers enter into the agreement to divide the fee or as soon thereafter as reasonably possible.

California also permits retainer fees. The term retainer fees often is used in two different contexts. A true retainer is an amount paid to a lawyer to ensure the lawyer’s ability during a specified period or on a specified matter that is earned on receipt or non-refundable. Such payments are allowed if the client agrees to the payment in writing after disclosure that the client will not be entitled a refund. The second type of a retainer fee is akin to an advance payment on fees and also is allowed. Advance fees, however, generally must be placed into a client trust account until the lawyer performs the required services or otherwise earns the fee.

A California attorney may charge a flat fee for legal services. Unlike advance fees, a flat fee paid in advance to an attorney may be deposited into the firm’s operating account if the lawyer makes the disclosures to the client required by CRPC 1.15.

Securing and Collecting Fees

An attorney can secure payment of legal fees and costs by obtaining a charging lien against a client’s future recovery. The disclosures required by the attorney regarding the charging lien depend on whether the lien secures an hourly or contingent fee.

An attorney who secures payment of hourly fees by acquiring a charging lien against a client’s future judgment or recovery has acquired an interest that is adverse to the client. As a result, the attorney must comply with CRPC 1.8.1. That rule requires an attorney who acquires an interest adverse to his or her client to do so upon “fair and reasonable” terms, disclose the terms in writing, advise the client of his or her right to seek independent counsel, and obtain the client’s informed written consent to terms of the transactions and the lawyer’s role in it.

On the other hand, a charging lien in an initial contingency fee agreement does not have to comply with CRPC 1.8.1 to create an attorney lien. In reaching this conclusion, a California Court of Appeal relied heavily on a 2006 California State Bar Ethics Opinion, which explained that charging liens in contingency fee agreements were so common and uncontroversial, it would be futile to require attorneys to advise their clients to seek independent counsel to review the fee agreement and lien provision.

This article does not address all ethics issues regarding attorney’s fees. Still, it can be used as a starting point for lawyers and firms to minimize the risk of having to forfeit a fee or attract unwanted attention from the State Bar. Lawyers should review the Rules of Professional Conduct and Business and Professions Code to ensure they comply with any rules specific to their practice.