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April 8, 2006

contingency fees (pt. 4): ethical duties

Filed under: — David Giacalone @ 2:57 pm

This is Part IV of a four-part series on the use of Contingency Fees (also called “contingent fees”) in personal injury (“p/i”) cases.  When properly used, contingency fees can be a beneficial option for the client.  However, this series focuses on the ethical and competitive issues raised by the common practice of using a “standard” contingency fee (often one-third or 40% of moneys received) for virtually all clients — without regard to the risk the lawyer is taking in each particular case of doing the work without receiving adequate compensation.  The standard contingency fee results in many clients paying unfairly high fees that are not warranted by either the work performed or the risk taken by the lawyer.

– Click for Part I (Market failures); Part II (risk matters)Part III (do “standard” fees still exist?); and Part IV (ethical duties) –

SlicingThePie No lawyer should charge a reasonable fee “by accident.” But, that is surely what happens when a p/i firm applies a “standard” or customary percentage rate contingency fee to virtually all of its clients — with the corresponding “accidental” charging of un-reasonable and excessive fees in the remaining cases.

After using some rhetorical barbs and adopting a bit of an editorial attitude in the first three parts of this series, I would like to state in plain English the duties that I believe are called for whenever a lawyer enters into a contingency fee agreement with a client. The goal is to assure that the agreement is appropriate and the fee reasonable, and that the client’s ethical and fiducial rights are preserved. My primary source in constructing these guidelines is Formal Ethics Opinion 94-389: Contingent Fees (1994; not available free online; $$ download from ABA), by the American Bar Association’s Standing Committee on Ethics & Professional Responsibility.

tiny check I choose Op. 94-389, because it persuasively — with no apparent philosophical or political axe to grind, nor financial conflicts of interest — takes into account the ethics history of contingency fee regulation (in Model Codes and Rules, as well as ABA ethics opinions, and legal scholarship), and the modern utilization and economic role of contingency fee arrangements. The result is a balancing of client and lawyer rights that is, nonetheless, true to the profession’s obligation to put the interests of the client first.

The authors of Op. 94-389 refused to condemn all contingency fees merely because the related ethical obligations might often be “honored in the breach.” Instead, the Opinion set as its goal: “reminding the profession of important client safeguards that come into play in the contingent fee area,” with the hope that the incorporation of those client rights in everyday law practice might make use of contingency fees less controversial. It also advised that:

mushroomsG“[A]ny lapse from the applicable requirements by some members of the profession simply suggests that the profession should redouble its efforts to assure that the ethical obligations associated with entering into a contingent fee arrangement are fully understood and observed.”

Asked to address “the circumstances under which the charging of contingent fees could violate either the ABA Model Rules of Professional Conduct (1983, as amended) or the ABA Model Code of Professional Responsibility (1980),” and to apply the principles to several particular situations and fee arrangements, Op. 94-389 appears to be the most comprehensive treatment of the ethics of contingency fees by any modern advisory committee.

Of course, no ethics opinion is of itself binding. But, Op. 94-389, with its uniquely comprehensive scope and respected source, is surely one of the most authoritative sources available. If nothing else, it deserves to be addressed on its merits, rather than ignored, mis-stated, or scoured for supposed loopholes that might justify adherence to financially rewarding practices that seem (to many inside and outside the legal profession) to unfairly enrich lawyers at the expense of their clients.

podiumSN Op. 94-389, and its predecessors (e.g., ABA Formal Opinion 93-373 and
ABA Informal Opinion 86-1521), set forth two basic requirements for the ethical use of contingency fee arrangements: The lawyer must:

(1) fully inform the client of all relevant factors, so that agreements can be entered into knowingly and intelligently; and
(2) treat each case and client separately, when deciding on the appropriateness of the arrangement and the reasonableness of the agreed-upon fee.

The expectation is that the lawyer will make a good faith, professionally-informed estimate of anticipated effort and risk (of non–recovery or inadequate compensation), and explain that evaluation to the client, prior to their coming to an agreement on a contingency fee. Op. 94-389 looks at two major issues: (1) when is it appropriate to use a contingency fee, and (2) when is a particular fee arrangement reasonable.

– Appropriateness –

To the dismay of some of those who brought the issue to the Ethics Committee, Op. 94-389 basically says that a contingency fee may be used in virtually any situation (absent a direct ban, such as for criminal matters, or divorce cases), if the client is fully informed by the lawyer and desires to use a contingency arrangement. We think that makes perfect sense, respecting both the fiduciary relationship and the right of both lawyer and client to enter into contractual relations. In a section of the Opinion titled

C. The Decision by the Client to Enter Into a Contingent Fee Agreement Must Be an Informed One,” Op. 94-389 makes it clear that:

“[R]egardless of whether the lawyer, the prospective client, or both, are initially inclined towards a contingent fee, the nature (and details) of the compensation arrangement should be fully discussed by the lawyer and client before any final agreement is reached.”

The extent of the discussion will depend on several factors, most important of which is “the experience and sophistication of the client with respect to litigation and other legal matters.” For each case, then:

“Among the factors that should be considered and discussed are the following:

a. The likelihood of success;

b. The likely amount of recovery or savings, if the case is successful;

c. The possibility of an award of exemplary or multiple damages and how that will affect the fee;

d. The attitude and prior practices of the other side with respect to settlement;

e. The likelihood of, or any anticipated difficulties in, collecting any judgement;

f. The availability of alternative dispute resolution as a means of achieving an earlier conclusion to the matter;


g. The amount of time that is likely to be invested by the lawyer;

h. The likely amount of the fee if the matter is handled on a non–contingent basis;

i. The client’s ability and willingness to pay a non–contingent fee;

j. The percentage of any recovery that the lawyer would receive as a contingent fee and whether that percentage will be fixed or on a sliding scale;

k. Whether the lawyer’s fees would be recoverable by the client by reason of statute or common law rule;

l. Whether the jurisdiction in which the claim will be pursued has any rules or guidelines for contingent fees; and

m. How expenses of the litigation are to be handled.”

It is no surprise that the enumerated factors go to the extent of a true contingency or risk — how likely is the claim to be successful; how much money is likely to be rewarded (or saved) and actually collected; and how much effort and resources is the lawyer likely to expend on the matter.

SlicingThePieF Like Opinion 86-1521, Op. 94-389 concludes that the choice is the client’s as to whether to use a contingency fee arrangement, after being informed of the above factors, including the likely range of cost on a flat fee or hourly basis. If the fully-informed client wants a contingent fee arrangement, the lawyer and client must come to an agreement on a fee that is reasonable. This topic is mainly covered in Sec. H. of Op. 94-389, but an earlier section gives an important indication of the relationship between reasonableness and risk.

tiny check In Sec. E, of Op. 94-389, the Committee concludes that “as a general proposition contingent fees are appropriate and ethical in situations where liability is certain and some recovery is likely.” However, the Opinion goes on to caution that in situations where the lawyer is likely to add little value to the client’s claim, because an acceptable offer is expected quickly,

“the fee arrangement should recognize the likelihood of an early favorable result by providing for a significantly smaller percentage recovery if the anticipated offer is received and accepted than if the case must go forward through discovery, trial and appeal.”

– Reasonableness of the Fee

In Section H. The Contingent Fee Arrangement Must Be Reasonable, Op. 94-389 clarifies that the reasonableness of the contingent fee depends on the facts of the particular case “judged at the time it is entered into.” Not only are the usual Rule 1.5(a) factors relevant, but (emphases added):

“Additionally, the lawyer must look again at, and discuss with the client, the factors that were considered in reviewing the appropriateness of the fee, discussed in Section C above.”

“We stress that the lawyer should take all these factors into account in evaluating every case. See ABA Formal Opinion 329 (1972).

Therefore, reasonableness must be based on the lawyer’s good-faith assessment of risk, which can be broken into the factors listed above — mainly the likelihood and size of a recovery and the amount of time and money “that is likely to be invested by the lawyer.” Although being diplomatic, the Committee made it clear that the obligation to evaluate each case separately makes the use of a standard fee ethically problematic:

“For this reason, a lawyer who always charges the same percentage of recovery regardless of the particulars of a case should consider whether he is charging a fee that is, in an ethical context, a reasonable one.”

[Ed. note: It is clearly not good enough to look at the Rule 1.5(a) factors, and conclude that the standard contingency fee is reasonable because it is “the fee customarily charged in the locality for similar legal services.” Similarly, ill-conceived is the notion that the lawyer must consider and discuss a long list of relevant factors, but can then simply use the standard fee. Op. 94-389 doesn’t merely state that a contingency fee must be reasonable — it explains how to achieve such a fee.]

Only when the client is brought into the discussion and fully informed of the lawyer’s good-faith evaluation of the case, can we begin to rely on the reasonableness of the resulting contingency fee. However, when the lawyer makes a good faith effort to evaluate a case and fully discuss it with the client, he or she can be confident that the bargain struck will be deemed to be reasonable.

– parting thoughts –

Although we talk about the client’s right to negotiate a fee, we should expect the conscientiously ethical lawyer to suggest a fee that is in line with his or her risk assessment — rather than expecting the client to suddenly become an accomplished negotiator, when faced with the usual standard fee. At a minimum, though, the “discussion” prescribed in Op. 94-389 must encompass fully informing the client and allowing him or her to bargain over the fee rate(s).

It has often been suggested that p/i lawyers can and do make up for the deficiencies of the standard contingency fee by basically rebating or discounting the fee at the back-end of a case.  However, Op. 94-389 (like Model Rule 1.5(a), which says “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee”), correctly assumes that the fee will be structured to be reasonable when the contingency arrangement is entered. No client should have to beg for a discount, attack a signed retainer contract, or be at the mercy of the lawyer’s notion of post-recovery fairness in order to achieve a reasonable fee.

– That does not mean that a p/i lawyer whose case is successfully concluded much sooner than anticipated, or for a lot more money, shouldn’t use his or her own standard of ethics or fairness in deciding to take a smaller fee than called for in a retainer contract. Codes and Rules are minimums, they never stop any lawyer from treating the client better than is required to avoid discipline or a guilty conscience.

Since I first wrote about Op. 94-389 (in my Advocate This! column for the now-defunct Prairie Law website), I have believed that a well-informed public was the most likely cure for the market and ethical failures we see in the use of contingency fees. Back then, I said:

“Until a legislative or regulatory solution arises, consumers will have to educate themselves and each other to assert their rights. It may only take a few price-oriented or rights-oriented ads for real competition to break out among personal injury lawyers.

“Maybe those TV or Internet ads will finally promise, ‘We get you everything you deserve and take only what we deserve’.”

boy writing This website is my attempt to educate both the public and the bar on the issues presented by the standard contingency fee. It would be great if consumers brought The Injured Consumers’ Bill of Rights for Contingency Fees, which we drafted based on the principles in Op. 94-389, with them when interviewing personal injury lawyers. Even better, of course, would be p/i firms handing out the forms to prospective clients.

And see the legal reform group HALT’s Injured Consumer’s Legal Bill of Rights (HALT, The Legal Reformer, December 1997; no longer available at the HALT website).

In a post advising the p/i bar on how to avoid imposition of rules such as the Common Good Early Settlement proposal, ethicalEsq stated back in 2003:

Because the requirements are almost universally ignored by lawyers and their watchdogs, it’s time to follow Op. 94-389’s recommendation that the profession:

“redouble its efforts to assure that the ethical obligations associated with entering into a contingent fee arrangement are fully understood and observed.”

This means creating CLE seminars, articles and brochures, and imposing some actual attorney discipline. Also, it should mean going to the public to let consumers know their rights, because that knowledge will allow clients to protect themselves and spur fee competition among p/i lawyers. To show good faith and effort, mandatory statements of client rights should be promulgated, to ensure that each prospective client has enough information to make a smart choice in bargaining for a fair contingency fee or another arrangement, such as paying by the hour.

The Inquirers who had prompted the issuance of Op. 94-389 made a large tactical error, I believe, after they failed to get an Opinion that would bar the use of contingency agreements in several situations. Like the p/i bar, which ignored the Opinion rather than face the implementation of the required clients safeguards, the Inquirers ignored the Opinion in order to continue their own battles. Had they taken up the Opinion’s challenge to inform the profession and the the public of the requirement to fully inform each client and to evaluate the circumstances of each case, before entering into a fee agreement, it is very likely that far fewer of the kinds of agreements that they dislike would ever be desired by clients. And, the terms of any such arrangements would have been far more favorable to the client. In addition, a better-informed public would have been able, in general, to both better protect themselves in individual cases and to better spur price and quality competition among p/i lawyers.

When lawyers worry about the image of the Bar or the profession, I hope they remember that the public is very likely to react positively to true educational programs (not PR hype telling them how wonderful lawyers are) — information that proves we put the client’s interests first — even when our financial interests are involved.

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