301: Listen and Learn -- Professional Responsibility: Fee Agreements

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You will take the MPRE, which is all about professional responsibility. And if you are in California, you will likely see professional responsibility on your written exam as well. Today we will be talking about fee agreements. So, let's first look at the general rules that a lawyer must follow when entering into a fee agreement with their client. Fees and fee agreements are governed by Rule 1.5 of both the ABA and the California Rules of Professional Conduct.

There are also some statutory rules relevant in California. First, the fees charged by a lawyer cannot be unreasonable under the ABA rules or unconscionable under the California rules. The factors determining whether a fee is reasonable, common to both ABA and

reputation, and ability of the lawyer or lawyers performing the services; and [8] whether the fee is fixed or contingent. Under the ABA rules, the fee customarily charged in the locality for similar legal services and the time limitations imposed by the client or by the circumstances are also relevant factors in determining whether a fee is reasonable.

And under the California rules, these additional factors are relevant in determining whether a fee is unconscionable: [1] whether the lawyer engaged in fraud or overreacting in negotiating or setting the fee; [2] whether the lawyer has failed to disclose material facts; [3] the amount of the fee in proportion to the value of the service performed; and [4] the relative sophistication of the lawyer and the client.

Now that we have an understanding of how to evaluate the amount a lawyer charges for their services, let's look more closely at the rules a lawyer must follow when entering into a fee agreement with their client. There are a few common types of fee agreements that we are going to cover briefly today, but keep in mind that the ABA and California rules cover other issues related to financial dealings with clients that we are not going to discuss today, but that you may see on an exam.

So, how do lawyers typically structure their fee agreements? A lawyer might charge a flat fee for a particular service, regardless of how long the service takes to perform, especially where the work performed is routine for the lawyer. For example, a lawyer specializing in estate planning might charge a flat amount to create a will and living trust for their client.

Lawyers also may charge an hourly rate for their services, which requires the client to pay for the time the lawyer spends on the client's matter. In this type of agreement, a lawyer sets their hourly rate for their services and rates for other expenses related to the representation, and bills the client for those services, usually on a monthly basis. Lawyers also use retainer agreements, which vary in structure.

A retainer can be used to guarantee that the lawyer will be available to take a particular case, to guarantee that the lawyer is on call to handle the client's legal problems over a period of time, or the retainer may be treated like a down payment on legal services that the client will need. And finally, lawyers often use contingency fee agreements. In a contingency fee agreement, a lawyer will only collect a fee if the outcome of the representation is favorable to the client.

Typically, the lawyer's fee is a percentage of the client's final recovery. And if the client's case is not successful, the lawyer does not collect a fee, though the lawyer may require the client to pay certain costs incurred by the lawyer in the case. The type of the fee agreement that is appropriate for a particular client is dictated by the subject and type of representation. Contingency fee agreements are much more restricted than other types of fee agreements.

Now let's talk about the basic requirements of a fee agreement between a lawyer and their client. The ABA rules provide: "The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible, shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer

will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee expenses shall also be communicated to the client." This is Rule 1.5[b]. And for contingency fee agreements: "A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited.

A contingent fee agreement shall be in writing, signed by the client, and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of a settlement, trial, or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated.

The agreement must clearly notify the client of any expenses for which the client will be liable, whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is recovery, showing the remittance to the client and the method of its determination." In California, the writing requirements are found in the Business and Professions Code.

For fee agreements that are not contingency fee agreements, Section 6148 of the Business and Professions Code provides : "In any case in which it is reasonably foreseeable that total expense to a client, including attorney's fees, will exceed $1,000, the contract for services in the case shall be in writing.

At the time the contract is entered into, the attorney shall provide a duplicate copy of the contract signed by both the attorney and the client, or the client's guardian or representative, to the client or to the client's guardian or representative.

The written contract shall contain all of the following: [1] any basis of compensation, including but not limited to hourly rates, statutory fees or flat fees, and other standard rates, fees, and charges applicable to the case; [2] the general nature of the legal services to be provided to the client; [3] the respective responsibilities of the attorney and the client as to the performance of the contract." This is California Business and Professions Code Section 6148, subsection [a].

And for contingency fee cases, Section 6147 of the Business and Professions code

This may include any amounts collected for the plaintiff by the attorney; and [4] finally, a statement that the fee is not set by law but is negotiable between attorney and client, unless the claim is subject to some specific statutory requirements we are not going to get into today. This is from California Business and Professions Code 6147, subsection [a].

So in summary, under the ABA and California rules, a contingency fee agreement must be in writing, and it must include information about how the fee and any expenses will be calculated and deducted from the final award. For all other fee agreements, California requires the fee agreement to be written if the total expenses to the client will be over $1,000. And under the ABA rules, the lawyer is simply encouraged to put the agreement in writing.

As I mentioned earlier, under both the California and ABA rules, there are circumstances in which a lawyer is prohibited from using a contingency fee agreement based on the impact to important constitutional rights and public policy in these types of cases.

Both the ABA and California rules prohibit a lawyer from using a contingency fee agreement for criminal cases or in a family law case where the payment or amount of the fee is contingent upon securing a divorce, or on the amount of child or spousal support, or property settlement in lieu thereof. A contingency fee agreement may be used in a family law matter where the subject or the representation is the recovery of post-judgment balances due under support or other financial orders.

Now let's consider how these rules might show up on a future exam by looking at how a fee agreement has been dealt with in the past. The following hypo is taken from the July 2005 California bar exam: "Lou is a lawyer. While he was having lunch with a friend, Frank, he learned that Frank's sister, Sally, had decided to dissolve her marriage. At Frank's request, Lou telephoned Sally, told her that Frank had asked him to call and offered to represent her.

They set up an appointment for the next day. During the appointment, Lou began the discussion by talking about his fee. Sally told Lou that she had no money, but admitted jointly owning with her husband some art valued at $1 million. Lou agreed to accept a payment of 50% of any assets awarded to Sally in exchange for representing her. Lou and Sally memorialized the agreement in writing." For our purposes, we are only looking at the fee agreement issue presented in this hypothetical.

Of course, when you take the bar exam or any exam, you should address all the issues you see in the question. So, what do you think about this fee arrangement? Has Lou committed any ethical violations with respect to the fee agreement with Sally? The short answer is "yes", but let's look at each aspect of the fee arrangement separately. Here, the fee arrangement between Lou and Sally is a contingency fee agreement, since he is planning to collect a percentage of Sally's final award in the case.

This is Lou's first problem. From our earlier discussion, we know that contingency fee arrangements are not permissible under either the ABA or California rules in family law matters, where the payment is contingent upon a property settlement. Lou has made his fee contingent on the value of the assets that Sally is awarded in her divorce, so this fee agreement is a violation of Lou's ethical duties, and he may be subject to discipline as a result.

It is important to know that at the time this fact pattern was tested, the ABA rules included this prohibition, but the California rules did not include the explicit prohibition against using a contingency fee agreement in a family law matter. When the California rules were updated in 2018, this prohibition against contingency fee agreements for family law matters was added to California Rule 1.5, which now mirrors the ABA rule.

Keep this in mind when you are reading the sample answers for this question posted by the California Bar. Okay, so we know the structure of Lou's fee agreement is impermissible, but what about the amount of the fee? Going back to our earlier discussion, we know that a fee must be reasonable under the ABA rules and not unconscionable under the California rules. Lou plans on collecting 50% of any assets awarded to Sally in the divorce.

Since this fee arrangement is a contingency fee agreement, we obviously can't predict exactly how much Lou's fee would be in this case, but there are a few facts that we can use to figure out the appropriate amount of Lou's fee and to determine whether or not Lou's fee amount is permissible. First, the percentage basis of this fee - 50% - is pretty high.

In cases where it actually is permissible for a lawyer to use a contingency fee agreement, the percentage usually does not exceed one third or 33% of the final award. So just thinking about the fact that this fee is 50%, it already looks like it is an unreasonable or unconscionable fee. We can also infer the minimum amount of the fee that Lou plans on collecting from Sally based on the value of the art, which is Sally's only asset that we have any information about.

Sally has a joint interest with her husband in the art, which is valued at $1 million. The art will likely be part of the community assets, which will be split between Sally and her husband in the divorce. At a minimum, then, the assets awarded to Sally in the divorce will be valued at $500,000, and Lou's fee is 50% of that amount, and that works out to $250,000. Lou could also be seeing dollar signs despite Sally not having any money of her own.

After all, if a couple owns art worth $1 million, they might also have other valuable community property assets. The assets awarded to Sally, and as a result, Lou's fee, might be even higher if that is the case. So, just breaking down the math on this fee probably gives you a gut feeling that a fee that could amount to $250,000 or more for a divorce with only one significant asset is both unreasonable and unconscionable. On an exam though, you'll need to explain why that is.

This fact pattern doesn't tell us a lot about Sally's case or Lou's normal practice. So when analyzing the reasonableness of the fee, you'll need to think about the services involved in a typical divorce case, and whether you can infer anything else about this case from the facts. The facts give us nothing that would indicate that this case is particularly involved or difficult. We don't know anything about Sally's husband or their other assets.

It seems like this divorce case could be as simple as allocating the art or proceeds from the sale of the art between Sally and her husband. We also know that Lou and Sally just met, so there's nothing indicating that a prior professional relationship could justify such a high fee. Looking at the situation as a whole, it appears that Lou's fee is disproportionate to the services he would be performing.

There are no facts to support Lou charging a fee that high, and the fee is probably considerably higher than the fees charged by most other lawyers handling a divorce like Sally's in the same area. In California, the California Supreme Court has also said that an unconscionable fee is one that is so exorbitant and wholly disproportionate to the services performed as to shock the conscience, which is from Herrscher v. State Bar (1935). Lou's fees certainly seems to fit that description.

The last fee-related issue in this hypothetical relates to the writing requirement. The fact pattern tells us that Lou and Sally memorialized the agreement in writing. Finally, Lou did something right, sort of. Since this was a contingency fee agreement, both ABA and California rules required it to be in writing.

The fact that Lou did memorialize the fee agreement in writing would also satisfy the California requirement for non-contingency fee agreements that a fee agreement be in writing when the lawyer knows that the total expenses to the client would exceed $1,000. Either way, putting the agreement in writing wouldn't help Lou avoid discipline for entering into a contingency fee agreement here, or for charging an unreasonable or unconscionable fee. And that's all we have time for today.

We hope that you found this hypo to be a helpful example of how to work through a question that involves a fee agreement. If you enjoyed this episode of the Bar Exam Toolbox podcast, please take a second to leave a review or rating on your favorite listening app. We'd really appreciate it. And be sure to subscribe so you don't miss anything. If you have any questions or comments, please don't hesitate to reach out to myself or Alison at lee@barexamtoolbox.com or alison@barexamtoolbox.com.

Or you can always contact us via our website contact form at BarExamToolbox.com. Thanks for listening, and we'll talk soon!