These are turbulent times. Like many businesses and individuals who are struggling to pay bills and stay afloat, clients may also be struggling to pay fees. Pursuing a fee claim under these circumstances would be problematic for a variety of reasons. Aside from the obvious destruction of the business relationship, fee claims typically elicit cross-claims for malpractice and breach of fiduciary duties. Before burning bridges, consider whether your fee agreement can be ethically renegotiated under terms that you and your client can both live with.
Generally, a lawyer and client may renegotiate a fee agreement during an existing relationship. The timing of payment may be modified, you may agree to reduce your hourly rate or switch from an hourly to a flat or fixed fee. Whatever the new arrangement, the lawyer typically carries the burden of establishing fairness of the new arrangement if it is ever challenged. See, ABA Form. Opn. 11-458.
As with the initial fee agreement, lawyers should also consult their state’s rules governing the form of fee agreements. For example, in California, the agreement must be in writing in contingency fee cases, and in non-contingency fee cases where the client is not a corporation and it is reasonably foreseeable that the total fee and expenses will exceed $1000. See, Cal. Bus. & Prof. C. §§6147; 6148. Any rules that apply to the form of the fee agreement will apply to the modification. At the very least, the modification should be in writing, and signed by the client.
Compliance with conflict of interest rules may be required. Fee renegotiation may also create the appearance of a conflict of interest and compliance with your state’s version of ABA Model Rule 1.8 may be required. Generally, the provisions of Rule 1.8 govern specific circumstances in which a conflict of interest may arise in the attorney-client relationship. Paragraph (a) provides that a “lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless” certain disclosure and consent requirements are met. A fee renegotiation may fit within this category. For example, you and the client may agree that in lieu of payment of fees, the client will give you an interest in real estate, security or other property. This is, essentially, a business deal with an existing client governed by Rule 1.8(a). See also ABA Form. Opn. 02-427. The transaction is prohibited unless: (1) the transaction and terms are “fair and reasonable to the client and are fully disclosed and transmitted in writing” in plain language; (2) the client is advised in writing about the desirability of consulting with independent legal counsel and given the opportunity to do so; and (3) the client signs and gives informed written consent to the essential terms of the transaction, including whether the lawyer is representing the client in the transaction.
As a matter of good risk management, a best practice is to comply with Rule 1.8(a) on any significant fee modification because it may be closely scrutinized. “Given the economic turmoil of the times, such modifications may occur with increased frequency. While attorneys are free to bargain for the terms of their engagements at arm’s length before the commencement of the relationship, there is a quantum change in the attorney’s ability to bargain once the fiduciary duties of counsel are assumed.” Cal. State Bar Ethics Alert (June 2009).
Contingency fees. Note that Rule 1.8(a) typically does not apply to contingency fees. Thus, if you switch from an hourly to a contingency fee, it must be in writing and signed by the client, but may not constitute a pecuniary interest adverse to a client. However, lawyers should consult their state’s rules of professional conduct and statutes.
Compliance with other ethical rules may be required depending on how the fee agreement is restructured. For example, if you switch to a flat fee arrangement, and the client pays before those fees are earned (e.g., you have not yet performed legal services), most states’ rules of professional conduct require that the fee be deposited into a client trust account rather than an operating account. See, ABA Model Rule 1.15(c). In California, advance flat fees may be deposited into an operating account if: (1) written disclosure is made that the client has a right to require the flat fee be deposited in a trust account until earned and that the client is entitled to a refund of unearned fees if the representation is terminated or not completed; and (2) if the flat fee exceeds $1,000, the client’s agreement to deposit the flat fee in an operating account, and the disclosure, are in writing.
The client may need a loan to pay fees. If the lawyer is the lender, this arrangement would require compliance with Rule 1.8(a) because it is, essentially, a business deal with the client. If the lawyer is not the lender, compliance with Rule 1.8(a) may not be required provided the lawyer: (1) did not handle the loan transaction or otherwise provide legal advice or representation regarding the transaction; (2) did not receive a referral fee ;and (3) has no undisclosed business or personal relationship with the lender or loan broker. See, Cal. State Bar Form. Opns. 2002-159; 2002-140.
The client may look to a third-party to pay fees. ABA Rule 1.8(f) provides that “a lawyer shall not accept compensation for representing a client from one other than the client unless: (1) the client gives informed consent; (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and (3) information relating to representation of a client is protected as required by Rule 1.6 [confidentiality].” Thus, third-party payment of fees is possible with proper client consent, as long as the payor does not interfere with the lawyer’s professional judgement and is not part of the attorney-client relationship. There should be two agreements: one with the client consenting to the arrangement and one with the third-party payor, containing the terms of payment and disclosure that the third-party payor is not a client.
Termination. Ultimately, you (and the client) may come to the conclusion that continuation of the representation is not economically feasible. Among other tasks in terminating the representation, you need to return any unearned fees to the client. If there is a dispute between what has been earned versus unearned, then the disputed portion of the funds should be safeguarded in a separate trust account until the dispute is resolved.
No one knows how this pandemic will turn out, but change brings with it both risk and opportunity. Unforeseen challenges will continue to present themselves, and attorneys must be ready to adapt to the new environment while complying with rules developed in the old environment. By using the resources available, and keeping in mind existing duties and obligations, lawyers can navigate these challenges and come out the other side with a more efficient, effective business model.