Hinshaw & Culbertson LLP
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,
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. §§
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
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.”
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,
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.
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.
For information about other important legal ethics concerns that the COVID-19 pandemic created or sharpened, check out the authors’
Cassidy E. Chivers is a Hinshaw & Culbertson LLP partner whose practice focuses on the defense of lawyers and counseling lawyers and law firms on risk management and ethics issues, as well as law firm formation and registration. Ms. Chivers is speaking at PLI’s upcoming program,
Suzanne M. Walsh is an Associate at Hinshaw & Culbertson LLP. She focuses her practice in defense litigation with particular emphasis on product liability claims.
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