Contingent Fees

Lawyers in Musk compensation case request approximately 29 million Tesla shares – valued at over $5 billion – to cover legal fees.

Michael 1 Comment

This post is an exercise in procrastination.

Do I want to blog about contingent fees on a Saturday morning?  

No, I don’t.  I’d rather go for a run.

Indeed, a few minutes ago, I set out to do just that: run.  However, 0.08 miles into the effort, I stopped and walked home.  I gave up because of the wind.  It’s currently blowing 18 MPH and, of all the weather conditions, “very windy” is one of my least favorites in which to run.

But if I don’t run today, there’s no way I can skip tomorrow’s run.  And, unfortunately, tomorrow looks windier than today, along with a side of “cold rain,” a combination that ranks even lower on my list than “very windy.” So, here I sit, trying to convince myself that posting a blog will somehow get me in the mood to run in today’s wind instead of tomorrow’s wind, cold, and rain.

Earlier this week I came across a Reuters article headlined “Could the $6 billion legal fee in the Musk’s Tesla case be reasonable?”   After reading it, additional searching of the interwebs led me to these headlines from, respectively, Fortune and the ABA Journal:

I understand that numbers like “$6 billion” and “29 million Tesla shares” and “$288K per hour” are likely to cause an initial reaction of “that’s outrageous! you’ve to got to be _#$%&*_ kidding me!!!”  

If that was your reaction, trust me, I get it.  But humor me.  Check out the brief that was filed in support of the fee application. I don’t know if it’ll change your mind, but I bet it’ll at least make you think twice about your gut reaction.[1]

Notably, early on, the lawyers expressly acknowledge “that the requested fee is unprecedented in terms of absolute size.”  They go on to argue that is

  • “because our law rewards counsel’s efforts undertaken on a fully contingent basis that, through full adjudication, produce enormous benefits to the company and subject the lawyers to significant risk. And here, the size of the requested award is great because the value of the benefit to Tesla that Plaintiff’s Counsel achieved was massive.”

Again, humor me. Read the brief.  I can’t wait to read the reply. I assume I will find it equally fascinating.

Anyhow, I doubt many Vermont lawyers will ever find themselves asking a court to approve a fee valued at nearly $6 billion. However, many of you likely enter into contingent fee arrangements. If you do, check out Back to Basics: Contingent Fees and Contingent Fee:  $18,500 per hour? Each includes a refresher on contingent fees.[2]

As always, let’s be careful out there.[3]

[1] I got a kick out of this sentence in the ABA Journal’s post: “The fee request amounts to more than $288,000 per hour, according to the 127th footnote in the brief.” (emphasis added).  The 41-page filing includes 131 footnotes. Done right, I’m a fan of footnotes. And I know that there’s at least one regular reader of this blog who is even a bigger fan of footnotes.  The reader always does them right, often cleverly using footnotes that appear later in the writing to reward those who are still reading.

[2] The latter was prompted by a story that, compared to today’s, now feels a bit quaint.

[3] Which is exactly what I plan to do as I head out to tackle today’s wind.

A refresher on fees & fee agreements.

Michael

Prelude: Yes, I intend to post a quiz later today.

Sometimes I get stuck not blogging because I try to make every post edgy & interesting. Alas, most of the time, legal ethics & professional responsibility is neither.  That said, the less-than-enthralling basics are important and as likely, if not more so, to lead to disciplinary complaints than issues associated with the “exciting” topics.

Which brings me to today’s post: the basics of the rules that apply to legal fees. This post addresses:

  1. Fee Disputes.
  2. Standard Hourly Fee Agreements
  3. Contingent Fees
  4. Referral Fees/Fee Sharing
  5. Flat Fees, Fees Paid in Advance, and fees labeled “non-refundable” or “earned upon receipt.”

Fee Disputes

Before I address the various types of fees, here’s a reminder about fee disputes.

V.R.Pr.C. 1.5(a) sets out the general rule: “a lawyer shall not make an agreement for, charge, or collect and unreasonable fee or an unreasonable amount for expenses.” Comment [9] to Rule 1.5 reminds lawyers that:

  • “If a procedure for resolution of fee disputes, such as arbitration or mediation, has been established in the representation agreement, the lawyer must comply with the procedure when it is mandatory, and, even when it is voluntary, the lawyer should submit to it if the client requests. Law may prescribe a procedure for determining a lawyer’s fee, for example, in representation of an executor or administrator, a class or a person entitled to a reasonable fee as part of the measure of damages. The lawyer entitled to such a fee and a lawyer representing another party concerned with the fee should comply with the prescribed procedure.”

Indeed, the Vermont Bar Association offers a Committee for the Arbitration of Fee Disputes.  For more information, contact the current chair, and regular member of the Five for Friday Honor Roll, Jeff Messina.

General Rule – All Fees

Again, V.R.Pr.C. 1.5(a) sets out the general rule: “a lawyer shall not make an agreement for, charge, or collect and unreasonable fee or an unreasonable amount for expenses.”

Critical to remember is that it’s a violation to agree to an unreasonable fee.  Indeed, the mere fact that a client agrees to a fee does not render it reasonable.  Indeed, the Vermont Supreme Court has rejected that exact argument, stating that “lawyers, unlike some other service professionals, cannot charge unreasonable fees even if they are able to find clients who will pay whatever a lawyer’s contract demands.”[1]  Rather, the reasonableness of a fee is judged by applying the criteria set out in V.R.Pr.C. 15(a).[2]

Standard Hourly Fee Agreements

Rule 1.5(a) states that “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.”  While the rule does not require an hourly fee agreement to be in a writing, I don’t know why a lawyer wouldn’t want to reduce the agreement to a writing that is signed by the client.

Contingent Fees

Rule 1.5(c) governs contingent fees.

Like any fee, a contingent fee shall not be unreasonable.  Further, a contingent fee agreement must:

  • be in a writing that is signed by the client;[3]
  • state the method by which the fee is to be determined;[4] and,
  • clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party.

Upon the conclusion of a contingent fee matter, a lawyer must provide the client with a written statement showing the outcome of the matter and, if there is a recovery, the remittance to the client and the method by which it was determined.

Rule 1.5(c) prohibits charging a contingent fee while representing the defendant in a criminal case. It also prohibits fees that are “contingent upon on the securing of a divorce or upon the payment of spousal maintenance or support, or property settlement in lieu thereof.”  However, the rule permits the use of contingent fees in certain post-judgment family matters.[5]

Referral Fees & Fee Sharing

I’ve blogged about referral fees before.  The most recent post is here.  Check it out. If you don’t want, remember this: Vermont does not allow straight referral fees.

Flat Fees Paid in Advance

Vermont allows fees to be paid in advance of any services being performed.  We also allow flat fees and flat fees that are paid in advance of any services being performed. 

The general rule is this: if a client advances a fee that you will bill against as you provide legal services, the fee must remain in trust until the services are provided and the fee is earned. However, in very specified situations, we permit lawyers to treat fees that are paid in advance as “earned upon receipt.”

A prior post on the rule that governs fees labeled as “non-refundable” and “earned upon receipt” is here.  Sometimes I worry that lawyers are charging “non-refundable” fees without complying with the rule that permits them to do so.  Therefore, I’m going to cut and past from the prior post.

Rules 1.5(f) & (g) took effect in May 2016.

As amended, Rule 1.15(f) states that a lawyer may characterize a fee as “nonrefundable” and accept such a fee in advance of services being rendered only if:

  • “(1) The lawyer confirms to the client in writing before or within a reasonable time after commencing representation (i) that the funds will not be refundable, and (ii) the scope of availability and/or services the client is entitled to receive in exchange for the nonrefundable fee.”

In addition,

  • “(2) A lawyer shall not solicit or make any agreement with a client that prospectively waives the client’s right to challenge the reasonableness of a nonrefundable fee, except that a lawyer can enter into an agreement with a client that resolves an existing dispute over the 2reasonableness of a nonrefundable fee, if the client is separately represented or if the lawyer advises the client in writing of the desirability of seeking independent counsel and the client is given a reasonable opportunity to seek such independent counsel.”

It is only under these specific conditions that a fee may be characterized as “nonrefundable” or other similar term.  Indeed, here’s the next paragraph:

  • “(3) Where it accurately reflects the terms of the parties’ agreement, and where such an arrangement is reasonable under all of the relevant circumstances and otherwise complies with this rule, a fee agreement may describe a fee as “nonrefundable,” “earned on receipt,” a “guaranteed minimum,” “payable in guaranteed installments,” or other similar description indicating that the funds will be deemed earned regardless of whether the client terminates the representation.”

Finally, paragraph (g) directs the way fees will be handled:

  • “(g) A nonrefundable fee that complies with the requirements of (f)(l)-(2) above constitutes property of the lawyer that should not be commingled with client funds in the lawyer’s trust account. Any funds received in advance of rendering services that do not meet the requirements of (f)(1)-(3) constitute an advance that must be deposited in the lawyer’s trust account in accordance with Rule 1.15(c) until such funds are earned by rendering services.”

Again, I must stress that, no matter how designated, a fee that paragraphs (f) and (g) authorize a lawyer to treat as earned upon receipt remains subject to the reasonableness standard in paragraph (a). The rule and the 2016 Reporter’s Note make this clear. In my view, an unreasonable fee must be refunded even if labeled “non-refundable.”

As always, let’s be careful out there.

[1] In re Sinnott, 2004 VT 16, §16.

[2] In re Sinnott, 2004 VT 16, §14

[3] The agreement must be signed “up-front.” See, In re Fink, 2011 VT 42, ¶17 (“The purposes of the rule is to set forth the parties’ obligations up-front to avoid later confusion or disagreement about the terms of the representation or the fee due.”) See also, In re Anonymous Attorney, 2015 VT 101 (lawyer admonished for failure to reduce contingent fee agreement to writing.)

[4] Including the percentage that will accrue to the lawyer in the event of settlement, trial or appeal;

the litigation & other expenses that will be deducted from any recovery; and, whether such expenses will be deducted before or after the contingent fee is calculated.

[5] V.R.Pr.C. 1.15(d) states that “contingent fees are not forbidden in domestic relations matters which involve the collection of (i) spousal maintenance or property division after a judgement is entered; or (ii) child support and maintenance supplement arrearages due after final judgment, provided that the court approves the reasonableness of the fee agreement.”

Contingent Fee: $18,500 per hour?

Michael 1 Comment

I continue to struggle to find the motivation to blog.  My malaise bugs me.  Rather than dwell on it, this morning I decided to rid myself of it.  My plan is simple: find an interesting story and figure out a way to tie it Vermont legal ethics and write about them.  Then, do it again a few days later. So, here goes.

Earlier this week, the ABA Journal posted Quinn Emanuel seeks fee amounting to $18,500 per hour; will judge approve it?  Quinn Emanuel is a law firm.  The firm represented a class of health care insurers that sued the federal government.  Bloomberg Law posted the firm’s motion to have its fee approved.  The motion’s introductory paragraph sets the stage better than I can:

  • “In February 2016, Quinn Emanuel became the first firm in the nation to file a lawsuit on behalf of a Qualified Health Plan issuer against the federal government alleging that the government improperly failed to make risk corridor payments in violation of Section 1342 of the Affordable Care Act. Four years later, following round after round of fierce litigation and a loss at the Federal Circuit, eight justices of the Supreme Court adopted the exact legal theory Quinn Emanuel set forth in the initial Health Republic complaint and which it advocated at every step, including in the parallel cases that eventually made their way to the Supreme Court. The result? An entire industry was able to collect three years’ worth of unpaid risk corridors amounts they had previously been forced to write off as a total loss—approximately $12 billion. Nearly $4 billion of that recovery will go to the class members in these class actions.”

Cutting to the chase, years ago, the firm notified class members that it would ask a court to approve a fee equal to 5% of any recovery.  Here, 5% of $3.7 billion is $185 million. Per the ABA Journal, that “translates to a whopping hourly fee of about $18,500.”

It’s not my point today to comment on the Quinn Emanuel case.  Rather, I’m using it as click bait to provide a refresher on contingent fee agreements.

Rule 1.5(a) prohibits lawyers from agreeing to, charging, or collecting unreasonable fees and expenses.  Contingent fees, and expenses in contingent fee cases, are subject to the rule.

A contingent fee agreement MUST be in a writing that is signed by the client.  In Vermont, the failure to reduce a contingent fee in writing has resulted in lawyers being reprimanded and admonished.  Tip: do this at the outset of the representation.

In addition, Rule 1.5(c) states that a contingent fee agreement MUST:

  • state the method by which the fee is to be determined, including:
    • the percentage that will accrue to the lawyer in the event of settlement, trial, or appeal;
    • the litigation & other expenses that will be deducted from any recovery; and,
    • whether such expenses will be deducted before or after the contingent fee is calculated.
  • clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party.

Upon the conclusion of a contingent fee matter, a lawyer:

  • MUST provide the client with a written statement showing the outcome of the matter and, if there is a recovery, the remittance to the client and the method by which it was determined.

Lawyers are NOT allowed to agree to, charge, or collect:

  • a contingent fee in a criminal case;
  • a fee that is contingent upon the securing of a divorce; or,
  • a fee that is contingent upon the amount of spousal maintenance or support, or property settlement in lieu thereof, in a domestic relations matter.

However, lawyers may use contingent fees in domestic relations matters that involve the collection of:

  • spousal maintenance or support due AFTER a final judgment has been entered; or,
  • child support and maintenance arrearages due AFTER a final judgment has been entered, provided that the court approves the reasonableness of the fee agreement.

In other words, contingent fees are okay in some POST-JUDGMENT divorce & custody matters.

Finally, two cautionary tales.

First, in this post, I referenced a case in which a contingent fee agreement called for a firm to receive 40% of any recovery.  It also included this provision:

  • “Should [Client] refuse to make any settlement which my attorneys advise me is reasonable and should be taken, then I understand that I am responsible for their fee on the basis of that offer, unless they waive this provision.”

Sure enough, the client rejected a settlement offer that the firm advised the client to accept. The firm withdrew and, pursuant to the clause, sought its fee. The Tennessee Supreme Court publicly reprimanded the lawyers, concluding that the settlement provision chilled the client’s right to decide whether to settle.

Second, the failure to reduce to a fee agreement to writing can result in more than a disciplinary sanction.  As the ABA Journal reported here – in a case in which the client was Johnny Depp – a contract for attorney’s fees can be voided if not reduced to writing.

I’ve blogged.  With that weight lifted, off to do what I never lack the motivation to do: get some miles in on a sunny day.  Enjoy the weekend!

Dollar Sign

An Improper Contingent Fee

Michael 1 Comment

I’ve used the past few Tuesdays to post on trust accounting.  I’m going off script today to call attention to a disciplinary case that strikes me as important.

Alberto Bernabe is a professor of law at the John Marshall Law School. Regular readers will recognize Professor Bernabe as a frequent member of this blog’s #fiveforfriday Honor Roll.  His Professional Responsibility Blog is a fantastic source of information on legal ethics & professional responsibility.

Yesterday, Professor Bernabe posted Tennessee Supreme Court imposes sanctions for improper contingency fee.  The opinion issued on May 13 and is here. The issue: whether a lawyer violated the rules by attempting to collect a fee that was based on a percentage of a settlement offer that the client rejected.

Before I get into the details, let’s review the rules that would apply if the issue arose in Vermont.

  • Rule 1.2(a) requires a lawyer to “abide by a client’s decision to settle a matter.”
  • Rule 1.5(a) prohibits a lawyer from agreeing to, charging, or collecting an unreasonable fee;
  • Rule 1.5(c) allows a fee that is contingent upon the outcome of a matter; and,
  • Rule 1.8(i) prohibits a lawyer from acquiring a proprietary interest in a client’s cause of action but allows (1) liens authorized by law to secure fees & expenses; and (2) contracts for reasonable contingent fees.

The facts of the Tennessee case:

Client filed a pro se complaint alleging that she’d been injured by the defendant’s negligence. Soon thereafter, Client retained Law Firm.  Client & Law Firm entered into a written fee agreement. Per the agreement, Client would pay Law Firm a contingent fee, plus expenses.  The amount: 40% if recovery were made before an appeal, 45% if recovery made after an appeal.  The fee agreement did not include any language that provided for an hourly fee.  It did, however, include this provision:

  • “Should [Client] refuse to make any settlement which my attorneys advise me is reasonable and should be taken, then I understand that I am responsible for their fee on the basis of that offer, unless they waive this provision.”

Following discovery, the defendant offered $12,500.  Attorney and another at Law Firm advised Client to accept. Client did not.

Attorney moved to withdraw.  In the motion, Attorney also requested a lien in the amount of $13,605 for fees, plus $2,4528.52 for expenses.  The motion asserted that Law Firm had put in 45.35 hours of work at $300 per hour.  The court granted the motion to withdraw but did not rule on the request for a lien.

Eventually, Client filed a disciplinary complaint.  By then, Attorney had filed two additional motions requesting a lien on any recovery.  The final request referenced the fee agreement and sought 40% of the settlement offer that Client had rejected.

At the trial level, a court concluded that Attorney violated Tennessee Rules 1.5(a), 1.5(c), 1.8(i).  The Tennessee Supreme Court affirmed and publicly reprimanded Attorney.

Some key points from the Tennessee Supreme Court’s opinion:

  • the “Settlement Offer Provision” created a fee that was contingent on Attorney recommending that Client accept a settlement offer, but not, as required by the rule, on the outcome of the matter;
  • the so-called “Settlement Offer Provision” was unreasonable in that had an impermissible “chilling effect” on Client’s decision whether to settle;
  • The “Settlement Offer Provision” impermissibly provided Attorney with a proprietary interest in any settlement offer that Attorney recommended Client accept; and,
  • The “Settlement Offer Provision” was unreasonable in that it by recommending that Client accept an offer, “Attorney thereby became entitled to a fee, regardless of whether [Client] accepted the offer and regardless of whether she obtained any recovery whatsoever.”

As noted by Professor Bernabe, Faughnan on Ethics blogged on the opinion here.  Like Bernabe, Faughnan is a terrific resources on professional responsibility.  The post notes:

  • “At its core, this case explains the limits on the ability of a plaintiff’s attorney to try to guard against what happens if their client rejects the attorney’s advice on whether to accept a settlement offer. There do, in fact, have to be limits on the ability to hedge against that because the ethics rules establish explicitly that the decision whether to settle a civil case or not is the client’s decision.”

The post goes on to remind us that, generally, the rules allow lawyers who withdraw “to assert a lien as authorized by statute and pursuant to either the terms of their contract or, perhaps, depending on how things turn out for payment in the form of quantum meruit.”

Again, this is a Tennessee opinion.  It’s worth noting, however, that the rules involved are identical to Vermont’s.

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Monday Morning Answers: #67

Michael 1 Comment

This week’s answers come to you live from Boston, MA.  I’m preparing to run the Boston Marathon.  Unlike most marathons, Boston seeds its start.  Faster runners up front, with runners organized, more or less, in numerical order.

It appears that I’m not one of the favorites:

IMG_2118

Friday’s questions are HERE.  The answers follow the honor roll.

HONOR ROLL

  • Evan Barquist
  • Penny Benelli
  • Beth DeBernardi
  • Laura Gorsky
  • Robert Grundstein
  • Anthony Iarrapino
  • Keith Kasper
  • Patrick Kennedy
  • Nicole Killoran
  • Deborah Kirchwey
  • Elizabeth Kruska
  • Cristina Mansfield
  • Hal Miller
  • Jim Runcie

Answers

Question 1

Which is most accurate?  A contingent fee:

  • A.   Must be fair
  • B.   Must be in a writing
  • C.   Must be in a writing signed by the client; See, Rule 1.5(c) and my blog on the basics of contingent fees.
  • D.  Must not be calculated until after the client’s expenses are deducted

Question 2

Attorney called with an inquiry.  I listened. I replied “It doesn’t matter that your client ‘initiated’ it, the rule still applies.  And the fact that you cc’d your client on the e-mail is not the same as consent.”

What topic did Attorney call to discuss?

Communicating with a represented party.  Specifically, Attorney called to discuss whether by cc’ing her client on an email to opposing counsel she had given opposing counsel permission to contact client directly.  I blogged on the issue HERE.

Question 3

Fill in the blank.

In an advisory ethics opinion okaying the use of a particular type of technology, the Philadelphia Bar Association concluded that:

  • “CROWDFUNDING sites can be a beneficial source of funds allowing the public to assist in the assertion of valid legal claims that might otherwise go without recourse. Thus, great care should be taken to make sure that the initial development of such sites not affect the ability of subsequent persons to use such a source.”

My blog on crowdfunding is HERE.

Question 4

North Carolina gained national attention for an amendment to its rules that went into effect last month.  If Vermont were to follow the Tar Heel state’s lead, nearly all lawyers would have a duty that, today, only applies to a subset of the bar.  It’s the rule that, right now, relates to:

  • A.  “Admiralty” lawyers being allowed to advertise their area of specialization
  • B.  Conflicts for defense attorneys who move from a public defender’s office to a state’s attorney’s office
  • C.   Television ads by lawyers who represent large classes of plaintiffs
  • D.  A prosecutor’s duty to disclose evidence that tends to negate the guilt of an accused.  

My blog on the issue is HERE.

Question 5

Earlier this week, three news media organizations were named co-winners of the 2017 Pulitzer Prize for Explanatory Journalism.  The organizations were The Miami Herald, The McClatchy Group DC, and The International Consortium of Investigative Journalists.  

The Pulitzer reflected their efforts on reporting a story that involved, among other things, Vladimir Putin, David Cameron, and offshore shell companies. The story came to light after a whistleblower “leaked” 11.5 million documents that a law firm had stored electronically. Review of the documents resulted in the law firm’s name partners being arrested and jailed on suspicion of money laundering.

By what name is the scandal better known?

THE PANAMA PAPERS

Back to the Basics: Contingent Fees

Michael 1 Comment

Sometimes a column must get back to the basics and discuss legal ethics without reference to music, tv, movies or sports.

As a result of a few seminars I’ve taught over the past few weeks, I’d like to get back to the basics of contingent fees.

Rule 1.5(a) prohibits lawyers from agreeing to, charging, or collecting unreasonable fees and expenses.  Contingent fees, and expenses in contingent fee cases, are subject to the rule.

In addition, Rule 1.5(c) states that a contingent fee agreement:

  • MUST be in a writing that is signed by the client;
  • MUST state the method by which the fee is to be determined, including:
    • the percentage that will accrue to the lawyer in the event of settlement, trial or appeal;
    • the litigation & other expenses that will be deducted from any recovery; and,
    • whether such expenses will be deducted before or after the contingent fee is calculated.
  • 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 the conclusion of a contingent fee matter, a lawyer:

  • MUST provide the client with a written statement showing the outcome of the matter and, if there is a recovery, the remittance to the client and the method by which it was determined.

Lawyers are NOT allowed to agree to, charge, or collect:

  • a contingent fee in a criminal case;
  • a fee that is contingent upon the securing of a divorce; or,
  • a fee that is contingent upon the amount of spousal maintenance or support, or property settlement in lieu thereof, in a domestic relations matter.

However, lawyers may use contingent fees in domestic relations matters that involve the collection of:

  • spousal maintenance or support due AFTER a final judgment has been entered; or,
  • child support and maintenance arrearages due AFTER a final judgment has been entered, provided that the court approves the reasonableness of the fee agreement.

In other words, contingent fees are okay in some POST-JUDGMENT divorce & custody matters.

So, there you have it.  The basics of contingent fees.

Of course, speaking of “back to the basics,” this is not one of those columns sans reference to music, tv, movies or sports.  Who could forget the Barden Bellas and their version of Back to the Basics in Pitch Perfect 2?

Pitch Perfect 2