This Month's Topic: Attorneys Fees - A Causerie
Overview
A. Cantaloupe, Frozen Bread, Ethiopian Linens and Attorney Fees. A lawyer, Grzybek, represented indigent clients. Grzybek told the court (and provided demonstrative evidence) that the clients, “often pay him in kind, with items such as cantaloupe, frozen bread, and Ethiopian linens rather than cash.” In re Grzybek, 552 N.W.2d 215, 216 (Minn. 1996). However, Grzybek violated numerous Rules. One of these, Rule 1.5(b), requires lawyers to communicate the basis or rate of a fee, at or near the outset of representations of new clients. Grzybek’s did not violate Rule 1.5(a), that is he did not charge unreasonable fees. Grzybek’s Rule 1.5(b) violation seems unusual because of the Ethiopian linens, etc., but it was typical insofar as it was formal, rather than substantive.
B. Treatise. The editors of Minnesota Legal Ethics have in hand the last chapter of the treatise, on ethics issues related to attorney fees. Although the chapter runs fifty pages, it does not attempt comprehensive coverage of the subject. Fees are the leading subject of attorney litigation.
C. Selection. This blog post briefly discusses a handful of the most interesting and colorful attorney fee issues. The full chapter will be published in or about April, as part of the first complete edition of the treatise.
1. HISTORY
A. Yesteryear: Lofty Rhetoric, Little Regulation. Over a century ago, ABA Canon 12 stated as axiomatic, “It should never be forgotten that the profession is a branch of the administration of justice and not a mere money-getting trade.” ABA Canons of Professional Ethics (1904). However, the leading mid-twentieth century commentary on legal ethics stated, “There is no ethical question involved unless fees are flagrantly excessive, ….” Henry S. Drinker, Legal Ethics 174 (1953). Echoing Drinker, the Code of Professional Responsibility, in effect in Minnesota from 1970 to 1985, provided, “A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee.” Minn. Code Prof ’l Resp. DR 2-106.
B. Customs and Regulations Favored Lawyers. For most of the 20th century, lawyers (especially established lawyers) very much had the upper hand in fee matters. The Minnesota Supreme Court condemned “underbidding” for legal services. In re Greathouse, 248 N.W.735 (1933). Lawyers billed standard fees for routine services, such as real estate closings, incorporations, and wills. In 1961, the Minnesota State Bar Association Practice of Law Committee opined, “it is unethical for a lawyer deliberately, habitually and systematically to perform or offer to perform legal services for less than the amount set forth in a recommended minimum fee schedule….” Id. Such schedules were abandoned after they were held to violate anti-trust laws and to be “unusually damaging” to the public. Goldfarb v. Va. State Bar, 421 U.S. 773, 782 (1975). If a client disputed a fee, until the 1970s, a lawyer could assert a retaining lien on the file.
C. Freedom to Contract. The Legislature also long supported attorneys’ freedom from regulation. A statute still provides, “‘(a) party shall have an unrestricted right to agree with his attorney as to his compensation for services, and the measure and mode thereof….” Minn. Stat. § 549.01. The supreme court has recognized this statute as effective, although in a few cases the court has nonetheless found particular contracts unenforceable or unconscionable. Kittler & Hedelson v. Sheehan Properties, Inc., 203 N.W.2d 835 (1973); Continental Casualty Co. v. Knowlton, 232 N.W.2d 789 (1975).
D. Peddling Tuna Fish. Until 1993, many law firms had profit centers in markups on expense items - most famously, tuna fish sandwiches, for which the Skadden firm charged $32 each, in 1991. A 1993 ABA ethics opinion, codified in 2005, effectively put these profit centers out of business. “The lawyer’s stock in trade is the sale of legal services, not photocopy paper, tuna fish sandwiches, computer time or messenger services.” ABA Formal Op. 93-379 (1993), Rule 1.5(a).
E. Increasing Fee Regulation Since 1985. Rule 1.5 was first adopted in Minnesota in 1985. In its original form, it tightened regulation of attorney fees in several ways. First, it prohibited “an unreasonable fee,” not just a “clearly excessive” fee. Second, Rule 1.5 required communication at or near the beginning of a representation with a new client of “the basis or rate” of the fee. Third, Rule 1.5 increased the formal disclosure and other requirements for certain types of fees, e.g. contingent fees and split fees. Additional formal requirements have been added in recent years.
F. Fee Disputes. Sometimes lawyers behave badly when clients dispute their fees. Suing a current client for fees involves a conflict of interest. In re Szymialis, 557 N.W.2d 554 (Minn. 1997). A lawyer whose fee demand letters are abusive may or may not be disciplined, under Rule 4.4. If the lawyer represents himself (as opposed to his professional association), Rule 4.4 does not apply. Several lawyers have been disciplined for charging for their time in responding to ethics complaints. In re Panel No. 94-17, 546 N.W.2d 744 (Minn. 1996). On the other hand, lawyers have been able to enforce clauses in fee agreements that allow charging fees to collect delinquent fees. M. Sue Wilson Law Offices, P.A. v. Grimm, et al., 2000 WL 1100180 (Minn. Ct. App. August 8, 2000); Goldetsky v. Winer, No. C1-95-2702 (Minn. Ct. App., June 4, 1996).
2. CURRENT ENFORCEMENT POLICIES
A. Overview. Discipline is only rarely applied to the fundamental substantive requirement of Rule 1.5 – that fees not be unreasonable. However, Rule 1.5’s formal requirements have proliferated, requiring numerous communications, disclosures, writings, signatures, and exact words, while forbidding other words and certain types of fees.
B. Summary Dismissal of Most Unreasonable Fee Complaints. “A complaint alleging a simple fee dispute . . . will be summarily dismissed by the Director without any investigation, pursuant to the Lawyers Board’s dismissal guidelines.” Martin A. Cole, Director’s Office Admonishes Attorney For Failing to Clearly Communicate Fee, MINN. LAW., Oct. 24, 1997. The resources to investigate ordinary fee complaints are not available. Almost all complainants are referred to fee arbitration committees. A small percentage of fee complaints are investigated, where formal requirements are not met, or the fee may be illegal, or unconscionable, or part of a pattern of misconduct.
C. Lotsa “Gotcha’s.” The formal requirements of Rule 1.5 are the basis for many disciplines. Rules 1.5(b), (c) and (e) have numerous specific requirements. For example, a flat fee paid in advance may be considered the lawyer’s property, subject to refund, only if the client signs a writing with five specific provisions. Rule 1.5(b)(1). Contingent fee and split fee agreements are regulated in comparable detail. Rules 1.5(c), (e). Failures to meet these requirements result in many disciplines, usually private admonitions. In addition, failures to meet these requirements may make a fee agreement unenforceable. Christensen v. Eggen, 577 N.W. 2d 221 (Minn. 1998).
D. Fees for Sex? A lawyer, Lowe, represented a woman (RD) in a marriage dissolution. RD was a vulnerable person, with a history of being sexually exploited. During the representation, Lowe and RD had sex many times. Lowe admitted that several of his bills “correlated” with dates on which he and RD had sex. Lowe admitted that his “conduct in billing R.D. for meetings in which they engaged in sexual relations violated Rules 1.5(a) and (b)...” In re Lowe, 824 N.W.2d 634 (Minn. 2013).
3. ALTERING FEE AGREEMENTS
A. Modifications Allowed. Fee agreements may be modified, “Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.” Rule 1.5(b). However, several issues arise.
B. Security and Rule 1.8(a). When a client becomes delinquent in fee payments, a lawyer may demand security, as a condition of providing further services. When a lawyer acquires a security or ownership interest, several formal requirements must be met. Rule 1.8(a).
C. Fiduciary Duty? Minnesota case law is not clear on how far a lawyer’s fiduciary duties to clients may apply to alterations to fee agreements. One case gave short shrift to the client’s fiduciary duty claim, but a later, unpublished case allowed such a claim to proceed. Peterson v. Gustafson, 584 N.W.2d 660, 664 (Minn. App. 1998), rev. denied Nov. 17, 1998; Abed v. Fafinski & Wallrich, P.A., 2006 WL 1738177 (Minn. App. June 27, 2006).
D. Timing of Notice Requirement. An OLPR article states that advance notice is required for change to a fee agreement. “Rule 1.5(b), MRPC, requires that any changes in the basis or rate of the fee or expenses must be communicated to the client before being imposed, so that the client can determine whether to continue representation with the lawyer under a revised agreement.” Martin A. Cole, Fee Disputes, BENCH & B. OF MINN., Mar., 2011. However, the article does not cite any language of Rule 1.5 to support its position. For the initial fee agreement, disclosure of the basis or rate is required, “before or within a reasonable time after commencing the representation.” Rule 1.5(b). In my opinion, a lawyer would comply with Rule 1.5(b) by communicating, at or about the beginning of the representation, the initial hourly rate, and that the rate is subject to change, with a new rate communicated in the first billing after the rate became effective. My opinion is at odds with OLPR’s position.
4. CONTINGENT FEE ISSUES
A. Discipline for Unreasonable Amount? OLPR’s director has declared, “A complaint that alleges that a one-third contingent percentage fee is unreasonable does not raise an investigable issue.” Martin A. Cole, Fee Disputes, BENCH & B. OF MINN., Mar. 2011. However, a prior director stated, “Attorneys who charge standard contingency rates in cases where there is virtually no risk of non-recovery will be subject to professional discipline.” Kenneth L. Jorgensen, Regulating Contingent Fees in No-Fault Cases, BENCH & B. OF MINN., July 2000. In extraordinary circumstances, unreasonable or unconscionable contingent fees have been the subject of discipline. In re Cary, 177 N.W. 801 (1920) (calling the fee “downright robbery”); In re Doherty, 374 N.W.2d. 721 (Minn. 1985); William J. Wernz, Summary of Admonitions, BENCH & B. OF MINN., March 1990.
B. Requirement to Discuss Alternatives? An ABA opinion stated, “It is ethical to charge contingent fees as long as the fee is appropriate and reasonable and the client has been fully informed of the availability of alternative billing arrangements.” ABA Formal Op. 94-389 (1994). An older opinion, stated, “A lawyer normally has an obligation to offer a prospective client an alternative fee arrangement before accepting a matter on a contingent fee basis.” ABA Informal Opinion 86-1521 (1986). However, these opinions have not been codified in current Rules.
C. “A Lawyer Must Consider.” A comment states, “In determining whether a particular contingent fee is reasonable, or whether it is reasonable to charge any form of contingent fee, a lawyer must consider the factors that are relevant under the circumstances.” Rule 1.5 cmt. 3. These factors would include, “the fee customarily charged in the locality for similar legal services.” Rule 1.5(a)(3). Another factor is that a “reasonable” fee is one charged by “a reasonably prudent and competent lawyer.” Rule 1.0(i). The lawyer may also consider declarations, above, by two OLPR directors.
D. “Law May Impose.” Another comment may add confusion, by referring to non-existent law, ”Applicable law . . . may require a lawyer to offer clients an alternative basis for the fee.” Rule1.5 cmt. 3. Model Rule comments often refer to “applicable law,” leaving it to individual states to determine whether they have any such law. To the best of the author’s knowledge, Minnesota does not have such law. Therefore, it appears, Minnesota lawyers are not required to offer alternatives to contingent fees, except, perhaps, in the very rare circumstances that such fees would be found clearly unconscionable.
5. SOME FEE-SPLITTING ISSUES
A. Payments That Do Not Split Fees. A comment states, “A division of fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm.” Rule 1.7 cmt. 7. As the comment also notes, “A division of fees most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist.” Id. There is not a “division of fee” when one lawyer pays another a fixed amount, for assisting in a representation, where the amount is due regardless of outcome or of when the first lawyer is paid by the client.
B. Contract and Temporary Lawyers. ABA Formal Opinions 88-356 (1988) and 00-420 (2000), take the position that a lawyer may bill a client for payments to A (a temp or contract lawyer) without showing the payments as a disbursement. The opinions also state that a lawyer may pay A without Rule 1.5(e) applying – so long as the payment is not a “direct division” of the fee, in the manner of a contingent fee split.
C. Arrangements, Agreements, Timing.
1. Lawyers’ “Arrangement,” Lawyer-Client “Agreement.” Rule 1.5(e) contemplates an “arrangement” between lawyers (“L,” who associates “A,” to provide some services), to divide a fee. Rule 1.5(e) also contemplates an “agreement” of the client, to the terms of the lawyers’ arrangement (“agrees to the arrangement”).
2. Time of Agreement, Communication. Rule 1.5(e) contemplates a three step sequence: (1) lawyers arrange for a fee division to be made; (2) the client agrees to the arrangement and the agreement is confirmed in writing; and (3) the fee division is made. Rule 1.5(e) prohibits the actual division (“a division of a fee… may be made only if….”) unless (1) and (2) have been accomplished. Rule 1.5(e) does not prohibit (1) until (2) has been accomplished. Rule 1.5(e) does not follow Rule 1.5(a) and (d), which both begin, “A lawyer shall not enter into an arrangement for, ….”
3. Other Rules. Regardless of when Rule 1.5(e) comes to apply, other Rules may apply at earlier times. In the typical fee-splitting arrangement, the original lawyer (L) may not be fully competent to provide services for a client (C) in litigation. L therefore associates with another attorney (A), often a trial specialist. C must be informed and consent, because of A’s major role. Rules 1.2, 1.4, and 1.6. In contrast, where A merely provides back-up help, on a contract basis, and L will pay A regardless of the fee L receives, ABA opinions indicate that C’s consent is not required.