Lester Brickman Re: Rule 1.5 of the Model Rules of Professional Conduct - Center for Professional Responsibility

March 23, 2000

 

Ethics 2000
ABA Center for Professional Responsibility
541 N. Fairbanks Court
Chicago, IL 60611

I am writing to comment on the proposal by the Commission on Evaluation of the Rules of Professional Conduct to amend Rule 1.5 of the Model Rules of Professional Conduct.

I would like to first commend the Commission for the proposed change to the text of Rule 1.5(a)(8) -- making explicit what has heretofore been implicit both in the Model Code of Professional Responsibility and the Model Rules -- that Rule 1.5(a)(8) mandates that the reasonableness of a contingency fee is a function of the degree of risk assumed by the lawyer. This explicit recognition that the ethical validity of a contingency fee is dependent upon the degree of risk assumed by the lawyer is especially welcome given the incomprehensible legal fees generated by the recent tobacco litigation settlements which bear no relationship to any ethical standard.

I would also favorably mention the proposed addition of Comment [2], which reads:

Contingent fees, like any other fees, are subject to the reasonableness standard of paragraph (a) of this Rule, including consideration of the risk assumed by the lawyer at the outset of the representation. Reasonableness of a contingent fee should ordinarily be determined based on the facts known at the time the fee agreement was reached. The amount of a contingent fee may be unreasonable if there was a high likelihood of substantial recovery by trial or settlement so that the lawyer bore little risk of nonpayment, or if the client's recovery was so large that the lawyer's fee would clearly exceed a sum appropriate in light of the services performed and risk assumed. . . .

This Comment sets forth three separate and important propositions. First, it repeats and amplifies the proposed change to Rule 1.5(a)(8), making explicit that the ethical validity of a contingency fee depends upon the risk being assumed by the lawyer.

Second, it endorses the proposition that charging a standard contingency fee in a case where the lawyer should reasonably expect that a substantial settlement offer will be made after the expenditure of little effort and without having to bear meaningful risk, thus generating an unreasonable windfall fee, is ethically improper.

Third, by inclusion of the third sentence of proposed Comment [2], the Model Rules absorb the proposition set forth in 47, Comment c of the ALI's Restatement of the Law Governing Lawyers, which provides that ". . . large [contingency] fees unearned by either effort or a significant period of risk are unreasonable". Thus, this sentence in Comment [2] is an acknowledgment that, in addition to the usual ex ante analysis of the ethical legitimacy of a contingency fee, there are circumstances where an ex post analysis of the reasonableness of a contingency fee is also ethically mandated. Of course, this addition to the Rules simply mirrors the applicable standard that courts have long applied. For example, in Gair v. Peck, 6 N.Y. 2d 97, 188 N.Y.S. 2d 491 (1959), the New York Court of Appeals stated:

Contingent fees may be disallowed as between attorney and client in spite of contingent fee retainer agreements, where the amount becomes large enough to be out of all proportion to the value of the professional services rendered.

Id. at 106 and 497.

The professionally responsible thrust of this Comment stands in stark contrast to the muteness of the bar in response to what I have earlier referred to as the utter absence of application of any ethical principles to the tobacco litigation fees.

While these proposed changes are positive steps towards rehabilitating the bar's extraordinarily low public esteem ranking, one change being proposed will have the precise opposite effect. I refer to the proposed deletion from former Comment [3], now proposed Comment [4], of the following language:

When there is doubt whether a contingent fee is consistent with the client's best interests, the lawyer should offer the client alternative bases for the fee and explain their implications.

This proposed deletion is surely a step backward from the two professionally responsible, self-disinterested proposals identified above. Indeed, the Commission confirms the self-interested nature of this proposed deletion by stating as its reason:

The Commission noted that some lawyers only charge contingent fees, and offering a fixed fee or hourly rate alternative to clients who would benefit thereby might require a change in such lawyers' regular practice.

In reassessing the propriety of this proposed deletion, I urge the Commission to consider the profound professional legacy that it proposes to be jettisoned.

In ABA Informal Opinion 86-1521 (Oct. 26, 1986), the Standing Committee on Ethics and Professional Responsibility responded to the question whether "a lawyer has an ethical obligation to offer a client an alternative fee arrangement before accepting a matter on a contingent fee basis," by stating: "[i]n most circumstances, the lawyer has that obligation". Id. at 1. The Standing Committee acknowledged that though

neither Rule 1.5 nor DR2-106 states specifically whether a lawyer must offer an alternative fee arrangement, that issue must be addressed in a context of the "reasonableness" and "clearly excessive" tests of the Model Rules and the Model Code, the commonly expressed rationale for permitting contingent fees and the Comment to Rule 1.5 and the Ethical Considerations of the Model Code.

Id. at 2. The Committee then cited to the precise language in the Comment to Rule 1.5 which the Commission now proposes to eliminate. It is clear from the context of the Standing Committee's opinion that in citing to that language, the Standing Committee was elevating "the client's best interest" over the financial self-interest of lawyers. Indeed, the Standing Committee specially noted that

under the Comment to Rule 1.5, when a client is in a position to pay a fixed fee, the lawyer should not seek unilaterally to determine whether a contingent fee is consistent with the client's best interest, but should provide the client with the opportunity to make that determination after consultation.

The Standing Committee also relied upon Ethical Consideration 2-20 of the Model Code of Professional Responsibility, which states:

Contingent fee arrangements in civil cases have long been commonly accepted in the United States in proceedings to enforce claims. The historical bases of their acceptance are that (1) they often, and in a variety of circumstances, provide the only practical means by which one having claim against another can economically afford, finance, and obtain the services of a competent lawyer to prosecute a claim, and (2) a successful prosecution of the claim produces a fund out of which the fee can be paid. Although a lawyer generally should decline to accept employment on a contingent fee basis by one who is able to pay a reasonable fixed fee, it is not necessarily improper for a lawyer, where justified by the particular circumstances of a case, to enter into a contingent fee contract in a civil case with any client who, after being fully informed of all relevant factors, desires that arrangement . . . . (emphasis supplied).

Somewhat surprisingly, the Standing Committee omitted reference to Ethical Consideration 5-7 which is even more emphatic in imposing upon the lawyer the fiduciary obligation to act in a self-disinterested fashion, even when negotiating a fee arrangement. EC5-7 provides that "a lawyer, who is in a better position to evaluate a cause of action, should enter into a contingent fee arrangement only in those instances where the arrangement will be beneficial to the client". (I have more fully explicated this analysis in an article titled, Contingent Fees Without Contingencies: Hamlet Without The Prince of Denmark?, 37 UCLA L. Rev. 29 at 49-74 (1989), which I commend to the Commission's attention.)

The message of ECs 2-20 and 5-7 and the Comment to Rule 1.5 that the Commission is proposing to delete, is clear and compelling. Lawyers are obligated to counsel clients as to the fee arrangements that are in the best interests of their clients even if that advice is contrary to a lawyer's financial self-interest. Clients have a co-relative fiduciary entitlement to be fully informed by their lawyer with regard to a proposed fee agreement. This is especially true in the contingency fee context where there is an extreme informational imbalance between lawyers' knowledge of the extent of risk and value of the claim and that of clients. Most clients lack sufficient information upon which to base an informed judgment regarding the fee structure and hence must rely on their lawyer for that knowledge. To allow the lawyer to be guided by self-interest in that circumstance is simply intolerable. That is why the drafters of the Model Code and the Model Rules and Informal Opinion 86-1521 as well as numerous courts have rejected the unregulated market in favor of imposing a fiduciary standard to regulate lawyer-client fee agreements.

The Commission -- no doubt, unintentionally -- deprecates the fiduciary standard expressed in the Model Code, the Model Rules and ABA Informal Opinion 86-1521, when it states as the reason for its proposed omission

that some lawyers only charge contingent fees, and offering a fixed fee or hourly rate alternative to clients who would benefit thereby might require a change in such lawyers' regular practice.

That rationale stands in stark contrast to a congruent point expressed in Informal Opinion 86-1521:

The client with a meritorious claim is entitled to representation and should not be required to relinquish a share of the claim to get representation if the client has money to pay a reasonable fixed fee and is willing to assume the contingency risk.

(This expression should properly be read to include charging an hourly rate as well as a fixed fee.)

The Commission's stated reason for its proposed omission is also objectionable because of its implicit policy content. If the Commission were to take note of the fact that some lawyers routinely violate Rule 1.5(e) by failing to get their clients' written consent to forwarding the claim to another lawyer or violate Rule 1.15 by not promptly paying clients settlement funds received by the lawyers, surely it would not then recommend that these Model Rule requirements be dropped because retaining them "might require a change in such lawyers' regular practice"?

In the course of reevaluating its stance, it may be useful to the Commission to consider why some if not most all contingency fee attorneys do indeed insist on charging contingency fees to the exclusion of fixed fees or hourly rate fees. It is, stated simply, blatant self-interest. Contingency fees yield 3-10 times the effective hourly rate that plaintiff lawyers would charge if they did charge on an hourly rate basis. From that prospective, contingency fees are clothed in stealth sheathing. They enable contingency fee lawyers to charge effective hourly rates of thousands of dollars an hour without disclosure or detection -- even in cases where from the outset it is apparent that a substantial settlement offer is going to be made after the expenditure of only a handful of hours and in the absence of any meaningful risk of nonrecovery.

Today, the sad truth is that an accident victim who receives a settlement offer and then seeks legal counsel as to the fairness of the offer is frequently if not virtually always compelled to enter into a contingency fee agreement to gain that advice even if the effect of doing so is a net financial loss to the claimant. I receive dozens of calls every year from claimants who have been subjected to just such abuse. While I inform some of these claimants that they have been the victims of deceptive practices and can file a complaint with disciplinary authorities, I also candidly state my appraisal of the likelihood of even an admonition issuing to the lawyer for mulcting his client as one in 50,000,000 -- lottery odds. Indeed, in an empirical survey of bar counsel, that is precisely what I documented. See Lester Brickman, Contingency Fee Abuses, Ethical Mandates, and the Disciplinary System: The Case Against Case-By-Case Enforcement, 53 Wash. & Lee L. Rev. 1339 (1996).

Ratification by the ABA of deceptive lawyer behavior with regard to fees may well be seen by the public as simply self-interest on the part of the organized bar, thus confirming what opinion polls already indicate with regard to the public's perception of the level of lawyers' fees. For this deception, however, to be facilitated by a panel with such a distinguished membership established for the purpose of evaluating the ethical rules, can only be regarded with profound disappointment.

I therefore urge the Commission to omit the proposed deletion, in keeping with the purposes of the Model Rules of Professional Conduct as stated in the Preamble to the Rules:

The legal profession's relative antonomy carries with it special responsibilities of self-government. The profession has a responsibility to assure that its regulations are conceived in the public interest and not in furtherance of parochial or self-interested concerns of the bar . . . .

Respectfully submitted,

 

Lester Brickman
Professor of Law

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