Every lawyer in private practice has experienced the need—or the desire—to adjust their fees, expenses or payment terms for a client.
The flat fee for closing the transaction turns out to be ridiculously low when the counterparty or deal terms change.
The contingent fee turns out to be more than a lawyer thinks the client should pay when the settlement comes in low.
The lawyer gets a stunning victory for the client in a tax dispute, obtaining a huge, unanticipated refund, and seeks a success fee to supplement the hourly fees paid to date, even though that’s not provided for in their engagement letter.
Or the lawyer simply wants to increase their hourly rate on an annual basis.
What all these (and countless other) scenarios share is danger to the lawyer.
The lawyer’s (or the client’s) concerns about fees or expenses may be just the symptom of a larger issue that should be addressed. In addition, the way the lawyer handles fees or expenses at these moments can itself generate problems for the client, ranging from nonpayment to a fee dispute to litigation to a bar complaint.
What to do? Act carefully and check the rules and other authorities. Let’s take a quick tour.
Fee agreements are contracts. Lawyer and client must mutually agree to them up front, and they must mutually agree to any changes. The ethics rules supplement these principles.
The basic rules don't vary much among the jurisdictions, but they don’t matter much for our purposes today. ABA Model Rule of Professional Conduct 1.5 prohibits “unreasonable” fees and expenses, and it sets out factors to judge reasonableness. So, neither the original fee agreed to by the client nor the proposed modified fee can be unreasonable. As a practical matter, expect more searching scrutiny by courts or regulators of any modified fee. You’ve been warned.
But more important are the rules that express, at the very least, a preference for fee and expense agreements, especially modified ones, to be in writing. ABA Model Rule 1.5(b) says the basis or rate of the fee and expenses “shall be communicated to the client, preferably in writing, before or within a reasonable time.” This section also says “[a]ny changes in the basis or rate of the fee or expenses shall also be communicated to the client.” Of course, contingent fees must be signed by the client under Rule 1.5(c). The basic rule on client communication, ABA Model Rule 1.4, also requires the lawyer to timely tell the client about fees and expenses and changes.
More importantly, and less well known to many lawyers, is that a number of jurisdictions also treat any modifications to fee or expense terms—at least those that are in any way disadvantageous to the client—to be business transactions with the client subject to the strict requirements of ABA Model Rule 1.8(a).
Maybe I should have said this earlier, but, if you remember nothing else about this subject, remember that we are in a fiduciary relationship with our clients. Justice Cardozo famously wrote about this highest duty known to the law as “something stricter than morals of the market place. Not honesty alone, but the punctilio of an honor most sensitive, is then the standard of behavior.”
ABA Model Rule 1.8(a), in place in every jurisdiction, is drawn from and built upon this fiduciary obligation to our clients. It requires that, if a lawyer “enters into a business transaction with a client or knowingly acquire[s] an ownership, possessory, security or other pecuniary interest adverse to a client,” the lawyer must meet three requirements:
“Ordinary fee arrangements,” the Rule’s Comment tells us, are exempt.
It’s certainly clear that some midstream lawyer-client agreements on fees and expenses fall under Rule 1.8(a) everywhere. For example, when the client, delinquent in paying fees, offers a security interest on their home, taking that interest is covered by the Rule, as is the case when the lawyer midstream agrees to take stock in the client in lieu of fees.
But some jurisdictions very clearly extend these same Rule 1.8(a) requirements to all midstream fee or expense modifications that are not in the client’s favor. For example, when, even at the client’s request, the lawyer switches from an hourly rate to a contingent fee that could well be more lucrative to the lawyer.
Not all jurisdictions may apply their version of Rule 1.8(a) to fee modifications. Nevertheless, if the legal question is in doubt in your jurisdiction, the practical question is not: taking steps to comply with the Rule strongly serves the interests of lawyer (and their client). Among other things, if the fee modification is ever challenged, the paper trail Rule 1.8(a) demands is a powerful lawyer defense.
Bear in mind that not all fee or expense modifications work to the client’s detriment. The contingent-fee lawyer who cuts their fee to enable a less-than-perfect settlement, or to accommodate the recalcitrant provider who refuses to reduce their lien are examples where a modification may not be to the detriment of the client. But even if the strict requirements of Rule 1.8(a) don't apply, the other requirements of clear communications about fee and expenses do. Besides, clear—and preferably written—communication to the client about these adjustments are also prudent for the lawyer.
What about annual hourly rate adjustments?
The authorities are clear that incremental increases in a lawyer’s hourly rates are generally fine, provided the fee remains reasonable, the client agrees to periodic increases up front and the actual increase is communicated to the client and accepted by the client. Does the client have to affirmatively sign off on every increase? The engagement agreement should plainly set the rules on this contractual question, and client communication as rates increase needs to be clear.
Let’s close with some practical concerns.
First, as with all matters concerning fees and expenses, clear and timely communication is critical. A lawyer in need (or want) of a midstream modification needs to tell the client that very clearly and directly.
Likewise, when the client approaches the lawyer about a modification, the lawyer needs to directly and clearly respond. Active listening, always in order, pays dividends here, as the client may well be conveying changed expectations that may inform the lawyer of more about the representation than just unhappiness about, or inability to pay, fees. Good lawyers read and rely on these signals.
Second, a lawyer should take even greater care in pursuing a fee modification where the client might be able to later claim duress. There are times when a lawyer may “threaten” to withdraw without a fee change, but a week before a trial is likely not one of them.
Third, if any changes in fee or expense arrangements are in order, document them clearly and carefully, regardless of whether ABA Model Rule 1.8(a) applies or not. Good communication, confirmed in a way that this client understands, is the best way to get paid and avoid dispute or discipline.
Fourth, sometimes—and clearly not every time—consider more than telling the client, as Rule 1.8(a) says, about “the desirability of seeking . . . independent legal counsel.” Consider insisting that the client see another lawyer for advice, or maybe even paying for it. Before a financially strapped client pledges their family home to pay your fee, you and they might be best protected by another lawyer counseling them.
Nothing contributes more to a healthy lawyer-client relationship than good and clear communication, especially and both fees and fee modifications.
