A federal court ruling has provided new ethics guidance on contingency fee agreements, holding that when an attorney’s pecuniary benefit comes at the expense of his or her client’s recovery, such an agreement may present an impermissible conflict of interest.
In Gamble v. Kaiser Found. Health Plan, Inc., the U.S. District Court for the Northern District of California considered whether a retainer agreement which (1) characterized client recovery as property of an attorney, (2) expressly assigned negotiation rights for said fees, and (3) required clients to pay twice the attorney’s Lodestar fee if attorney fees were waived as part of settlement, presented an impermissible conflict of interest that runs afoul of California ethics rules.
In response to the defendant’s allegations of ethical impropriety, the plaintiffs in Gamble brought a motion pursuant to Rule 16 and the court’s inherent power to control the conduct of the attorneys that appear before it. As the court described it, the plaintiffs sought an order “dictating in advance the parameters of any settlement negotiations with defendants,” and asking the court to “give its imprimatur to plaintiffs’ counsel’s fee agreement and confirm that it poses no conflict of interest with the named plaintiffs or the class.”
Rule 16 of the Federal Rules of Civil Procedure authorizes the court to hold pretrial conferences, either on its own or at the request of either party, during which the court may order special procedures for managing complex issues, difficult legal questions, or otherwise unusual administrative issues that arise in a case. This includes a party’s request to determine appropriateness of the plaintiff’s counsel, as authorized by Rule 23. As detailed below, the court found the above provisions created an inherent conflict of interest between the attorney and his clients, thus necessitating his withdrawal and staying the entire proceeding pending retention of new counsel.
Under Rule 23 of the Federal Rules of Civil Procedure, the court has an obligation to evaluate putative class counsel, ensuring no conflicts of interest with class members. In order to evaluate an attorney’s fitness, Rule 23(g) permits the court to “order potential class counsel to provide information on any subject pertinent to the appointment and to propose terms for attorney's fees and nontaxable costs” to determine if any potential conflicts exist.
In support of its finding that the three provisions presented an ethical conflict, the court relied on California State Bar Formal Ethics Opinion No. 2009-176, which provides that “[a] lawyer is ethically obligated to inform a client that the client possesses, and can waive, the right to seek an award of statutory attorney’s fees as a condition of settlement even though it may result in the lawyer not receiving remuneration for services performed” and “[a] lawyer is ethically obligated to consummate a settlement in accordance with the client’s wishes and cannot veto a settlement simply because it includes a fee waiver.”
The court reasoned that, by these standards, the notion that the attorney may reject a settlement offer because the attorney fees are insufficient is contrary to California ethics rules.
The court further expressed that California recognizes an “inherent conflict of interest” when a plaintiff’s attorney insists on negotiating the amount of damages payable to the plaintiff separately from the award of attorney fees. This conflict arises from the attorney’s duty of loyalty by allowing an attorney to dictate settlement negotiations that maximize attorney fees at the expense of the client’s recovery.
As to the third and final provision, the court found the retainer agreement, requiring settlement of attorney fees to be negotiated separately from damages (and thus forfeiting the client’s ability to pay fees on a contingency basis), would result in clients owing the attorney double his Lodestar rate (time spent on the case multiplied by hourly rate).
ABA Section of Litigation leaders find the Kaiser ruling, despite its harsh outcome on plaintiffs’ counsel, to be in line with standard practices for class action counsel. “Lawyers have been representing classes in Rule 23 cases for decades, and have managed to avoid ethical conflicts over fees,” opines John M. Barkett, Miami, FL, cochair of the Section of Litigation’s Ethics & Professionalism Committee. “I do not see this opinion changing anything. To the contrary, this opinion should help class counsel design a fee agreement that is ethically compliant.”
Further expanding on this point, Adam Polk, San Francisco, CA, cochair of the Section’s Class Action & Derivate Suits Committee, adds: “The scrutiny courts give to fee requests in class action settlements under Rule 23(e) is, in my experience, a sufficient procedural safeguard that properly balances the interests of the class in not paying a windfall, against the fair compensation of class counsel, who have oftentimes invested in the case and borne the risk of litigation for the class’s benefit with no guarantee of recovery.”
Although the court in Kaiser recognized the unusual nature of the motion, Barkett believes its order created a valuable tool for class action counsel to reference when drafting retainer agreements. “Where statutory fees are awardable if a plaintiff prevails in a claim, lawyers need to know the applicable law and ethics opinions, and then draft a retainer agreement that is consistent with the law and ethics opinions and results in a fair and reasonable fee,” notes Barkett.
“Keep this opinion on your desk if you need to be reminded about what is or is not permissible,” advises Barkett. “Reduced to its essence, the holding in Kaiser is that lawyers have a fiduciary duty to their clients, and when a conflict of interest arises they will breach that duty if they do not withdraw,” he continues. Further, to protect their interests, “where practicable, potential clients should seek the input of a third party on an engagement letter to identify and address any potential issues that may be present,” Polk suggests.
