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Lengthy Fee Fight Settles In $6 Million Harass Case

The Supreme Court to ruled that lawyers splitting fees need the client’s written consent.

By Michael Fish

Vice Chair of the State Bar Mandatory Fee Arbitration Committee
And Chair of the MCBA Client Relation’s Committee

 

A ten-year fee fight, which prompted the state Supreme Court to provide strict rules governing attorneys’ fee-sharing agreements, has been settled.

For five years, attorneys Arthur Chambers and Philip Kay litigated over fees earned in a historic sexual harassment case. Their dispute reached the California Supreme Court, which used the case to, among other things, declare that fee-sharing agreements between lawyers are void without written consent from the client. Chambers v. Kay (2002) 29 Cal.4th 142.

The litigation came to a when both parties agreed to settle. Terms were undisclosed.

The Chambers case brought increased focus to fee-sharing agreements by both the state Supreme Court and the state bar.

A review of the fee disputes in Marin County reveals that many attorneys are not aware of the Chambers rule and the perils of fee division agreements, who are practicing on handshake agreements for division of fees.

The case began when Kay asked Chambers for help on a sexual harassment case filed by a legal secretary against the giant law firm Baker & McKenzie.

The two lawyers agreed that Chambers would receive 28 percent of the attorneys’ fees if the case went to trial. During discovery, however, the lawyers disagreed over tactical matters, and Kay dismissed his co-counsel.

At trial, a jury awarded the secretary $6.9 million in punitive damages, which the trial judge knocked down to $3.5 million. The case ultimately generated about $2.5 million in attorneys’ fees. Weeks v. Baker & McKenzie (1998) 63 Cal.App.4th 1128.

Kay reneged on the fee-splitting arrangement, saying Chambers had failed to perform his duties and billed for services improperly. Chambers sued in 1999.

The State Bar’s Rule of Professional Conduct 2-200 mandates that lawyers shall not divide a fee for legal services with another lawyer who is not a partner, associate or shareholder, unless the client consents in writing. In Chambers, the California Supreme Court held that, absent such approval, a fee-splitting agreement is void.

The decision left open the possibility that Chambers could recover for the reasonable value of the work he did on the case, and the two lawyers returned to the trial court to litigate that claim. They were weeks away from their trial date when they reached the settlement.

 

“NON-REFUNDABLE” RETAINER PROVISIONS IN FEE AGREEMENTS ~ ARE THEY PROPER?

Submitted by
Michael Fish

Based in large part on
STATE BAR MANDATORY FEE COMMITTEE
ARBITRATION ADVISORY 2011-01

 

As a former Chair and former member of the State Bar Mandatory Fee Arbitration Committee, I was often called upon to review and evaluate the provisions of a fee agreement that characterizes a payment by the client as “non-refundable” or “earned upon receipt.” There are important differences, however, as to how we as attorneys are required to treat such payments, depending on the true nature of the payment and regardless of the language used in the fee agreement. Principally, these differences concern (1) the attorney’s obligation, if any, to refund some or all of an advance payment upon discharge or withdrawal and (2) whether the advance payment should be placed in the attorney’s client trust account or in the attorney’s own proprietary account. These are important distinctions to understand because if handled incorrectly by the attorney, it may be grounds for discipline.

DOES AN ATTORNEY HAVE AN OBLIGATION TO REFUND PAYMENTS MADE BY THE CLIENT?

A. Distinction Between “True” Retainers and Other Advance Payments.

As attorneys we should understand that when the attorney-client relationship has concluded the attorney must:

“Promptly refund any part of a fee paid in advance that has not been earned. This provision is not applicable to a true retainer fee which is paid solely for the purpose of ensuring the “availability” of the member for the matter.”

 Rule 3-700(D)(2) of the Rules of Professional Conduct (“Rules”) provides that unless the attorney and client have contracted for a “true retainer” (also known as a “classic retainer”), the attorney must refund any portion of an advance fee that the attorney has not yet earned. This raises the question of how to distinguish a “true retainer” from other forms of advance payments. Rule 3-700 (D)(2) itself suggests that a “true retainer” is one that is paid “solely for the purpose of ensuring the availability of the member.” (emphasis added.) This definition of a “true retainer” was adopted by the California Supreme Court in Baranowski v. State Bar (1979) 24 Cal.3d 153.

In Baranowski, an attorney was disciplined for failing to return advance payments to three clients. The court explained that:

“An advance fee payment as used in this context is to be distinguished from a classic retainer fee arrangement. A [classic] retainer is a sum of money paid by a client to secure an attorney’s availability over a given period of time. Thus, such a fee is earned by the attorney when paid since the attorney is entitled to the money regardless of whether he actually performs any services for the client.” [Id., at 164 fn.4].

It is important to note that the key defining characteristic of a “true” or “classic” retainer is that it is paid solely to secure the availability of the attorney over a given period of time and is not paid for the performance of any other services. In a true retainer situation, if the attorney’s services are eventually needed, those services would be paid for separately and no part of the retainer would be applied to pay for such services. Thus, if it is contemplated that the attorney will bill against the advance payment for actual services performed, then the advance is not a true retainer because the payment is not made solely to secure the availability of the attorney. Instead, such payments are more properly characterized as either a security deposit or an advance payment of fees for services.

An “advance payment” would typically be applied toward the client’s bill at the end of the current billing period. A “security deposit” is one held by the lawyer throughout the representation and refunded to the client once all services are completed and the attorney has been paid. For convenience, a security deposit is sometimes applied to the final invoice.

A true retainer is earned upon receipt (and is therefore non-refundable) because it takes the attorney out of the marketplace and precludes him or her from undertaking other legal work (e.g., work that may be in conflict with that client). It also requires that the attorney generally be available for consultation and legal services to the client. Sometimes a true retainer will take the form of a single payment to guarantee the attorney’s future availability for a specified period of time and other times as payments made on a recurring basis, such as a monthly retainer, to assure the attorney’s availability to represent the client for that month. Sometimes this is referred to as having the attorney “on retainer.” This is the ONLY type of retainer that is truly non-refundable.

As might be expected, true retainers are rare in today’s legal marketplace. Due to the abundance of competent attorneys in virtually all fields of law, there are probably only a handful of situations in which a client would want to pay a true retainer. Nonetheless, true retainers do have a legitimate, if infrequent, use in the legal marketplace. As one court has noted, “A lawyer of towering reputation, just by agreeing to represent a client, may cause a threatened lawsuit to vanish.” [Bain v. Weiffenbach (Fla.App. 1991) 590 So.2d 544]. In some cases, a client may perceive that only the retained attorney has the requisite skills to handle a particular matter and may want to guarantee that attorney’s availability. In other cases, a true retainer may be used simply to prevent the attorney from representing an adverse party. We used to see this on Wall Street where large brokerages wanted to tie up the services of the best firms to eliminate them from use by their competitive brokerage house or customers, or in small communities where doctors might pay a retainer to all of the local divorce specialists to keep them from being used by their spouses. Other than these examples though, true retainers would seem to be of little use to clients in everyday legal matters.

In other instances, a so-called “retainer” is effectively merely a security deposit or an advance payment of fees. This is an important distinction because a payment that represents a security deposit or an advance payment for services to be performed in the future remains the property of the client until earned by the attorney, and any unearned portion is to be returned to the client [Rule 3-700(D)(2); S.E.C. v. Interlink Data Network (9th Cir. 1996) 77 F.3d 1201]. An example of an advance payment for services would be where the attorney charges $200 per hour and collects a “retainer” of $2,000, giving the client credit for 10 hours of legal services to be performed in the future. If the attorney is discharged or the matter is otherwise concluded before the attorney has expended 10 hours of his or her time, the attorney must refund the balance of the advance payment that has not yet been earned. Thus, if the attorney had only expended four hours of time prior to being discharged, under Rule 3-700(D)(2) the attorney must promptly refund $1,200 to the client. In S.E.C. v. Interlink Data Network, supra, the law firm’s characterization of the fee as a “present payment for future work,” which it alleged was earned when paid, was unsuccessful in avoiding a refund of the unused portion of the fee to the client’s bankruptcy trustee.

B. Language of Fee Agreement Not Controlling.

You just can’t get around the fact that advance payments that are not “true” retainers are refundable under Rule 3-700(D)(2) to the extent they are unearned, no matter how the fee agreement characterizes the payment [Matthew v. State Bar (1989) 49 Cal.3d 784; see also Federal Savings & Loan v. Angell, Holmes and Lea (9th Cir. 1988) 838 F.2d 395, 397-398]. This is a trap for the unwary attorney who thinks he or she can keep these funds merely because they characterize them in their fee agreements as “non-refundable.” In Matthew, two fee agreements provided for a “non-refundable” retainer payment. In each instance it was contemplated that the attorney would bill against the “retainer”, but the attorney failed to fully perform the required services. The attorney was disciplined both for client abandonment and for failure to account for and return the unearned portion of the fees. Thus, the attorney’s characterization of the retainer as “non-refundable” in the fee agreement did not abrogate the attorney’s duty to return any portion of the fee that had not been earned. The Supreme Court emphasized that “Retention of unearned fees [is] serious misconduct warranting periods of actual suspension, and in cases of habitual misconduct, disbarment.” [Id. at 791]. Simply stated, “A member’s failure to promptly account for and return the unearned portion of an advance fee warrants discipline” [In the Matter of Fonte (Review Dept. 1994) 2 Cal. State Bar Ct. Rptr. 752].

Another case in which the language of the fee agreement did not control the characterization of the advance payment is In re: Matter of Lais (1998) 3 Cal. State Bar Ct. Rptr. 4 907. In the Lais case the attorney’s fee agreement read as follows:

“Client agrees to pay attorney for his services a fixed, non-refundable retainer fee of $2,750 and a sum equal to $275 per hour after the first ten hours of work. This fixed, nonrefundable retainer is paid to the attorney for the purpose of assuring his availability in the matter.”

This language is very clever on its face, but unenforceable. Even though the language of the agreement stated that the advance was being paid to assure the attorney’s availability and was nonrefundable, the advance was clearly also to be applied to the first ten hours of work. Therefore, the advance was obviously not paid solely to assure the attorney’s availability. The court held that the $2,750 payment was not a true retainer and that the attorney was required to refund any amount that had not been earned.

C. Unconscionability

There is another trap for the unwary practitioner. Civil Code section 1670.5 provides that a contract may be found to be unenforceable if its terms are unconscionable. In addition, Rule 4-200 of the Rules of Professional Conduct provides that an attorney may not charge or collect an illegal or unconscionable fee. It is therefore not surprising that in some cases, a payment that is properly characterized as a true retainer may nonetheless be unenforceable if it is found to be unconscionable.

The concept of unconscionability has both procedural and substantive elements [Samura v. Kaiser Foundation Health Plan, Inc. (1993) 17 Cal.App.4th 1284, 1296]. Substantive unconscionability refers to the harshness of the contract terms. “Substantive unconscionability is indicated by contract terms so one-sided as to shock the conscience.” [American Software, Inc. v. Ali (46 Cal.App.4th 1386, 1391; see also Bushman v. State Bar (1974) 11 Cal.3d 558, 563-566 (attorney’s fee found unconscionable where it was “so exorbitant and wholly disproportionate to the services performed as to shock the conscience.”)]. Procedural unconscionability refers to the manner in which the contract was negotiated and the circumstances of the parties at that time [Kinney v. United HealthCare Services, Inc. (1999) 70 Cal.App.4th 1322, 1329]. Examples of issues relevant to a procedural unconscionability analysis are the inequality in bargaining power between the parties and the absence of real negotiation or meaningful choice [American Software Inc. v. Ali (1996) 46 Cal.App.4th 1386, 1391].

Rule 4-200 sets forth eleven factors to be examined in determining whether an attorney’s fee is unconscionable. Some of these factors include: (1) the relative sophistication of the attorney and the client; (2) the amount of the fee in proportion to the value of the services rendered; and (3) the experience, reputation and ability of the attorney. One case held that a fee agreement requiring the client to pay a “minimum fee” upon discharge was unconscionable [In re: Scapa & Brown (1993) 2 Cal. State Bar Ct. Rptr. 635, 652].

Unconscionability in the context of a true retainer agreement would normally not be a consideration where the client is a sophisticated purchaser of legal services, a large insurance company or a corporation for example, or where the attorney’s skill and reputation are well known. As previously noted, however, the situations in which a client may have a valid reason for paying a true retainer fee are not very common. True retainers are therefore scrutinized to see if the fee is unconscionable. For example, a client may receive very little or no value at all by ensuring the availability of the attorney if the attorney has no particular reputation or expertise and if there is an abundance of other competent attorneys available to handle the client’s matter. In cases such as this, a true retainer might be unconscionable, particularly if the amount charged is very high and the client is not a sophisticated purchaser of legal services.

In examining whether a true retainer withstands an unconscionability analysis, it is important to remember that an agreement may only be voided on grounds of unconscionability based on the facts as they existed at the time the contract was formed [Civil Code section 1670.5; Rule 4-200(B)]. “The critical juncture for determining whether a contract is unconscionable is the moment when it is entered into by both parties, not whether it is unconscionable in light of subsequent events.” [American Software Inc. v. Ali (1996) 46 Cal.App.4th 1386, 1391].

Thus, if a client enters into a true retainer agreement with a famous criminal defense attorney because the client fears that he will be indicted and wants to ensure the defense attorney’s availability, the client could not void the contract on grounds of unconscionability merely because the indictment never occurred. On the other hand, if the same client entered into a true retainer agreement with an attorney who had no experience or reputation in handling criminal law matters, the retainer might be unconscionable depending upon the amount paid and the sophistication and bargaining power of the client, regardless of whether the indictment occurred or not.

 

WHERE SOULD AN PLACE ADVANCE FEES AND TRUE RETAINERS PIAID BY CLIENTS?

The issue of where attorneys should place advance payments depends on the nature of the payment. Rule 4-100 provides, in pertinent part:

“All funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses, shall be deposited in one or more identifiable bank accounts labeled “Trust Account”, “Client Funds Account” or words of similar import. No funds belonging to the member or the law firm shall be deposited therein or otherwise commingled.”

Because true retainers are earned upon receipt, they are not “funds held for the benefit of the client.” Therefore, Rule 4-100’s prohibition on commingling “funds belonging to the member” means that true retainers should be placed in the attorney’s proprietary account and not in the client trust account.

The California Supreme Court has not required “advance fees” to be deposited in the attorney’s trust account, but has instead expressly left the issue open. [See Baranowski v. State Bar (1979) 24 C3d 153, 164, 154 CR 752, 757]

Nevertheless, the Court has indicated its views on the subject. In Baranowski, supra, the Court did not impose discipline on the attorney for failing to deposit advance fees in a trust account (although discipline was warranted on other grounds). [Baranowski v. State Bar, supra, 24 C3d at 163–164, 154 CR at 756–757]. The Court did approve current CRPC 4–100 as proposed by the State Bar. In recommending the current Rule, the State Bar specifically noted that it did not intend the Rule to require advance fees to be deposited in a client’s trust account:

“The concept of including in paragraph (4–100)(A)) a requirement that ‘advances for fees’ be placed in the client trust account was considered but rejected because it is believed that such a provision is unworkable in light of the realities of the practice of law.” [In the Matter of the Proposed Amendments to the Rules of Professional Conduct, California Supreme Court Case No. Bar Misc. 5626, at “Request that the Supreme Court of California Approve Amendments to the Rules of Professional Conduct of the State Bar of California, and Memorandum and Supporting Documents in Explanation,“ at Memorandum, Dec. 1987, p. 42 (parentheses added); see also Cal. State Bar Form.Opn. 2007–172—”Under rule 4–100, as it has been construed by the courts, an attorney is ethically permitted, but not required, to deposit fees not yet earned into a client trust account“ (emphasis added)]

The California Supreme Court has thus far declined to approve a proposed Rule amendment requiring advance fees to be deposited into client trust accounts.   

CONCLUSION

In the context of the business operations of a law practice, when presented with circumstances where the client has made an advance payment and claims entitlement to a refund of all or a portion of the advance, attorneys should carefully consider the following issues:

  • Whether the retainer is a “true retainer” or a “classic retainer” that was paid solely to ensure the attorney’s availability and not paid for the performance of any particular legal services;
  • Whether the retainer merely represents an advance payment or security deposit for actual legal services to be performed in the future. A provision that the attorney will charge an hourly rate to be billed against the retainer is a conclusive indicator that the payment is an advance payment or a security deposit that is refundable unless fully earned;
  • If the payment represents a true retainer fee paid solely to ensure the availability of the attorney, whether the fee is unconscionable in light of the facts as they existed at the time the agreement was formed; and
  • To the extent it may bear upon the fees, costs, or both to which the attorney is entitled [See Business & Professions Code section 6203(a)], whether the attorney complied with Rule 4-100(A) in placing the advance payment in the appropriate account.

 

Michael J. Fish is a partner with the firm of Merrill, Arnone & Jones, LLP with locations in Santa Rosa and Novato.  He is a past chair of The State Bar of California Mandatory Fee Arbitration Committee and the Marin County Bar Association Client Relations Committee and a current member of the MCBA Board of Directors.

 

WHAT IS THIS THING CALLED “THE MANDATORY FEE ARBITRATION PROGRAM”?

On occasion, a client or litigant in propia persona may decide that they do not want to pay their attorney’s bill and may ask for information about their rights and responsibilities regarding a fee dispute. We have all heard it. “I could have done that myself!” “That Shyster! What did I pay him for?” “I was told that it would only cost $500, not $5,000.” The never-ending ulcer producing rhythm and chorus of the dissatisfied non-paying client.

In Marin County, we are fortunate enough to have a long-running successfully operated Mandatory Fee Arbitration with a committee of competent attorneys (and lay persons for the 3-person panel) ready, willing and able to serve to resolve these issues in a fair and expeditious manner.

The purpose of this article is to provide a summary of the essentials of the Mandatory Fee Arbitration Fee Arbitration Program in Marin County to enable you to correctly identify when a dispute is a proper subject for mandatory fee arbitration and refer parties to our bar association program, if appropriate.

 

What is the Mandatory Fee Arbitration Program?

The Mandatory Fee Arbitration Program (“the Program”) provides an opportunity to have a volunteer arbitrator resolve attorney fee and cost disputes between clients and attorneys through an informal, low-cost alternative to the court system.  The arbitrator determines whether the fees and costs charged by the attorney are reasonable for the services provided.  The Program is authorized by Business and Professions Code section 6200 et seq.  Fee arbitration is voluntary for the client, unless the parties previously agreed to arbitrate their disputes with the Program.  Fee Arbitration is mandatory for the attorney if the client requests it.  (See Bus. & Prof. Code §6200, subd. (c).)

 

How does the Program work?

Most Marin County fee arbitrations are conducted through our local bar association’s State Bar approved Mandatory Fee Arbitration Program.  Jurisdiction usually lies in the county where the legal services were provided, where the attorney maintains an office, or where the client lives.  Our local bar rules should be consulted to determine if jurisdiction exists. If our local program lacks jurisdiction, or if either party declares that he/she cannot obtain a fair hearing at the local level, the State Bar Office of Mandatory Fee Arbitration will assume jurisdiction of the matter.

 

Are All Disputes With an Attorney Covered by the Mandatory Fee Arbitration Program?

No.  Fee disputes where the fee or cost to be paid by the client has been determined pursuant to statute or court order are not covered.  (See Bus. & Prof. Code §6200, subd.(b)(3).) For example, court ordered or statutorily set attorney’s fees in family law, bankruptcy or probate cases are not covered by the Program.  Nor are claims for affirmative relief against the attorney for damages or otherwise based upon alleged malpractice or professional misconduct.  (See Bus. & Prof. Code §6200(b)(2).)  However, evidence of professional negligence or misconduct is admissible in the fee arbitration hearing.(Bus. & Prof. Code §6203, subd. (a.).)

 

What are the Client’s Rights Before an Attorney May File a Lawsuit to Collect Unpaid Attorney’s Fees?

Prior to or at the time of service of summons or claim in an action against the client, or prior to commencing a proceeding as an alternative to arbitration under the Mandatory Fee Arbitration Program, the attorney shall forward a written notice to the client of his or her right to arbitration under the Program.  The Notice shall be the Marin County Bar Association’s State Bar-approved Notice of Client’s Right to Arbitration.  The client’s failure to request fee arbitration within 30 days of his or her receipt of the Notice is deemed to be a waiver of the right to arbitration under the Program.  (See Bus. & Prof. Code §6201, subd.(a).) However, the court in this county has been known to order parties to fee arbitration through this program after the 30 days has elapsed and after the attorney has filed suit to collect fees and costs claimed due.

If the attorney has already filed a lawsuit against the client for unpaid fees, the client may elect to either respond to the lawsuit or request fee arbitration.  If the client files a response to the lawsuit, after Notice of the right to arbitration is given, technically his or her right to arbitrate the fee dispute is deemed waived.  (See Bus. & Prof. Code §6201, subd.(b).)   If the client requests fee arbitration, the lawsuit is automatically stayed.  (Bus. & Prof. Code §6201, subd. (c).)  To alert the court, the client should file the appropriate notice of automatic stay where the lawsuit is pending.  To preserve the right to arbitrate, the client should file a request for arbitration promptly. However, as stated hereinabove, the court in this county, recognizing the obvious benefits of our program, has ordered parties to participate in our mandatory fee arbitration as an alternative to the ADR program currently in place within our court process.

 

What Happens Once Arbitration Is Requested?

To request arbitration, a party submits a completed arbitration request form from the fee arbitration program and pays any required filing fee.  A telephone call or letter to the program requesting arbitration will not protect the right to arbitration.

The program will assign a sole arbitrator or a panel of three arbitrators (depending on the amount in dispute) to hear the dispute and determine whether the attorney’s fees and costs were reasonable.  If the arbitrator determines that the attorney’s fees were not reasonable, the client may be awarded a refund of attorney’s fees or costs.  Alternatively, the arbitrator may determine that no refund is owed or that the client owes fees to the attorney.

Depending on the circumstances, the arbitrator will consider a number of factors in making a decision.  These may include: whether there was a written fee agreement; the reasonable value of the attorney’s services; the amount of time the attorney spent on the case; and whether any misconduct or incompetency by the attorney affected the value of the services.  The arbitrator will decide the matter based only upon the evidence presented at the hearing.  The arbitration award will be served on the parties after the hearing is submitted for decision.

 

Is an Attorney Necessary for a Party in a Fee Arbitration?

Because the program is intended to be a low cost alternative to the court system, parties do not need an attorney to represent them in a fee arbitration. Either party may choose to hire an attorney at his or her own expense, but the arbitration award cannot include the attorney’s fees incurred for the preparation for, or appearance at the arbitration hearing.  (See Bus. & Prof. Code §6203, subd. (a).)

 

What if the Client Believes that the Attorney Engaged in Misconduct or Malpractice?

The Mandatory Fee Arbitration Program cannot help recover damages or offset expenses incurred by attorney malpractice or misconduct.

If the arbitrator determines that the attorney’s malpractice or professional misconduct reduced the value of the attorney’s services, the arbitrator can reduce the attorney’s fees accordingly.  However, the arbitrator cannot offset the fee or order the attorney to pay for any damages the attorney’s conduct may have caused. (See Bus. & Prof. Code §6203, subd. (a).)  If there are concerns about attorney malpractice, they should be discussed with an independent attorney.

In addition, a disciplinary complaint may be filed with the State Bar of California by calling the State Bar’s toll-free number: (800) 843-9053.  A copy of the pamphlet “What Can I Do If I Have A Problem With My Lawyer?” is available by calling the State Bar.  The pamphlet may also be accessed from the internet at www.calbar.ca.gov.

A discipline complaint and a request to arbitrate a fee dispute are separate matters.  Filing a complaint may result in disciplinary action against the attorney; however, the result may or may not require the attorney to pay restitution or unearned fees to the client.

 

Can the Client Still Litigate a Fee Dispute In Court If He/She Is Dissatisfied with the Arbitration Award?

 It depends on whether the fee arbitration proceeded as binding or non-binding.  Fee arbitrations are non-binding unless the parties agree in writing to binding arbitration after the dispute arises but prior to the hearing.  If the arbitration is binding, the award is final and neither party may request a new trial in court.  A binding award can only be corrected or vacated for very limited reasons as set forth in Code of Civil Procedure section 1285 et seq.  The time period for filing a petition to correct or vacate the award is 100 days from the date of service of the award. (Code. Civ. Proc.§1288.2.)

If the award is non-binding, a party has 30 days from the date of service of the award to file an action in court requesting a trial to reject the award.  (Bus. & Prof. Code §6204 (c).)  If a trial is not requested within the 30 days by either party, the award automatically becomes binding.  In small claims court, the parties may use the Judicial Council forms SC-100 and SC-101 to request a trial de novo. Form SC-101 contains useful information on this process.

 

How Does the Client Enforce An Arbitration Award Against the Attorney?  

An arbitration award must become final before it is enforceable.  Generally, that means that the 30- day time period to request trial de novo or the 100-day period to petition to vacate or correct the award must pass.  Either party may then request the court to enter a judgment confirming the arbitration award. The client may then enforce the judgment against the judgment debtor.  (See Code Civ. Proc.§1287.4.)

If the arbitration award rendered is in favor of the client for a refund of attorney’s fees or costs, the client may request the State Bar for assistance in enforcing the award or judgment. (See Bus. & Prof. Code §6203, subd.(d).) The attorney’s reply may consist of a payment proposal, a claim of financial inability to pay or lack of  liability.  By statute, the State Bar is authorized to enforce an unpaid award by imposing administrative penalties on the attorney member.  It may also seek a State Bar Court order enrolling the attorney on inactive status until the award is paid. (Ibid.)

 

That’s It!

So, take a deep breath! There is life after a disgruntled non-paying client and a reasonable means to reconcile your differences.

 

For further information about the Mandatory Fee Arbitration Program, please contact:

Robynn Gaspar,  Executive Director

Marin County Bar Association

(415) 499-1314

 

WHAT IS A REASONABLE ATTORNEY FEE?

As summarized by Michael J. Fish from the State Bar Mandatory Fee Arbitration, Arbitration Advisory 98-03, Determination of a “Reasonable” Fee, dated June 23, 1998.

As attorneys we are often called upon to look at the reasonableness of our own fees charged for the services we rendered—if not by our clients, then by our own sense of fairness.

When a client’s challenge raises the requirement of determining a reasonable attorney fee, the burden of establishing entitlement to the amount of the charged fee is upon the attorney.[1]

In cases involving statutory awards of attorney’s fees, it is clear that the party seeking the award has the burden of establishing that the fees incurred were reasonably necessary, and reasonable in amount.[2]

It is therefore important for the attorney to regularly review their billing records and fees and to take a reality check.

FACTORS WHICH AFFECT DETERMINATION OF A REASONABLE FEE

Whether a fee is reasonable, unreasonable or unconscionable is often a matter of degree and involves the assessment of a multiplicity of factors which are discussed below.  Consideration should be given to each factor.

One of the most significant factors in determining a reasonable fee is the amount of time spent.[3]  Thus an attorney who fails to keep adequate time records, or uses the questionable practice of “lumping” time or “block billing” may have difficulty meeting the burden of proof.  The practice of block billing will also violate Bus. & Prof. Code § 6148(b) if the client cannot reasonably ascertain the time and rate for particular tasks.

The State Bar Mandatory Fee Arbitration Committee has formulated a list of relevant questions which may provide some guidance in determining the reasonableness of your attorney’s fees.[4]  The questions are designed to trigger appropriate areas of inquiry and analysis.  Obviously, the issues raised in these questions will not be relevant to every case, but it is recommended that each attorney consider them in the course of conducting their own regular reasonable fee analysis.

  1. Did the attorney do what the client requested? Did the attorney accomplish the client’s goals (and was it reasonably possible to do so?)
  2. Were the services provided by the attorney necessary, reasonable, and efficient, or excessive, duplicative, and inefficient?
  3. Were the results obtained by the attorney generally considered successful, or within the reasonable expectations of the parties?
  4. Did the client receive a benefit from the services commensurate to the amount of compensation sought by the attorney? Did the client receive fair value for the services performed?
  5. Did the client have a reasonable expectation of a fee that would be charged, and if so, what rate and amount? Is the fee charged substantially more or less than the reasonable expectations of the parties?
  6. Did the client have any understanding as to the approximate amount of time which would be incurred?
  7. Was an estimate provided? If so, how does the fee sought to be charged compare with the estimate?
  8. What are the prevailing hourly rates in the legal community in which the services were performed?
  9. Did this representation involve peculiar expertise, beyond the capabilities of an average attorney?
  10. Is there any reason to believe that the attorney’s services or the complexity of the matter required extraordinary effort or talent to justify a fee in excess of rates customarily charged by other attorneys in the community?
  11. Was this representation particularly contentious, or involve extraordinary services which would warrant an enhancement over the community standard?
  12. Was the client kept reasonably informed during the representation of the services being performed and the charges incurred?
  13. Were regular billing statements sent to the client?
  14. Did the billing statements provide adequate detail and comply with Business and Professions Code 6148(b)?
  15. Did the attorney adequately communicate with the client regarding the strategies, legal options, and choices which impacted the amount of the fee?
  16. Were there communications difficulties between attorney and client [Rule 3-500 of the Rules of Professional Conduct]?
  17. Was there any conduct, act or omission of the attorney which affected the outcome of the representation in a negative way? Is there any professional misconduct which affects the value of the fee?
  18. Did such act or omission deny to the client the benefit of competent legal representation for which the attorney was retained?
  19. Was the attorney’s conduct professional? Did the attorney comply with the ethical standards of the profession?
  20. Did the attorney complete the project? Was the project abandoned?
  21. Was the client required to retain another attorney to accomplish the client’s goals?
  22. Were the client’s overall fees or expenses increased by the necessity to discharge the attorney or retain other counsel?
  23. Did the client impose conditions which made it more difficult or time consuming for the attorney to render the requested services? Was the client difficult, unreasonable or demanding?
  24. Was the amount of fee or the time incurred affected by the personalities of the adverse party or its counsel?
  25. Was the tenor of the litigation particularly contentious (i.e. “scorched earth” or “take no prisoners” litigation)? If so, who was responsible for that?
  26. How long have the attorney and client done business with each other?
  27. Did the client have reason to know the attorney’s billing practices and procedures, such that the client was not surprised?
  28. Was the client adequately informed of the litigation process and the projected fees or expenses which might be incurred?

There are also some statutory principles to consider.  Bus. & Prof. Code § 6146–6148 and applicable case law will limit an attorney to a reasonable fee in many instances.

The Rules of Professional Conduct also provide guidance.  They prohibit the charging of an “illegal or unconscionable fee” [Rule 4-200 of the Rules of Prof. Conduct (“RPC”)].  Under RPC Rule 4-200(B), unconscionability is determined on the facts and circumstances existing at the time that the agreement is entered into, in consideration of the following factors:

  1. the amount of fee in proportion to the value of the services performed;
  2. the relative sophistication of the member and the client;
  3. the novelty and difficulty of the question involved and the skill requisite to perform the legal service properly;
  4. the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the member;
  5. the amount involved and the results obtained;
  6. the time limitations imposed by the client or by the circumstances;
  7. the nature and length of the professional relationship;
  8. the experience, reputation, and ability of the member or members performing the services;
  9. whether the fee is fixed or contingent;
  10. the time and labor required; and
  11. the informed consent of the client to the fee.

The most relevant of the Rule 4-200 factors are items (1) comparison of fee charged to value received; (8) the experience, reputation and ability of the attorney; and (11) the informed consent of the client to the fee.[5]  Informed consent generally requires that the client’s consent be obtained after the client has been fully informed of the relevant facts and circumstances, or is otherwise aware of them.  The client must be sufficiently aware of the terms and conditions of the fee arrangement so as to make an informed decision.

A fee which is unconscionable is necessarily unreasonable, and cannot be allowed.  The real question you must consider is whether the unconscionability is so extreme as to warrant complete denial of a fee or whether the fee should be adjusted and allowed on a quantum meruit basis to avoid unjust enrichment to the client.

An unconscionable fee is difficult to define, prompting comments like:  “I don’t know how to define it, but I know it when I see it.”  An unconscionable fee is one which is “so exorbitant and wholly disproportionate to the services performed as to shock the conscience”.[6]

An attorney’s fee that is high is not the same as an “unconscionable” fee;[7] but, a high fee may be found to be an “unreasonable” fee.

If the fees charged by the attorney are disproportionately high compared with similar services performed in the legal marketplace where the contested services are performed, then such fee may be considered unreasonable.  Rates and charges on par with similar charges for similar services performed by other attorneys in the community with similar experience may be considered “reasonable.”[8]

In a small community where hourly rates average $150–200/hour, it may be highly unusual or excessive for an attorney to charge $400/hour.  Such a rate may not be considered excessive in a major metropolitan area.  In analyzing the weight to be given to a community standard, one must also consider whether the attorney’s higher rate is justified by reputation, by specialized experience in a complex field of practice or by the client’s informed consent to the rate.

The internal cost of providing the services, however, is not relevant to a determination of their value.[9]  Thus it is not proper to consider the amount paid by a law firm to its associates or contract attorneys, to determine whether the profit margin is reasonable.  Attorneys’ fees for hours spent should be awarded based on quality of the work done, the benefit it produces for the client and the community, not the cost of heating and lighting the office where the work was performed.[10]

The primary inquiry in hourly rate matters is the quality and necessity of the services and a comparison of their cost with what would be charged for such services by other attorneys in the community who have similar experience and ability.[11]

A lawyer’s customary hourly rate can be evaluated by comparison to that rate charged by others in the legal community with similar experience.[12]  The number of hours expended by a lawyer can also be evaluated in light of how long it would have taken other attorneys to perform the same tasks.  After consideration of these factors, adjustments can be made to the hourly rate and number of hours expended and this should yield a reasonable value of the work completed.[13]

The determination of a “reasonable” fee also involves consideration of the adequacy of the attorney’s time records.[14]  Information crucial to making a determination regarding a reasonable fee in an hourly context thus would include whether the attorney maintained records showing the number of hours worked, billing rates, types of issues dealt with, and appearances made on the client’s behalf.[15]  This is a performance based analysis in which the arbitrator looks not only at the quantity of time spent but the quality of the time as well.

Failure to maintain adequate time and billing records, or failure of the billing statements to clearly show the amount, rate, basis for the calculation or other method of determining the fees and costs charged, in addition to being a potential violation of Bus. & Prof. Code Section 6148(b), may be a reason to disallow some or all of the claimed charges based upon the inadequacy of the evidence supporting them.  Additionally, time records should be scrutinized for such matters as duplication of services and excessive services in determining the reasonableness of the overall fee claimed by the attorney.[16]

The nature of the matter and the amount at issue should be considered, such as in the case of Levy v. Toyota Motor Sales, U.S.A. Inc. (1992) 4 Cal.App.4th 807, where the attorneys requested $137,459 in connection with a lemon law case over a vehicle which had a value of $22,000.  The court rejected the request and reduced attorneys’ fees to $30,000.

Rate increases are improper unless provided in a valid contract and properly noticed to the client.[17]  Fixed or minimum time charges (i.e., four hours for any court appearance) are impermissible unless clearly disclosed and specified in a valid fee agreement.[18]  Such charges should not be allowed if the effect is to compound the attorney’s hourly rate (i.e., one attorney covers three appearances in one morning and bills four hours to each of these clients).  Such a billing practice may be fraudulent unless it has been disclosed to the client and there is an agreement that the attorney may bill the same hours to multiple clients.  In such cases, the arbitrator should closely examine whether the client has given informed consent.

Attorneys may be faced with a case which is prosecuted “as a matter of principle”.  The fee sought to be charged grossly exceeds the recovery derived, resulting in the client receiving little or no financial benefit.  Sometimes this occurs in cases where the client asks the attorney to prosecute or defend a case “as a matter of principle”.  Such matters are inherently uneconomical.  The decision in such cases may turn on whether the client gave informed consent (i.e., with knowledge of the likelihood that fees may exceed results).  Fees may be adjusted in such cases, where appropriate.

CONTINGENCY FEES

The issues which arise in fee disputes involving contingency fees are the subject of a separate Arbitrator Advisory entitled “Fee Arbitration Issues Involving Contingency Fees” [Advisory 97-03 dated August 22, 1997].

Applying the factors in Rule 4-200(B), the courts have upheld contingency fee awards where a complying written contract exists even though the attorney may receive compensation which exceeds the reasonable value of his or her services if an hourly rate had been applied.[19]  The rationale for this is that the lawyer on a contingency fee contract receives nothing unless the plaintiff obtains a recovery.  Further, the fee is contingent only on the amount recovered.  As such, the lawyer runs the risk that even if successful, the amount recovered will yield a percentage fee which does not provide adequate compensation.[20]  Further, there is a delay in the attorney receiving the fee until conclusion of the case.  The lawyer, in effect, finances the case for the client during the pendency of the lawsuit.

It has been held that a one-third contingency was not unconscionable even though the defendant lost by default, where the parties could not ascertain that defendant would default, and the services might have required a contested trial and possible appeal.[21]  The reasonableness of the contingent fee is to be judged not by hindsight but by the “situation as it appeared to the parties at the time the contract was entered into”.[22]

A personal injury fee contract will often provide for a one-third contingency.  This is routine and commonly accepted.  But if the attorney settles the case with the adjuster after three phone calls and two hours of work, the fee may be unreasonable or even unconscionable in light of all factors.  The determination must necessarily consider the relevant facts, the unconscionability factors described above, and the circumstances known to the parties at the time.  A case with severe injuries and immensely strong settlement value may not be contingent at all where it is likely that the recovery will be quickly derived through an insurance carrier without litigation and such event is predictable to a virtual certainty.  The “unconscionability” implications of such an arrangement may weigh heavily in the reasonable fee analysis.

CONCLUSION:

While the foregoing may not be a complete recitation of all of the considerations which may be applicable to the setting of a “reasonable” fee in all cases, it may be used as a guide regarding the factors which should be considered and how they might be applied generally. In each case the inquiry will be “fact-specific”.  Each case requires the attorney to apply his or her individual judgment and reasonable discretion, with a view toward achieving fundamental fairness.  Remember:  BE FAIR!

Michael J. Fish is a partner with the firm of Merrill, Arnone & Jones, LLP, located in Santa Rosa with a satellite office in Novato.  He is a past chair of The State Bar of California Mandatory Fee Arbitration Committee, former Chair of the Marin County Bar Association Client Relations Committee and a current member of the MCBA Board of Directors.

Please consider offering to serve as a Fee Arbitrator on the Sonoma County Bar Association Panel.  

 

[1] See State Bar Mandatory Fee Arbitration, Arbitrator Advisory 96-03, Burden of Proof in Fee Arbitrations dated June 7, 1996.

[2] Levy v. Toyota Motor Sales, U.S.A., Inc. (1992) 4 Cal.App.4th 807, 816.

[3] Cazares v. Saenz (1989) 208 Cal.App.3d 279, 287-89.

[4] State Bar Mandatory Fee Arbitration, Arbitration Advisory 98-03, Determination of a “Reasonable” Fee, dated June 23, 1998.

[5] Shaffer v. Superior Court, supra, 33 Cal.App.4th 993, 1002.

[6] Goldstone v. State Bar (1931) 214 C. 490, 498.

[7] Aronin v. State Bar of California (1990) 52 Cal.3d 276.

[8] Shaffer v. Superior Court, supra, 33 Cal.App.4th 993, 1002-3.

[9] id. at 1002-3.

[10] id. at 1002; Margolan v. Regional Planning Commission of Los Angeles County (1982) 134 Cal.App.3d 999.

[11] Shaffer v. Superior Court (1995) 33 Cal.App.4th 993, 1002-3.

[12] Cazares v. Saenz (1989) 208 Cal.App.3d 279.

[13] Cazares v. Saenz id. at 279.

[14] Margolan v. Regional Planning Commission of Los Angeles County (1982) 134 Cal.App.3d 999; Martino v. Denevi (1986) 182 Cal.App.3d 533.

[15] Martino v. Denevi (1986) 182 Cal.App.3d 533.

[16] Margolan v. Regional Planning Commission of Los Angeles County (1982) 134 Cal.App.3d 999; Martino v. Denevi (1986) 182 Cal.App.3d 533.

[17] Severson & Werson v. Bolinger (1991) 235 Cal.App.3d 1569, 1572-73.

[18] ABA Formal Opinion 03-379; COPRAC Formal Opinion No. 1996-147; Los Angeles County Bar Assn. Ethics Opinion No. 479.

[19] See, Franklin v. Appel (1992) 8 Cal.App.4th 875, where a fee award which was equivalent of $1,184 per hour was affirmed on appeal. See also, Cazares v. Saenz (1989) 208 Cal.App.3d 279.

[20] Cazares v. Saenz, supra, 208 Cal.App.3d 279.

[21] Setzer v. Robinson (1962) 57 Cal.2d 213, 218.

[22] Youngblood v. Higgins (1956) 146 Cal.App.2d 350.