July 2000

Ethics and the Law
Changing Fee Agreements

by Barrie Althoff, WSBA Chief Disciplinary Counsel

This article looks at some ethical issues arising when, after entering into an initial fee agreement with a client, the lawyer seeks to change that agreement. It first identifies the applicable ethical principles, and then briefly looks at the contractual remedy of accord and satisfaction. It then applies these, raising more questions than it answers, to the thorny situation of attorney fees being recovered from a personal injury protection insurer long after complete resolution with the tortfeasor of the underlying litigation and distribution of all recovered funds. The primary ethical obligations of the lawyer under the Rules of Professional Conduct addressed here are the lawyer's duty as a fiduciary to assure that the lawyer's fee is reasonable and to avoid conflicts of interest.

Although a lawyer must deal honestly and fairly with a prospective client, the lawyer does not have a fiduciary relationship until the lawyer-client relationship is established. Until then, a lawyer has the opportunity to look out for and protect his or her own interests without regard to whether it is in the interests of the prospective client, and to bargain at arm's length about the terms and conditions of the lawyer rendering legal services, provided only that the resultant fee is not unreasonable under the RPCs. Once the lawyer-client relationship is established, however, the lawyer becomes a fiduciary and loses that bargaining position.

The basic ethical rule on lawyer fees, set out in RPC 1.5(a), is easy to state: "A lawyer's fee shall be reasonable." Applying it is far more difficult. RPC 1.5(a) sets out eight non-exclusive factors to be considered in determining the reasonableness of a fee. Among them are "the terms of the fee agreement between the lawyer and the client" (RPC 1.5(a)(1)), and "whether the fee agreement or confirming writing demonstrates that the client…received a reasonable and fair disclosure of material elements of the fee agreement and of the lawyer's billing practices" (RPC 1.5(a)(8)). Quite aside from the fact that it is poor business practice not to communicate such information to a client, the lawyer also has an ethical duty under RPC 1.4 to explain a matter to the client so that the client can make informed decisions regarding the representation. For every buy-sell transaction, whether for widgets, pigs or legal services, price and terms of payment are material terms. Unless they are communicated to the client, however, the client is being asked to buy the proverbial "pig in a poke."

RPC 1.5(b) requires a lawyer who has not regularly represented a client, or whose fee agreement is substantially different from that previously used with the client, to take the pig out of the poke. Specifically, RPC 1.5(b) requires the lawyer to communicate to the client, preferably in writing, before or within a reasonable time after commencing the representation, "the basis or rate of the fee or factors involved in determining the charges for legal services and the lawyer's billing practices." Although the rule only requires disclosure of the basis or rate of the fee to be in writing when requested by the client, the lawyer would be wise to always provide that disclosure in writing. If the lawyer has not made the disclosures required under RPC 1.5(b), or the client has not agreed to the stated basis, factors or practices for the representation, the lawyer as a fiduciary has a heavy burden to prove he or she is entitled to a fee.

RPC 1.5(c) generally permits a lawyer's fee to be contingent on the outcome of the matter for which the service is being rendered. RPC 1.5(c)(1) requires a contingent fee agreement to be in writing and to state "the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated." The bedrock principle, of course, is that the entire recovery belongs to the client; only to the extent that the client explicitly consents, based on full information of all material facts, is the lawyer entitled to any of it. RPC 1.5(c)(1) also requires the lawyer to provide the client, upon conclusion of the contingent fee matter, "with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination." The purpose of the written statement is to provide the client with a full accounting of how the lawyer has handled the client's recovery so the client can make an informed decision, based on all material facts, on whether the lawyer has served the client as agreed.

In drafting and explaining to the client any fee agreement, the lawyer should recognize that in any dispute with the client, any ambiguity in the agreement will be interpreted against the lawyer. For example, if the lawyer has not explained to the client alternatives to contingent fees, or has not clearly explained the difference between the lawyer taking a contingent fee on the gross recovery as opposed to the net recovery, the lawyer is likely to have a dissatisfied client, particularly where the recovery is small. Clear examples in the fee agreement showing each category of likely material expense, showing modest or even token recovery amounts, and demonstrating the difference between gross and net recoveries, will help the client understand the agreement and the lawyer defend it.

In determining a contingent fee, the lawyer should weigh the degree of risk of nonrecovery, the amount of recovery reasonably likely, the estimated effort needed for recovery, and the estimated liability, so that the fee is not viewed as unreasonable. The lawyer is far better served by willingly surrendering on his or her own initiative some of the fee which the fee agreement says the lawyer is entitled to, rather than having the fee reduced or nullified as unreasonable after litigation. Although Formal Opinion 94-389 (1994) of the ABA Committee on Ethics and Professional Responsibility permits a lawyer to charge a contingent fee even when liability is clear and recovery certain, with the amount of recovery being the only real issue, it also advises that a fee agreement should provide for a smaller percentage fee when recovery is early than when the case goes through discovery, trial and appeal. WSBA Formal Ethics Opinion 191 (1994), rejecting sub silentio a portion of the ABA opinion, concludes, however, that Washington's RPCs prohibit a lawyer from basing a contingent fee on the larger of the recovery obtained at trial or in arbitration or the amount offered in settlement. Likewise, a number of commentators and courts have rejected the notion that contingent fees are reasonable where there is in fact no material contingency. See, for example, Brickman, ABA Regulation of Contingency Fees: Money Talks, Ethics Walks, 65 Fordham L. Rev. 247 (1996), and Brickman, Contingent Fees Without Contingencies: Hamlet without the Prince of Denmark?, 37 UCLA L. Rev. 29 (1989). See also, ABA Annotated Model Rules of Professional Conduct (4th Ed., 1999), 57-58.

In most cases, initial fee agreements serve lawyers and clients well. The legal representation is usually completed, and the lawyer is paid in accordance with the terms of the agreement, without any material changes to the fee agreement being made or being necessary.

Where there is a fee dispute after the agreement is entered, it is usually the client, now freed from the legal quandary that first brought the client to the lawyer, or now first facing the reality of having to pay an outstanding bill for services already rendered, who is contending in retrospect that the previously agreed amount of legal fees was too much. In some cases, of course, a fee adjustment is made simply to reflect the fact that things did not work out the way both lawyer and client expected them to. The lawyer and client usually resolve such disputes by informally "amending" their fee agreement by the lawyer simply reducing his fee, perhaps refunding some of the already paid fees, or by writing off all or part of any outstanding fee balance.

The lawyer reduces his or her fees not because the lawyer is not in fact legally and ethically entitled to the full agreed fee, but rather because the lawyer's primary professional goal is to serve the client well, and payment is only a very secondary consideration. Substantially all lawyers have been cheated of their fairly earned fees by a number of unscrupulous clients — it is simply one of the unpleasant facts of practicing law. Such informal amendments to fee agreements also, of course, reduce the likelihood of the client making malpractice or disciplinary claims against the lawyer, and thus allow both lawyer and client to get on with their lives. Overwhelmingly, these informal day-to-day "amendments" to fee agreements work well for both lawyer and client and completely resolve any fee dispute.

In a small minority of cases, the lawyer seeks not to reduce his or her pre-agreed legal fees, but rather to increase them or to obtain more security that the fees will in fact be paid by the client. These cases raise troublesome ethical issues.

Where the lawyer has made the disclosures required under RPC 1.5(b) but later seeks to change the fee agreement, the lawyer has a very heavy burden to justify any change that would benefit the lawyer. The lawyer must be able to justify placing the lawyer's personal interests above the lawyer's fiduciary duty of loyalty to the client. In doing so the lawyer must overcome the presumption that any ambiguity or uncertainty in the fee agreement written by the lawyer should be read against the lawyer as the drafter of the agreement. The lawyer must also overcome the presumption that the lawyer's fiduciary duty of loyalty to the client should prevail over the lawyer's personal interests. Finally, the lawyer must overcome the presumption that any lawyer-client business transaction that benefits the lawyer is fraudulent. See, for example, In re McGlothlen, 99 Wn.2d 515, 663 P.2d 1330 (1983), and In re McMullen, 127 Wn.2d 150, 896 P.2d 1281 (1995).

The Washington Supreme Court has made clear the primacy of a lawyer's fiduciary obligations to a client where a lawyer's contractual rights and ethical duties intersect. Perez v. Pappas, 98 Wn.2d 835 (1983). Although the case arose under the ethical rules applicable before adoption in 1985 of the RPCs, the Court's analysis applies equally well under the RPCs.

In Perez, the client's third lawyer (the client had fired the first two) agreed to represent the client in a personal injury action for a 35 percent contingent fee. After the lawyer negotiated a structured settlement accepted by the client, both the lawyer and client agreed the lawyer would instead take a fixed cash amount. The lawyer and client differed as to the intent of the amendment and whether it was based on the present value of the structured settlement. Six months thereafter, the client complained about the amended fixed fee to the lawyer, who agreed to and did repay the portion of the fee ($37,500) exceeding the initial 35 percent, plus interest thereon. The client accepted the repayment. Neither the initial 35 percent agreement, the amended fixed amount agreement, nor the excess repayment agreement were in writing, nor did the lawyer ever provide the client with a final written accounting of the settlement. Thereafter, the client, through his fourth lawyer, sued the third lawyer, charging breach of fiduciary duty and seeking alternatively complete forfeiture of all attorney fees, or forfeiture of all fees in excess of quantum meruit fees, or repayment of fees to result in the client obtaining a specified fixed recovery.

The trial court found that the parties had agreed to a 35 percent fee, and that the lawyer breached his fiduciary duty by renegotiating his fee upward and by failing to give the client an accounting, but that the breach was cured by the subsequent agreement and payment. The trial court rejected the theory that the repayment represented an accord and satisfaction, because in its view there was no dispute as to what the fee should be, but only as to the cash value of the settlement. The client appealed.

The Supreme Court affirmed (at 839-840) the result reached by the trial court, but on different grounds:

We hold that although respondent did a commendable job in negotiating a settlement for appellants, he did in fact breach his fiduciary duties in renegotiating the fee for his services without full disclosure and in failing to give a written accounting. We disagree with the trial court that a breach of fiduciary duty can be [839/840] "cured." It is well settled that restitution is no defense to an attorney's violation of the Code of Professional Responsibility, In re Pennington, 73 Wn.2d 601, 440 P.2d 175 (1968), and this appears to us to be an analogous situation. However, this is not an attorney discipline case and we can see no legal or public policy reasons which prevent an attorney and client from availing themselves of the contract remedy of accord and satisfaction. There was a genuine dispute in the instant case as to the fees and the basis of calculating those fees. We hold that the parties resolved the dispute regarding the fees to which respondent was entitled by agreement. Therefore respondent's payment of $37,500 constituted an effective accord and satisfaction.

While agreeing that the lawyer breached his fiduciary duty by increasing his fee from the 35 percent contingent amount to the higher fixed amount, the court also concluded that the breach had been resolved through the contractual remedy of accord and satisfaction. It stated (at 840-841):

…[A]n attorney must continually be aware that the [840/841] attorney-client relationship is a fiduciary one as a matter of law and thus the attorney owes the highest duty to the client…. [citations omitted] We agree with a well recognized principle that:

Once the attorney-client relationship is established, any modification of the fee arrangement becomes subject to the fiduciary obligations and the well-established presumptions. The courts have generally given particular attention and scrutiny to fee contracts made or altered during the attorney-client relationship.

…Additionally, if the renegotiation results in greater compensation than counsel was entitled to under the original agreement, courts may refuse to enforce the renegotiation unless it is supported by new consideration.

Accordingly, respondent's renegotiation of his fee after settlement must be carefully scrutinized….

Since close scrutiny reveals that all the contingencies cited by respondent as justifications for renegotiating his fee upward were essentially nonexistent, we agree with the trial court's conclusion that a breach of fiduciary duty occurred.

The Court found that the contractual remedy of accord and satisfaction was applicable, observing that it consists of a bona fide dispute, an agreement to settle the dispute and performance of the agreement. It also concluded that the new contract must rest on consideration, which exists when the agreement compromises the parties' differences in a dispute. The Court rejected the client's contention, based on Gleason v. Metropolitan Mortgage Co., 15 Wn.App. 481, 551 P.2d 147 (1976), that there can never be an accord and satisfaction between a fiduciary and a principal. In doing so, it quoted that case as holding merely that "[i]n the absence of an express agreement, made upon full revelation, no accord and satisfaction will arise" in a fiduciary relationship case, but that in Perez there was both an express agreement and full revelation.

The importance of "full revelation," that is, of the lawyer fully informing the client of all material facts when seeking to resolve a dispute with the client, is shown in a recent Court of Appeals decision, Simburg, Ketter v. Olshan, 97 Wn.App. 901 (Div.I, 1999). After completing representation of a client in commercial litigation on an hourly basis, during which the client had paid about $200,000 in fees and $50,000 in costs on interim bills, the law firm sent a final billing for about $164,000. After considerable discussions about the bill, the law firm agreed with the client to further reduce its fees and accept interest-free monthly installment payments of $2,000 or more on approximately $154,000 in principal. After paying for 18 months, the client demanded a further reduction in fees to, it appears, approximately the amount the client had already paid. The client declined the law firm's offer to further reduce the balance by 15 percent if paid off within a specified time period, and neither side further compromised. The law firm then sued for its outstanding fees. The trial court granted the law firm summary judgment. The Court of Appeals reversed and remanded, holding that there was a material issue of fact and accordingly summary judgment had not been appropriate.

After discussing Perez, the Court focused on the client's contention that the law firm had not made a full revelation to the client of its billing practices before it entered into an accord on unpaid fees. Specifically, the client argued that the law firm's billing statements failed to disclose the hourly billing rates for each attorney and staff person, any changes to those rates, the minimum billing increment allegedly charged, excessive billings, the specific attorneys and staff persons who performed services and a particular attorney's participation in the litigation and certain decisions he made.

After reviewing the record on the billing statements, the Court concluded that the law firm violated RPC 1.5(b) by not communicating the basis of its fee in writing when the client requested a review of its billings before entering into the accord. The Court thus concluded (at 910) that for purposes of review of the trial court's summary judgment in favor of the law firm, "a reasonable person could conclude that the … firm did not make a full revelation of its billing practices before entering into an accord for unpaid fees" with the client. Accordingly, it reversed and remanded the case.

In changing a fee arrangement to increase the amount or likelihood of payment of legal fees, the lawyer has a material conflict between the lawyer's own interests and those of the client. RPC 1.7 and 1.8 set out the applicable conflict of interest rules.

Under RPC 1.7(b), if there is any possibility that the lawyer's representation of a client may be materially limited by the lawyer's own interests, the lawyer may not represent or continue to represent the client unless: 1) the lawyer reasonably believes the representation will not be adversely affected, and 2) the client consents in writing after consultation and a full disclosure of the material facts. The rule is intended to assure the lawyer's loyalty to the client and that the lawyer's own interests do not adversely affect the representation. Comment 6 to Rule 1.7(b) of the ABA Model Rules of Professional Conduct. As a practical matter, this means the lawyer has the choice of living with the existing fee agreement, withdrawing from the representation, or complying with the belief-disclosure-consent requirements of RPC 1.7(b).

Even if the lawyer concludes that the representation will not be materially limited by the lawyer's own interests, if a lawyer enters a business transaction with the client, the lawyer must also comply with the RPC 1.8(a). Amendment of an existing fee agreement is subject to this rule. The rule prohibits a lawyer who is representing a client from entering into a business transaction with a client unless: 1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client, and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client; 2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and 3) the client consents thereto. Again, the lawyer in effect has the same choices as under RPC 1.7(b).

While the conditions of RPC 1.7(b) and 1.8(a) are not always easy (and in some cases may even be impossible) to meet, compliance is essential if the lawyer is to meet the lawyer's fiduciary duties to the client. Failure to do so may lead to malpractice, disciplinary and breach of fiduciary duty charges. For a more detailed discussion of ethical issues arising under RPC 1.7(b) and 1.8(a), see Althoff, "Investing in Your Clients' Business," Washington State Bar News, March 2000, p. 45.

The financial terms of a legal representation agreement are "entrepreneurial aspects of the practice of law" which Short v. Demopolis, 103 Wn.2d 52 (1984), held to be subject to the Washington Consumer Protection Statute. Any material change in the terms of a fee agreement which is adverse to the client's interest is subject to the requirements of RPC 1.8(a). In the context of changes to a fee agreement, the rule is intended to prevent a lawyer from taking unfair advantage of a client, by demanding, for example, more fees or additional security for those fees on the eve of litigation. See, for example, In re Hatch, Bar News, January 1999, p. 47 (lawyer censured for seeking security for legal fees immediately prior to a settlement conference, thus depriving the client of the opportunity required under RPC 1.8(a) to seek independent counsel).

A 1998 Supreme Court decision, Mahler v. Szucs, 135 Wn.2d 398, 957 P.2d 632 (1998), raises interesting ethical issues relating to attorney fees even though the decision itself is based on contractual, subrogation and common-fund analysis and not on the RPCs.

When insureds resolve claims against tortfeasors, they usually collect and set aside amounts as reimbursements of the personal injury protection benefits paid by the insurers. Before Mahler, insureds often claimed, and insurers denied, a right to offset from those amounts a proportionate share of the insured's attorney fees incurred to recover amounts (including the amounts of PIP benefit payments) from the tortfeasors (referred to in this article as "disputed fees"). As a practical matter, lawyers, while believing they were entitled to the disputed fees, often waived or surrendered their right to them simply to serve their clients and make a settlement possible. Facing conflicting results in the lower courts on the obligation of insurers to pay the disputed fees, the Supreme Court consolidated several cases. In Mahler it held that the insurers were required to pay the disputed fees.

In reaching its decision, the Court rejected various contentions of the insurers, including claims based on ethics that the attorneys' dual representation created potential conflicts of interest, and that it was "unethical for an attorney to calculate a contingent fee based on PIP payments the client received without any effort by the attorney." Holding that PIP insurers must pay the disputed fees, the Court approvingly quoted (at 425, n. 17) an insurance treatise:

It is grossly inequitable to expect an insured … in the process of protecting his own interest, to protect those of the [insurer] as well and still pay counsel for his labors out of his own pocket, or out of the proceeds of the remaining funds. And this is precisely the view taken by the overwhelming majority of decisions, in that a proportionate share of fees and expenses must be paid by the insurer or may be withheld from its share.

The Court also rejected (at 428-9) the insurers' claims that the insured's lawyer would receive a "second, unmerited attorney fee," observing that to the extent the lawyer "pursues a recovery for the insured, counsel is entitled to a single fee from the insured for the work performed" (at p. 428-9). The Court stated that it is of no concern to the insurer whether any fee agreement between the insured and the insured's attorney provides for additional attorney fees; that the insurer had no standing to complain about fee agreements it is not a party to; and that the effort to secure a personal injury recovery, which involves both the insurer's PIP payments and the insured's other damages, "must inure to the benefit of the insured, not the insured's lawyers." (footnote omitted) (p. 429).

The Court's conclusion about the insured's lawyer receiving only a single fee, and that the insured's lawyer's recovery efforts must inure to the benefit of the insured and not the insured's lawyer, is correct. It does not reflect the reality, however, that prior to Mahler the insured's lawyer usually did not receive the complete "single" fee the lawyer was entitled to on the entire amount of recovered damages, because the lawyer usually informally "surrendered" his right to the disputed fees in order to effect a settlement for the client. As a practical result of Mahler, the insured's lawyer should not have to do so any longer, and thus the lawyer's recovery efforts will now in fact more directly inure to the benefit of both the insured and the lawyer.

A number of Court of Appeals decisions have since applied Mahler to require insurers to pay the disputed fees, including DeTurk v. State Farm Mut. Auto Ins., 94 Wn.App. 364 (Div. II, 1998), Peterson v. Safeco Ins. Co., 95 Wn.App. 254 (Div. III, 1999), and Winters v. State Farm Mut. Auto Ins., — Wn. App. — (Div. II, 2/29/2000). In DeTurk, the Court rejected (at 371) the insurer's claim that the insureds and their lawyer had either waived their rights to seek recovery of the disputed fees or should be estopped from pursuing their claim by reimbursing the insurer without demanding legal fees. The rejection was principally on the basis that the insurer's obligation to pay the disputed fees was not determined until the Mahler decision.

So Now, Who Really Gets the Money?

Mahler determined that between the PIP insurer and the insured, the insurer is obligated to pay the disputed fees. Litigation is now underway by insureds, directly and through class actions, to recover retroactively from insurers the disputed fees which insurers retained or never paid. Since Mahler addressed the dispute between insured and insurer, it did not address or directly answer the question of who is really entitled to keep such recovered disputed fees. By implication, the case can be read to mean that the fees belong to the client. But, between the lawyer and the insured client, who should be entitled to the recovered fees?

The answer to the question requires a tripartite analysis of the contractual fee agreement between the client and the lawyer, of what the attorney and client understood and agreed to as to the disputed fees, and of the attorney-client relationship in light of the ethical principles outlined above. Although there is no one answer for every factual situation, it appears likely that, due to the lawyer's fiduciary relationship with the insured client, only rarely will the attorney be entitled to any of such recovered amounts.

The question of who is entitled to recovered disputed fees likely will arise in several scenarios. In each case it is assumed that before the Court decided the Mahler case, the attorney and client entered, at the inception of the attorney-client relationship, a written contingent fee agreement.

In some pre-Mahler cases, initial fee agreements may have called for the lawyer to receive, and the lawyer in fact charged, a percentage contingent fee on the gross recovery (before repayment of PIP benefits to the PIP insurer), and the lawyer in fact collected that gross fee, either because the PIP insurer paid its proportional share of the disputed fees, or because the client paid them. In these cases, likely relatively few in number, the lawyer has been paid in full and the client is clearly entitled to any disputed fees recovered from the PIP insurer. If the client is now represented by another lawyer in seeking recovery of those disputed fees (for example, as part of a class-action suit), then the client has presumably entered with that new lawyer a new fee agreement governing rights to any recovered fees.

In other pre-Mahler cases, initial fee agreements may have called for the lawyer to receive, and the lawyer in fact charged and collected, a percentage contingent fee on the net recovery (that is, what remains after repayment of costs and PIP benefits to the PIP insurer). In these cases, also likely to be relatively few in number, the lawyer has again been paid in full pursuant to the agreement, and there are no disputed fees to be recovered.

In most pre-Mahler cases, however, the initial fee agreement likely called for the lawyer to receive a percentage contingent fee based on the gross recovery (before repayment of PIP benefits to the PIP insurer), but the lawyer did not in fact receive the full agreed percentage. Instead, when the PIP insurer disputed its duty to pay its share of the attorney fees, the attorney probably accepted the reality that no settlement was likely going to be possible unless the attorney reduced his agreed gross recovery to a net recovery. In short, the lawyer, in the best tradition of the profession, put aside his own legal right for the disputed fees so that his client's matter could be resolved. Of course, the lawyer also benefits by reducing his fees, because by bringing resolution to the matter the lawyer is finally entitled to take his contingent fee in the case and likely discontinue future efforts on the case.

What happens when, long after recovered funds (less disputed fees) have been distributed and the lawyer has concluded the representation, and long after lawyer and client have each gone on with their lives, the law is clarified to the effect that PIP insurers owe those disputed fees and the fees become retroactively recoverable?

Few of the initial fee agreements in these cases likely recognized the possibility that the lawyer might in effect unilaterally amend the agreement by reducing his fee as to the PIP recoveries to make settlement possible, or specified whether in such a case the lawyer would have some continuing or residual right to receive the full gross fee if the disputed fees were subsequently recovered from the PIP insurer. Accordingly, it was unlikely that any agreement on this issue was negotiated between the lawyer and the client before the lawyer became a fiduciary as to the client by entering into the lawyer-client relationship. Thus, any agreement made as to who would be entitled to any recovered disputed fees would likely have been made in the lawyer's capacity as a fiduciary and would be subject to the RPCs' requirements and general fiduciary principles. Few such agreements likely met those requirements and principles.

The ethical issue that arises, of course, is not from the lawyer's reduction of his fee, even a unilateral reduction of the fee without client consent, since such reduction of itself presents no conflict of interest, benefits the client, and is not a breach of a fiduciary duty. The ethical problem arises instead where the lawyer thereafter seeks to recover those lost amounts without the client having been provided the full disclosure/revelation needed to make an informed decision, required of the lawyer as a fiduciary, and called for under RPC 1.7 and 1.8 and for a contractual accord. It is not a simple matter of the client having agreed to pay the specified contingency percentage on the gross recovery, but not having done so, the lawyer is still entitled to the percentage, and if the client were to receive it, the result would be an unjustified windfall to the client. This simplistic view disregards the lawyer's fiduciary and ethical duties to fully inform the client and abide by the client's decision, and disregards the difference between a pre-fiduciary stage fee agreement and a fiduciary stage change in that agreement. Rather, where a lawyer and client have already entered into a fee agreement, and then the lawyer seeks to change the agreement, they are in effect entering into a new agreement, but they are doing so at a time when the lawyer has a heightened ethical duty to the client as a fiduciary.

These cases raise difficult ethical and contractual issues of fairness and equity, of the lawyer's compliance with the ethics conflicts of interest rules, of a lawyer's fiduciary duties, of the application of the contractual remedy of accord and satisfaction, and perhaps of unwarranted, even windfall, recoveries to the client. Resolution of these issues is necessarily dependent on the specific facts of each case, but will in all cases be subject to the ethical and contractual principles outlined above.

In resolving these issues, some of the relevant questions include: What did the initial fee agreement say? Did the lawyer unilaterally make the decision to reduce his fee? Was the reduction unconditional, or was it contingent on the lawyer's right to seek recovery of the disputed fees from the PIP insurer? Did the lawyer specifically retain a right to recover the disputed fees? Did the client assign to the lawyer that right, and if so, was there consideration? Did the lawyer in effect surrender his or her right to the disputed fees in exchange for a prompt payment of a lesser amount? Does the client have any obligation to assist the lawyer? Did the lawyer discuss with the client the lawyer's decision to reduce his or her fees? Did the client agree? Did the lawyer provide the type of detailed "revelation" of material facts needed under Perez and Simburg, Ketter for an accord with the client? Was the disclosure sufficient to satisfy the requirements of RPC 1.7(b) and RPC 1.8(a) for entering into a "revised" business arrangement with the client? Did the lawyer disclose, for example, that the lawyer had a personal interest in reducing his fees just to close the case, get the fee, and go on to another client's work? Did the lawyer document the disclosure to, discussions with and agreement by the client? Were changes in the agreement between client and lawyer material modifications under RPC 1.7 and 1.8? Did the client have an opportunity to consult independent counsel before making a decision as to who was entitled to receive any such recoverable disputed fees?

Assuming that the lawyer and the client did not foresee the possibility of retroactively recovering the disputed fees and did not document their agreement thereon, the lawyer who previously gave up his right to those fees has several choices: 1) rejoice at the client's good fortune knowing that the legal profession has well served the client, or 2) seek to claim all of, or share in, that good fortune. The first alternative is simple, altruistic, ethical, and probably financially painful, but allows the lawyer to get on with his life without regard to the past, and recognizes that the lawyer likely had already resigned himself to not having received the disputed fees. The second alternative is far more complex, fraught with ethical perils, and likely to lead to client and public ill will and a public perception of lawyers as greedy.

If a lawyer seeks to claim or share in the client's retroactive recovery, the lawyer must fully comply with the lawyer's ethical duties under RPC 1.5, 1.7(b), and 1.8(a). If the initial fee agreement is to survive, the lawyer must also satisfy, as a fiduciary, the contractual requirements for an accord. These require at the least that the lawyer fully disclose to the client in writing, in a manner which can be reasonably understood by the client, all material facts and issues regarding the terms of the original fee agreement under which the client agreed to pay the lawyer a percentage fee based on the gross recovery, which included a percentage of PIP recoveries. It should explain that at the time of the resolution of the client's case, Washington law was not clear that the insurer was obligated to pay those disputed fees, and that the lawyer in effect forgave his or her right to receive those disputed fees in order to effectuate a resolution of the client's case.

The document should explain that after the client's case was resolved, the Washington Supreme Court ruled in Mahler that the insurers should have paid the disputed fees. The document should explain that class actions are now pending against various insurers seeking retroactively to recover those disputed fees, and that the client, as an insured who was denied recovery of the disputed fees, may as a class member now recover all or a portion of those disputed fees.

Then comes the tough part of explaining why the lawyer believes he is in fact entitled to the money that the client will be recovering. The disclosure document should clearly and objectively explain not only the lawyer's rationale of why the lawyer is entitled to the recovery, but also opposing rationales that conclude that the client and not the lawyer is entitled to the recovery. It should explain that the client has the choice of keeping the recovery if and when the client receives it from the class actions, paying it to the lawyer, or some combination of these. It should explain that the client can, if the client chooses, do absolutely nothing vis-à-vis the lawyer's claimed interest in the recovered fees and need not respond to the lawyer's request to share in the recovery.

While the lawyer may want to offer to discuss the matter with the client, the document should clearly explain that the lawyer's interest is adverse to the client's and that the client should not rely on the lawyer to be objective. It should encourage the client to seek independent legal advice on what to do. Finally, to avoid any semblance of coercion or undue influence, it should clearly state that the lawyer will accept the client's decision and will not bring any legal action against the client if the client decides to keep any recovery of disputed fees rather than pay them over to the lawyer. When writing to the client, the lawyer may want to enclose a copy of this article as an explanation of some of the principal issues.

Once the lawyer has undertaken a representation, the lawyer becomes a fiduciary as to the client and must give the client's interests priority over the lawyer's interests. The lawyer must fully disclose the basis and rate of the lawyer's fee, the factors involved in determining the charges for the legal services, and the lawyer's billing practices. When seeking to make any change in a fee agreement that may benefit the lawyer, the lawyer must overcome various presumptions against the validity of the change, including the presumption that any transaction between the lawyer and the client which benefits the lawyer is fraudulent.

Lawyers pondering how to handle possible recovered disputed fees from PIP insurers need to analyze their ethical duties very carefully. If they conclude they are in fact ethically and contractually entitled to the fees, they should be prepared to make full disclosure to their client, to likely engender considerable client and public ill will, and then to walk the very perilous ethical path of fully complying with their duties as a fiduciary and under the RPCs.

When a lawyer is in doubt as to who should benefit from any changed arrangement with the client, the answer is simple and obvious, although sometimes painful: The client's interest must take priority and the client must benefit from any uncertainty or ambiguity in a fee agreement. By so responding, the lawyer will maintain the highest traditions of the Bar and consistently put professionalism above commerce.

Back to table of contents >>