Another for the annals of ethics opinions of questionable origin

I want to quickly discuss an ethics opinion out of New York state.  No, not that one.  I’m not going to delve into the brouhaha over the one from March 2016 that only got publicity in August 2016 that involves saying it is ethical for a firm to charge clients for work performed by unpaid interns as long as it is all disclosed to the client.

Not going to delve into it to discuss it because of course it is ethical as long as the amount that is being charged isn’t so high as to be unreasonable under RPC 1.5.  After all, say a firm fires an associate for cause and doesn’t ever end up paying the associate any of the last month of their salary.  Does that mean the firm can’t bill the clients for which that associate worked at the agreed upon hourly rates for that same time period?  Of course not.

Whether it is moral or right to take on unpaid interns and then bill clients for the time those unpaid interns spend on client matters is another question altogether, and it is also an interesting federal labor law question but., in my opinion, it isn’t a very difficult legal ethics question.  It is an ethics question that I can understand why someone would ask for guidance because doing it might make a lawyer feel queasy, but it isn’t all that difficult an ethics question in the end.

That is not at all true about the New York state ethics opinion I do want to discuss, NYSBA Op. 1103 from July 2016 that answered the following inquiry:

May a lawyer undertake to represent a client, Corporation B, in litigation with Corporation X, where it is in the economic interest of a former client, Corporation A, for Corporation B to lose the litigation?

Seriously?  There are some truly difficult conflicts questions that lawyers have to navigate, but this one ought not make it into a top 50 list.  And, the reason the answer is easy isn’t at all counter-intuitive, so why ask?  If this kind of thing were even a close call, then there would be no difference in treatment under the ethics rules between clients and former clients.

The more fleshed out facts that the opinion leads off with are as follows:

Corporation A and Corporation B are competitors.  They are engaged in the same industry, in the same geographic area, providing similar services to the same customer base.  The inquirer previously represented Corporation A in a matter than has been concluded (“Matter 1”).  The inquirer now proposes to represent Corporation B in litigation with Corporation X (“Matter 2”).  The inquirer states, and we assume for purposes of this opinion, that Matter 1 and Matter 2 are not factually related.  However, if Corporation B is unsuccessful in this suit, it might be forced to cease operations, which would benefit Corporation A.

In case the point passes by in quick reading, here is a less generic version of the same inquiry with a fun, familiar fictional scenario.  (At least fun for me.)

Mr. Plow and Plow King both provide snow removal services to the town of Springfield.  Lionel Hutz represented Mr. Plow in the past in connection with a piece of employment litigation.   (Maybe a former employee, Bart, sued Mr. Plow for failing to pay him overtime and Mr. Plow defended by explaining that you can’t employ children and, therefore, it would be illegal to pay him.)  That matter concluded and Hutz no longer represents Mr. Plow.  Now Hutz is being asked to represent Plow King in connection with litigation being brought by Moe’s Tavern.  Moe’s Tavern contends that Plow King failed to properly remove snow from their parking lot and the result was that Nick Riviera crashed his car into the building wiping out the taps at Moe’s Tavern for a month and is suing Plow King for $2 million dollars.  If Plow King loses the suit, it likely will go bankrupt and go out of business.

So the question would be whether, since Mr. Plow would love it for Plow King to go out of business,  does that mean that it would be unethical for Hutz to represent Plow King?  This again falls into that category for me of — how did anyone decide that this was a question that needed to be asked?

Of course it wouldn’t be unethical for Hutz to take on the Plow King representation.  Mr. Plow is just a former client.  It wouldn’t even truly be ethically prohibited if Mr. Plow were still a current client.  Might be a representation his firm wouldn’t undertake for business reasons, but it wouldn’t be an ethical issue in terms of an RPC 1.7 conflict.  So when Mr. Plow is but a former client, this isn’t something that ought to take more than five seconds of analysis in terms of working through RPC 1.9 to get to the right result.

Thankfully the opinion gets the analysis on this issue absolutely correct.  It makes the point that — perhaps in other circumstances would be crucial to get right, that “market rivalry” doesn’t rise to the level of causing a matter for a new client to be considered materially adverse to a former client.  But it also drives home the other overriding point – when we’re talking about a former client after all — that makes this such an unnecessarily posed question in the first place.  The scenario being inquired about isn’t one where the two matters are at all the same or substantially related, so it wouldn’t be precluded by RPC 1.9 even if it did involve doing something “materially adverse” to the former client.

So, in the end, it is a fine opinion as far as the analysis goes, it is just a bit silly that this kind of question was posed at all.  But, it did give me the chance to write a little Simpsons fan fiction so… a festive Labor Day to all.

“Cases Without Counsel” study confirms the obvious but also raises more subtle dilemmas

If all you manage to do was read the headline from the ABA Journal online story today — “Self-represented litigants perceive bias and disadvantage in court process, report finds,” your reaction will likely be limited to “Duh.”  But, there is much more that can be gleaned from this “Cases Without Counsel” study and report that the Institute for the Advancement of the American Legal System has put out than confirmation of obvious suspicions.  The report includes findings and recommendations learned from the experiences of more than 125 self-represented litigants in family law matters in four different states, including my own state of Tennessee.  The group also interviewed nearly 50 other players in the systems (judicial and non-judicial) who regularly interact with self-represented litigants, but not any opposing counsel.

As to the headline, of course someone who seeks to represent themselves is going to see the way the system is set up as putting them at a disadvantage, and, of course, they are going to think that the deck is stacked against them in favor of an adversary who has a lawyer.  The lawyer (hopefully) knows what they are doing and, thus, speaks the language of the court and, more likely than not, will at least appear to have a cordial, professional relationship with the presiding judge.  All of those factors are discussed by interviewees in the report and all of them, not surprisingly, affect the perception of whether the result was fair and just.  One study participant explains quite vividly how even what likely is intended by judges to be an effort at being helpful — encouraging a self-represented litigant at a disadvantage to go get a lawyer — can be perceived as discouraging if not insidious:

She [the judge] actually told me twice that I needed to get a lawyer….She made it sound like that was her ruling — that I had to get a lawyer or they weren’t going to welcome me back into court.  She sided with him and I felt like it was because he had the lawyer, because she told me twice I needed to get one.

I’ve a timely example of this from my own life.  As I know I’ve mentioned before, Tennessee’s bar is not unified and the Tennessee Bar Association is just a voluntary membership organization.  I get telephone calls and emails from people who are unhappy with a lawyer and find on the web that I am the Chair of the TBA Standing Committee on Ethics and Professional Responsibility.  They reach out to me thinking I’m in the business of disciplining lawyers – I end up explaining to them that I’m not, that I actually represent lawyers and law firms – but I let them know how to get in touch with the Tennessee Board of Professional Responsibility, if they want to, which is the regulatory/disciplinary arm in our state.  Yesterday I received such a call, but the complaint – which the caller managed to communicate before I could truly suss out the situation and cut them off politely to point them in the right direction — was that opposing counsel in their case had information but was waiting to turn it over until the court-established deadline for doing so.  The caller wanted to know whether opposing counsel could get in trouble for that since surely the lawyer is supposed to tell any one who is self-represented information learned it or documents gathered as soon as the opposing lawyer learned it.  This person may not end up calling the BPR after hearing me say, “no, generally speaking, the lawyer on the other side of your case owes most of their duties to their client, some more to the court, but a very small number to you as their client’s adversary,” (or probably words to that effect but that weren’t nearly as well-articulated).

The report generated from the study sheds a good bit of light on the complexities involved in how people end up having to (or choosing to) navigate the court system on their own in family law cases.  It clearly confirms another piece of information that is obvious — while not the “only” factor, actual (or perceived) lack of ability to afford a lawyer is beyond question the primary factor that leaves people to navigate the court system on their own.

But, that non the “only” factor still deserves real discussion.  Almost 25% percent of the participants in the study actually “expressed a preference to handle the matter without attorney representation.”  And nearly 20% of the participants in the study also indicated that past bad experiences with attorneys influenced their decision to not hire a lawyer for their family law matter.

This report is another data point helping make clear that trying to “solve” the problem of self-representation, which is often described as an access to justice problem but is really a second-level version of what is traditionally thought of as the original access-to-justice problem — delivering legal services to people who are truly indigent — is not something for which there is going to be one “silver bullet” solution in the form of changes to the ethics rules.

The full report is absolutely worth adding to your reading pile and you can get it here.  Digesting the full report does leave me, for the first time, questioning whether the absolute prohibition on contingent fee representation in divorce cases set out in Model Rule 1.5(d)(1) ought to be reevaluated.

ABA Formal Opinion 16-474: half (or more) of a pretty good opinion

Last week, the ABA Standing Committee on Ethics and Professional Responsibility issued its latest formal opinion – Opinion No. 16-474 addressing the topic of “referral” fees under the ABA Model Rules and, specifically, the intersection of Model Rule 1.5(e) and conflicts requirements under Model Rule 1.7.   Along the way, the opinion also stakes out a position on timing in terms of when the necessary written agreement required under Rule 1.5(e) must be created.

In its evaluation of the intersection of the conflicts rules and 1.5(e)’s requirements, the ABA opinion does a spot-on job of explaining why a lawyer who is going to share a fee, even under the assumption-of-joint-responsibility prong (i.e. something that without the assumption of responsibility would be pure referral fee prohibited under the ethics rules), has to recognize that they are representing the client and, therefore, can’t be involved in the arrangement without also being in compliance with the conflicts rules.

Though really just nitpicking, I do wish the opinion had taken the opportunity to explicitly address a relevant, related topic that I hear lawyers ask about from time-to-time (and that I think, and am happy to be corrected if wrong, the ABA has not previously addressed in a formal opinion) — if you have a conflict preventing taking on a prospective client, is it somehow unethical to give that person a referral to other competent counsel.  Absent truly extraordinary circumstances, if all the lawyer is doing is making a referral to another lawyer of the matter – without any component of fee sharing — then the answer should be that no conflict problem is created at all, and Formal Opinion 474 would have offered a nice opportunity to drive that point home through juxtaposition with any one of the three variations on The Flower Shoppe hypo offered up.

The logic that the opinion offers as to the “timing” question regarding when a writing must be created appears to have two parts to it.

The first is to stress the use of future tense in the text of the rule and in paragraph [7]  of the Comment.  (Rule 1.5(e)(2) – “including the share each lawyer will receive” & Cmt. [7] – “the client must agree to the arrangement, including the share that each lawyer is to receive”)  That logic only goes so far, however.  The language that the opinion stresses to make its point is a part of a rule that speaks separately about the act of the client agreeing to the arrangement and the act of the arrangement being memorialized in a writing.  Thus, placing so much emphasis on the use of “will receive” and “is to receive” isn’t a shatterproof construct beyond proving that a written memorialization that happened after the fee was paid out would be stretching it.

The second piece of the puzzle is the notion — supported by some case law citations in a footnote of the opinion –that the creation of a written agreement to indicate that the lawyer had undertaken joint representation is a meaningless act if it only happens after the representation has come to an end.  That also is a position that is not 100% true.  Given that many courts have allowed litigants to settle a case and then file suit against their lawyers for malpractice – claiming that but for a lawyer’s error, they could have gotten a better outcome — even an 11th hour written agreement to be jointly responsible for the outcome could be a quite meaningful financial commitment by a lawyer.  Further, the opinion stresses only one side of the coin – an arrangement based on assumption of joint responsibility.  If two lawyers and a client are late in papering up a fee sharing agreement based on proportional work performed, then there seems even less reason to insist that Rule 1.5(e) be read to take a later is not better than never approach.  It is also worth noting that even in the absence of such a writing, there are courts that have indicated that the lawyers involved may still be held to their agreement on sharing of fees.  See generally Daynard v. Ness Motley Loadholt Richardson & Poole, P.A., 178 F. Supp. 2d 9 (D. Mass. 2001).

Obviously, the better practice is for the written memorialization of the fee sharing arrangement to be created promptly in connection with the agreement itself, but as with many issues there ought to be some recognition that there is a difference between handling something in a way that is less than ideal and a declaration that conduct is unethical because the agreement, including the confirmation in writing of client consent, “must be completed before or within a reasonable time after the commencement of the representation.”

 

Pursuing a popular cause? Crowdsourcing payment of your fees may be an option for your client.

Some time ago, I wrote a bit about how existing ethics rules make attempting to use Kickstarter to launch a law firm not a viable option.  The primary problem with using crowdsourcing to raise funds to start a law practice is the prohibition in the ethics rules on nonlawyer ownership or investment in law firms.

Having someone other than a client pay the fees and expenses of an attorney, however, is a concept that the ethics rules have long acknowledged, permitted, and embraced as long as certain safeguards are in place — primarily measures to make certain the attorney does not permit the person paying the fees to call the shots or impact the lawyer’s independent professional judgment.

Thus, it should come as no surprise to hear that the use of crowdsourcing platforms to raise money to pay for attorney fees is permitted by the ethics rules as long as the same kinds of safeguards are in place.  Yet, given that new technologies can sometimes lead bodies that draft ethics opinions to lose sight of the “old wine in a new bottle” aspect of some questions, it is always refreshing to read a well-written ethics opinion that gets the answer to such a question correct.

And that is exactly what the Philadelphia Bar Association’s Professional Guidance Committee offers in Opinion 2015-6.  And to make matters even better, Opinion 2015-6 does so in the context of educating the lawyer who made the initial inquiry that s/he can accomplish the goal but not in a fashion different from what s/he initially contemplated.

Opinion 2015-6 starts out answering an inquiry from a lawyer who is contemplating representing a client who cannot afford to pay a fee in pursuit of litigation against a government entity on a cause of action that would not include damages but where the possibility exists for a statutory attorney fee award.  The lawyer’s proposal in requesting the opinion was:

to solicit compensation for his or her work on a crowdfunding platform, an internet site that enables users to post information about a project and solicit financial contributions from persons who believe the project to be a worthy cause.  The inquirer would publicize the anticipated litigation on such a website and solicit contributions to serve as his or her fee.

The lawyer’s inquiry also explained that any contract with the client would make clear that money obtained from crowdfunding would belong to the lawyer under any circumstances.  Before working through the ethical issues implicated by, and the one real flaw associated with, the specific proposal, Opinion 2015-6 offered highly practical, and ultimately helpful, advice about the existence of an alternative that should work much better under the guidance the rest of the opinion will provide:

It is possible to raise funds on a crowdfunding site to support litigation, either by paying lawyers’ fees or expenses or both, but to hold the funds raised in some sort of trust arrangement and pay them out only as earned or incurred.

After teeing up the existence of this alternative, to which it returns in its discussion about the ethical requirement for reasonableness of fees, the opinion works through the traditional concept under the ethics rules permitting someone other than the client to pay an attorney’s fees as long as the safeguards imposed by RPC 1.8(f) are met.  The opinion then addresses the reality that, in order to avoid violating RPC 1.6, the client will have to give consent to any disclosures about the case that would be made in connection with seeking to raise funds from public supporters on any such site.

The longest portion of the opinion, however, involves working through why having the money raised be the property of the lawyer creates ethical problems — and simultaneously why the contrasting alternative approach where the funds raised belong to the client (or even to a separate entity created on the client’s behalf) — is a much sounder ethical approach for lawyers.

We suspect that the inquirer anticipates that the amount raised will total far less than he would expect to be paid if the matter takes as long as he or she now anticipates, he or she spends the total number of hours now anticipated and if those hours were compensated at average rates of pay in the area.  However, it may not turn out that way…. The litigation could end quickly, either favorably or not; before the litigation’s end the inquirer may seek to withdraw or the client may wish to discharge him; or the inquire may or may not succeed in seeking the payment of fees and expenses under an applicable fee shifting statute…. Without knowing how much was raised, it would therefore be difficult to determine whether or not the fees would be clearly excessive….

Opinion 2015-6 then proceeds to explain the kind of agreement attorney should enter into with client to pursue such an endeavor so as to avoid the RPC 1.5 concerns:

First, the fee arrangement should include terms which describe the lawyer’s obligations including the lawyer’s obligation to remain in the case, assuming the client wishes him to do so, until its conclusion or until some other point at which retention of the total fees paid would not constitute an excessive fee.  For example, the fee arrangement with the client could state that the inquirer is obligated to remain in the representation until the time expended reaches a total figure such that the total fee paid is reasonable in light of that time expended.

Second, the arrangement should require that the amount raised be placed in a trust account established under Rule 1.15 until those amounts are earned in accordance with the terms of the final fee agreement.  Until such time that it is determined that the fee is actually earned, the monies raised constitute Rule 1.15 funds and should be held separate from the lawyer’s own property.

The best part of the Philadelphia committee’s willingness to proffer such guidance is that it makes this kind of crowdfunding endeavor practically much more viable in terms of fundraising.  One would anticipate that the average person would be more likely to throw some money toward an impecunious client than a lawyer representing that client.  But even if the client in question would not qualify as impecunious, having the person who is the face of whatever cause is being pursued as the person making the plea for funds that can be used to pay an attorney seems like a rich vein of opportunity.  Particularly so, given how divided the public is on so many polarizing issues and how fervently each side feels on a variety of issues, such that the number of “causes” that could be popular enough to generate ample fundraising is likely larger than you might otherwise think.

And, I’m certainly no tax lawyer, but depending on the nature of the cause to be pursued, I would guess the possibilities exist for the creation not only of entities separate from the client who would be the recipient of the funds raised and then paid on the client’s behalf to an attorney but also of even entities that might qualify as non-profits in terms of the “mission” of the litigation.

(One caveat worth referencing is that in any jurisdiction in which the mostly outdated concepts of champerty, maintenance, or barratry are still alive and kicking, an attorney would be wise to assist a client in working through whether any of those common law doctrines might offer some risk to an otherwise potentially successful crowdfunding endeavor.)

[Edited to add: Crowdsourcing also works for editing purposes.  Thank you kind reader for catching my significant error which is now corrected above.]

More on contingent fees and the overall requirement of “reasonableness”

In my last post of 2015, in the context of a discussion of a slightly different fee topic (nonrefundable fees), I made reference to the overarching “reasonableness” requirement under the ethics rules for attorney fees of any flavor, including contingency fees.  The example I grabbed for at the time was how a 60% contingency fee could be subject to attack as unethical even if a client had agreed to it in a signed writing that would otherwise meet all of the requirements to comply with RPC 1.5(c).

The Eye on Ethics column in the January 2016 issue of the online YourABA has a good, overview-style article worth reading for lawyers who use contingent fee agreements as their stock in trade.  The article lays out the traditional issues that lawyers are expected to wrestle with before deciding to enter into a contingency agreement, as well as the different approaches used by jurisdictions in evaluating whether a particular contingency agreement was reasonable.  It helpfully highlights the variance among jurisdictions with the biggest impact in such disputes — whether the reasonableness of a contingency fee agreement will be judged only on a prospective basis looking at the case as it appeared at the outset or whether such an arrangement is fairly scrutinized with the benefit of hindsight.  If a contingency arrangement is permitted to be scrutinized only after the litigation has played out, you can expect the results to be harsher for attorneys seeking to enforce such an agreement over a client’s objection.

And, to be clear, I keep saying that the evaluation of a contingent fee under RPC 1.5(a) involves a determination of reasonableness, but that is not, strictly speaking, true.  The evaluation actually involves determining whether the contingent fee can be said to be unreasonable.  In most instances, reasonable versus unreasonable can be thought of as a binary concept, like an on and off switch.   When it comes to interpreting a rule prohibiting the charging of an unreasonable fee rather than mandating lawyers charge only a reasonable fee, there is room for more nuance at the margins.  The “not unreasonable” fee, if you will.  And, in the world of determinations of reasonableness. it still remains true that “whether the fee is fixed or contingent” is just one of many factors under RPC 1.5(a) for determining reasonableness (here in Tennessee it is just 1 of 10; under the ABA Model Rules approach it is 1 of 8).

The ABA Eye on Ethics article does an admirable job of surveying the landscape in terms of some of the case law scrutinizing contingent fee arrangements.  The article also reminds readers about some of the guidance provided by the ABA more than 20 years ago in Formal Opinion 94-389.  The article picks these four of the thirteen factors listed in 94-389 to stress:

What is likelihood of, or any anticipated difficulties in, collecting any judgment?  What is the amount of time that is likely to be invested by the lawyer?  What is the client’s ability and willingness to pay a noncontingent fee?

But there are two others listed in Formal Opinion 94-389 that really should not be overlooked:  “The attitude and prior practices of the other side with respect to settlement,” and “The likely amount of the fee if the matter is handled on a non-contingent basis.”

My strong suspicion has long been, and continues to be, that plaintiffs’ lawyers who routinely have the kind of conversation with a client about whether something other than a contingency fee might be in their best financial interest contemplated by 94-389 are the exception and not the rule.  To some extent, I think it is because many lawyers are not aware that the ethics rules can be construed in a fashion that contemplates such a conversation occur.  For example, Tennessee’s rule doesn’t give a tremendous level of detailed guidance when it says: “Contingent fees, like any other fees, are subject to the reasonableness standard of paragraph (a) of this Rule.  In determining whether a particular form of contingent fee is reasonable, or whether it is reasonable to charge any form of contingent fee, a lawyer must consider the factors that are relevant under the circumstances.”  A lawyer has to dig into ethics opinion, like 94-389, and case law to get a better sense of the standard to which s/he might ultimately be held.  In Tennessee, a lawyer who digs in may be surprised to find case law support for the idea that the lawyer’s fiduciary duty extends so far as to cover initial negotiations over fees with a potential client.  See Alexander v. Inman, 974 S.W.2d 689, 694 (Tenn. 1998).

My instinct though is that the larger explanation for why these conversations don’t often occur is because the business model of a plaintiffs’ contingency fee practice involves having to balance out losses with recoveries and that need for balance makes it very difficult for lawyers to give clients whose cases look like lucrative, low-hanging fruit on the front end the chance to negotiate a flat fee or to arrange an hourly fee structure for work performed.  (And, in some shops, hourly billing is not even in the realm of the possible because the firm’s lawyers don’t keep time records as a matter of course.)

Traps for the Unwary – nonrefundable fees and retainers

For my last post of 2015, some thoughts on a frequent source of trouble for lawyers in certain practice areas where efforts are often made to charge nonrefundable fees.  In Tennessee, back in 2011, our rules were revised to specifically acknowledge the legitimacy of the concept of a nonrefundable fee but also to impose certain strict requirements on its use.

Specifically, Tennessee enacted RPC 1.5(f) that reads as follows:

A fee that is nonrefundable in whole or in part shall be agreed to in a writing, signed by the client, that explains the intent of the parties as to the nature and amount of the nonrefundable fee.

We also enacted language in the Comment to the Rule to provide further guidance about this type of fee arrangement:

[4a]  A nonrefundable fee is one that is paid in advance and earned by the lawyer when paid.  Nonrefundable fees, like any other fees, are subject to the reasonableness standard of paragraph (a) of this Rule.  In determining whether a particular nonrefundable fee is reasonable, or whether it is reasonable to charge a nonrefundable fee at all, a lawyer must consider the factors that are relevant to the circumstances.  Recognized examples of appropriate nonrefundable fees include a nonrefundable retainer paid to compensate the lawyer for being available to represent the client in one or more matters or where the client agrees to pay to the lawyer at the outset of the representation a reasonable fixed fee for the representation.  Such fees are earned fees so long as the lawyer remains available to provide the services called for by the retainer or for which the fixed fee was charged.  RPC 1.5(f) requires a writing signed by the client to make certain that lawyers take special care to assure that clients understand the implications of agreeing to pay a nonrefundable fee.

At the same time that Tennessee adopted this new rule, we also adopted revised language in the Comment to RPC 1.15 to help lawyers focus on the earned/unearned distinction, rather than other nomenclature, for making a proper determination about whether money paid to the lawyer by the client should go into the client trust account or somewhere else:

[10] Whether a fee that is prepaid by a client should be placed in the client trust account depends on when the fee is earned by the lawyer.  An advance payment of funds upon which the lawyer may draw for payment of the lawyer’s fee when it is earned or for reimbursement of the lawyer for expenses when they are incurred must be placed in the client trust account.  When the lawyer earns the fee, the funds shall be promptly withdrawn from the client trust account, and timely notice of the withdrawal of funds should be provided to the client.

The Comment goes on to explain, as do other aspects of the Comment accompanying RPC 1.5, that advance fees not earned must be refunded but a reasonable nonrefundable fee does not have to be returned to a client.

Therein lies the rub, of course, or at least one of the two peskier rubs.  The reasonableness requirement that applies over and above the technical/procedural requirements of RPC 1.5(f) can still create real issues.

Just as a 60% contingent fee agreement with a client is subject to challenge as unreasonable even if the client had signed a written agreement otherwise satisfying all the procedural requirements of RPC 1.5(c), a nonrefundable fee agreement remains subject to challenge even if RPC 1.5(f) could otherwise be shown to be satisfied if the amount is unreasonable.

The other pesky rub for lawyers comes when they properly document something with their client as one thing, but then deposit it into the wrong account.  For example, being scrupulous in papering up a fee as nonrefundable and thus earned by the lawyer at the time of payment, but not having faith in the arrangement and depositing the fee into trust “out of an abundance of caution.”  Down that road lies commingling no matter how good the lawyer’s intentions.

Earlier this week, the Tennessee Supreme Court issued a new opinion involving the suspension of a lawyer (who just so happens to be the lawyer whose constitutional challenge argument on behalf of another lawyer was characterized by the Tennessee Supreme Court as “rambling and bordering on incoherent”) for multiple offenses, including charging an unreasonable nonrefundable fee.

Reading the opinion, the lawyer seems to have only attempted to treat the fee as nonrefundable after she was discharged by her client.  The opinion indicates that she believes she deposited the $10,000 into trust and then withdrew amounts from trust as billed.  And her fee agreement, as described, does not seem to have involved an effort to satisfy the language of RPC 1.5(f).   (In fact, rather than make an effort to reference that rule, the agreement referenced instead a 1992 Formal Ethics Opinion that interpreted pre-2003 versions of the ethics rules.)

Nevertheless, even if the lawyer had a well-documented agreement making the $10,000 payment a nonrefundable fee, the facts as they played out were ones in which I suspect most lawyers in Tennessee would likely end up agreeing to refund a substantial amount of the difference between the $10,000 paid up front and the roughly $2,000 worth of work performed at hourly rates before the client discharged the lawyer.  Questions certainly exist in Tennessee about how RPC 1.5(f) will be interpreted with respect to the timing of how to determine reasonableness and whether you only evaluate it prospectively, or retrospectively, or a little of both, but I don’t think many lawyers would want these kinds of facts to be involved in any test case addressing those issues.

Fortunately, the Court did take this opportunity to stress the earned/unearned distinction now spelled out in the Comments to our rules with a reference to one of the best sources of discussion for the distinctions to be drawn among the three arrangements lawyers manage to call “retainers” these days, a law review article by my friend Doug Richmond.

Thus, to the extent that lawyers in Tennessee may continue to focus on what they call a fee when trying to figure out where it should be deposited, our Court considers a “classic” or “true” retainer — a payment to ensure lawyer availability — as earned when paid.  Likewise, “advance fee retainers” are considered to be synonymous with “fixed” or “flat” fees, and also earned when paid.  Thus, both of these types of “retainers” should not go into a client trust account.  The third type of “retainer,” the “security retainer” — the type of advance fee payment that you draw down from as you perform work (i.e. what the $10,000 paid to this now-suspended lawyer actually was — goes into the trust account because at the time it it paid it is not yet earned.

Remember my conversation with the SuperShuttle driver?

A while back I wrote a piece about a relatively deep conversation I had about right and wrong and why lawyers do some really bad things with a SuperShuttle driver in Phoenix.  If you missed it, you can read it here.  But one of the things I didn’t say during that conversation was that there are some people out there who are:  just.the.worst.  Some of them end up lawyers.  And when they do, hoo boy.

I imagine if I asked the driver to paint the picture of someone who he would consider the worst possible lawyer of any of the truly rotten apples,then he’d probably say it would be someone who steals money, lies, is disrespectful, rude, vindictive, a bully, and maybe even something of a racist/misognynist/homophobe.  It is probably less likely that the driver would even think to also say that he blabs about privileged communications, but maybe he’d think to make that point as well.  Well, this Indiana lawyer who just got disbarred the first day of this month reads like he came straight out of central casting for the part.

I bet lots of people will be writing about this character, or already have written about him ( I promise I’m not lying when I say I haven’t gone looking for or read anybody’s take on this guy yet beyond the ABA Journal story here that got it on my radar screen).

I’m writing about him right now because I’m lazy.  My seminar season is about to kick into gear starting tomorrow with an hour of ethics I am looking forward to doing for the Memphis Bar Association Labor & Employment section here in Memphis.  Between actual work and seminar season, I’m going to have to be highly efficient with content for the blog this month.

Go read the order in all its gory detail if you can manage it, or I can give you a pretty good feel for it with this snippet of the Court’s order:

The seriousness, scope, and sheer brazenness of Respondent’s misconduct is outrageous.  He stole approximately $150,000 from his clients, threatened and intimidated his staff, disparaged and mocked virtually everyone around him, lied to all comers, and obstructed the Commission’s investigation.  Perhaps most disturbingly, Respondent repeatedly and fundamentally breached the duty of confidentiality that lies at the heart of the attorney-client relationship.  Respondent recorded privileged conversations and shared those recordings with others for his own amusement, he solicited his office staff to do the same, and he posted client confidences and falsehoods on a legal marketing website in order to “punish” certain clients and inflate Respondent’s own website ranking.

There are some nuances to the guy’s situation – like manipulating online reviews and whether opinions like that New York one from earlier this year tempt that kind of behavior – that could merit some thoughtful exploration, but it doesn’t deserve to be done in the context of someone who appears to just be a horrible human being.

“Licensed to bill?” or “When a fee award won’t hold its worth”

Practicing in the part of the world that I do, I gape with both amazement and jealousy at the hourly rates lawyers are able to charge in much larger metropolitan areas.  I try not to think about the difference in a way that is demeaning; instead, I try (perhaps just for more own sanity) to be rational and remember that you can buy a 3,500 plus square foot home in my part of the world for what a studio apartment in New York City might cost.  So, to some extent, it is all relative.

What is pretty consistent though is that people tend to be willing to really pay some exorbitant amounts in attorney fees — even amounts that seem well out of proportion to the size of their dispute — when they are hopeful that someone else will be the one to ultimately foot the bill.

A high-profile example of this phenomenon can be found in the intellectual property dispute between the Beastie Boys and Monster Energy Drink.  After the Beastie Boys prevailed, they sought to shift some $2.4 million in fees they incurred.  Their effort to offload the full amount of their attorney fees onto Monster Energy Drink was rebuffed because the court considered them to have chosen and paid for a Cadillac Escalade instead of a Honda Civic.  So, the attorney fee award against Monster was reduced to a smidge above $667,000.

Earlier this month, an example closer to home of this phenomenon surfaced when the Tennessee Court of Appeals reversed a trial court’s attorney fee award of over $460,000 as alimony in solido in Holdsworth v. Holdsworth.

The court of appeals, of course, could have simply stopped its opinion after indicating that the award had to be reversed because the recipient, the wife, had not demonstrated financial inability to get counsel (her parents paid in exchange for promissory notes) and because both she and the husband would be equally harmed by having to deplete their marital share to pay the amount.  The judges did not stop there, however.  Instead, the appellate court managed to simultaneously call out, and take it a bit easy, on a prominent domestic attorney in Tennessee for managing to run up more than $460,000 in attorney fees and expenses defending a divorce case in which the total estate was ultimately determined to be worth slightly less than twice that amount:  “We would be remiss if we did not convey our displeasure with the extraordinary amount of attorney’s fees incurred in this case.”  Yet, after then laying out its view that there really was not much in the case for the parties to fight about, the court then opted for rhetoric of the “pox on both houses” variety when simple math would indicate that one side’s lawyer may have run up a bill 9 times higher than the other side:  “Nevertheless, the parties somehow incurred more than half of a million dollars in attorneys’ fees and expenses.”

From an ethics perspective, the key point is, I guess, an obvious one — RPC 1.5(a) imposes a requirement of reasonableness on all attorney fees charged.  It is true that (a)(1) indicates that whether “the fee agreement is in writing” can make it easier to survive a reasonableness challenge when a client has agreed to the fee terms in writing, but there are nine other factors under the rule as well and whether a client is being charged by the hour or on a contingent fee basis, even a fee that a client has agreed to and paid can later cause real problems for the lawyer if it turns out to be unreasonable.  As long as the client is happy, however, it is much less likely to become an issue.  When your client is involved in an effort to shift those fees to someone else though, that same fee becomes much more likely to be scrutinized by the court, and it is worth remembering that none of the factors laid out in RPC 1.5(a) that address what makes a reasonable fee relate to whether or not someone else beside the client would ultimately be on the hook for it.

(P.S.  Apologies for the Bullwinkle-style title, I’m showing my age…”)

Traps for the unwary – Mid-stream changes to your client’s fee agreement

When lawyers think about problematic business transactions with a client, they usually think about things like loans or, perhaps, situations in which a lawyer is joining a client as an investor in a business venture.  The ethics rule regarding business transactions with clients, RPC 1.8(a), is broader in its coverage than just those situations and, in fact, broader than many lawyers realize.  A particular issue that pops up from time-to-time to cause trouble for lawyers is failure to understand that RPC 1.8(a) applies when you renegotiate a fee agreement with a client.  Given the nature of the attorney-client relationship and the broad fiduciary duties attorneys owe their clients, it should be logical that a lawyer faces a heavier than normal burden when trying to turn an existing fee agreement with a client into something more favorable for the lawyer.

It was but one of two problems involving handling of client fees, but failure to comply with RPC 1.8(a) when changing the terms of his client’s fee agreement was part of the reason a Tennessee lawyer was publicly censured at the end of last month.

The trap for a lawyer who does not realize that RPC 1.8(a) applies to such a change is that, even a change that would still amount to a reasonable fee arrangement in compliance with RPC 1.5, amounts to a violation of the rules unless it meets all of the additional requirements of RPC 1.8(a).  (Because the purpose of this rule is to prevent the lawyer from taking advantage of the client, RPC 1.8(a) does not apply when a lawyer is re-doing the terms of a fee agreement to make it more favorable to the client (i.e. marking down or walking away from a bill for example or agreeing to lower their hourly rate)).

Though numbered as three sub-parts, there are actually five additional requirements  to be met: (1) there has to be a writing transmitted to the client that discloses the transaction and the terms in a manner reasonably understood by the client; (2) the transaction and terms have to be fair and reasonable to the client; (3) the client has to be advised in writing that it is desirable to seek independent legal counsel for advice on the transaction; (4) the client must be given a reasonable opportunity to seek independent legal counsel; and (5) there has to be a writing, signed by the client, showing the client’s informed consent to the terms and the lawyer’s role (including whether the lawyer was also representing the client in the transaction.

Comment [1] to the rule offers a pretty specific pointer to try to make it harder for a lawyer to be unwary and, thus, prevent this rule from serving as a trap.  The next sentence in Comment [1] makes clear that this rule does not apply to standard commercial transactions (e.g. you represent a large bank and you also obtain a home mortgage from that bank) not only because requiring compliance would be impracticable but also because there is no real concern of an imbalance between lawyer and client in such situations.

When there is any real doubt about what the net outcome of a midstream fee change would be, the safe course is to make sure to comply with RPC 1.8(a).  Thus, while a lawyer who has been handling a plaintiff’s case on a hourly fee basis may be able to argue that moving the arrangement over to a contingent fee agreement was for the client’s benefit to avoid a burden of continuing to pay fees on a case that might not be successful, it’s a very risky endeavor to proceed without making sure that you tick each of the boxes to comply with RPC 1.8(a).

TN’s Approach to Nonrefundable Fees – A Reminder

Near the end of February 2015, the New York City Bar put out its Formal Opinion 2015-2 evaluating a question of propriety of a flat, nonrefundable monthly fee in a retainer agreement and reached the conclusion that a particular one that was something of a “hybrid” was problematic.  Although the NYC opinion makes for a good read, it is of limited utility in evaluating these issues in Tennessee.

While New York has an RPC 1.5(d)(4) that prohibits non-refundable retainer fees, Tennessee has gone in a significantly different direction.  RPC 1.5(f) in Tennessee makes nonrefundable fees enforceable provided that they are reasonable in amount and that the fee is “agreed to in a writing, signed by the client, that explains the intent of the parties as to the nature and amount of the nonrefundable fee.”  Tennessee lawyers, of course, still have to tread carefully in this area — especially with respect to avoiding problems of commingling by depositing a fee designated as nonrefundable (and therefore earned upon payment) into a client trust account rather than into an operating account where it belongs.