Randy Johnston, Robert L. Tobey 0000-00-00 00:00:00
Courts in recent years, including the Texas Supreme Court on at least two occasions, have construed several contingent fee agreements and struck down all or a portion of them. It is obviously important to make sure that your contingent fee agreements comply with Texas law to avoid the unpleasant prospect of litigating your fees with your clients. In Anglo-Dutch Petroleum International, Inc. v. Greenberg Peden, P.C., 352 S.W. 3d 445 (Tex. 2011), the Texas Supreme Court construed ambiguities in a contingent fee contract against the lawyer and in favor of the client. Anglo-Dutch Petroleum asked Gerald Swonke, an of-counsel attorney at Greenberg Peden, to represent the company in a complicated oil and gas suit known as the Tenge Field case. Id. at 447. Greenberg Peden had represented Anglo-Dutch for years, and Swonke had been responsible for Anglo-Dutch’s initial engagement as a firm client and had done much of the work. Anglo- Dutch proposed a 20-percent contingent fee for handling the Tenge Field case, but Greenberg Peden refused to represent Anglo-Dutch until it became current on its fees. Swonke then referred Anglo-Dutch to McConn & Williams, which took the Tenge Field case on a contingent fee. Id. To assist McConn & Williams, Swonke (but not Greenberg Peden) agreed to represent Anglo-Dutch on a contingent fee. Rather than use personal stationery though, Swonke prepared the fee agreement on Greenberg Peden letterhead, which Anglo-Dutch signed and acknowledged as the “Agreement between Greenberg Peden, P.C. and Anglo-Dutch.” A year later, Greenberg Peden dissolved and Swonke became of counsel at McConn & Williams, where he continued to work on the Tenge Field case. Anglo-Dutch won a plaintiff ’s verdict, and then settled for $51 million. Id. at 449. A few days before the settlement was funded, Swonke told Anglo-Dutch that he expected to be paid for 277 hours he worked on the Tenge Field case while at Greenberg Peden and for 1,022 hours he worked on the case while at McConn & Williams pursuant to the contingent fee agreement. Greenberg Peden then assigned its interest in Swonke’s individual fee agreement to Swonke. Id. Anglo-Dutch offered to pay Swonke $293,338.85 for his work on the case while at Greenberg Peden but refused to pay for the time he spent on the case while at McConn & Williams. Id. Anglo-Dutch then sued seeking a declaration that the fee agreement was with Greenberg Peden and not with Swonke, individually. Swonke argued that his use of firm letterhead in his fee agreement was a mistake. The trial court concluded that the agreement was ambiguous and submitted the dispute to a jury, which awarded Swonke $1 million after finding that the fee agreement was with him personally. The 14th Court of Appeals affirmed the verdict. Id. Justice Nathan Hecht writing for the Supreme Court found that the fee agreement was not ambiguous and that the fee agreement was between Anglo-Dutch and Greenberg Peden. The Court stated in its holding as follows: Construing client-lawyer agreements from the perspective of a reasonable client in the circumstances imposes a responsibility of clarity on the lawyer that should preclude a determination that an agreement is ambiguous in most instances. Lawyers appreciate the importance of words and “are more able than most clients to detect and repair omissions in client-lawyer contracts.” A client’s best interests, which its lawyer is obliged to pursue, do not include having a jury construe their agreements. Id. at 453 The lesson from this case is that lawyers need to ensure that their fee agreements are clear and unambiguous, because courts are likely to construe fee agreements in favor of the client and against the lawyer in the event of a dispute. In Hoover Slovacek, L.L.P. v. Walton, 206 S.W. 3d 557 (Tex. 2006), the Texas Supreme Court initially struck the law firm’s entire contingent fee agreement but, on rehearing, struck only a portion of it. The portion of the contingent fee agreement in controversy was as follows: You may terminate the Firm’s legal representation at any time … . Upon termination by You, You agree to immediately pay the Firm the then present value of the Contingent Fee described [herein], plus all Costs then owed to the Firm, plus subsequent legal fees [incurred to transfer the representation to another firm and withdraw from litigation]. After becoming dissatisfied with the law firm’s tactics in settlement negotiations, the client fired the law firm. The law firm then sent the client a bill for $1.7 million representing the law firm’s purported contingent fee based on a settlement offer made by the defendant in the lawsuit. At trial, the jury failed to find that the client discharged the lawyers for good cause or that the lawyers’ fee was unconscionable. The trial court entered judgment on the verdict, which awarded the lawyers $900,000. The court of appeals reversed and rendered a take-nothing judgment for the client concluding that the lawyers’ fee agreement was unconscionable as a matter of law on multiple grounds. Id. at 560. The Texas Supreme Court upheld the standard set forth in Mandell & Wright v. Thomas, 441 S.W.2d 841, 874 (Tex. 1969), that if an attorney hired on a contingency fee basis is discharged without good cause before the representation is completed, the attorney may seek compensation in quantum meruit or in a suit to enforce the contract by collecting the fee from any damages the client subsequently recovers. Both remedies are subject to the prohibition against charging and collecting an unconscionable fee. Id. at 561. Whether a particular fee or contingency percentage charged by the attorney is unconscionable under all relevant circumstances of the representation is an issue for the fact finder. Id. The Supreme Court found that the lawyer’s termination fee provision purported to contract around the Mandell remedies in three ways. First, it made no distinction between discharges occurring with or without cause. Second, it assessed the attorney’s fee as a percentage of the present value of the client’s claim at the time of discharge, discarding traditional quantum meruit and contingent fee measurements. Finally, it required the client to pay the lawyer the percentage fee immediately at the time of discharge and regardless of the outcome. Id. at 562. As a result, the Supreme Court held that the lawyer’s termination fee provision violated public policy and was unconscionable as a matter of law. The Supreme Court remanded the case to the court of appeals to determine whether or not there was sufficient evidence to find that the client’s termination of the law firm was for good cause. Id. at 566. In Levine v. Bayne, Snell & Krause, Ltd., 40 S.W. 3d 92 (Tex. 2001), the Texas Supreme Court refused to construe a contingent fee contract as entitling the attorney to compensation exceeding the client’s actual recovery. Id. at 95. In the Levine case, the clients purchased a home containing foundation defects and stopped making mortgage payments when the defects were discovered. Id. at 93. They agreed to pay their lawyer one-third of “any amount received by settlement or recovery.” Id. A jury awarded the clients $243,644 in damages but offset the award against the balance due on their mortgage, resulting in a net recovery of $81,793. Id. The lawyer sued to collect $155,866, a fee equaling one-third of the gross recovery, plus pre- and post-judgment interest and expenses. Id. In refusing to interpret “any amount received” as permitting collection of a contingent fee exceeding the client’s net recovery, the Supreme Court emphasized that the lawyer is entitled to receive the contingent fee “only when and to the extent the client receives payment.” Id. at 94. (quoting Restatement (Third) of the Law Governing Lawyers §35). A reasonable client does not expect that a lawyer engaged on a contingent fee will charge a fee equaling or, as in this case, exceeding 100 percent of the recovery. The Supreme Court stated that “lawyers almost always possess the more sophisticated understanding of fee arrangements. It is therefore appropriate to place the balance of the burden of fair dealing and the allotment of risks in the hand of the lawyers in regard to fee arrangements with the client.” Id. at 95. Several Recent Ethics Opinions In April 2008, the Supreme Court of Texas’ Professional Ethics Committee for the State Bar of Texas issued Ethics Opinions Nos. 581 and 582. In Opinion 581, the issue was framed as follows: May a lawyer entering into an agreement to defend a client in litigation include in the engagement agreement with the client a provision that requires the client to pay defense expenses incurred by the lawyer if the lawyer is later joined as a defendant in the litigation? The lawyer previously had been engaged to defend clients in lawsuits brought by beneficiaries of estates. In some of these cases, the lawyer was joined as a defendant by the plaintiff beneficiaries based on allegations of fraud and conspiracy between the lawyer and the client to breach fiduciary duties. The lawyer contended that his joinder in those instances was merely a tactic to dissuade the lawyer from appearing as counsel for the defendants in the litigation. In the past, the lawyer had been forced to bear the costs of the lawyer’s defense. In the engagement letter, the lawyer sought to have the client bear the lawyer’s defense expenses in the event that the lawyer was sued by the beneficiaries. After discussing the lawyer’s obligation to ensure that there was no conflict with the client at the outset of the representation, the Ethics Committee concluded that such a provision in an engagement letter would be permissible under the following circumstances: Under the Texas Disciplinary Rules of Professional Conduct, a lawyer-client engagement letter may include a provision under which the client agrees to pay the defense expenses incurred by the lawyer in the event of a joinder of the lawyer as a defendant in the client’s litigation provided that (1) the agreement does not prospectively limit in any way the lawyer’s liability to the client for malpractice and (2) the obligation for payment of the lawyer’s legal defense fees and the obligation to pay the fees billed by the lawyer for his work do not taken together constitute a compensation arrangement that would be unconscionable within the meaning of Rule 1.04(a). In Ethics Opinion 582, the lawyer sought to enter into a fee arrangement whereby if payment was not made to the lawyer within 30 days after the invoice went out, the lawyer could charge the client’s credit card for the amount of the invoice. The Ethics Committee initially confirmed that both it and the American Bar Association Standing Committee on Ethics and Professional Responsibility had previously ruled that using credit cards for the payment of legal fees was acceptable. After warning about the dangers of unconscionability under Rule 1.04(a), the Ethics Committee found that there was nothing inherently illegal or unconscionable about the arrangement as stated. The Ethics Committee stated that a different rule applies if the client disputes the fee. In that circumstance, it would not be permissible for the credit card payment arrangement to negate the requirement that an attorney hold disputed funds separately until the dispute is resolved in accordance with Rule 1.14(c) of the Texas Disciplinary Rules of Professional Conduct. Therefore, in the event that a dispute exists, the lawyer may charge the client’s credit card for the disputed amount, but the lawyer may not place that amount in his operating account. The Ethics Committee concluded as follows: The Texas Disciplinary Rules of Professional Conduct do not prohibit a lawyer’s charging a credit card for attorney’s fees that have been earned by the lawyer provided the client consents and the client’s ability to challenge a disputed statement for legal fees is preserved. In Opinion 606, issued in May 2011, the question asked was: “Under the Texas Disciplinary Rules of Professional Conduct, is a lawyer permitted to continue to hold in the lawyer’s trust account unearned fees paid by a client and otherwise repayable to the client if continuing to hold the unearned fees is based only on the lawyer’s belief, in the absence of a claim asserted, that the client may have improperly or illegally obtained the funds paid by the client?” This ethics opinion dealt with a lawyer who represented a client in a criminal case who has earned a portion of the fee paid by the client. When the representation ended, the lawyer was concerned that the money paid to the lawyer by the client may have been obtained fraudulently by the client. The Ethics Committee concluded as follows: Under the Texas Disciplinary Rules of Professional Conduct, a lawyer is not permitted to continue to hold in the lawyer’s trust account unearned fees that are otherwise repayable to a client under the fee agreement between the lawyer and client if continuing to hold the unearned fees is based only on the lawyer’s belief, in the absence of a claim asserted, that the client may have improperly or illegally obtained the funds paid by the client. The lawyer is not permitted to communicate with possible claimants to determine the existence of unasserted claims to funds to which the client is otherwise entitled. How to Minimize Risk of Fee Disputes Below, in no particular order, are thoughts and suggestions to minimize the risk of a client suing over a fee dispute: 1. Honestly evaluate the risks of the case. If you have a client injured by an uninsured drunk driver and whose only recovery will be on her own uninsured motorist policy, send a demand letter and secure the client that money without charging a fee. 2. Be wary of “ratcheting contingencies,” when you control the ratchet. If you agree to a lower fee if a case is settled before suit is filed, you should use reasonable efforts to settle the case before the suit is filed and confer with the client before filing suit, as opposed to simply ratcheting your fee up unilaterally. 3. Explain the conflicts of both contingency and hourly fees to the client. Tell clients it is usually in their best interest to pay an hourly fee if they can. Remember, the case you want on a contingent fee is the very one on which they should pay hourly: They should know that before signing a contract with you. 4. If you are going to charge more than the “industry standard” of one-third, be prepared to defend your fee, both to the client and a court, by reference to the factors set out in Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct. 5. Never take more than the client. Settlements that provide for a contingent fee plus expenses can result in the lawyer getting more money from the settlement than the client. It just violates some gut level instinct for the lawyer to get more money than the client out of a settlement and most juries agree. 6. At the time of closing, explain to your client that they have the right to challenge your fee as excessive. After all, your contract with the client is only enforceable if it is reasonable and you should tell the client so. Randy Johnston and Robert L. Tobey are shareholders in Johnston Tobey, P.C. in Dallas. The firm specializes in handling professional negligence and business litigation matters.
Published by State Bar of Texas. View All Articles.