December 2013 - Requirements for Client Retainer Agreements
by Eugen C. Andres and Jim Moore
Just as it pays to have a yearly medical checkup to catch health issues before they become too serious, it also pays to perform an annual retainer checkup to ensure your client relations and practice remain healthy. Fixing issues with your client retainer agreements before they become full-blown problems can help immunize attorneys and law firms from billing disputes, ethical trouble, and potential lawsuits. In order to assist attorneys in double-checking and revamping their retainer agreements, this article will explain the statutory and ethical requirements for retainers, and discuss issues related to those requirements that could cause trouble if preventative measures are not taken. This article is meant as a general checkup for retainer agreements, and cannot cover all of the potential issues involving fee agreements in all types of cases. If an attorney is unsure as to whether special provisions apply to a particular type of case, the attorney should conduct research before entering into a fee agreement.
First, attorneys must ensure that retainer agreements comply with the requirements contained in the California Business & Professions Code. Requirements for contingency agreements and fee-for-service agreements are contained in California Business & Professions Code §§ 6147 and 6148 (West 2013). (All further statutory references are to the California Business & Professions Code unless otherwise noted). Fee agreements in medical malpractice cases are addressed in Business & Professions Code § 6146 (West 2013). These requirements are relatively straightforward and simple, but failure to adhere to them can be costly if a dispute arises.
Contingency Fee Agreements
Section 6147 deals with contingency fee agreements. A contingency fee agreement must be in writing, and must contain the following:
- A statement of the contingency fee rate. The code itself does not specify the rate an attorney may charge in most cases. Generally, if there is not a specific statutory limitation, the attorney is free to charge whatever contingency rate the attorney and client can agree on, as long as that rate is not unconscionable. However, for some cases, the contingency fee a lawyer may charge is capped by statute. For example, caps apply to cases on behalf of minors and federal tort claims. There is also a separate code section that sets out a fee limit schedule for medical negligence cases (section 6146). That section caps contingency fees at a rate of forty percent of the first $50,000 recovered, thirty-three and one-third percent of the next $50,000 recovered, twenty-five percent of the next $500,000, and fifteen percent on anything over $600,000. These are maximums, and the attorney and client are free to negotiate lower rates.
- A statement of how costs will affect the contingency rate. The attorney must tell the client in the retainer agreement itself whether costs will come off the top before the contingency rate is calculated or if the contingency rate will be calculated based on the gross recovery. Again, in certain types of cases this decision is made by law. Section 6146, for example, defines the amount “recovered” in medical negligence cases as “the net sum recovered after deducting any disbursements or costs incurred in connection with prosecution or settlement of the claim. Costs of medical care incurred by the plaintiff and the attorney’s office-overhead costs or charges are not deductible disbursements or costs for such purpose.” In other words, court costs and the like must be deducted from the gross recovery before the contingency fee is calculated in these types of cases.
One issue that arises repeatedly in contingency cases is whether reimbursement for costs incurred by the attorney in prosecuting the case is contingent upon the outcome. California Rules of Professional Conduct Rule 4-200(A)(3) does allow the attorney to make reimbursement for costs contingent upon the outcome of the litigation. However, not all contingency fee agreements include costs as part of the contingency. It is best practice to make sure the client clearly understands this issue. If the attorney expects to be reimbursed for costs regardless of the outcome, a clear and prominent statement to that effect should be included in the section of the retainer dealing with costs. It also can be helpful to include a brief explanation of the difference between costs and fees.
- A statement as to how the attorney will be compensated, if at all, for related matters not covered by the fee agreement. If the attorney is to be paid for defending a cross-complaint in a contingency fee case, or for undertaking post-judgment collection efforts, that compensation must be set forth clearly in the retainer agreement. If the attorney is not going to handle such matters as part of the retainer agreement, or if no additional compensation is to be paid, that should also be clearly set forth. Not only will specificity on this issue enable the attorney to comply with the statute, it will also help avoid disputes with the client later. Clients are less likely to be upset or disappointed at the attorney’s refusal to handle related matters or insistence on additional compensation for doing so if this is made clear from the start.
- A statement that contingency rates are not set by law, but are negotiable between the attorney and client. In medical malpractice cases, section 6146 requires a statement that the rates set forth are the maximum allowable rates, and the attorney and client are free to negotiate lower rates. As a general rule, though, the only limit on contingency fees is unconscionability. Unconscionability depends on the particular circumstances of the representation. Cal. Rules of Prof. Conduct, rule 4-200(B). If a matter is particularly risky or complicated, a higher contingency fee may well be justified and reasonable. However, the flip side may also be true in some circumstances. If a case is quickly and easily disposed of with minimal efforts on the attorney’s part, it can be very unfair to the client to charge a substantial percentage. Typically, it is very difficult to know how much time and effort will be required to complete the representation when the retainer is signed. Many attorneys address this problem by using retainers that call for stepped up fees if certain milestones are reached in a case.
Section 6147 applies to all contingency fee agreements, not just to contingency fee agreements covering litigation matters. Arnall v. Superior Court, 190 Cal. App. 4th 360, 371 (2010). Because a previous version of the statute referred to “plaintiffs” rather than “clients,” the statute had previously been limited to agreements to represent plaintiffs in litigation matters. The section’s requirements are also applicable to hybrid agreements. Id.
Fee-for-service contracts, whether hourly or flat fee, are governed by section 6148. That section requires a written agreement in all cases where it is reasonably foreseeable that the total fee will exceed $1,000. All fees for service contracts must contain the following provisions:
- A statement of the rate to be charged, whether hourly, flat fee, statutory fee, costs, or any other charges that can reasonably be anticipated. This should be as clear and detailed as possible. Rates for attorneys, paralegals, and legal secretaries should all be included if the attorney is billing for his or her time. If rates for different people within those categories are different, this should be clearly explained.
- A statement of the general nature of the legal services to be provided. Although the statute uses the term “general nature” of legal services, that does not mean the statement should be vague. The attorney should clearly and explicitly describe to the best of his or her ability which services fall within the contract and which do not. If you are representing a client in a business dispute with a competitor, you should make sure the client understands, in writing, that your agreement only covers this dispute with this party and is not meant to extend to similar disputes with others. If you are representing a client in a personal injury case that arose in the course and scope of the client’s employment, you should clearly state whether any workers’ compensation claim falls within the ambit of the contract. A clear delineation of the services to be provided in this part of the retainer can be very important in heading off disputes as the representation progresses.
- A statement concerning the duties of the attorney and the client. In many retainer agreements, this statement generally provides that the client has a duty to be truthful with the attorney, and the attorney has a duty to use his or her best efforts on behalf of the client. However, it is also important to note more specific items such as whether the client will locate or select an expert, or whether the attorney or client will advance funds to pay the bill for extraordinary expenses.
Each of the above referenced Business & Professions Code sections also requires the attorney to give the client a fully executed copy of the retainer agreement. If this is not done, the client will have the option to void the agreement.
Blended or Hybrid Fee Agreements
Some attorneys use blended fee contracts in some cases. These agreements provide for both an hourly or flat rate and a contingency component to the total fee, typically at a reduced rate for the hourly or flat portion and contingent portion of the fee. Such agreements can work to the client’s advantage by resulting in a lower overall fee, particularly if a case is settled early in the litigation process, while still ensuring the attorneys will receive some compensation for their efforts regardless of the ultimate outcome. Attorneys who use such agreements, though, must ensure that each requirement contained in all statutes pertaining to fee agreements is met. In Arnall, 190 Cal. App. 4th at 371, the court held that the requirements of both section 6146 and section 6147 applied to a hybrid fee agreement. There is no practical reason the same analysis would not apply to any other statutory requirements.
It is important to ensure the client understands all components of the total fee calculation at the outset of the representation. In blended agreements, as well as in some straight contingency fee cases, the authors have also begun including hypothetical fee and cost calculation illustrations in their retainers to help clients better understand how fees and costs will be calculated. While this may not be necessary in most contingency or hourly retainers, it can be helpful in blended agreements to ensure the client really does understand how the total fee will be calculated.
While there are no specific fee caps on retainer agreements, that does not mean attorneys can simply charge whatever they want or whatever to which they can get a client to agree. Rule of Professional Conduct 4-200(A) prohibits attorneys from entering into an agreement that calls for charging or collecting an illegal or unconscionable fee. Rule 4-200(B) sets forth eleven non-exclusive factors in determining whether a fee is unconscionable.
Illegal fees are fees that exceed statutory limits, such as those contained in section 6146, or contingency fee limits in minors’ cases or federal tort claims. It is usually fairly easy to avoid those issues with a few minutes of research. However, there is no bright line test for unconscionablity. Generally, an unconscionable fee is one that is so disproportionate to the services rendered that it “shocks the conscience.” Tarver v. State Bar, 37 Cal. 3d 122, 134 (1984). A less formal expression of this concept is whether the attorney can quote the fee to the client and keep a straight face. If the fee does not pass this “laugh test,” it is likely to shock the conscience and be found unconscionable.
Consequences of Failing to Include Statutorily Required Provisions
Failure to comply with the above-referenced statutory provisions in either a contingency or fee-for-service agreement renders the agreement voidable by the client. The attorney is then allowed only the reasonable value of his or her services as compensation. In contingency cases, many attorneys do not keep careful records of the time they put in. While there is more to a calculation of the reasonable value of services than the normal hourly rate multiplied by the number of hours spent, being forced to prove the reasonable value of services in a contingency matter is generally more difficult if the attorney is unable to show how much time was spent on the case. Thus, it is helpful to keep track of the time spent on all cases, even if you are not being paid on an hourly basis.
A client may also void a retainer agreement if the attorney fails to provide them with a fully executed duplicate copy of the agreement. Careful attorneys will typically make sure to document this with a cover letter enclosing the duplicate copy mailed to the client at the outset of the representation. In some cases, the authors have included an acknowledgement in the retainer agreement for the client to initial to indicate they have received a copy. In those situations, the client is first handed their copy and then asked to initial both the copy and the original in the attorney’s presence. While there is no requirement to document the provision of a copy, there is really no good reason not to take this simple step to protect yourself.
Attorneys who fail to adhere to the statutory requirements will not be given any slack from a court or arbitrator in the event of a dispute. There is no substantial compliance in those situations. Fail to include all of the required statements in the agreement, or find yourself unable to demonstrate that you gave the client a fully executed duplicate copy of the agreement, and you will have to fall back on the reasonable value of services if the issue is raised.
Other Ethical Issues Related to Retainer Agreements and the Inception of the Attorney-Client Relationship
While the primary focus of this article is the statutory requirements for retainer agreements with an eye toward preventing basic contract problems, there are other important issues related to the inception of the attorney-client relationship that attorneys should review and be prepared to address with clients at the time the retainer is signed. Failure to identify and correct problems in these areas can injure an otherwise healthy practice or law firm just as much as the requirements discussed above.
Disclosure of Malpractice Insurance
The first of these issues is the requirement to disclose lack of insurance coverage in the retainer agreement. California Rules of Professional Conduct Rule 3-410 requires attorneys to disclose to their clients at the time of the engagement, in writing, the lack of professional liability insurance. It is only the lack of coverage that must be disclosed. California does not require that attorneys have such insurance, and an attorney who carries errors and omissions coverage does not have to disclose the existence of such coverage, the amount, or the carrier to the client. If the attorney lacks coverage at the time the retainer is entered into, this disclosure must be made as part of the retainer agreement. If coverage lapses during the representation, the client must be informed in writing.
The insurance disclosure requirement should be old news at this point, having been added to the Rules of Professional Conduct in 2010. However, in the course of their practice, the authors still run across uninsured attorneys whose fee agreements fail to alert the clients to their status.
Fee Splitting With Other Attorneys
If the fee contemplated in the retainer is to be split with an attorney who is not a partner with, or associate of, or shareholder with the retained attorney, disclosure of the fee splitting arrangement must also be made in writing and approved by the client. California Rules of Professional Conduct, Rule 2-200. Compliance with the rule’s requirements is particularly important to the non-retained attorney. Without proof that the fee arrangement was disclosed to the client in writing and the client consented, the non-retained attorney will not be able to enforce the agreement. See Huskinson & Brown v. Wolf, 32 Cal. 4th 453, 462-63 (2004). However, the Court of Appeal, Fourth District, Division 3 recently held that where an attorney unfairly prevents another attorney from complying with the requirements of Rule 2-200, the first attorney may be equitably estopped from raising the second attorney’s non-compliance as a defense in litigation to enforce the agreement. Barnes, Crosby, Fitzgerald & Zeman, LLP v. Ringler, 212 Cal. App. 4th 172, 186 (2013).
Attorneys should also be aware that attorney charging liens fall within the ambit of California Rules of Professional Conduct Rule 3-300 which governs an attorney’s acquisition of interests adverse to the client. Because the charging lien gives the attorney an interest in the proceeds of the litigation, it is considered an interest that is adverse to the client. In order to be able to enforce a charging lien, the attorney must disclose the lien provisions to the client in writing, and advise the client of the opportunity to seek independent legal counsel. The client must then consent to the lien in writing. The disclosure should be made in clear and simple terms so there is no question of the client’s misunderstanding the nature and existence of the lien. If the requirements are not met, the lien will not be enforceable. See Fletcher v. Davis, 33 Cal. 4th 61, 71-72 (2004).
Finally, the issue of conflicts between clients will likely arise at some point in most attorneys’ careers. Anytime an attorney represents multiple clients, the clients must be apprised of any potential conflicts in writing at the outset of the litigation. This writing should be referred to in the retainer, but should be separate from the retainer itself. All potential clients must waive the conflict before the attorney begins working on the case.
While no particular form of conflict waiver is required, as with all issues pertaining to communications within the attorney-client relationship, it is vital the attorney ensure that the client understands the issues involved. A clear statement about the nature of the conflict, and an explanation as to the attorney’s inability to favor one client over another in the event the potential conflict does arise, are musts. As well, clients must be notified in writing that they may seek advice from a different attorney about the issue.
It is important to keep your retainer agreements up-to-date in order to ensure their enforceability, and to stay out of trouble with the state bar. Any attorneys who have not recently reviewed their retainer agreements for statutory and ethical compliance should do so. Non-compliant fee agreements can affect client relations, cause disciplinary problems, and damage an attorney’s bottom line. Keep your agreements healthy and your practice happy by subjecting them to an annual checkup.
Eugen C. Andres and Jim Moore practice in Santa Ana with the firm of Andres, Andres & Moore, LLP. The firm primarily represents plaintiffs with a focus on legal malpractice cases. Eugen can be reached at firstname.lastname@example.org, and Jim can be reached at email@example.com.