May 2010 - Modification of Lawyer-Client Fee Agreements

by Carole J. Buckner

Modification of attorney-client fee agreements may become a trickier business to navigate given a proposed revision to the Rules of Professional Conduct. You might be in a position to modify your fee agreement for any number of reasons. For example, your client may request a modification due to changed financial circumstances. Or, you or your law firm might also have reason to request the modification of a fee agreement. The ethical issue is whether a lawyer should, or must, advise a client, in writing, to consult with another independent lawyer regarding the modification of a fee agreement.

The Board of Governors of the State Bar of California recently approved for public comment an addition to the Rules of Professional Conduct specifically addressing modification of fee agreements. The public comment deadline is June 15, 2010, and the rule must be approved by the California Supreme Court. Lawyers should provide comment, but also give thought to the ramifications of the proposed provisions and, as a matter of prudence, take them into consideration now when modifying their agreements with their clients. This will require some lawyers to handle such modifications differently than in the past, by advising clients in writing to consult independent counsel regarding the proposed modification, and giving the client the opportunity to do so.

Opinion on the topic is hotly divided, so much so that the Rules Revision Commission (RRC), the Commission re-writing the Rules of Professional Conduct, rated the rule it originally proposed as “very controversial.” The State Bar’s Committee on Professionalism and Conduct (COPRAC) issued an Interim Opinion on the topic, triggering widespread discussion. Debate involved whether California’s Rule of Professional Conduct 3-300 applied to fee modifications. Rule 3-300 generally requires that: 1) lawyer-client business transactions be fair and reasonable; 2) the terms be fully disclosed in writing in a manner understandable by the client; and 3) the client either is represented in the transaction by independent counsel, or advised in writing by the lawyer to seek the advice of independent counsel, and given the opportunity to do so.

COPRAC’s proposed Opinion concluded that Rule 3-300 did not apply to the modification of engagement agreements, so that lawyers were not required to advise clients to consult with independent counsel when modifying fee agreements. State Bar Formal Opinion Interim No. 05-0001, http://calbar.ca.gov/cal bar/pdfs/public-comment/2008/Prop-Ethics-Opin_Atty-Fees.pdf . The proposed Opinion generated significant comment by several important stakeholders. The State Bar’s Office of Chief Trial Counsel (“OCTC”) stated that it believed Rule 3-300 did apply to the modification of fee agreements, and reserved “the right to file charges” in such situations. The OCTC asserted that compliance with Rule 3-300’s requirements would not be too onerous for lawyers. The State Bar’s Committee on Fee Arbitration also weighed in, indicating that it too believed that the provisions of Rule 3-300 applied to fee modifications. The Board of Governor’s Committee on Regulations, Admissions, and Discipline ultimately did not approve the Interim Opinion and COPRAC later issued an Ethics Alert, concluding that “pending further clarification . . . the prudent attorney will be best served by complying with all aspects of Rule 3-300 when modifying a fee agreement with an existing client.” See Uncertain Ethics Requirements for Attorney Fee Modifications Counsel Compliance with Rule 3-300 when Modifying a Fee Agreement, available at http://calbar.ca.gov/calbar/pdfs/ethics/Ethics-   Alert-Modification.pdf.

Indeed, the California Supreme Court has held that Rule 3-300 applies to the modification of a fee agreement in some circumstances. In re Silverton, 36 Cal.4th 81, 84-87, 89 (2005) (modification authorizing attorney to compromise medical bills). In addition, a prior COPRAC opinion determined that Rule 3-300 applied in connection with the modification of a contingency fee agreement. Formal Opinion 1994-135 (Rule 3-300 applies to modification of contingency fee agreement involving front-loaded receipt of attorneys’ fees in connection with a structured settlement).

This left the RRC to reconsider the issue. The majority of the RRC agreed with COPRAC’s position, finding Rule 3-300 inapplicable. The RRC found that telling your client in writing to consult with another lawyer when modifying a fee agreement would burden lawyers and could also chill modifications that might benefit clients. The OCTC informed the RRC that it considered modifications of fee agreements subject to Rule 3-300’s rigorous protocol. Ultimately, the Board of Governors directed the RRC to incorporate some of the primary client protective provisions directing the client to obtain independent legal advice into Rule 1.5 (current Rule 4-200), the rule governing fees.

The proposed rule approved for public comment by the Board of Governors in January 2010 adds a new subsection (f) to Rule 1.5. Note that the RRC has renumbered the proposed rules to correspond to the ABA Model Rules numbering system, although California likely will not adopt many of the provisions of the ABA Model Rules. The applicable new subsection addressing fee modifications will provide that: “A lawyer shall not make a material modification to an agreement by which the lawyer is retained by the client that is adverse to the client’s interests unless the client is either represented with respect to the modification by an independent lawyer or is advised in writing by the lawyer to seek the advice of an independent lawyer of the client’s choice and given a reasonable opportunity to seek that advice.”

Several new comments are also proposed. The proposed comments, also approved for public comment by the State Bar’s Board of Governors, further provide that a “material” modification is “one that substantially changes a significant term of the agreement, such as the lawyer’s billing rate or manner in which fees and costs are determined and charged.” Proposed Comment [3]. The proposed modification is described as “adverse” when it benefits the lawyer in a manner that is contrary to the client’s interests. Id. So, for example, an increase in billing rate or contingency fee will normally be both material and adverse, requiring that the client be either represented by independent counsel, or advised of the opportunity to be represented by counsel and given the chance to obtain such advice. Comment [3] expressly carves out increases in fees, costs, and expenses pursuant to provisions in a pre-existing agreement permitting such increases, while pointing out that those types of provisions will be subject to the other provisions of Rule 1.5.

Under the proposed scheme, proposed Rule 1.8.1 (formerly Rule 3-300) will continue to govern some fee modifications where a lawyer receives an ownership, possessory, security, or other pecuniary interest adverse to the client. Other modifications to engagement agreements will fall within proposed Rule 1.5 (formerly Rule 4-200), prohibiting fee agreements that are unconscionable or illegal.

As the proposed comments reflect, attorneys are required to deal fairly with clients in fee negotiations. Bird, Marella, Boxer & Wolpert v. Superior Court, 106 Cal.App.4th 419, 430 (2003) (attorney must deal fairly with client in negotiating a fee agreement); Severson & Werson v. Bolinger, 235 Cal.App.3d 1569, 1572 (1991) (terms of a fee agreement must be fair, reasonable, and fully explained to client). Lawyers should continue to bear in mind that, in addition to their obligations arising from the Rules of Professional Conduct, they have fiduciary obligations once the attorney-client relationship is established. Lee v. State Bar, 2 Cal.3d 927, 939 (1970); Yorn v. Superior Court, 90 Cal.App.3d 669, 675 (1979). The modification of a fee agreement is further constrained by the prohibition against acts involving moral turpitude. Cal. Bus. & Prof. Code §6106.

Modification of fee agreements will be subjected to close scrutiny. In re Lindmark, 4 Cal.StateBarCt.Rptr. 668 (2004). Because of this, COPRAC’s Interim Opinion suggested lawyers should exercise caution in certain common situations where fee modification is under consideration. For example, modifications requested by the client are likely to be more favorably considered, especially where the client is sophisticated, while those requested by the lawyer are likely to receive greater scrutiny. Formal Interim Opin. 05-0001; Lindmark, 4 Cal.StateBarCt.Rptr. at 668. Timing is also critical. For example, a modification favorable to the lawyer, under threat of withdrawal on the eve of trial would be less likely to be considered fair and reasonable. See, In the Matter of Shalant, 4 Cal.StateBarCt.Rptr. 829 (2005) (pressuring client into modified fee agreement on eve of deposition constitutes moral turpitude warranting discipline).

Client protection concerns arising in the context of fee modification are significant. Clients dealing with modification of a fee agreement might feel pressure to accept the deal simply because it is a burden to change legal representation midstream. Restatement (Third) of the Law Governing Lawyers, §18, cmt.(e) (2000). The client might fear the lawyer’s resentment if the modification is rejected, or naturally believe that the modification is offered in good faith. Id. Such concerns arguably are mitigated by the requirement that a client obtain independent advice.

Those laboring in the fee arbitration trenches argue that advising the client to seek independent advice regarding a proposed fee modification also protects less sophisticated clients against overreaching attorneys. With independent advice, the argument goes, clients can better evaluate the wisdom of a proposed fee modification, and fully consider the merits and demerits of any alternatives. Requiring independent legal advice, or at least that the client be told of the right to obtain such advice, and given the opportunity to obtain such advice, will discourage attorneys from forcing overly-aggressive fee modifications on their clients.

Those inclined toward lawyer protection might also favor the proposed revisions to Rule 1.5. A lawyer who complies with the rule may enjoy additional protection from potential discipline. Certainly when a client obtains independent legal advice, and moves forward with the proposed modification, the lawyer enjoys greater protection against the potential disgorgement of fees following an allegation of an ill-considered fee modification. Lawyers involved in fee arbitrations with their clients might find arbitrators more likely to uphold the enforceability of fee modifications where the client obtained independent counsel.

In the midst of any particular modification, lawyers might agree with the RRC, that the proposed rule is burdensome, as is the case with compliance with many ethical constraints and requirements. Those lawyers should bear in mind the OCTC’s view that compliance with the even more rigorous requirements of Rule 3-300 is not onerous, citing Hawk v. State Bar, 45 Cal.3d 589, 601 (1988). Indeed, many lawyers already include language like that which would be required by proposed Rule 1.5(f) in modifying fee agreements. Those not inclined to advise their clients to seek advice of independent counsel can always avoid compliance with the requirement entirely by foregoing the proposed modification, and living with the fee agreement initially negotiated. Unfortunately, this may deter modifications that would benefit clients. That said, the proposed rule will have the salutary effect of deterring overreaching modification of fee agreements. While there is a place for modification of fee agreements, there is seldom any valid reason that a lawyer does not have the experience, knowledge, and the sophistication to enter into an appropriate fee agreement with the client at the inception of the relationship. Restatement (Third) of the Law Governing Lawyers, §18, cmt.(e) (2000). Perhaps the proposed changes to Rule 1.5 will incentivize lawyers to make their best bargain at the start of their relationship with their clients, when a lawyer and a client are negotiating at arms length.

Carole J. Buckner is a Special Assistant United States Attorney, and an Adjunct Professor at Western State College of Law, Chair of the State Bar’s Committee on Professionalism and Conduct (COPRAC), and member of the OCBA’s Professionalism and Ethics Committee. The views expressed are those of the author alone, and do not necessarily represent the views of the Department of Justice, the State Bar, or the OCBA Committee on which she serves.