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Ethics Opinion

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C-235

May, 1985

SYLLABUS

    A lawyer representing a party in a federal civil rights case where attorney fees are awardable to the prevailing party may simultaneously negotiate settlement of the merits and the attorney fee.

    During settlement negotiations the lawyer may reveal the number of hours spent on the case, the lawyer's customary hourly rate, and any multiplier the lawyer may urge upon the court in establishing attorney fees.

    Counsel must disclose potential conflicts of interest at the time counsel accepts employment, and must continue to disclose all facts and circumstances which might lead to an actual conflict of interest.

    If an actual conflict of interest arises regarding statutory attorney fees, it is ethically permissible to seek the court's intervention in settlement.

    References: MCPR Canons 5, 7, DR 5-101(A), DR 5-107(A), DR 7-101(A)(1); White v. New Hampshire, 629 F2d 697 (CA 1, 1980), rev'd on other grounds, 455 US 445 (1982).

TEXT

A lawyer represents a plaintiff in a civil rights action brought pursuant to 42 USC 1983. Attorney fees in such matters may be awarded by the court to the "prevailing party." 42 USC 1988. A plaintiff obtaining a favorable settlement may be a "prevailing party" for the purpose of imposing such lawyer fees.

Suit was filed in federal court for injunctive and monetary relief, but injunctive relief is the client's primary goal. Discussions with defense counsel have indicated that a consent decree awarding the injunctive relief sought would provide a basis for settlement, so long as the attorney fee obligation under 42 USC 1988 is also acceptable. Defense counsel has requested that plaintiff's counsel provide information with respect to a potential claim for fees, including number of hours spent, the hourly rate and the maximum amount which might be claimed.

The lawyer asks (a) whether the fee information may be provided; (b) what advice must be given to the client regarding the request for information about fees; (c) whether the court may become involved to the determine the propriety of negotiations concerning the attorney fees; (d) whether the negotiation of the attorney fees properly chargeable under 42 USC 1988 conflicts with the duty to provide independent representation uninhibited by the lawyer's own financial interests?

Issue (d) must be addressed before answers can be formulated to the requestor's specific questions. To quote the Court in Jeff D v. Evans, 743 F2d 648, 652 (CA 9, 1984):

    "The crux of the problem is the possibility of diverging interests of the lawyer and the [client]. The attorney may be tempted with a generous fee offer as a quid pro quo for A less than optimal settlement. Alternatively, the defendant may condition settlement on an attorney's waiver of fees, creating particularly severe conflict when important interests of [clients] are at stake."

The Civil Rights Attorney's Fees Awards Act (hereinafter "the Fees Act"), 42 USC 1988, was enacted in 1976 in response to the decision in Alaska Pipeline Serv. Co. v. Wilderness Society, 421 US 240, 44 L Ed 2d 141, 95 S Ct 1612 (1975), which disapproved of awards of lawyers' fees to prevailing parties in federal litigation in the absence of statutory authorization. The fees act provides that courts "may allow the prevailing party . . . a reasonable lawyer's fee as part of the costs" to be paid by the losing party. The purpose of the Fees Act is explained by a Senate report:

    "All of these civil rights laws depend heavily upon private enforcement, and fee awards have proved an essential remedy if private citizens are to have a meaningful opportunity to vindicate the important Congressional policies which these laws contain.

    "In many cases arising under our civil rights laws, the citizen who must sue to enforce the law has little or no money with which to hire a lawyer. If private citizens are to be able to assert their civil rights, and if those who violate the nation's fundamental laws are not to proceed with impunity, then citizens must have the opportunity to recover what it costs them to vindicate these rights in court." S. Rep No 1011, 94th Cong, 2d Sess 2 (1976), reprinted in 1976 US Code Cong & Ad News 5910.

Courts have found a plaintiff to be a "prevailing party" entitled to an award of lawyer fees where settlement has been secured and where consent decrees have been entered. Parker v. Califano, 561 F2d 320 (DC Cir 1977); Foster v. Bornstein, 561 F2d 340 (DC Cir 1977); Nandau v. Helgemo, 581 F2d 275 (CA 1 1978).

While federal circuits differ somewhat in their approaches to fee computation, the circuits generally agree as to the factors which should be considered. Particular weight is given to the number of work hours worked by the lawyer and the lawyer's customary billing rate. Comment, Settlement Offers Conditioned Upon Waiver of Attorneys Fees: Policy Legal and Ethical Considerations, 131 U Penn L Rev 793, 797 (1983).

Hours spent multiplied by the billing rate is often referred to as the "lodestar" amount. This amount is then adjusted upward or downward, in light of a variety of other factors. See, e.g., the twelve factors listed in Johnson v. Georgia Highway Express Inc, 488 F2d 714 (CA 5 1974).

MCPR 5 states:

    "A lawyer should exercise independent professional judgment on behalf of a client."

MCPR DR 5-101(A) states:

    "Except with the consent of his client after full disclosure, a lawyer shall not accept employment if the exercise of his professional judgment will be or reasonably may be affected by his own financial business, property, or personal interests."

MCPR DR 5-107(A) states:

    "Except with the consent of his client after full disclosure, a lawyer shall not:

      "(1) Accept compensation for his legal services from one other than his client;

      "(2) Accept from one other than his client anything of value related to his representation of or his employment by his client."

Lawyer fee claims under the Fees Act may constitute a lawyer's "own financial . . . interest" for purposes of MCPR DR 5-101(A). The court in Regalado v. Johnson, 79 FRD 447, 451 (ND Ill 1978), noted, "A motion for fees and costs . . . although made in the name of the plaintiff, is really one for the attorneys."

An award under the Fees Act may be considered to have been paid by a third party under MCPR DR 5-107(A). Civil rights lawyers realize the full impact of this potential conflict in settlement negotiations. In settling claims that include lawyers fees, lump sum settlement offers made by defense counsel have been recognized as creating conflicts of interest between plaintiff and counsel. Likewise, demands that lawyers fees be waived as a condition to obtaining beneficial (and perhaps non-monetary) settlement create very difficult conflicts.

A number of federal circuits have discouraged the practice of simultaneously negotiating lawyer fees and substantive issues in settlement negotiations as a means to avoiding potential conflicts.

    "A reasonable solution, we suggest, is for trial courts to insist upon settlement of the damage aspect of the case separately from the award of statutorily authorized attorney fees. Only after court approval of the damage settlement should discussion and negotiation of appropriate compensation for the attorneys begin." Prandini v. National Tea Co., 557 F2d 1015, 1021 (CA 3 1977).

In accord Mendoza v. United States, 623 F2d 1338 (CA 9 1980); Obin v. District No. 9 of the Int'l Ass'n of Machinists, 651 F2d 574 (CA 8 1981). However, no circuit has yet mandated such a two-step procedure for negotiating settlements of class action. The Mendoza Court, while strongly discouraging simultaneous negotiation of substantive award and lawyer's fees, indicated it would not reject such a settlement in every case.

Prandini, Mendoza and Obin were all class action cases where the court had broad control over settlements under Federal Rule of Civil Procedure 23(e). Such degree of control will rarely be exercised in cases other than class actions. Furthermore, all three decisions are based upon the traditional authority of courts to supervise lawyer conduct, not upon ethics rules.

In White v. New Hampshire Dep't of Employment Security, 629 F2d 697 (CA 1, 1980), rev'd on other grounds, 455 US 445, 71 L Ed 2d 325, 102 S Ct 1162 (1982), the court found nothing inherently wrong with facing up to the issue of lawyer settlement negotiations. According to that court, "failure to confront the fees issue merely muddies the waters . . . ." The only cautionary advice of the court was:

    "[W]e of course do not suggest that an attorney in the course of settlement negotiations need, or in every case properly may, hold out against his client's best interest, for a specified fee award to be included in the consent decree. If the agreement as to fees is not easily accomplished, the parties may provide for submission of the entire question of fees to the Court; further, they may, of course, decide to waive fees altogether." 629 F2d at 705.

On appeal, the Supreme Court considered in dicta the argument that prejudgment fee negotiations could raise an inherent conflict of interest:

    "Although sensitive to the concern that petitioner raises, we decline to rely on this proffered basis. In considering whether to enter a negotiated settlement, a defendant may have good reason to demand to know his total liability from both damages and fees. Although such situations may raise difficult ethical issues for a plaintiff's attorney, we are reluctant to hold that no resolution is ever available to ethical counsel." 445 US 454 at n 15.

Equally unsettled in federal decisions is the effect of a settlement which deals (or fails to deal) with the lawyer fee issue. El Club del Barrio Inc. v. United Community Corps., Inc., No 83-5121 (CA 3, 1984), held that a losing party in a settled civil rights action who wishes to foreclose subsequent suit under the Fees Act must insist that a stipulation waiving such fees appear in the settlement agreement. Jeff D v. Evans, 743 F2d 648 (CA 9, 1984), on the other hand, held in a class action that the court should not accept a stipulated waiver of lawyer's fees, but should instead make its own determination whether lawyer's fees should be awarded.

All that can be discerned with certainty from these decisions is that the law is uncertain.

State bar association ethics committees in two states have considered these issues in published opinions. Both approached the issue form the perspective of defense counsel. New York City Bar Association Op 80-94 stated:

    "[D]efense counsel may not condition . . . settlement on the waiver of plaintiff's statutory attorney fees and may not attempt to negotiate the fees awarded under such statutes at the same time he is negotiating the settlement of the merits. Such conduct would have a deleterious effect on the use of civil rights statutes since their enforcement depends in part on the availability of statutory counsel fees. Because the long-term effect of persistent bargaining demands for the waiver of statutory attorney's fees would be to prejudice a vital aspect of the administration of justice and undermine efforts to make counsel available to those who cannot afford it, the demand constitutes an unfair and unethical bargaining tactic."

Georgia State Bar Disciplinary Board Op 39 takes a contrary position, ruling that a defense lawyer in a federal civil actions may offer to settle the case for a lump sum amount which represents both damages and lawyer fees. The Georgia opinion expressly rejects the New York approach and looks to White v. New Hampshire Dep't of Employment Security, 629 F2d 697 (CA 1, 1980), rev'd on other grounds, 455 US 445, 71 L Ed 2d 325, 102 S Ct 1162 (1982), for its basis. The Georgia Board states:

    "Clearly in appropriate cases, the questions of a defendant's liability for plaintiff's attorney's fees, where so provided by statute, can be a significant factor in reaching a decision as to whether to make an offer of settlement. To force a defendant into proposing a settlement offer wherein the plaintiff's statutory attorneys' fees are not negotiated or incorporated into a final settlement offer leaves a defendant in a position of exposure that is at best uncertain, and at worst so tenuous that meaningful settlement proposals might never be made."

Hence review of ethics opinions fails to reveal any more consensus than a review of court decisions.

We are asked here to view the issue from the vantage of plaintiff's counsel. In so doing we are mindful that we can determine only the ethics in light of the Code of Professional Responsibility and the authority developed under the Code. We cannot opine on the judicial interpretation of the Fees Act, nor can we strike a direction for public policy.

The initial question is whether it is ethically permissible to simultaneously negotiate a settlement on the merits and a resolution of lawyer fees. We conclude that it is ethically proper to simultaneously negotiate settlement of the merits and the attorneys' fee. However, we caution that ethical issues may arise during the course of such negotiations, and that an actual conflict of interest will require appropriate response by counsel.

In reaching this conclusion we decline to follow the Ethics Committee of the New York City Bar Association, which is based first on an interpretation of case law and legislative history that leads to finding of public policy, i.e., certain settlement offers could undermine the enforcement of the civil rights statutes; we leave such a finding to the Congress and the courts, where it belongs. After declaring public policy, the opinion then finds an ethical duty not to undermine the enforcement of these statutes. There is scant support under the Code for that conclusion. The thrust of the Code is to focus the lawyer's primary duty toward his or her client, not toward a broader and less discernible "public interest." It is impossible to square the notion that defense counsel should not offer a lump sum settlement or should not insist upon a waiver of lawyer's fees, on the one hand, with the fact that it would often be clearly in the client's best interest that the lawyer do so. To require a lawyer to forego the client's best advantage is abhorrent to the Code, so long as the available means are permitted by law and the disciplinary rules, MCPR DR 7-101(A)(1).

Not every negotiation of lawyer's fees will result in an actual conflict of interest. In many cases the interest of the client and lawyer will be the same. If the client is responsible for compensating his or her lawyer on an hourly-rate basis or at a set fee, any additional recovery of lawyer fees under the Fees Act will diminish the financial obligation. If the client has retained the lawyer on a contingent fee basis, recovery of statutory lawyers' fees will likewise inure to the client's benefit by decreasing or eliminating the portion of the recovery which must be paid the lawyer.

While a potential for conflict may always exist, MCPR DR 5-101(A) requires only that the potential be fully disclosed and that the client consent. A properly drafted retainer letter, signed by the client, can satisfy the mandate of MCPR DR 5-101(A). CI-328, C-213. Likewise, disclosure and consent can satisfy the mandate of MCPR DR 5-107(A). CI-973.

The problem for the plaintiff's lawyer intensifies where the plaintiff is indigent and where monetary damages are slight or of secondary importance.

The response of counsel might properly include:

  1. A retainer agreement which specifies how the issue of fees awardable under the Fees Act are to be handled as between lawyer and client, and as between client and opposing party, during settlement negotiations.

  2. Communication with the client during settlement negotiations, including informing the client of all settlement offers (See the aspirational advice of ABA Model Code of Professional Responsibility Ethical Consideration 7-7), informing the client of all relevant considerations regarding settlement or trial (See Ethical Consideration 7-8), including as a "relevant consideration" any ethical problems involved in the representation. See In re Farr, 264 Ind 153, 340 NE2d 777 (1976).

  3. Appropriate motion to the court for assistance and/or protection.

  4. Where actual conflict is unavoidable, withdrawal as counsel, MCPR DR 2-110.

Not all pitfalls and risks of conflicts can be eliminated. There are potential conflicts in the settlement of any case. The answer to the conflict lies in the lawyer's clear obligation to the client's interests at the expense of the lawyer's own.

    "Attorneys must not allow their private interests to conflict with those of their clients . . . . They owe their devotion to the interests of the client." United States v. Anonymous, 215 F Supp 111, 113 (ED Tenn, 1963).

The decision whether or not to settle is solely that of the client. CI-748; Clarion Corp. v. American Home Products Corp., 494 F2d 860 (CA 7), cert den 419 US 870, reh den 419 US 1027 (1974).

Having addressed the underlying issue, we now answer specific questions:

  1. A lawyer may during settlement negotiations reveal the number of hours spent on the case, his or her customary hourly rate, and any multiplier he or she may urge upon the court in establishing fees under the Fees Act. We note that this has been found permissible even in jurisdictions which strongly recommend no discussion of lawyer's fees until after settlement of the merits. See, New York City Bar Association Op 82-80; Comment, Settlement Offers Conditioned Upon Waiver of Attorneys' Fees: Policy Legal, and Ethical considerations, 131 U Penn Law Rev 793, 805, n 90 (1983).
  2. Disclosure to the client regarding potential conflicts of interest must start with the retainer agreement, and continue as to all facts and circumstances which might lead to an actual conflict of interest, MCPR DR 5-101, MCPR 7.
  3. If an actual conflict arises, it is ethically permissible to seek the court's intervention in settlement. MCPR 7, DR 7-101(A)(1).
 
     

 

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