April 30, 1993
The ethical propriety of a fee agreement for representation of a client in federal court proceedings is determined under the ethics rules adopted by the federal court.
Whether a lawyer's fee arrangement with a client is "clearly excessive" or "reasonable" must be evaluated on a case-by-case basis. A lawyer has a continuing duty prior to billing the client and before collecting a fee from a client to reexamine the reasonableness of the fee in light of subsequent events in the representation.
In the case of a recovery payable in installments, the contingent fee agreement should provide that the fee shall be computed using the present value of the future payments. If the fee is to be taken from the cash portions of the award, the fee agreement must so state.
Where the contingent fee agreement is silent or ambiguous regarding the calculation of the fee concerning a particular recovery realized in the case, a lawyer should either seek judicial clarification or calculate the fee by the means most favorable to the client.
References: MRPC 1.5(a) and (c); R-11; RI-150; CI-853; MCR 8.121; Local Rule A-4(b) of the United States District Court for the Eastern District of Michigan; City of Burlington v Dague, 505 US ___, 112 S Ct 2638, 120 L Ed 2d 449 (1992); Cappel v Adams, 434 F2d 1278 (CA 5, 1970); Garrett v McRee, 201 F2d 250 (CA 10, 1953); Hamilton v Ford Motor Co, 636 F2d 745 (CA DC, 1980); Hoffert v General Motors Corp, 656 F2d 159 (CA 5, 1981); Krause v Rhodes, 640 F2d 214 (CA 6, 1981); McKenzie Construction Inc v Maynard, 823 F2d 43 (CA 3, 1987).
A lawyer represents clients in federal court litigation concerning employee pensions. A fee agreement with the clients provides for "one-third of all monies and any things of value recovered in this claim whether by compromise, settlement or otherwise. Such one-third recovery to the attorney shall be calculated based on the net sum recovered by client after deducting from all recoveries any costs advanced by attorney and properly chargeable to client."
The client's "recovery" may include (a) an award of damages including back pension benefits, longevity pay, reimbursement for medical expenses, pre-judgment interest and post-judgment interest; (b) an award of costs; (c) the present value of future monthly pension benefits up to the age of 65 and the present value of health and life insurance benefits up to the age of 65 provided with the monthly pension; (d) a court award of attorney fees premised on a finding of bad faith by defendants.
The lawyer asks about the "appropriateness" of the fee agreement and its calculation in light of each of the types of "recovery."
Local Rule A-4(b) of the United States District Court for the Eastern District of Michigan provides that the Rules of Professional Conduct adopted by the District Court are the Rules of Professional Conduct adopted by the Michigan Supreme Court. Local Rule A-4(b) contains the following express reference to the Standards for Professional Conduct: "The Rules of Professional Conduct adopted by this Court are the Rules of Professional Conduct adopted by the Michigan Supreme Court as amended from time to time."
The subject of fees is covered by MRPC 1.5 and the lawyer is bound by MRPC 1.5(a) which states:
"(a) A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee. A fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee. The factors to be considered in determining the reasonableness of a fee include the following:
"(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
"(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
"(3) the fee customarily charged in the locality for similar legal services;
"(4) the amount involved and the results obtained;
"(5) the time limitations imposed by the client or by the circumstances;
"(6) the nature and length of the professional relationship with the client;
"(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and
"(8) whether the fee is fixed or contingent."
The lawyer must take each of these factors into account in determining whether the fee in question is reasonable and, therefore, ethical. The lawyer has the obligation to review these criteria when making the fee agreement prior to representation, and again before charging or collecting the fee. RI-150.
With regard to contingent fees, MRPC 1.5(c) states:
"(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or by other law. A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement of the outcome of the matter and, if there is a recovery, show the remittance to the client and the method of its determination. See MCR 8.121."
MRPC 1.5(d) prohibits contingent fees in domestic relations matters and criminal matters. Thus there appears to be no ethical impropriety in charging a contingent fee in an employee pension case in federal court.
MCR 8.121(A) limits contingent fees in wrongful death and personal injury cases to one-third of the amount of the recovery, and deems fees in excess of one-third for such matters to be a "clearly excessive fee." The inquirer's fee agreement does not violate these provisions.
MCR 8.121(C) states:
"The amount referred to in subrule (B) shall be computed on the net sum recovered after deducting from the amount recovered all disbursements properly chargeable to the enforcement of the claim or prosecution of the action. In computing the fee, the costs as taxed and any interest included in or upon the amount of a judgment shall be deemed part of the amount recovered. In the case of a settlement payable in installments, the amount referred to in subrule (B) shall be computed using the present value of the future payments."
The inquirer's fee agreement does not contravene this rule.
The Committee has previously observed that a lawyer must carefully advise a client concerning contingent fee arrangements, and that extra burdens are placed upon the lawyer in such arrangements. Both the Michigan Court Rules and the Michigan Rules of Professional Conduct indicate particular information the lawyer must provide a client in contingent fee matters, and require that the agreements be in writing. In R-11 the Committee opined that where a contingency fee agreement is silent or ambiguous concerning the taking of an appeal, a lawyer in a contingent fee matter is required to file notice of appeal of a client's case at the client's request and may not charge an additional fee for taking the appeal. Thus the burden is on the lawyer to provide clearly in the written agreement how the fee will be calculated and to explain the calculation to the client.
The language of the fee agreement and MCR 8.121(C) appears to adequately address the computation of the fee for (a) an award of damages including back pension benefits, longevity pay, reimbursement for medical expenses, prejudgment interest and post-judgment interest, and (b) an award of costs.
With regard to recovery (c), the present value of future monthly pension benefits up to the age of 65 and the present value of health and life insurance benefits up to the age of 65 provided with the monthly pension, the agreement is unclear. The fee agreement language, "such one-third recovery to the attorney shall be calculated based on the net sum recovered by client after deducting from all recoveries any costs advanced by attorney and properly chargeable to client," comports with MCR 8.121(C), but it does not explain whether the lawyer will take the total fee from the first installment paid the client, or whether the lawyer will take the fee in installments. CI-853 requires the client to be informed and consent that the lawyer intends to take a contingent fee calculated on the present value of the structured settlement out of the cash portion of the settlement award. Since this case deals with pension benefits, the lawyer had a reasonable expectation that a recovery would involve installments. Through application of MRPC 1.5(c), the handling of the lawyer's fee should be included in the written fee agreement. If the lawyer has failed to provide in the fee agreement for taking the lawyer's fee from the cash portion of the settlement, and the lawyer fails to obtain judicial direction on the matter, the lawyer's fee should be taken proportionately from the proceeds the client receives over the period of the structured settlement.
The calculation of the fee under the contingent fee agreement in the event of a court award of attorney fees is more troublesome. Ideally the court's order will specify how the award should be treated, i.e., fully benefitting the prevailing party, fully benefitting the prevailing party's counsel, or some division between the two such as application of whatever formula is specified in a written fee agreement between the prevailing party and the party's counsel.
An attorney's right to contract for a contingent fee is not completely beyond judicial control. A federal district court has broad equity power to supervise the collection of attorneys' fees under contingent fee contracts. Krause v Rhodes, 640 F2d 214 (CA 6, 1981); Garrett v McRee, 201 F2d 250, 253 (CA 10, 1953). A sum determined to be a reasonable attorney fee is within the discretion of the district court, and a reviewing court should not disturb the holding unless there is a clear showing that the trial judge abused his or her discretion. Cappel v Adams, 434 F2d 1278 (CA 5, 1970). See also, Hoffert v General Motors Corp, 656 F2d 159 (CA 5, 1981), holding that the attorneys themselves invoked the equitable jurisdiction of the court by asking it to approve the terms of a settlement agreement which specified a one-third contingency fee for plaintiff's counsel, and which the district court reduced to one-fifth. The Court of Appeals further held that the fact that no party questioned the propriety of the one-third contingent fee did not shield the fee from the court's scrutiny as part of the overall settlement which the district court had before it.
In City of Burlington v Dague, 505 US; 112 S Ct 2638; 120 L Ed 2d 449 (1992), the Supreme Court discussed the effect of fee-shifting statutes on a contingency fee agreement, holding that the contingent risk that a party's counsel would not have been paid had the lawsuit failed cannot be used to increase the fee award.
But a court order reducing an attorney fee does not mean the original fee agreement is per se unethical. In McKenzie Construction Inc v Maynard, 823 F2d 43 (CA 3, 1987), a client sued to recover a portion of a contingent fee which the client claimed was excessive. The court stated:
"[I]n a civil action, a fee may be found to be 'unreasonable' and therefore subject to appropriate reduction by a court without necessarily being so 'clearly excessive' as to justify a finding of a breach of ethics. We do not believe that the standards under the court's duty to monitor fee agreements and the court's duty to discipline attorneys are necessarily the same, or serve completely identical purposes."
Therefore, where the contingent fee agreement is silent or ambiguous regarding the calculation of the fee concerning a particular recovery realized in the case, a lawyer should either seek judicial clarification or calculate the fee by the means most favorable to the client. In accord, Hamilton v Ford Motor Co, 636 F2d 745 (CA DC, 1980), where the retainer agreement between plaintiff and counsel provided for a contingent fee of one-third of any amount recovered and did not contain a provision allocating court-ordered awards of attorney fees, and where the work performed by counsel relating to the abuses of the discovery process was contemplated by the retainer agreement, the plaintiff, not plaintiff's counsel, was entitled to the benefit of the entire discovery sanction.