October 28, 1993
A lawyer may not enter into a contingency fee agreement in a personal injury action, which provides or might enable the lawyer to be paid in excess of one-third of the total recovery.
A lawyer hired to vacate a negotiated settlement on a personal injury claim may enter into a contingency fee agreement which provides that the lawyer will receive forty percent of the enhanced value of any future recovery, i.e., any recovery beyond the structured settlement amount previously negotiated, provided further that the agreement states that in no event will the lawyer's compensation exceed one-third of the client's total recovery.
References: MRPC 1.5(a) and (c); R-11; MCR 8.121.
A lawyer has been contacted by a client seeking legal advice regarding a structured settlement, which the individual negotiated with a third party insurer. The structured settlement was to resolve a claim for certain serious and permanent injuries suffered by the client's two minor children in an automobile accident.
The lawyer now inquires about the propriety of entering into a contingency fee agreement providing that the lawyer would be paid 40% of any amounts received over and above the previously negotiated settlement amount. The lawyer indicates that the fee charged would ultimately be less than one-third of the individual's total recovery, i.e., amounts previously negotiated plus amounts received from future negotiations.
The propriety of a lawyer's fee is generally governed 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."
Contingent fees are generally permitted. 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."
MCR 8.121 addresses permissible contingency fee arrangements in personal injury actions. MCR 8.121(B) provides that "the maximum allowable fee for the claims and actions referred to in Subrule (A) [wrongful death and personal injury actions] is one-third of the amount recovered."
Setting aside the structured settlement currently in place will require restoring the parties to the pre-settlement status quo. Cary v Levy, 329 Mich 458, 45 NW2d 352 (1951). The lawyer and client are taking a calculated risk that any prospective recovery will be less than the current structured settlement.
Although it is numerically possible that the contemplated fee agreement would not result in compensation in excess of one-third of the total recovery, it is also possible that the enhanced recovery would be so significant that an agreement entitling the lawyer to forty percent of the enhanced recovery would result in compensation greater than the permitted one-third of the total recovery and violate MCR 8.121(B). Such an agreement would be prohibited under MRPC 1.5(c), and entering into such an agreement violates MRPC 1.5(a). See R-11; MCR 8.121(A).
The fee agreement could permissibly provide that the lawyer will receive forty-percent of the enhanced recovery, but in no event greater than one-third of the individual's total recovery.