May 19, 1989
A fee agreement in which a client agrees to pay a percentage of the net recovery or the lawyer's hourly rate, whichever is greater, is not improper if:
- Calculations of the fee under both standards result in a reasonable fee;
- The fee agreement is in writing;
- The client is kept advised of the calculation under the hourly rate as the matter progresses;
- The percentage calculation is at a rate lower than the maximum rate allowable if the lawyer had risked no fee; and
- The hourly rate or flat fee is lower than the normal rate charged by the lawyer for the matter.
In a fee agreement which provides for an hourly rate or flat fee and a percentage of the net recovery, the same tests apply; however, in personal injury or wrongful death cases subject to MCR 8.121, where there is in fact a recovery, the total fee under such an agreement may not exceed 33-1/3% of the net recovery.
References: MRPC 1.4, 1.5; MCR 8.121; CI-962; ABA i1317. CI-1089 is superseded.
A lawyer wishes to enter into a fee agreement with a client providing for an attorney fee which is equal to the greater of (a) one-third of the net recovery, and (b)the lawyer's hourly rate.
The hourly fee is not contingent on the outcome of the case, but results in a minimum fee even if no recovery is realized. The one-third contingency fee only would apply in the event that a recovery was realized, and in a sum sufficient to render one-third of that net recovery greater than the fees based on the hourly rate.
In the alternative, the lawyer wishes to enter into a fee agreement with a client providing for an hourly rate or flat fee and a percentage of the net recovery.
In CI-1089 the Committee addressed this question stating:
"Use of a mixed fee structure involving both contingent fee and hourly fee components is not per se unethical. In personal injury or wrongful death cases, however, the total fee recoverable under such a mixed fee structure cannot exceed one-third of any net recovery realized. In other cases, the fee must not be 'clearly excessive', and the percentage used in the contingent fee portion of the structure, as well as the hourly rate, should appropriately reflect the nature of the agreement. DR 2-106."
We are now asked to review that decision based on the Michigan Rules of Professional Conduct.
It is clear that as long as a fee is not illegal or "clearly excessive" under MRPC 1.5, a lawyer may charge and a client may agree to pay on the basis of a flat fee, an hourly rate, a percentage basis, or some combination or "mix" of these types of fees. CI-962; ABA i1317.
Any agreement including a contingent fee shall be in writing, shall state the method by which the fee is to be determined, and upon conclusion of the matter, shall be accounted for with a written statement. MRPC 1.5(c).
MCR 8.121 defines the "maximum allowable fee" in personal injury or wrongful death claims in which the "attorney's compensation is dependent or contingent in whole or in part upon successful prosecution or settlement, or upon the amount of recovery." Emphasis added. A fee agreement governed by MCR 8.121 where the compensation is contingent upon successful prosecution, or settlement, or amount of recovery, may not provide for a fee in excess of one-third of the amount recovered. For example, a fee agreement may provide for the lawyer to be paid a $500 retainer plus a percentage of any recovery. If there is in fact recovery, the total fee, retainer + percentage, must not exceed 33-1/3% of the net recovery. If there is no recovery, the retainer remains the only charge. For this type of mixed fee, the percentage would necessarily be less than 33-1/3%.
MCR 8.121 does not place a ceiling on mixed fees for claims other than personal injury and wrongful death, nor does it address other kinds of contingencies or dependencies beyond (a) successful prosecution, (b) settlement, or (c) the amount of recovery. Thus a contingency described in terms of whatever calculation is "greater" is not prohibited by the rule except as described in the preceding paragraph or in matters not governed by MCR 8.121.
A fee agreement providing for an hourly rate or a percentage of recovery, whichever is greater, allows calculation by two separate methods. Until conclusion of the matter, the client and the lawyer will not know the exact fee charged, although both will be able to monitor the hourly rate calculation as the matter progresses. Even in personal injury and wrongful death actions, where the hourly fee is the greater of the two alternatives, the fee is not contingent in whole or in part.
However, the philosophy behind allowing a percentage fee, which usually results in higher recovery for the lawyer, is that the lawyer is willing to risk getting nothing if the lawyer is unsuccessful. When the lawyer's risk is lowered by a mixed fee arrangement that guarantees the lawyer a retainer, an hourly fee, or a fee alternatively calculated, then the maximum percentage calculation allowable should be reduced by some reasonable amount to reflect the lawyer's lesser risk, i.e., in such fee arrangements the percentage calculation must be something less than 33-1/3%, or in cases where the 33-1/3% is not applicable, something less than the percentage that would be charged where the lawyer risked everything.
Similarly, the hourly or flat rate normally charged by the lawyer in such matters should be reduced by some proportionate amount in cases where the fee agreement provides a client is to pay the greater of a percentage rate and an hourly or flat rate, to reflect the lawyer's lesser risk.
Thus we conclude that MCR 8.121 does not limit a fee to 33-1/3% of recovery under such alternate calculations and CI-1089 is therefore superseded. But the calculation of such fee on a percentage basis must be less than the maximum percentage allowed had the lawyer risked taking nothing.
In addition, MRPC 1.4 states that a lawyer shall keep a client reasonably informed about the status of a matter. In a fee arrangement including hourly fees, the calculation of hourly fees as the matter progresses is part of the "status of a matter" about which the lawyer should keep the client informed, through monthly accounting statements or other periodic communication.