Share

Share this on Twitter Share this on Facebook Share this on Linked In Share this by Email
 
 

Keeping a simple fee dispute from
escalating into a big headache

By Diane Karpman

Diane Karpman
Diane Karpman

It is common for clients to exert extra leverage in fee disputes with their lawyers by threatening or bringing a State Bar complaint as a sort of “strong arm” tactic. Usually, the State Bar will not pursue an investigation when it’s solely a fee dispute. (It’s probably a good idea to send a “client’s right to arbitrate” if you sense this coming. See Business and Professions Code § 6200 et seq.)

A new case from the First District Court of Appeal, Cotchett, Pitre & McCarthy v. Universal Paragon Corp. (filed Aug. 31, A126149), has reaffirmed the settled case law regarding legal fees. “[T]he State Bar has no power to regulate the amount of fees charged by its members unless such fees are so ‘outlandish’ as to merit discipline or the conduct [of] the attorney in negotiating for or attempting to collect a fee merit discipline.” Cotchett, page 15.

In Cotchett, the lawyers obtained a “stupendous” result in extraordinarily complex litigation, requiring a high level of legal skill. The underlying litigation between two corporations involved ownership of contaminated real property, which would require very extensive remediation. The fee agreement was unusual, permitting the firm to recover 16 percent of the client’s estimated damages, even though this formula resulted in the lawyers collecting more money than the client. The almost $8 million in fees was not deemed unconscionable.

The court rejected the client’s argument that the fee agreement was unconscionable and unenforceable, because the fee exceeded the settlement, and resulted in the firm receiving substantially more than if they had charged by the hour. The fee agreement, although unusual, reflected an attempt by equally sophisticated parties to share the risk of extremely complicated litigation. “This was a private business transaction between equally matched parties, pure and simple.” Cotchett, page 16, citing Ramirez v. Sturdevant (1994) 21 Cal. App. 4th 904, 913.

In California, lawyers can be subject to discipline if they charge “unconscionable fees” under Rule 4-200, as opposed to “unreasonable” fees, which is the standard in states adopting the Model Rules of the American Bar Association. California has a well-developed body of jurisprudence involving unconscionability. Attorney fees are unconscionable if they are “so exorbitant and wholly disproportionate to the services performed as to shock the conscience.” Cotchett, page 17, citing Tarver v. State Bar (1984) 37 Cal. 3d 122, 134. For example, it is unconscionable for a personal injury lawyer to receive a contingency fee, and then also keep 100 percent of any reductions in medical fees negotiated on behalf of the client from medical care providers. In re Silverton (2004) 36 Cal. 4th 81, 92-93.

The 11 factors explained in Rule 4-200, provide a “nonexclusive list of factors, both procedural and substantive, that may be relevant when determining whether a legal fee is unconscionable.” Cotchett, page 15. This was not a “take it or leave it” deal forced on a “widow or orphan.” Here, there was a sophisticated corporate client, employing outside counsel, with equal bargaining power.

Procedural unconscionability involves oppression, which is manifested in an inequality of bargaining power, forcing the weaker party to accept or “stick to” the deal. (Remember adhesion contracts?) In Cotchett, the client could have employed any number of law firms. The client hired outside counsel to negotiate the fee agreement, which took about two months. There were no surprises or hidden terms in a complex document. E-mails were exchanged between the parties, with examples. The final retainer included a “Hypothetical Example of Alternative Contingency Described in Paragraph 3 of the Fee Agreement.” The hypothetical clearly demonstrated to the client how the fee agreement would work, eliminating any claims of confusion. (This is a good practice pointer.)

The other variety of unconscionability is an “unfairly one-sided” bargain. This would show an overly harsh allocation of risks or costs not justified by the circumstances. Cotchett demonstrated “arms’ length” bargaining. The unusual arrangement based on damages was suggested because the client wanted to avoid hefty hourly fees.

In Cotchett, a “stupendous result” led to a stupendous case. Clients were denied the ability to use the rules to the disadvantage of lawyers, which frequently occurs in fee disputes with lawyers. There are lots of good practice pointers in this case. Review it, so that you don’t walk into what you think is a simple fee dispute only to face a lawsuit for legal malpractice or a frivolous State Bar complaint.

Legal ethics expert Diane Karpman can be reached at 310-887-3900 or at karpethics@aol.com