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Ethics Byte

Building safeguards into fee agreements

By Diane Karpman

Diane KarpmanAround the first of the year, we often discuss fee agreement “tune ups.” These methods are designed to protect your future happiness, because a fee agreement may be the first and last time you can control your destiny.

For the last decade, I have recommended using the State Bar’s Fee Forms, primarily because they have been blessed and tested by others and because they give a lawyer the protective aura of using the gold standard. Because they are from the State Bar, they lend a sort of “halo effect” in fee arbitration. However, the State Bar generally does not get involved directly in fee disputes, unless there is a possibility of unconscionability, or there is a violation of Rule 4‑200 (Fees For Legal Services).

There are a number of clauses you should avoid in your fee agreements because they are often deemed contrary to public policy. Many are based on the allocation of "authority" between the lawyer and the client, which impacts on how the relationship is analyzed, or the "objectives and the means" in the case.

If something involves the "ultimate resolution" of the case, or the "substantive rights" of the client, the client is in charge of making the decisions. Lawyers are allocated the authority to determine many procedural and tactical decisions (Blanton v. Womencare). Essentially, it is the client who decides when to bring the case and when and how to close the case. This allocation issue becomes more interesting in criminal law, when defendants have even greater rights and control than for clients in civil cases, due to constitutional implications.

The most controversial aspect of the allocation of authority involves the client’s right to accept a settlement offer. Contingency fee lawyers are particularly incensed by this. They often have a significant investment in a client’s case. Because they provided all the experts, the "day-in-the-life" video or pictures and full staffing, they often have much at stake. When a perfectly good and valid offer is made, the lawyer often believes the client should take it. Suddenly, however, a client can morph into someone who is simply seeking "justice." In employment cases or maybe "wage-and-hour" actions, the client can go "Norma Rae" (the Sally Fields character in the 1979 film about a union organizer). Be very wary of clients seeking justice.

Anytime you go to trial, there is a high degree of risk or potentially a complete loss. The lawyer may advise acceptance of the reasonable settlement offer. You never know what a jury will do or what they will believe about the plaintiff. Even great cases have been lost at trial.

A lawyer must abide by a client’s decision to continue to litigate a matter, even though the lawyer advised the client to accept a remarkably generous settlement. This circumstance can be so outrageous that lawyers will often attempt to limit the client’s settlement authority by way of "artistic" clauses in the fee agreement.

For example, they use a clause that transforms a contingency to an hourly fee if the client refuses a reasonable settlement, or a clause that mandates that all costs are due if a settlement is refused. There are many variations on this theme, which involves the impairment of the client’s absolute rights regarding settlement, or the ability to "hold the clients right to settle" hostage. Look at Ramirez v. Sturdevant, in which a client authorized a lawyer to accept a huge amount, and unbelievably, it was actually offered and accepted.

Another questionable clause involves billing, which may be one of the most difficult acts many of us perform on a daily basis. I realize that many will disagree with me, but my experience is that lawyers will generally round their fees down, giving the client the benefit. But that is the subject of another article.

There is a questionable fee clause which states that if the client fails to object to the bill within 30 days, the client has forever waived the right to object. It’s sort of reminiscent of the law school class of Contracts 101, in that "silence is an acceptance." You also may recall that it rarely worked.

Maybe this concept would be effective if you were a merchant selling rugs in the Grand Bazaar of Marrakech, but it may not work very well against a claim for breach of fiduciary duties. As a fiduciary, you cannot impose duties upon the client. In Charnay v. Colbert, a fee provision stating that the client had 10 days to object was held to be invalid against claims involving breach of fiduciary duty based upon improper billing. This might also be a clause to be avoided in your fee agreement.

I have discussed only a few clauses that will cause an expert to question the validity of your fee agreement, which a client always has the option of voiding. If that happens, you would have to file a claim for recovery of the reasonable value of your services. Even if you win, that decreased valuation of your performance would make it difficult to continue to support your dependents in the lifestyle to which they have become accustomed. In order to recover your "expectation interest," you’ll need a good fee agreement that will be validated.

If you have an interesting topic or story, we are always looking for issues to consider in this column, so please email suggestions to me. Happy Holidays!

Diane Karpman can be contacted at 310-887-3900 or