ABA Section of Litigation 2012 Section Annual Conference April 18-20, 2012: Ethics Surrounding Attorneys' Fees: How to Agree to Them, Collect Them, Keep Them, and Persuasively

Seek Them as Sanctions

ETHICAL PRINCIPLES APPLICABLE TO ALTERNATIVE FEE ARRANGEMENTS AND RELATED AREAS Gregory R. Hanthorn1 Jones Day Atlanta, GA

I. INTRODUCTION

The Model Rules of Professional Conduct (“Model Rules”) do not necessarily address every potential fee arrangement that can be conjured up. They do, however, provide a series of boundaries and guidelines to be examined in exploring any particular fee arrangement. The Model Rules are not self-executing and

1 Any opinions expressed herein are solely those of the author and not necessarily those of Jones Day or its clients.

must be adopted on a state-by-state basis before becoming binding upon lawyers.2 Because nearly every state bar and the District of Columbia bar has adopted some version of the Model Rules,3 they provide a useful starting point for discussion. However, as any individual issue arises, a prudent lawyer will wish to examine the specific rules as adopted in his or her home state as well as local interpretations of those rules. The guiding principle for all fee arrangements is set forth in Model Rule 1.5(a): “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” This requirement of reasonableness prevails irrespective of the novelty of the fee arrangement or even who first proposed it. A second theme that runs throughout the discussion of alternative fee arrangements concerns the interaction between Model Rules 1.5 and 1.8. Model Rule 1.8 provides that, with certain express exceptions, “[a] lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client . . . .” Model Rules of Prof’l Conduct R. 1.8(a) (2011). Because many alternative fee arrangements involve attempts to tie the interests of the lawyer more closely to those of the client, they fundamentally involve the lawyer entering into a business arrangement with the client that may well be designed to go beyond the “normal” fee-for-services arrangement. These business arrangements must not only result in a not “unreasonable” fee pursuant to Model Rule 1.5, but must be measured against the disclosure and consent standards of Model Rule 1.8 as well. Finally, collection efforts that may appropriately be taken are examined. In general, attorneys may charge interest on unpaid fees and may, under appropriately narrow circumstances, secure the payment of fees via a lien arising by statute or agreement. However, the attorney must take care that the exercise of any lien (especially if the exercise involves retaining documents or papers necessary to the client) does not unduly prejudice the client. II. GENERAL STANDARDS FOR ANY FEE ARRANGEMENT

Whatever type of fee is in view, “[a] lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” Model Rules of Prof’l Conduct R. 1.5(a). The factors that determine the reasonableness of a fee include, but are not limited to:

(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;

2 One exception may exist where an individual federal court may adopt the Model Rules as the standard for that federal court in lieu of the disciplinary rules of the state in which the court sits. 3 A useful chart concerning state by state comparisons of particular Model Rules of Professional Conduct can be found at: http://www.americanbar.org/groups/professional_responsibility/policy/rule_charts.html. Additionally, links to various state Rules of Professional conduct appear on the ABA website at: http://www.abanet.org/cpr/links.html.

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(5) the time limitation 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.

Model Rules of Prof’l Conduct R. 1.5(a)(1)-(8). These factors are not exclusive. Model Rules of Prof’l Conduct R. 1.5 cmt. 1. When a representation is based upon an hourly rate, the minimum unit of time for which a client will be billed should be apparent. See, e.g., Georgia Bar Formal Advisory Op. 01-1 “Is it ethically permissible for a lawyer, with or without notice to a client, to charge for a standard time unit without regard to how much time is actually expended?” (May 3, 2001) (discussing six minute and quarter-hour increments). The timing of when “reasonableness” is to be determined is critical as well. While some ABA Formal Opinions expressly note that “reasonableness” is determined at the time the fee agreement is reached (see, e.g., ABA Comm. on Prof’l Responsibility Formal Op. 11-458 at 2 (2011) “Changing Fee Arrangements During Representation” (“The reasonableness of a lawyer’s fee typically is assessed in light of circumstances as of the time the original fee agreement is made.”), some courts have focused upon Model Rule 1.5(a)’s prohibitions against “mak[ing] an agreement for,” “charg[ing],” and “collect[ing]” an unreasonable fee to hold that the fee must not be unreasonable at any of these points; that is, it must not be unreasonable when agreed, charged (i.e., billed), or collected. See, e.g., Matter of Powell, 2011 WL 4498991 (Ind. Sept. 29, 2011) (“Even if a fee agreement is reasonable under the circumstances at the time entered into, subsequent developments may render collection of the fee unreasonable.”) (attorney who attempted to collect unreasonable fee subject to 120-day suspension although agreement may have appeared reasonable when entered; agreement was for attorney to receive one-third contingency of all money in trust for successfully pursuing removal of trustee; trustee voluntarily agreed to be replaced by the attorney after one phone call and limited subsequent work was required); see also id. (in reviewing and concurring with recommendation of discipline, Indiana Supreme Court noted, “But within two or three days, [prior Trustee] agreed to resign as trustee in favor of Respondent, and Respondent had assumed control over the trust, knew the balance in the trust account, had gained access to those funds, and had cut himself a check for his fee. At this point, he knew the case did not involve any complex issues, prolonged time commitment, risk of no recovery, or even any opposition.”). Another twist on the timing and scope of the “reasonableness” inquiry can arise when a lawyer with an appropriately drafted continent fee agreement is discharged (especially without cause). Jurisdictions vary on whether or under what circumstances a lawyer who is discharged, even without cause, can collect his or her entire fee when the matter is resolved. The Indiana Supreme Court outlined some of these successive counsel issues by examining whether a client with a contingent fee agreement could still exercise the right to discharge his or her lawyer:

A corollary of the client's right to discharge a lawyer is that a contract between the client and the lawyer that unduly impairs that right is invalid. 1 Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of Lawyering § 1.16:201-1 (1990 & Supp.1998). Accordingly, even if an agreement calls for a full contingent fee in the event of discharge, it is likely to be unenforceable. If a client is required to pay the discharged lawyer the fee for the completed project, especially if this is a percentage contingent fee, and then pay a second fee for its completion, the client's right to discharge the lawyer may be too costly to assert. Id. at § 1.16:602 n. 2.1 (a client's right to discharge is not much of a right if it would be too costly to assert); AFLAC, Inc. v. Williams, 264

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Ga. 351, 444 S.E.2d 314, 317 (1994) ("A client should not be deterred from exercising his or her legal right because of economic coercion."). Otherwise stated, holding a client responsible for the entire amount of a contract would chill a client's exercise of the right to discharge a lawyer. Estate of Forrester, 562 N.E.2d at 1317; see also Saucier v. Hayes Dairy Prod., Inc. ,373 So.2d 102, 116 (La.1978) (the client's absolute right to discharge a lawyer is stripped of effect if the exercise of that right is conditioned upon payment of the full amount specified in the contract). The requirement of Professional Conduct Rule 1.5 that a lawyer's fee be reasonable is also relevant. A full contingency for partial completion overcompensates the discharged lawyer by giving a full contingent fee for less than a full work load. Similarly, however, allowing a full contingency to a successor may be unreasonable. If the former lawyer has contributed significantly to the result but the successor receives a full contingent fee, either the first lawyer remains uncompensated for that contribution or the client pays more than a full contingent fee. In either case, the successor gets a windfall in the form of being relieved of the effort contributed by the first lawyer but nonetheless receives a full contingent fee. None of these results is the desired default setting the law should provide in the absence of a contract spelling out exactly who pays how much under these circumstances.

Galanis v. Lyons Truitt, 715 N.E.2d 858, 861 (Ind. 1999). Thus, at least some courts will examine whether the total fee earned by both firms in a successive relationship is reasonable, and then determine how to split that reasonable, total fee between the two firms.

Other jurisdictions will, in general, allow a lawyer discharged without cause to attempt to collect the full, agreed contingency or to seek some form of quantum meruit recovery. See Mandell & Wright v. Thomas, 441 S.W.2d 841, 847(Tex. 1969) (holding that Texas attorney discharged before conclusion of contingent fee matter could elect to pursue recovery of fees either (i) in quantum valebant/quantum meruit or (ii) on the basis of the written contract); but cf. Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006) (rejecting as “unconscionable” a contingent fee agreement that purported to make the entire fee based upon the ad damnum requested immediately due and owing the first firm and, instead, applying quantum meruit principles). Successor counsel, in particular, would be well advised to consult the applicable state’s ethics and fee opinions before agreeing to a contingent fee arrangement where the firm’s recovery may be limited based upon work already performed by a prior firm. III. THE FUNDAMENTALS OF BUSINESS RELATIONSHIPS WITH CLIENTS Many alternative fee arrangements will likely involve sharing risks and rewards associated with the representation between the lawyer and the client. That is, there will be some effort to change what either a “normal” contingent fee or hourly billing arrangement would yield. Because this will necessarily involve discussions with the client or potential client concerning how best to rearrange traditional relationships, Model Rules addressing business relationships with clients come into view.

“A lawyer’s legal skill and training, together with the relationship of trust and confidence between lawyer and client, create the possibility of overreaching when the lawyer participates in a business, property or financial transaction with a client, for example, a loan or sales transaction or a lawyer investment on behalf of a client.” Model Rules of Prof’l Conduct R. 1.8 cmt. 1 (“Business Transactions Between Client and Lawyer”). Accordingly, any business arrangement between a lawyer and a client must objectively be “fair and reasonable” to the client after full written disclosure to the client of the terms of the transaction. See Model Rules of Prof’l Conduct R. 1.8(a). In negotiating any type of agreement with a client, “[a] lawyer shall not use information relating to representation of a client to the disadvantage of the client

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unless the client gives informed consent, except as permitted or required by these [Model] Rules.” Model Rules of Prof’l Conduct R. 1.8(b). “Use of information relating to the representation to the disadvantage of the client violates the lawyer’s duty of loyalty” although “[t]he Rule [1.8] does not prohibit uses that do not disadvantage the client.” Model Rules of Prof’l Conduct R. 1.8 cmt. 5. The level and degree of disclosure of the lawyer’s self-interest are also addressed in Model Rule 1.7. “Under that Rule, the lawyer must disclose the risks associated with the lawyer’s dual role as both legal adviser and participant in the transaction, such as the risk that the lawyer will structure the transaction or give legal advice in a way that favors the lawyer’s interests at the expense of the client. Moreover, the lawyer must obtain the client’s informed consent. In some cases, the lawyer’s interest may be such that Model Rule 1.7 will preclude the lawyer from seeking the client’s consent to the transaction.” Model Rules of Prof’l Conduct R. 1.8 cmt. 3 (discussing interplay with Mod. R. Prof. Cond. 1.7). Model Rule 1.7 provides, in relevant part, that, “a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: . . . there is a significant risk that the representation of one or more clients will be materially limited by . . . a personal interest of the lawyer.” Model Rules of Prof’l Conduct R. 1.7(a)(2). In such cases, a client may agree to be represented by the lawyer (and accordingly waive the current conflict), by giving “informed consent, confirmed in writing.” Model Rules of Prof’l Conduct R. 1.7(b)(4). IV. SPECIFIC ALTERNATIVE FEE ARRANGEMENTS

While the types of alternative fee arrangements that can be conceived are presumably infinite,

most will involve some form of fixed fee (for an entire matter or subset), a “reverse contingency fee,” or a narrowing or a sharing of responsibility.

A. There are Particular Contingency Fee Agreements Expressly Forbidden by Model

Rule of Professional Conduct 1.5. Model Rule 1.5(d) provides two “thou shalt nots.” First, “[a]ny fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof” is expressly forbidden by Model Rule 1.5(d)(1). Second, pursuant to Model Rule 1.5(d)(2), the fee in a criminal case cannot be contingent upon the success of the representation. Model Rules of Prof’l Conduct R. 1.5(d)(2).

B. Fixed Fee Agreements Can Be Appropriate In Most Jurisdictions, Following Discussion and Disclosure.

The Model Rules expressly contemplate that a lawyer’s fee may be “fixed or contingent.” Model Rules of Prof’l Conduct 1.5(a)(8). Yet, care needs to be taken to assure that any fixed fee is clearly described and the conditions clearly set forth. When a matter is carried through to conclusion (that is, the deal closes or the litigated matter is resolved), the fixed fee is easy to calculate (it is probably set forth explicitly in the engagement letter). Issues can arise, however, concerning precisely when a fixed fee is “earned” and what happens if a particular engagement is not carried through to conclusion. “A lawyer may require advance payment of a fee, but is obliged to return any unearned portion.” Model Rules of Prof’l Conduct 1.5 cmt. 4. Model Rule 1.16(d) states specific duties that a lawyer has when representation is terminated, including “refunding any advance payment of fee or expense that has not been earned or incurred.” Model Rules of Prof’l Conduct 1.16(d). A cautious lawyer, then, will make clear at what point a fixed fee is “earned” and state that point in the engagement letter. The reasonableness of earning the fee at that point will depend

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upon the types of factors set forth in Model Rule 1.5(a)(1)-(8), and can include disclosure by the lawyer of the fact that the lawyer has, by undertaking this engagement, will not be able to take on other work.4 Some jurisdictions are particularly wary of fees that are fully “earned” upon entering the engagement. In general, however, “[a] lawyer may designate a fee arrangement as a non-refundable retainer and upon receipt deposit such funds in the lawyer's operating account. The amount of a non-refundable retainer fee must be reasonable in amount and comply with Rule 1.5.” (Kentucky Supreme Court Commentary to Ky. R. 1.5, Commt. 11 (2009)). Accord Prof’l Ethics Committee for the State Bar of Texas Op. No. 611 at 3 (September 2011) (“A legal fee relating to future services is a non-refundable retainer at the time received only if the fee in its entirety is a reasonable fee to secure the availability of the lawyer’s future services and compensate the lawyer for the preclusion of other employment that results from the acceptance of employment by the client.”) (emphasis in original). The “fixed fee” situation is complicated when someone other than the client is setting the fee. For example, in 1994 the Kentucky bar took the position that fixed or flat fee arrangements between a liability insurer and counsel are per se unethical. See Kentucky Bar Ass’n KAB E-368 (1994). In Am. Ins. Ass’n v. Kentucky Bar Ass’n, 917 S.W.2d 568 (Ky. 1996), this bar rule was challenged by an insurance company wishing to engage counsel for its insured on a fixed fee per case basis. In upholding the restriction against fixed fees in the liability insurance context the Kentucky Supreme Court stated:

the pressures exerted by the insurer through the set fee interferes with the exercise of the attorney’s independent professional judgment, in contravention of Rule 1.8(f)(2). The set fee arrangement also clashes with Rule 1.7(b) in that it creates a situation whereby the attorney has an interest in the outcome of the action which conflicts with the duties owed to the client; quite simply, in easy cases, counsel will take a financial windfall; in difficult cases, counsel will take a financial loss.

917 S.W.2d at 572. Other jurisdictions have noted similar concerns, but allow the fixed fee practice so long as the concerns are addressed. See Georgia Bar Formal Advisory Op. 11-1, “Ethical Considerations Bearing on Decision of Lawyer to Enter into Flat Fixed Fee Contract to Provide Legal Services” (April 14, 2011) (not banning but limiting practice); Ohio Bd. of Comm’ers on Grievances and Discipline Op. No. 97-7, 1997 WL 782951 (Dec. 5, 1997) (Ohio Supreme Court approving flat fee so long as reasonable and adequate in light of work to be performed).

C. Under Appropriate Circumstances, the Services of a Lawyer Can Be “Unbundled” or Even Subject to a Coupon.

Model Rule 1.2(c) provides the ethical basis for “unbundling” some legal services as a cost-saving matter: “A lawyer may limit the scope of the representation if the limitation is reasonable under the circumstances and the client gives informed consent.” Model Rules of Prof’l Conduct 1.2(c). The ability to limit the scope of the representation has important conditions. “Although this Rule affords the lawyer and client substantial latitude to limit the representation, the limitation must be reasonable under the circumstances. If, for example, a client’s objective is limited to securing general information about the law the client needs in order to handle a common and typically uncomplicated legal problem, the lawyer and client may

4 This may be due to creating potential conflicts of interest pursuant to Model Rules 1.7 and 1.8 or because substantial time and effort will be needed to complete the engagement, such that time is not readily available for other transactions or cases. When these situations exist, they should be disclosed to the client so that the likelihood of having to turn down other work is “apparent to the client.” Model Rules of Prof’l Conduct 1.5(a)(2).

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agree that the lawyer’s services will be limited to a brief telephone consultation. Such a limitation, however, would not be reasonable if the time allotted was not sufficient to yield advice upon which the client could rely. Although an agreement for a limited representation does not exempt a lawyer from the duty to provide competent representation, the limitation is a factor to be considered when determining the legal knowledge, skill, thoroughness and preparation reasonably necessary for the representation.” Model Rules of Prof’l Conduct 1.2, cmt. 7. Assuming appropriate disclosure and a reasonably sophisticated client, this limited ability to unbundle legal services may provide an informed client and a lawyer the opportunity to price some services separately, and even to agree that an existing, fixed-fee representation will take place for an express period of time or until a milestone is reached, such as the end of discovery or resolution of substantive motions. After the milestone is reached, a new arrangement may be negotiated for the next phase of the matter. The attorney should make sure he or she has not contracted away the duty of care, and the more sophisticated the client, the more likely this type of arrangement may make sense. Bar authorities in New York and South Carolina have also addressed the issue of the use by attorneys of “deal of the day” or “group coupon” websites. Both states have approved of the use of this type of marketing and fee payment under appropriate circumstances. See South Carolina Bar Ethics Advisory Op. 11-05 (2011); New York State Bar Ass’n Comm. On Prof’l Ethics Op. No. 897 (Dec. 13, 2011). Appropriate circumstances include the lawyer providing a full refund if the lawyer is unable to honor the coupon due to conflicts or other issues, although the New York Bar Opinion does note that if the client/buyer subsequently terminates the relationship the client’s/buyer’s refund will be subject to the lawyer’s quantum meruit claim. New York State Bar Ass’n Comm. On Prof’l Ethics Op. No. 897 at 1, 3 (citing Rule 1.16(e)) (Dec. 13, 2011). Should the buyer fail to redeem the coupon within the stated period, “the lawyer is entitled to treat the advance payment received [from the website provider who sold the coupon] as an earned retainer for being available to perform the offered service in the given time frame.” Id. at 3. Both the New York and South Carolina opinions stress the need for the information concerning the daily coupon deal to be accurate and comply with all rules governing attorney advertising, including those based upon Model Rules 7.1 through 7.4. New York State Bar Ass’n Comm. On Prof’l Ethics Op. No. 897 at 3; South Carolina Bar Ethics Advisory Op. 11-05 at 1.

D. Reverse Contingency Fee Arrangements Can be Entered in Some Jurisdictions. One form of alternative fee arrangement arises when a set amount is requested in litigation and the lawyer and client agree that the lawyer will take as a fee a percentage of the amount less than the total amount requested that is ultimately agreed to be paid or compelled by a final decision of a court. This type of “reverse contingent fee” agreement should be in writing and should define the amount that will be used to calculate the fee. ABA Comm. on Ethics & Prof’l Responsibilities, Formal Op. 93-373 at 2-3 (1993), “Contingent Fees in Civil Cases Based on the Amount of Money Saved for the Client,” concluded that when “reasonably determinable civil damages between private parties are at issue . . . there is no basis in public policy for prohibiting a fee arrangement based on the percentage of the amount saved a defendant, so long as the reasonableness and informed consent requirements of Rule 1.5 are satisfied.” The resulting fee must still be objectively reasonable, and the sophistication of the client may be considered in reaching the result. Formal Opinion 93-373 reached a different result from the Iowa Supreme Court, which held that an unliquidated tort amount was too speculative to be the basis of a reverse contingency fee arrangement and was thus void as a matter of public policy. Wunschel Lawfirm, P.C. v. Clabaugh, 291 N.W.2d 331 (Iowa 1980) (applying Iowa Code of Professional Responsibility).

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E. Payments Other Than Money Can Be Accepted, And Security Can Be Provided By a Client, But These Arrangements Should Be Examined Carefully.

Frequently clients may wish to discuss fee arrangements that involve the payment of something other than money. This can include an equity stake in the client (particularly if it is a start-up early in its corporate existence), and even matters such as literary rights. In addition to examining the usual “fee” issues, these types of transactions require examining the rules dealing with doing business with clients. The rules for business engagements with clients are set forth in Model Rule 1.8. A lawyer cannot ethically enter into a business transaction with a client or acquire any security interest in property of a client unless the following conditions are satisfied:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing signed by the client, the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.

Model Rules of Prof’l Conduct 1.8(a). “Although a fee agreement with a client is not generally considered to constitute a business transaction [within the meaning of Model Rule 1.8(a)], the transaction with a client to secure a fee is itself regarded in most state and local bar opinions and court decisions as a business transaction.” ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 02-427 (2002), “Contractual Security Interest Obtained by a Lawyer to Secure Payment of a Fee” (and citations therein). If client property is to be held by the lawyer, the lawyer also acquires duties to identify the property as the client’s and to safeguard it. Model Rules of Prof’l Conduct 1.15(a). Formal Opinion 02-427 takes the position that “a lawyer may take a security interest in client property when the property is the subject of litigation in which the lawyer represents the client” if the disclosures and other provisions of Model Rule 1.8 are satisfied; there is no need for an express statute or external source of law authorizing a lien or security interest beyond the contract itself. ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 02-427 at 4-5 (2002), “Contractual Security Interest Obtained by a Lawyer to Secure Payment of a Fee” (noting that revision of Model Rule 1.8 and Comment 16 include “liens acquired by contract with the client.”). Not all liens are enforced equally, however. For example, Formal Advisory Opinion 87-5 of the State Bar of Georgia examined a potential conflict between O.C.G.A. § 15-19-14, which grants attorneys who are not paid as agreed a lien on papers within the attorneys’ possession, and the need of a client for those papers, concluding: “An attorney's ethical obligation not to cause prejudice to his or her client is paramount over rights under the lien statute. Accordingly, an attorney may not to the prejudice of a client withhold the client's papers or properties upon withdrawal as security for unpaid fees.” In short, the statutory lien would only apply if it would not prejudice the client. Effectively, if the lien would put pressure on a client, it should not be asserted.

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V. OTHER THAN THROUGH APPROPRIATE CONTINGENT FEE ARRANGEMENTS, LAWYERS SHOULD AVOID TAKING A STAKE IN THE OUTCOME OF THE MATTER.

Contingent fees are expressly allowed by the Model Rules. See, e.g., Model Rules of Prof’l Conduct 1.5(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 other law.”). In general, any such arrangement “shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. . . .” Model Rules of Prof’l Conduct 1.5(c). If the attorney desires to be paid in the event the client fires the attorney, whether by converting the matter to time and expenses or through some presumably reduced contingency percentage, then that payment would logically be part of “any expenses for which the client will be liable whether or not the client is the prevailing party” at the time the lawyer is fired and should be stated in the writing. See, e.g., Mass. R. Prof. Cond. 1.5(c)(7) (“if the lawyer intends to pursue such a claim, the client’s potential liability for expenses and reasonable attorney’s fees if the attorney-client relationship is terminated before the conclusion of the case for any reason, including a statement of the basis on which such expenses and fees will be claimed, and, if applicable, the method by which such expenses and fees will be calculated;”); Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006) (recovery that can be contracted for in event of discharge of attorney cannot be more favorable than recovery for lawyer would have been had contract been performed; invalidating “immediate payment” provision and attempt to define earned fee based upon estimate of amount of claim at time attorney-client fee agreement entered; awarding fee based upon agreed percentage times amount actually agreed to in settlement that followed discharge of law firm). Some specific types of property raise particular issues. Model Rule 1.8(d) cautions that “[p]rior to the conclusion of representation of a client, a lawyer shall not make or negotiate an agreement giving the lawyer literary or media rights to a portrayal or account based in substantial part on information relating to the representation.” The commentary to Model Rule 1.8 explains, “[a]n agreement by which a lawyer acquires literary or media rights concerning the conduct of the representation creates a conflict between the interests of the client and the personal interests of the lawyer. Measures suitable in the representation of the client may detract from the publication value of an account of the representation. Paragraph (d) does not prohibit a lawyer representing a client in a transaction concerning literary property from agreeing that the lawyer’s fee shall consist of a share in ownership of the property, if the arrangement conforms to Rule 1.5 [reasonableness of fee] and paragraphs (a) and (i) [of Model Rule 1.8].” Model Rules of Prof’l Conduct 1.8, cmt. 9. VI. FEE ARRANGEMENTS FOR CHANGES IN HOURLY RATES OVER THE

LIFE OF THE MATTER, AND OTHER CHANGES IN CIRCUMSTANCES Additionally, lawyers may choose to bill less than the number of hours actually spent on a case. An exercise of judgment in this area is both appropriate and professional.5 The converse, however, is not true. Without client consent, additional sums cannot be charged. See, e.g., Beatty v. N.P. Corp., 581 N.E.2d 1311, 1315 (Mass. App. 1991) (cited in ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 11-458 at 3 (2011), “Changing Fee Arrangements During Representation.” That is, either a pre-

5 See generally, ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-379 (1993), “Billing for Professional Fees, Disbursements, and Other Expenses.”

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negotiated “success” fee may be paid, or even after the fact a success fee may be requested. However, a success fee, even for an extraordinary result, cannot simply be applied without client consent. Similarly, inflating the claimed number of hours or changing billing rates for the purpose of extracting a success fee is not permitted. “The point here is that fee enhancement cannot be accomplished simply by presenting the client with a statement reflecting more billable hours than were actually expended.” ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 93-379 at 4 (1993), “Billing for Professional Fees, Disbursements, and Other Expenses.” Lawyers who have agreed to perform work in exchange for an hourly rate have an ethical duty to staff efficiently. “Moreover, continuous toil on or overstaffing a project for the purpose of churning out hours is also not properly considered ‘earning’ one's fees. One job of a lawyer is to expedite the legal process. Model Rule of Prof’l Conduct 3.2. Just as a lawyer is expected to discharge a matter on summary judgment if possible rather than proceed to trial, so too is the lawyer expected to complete other projects for a client efficiently. A lawyer should take as much time as is reasonably required to complete a project, and should certainly never be motivated by anything other than the best interests of the client when determining how to staff or how much time to spend on any particular project.” In general, a lawyer may contract for fees calculated on an hourly basis and may also contract for the hourly rates to change over the life of the matter. Model Rule 1.5(b) provides, “Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.” The ABA Committee on Ethics and Professional Responsibility has interpreted this to include incremental increases in hourly rates on an annual or other periodic basis “if communicated clearly to clients at the commencement of the client-lawyer relationship . . . .” ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 11-458, at 3 (2011), “Changing Fee Arrangements During Representation.” VII. ADDED DUTIES OF CARE FOR DISABLED, MINOR, OR INCOMPETENT

CLIENTS “The normal client-lawyer relationship is based on the assumption that the client, when properly advised and assisted, is capable of making decisions about important matters. When the client is a minor or suffers from a diminished mental capacity, however, maintaining the ordinary client-lawyer relationship may not be possible in all respects.” Model Rules of Prof’l Conduct 1.14, cmt. 1. Accordingly, fee arrangements with clients with diminished capacity should be scrutinized further to avoid the appearance of overreaching. The discipline that resulted in Matter of Powell, 2011 WL 4498991 (Ind. Sept. 29, 2011), discussed above, may be explained in part by the Indiana Supreme Court’s concern that the fee agreement was entered into in connection with a client of diminished capacity. Family members may, in appropriate situations, assist the lawyer and client. The attorney should assure that the attorney-client privilege is adequately considered and protected. Model Rules of Prof’l Conduct 1.14, cmt. 3. In addition, substantive law may provide that minors or clients with diminished capacity must have guardians ad litem or guardians of the property appointed to further assure that their interests are protected. See, e.g., Fed. R. Civ. P. 17(c)(2) (“A minor or an incompetent person who does not have a duly appointed representative may sue by a next friend or by a guardian ad litem. The court must appoint a guardian ad litem -- or issue another appropriate order -- to protect a minor or incompetent person who is unrepresented in an action.”).

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VIII. OPTIONS WHEN CLIENTS BECOME DELINQUENT Sometimes in spite of the best efforts of the lawyer, and even the client, a client may become delinquent. Alternatively, a client may discharge a lawyer while a large receivable is owing. Even in these situations lawyers must proceed carefully. Some jurisdictions provide that a lawyer may ethically charge interest on delinquent fees, even if not expressly provided in the original engagement. See, e.g., Georgia Formal Advisory Opinion 45 (March 15, 1985, amended November 15, 1985) “The State Disciplinary Board is of the opinion that an attorney may ethically unilaterally charge interest on client's overdue bills.”). In order to do so, however, the attorney must provide at least 30 days advance notice to the client that interest will be charged on the delinquent amount. A similar result may be reached by providing notice to a delinquent client pursuant to ABA Formal Op. 11-458 at 3 (2011), “Changing Fee Arrangements During Representation,” although this appears less certain. The relationship between lawyer and client may still preclude some collection techniques. “Even if the lawyer has been unfairly discharged by the client, a lawyer must take all reasonable steps to mitigate the consequences to the client.” Model Rules of Prof’l Conduct 1.16, cmt. 9. As noted above, these steps have been interpreted in some jurisdictions to require delivering papers or work product needed by the client even if a statutory lien provides that the lawyer may maintain them. See, e.g., Ga. Formal Advisory Op. 87-5, “Assertion of Attorneys’ Retaining Liens” (September 26, 1988). If the representation involves appearances in court, the withdrawing attorney may well need court permission to withdraw and withdrawal may not always be permitted. See ABA Comm. on Ethics & Prof’l Responsibility, Formal Op. 1.16(c) (“A lawyer must comply with applicable law requiring notice to or permission of a tribunal when terminating a representation. When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation.”). IX. RECORDING OF TIME SHOULD BE VIEWED AS A COMMUNICATION TO A

CLIENT It should go without saying that billing practices should follow the agreed arrangement. That is, if an arrangement involves payment of an hourly rate or series of hourly rates for different service providers, then both the number of hours which the client is billed and the rates should be reflected appropriately. The golden rules of best practices for hourly arrangements all center around contemporaneous events. Time should be recorded and entered into appropriate systems as closely as possible to the time services are rendered. Frequently, this will involve daily recording and review. Second, pro formas reflecting the total time for a particular engagement should be generated and reviewed on a periodic basis. Again, the goal is to review the material presented in the time sheets and anticipate in advance any client questions concerning descriptions or compliance with the written arrangement. Third, bills should be generated and provided to the client, along with the agreed level of description, on a timely basis. Frequently this will be monthly. The evidence is straightforward: “In matters where the client has agreed to have the fee determined with reference to the time expended by the lawyer, a lawyer may not bill more time than [he or she] actually spends on a matter, except to the extent that [lawyer] rounds up to minimum time periods (such as one-quarter or one-tenth of an hour) . . . . [T]he lawyer who has agreed to bill on the basis of hours expended

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does not fulfill [his or her] ethical duty if [that lawyer] bills the client for more time than [was] actually spent on the client’s behalf.” ABA Comm. on Ethics & Prof’l Responsibility, Formal Op 93-379 at 3-4 (1993), “Billing for Professional Fees, Disbursements, and Other Expenses.” The formal opinion addressed three specific circumstances: (1) when a lawyer is in court on a calendar call for more than one client, yet wishes to bill each client for the full time; (2) when a lawyer is traveling to perform work for Client A, yet does work for Client B en route, and wishes to bill both because Client A has agreed to pay for travel time; and (3) recycling or recapturing work product and billing the second client the full amount that the original client was billed. Id. In each of these instances, the contemplated billing is improper. Instead of focusing exclusively upon whether each client had agreed to pay under the circumstances presented, focus should be on “what a client could be forced to pay, but rather from the perspective of what the lawyer actually earned. A lawyer who spends four hours of time on behalf of three clients has not earned twelve billable hours.” Id. Thus, in each instance a lawyer could not “earn” pay for more hours than were spent by the lawyer on the total work; the sum total billed to all clients could not exceed the total time spent by the lawyer.6 To the extent economies are created because more than one client is involved (for example in the case of the lawyer attending a four-hour calendar call for two or three clients), “the lawyer who has agreed to bill solely on the basis of time spent is obliged to pass the benefits of these economies on to the client.” Id. So when an hourly rate is the standard, and economies take place due to the presence of more than one client, the clients are to receive the economic benefits of the efficiencies. See also, S. Chan, “ABA Formal Opinion 93-379: Double Billing, Padding and Other Forms of Overbilling” in 9 Geo. J. Legal Ethics 611 (1995-1996). Timekeeping may prove to be a useful discipline even on contingent matters or matter where a non-refundable retainer has effectively become the “flat billed price” agreed upon for the services. First, this type of contemporaneous recording will assist the lawyer or lawyer’s staff in making determinations regarding profitability. That is, did the flat billing arrangement make economic sense when looking back over the course of the representation? Second, contemporaneous recording even in contingent fee matters may become necessary should the relationship be severed. When one contingent fee lawyer is replaced by a second contingent fee lawyer, a reviewing court at the end of the matter may very well decide that one of the successive lawyers or law firms must take a haircut. Contemporaneous billing records provide support for the actual efforts that were provided. For example, in Galanis v. Lyons & Truitt, 715 N.E.2d 858 (Ind. 1999), the Indiana Supreme Court examined a situation where the original counsel on a contingent fee case was discharged and replaced before trial. The Court sought to assure that the fee received by the discharged lawyer was proportional to the work performed, and concluded:

There are a number of factors that are relevant to a fair resolution of these issues, including whether the predecessor's compensation is contingent on the ultimate result, whether the predecessor's efforts served to reduce the work necessary to bring the case to conclusion, whether the efforts of each lawyer were reasonably efficient, and presumably many others. We assume that the vast majority of these fee arrangements are and should be resolved by agreement between the affected lawyers with appropriate deference to the assumption that each lawyer handled the

6 This does not address the issue of when a specific task (for example, preparing an Answer in one of several repetitive matters) can be billed by agreement at a specific cost. These “fixed fee” agreements or “unit billing” agreements can be appropriate for sophisticated clients. See, e.g., Georgia Bar Formal Advisory Op. 11-1 (April 14, 2011) (addressing “Ethical Considerations Bearing on Decision of Lawyer to Enter into Flat Fixed Fee Contract to Provide Legal Services”).

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case efficiently and productively. If not, finding the proper allocation of these contributions is the sort of fact issue trial courts resolve on a daily basis. To the extent an agreement cannot be reached, lawyers, like any other litigants, may take their factual dispute to a trial court. And, like any other litigant, if they do not spell out the arrangement in a written agreement, they take their chances on the deal the trial court will cut for them. Here, for the reasons given, the subsequent lawyer's fee, not the client, should be the source of payment of the predecessor.

715 N.E.2d at 864. Determining the proper allocation between the two law firms involved would, upon remand, depend in part upon the “itemized list of [the first law firm’s] hours and expenses” that had been sent to the client when the first firm was discharged. Id.; see also Mandell & Wright v. Thomas, 441 S.W.2d 841, 847 (Tex. 1969) (holding that Texas attorney discharged before conclusion of contingent fee matter could elect to pursue recovery of fees either (i) in quantum valebant/quantum meruit or (ii) on the basis of the written contract); Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 562 (Tex. 2006) (holding that “unconscionability” of a fee contract was a question of law for the court and invalidating a contingent fee agreement resulting; quantum meruit principles applied). Gregory R. Hanthorn Jones Day Suite 800 1420 Peachtree Street, N.E. Atlanta, Georgia 30308 (404) 581-3939 ghanthorn@jonesday.com

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