The Business of Law - Module 5 of 5

Module 5: The Business of Law

Attorney’s Fees

The attorney-client relationship is based on an agreement by the lawyer to provide legal services to a client in exchange for compensation. This agreement is a binding contract, which obligates the lawyer to provide professional services and obligates the client to pay fees for those services.

As with other professions, the structure of the fees, as well as the fee amounts, are determined by the lawyer. However, legal counsel is a specialized service, so it may be difficult for a prospective client to evaluate the degree of difficulty and the amount of time that would be appropriate for a lawyer to spend on the client’s legal matter. As such, the client may not be in a position to determine whether the fee arrangement offered by the lawyer is fair under the circumstances.

For this reason, there are rules of legal ethics concerning the fees that lawyers may charge their clients. To start with, lawyers may not charge “unreasonable” fees and may not seek to recover unreasonable amounts for expenses associated with the representation.[1] The determination of what is considered a reasonable fee largely depends on the circumstances. Nevertheless, there are a number of factors that a lawyer should consider when determining whether a fee is reasonable, including the amount of time the representation will require, the degree of difficulty of the legal questions involved and the level of legal skill needed to provide legal services under the circumstances.

Note that if a lawyer accepts a case regarding a subject matter with which she is unfamiliar and inexperienced, it is not reasonable to expect the client to pay for all the time the lawyer needs to prepare for the matter beyond what a lawyer who is reasonably skilled in that area would need.[2]  The lawyer may also consider whether the acceptance of the representation will preclude the lawyer from accepting other new clients at the same time.

Additional factors include the customary fee for similar legal services, the nature of the professional relationship with the client and the experience and reputation of the lawyer offering the services.[3]  The lawyer should disclose the basis of the fee to the client at the outset of the representation in a manner that would allow the client to understand the nature of the fees and charges for which she is being billed. [4]

All these evaluations must be considered in light of the degree of sophistication and experience of the client, and whether the client is in a position to bargain for a reasonable fee and to understand the complex terms of a fee arrangement.[5] Note that the standards in some states allow more leeway for lawyers to charge a fee without running afoul of the ethics rules. For example, the standard for an impermissible fee in some jurisdictions is merely to disallow fees that are “clearly excessive” or “unconscionable” rather than merely “unreasonable.”[6]

Contingency Fees

Instead of charging an hourly rate or a fee specified at the outset, lawyers sometimes offer clients arrangements under which the fees are contingent on the outcomes of the cases. In most cases, this means that the lawyer’s fee will be a fixed percentage of any award for damages resulting from the lawsuit. As such, when the client agrees to a contingency fee arrangement, the lawyer only collects the fee if the client wins or settles the case.

Contingency arrangements are very common in personal injury cases. These fee arrangements may be useful for clients who have suffered harm but are not in a financial position to hire a lawyer and pay attorney’s fees. Contingency arrangements allow clients to pay fees out of the monetary awards they receive at the conclusions of their cases.  

On the other hand, the use of such fees opens the way for lawyers to take advantage of clients who have little bargaining power. For this reason, in addition to the ethical obligation not to charge an unreasonable fee, some states have statutes which limit the percentage of the damages that the lawyer may take.[7] A typical statute limits the fee to one-third of the total damages awarded to the plaintiff. However, some jurisdictions allow a lawyer to apply to the court for higher fees under extraordinary circumstances when the statutory fee does not provide adequate compensation for the legal work involved.[8]

In cases involving minors, contingency fee arrangements are subject to court approval.[9] Moreover, contingency fee agreements must be in writing, must state the precise method for calculating the lawyer’s fee in case of a settlement or a successful litigation, must specify any fees which will be collected regardless of the outcome (such as court costs and expert witness fees) and must be signed by the client.[10]

If there is doubt whether a contingent fee is in the client's best interest, the lawyer should discuss alternative fee arrangements with the client.[11]

In most states, lawyers may not enter into contingency arrangements for criminal defense representations.[12] Likewise, in a domestic relations case, the fee cannot be contingent on securing a divorce or on the amount of alimony or support awarded to the client.[13] This rule stems from a concern that if a lawyer has a stake in a divorce settlement, there will be an improper incentive for the lawyer to encourage divorce over reconciliation.[14]

Fee Splitting

On occasion, a lawyer representing a client may ask another lawyer to join the representation. This may be because the primary lawyer believes that the representation requires a specialist in a particular field of law, because the matter will be litigated in a jurisdiction in which the primary lawyer is not licensed to practice or for any number of reasons. In such cases, and in particular when the primary lawyer has entered into a contingency fee agreement with the client, the division of fees between the lawyers may be unclear.

Lawyers are permitted to divide the fees amongst themselves on the condition that the division is proportional to the services rendered by each lawyer. Alternatively, the fee may be split between them if the lawyers both assume joint responsibility for the representation as a whole.[15] The client must agree in writing to the arrangement, which must state how the fees will be split between the lawyers.[16]

These rules also apply to cases in which a lawyer refers a legal matter to another lawyer. Attorneys who are not in the same firm may share/split fees only if (1) the division is proportionate to the work performed, or each attorney assumes joint responsibility; (2) the client agrees in writing, including agreement about the share to be received by each attorney; and (3) the total fee is reasonable.[17]

Thus, a referral fee where a lawyer is being paid solely for referring a case in which she will do no legal work would be unethical.[18] Reciprocal referral arrangements with another attorney or even a non-attorney professional, where the parties informally agree to refer clients to each  other, is ethical as long as the arrangement does not violate any other Rules, including interference with the attorney’s professional independence. However, the agreement must not be exclusive, and the client must be informed of the existence and nature of the agreement.[19]

Of course, a lawyer should only refer a matter to another lawyer if she reasonably believes the other lawyer is competent to handle the matter.[20]

Lawyers have the duty to exercise independent professional judgment on behalf of a client. For this reason, ethical rules do not permit lawyers to subject their autonomy and decision-making to the control or direction of non-lawyers, who do not have the same ethical obligation.[21] As such, lawyers are prohibited from forming partnerships with non-lawyers if the partnership engages in the practice of law. This prohibition applies even if the practice of law is only one of the professional spheres in which the partnership operates.[22] Similarly, to protect the lawyer’s independence, a lawyer may not share legal fees with a non-lawyer, except under very specific conditions.[23]

Payments from Other Parties

A lawyer’s obligation to exercise independent, professional judgement may be compromised when a third party, rather than the client, is compensating the lawyer for legal services. The third party may have interests which differ from those of the client, such as limiting the amount of money spent on the representation and seeking influence over whether the client settles the case or agrees to a plea bargain.[24]

Therefore, a lawyer may only accept offers of payment of legal fees from third parties if doing so will not interfere with the lawyer’s independent professional judgment or with the lawyer-client relationship. In addition, the lawyer still has a duty of confidentiality exclusively to the client and may not share confidential information learned over the course of the representation with the third party without consent of the client.[25] When these conditions are met, the lawyer may participate in the solicitation of third parties to pay a client’s legal fees, as long as the contributors are disclosed and the funds are administered honestly.[26]

In some cases, opposing parties may be forced to pay legal fees for the client. Generally, in the United States, each party to litigation pays its own legal fees regardless of the outcome of the litigation. However, in some cases, federal and state laws allow (or even require) courts to order the losing side of the case to pay the legal fees of the winning party.[27]  

The reason for these “fee-shifting” statutes is generally to encourage plaintiffs to bring certain types of cases, such as some types of employment whistleblowing and antitrust cases. People are more likely to come forward if they know that if they prevail, they will not have to pay the cost of legal counsel. The areas with fee-shifting statutes are generally those in which the state is seeking to enforce important public policies by encouraging lawsuits, such as in the area of civil rights litigation.[28]

Nevertheless, plaintiffs may waive the payment of fees by the defendant if the defendants insist on this waiver as part of a settlement agreement.[29]

Advertising Legal Services

The practice of law is a specialized profession, requiring a degree of knowledge and experience not generally possessed by non-lawyers. This creates the opportunity for unscrupulous conduct on the part of lawyers, who may seek to use their reputations of having superior knowledge and understanding of the legal system to attract clients by misrepresenting what clients stand to gain from hiring lawyers. Thus, to maintain the integrity of the legal profession and to protect prospective clients, the ethical rules restrict the manner in which lawyers may advertise their services and solicit clients.

While the Supreme Court has ruled that a blanket ban on advertising by lawyers violates the freedom of speech clause of the First Amendment, states and professional associations may restrict false and misleading advertising, as is permissible for other forms of commercial speech.[30]  As such, lawyers may not make false or misleading claims about the legal services they offer.[31] This rule covers all forms of communications by a lawyer, whether the communication would generally be considered an advertisement or not.[32]

The ethical rules also prohibit a lawyer from stating or implying that she is certified as a specialist in a particular field of law unless the lawyer is in fact certified by an organization accredited by an appropriate organization or authority in that field.[33] Moreover, the advertisement must clearly identify the name of the certifying organization.[34]

All lawyer advertising must include the name and contact information of the lawyer or law firm responsible for its content.[35] 

Many states also limit or regulate what may appear in an advertisement for legal services. For example, in New York, an advertisement for legal services may not include statements which compare the quality of the lawyer’s services with that of other lawyers or offer testimonials from former clients, unless any factual statements presented in the advertisement can be supported. Likewise, these advertisements must include the disclaimer, “prior results do not guarantee a similar outcome.”[36]

In California, legal advertising may not contain any guarantee regarding the outcome of a legal matter or any wording that implies that the lawyer can obtain immediate cash or a quick settlement for a prospective client.[37] The advertisement may not include a celebrity spokesperson unless the title of the spokesperson is disclosed.[38] Note that this prohibition of paying for recommendations does not preclude paying the costs of advertising or using a lawyer referral service, and it does not preclude giving nominal gifts as expressions of appreciation rather than as a form of compensation.[39]

Finally, lawyers may not pay others to recommend the lawyer’s services, or to endorse the lawyer’s professional qualities, competence or character.[40]

Solicitation of Clients

The courts have recognized that although the First Amendment protects truthful advertising, direct, in-person solicitation by a lawyer of a potential client creates a special risk of harm, and thus may be severely restricted. For lawyers trained with professional persuasive skills, the personal solicitation of someone who may be facing serious legal difficulties or other forms of distress invites undue influence by the lawyer on a layperson and opens them to possible invasion of privacy.[41]

Therefore, under the rules of legal ethics, a lawyer may not solicit or offer to provide legal services to potential clients through live, person-to-person contact, when the lawyer knows that the person is in need of legal services for the matter.[42] “Live, person-to-person contact” includes not only in-person, face-to-face contacts, but also live telephone or other “real-time visual or auditory person-to-person communication where the person is subject to a direct personal encounter without time for reflection.”

While this includes many forms of modern technological communications, it does not prohibit communications that may be easily disregarded, such as text messages or solicitation in chat rooms.[43] 

There are several exceptions to the no in-person solicitation rule. If the potential client is herself a lawyer, or if she is a family member or close personal friend of the lawyer, in-person solicitation is permissible. Likewise, a lawyer may offer to provide legal services in face-to-face or real-time communication if the person solicited routinely avails himself the type of legal services offered by the lawyer.[44]

Lawyers may also solicit their own former or current clients. So, for example, a lawyer who drafted a will for someone may call the client and suggest that the will be updated or re-done.

Conclusion

          Thank you for participating in LawShelf’s video-course on the basics of legal ethics. We hope you now have a better understanding of the ethical principles under which attorneys and other legal professionals are expected to behave. We hope that you will take advantage of our other courses and that you will contact us if you have any questions or feedback.