State Bar of Arizona Ethics Opinions

94-02: Retainer Agreement; Representation; Fees and Files
3/1994

Attorney's proposed contingent-fee agreement violates Rules as to: 1) limiting client's right to discharge attorney; 2) attorney's right to withdraw unilaterally; 3) attorney's overbroad authority; 4) method of calculating fee; and 5) attorney's withholding client files after termination of representation.



  

FACTS

 

The inquiring attorney has drafted a Personal Injury Employment Agreement. His purpose is to inform fully his potential clients of their rights and obligations should they cancel their case or try to change attorneys. The inquiring attorney also seeks to give himself the maximum rights permitted by law and ethics in personal injury cases.

 

The Agreement (which is reproduced in its entirety in the appendix) is comprised of eight (8) numbered paragraphs. In turn, the Agreement's provisions fall within six (6) categories: attorney's authority; attorney's scope of duties; client's limited right to discharge attorney for good cause only; attorney's right to abandon or withdraw from the case; fees and costs; and attorney's lien. The relevant provisions are as follows:

 

Attorney's Authority

 

The inquiring attorney is ". . . made, constituted and appointed ... true and lawful attorney ...in HIS/HER name, place, and stead, to settle, adjust, file and prosecute by suit . . ." the personal injury case. (Par. 1.)

 

Attorney's Scope of Duties

 

The inquiring attorney "agrees to conduct and prosecute the claim with due diligence to a conclusion whether it be by way of a settlement or by an action at law." (Par. 3.) "Fees for appeals or special actions shall be separately negotiated." (Par. 2.)

 

Client's Limited Right to Discharge Attorney for Good Cause Only

 

"Under the law, a client has the power, but not necessarily the contract right, to discharge their attorney at any time. It is the intent of the parties herein that the client's right to discharge [Inquiring Attorney] be limited, to the extent possible by law, to situations where there is good cause for his dismissal." (Par. 4.)

 

Attorney's Right to Abandon or Withdraw From the Case

 

"If, in the opinion of [Inquiring Attorney] and his staff, the case does not have sufficient merit because it is fraudulent, false or unprovable, or if the amount of work necessary to achieve a settlement or judgment far exceeds the fee that the firm would likely derive from the case, [Inquiring Attorney] may abandon the case upon proper notice to the client and proper- protection of their interests. [Inquiring Attorney] will make every effort to find a successor attorney, but if the case in fact is fraudulent or has little or no value, this may not be possible." (Par. 7.) "The client also will be given the opportunity to explain and rebut any allegations that the case is phony or weak, but [Inquiring Attorney] ethically and/or economically cannot proceed to process cases which have little or no value." (Par. 8.)

 

Fees and Costs

 

The inquiring attorney will receive 33 1/3% of all funds received in settlement, or 40% if the matter is resolved by trial, mediation or arbitration. (Par. 2.) If the Inquiring Attorney is discharged with cause, he will not be entitled to any fee. If he is discharged without cause, "client shall pay a fee in accordance with ER 1.5, which includes the fact the case was taken which may preclude the firm from taking other cases; the number of hours put into the case, keeping in mind that no hourly records are normally kept so this has to be estimated; and most importantly, the stage at which the case stands at the time it is removed from the firm. In other words, if the client removes the case and little or no additional work need be done by a successor attorney to get a settlement or judgment, then the lion's share of all attorney's fees should go to [Inquiring Attorney] and not the new attorney. " (Par. 5.)

 

"On the other hand, if the new attorney must file suit, do discovery, take the case to trial... then it may well be that the lion's share of the fee should go to the new attorney, regardless of the amount of effort put in by [Inquiring Attorney] or the number of hours that he has." (Par. 6.)

 

"Client shall be liable for all costs ...." (Par. 2.) If Inquiring Attorney is discharged for cause, he will be entitled to out-of-pocket costs. (Par. 4.)

 

Lien

 

Inquiring Attorney "will impose a lien upon the file and the value of the case with the adjusters in the event that an agreement cannot be reached as to either an exact fee for his services upon discharge or at least a range of fees which will be quantified specifically at the end of the case." (Par. 6.)

 

QUESTION

 

Does the Inquiring Attorney's proposed Personal Injury Employment Agreement violate any of the Rules of Professional Conduct?

 

ETHICAL RULES INVOLVED

 

ER 1.2.                   Scope of Representation

 

(a) A lawyer shall abide by a client's decisions concerning the objectives of representation, subject to paragraphs (c), (d) and (e), and shall consult with the client as to the means by which they are to be pursued. A lawyer shall abide by a client's decision whether to accept an offer of settlement of a matter....

 

*****

 

Comment

 

*****

 

An agreement concerning the scope of representation must accord with the Rules of Professional Conduct and other law. Thus, the client may not be asked to agree to representation so limited in scope as to violate ER 1.1, or to surrender the right to terminate the lawyer's services or the right to settle litigation that the lawyer might wish to continue.

 

*****

 

ER 1.4.                   Communication

 

(a) A lawyer shall keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information.

 

(b) A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

 

Comment

 

The client should have sufficient information to participate intelligently in decisions concerning the objectives of the representation and the means by which they are to be pursued, to the extent the client is willing and able to do SO. For example, a lawyer negotiating on behalf of a client should provide the client with facts relevant to the matter, inform the client of communications from another party and take other reasonable steps that permit the client to make a decision regarding a serious offer from another party. A lawyer who receives from opposing counsel an offer of settlement in a civil controversy... should promptly inform the client of its substance unless prior discussions with the client have left it clear that the proposal will be unacceptable....

 

*****

 

ER 1.5.                   Fees

 

(a) A lawyer's fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee include the following:

 

(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;

 

(5) the time limitations 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.

 

(b) When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.

 

(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. A contingent fee agreement shall be in writing 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. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery showing the remittance to the client and the method of its determination.

 

*****

 

ER 1.16.                Declining or Terminating Representation

 

(a) Except as stated in paragraph (c), a lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client if:

 

*****

 

(3) the lawyer is discharged.

 

(b) Except as stated in paragraph (c), a lawyer may withdraw from representing a client if withdrawal can be accomplished without material adverse effect on the interest of the client, or if:

 

(1) the client persists in a course of action involving the lawyer's services that the lawyer reasonably believes is criminal or fraudulent;

 

(2) the client has used the lawyer's services to perpetrate a crime or fraud;

 

(3) the client insists upon pursuing an objective that the lawyer considers repugnant or imprudent;

 

*****

 

(5) the representation will result in an unreasonable financial burden on the lawyer or has been rendered unreasonably difficult by the client;

 

*****

 

(c) When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation.

 

(d) Upon termination of the representation, a lawyer shall take steps to the extent reasonably practicable to protect a client's interests, such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled.... The lawyer may retain papers relating to the client to the extent permitted by other law.

 

Comment

 

*****

 

A client has a right to discharge a lawyer at any time, with or without cause, subject to liability for payment for the lawyer's services. Where future dispute about the withdrawal may be anticipated, it may be advisable to prepare a written statement reciting the circumstances.

 

*****

 

Optional Withdrawal

 

A lawyer may withdraw from representation in some circumstances. The lawyer has the option to withdraw if it can be accomplished without material adverse effect on the client's interests. Withdrawal is also justified if the client persists in a course of action that the lawyer reasonably believes is criminal or fraudulent, for a lawyer is not required to be associated with such conduct even if the lawyer does not further it. Withdrawal is also permitted if the lawyer's services were misused in the past even if that would materially prejudice the client. The lawyer also may withdraw where the client insists on a repugnant or imprudent objective.

 

*****

 

Assisting the Client Upon Withdrawal

 

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. The lawyer may retain papers as security for a fee only to the extent permitted by law.

 

*****

 

OPINION

 

1. "Client's limited right to discharge attorney for good cause only."

 

ER 1.16 and its Comment provide that a· lawyer shall withdraw from the representation if the lawyer is discharged, and that a client has a right to discharge a lawyer at any time, with or without cause, subject to liability for payment for the lawyer's services. Indeed, the Comment to ER 1.2 states that a lawyer may not even ask the client to surrender the right to terminate the lawyer.

 

The inquiring attorney' s proposed employment agreement attempts to circumvent this well-established rule by denominating the agreement a "Personal Injury Employment Agreement" (emphasis added), and stating that "[u]nder the law, a client has the power, but not necessarily the contract right, to discharge their attorney at any time."

 

The inquiring attorney's attempted limitation on this right is unethical because it would likely interfere with the client's right to have counsel of his or her choice. Such a provision would likely discourage or deter a client, who no longer had confidence in or even distrusted counsel, from discharging the lawyer and hiring a new lawyer. The threat of a breach of contract action would act as a deterrent.

 

This issue presents a mixed question of law and ethics. The weight of case authority supports the general rule enshrined in ER 1.16 and its Comment that the client has the right to terminate a lawyer at any time with or without cause, subject to liability for payment for the lawyer's services, with exceptions only in the employer-employee context.

 

In State Farm Mutual Ins. Co. v. St. Joseph's Hospital, 107 Ariz. 498, 489 P.2d 837 (1971), the Arizona Supreme Court held:

 

. . .the law is clear in Arizona that a client has the absolute right to terminate the attorney-client relationship at any time with or without cause. ... [W]e ... reaffirm the power of the client at any time to discharge his attorney and to settle or compromise his own claim. Our law does not bind a person to one attorney merely because he has entered into a contingent fee relationship. (107 Ariz. at 501-502.)

 

The California Supreme Court, in Fracasse v. Brent, 6 Cal.3d 784, 494 P.2d 9, 100 Cal. Rptr. 385 (1972), also held that the client has an absolute right to discharge his attorney with or without cause. It further held that such a discharge does not constitute a breach of contract.

 

We have concluded that a client should have both the power and the right at any time to discharge his attorney with or without cause. Such a discharge does not constitute a breach of contract for the reason that it is a basic term of the contract, implied by law into it by reason of the special relationship between the contracting parties, that the client may terminate that contract at will. It would be anomalous and unjust to hold the client liable in damages for exercising that basic implied right. (6 Cal. 3d at 790 - 791, 494 P.2d at 13)

 

See also, Teichner by Teichner v. W & J Holsteins, 64 N.Y. 2d 977, 478 N.E. 2d 177, 489 N.Y.S.2d 36 (Ct. App. 1985); Baker v. Zikas, 176 Neb. 290, 125 N.W. 2d 715 (1964).

 

The only exception to this general rule that the courts have recognized is where the client hired the attorney as an employee pursuant to an employment contract for a fixed salary, freely negotiated between parties of similar sophistication and bargaining power. For instance, in Chyten v. Lawrence & Howell Investments, 18 Cal. App. 4th 618, 22 Cal. Rptr. 2d 392, 8 I.E.R. Cas. (BNA) 1438 (Calif. Ct. App. 1993), the California Court of Appeals held that Fracasse did not require "that a salaried attorney-employee be deprived of contractual employee benefits when discharged without cause." 18 Cal. App. 4th at 624, 22 Cal. Rptr. 2d at 396. See also, Mourad v. Automobile Club Insurance Association, 186 Mich. App. 715, 723, 465 N.W.2d 395, 399, 6 I.E.R. Cas. (BNA) 193 (Mich. Ct. App. 1991 ) [The general rule that a client has the right to discharge his attorney, with or without cause, does not bar an attorney employed by insurance company client from bringing suit for breach of just cause contract based on retaliatory demotion and constructive discharge]; Nordling v. Northern States Power Company, 478 N.W.2d 498 (Minn. 1991 ) [Attorney-client relationship does not preclude an employee-attorney from bringing wrongful discharge claim against his corporate employer-client].

 

Other jurisdictions, however, enforce the general rule absolutely and refuse to permit even an employee-attorney from suing his or her employer-client. Herbster v. North American Co., 150 Ill. App. 3d 21, 501 N.E.2d 343, 1 I.E.R. Cas. (BNA) 1392 (Ill Ct. App. 1986) [Tort of retaliatory discharge is not available to employee-attorney who was discharged for alleged refusal to commit a fraud and violate the rules of professional conduct]; Balla v. Gambro, Inc., 145 Ill.2d 492, 584 N.E.2d 104, 7 I.E.R. Cas. (BNA) 1 (1991) [In-house counsel, discharged after he told employer-client he would do whatever was necessary to stop employer's sale of defective dialyzers, had no cause of action for retaliatory discharge; client may discharge his attorney at any time, with or without cause, and this rule applies equally to in-house and outside counsel].

 

Under the facts presented, the inquiring attorney is proposing a fee agreement for handling a client's personal injury case on a contingency fee basis, not an employer-employee contract. He is not the client's employee;·the client does not control his salary, benefits, hours of work, and work he is assigned. Accordingly, the general rule set forth in ER 1.16 and its Comment, and in St. Joseph's Hospital and Fracasse, supra, apply to the proposed fee contract.

 

Under the facts presented, it would be unethical for the client to be told that his or her right to discharge counsel is limited ". . . to situations where there is good cause for his dismissal."

 

2. "Attorney's right to abandon or withdraw from the case."

 

To "abandon" a client is to refuse improperly to render services or to leave the client without any recourse if counsel decided he did not want the case. This is unethical. It is true that, under ER 1.16, the inquiring attorney would have grounds to withdraw from representation if the case were "fraudulent, false or unprovable" (ER 1. 16(a) (1), (b) (1)), or if the case would impose un unreasonable financial burden on the lawyer (ER 1.16 (b) (5)). However, this "abandonment" provision is misleading and improper because the inquiring attorney .cannot unilaterally withdraw once the case is in litigation. See Rule XII(c) (2), Uniform Rules of Practice of the Superior court of Arizona. Indeed, the inquiring attorney would have to continue with the case notwithstanding good cause to withdraw if ordered to do so by a tribunal. ER 1.16(c).

 

3. "Attorney's Authority."

 

The provision setting forth the inquiring attorney's authority is overbroad and improperly gives him what is in effect a power of attorney to settle the case without prior informed consent by the client. A client may not be asked to agree to representation so limited in scope that the client surrenders the right to settle his or her own matter. See Comment to ER 1.2(a).

 

ER 1.4 requires an attorney tc "keep a client reasonably informed about the status of a matter" and to "explain a matter to the extent reasonably necessary to permit the client to make informed decisions ...." If the inquiring attorney received an offer of settlement from an insurance carrier, he would have an obligation under ER 1.4 to inform the client adequately so that the client could make the decision whether to accept or reject the offer.

 

The provision would be clearer and less subject to misuse or misinterpretation if the Agreement recited that the inquiring attorney will not settle or compromise the client's claim without the client's prior approval after being adequately informed of the relevant facts. ER 1.4.

 

4. "Fees and Costs."

 

The committee is unable either to approve or disapprove of the 33 1/3%/40% contingency fee provision except insofar as it is analyzed as to its particular facts under ER 1.5 (a) ("A lawyer's fee shall be reasonable.") There are insufficient facts for us to do so here. Also, it may not be possible to know if a fee is reasonable until the conclusion of a lawyer's services. What may appear reasonable when first agreed upon may, with developing circumstances, have become excessive. Matter of Swartz, 141 Ariz. 266, 273, 686 P.2d 1236, 1243 (1984).

 

ER 1.5 (c) also states that " [a] contingent fee agreement shall be in writing 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 proposed fee agreement fails to comply fully with ER 1.5(c). For example, it is not stated whether the contingency fee percentage will be taken from all amounts received by settlement, trial, mediation or arbitration before or after all unpaid costs and disbursements are paid out of the settlement monies.

 

The provision regarding fees upon discharge without cause appears to provide the inquiring attorney with more than a quantum meruit recovery by reference to compensation based on "the fact that the case was taken [and this] may preclude the firm from taking other cases ...." This quantum meruit rule

versus the right to recover the full fee set forth in the agreement is consistent with the general rule that the client may discharge the attorney at any time with or without cause. See, State Farm Mutual Insurance Co. v. St. Joseph's Hospital, supra, 107 Ariz. at 502. If the client were obliged to pay the full fee

under the fee agreement it would deter the client from discharging an attorney the client distrusted or no longer had confidence in. ABA/BNA Lawyers' Manual on Professional Conduct, "Fees," p. 41:2012 ("Quantum Meruit Rule").

 

The inquiring attorney's provision on fees upon discharge also states that, if he has substantially cr fully performed under the contract, i.e., "little or no additional work need be done by a successor attorney, " he is entitled to "the lion' s share of all attorney's fees," or the full fee. This is consistent with ER 1.5. Zaklama v. Mount Sinai Medical Center, 906 F.2d 650, 653 (llth Cir. 1990); Joseph E. DiLoreto, Inc. v.

O'Neill, 1 Cal. Rptr. 2d 636, 640, 7 Law.Man. Prof. Conduct 397 (Calif. Ct. App. (1991) [lawyer entitled to full fee under fee agreement if he fully performed under the contract]; Kaushwa v. Hutter, 454 A.2d 1373, 1375 (D.C. Ct. App. 1983); Farrar v. Kelly, 440 So.2d 939, 941 (La. Ct. App. 1983) [lawyer who substantially performs under the fee agreement before being discharged without cause is entitled to full fee].

 

However, the fee in all cases must be reasonable under ER 1.5(a).

 

5. "Lien."

 

The subject of attorneys liens is addressed in National Sales & Service Co. v. Superior Court, 136 Ariz. 544, 667 P.2d 738 (1983) . Whether the attorney may impose a lien on the "value of the case with the adjusters" under these circumstances raises a question of law which the committee declines to address. See, our Statement of Jurisdictional Policies, para. 6(a) [the committee will not render an opinion on a pure question of law].

 

As to withholding the client's file, ER 1.16(d) mandates that a lawyer shall protect the client's interests upon termination of the relationship, including "surrendering papers and property to which the client is entitled." Under National Sales & Service Co., the retaining lien should apply only to the attorney's and his staff's research notes and internal memoranda, not the entire file. 136 Ariz. at 546.

 

It is therefore our conclusion that, based on the foregoing, the proposed Employment Agreement is improper under the Rules of Professional Conduct, particularly with regard to the client's limited right to discharge the attorney, the attorney's right to withdraw unilaterally from the matter, the attorney's overbroad authority, and the method by which the fee is to be determined, as well as the withholding of the client's file after termination of representation.

 

(Appendix)

 

PERSONAL INJURY EMPLOYMENT AGREEMENT

 

1. KNOW ALL MEN BY THESE PRESENT THAT_______________, residing at_____________, Arizona, had made, constituted and appointed by these presents does make, constitute and appoint, [Inquiring Attorney],·true and lawful attorney of HIS/HERS and in HIS/HER name, place, and stead, to settle, adjust,

file and prosecute by suit in the proper courts, or otherwise dispose of, claims against: ________________________________________ and/or insurance companies involved herein, for damages resulting from _________________________ which occurred at _____________________

on_____________  _______________, 19______.

 

2. Said attorney is to receive as compensation thirty-three and one-third (33 1/3%) percent of all funds received by way of settlement. In the event that this claim be settled by ways of Trial, Mediation or Arbitration, said attorney shall receive forty (40%) percent of all funds received. Trial, Mediation,

or Arbitration are said to be commenced once said attorney has filed a lawsuit or Notice of Arbitration. Client shall be liable for all costs necessarily incurred by said attorney, although attorney may, at his option, advance same temporarily. Fees for appeals or special actions shall be separately negotiated.

 

3. In consideration thereof, the said attorney agrees to conduct and prosecute the claim with due diligence to a conclusion whether it be by way of a settlement or by an action at law.

 

4. Cancellation of Contract by Client

 

Under the law, a client has the power, but not necessarily the contract right, to discharge their attorney at any time. It is the intent of the parties herein that the client's right to discharge [Inquiring Attorney] be limited, to the extent possible by law, to situations where there is good cause for his dismissal. If there is in fact good cause for discharging [Inquiring Attorney], client shall pay only out of pocket costs and shall not be liable for any fees.

 

5. In the absence thereof, client shall pay a fee in accordance with E.R. 1.5, which includes the fact the case was taken which may preclude the firm from taking other cases; the number of hours put into the case, keeping in mind that no hourly records are normally kept so this has to be estimated; and most importantly, the stage at which the case stands at the time it is removed from the firm. In other words, if the client removes the case and little or no additional work need be done by a successor attorney to get a settlement or judgment, then the lion's share of all attorney's fees should go to [Inquiring Attorney] and not the new attorney.

 

6. On the other hand, if the new attorney must file suit, do discovery, take the case to trial, etcetera, then it may well be that the lion's share of the fee should go to the new attorney, regardless of the amount of effort put in by [Inquiring Attorney] or the number of hours that he has. Client agrees and understands that [Inquiring Attorney] will impose a lien upon the file and the value of the case with the adjusters in the event that an agreement cannot be reached as to either an exact fee for his services upon discharge or at least a range of fees which will be quantified specifically at the end of the case.

 

7. Cancellation of Contract by [Inquiring Attorney]:

 

If, in the opinion of [Inquiring Attorney] and his staff, the case does not have sufficient merit because it is fraudulent, false or unprovable, or if the amount of work necessary to achieve a settlement or judgment far exceeds the fee that the firm would likely derive from the case, [Inquiring Attorney] may abandon the case upon proper notice to the client and proper protection of their interests. [Inquiring Attorney] will make every effort to find a successor attorney, but if the case in fact is fraudulent or has little or no value, this may not be possible.

 

8. The client also will be given the opportunity to explain and rebut any allegations that the case is phony or weak, but [Inquiring Attorney] ethically and/or economically cannot proceed to process cases which have little or no value. No charge will be made if the case is abandoned by [Inquiring Attorney] other than out-of-pocket costs.

 

IN WITNESS WHEREOF, the parties hereto have subscribed their hands on this ___ day of ________, 19_____.

 

_______________________                                   _______________________

CLIENT                                                                                  ATTORNEY

 

 

Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings. 

©State Bar of Arizona 1994



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