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Category: Fee Splitting / Sharing

Client’s Acknowledgement of Fee Splitting is Not ‘Consent’ in CA

June 9, 2020

A recent Metropolitan News story, “Client’s Acknowledgement of Fee-Splitting is Not ‘Consent’” reports that a lawyer cannot collect an agreed-upon referral fee from another attorney where the client merely acknowledged receipt of a letter telling him of the arrangement and affirming that he understood, but without his expressing explicit consent, the Third District Court of Appeal held.

The client’s subsequent testimony that his acknowledgement indicated his approval of the fee was ineffective, Justice Louis Mauro wrote.  At the time of the arrangement, Rules of Professional Conduct, rule 2-200 was in effect.  It read: “(A) A member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless: (1) The client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division….”

To like effect is the current rule 1.5.1, which declares: “(a) Lawyers who are not in the same law firm shall not divide a fee for legal services unless: (1) the lawyers enter into a written agreement to divide the fee; (2) the client has consented in writing, either at the time the lawyers enter into the agreement to divide the fee or as soon thereafter as reasonably practicable, after a full written disclosure to the client of: (i) the fact that a division of fees will be made; (ii) the identity of the lawyers or law firms that are parties to the division; and (iii) the terms of the division….”

The opinion reverses a San Joaquin Superior Court judgment in favor of the referring attorney, Robert K. Reeve of Valley Springs (in Calaveras County), and against Stockton attorney Kenneth N. Meleyco.

A jury awarded Reeve $78,750, based on both his causes of action for breach of contract and under a quantum meruit theory, and San Joaquin Superior Court Judge Barbara A. Kronlund added an award of $49,364.35 in prejudgment interest.  Explaining the reversal as to contract damages, Mauro said: “We conclude the client’s written acknowledgement that he received and understood the letter did not constitute written consent to the referral fee agreement under former rule 2-200, and the client’s subsequent testimony did not remedy the deficiency.  The referral fee agreement is unenforceable as against public policy and Reeve cannot recover for breach of contract.”

The client signed and returned a copy of the letter from Meleyco apprising him of the arrangement with Reeve, with his signature appearing under the words, “I, JAMES G. LUOMA, acknowledge receipt of this letter and understand the contents.”

Mauro set forth: “Consent is different from disclosure or receipt, and it is also different from understanding….Written consent requires written words expressing agreement or acquiescence, not just words expressing receipt or understanding.  Luoma’s acknowledgement was deficient in this regard.

“We understand Reeve to suggest that Luoma’s acquiescence can be inferred from his receipt of the letter, his understanding of the letter, and his lack of objection to the referral fee.  But because consent must be expressed in writing, silence cannot convey written consent.”

The testimony by Luoma that he intended his signing of the letter to indicate assent was ineffective because there was no ambiguity to be resolved in light of the meaning of the language being clear.  Mauro also said Reeve cannot recover under a quantum meruit theory because the last of his services in the case occurred more than three years before he filed his complaint and the statute of limitations in two years.

Article: Fee Sharing Between Discharged Counsel and New Counsel in Contingent Fee Cases

June 5, 2020

A recent The Legal Intelligencer article by Sarah Sweeney and Thomas Wilkinson of Cozen O'Connor, “Fee Division Between Discharged Counsel and New Counsel in Contingent Fee Cases” reports on the division of attorney fees between discharged counsel and new counsel in contingency fee matters.  This article was posted with permission.  The article reads:

When a client terminates, without cause, its legal representation in a contingent fee matter and subsequently retains new counsel from a different firm, the Rules of Professional Conduct related to the division and disbursement of fees impose certain requirements on the successor attorney.  The American Bar Association recently issued Formal Opinion 487—ABA Formal Opinion 487 (Fee Division with Client’s Prior Counsel), June 18, 2019—to identify the applicable rules, and to clarify the duties owed to the client by the successor attorney.

The opinion explains that Model Rule 1.5(e) (or its state equivalent) has no application to the division of fees in cases of successive representation.  Model Rule 1.5(e) applies to the division of fees between lawyers of different firms who are representing the client concurrently or who maintain joint ethical and financial responsibility for the matter as a whole.  Such situations are governed by Rule 1.5(b)-(c), which according to the opinion, require the successor counsel to “notify the client, in writing, that a portion of any contingent fee earned may be paid to the predecessor attorney.”

Specifically, Rule 1.5(b) requires attorneys to communicate the rate or basis of legal fees, and Rule 1.5(c) requires that the written fee agreement include the method of determining the fee.  Both subsections are designed to ensure that the client has a clear understanding of the total legal fee, how it will be computed, and when and by whom it will be paid.  When a client replaces its original counsel with new counsel in a contingent fee matter, the discharged attorney may have a claim for fees under quantum meruit or pursuant to a clause in the contingency fee agreement; and the successor counsel’s failure to communicate to the client the existence of such claim would run afoul of Rule 1.5(b)-(c).  Therefore, even if the exact amount or percentage (if any) owed to the first attorney is unknown at the time, it is incumbent on the successor attorney to advise a contingency client of the existence and effect of the predecessor attorney’s claim for fees as part of the terms and conditions of the engagement from the outset.

While the foregoing ABA guidance is reasonable, Model Rule 1.5(b) and (c) do not provide the most compelling basis to obligate successor counsel to advise the client of predecessor’s possible fee claim.  As explained in Pennsylvania Bar Association Formal Opinion 2020-200: Obligations of Successor Contingent Fee Counsel to Advise Client of Potential Obligations to Prior Counsel, “a contingent fee agreement that fails to mention that some compensation may be due to, or claimed by, the predecessor counsel in circumstances addressed by this opinion is inconsistent with Rules 1.4(b) and 1.5(c),” which “mandate that successor counsel provide written notice that compensation may be claimed by Lawyer 1, and explain the effect of that claim on Lawyer 2’s contingent fee.” See also Philadelphia Bar Association Professional Guidance Comm. Op. 2004-1 (“In discharging the inquirer’s obligations under Rule 1.1 (competence) and Rule 1.4 (communication), the committee recommends that the inquirer have a thorough discussion with the client about the potentials for a fee and cost claim by the discharged attorney, and how such a claim, if made, might affect the inquirer’s representation of that client and/or the client’s ultimate distribution, if there is any recovery in the client’s case.”). Pennsylvania Rule 1.4(b) is identical to Model Rule 1.4(b).

The role of the successor attorney with respect to the discharged attorney’s claim for fees should also be set forth in the engagement agreement.  The opinion advises that the engagement agreement should expressly state whether the issue is one to be decided between the discharged attorney and the client or, alternatively, whether the successor attorney will represent the client in connection with the resolution of prior counsel’s fee interest.  If the latter, the successor attorney must obtain the client’s informed consent to the conflict of interest arising from his/her dual role “as counsel for the client and a party interested in a portion of the proceeds.” (emphasis in original)  In many situations, the fees paid to the discharged and successor attorneys may not affect the client’s ultimate recovery, and the client may make an informed decision to leave the matter for the two attorneys to determine among themselves.  In resolving any such dispute, both attorneys remain bound by Rule 1.6 confidentiality or pursuant to any confidentiality provisions in any underlying settlement agreement.

Upon recovery, the successor attorney must comply with Rule 1.15(d) by notifying the discharged attorney of the receipt of funds.  However, client consent is required prior to disbursement of any fees that may be payable to the discharged attorney.  If there is a disagreement about the discharged attorney’s claim or the amount owed, the successor attorney must hold the disputed fees in a client trust account under Rule 1.15(e) until the dispute is resolved.

The Disciplinary Board of the Pennsylvania Supreme Court (board) has proposed that the guidance in the opinion be incorporated into the comment supporting Pennsylvania Rule of Professional Conduct 1.5 governing fees.  Recognizing that the opinion is not binding precedent, the board’s published notice for comment dated Dec. 7, 2019 stated that the opinion represents “helpful guidance to successor counsel and predecessor counsel in this common situation.  The original lawyer in a contingency-fee matter will often assert a lien on the proceeds.  But if the client retains new counsel, that client may not understand there is a continuing obligation to pay the original lawyer for the value that lawyer contributed or was entitled to under the original fee agreement.”

The board has proposed amending Comment [4] of Rule 1.5 to expressly reference the opinion.  The comment period has expired, so practitioners should proceed on the assumption that the board’s recommendation will likely be approved by the Supreme Court.  While adoption of the new proposed comment will not make compliance with all aspects of the opinion mandatory, practitioners would be wise to include a written notice to clients that a portion of the fee may be claimed by predecessor counsel.  In addition, successor counsel should confirm in writing any undertaking to resolve the prior counsel’s fee interest.  Since the opinion characterizes this as involving a conflict of interest requiring the client’s informed consent to a waiver, the successor firm should also confirm that consent in writing.  In this respect the opinion goes further than previous bar association ethics guidance in Pennsylvania.

Inclusion of an express reference to an ABA or other ethics opinion in the text of a comment to a disciplinary rule is highly unusual.  An alternative would have been to instead include a concise summary of that guidance.  In any event, the Disciplinary Board presumably felt it appropriate to supplement the guidance on this important topic to lawyers handling contingent fee cases because lawyers often fail to engage in earnest efforts to resolve the respective fee interests promptly after successor counsel is retained, leaving the unsuspecting client exposed to complications, potential litigation and delays over the allocation of fees and costs following an award or settlement.

When asked by a prospective client to replace the client’s counsel in a pending contingency fee case, attorneys and firms should be mindful of the duties imposed by the opinion on successor counsel, as well as the specific Rules of Professional Conduct in the relevant jurisdiction and any other applicable substantive law or authority.  In many cases compliance with the new guidance will require updating contingent fee agreements, as well as ensuring the client is adequately informed of the prior counsel’s fee interest and how it will be addressed in the event of a recovery.

Sarah Sweeney is professional responsibility and compliance counsel at Cozen O’Connor.  She serves as co-chair of the Philadelphia Bar Association’s professional guidance committee.  Thomas G. Wilkinson is a leader of the legal professionals practice group at Cozen O’Connor.  He is a member of the professional guidance committee and the ABA standing committee on professionalism.