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Opinion: Apply NJ Contingency Fee Cap More Broadly

March 8, 2018 | Posted in : Contingency Fees / POF, Fee Caps / Fee Limits

A recent New Jersey Law Journal Editorial, “Apply Contingency Fee Cap More Broadly,” speaks to a recent case and rules involving contingency fee caps in New Jersey.  It reads:

The New Jersey Contingency Fee Rule (R. 1:21-7) establishes the outer limits of permissible fees in tort cases. Pursuant to the rule, where the amount recovered is for the benefit of a minor, the fee cannot exceed 25 percent. If attorneys consider a tort fee to be inadequate, they have the right on written notice to the client to apply to the court for a hearing to determine what would be a reasonable fee in light of all the circumstances. Statutorily based discrimination and employment claims are excluded from the rule’s fee limitations.

The rule was promulgated because of the concern that clients could be charged excessive contingency fees in tort matters that had no relationship to the amount and quality of the services provided and the amount of attorney compensation. Discrimination and employment cases are not subject to the rule because their respective statutes provide for a fee shift such that the attorney fee is awarded by a court to the prevailing party, and the fee is paid by the opposing party. As a consequence of the exclusion for statutorily based discrimination and employment claims, the rule as written permits counsel in such cases to settle a matter, not seek a fee shift and charge the client a negotiated contingent fee that exceeds the fee limitations imposed by the rule.

Recently, in A.W. By Her Parent & Guardian ad Litem, B.W. vs. Mt. Holly Board of Education, decided Feb. 1, 2018, the Appellate Division, in a published opinion, addressed a matter where an attorney sought to collect an agreed-upon 45 percent contingent fee from a minor plaintiff in an action brought under the New Jersey Law Against Discrimination and the New Jersey Civil Rights Act. It was contended that the attorney did not need judicial approval of the reasonableness of the fee. In the case, a fifth-grade student was alleged to have been subjected to ongoing harassment, intimidation and bullying by other students on a near daily basis, which resulted in the placement of homebound instruction and the ultimate transfer of the student to a private school.  The claim was for emotional distress, anxiety, depression and post-traumatic stress disorder. The impact to the child and her family was substantial. A lawsuit was filed because of the alleged inadequate response by school administrators. The child and her parents entered into an 18-page retainer agreement where it provided that the lawyer would receive either a 45 percent contingency fee, or, in the alternative, a fee based on the proscribed hours, whichever was greater. The retainer agreement further provided that if the matter proceeded to trial and fees were awarded by the court, then the fee awarded to the law firm would be added to the totality of the child’s recovery for purposes of determining the amount of the 45 percent contingency fee. After routine discovery, the case was settled for $100,000. The settlement precluded the plaintiff from applying for an award of attorney’s fees under the applicable fee-shifting statutes. At the required friendly hearing, counsel sought the 45 percent contingency fee set forth in the agreement plus costs of $4,629.33. The fee agreement itself was not offered into the record. The settlement was approved, but the court was not inclined to grant a fee in excess of 25 percent of the settlement. After briefing and oral argument, the court, recognizing its obligation to scrutinize the settlement and fees for this minor claimant, independently reviewed the reasonableness of the fee. The court observed that no proof was offered at the friendly hearing that either the parents or the minor were aware of the provision in the settlement agreement that had forfeited their right to seek a fee shift. Nor was there any summary or statement put forth as to the attorney’s hours expended. It was determined that the agreement was an unreasonable overreaching and that 25 percent of the recovery was sufficient. The trial court reasoned that although claims with statutory fee shifts are ordinarily excluded from the R. 1:21-7 fee limitations, those fee limitations nevertheless should apply when counsel chooses to forgo an application for a fee shift and instead pursues a negotiated contingent fee percentage.

The Appellate Division affirmed and limited the fee to 25 percent, rejecting the attorney’s contention that the trial court lacked the authority to review the asserted consensual contingent fee arrangement in a statutorily based discrimination action where plaintiffs and plaintiffs’ counsel did not apply for a fee-shifting award against the defendant. Although the Appellate Division did not adopt the trial court’s holding that fee-shifting claims are only excluded from the R. 1:21-7 fee limitations when fee shifting occurs, the court understandably emphasized that reasonableness of attorney fees are always subject to judicial review. Regrettably, the court failed to repeat the trial court’s explicit criticism and condemnation of this fee arrangement.

When the lawyer responded to inquiries of the New Jersey Law Journal, he said that the 45 percent fee had been common practice for his law firm and had been judicially approved in the past in a couple of dozen cases. He stated he will continue to utilize his fee agreement but will be more cognizant about putting the details of his clients’ agreements before the courts.

The cost to hire or engage a lawyer may be burdensome or prohibitive. Contingency fee agreements and fee-shifting statutes make legal services available to people who could not ordinarily afford them. People who are inexperienced and unsophisticated in legal matters usually rely on a lawyer’s advice and counsel as to whether their case has a potential for success and whether the fee agreement is appropriate and reasonable. The majority of attorneys represent their clients fairly. A client may be unaware when a lawyer charges an excessive or unreasonable fee. It cannot be assumed that clients routinely read or review a lengthy retainer agreement or understand the meaning and implications of a complex fee structure.

It is difficult for people without means or power to complain or challenge the amount of fees that they are charged. In 1978, Fee Arbitration Committees were created to resolve disputes when clients filed grievances. The members of the committees universally act in good faith, work hard and are not hesitant to rule in favor of a client. The committees, however, have discretion to decline to hear cases that are complex, raise substantial legal questions, or involve a large amount of money and, especially in those matters, clients may be intimidated in initiating legal proceedings against their attorneys.

The court’s decision in A.W. v Mount Holly Bd. Of Ed. is an important reaffirmation that the bargaining power between lawyer and client, particularly in the context of tort, product liability and discrimination actions, is often uneven, and as a consequence the fee charged is always subject to a review for reasonableness regardless of the terms of the negotiated fee agreement. Although we agree with the decision, we also would like to see the Supreme Court refer the matter to the Civil Practice Committee for consideration of a rule change consistent with the reasoning of the trial court. Specifically, we would support a rule amendment calling for the application of the R. 1:21-7 fee limitations when counsel in a statutory fee-shifting case opts for a negotiated contingent fee in lieu of an application for fees. Excluding fee-shifting cases from the fee limitations in the rule makes sense when a fee shift is ordered, as the fee in that instance is paid by the defendant. But when counsel fees are paid by the client, as was the case in A.W., then there is no reason why the protections afforded by R. 1:21-7 ought not apply.