CLOSE X
RSS Feed LinkedIn Instagram Twitter Facebook
Search:
FMG Law Blog Line

Posts Tagged ‘legal fees’

Are “Flat Fees” For Legal Services Okay in California?

Posted on: July 15th, 2020

By: Greg Fayard

Many lawyers in California charge their clients “flat fees.” That is, immigration lawyers, criminal defense lawyers, bankruptcy and estate planning lawyers, and patent lawyers all routinely charge “one price” for all services, regardless of the time it took the lawyer to do the work.

Under the old rules of Professional Conduct for California lawyers, if a lawyer received a flat fee, the rules were silent on where to put those funds—the lawyer’s trust account or operating account? Under the current rule, Rule 1.15, flat fees MAY go into the lawyer’s operating account.

Flat fees over $1,000 can go into the operating account provided the lawyer discloses in writing that the fee MAY go into the client’s trust account until earned and the client is entitled to a refund of any amount that is unearned.

If the lawyer does not have this disclosure in writing, which the client must sign, flat fees over $1,000 MUST go into the lawyer’s trust account.

Fortunately, the California State Bar has ethics guidelines to help lawyers determine what part of a flat fee is earned and when. For those California lawyers who charge flat fees, please read Rule 1.15 to make sure you are in compliance.

If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

California Lawyers Cannot Churn Files

Posted on: November 7th, 2019

By: Greg Fayard

Under the Rules of Professional Conduct applicable to California lawyers, attorneys are not supposed to do things where the substantial purpose is to delay, prolong, or cause needless expense. Under Rule 3.2, lawyers can be disciplined for churning a file for the substantial purpose of increasing legal fees. Examples of needless work would be lawyers spending time researching irrelevant issues, working on a case just to increase the legal fees, and seeking to continue a case for no valid reason, such as to extend a billing opportunity or delay a case simply to aggravate the opposing party.

Of course, the California State Bar might have trouble proving a violation of Rule 3.2, as most legal work has a motivation that is not based substantially on delay or increasing expenses.

That said, the best practice for all lawyers is to do what is necessary but which potentially advances the client’s interests.

If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

Are Verbal Fee Splits Among California Law Firms Okay?

Posted on: July 18th, 2019

By: Greg Fayard

The answer to this question is now “no.” When different law firms split a legal fee–say a contingency fee–verbal “gentlemen’s agreements” are not permitted under California’s new ethics rules. The old ethics rules allowed different law offices to verbally agree to a referral fee wherein the referring lawyer would get, say, 5% of any total recovery by another, unaffiliated lawyer. New Rule 1.5.1, now requires that the unaffiliated lawyers splitting or dividing such a fee have their own agreement in writing. Further, the client has to consent in writing to that fee split. The written disclosure to the client must disclose the terms of the fee split and the identity of the lawyers who are splitting the fee. As long as the total fee charged by all lawyers is not increased due to the agreed split, fee sharing among different law offices is permissible under California’s ethical rules.

The agreement among unaffiliated law offices need not be signed, however. An informal e-mail setting forth the terms of the fee split could suffice.

The lesson here is casual, oral arrangements among California law firms to split legal fees are no longer permitted under the ethical rules.

If you have any questions or would like more information, please contact Greg Fayard at [email protected], or any other member of our Lawyers Professional Liability Practice Group, a list of which can be found at www.fmglaw.com.

Cal. Supreme Court Says Attorneys May Not Get Paid If They Have A Flawed “Blanket” Conflict of Interest Waiver

Posted on: September 13th, 2018

By: Greg Fayard

The California Supreme Court has weighed in on the vital importance of conflict of interest waivers. A flawed one could deprive attorneys of their fees.

On August 30, 2018, the Supreme Court analyzed the validity of a conflict of interest waiver in a law firm’s retainer agreement for a high stakes case.  In Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc. (2018) 2018 Cal. LEXIS 6399, J-M Manufacturing Company, Inc. (J-M) retained California law firm Sheppard Mullin to represent it in a large federal lawsuit where J-M was sued for over $1 billion in damages. Sheppard Mullin’s agreement had a general conflict waiver, where J-M waived any and all conflicts of interest. It turns out, however, that Sheppard Mullin had, and was, representing one of J-M’s adversaries in the federal case—specifically the South Lake Tahoe Public Utility District (South Tahoe), but in unrelated employment matters. That prior and concurrent representation was not specified in the conflict waiver that J-M agreed to.

South Tahoe learned of the conflict, and successfully moved to disqualify Sheppard Mullin. Unfortunately, Sheppard Mullin had already billed 10,000 hours in the huge federal action, to the tune of some $3 million in fees, with over $1 million unpaid by J-M. Sheppard Mullin then sued J-M for its unpaid fees. J-M cross-complained, seeking to disgorge its fees it paid to Sheppard Mullin and to not have to pay the additional fees owed. The law firm’s retainer agreement had an arbitration clause, which Sheppard Mullin successfully invoked. The arbitrators ruled in favor of Sheppard Mullin, allowing the law firm to keep its earned fees, but also requiring J-M to pay Sheppard Mullin the over $1 million it still owed. The arbitrators described Sheppard Mullin’s flawed conflict waiver as a minor and it did not warrant disgorgement of all the fees J-M had paid. J-M claimed the flawed conflict waiver was an ethical breach by Sheppard Mullin that rendered the whole contract illegal and unenforceable, in violation of public policy (to protect the public from unethical attorney conduct). The trial court disagreed and affirmed the arbitrators’ ruling. J-M appealed. The Court of Appeal reversed, holding the entire agreement was illegal, and Sheppard Mullin was not entitled to any of its $3 million in fees, including the millions J-M already paid the firm. Sheppard Mullin petitioned the Supreme Court, which granted review and issued a 41-page opinion and dissent.

The Supreme Court held that the whole Sheppard Mullin-J-M contract was unenforceable because the flawed conflict waiver violated public policy. The Supreme Court held that at the time it represented J-M, Sheppard Mullin represented an adverse party in that case, which the firm knew about but did not tell J-M. Hence, the general conflict waiver J-M agreed to was not “informed.” Sheppard Mullin’s representation of J-M’s adversary (South Tahoe), was a “present reality” and not a “future possibility” and should have been specifically disclosed. Hence, the Supreme Court vacated Sheppard Mullin’s attorneys’ fee award. Sheppard Mullin was therefore not entitled to the over $1 million in unpaid fees.

But what about the millions of dollars J-M already paid Sheppard Mullin? Should those fees be disgorged? Could Sheppard Mullin keep those fees based on a quantum meruit theory? The Supreme Court held that quantum meruit was not before the court, as it did not have a robust-enough factual record on the fees J-M already paid, and remanded to the trial court. The Supreme Court provided guidance to the trial court on the quantum meruit analysis. Attorneys may be entitled to quantum meruit fees even under the cloud of an unwaived or improperly waived conflict of interest, which is a case-specific inquiry that focuses on whether the flawed conflict waiver was willful, whether any value had been provided to the client, and the amount of harm to the client. The Court held that there is no categorical rule barring quantum meruit fees when an unwaived or improperly waived conflict of interest exists. It depends on the circumstances.

Specifically: “When a law firm seeks fees in quantum meruit that it is unable to recover under the contract because it has breached an ethical duty to its client, the burden of proof on these or other factors lies with the firm. To be entitled to a measure of recovery, the firm must show that the violation was neither willful nor egregious, and it must show that its conduct was not so potentially damaging to the client as to warrant a complete denial of compensation. And before the trial court may award compensation, it must be satisfied that the award does not undermine incentives for compliance with the Rules of Professional Conduct. For this reason, at least absent exceptional circumstances, the contractual fee will not serve as an appropriate measure of quantum meruit recovery. . .  Although the law firm may be entitled to some compensation for its work, its ethical breach will ordinarily require it to relinquish some or all of the profits for which it negotiated.” (Sheppard, Mullin, Richter & Hampton, LLP v. J-M Manufacturing Co., Inc., 2018 Cal. LEXIS 6399, *56.)

The trial court, therefore, should decide if such legal fees should be completely or partially forfeited.

The lesson here is straightforward and applies to all jurisdictions, not just California: conflict of interest waivers are very important. They should be as clear and specific as possible so that the client knows exactly what it is waiving. Blanket, general, waivers can be insufficient, creating the risk of attorneys losing millions of dollars in legal fees.

If you have any questions or would like more information, please contact Greg Fayard at [email protected].

Is an Unethical Fee-Splitting Agreement Per Se Unenforceable? Perhaps Not

Posted on: January 4th, 2018

By: Mark C. Stephenson

Rule of Professional Conduct 5.4 limits the circumstances in which an attorney may share legal fees with a non-lawyer. A recent Pennsylvania Supreme Court decision considered what impact Rule 5.4 has on the claim that was made by a non-lawyer acting as a consultant to a law firm, who sought to enforce an alleged right to recover a five-percent share of the firm’s annual profit.  Rule 5.4 allows a lawyer or law firm to include nonlawyer employees in a firm compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement. In SCF Consulting v. Barrack, Rodos & Bacine, the non-lawyer/consultant was independent and not a firm employee, such that the fee-splitting arrangement at issue violated the rule. But did that violation bar his breach of contract claim?

SCF Consulting entered into a written agreement with the Barrack firm to work exclusively to develop the firm’s securities class action business in exchange for a fixed annual consulting fee plus a five-percent share of profit. The Barrack firm allegedly later refused to pay SCF Consulting the agreed upon bonus and SCF sued. The trial court granted summary judgment to the firm, finding that Rule 5.4 prohibited the arrangement and rendered the contract unenforceable. On appeal, the Pennsylvania Superior Court affirmed summary judgment, noting that there was no dispute that the non-lawyer consultant was not an employee of the firm which made Rule 5.4’s exception for employee profit-sharing plans inapplicable.

The Pennsylvania Supreme Court granted allocator on the question of whether public policy required the agreement be enforced as to the non-lawyer because an attorney must not be shielded from liability nor financially rewarded for violating the Rules of Professional Conduct. On December 19, 2017, Chief Justice Saylor wrote for a fractured majority to reverse summary judgment and remand for further proceedings, holding that an unethical fee-splitting agreement is not per se unenforceable as to the non-lawyer but may become so if the court determines that the non-lawyer bore some responsibility for the ethical violation. Justice Baer (joined by Justice Todd), concurring and dissenting, would have held that, “because a non-lawyer is not bound by the Rules of Professional Conduct, the non-lawyer committed no unethical or illegal act by entering into the agreement and, thus, can bear no measure of responsibility relative to the law firm’s material violations of the rules governing the profession.” Justice Wecht (joined by Justice Donahue) dissented, arguing that a such arrangements must be per se unenforceable and leaving the non-lawyer to seek relief in equity by showing, among other things, that they entered the agreement with clean hands.

As legal fee arrangements become increasingly creative, there is clear indication that the courts will not allow lawyers and law firms to use Rule 5.4 as a shield to avoid liability for otherwise required payments to non-lawyers. Practitioners should also take note that nothing in SCF Consulting relieves the law firm from its violation of Rule 5.4 and potential penalties that may apply. Arguably, a law firm’s attempts to manipulate Rule 5.4’s prohibition of legal fee sharing with non-lawyers only serves to underscore the severity of the firm’s original ethical violation by entering into the prohibited relationship in the first place.

If you have any questions or would like some more information, please contact Mark Stephenson at [email protected]