Time To Give Your Fee Agreement A Check-up?

Time To Give Your Fee Agreement A Check-up?
James E. Towery and Alison P. Buchanan

Mr. Towery is a shareholder, and Ms. Buchanan an associate, at Hoge, Fenton, Jones & Appel, Inc., in San Jose, where both specialize in the defense of professional liability claims. Mr. Towery was chairman of the State Bar Insurance Disclosure Task Force. He can be reached at jet@hogefenton.com. Ms. Buchanan can be reached at apb@hogefenton.com.

Introduction
How long has it been since you reviewed your fee agreement? If you are like many lawyers, it’s been a long time since you took a thorough look at this important document.

Here is a checklist to help you assess whether your fee agreement is up to date:

• In an hourly fee agreement, is your lien provision in keeping with Fletcher v. Davis (2004), which requires that you to advise your client in writing that the lien is potentially adverse to the client’s interest, and thus the client is entitled to consult with independent counsel before executing the lien provision (Rules of Professional Conduct 3-300)? If it is not, your lien clause is likely unenforceable.
• Does your agreement disclose that you have malpractice insurance? That disclosure has not been required since 1993.
• Does your agreement seek interest on past due amounts in excess of the statutory 10%? If so, such a clause may be unenforceable.
• Does your fee agreement require binding arbitration of any fee disputes? While this is a complex area of law, the clause is likely unenforceable unless, after any fee dispute has arisen, the client waives his or her right to statutory non-binding fee arbitration.

Let’s take a look at these four points in more detail with an eye to improving your fee agreements.

Hourly Liens and Fletcher v. Davis
Before 2004, most lawyers assumed that lien clauses in both hourly and contingent fee agreements were valid. Lien clauses assure that the attorney will be paid out of any recovery. In June 2004, the California Supreme Court decided Fletcher v. Davis, supra, and held that a lien clause in an hourly agreement created potential adversity with the client. This decision triggered California Rule of Professional Conduct 3-300. Under Rule 3-300 an attorney must advise the client in writing of the right to seek advice from independent counsel before signing a fee agreement with a lien clause. The State Bar Committee on Mandatory Fee Arbitration has distributed sample fee agreements with a lien clause that complies with the Fletcher decision.

These samples are available free from the State Bar.

It remains an open question whether lien clauses in contingent fee agreements are covered by Fletcher and require compliance with Rule 3-300. In the Fletcher opinion, the Supreme Court specifically reserved the question and did not decide it. The State Bar Committee on Professional Responsibility and Conduct or COPRAC, has issued an opinion that Fletcher is inapplicable to contingent fee agreements. Other commentators have a different view, and believe that all of the same issues of adversity between client and attorney apply equally to a lien in a contingent fee agreement as in an hourly agreement. Until California appellate courts address the issue, attorneys are well-advised to assume the worst, and to also give the Rule 3-300 warnings in contingent agreements.

Insurance Disclosure in Fee Agreements
Having reviewed numerous fee agreements from other attorneys, it appears that a substantial number of California attorneys continue to disclose that they have malpractice insurance. In 1991, Business & Profession Code Sections 6147 and 6148 were amended to require that all lawyers disclose the presence or absence of malpractice insurance in their fee agreements. In 1993, a further amendment excluded attorneys who had malpractice insurance from making any disclosure, leaving only uninsured attorneys required to disclose. However, since 2000, there has not been any requirement of disclosure for anyone -- insured or not. If your fee agreement presently contains a disclosure, you may safely remove it.

It should be noted, however, that the disclosure requirement might be reinstated. In the past decade, there has been a national movement towards requiring disclosure by uninsured attorneys, either directly to the client, or indirectly to the attorney licensing agency. At present, over twenty states have adopted such disclosure in some form. In 2007, a task force of the State Bar of California recommended the adoption of a rule of professional conduct requiring uninsured lawyers to disclose that fact directly to clients, and all attorneys to disclose to the State Bar whether they have insurance. It is an understatement to call the proposal controversial. At this writing the proposal remains pending before the State Bar Board of Governors and should be taken up sometime in 2008. Even if the State Bar recommended and the California Supreme Court approved such a proposal, any action is likely to take at least a year to go into effect.

Interest on Unpaid Attorneys’ Fees
It is completely reasonable for an attorney to seek interest on unpaid attorneys’ fees. The issue of how much interest can legally be charged is a complex one and poorly understood by many attorneys. Obviously, interest applies only to unpaid hourly fees. Because contingent fees are not liquidated until a recovery by the client has occurred, the issue of interest rarely arises as to contingent fees.

To encourage prompt payment by clients, many attorneys include a clause in their hourly fee agreement charging one and one half percent per month (18% per year) in interest on unpaid balances. If you represent consumer clients, this type of interest clause may violate the Truth in Lending Act with its extremely complex disclosure requirements. The State Bar Mandatory Fee Arbitration Committee has a helpful Arbitration Advisory (Advisory 93-01) on this issue, available at http://calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=11337&id=4787

A safe approach to the interest issue is to charge the statutory amount of prejudgment interest—10% per year. While it’s not necessary to include this in your fee agreement, as liquidated damages are entitled to that interest by law, it is a good client relations practice to advise your client that interest at 10% will be added to past due balances.

Binding Arbitration Clauses
Many attorneys include binding arbitration clauses in their fee agreements. Such clauses can apply only to malpractice claims, only to fee disputes, or to both malpractice claims and fee disputes. Again, including them is a complex legal issue. If an attorney intends the binding arbitration clause to apply to fee disputes, there is a strong probability that the binding arbitration clause is not valid.

Binding arbitration clauses have long been accepted as valid as applied to potential malpractice claims. In Powers v. Dickson, Carlson & Campillo (1997), the court upheld a broad binding arbitration clause in a fee agreement applicable to any dispute arising from the attorney-client relationship, even though the clause did not contain an express waiver of jury trial and was not prominently displayed in the agreement.

However, the fee arbitration statute was amended in 1996 to provide that parties could stipulate in writing to have binding arbitration of fee disputes, but only after the dispute arises. Accordingly, a binding arbitration clause contained in the original fee agreement, before any fee dispute arises, is invalid. This of course assumes that the client does not waive his or her right to statutory nonbinding fee arbitration under the statute. In Aguilar v. Lerner (2004) the California Supreme Court held that when a client waives the right to fee arbitration (in that instance, by the client’s filing of a malpractice claim against the attorney), then the binding arbitration clause was valid and enforceable.

We recommend that you take a practical approach. If you seek to have binding arbitration of fee disputes with clients, you might end up spending substantial resources litigating the Aguilar issue—whether the client has waived the right to fee arbitration which will defeat the very purpose of arbitration—to make the resolution of disputes more efficient. Therefore, we recommend that attorneys use two methods in their standard fee agreements. First, only include a non-binding arbitration clause. The practical experience of the fee arbitration programs over 30 years is that over 95% of all non-binding fee arbitration awards become binding because neither party rejects the award within thirty days. Such a high rate of acceptance of non-binding arbitration awards may be due to the cathartic effect clients experience by having a venue to complain about the fees.

Our second recommendation is to consider a mandatory mediation clause in your fee agreement, that would require all fee disputes to be mediated as a preliminary step before arbitration. Mediation has many advantages over arbitration in the area of fee disputes, just as in other types of disputes. A classic example is that a mediator can address payment plans, if the reason for non-payment is primarily a client’s inability to pay. An arbitrator can only deal with the amount owed. Occasionally, mediation does not resolve the dispute. In those cases, two steps of ADR will be necessary. However, these cases should be rare and offset by the larger number of instances in which mediation is successful in resolving the dispute without arbitration.

In summary, all attorneys should periodically give a thorough check-up to their fee agreement forms. It is a perfect example of where a little foresight can pay significant dividends, both in avoiding fee disputes altogether, and in making such disputes more manageable when they do arise.