Needing to adjust the basis of your legal fee mid-stream is a fairly common occurrence. When a matter becomes more complicated than you originally contemplated, or for other reasons, the fee agreement you entered into with the client at the beginning may become unworkable before the matter is over.
But renegotiating fees with an existing client is not the same as reaching terms on the original arrangement. Such adjustments can be considered a “business transaction” with a client — requiring written informed consent under state versions of Model Rule 1.8(a) — and determining when the rule applies is not always straightforward. A recent opinion from the Fifth Circuit in Wiener, Weiss & Madison v. Fox sheds some light, and warns that failure to comply with Rule 1.8 when required can void a fee agreement.
Show me the money
Rule 1.8(a) prohibits “enter[ing] into a business transaction with a client or knowingly acquir[ing] an ownership, possessory, security or other pecuniary interest adverse to a client” without fulfilling three requirements:
- the transaction must be fair and reasonable to the client and fully disclosed to the client in writing;
- the client must be advised in writing that it would be desirable to seek advice on the transaction from “independent legal counsel,” and given a reasonable opportunity to do so;
- the client must give informed consent, “in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.”
The client in Wiener was in the midst of a messy divorce in Louisiana when a receiver was appointed over the couple’s significant assets, consisting of “state-licensed gaming enterprises.” After her husband declared bankruptcy, the client hired the Wiener firm, which originally agreed to represent her on an hourly basis, payable from the bankruptcy estate. A year later, the bankruptcy court approved over $1.2 million in fees to the firm.
With more work to be done, the firm and the client agreed on a contingency fee for the firm’s ongoing representation: up to a 35 percent interest in the gross proceeds the client might receive for claims against the estate and as an equity owner of the estate.
Three years after that, the bankruptcy court approved a reorganization plan, and the firm informed the client that if she “wanted them to stay on,” she had to “increase the contingency percentage.” The client signed a new agreement in 2013 upping the contingency fee to 40 percent.
Finally, in 2016, the client received full ownership of the gaming enterprise out of the bankruptcy, and the firm proposed revising the fee arrangement once again — apparently sweetening the deal for the firm and making its fee come solely from distributions of cash or property to the client.
For the first time, the firm recommended that the client seek independent legal advice about whether to execute the new, eleven-page contingency agreement. The client took that advice, and independent counsel advised against signing the agreement.
The firm eventually sued the client to enforce the contingent fee agreement. In response, the client asserted that the firm’s claims were barred because the later agreements violated Rule 1.8(a).
The district court disagreed, reasoning that the revised fee agreement was not a “business transaction” under Rule 1.8 because it conveyed only a contingent claim to proceeds of the bankruptcy estate.
Business transaction — or not?
Reversing the district court, the Fifth Circuit agreed with the client, voiding the contingent fee agreements.
The reason for the the business-transaction rule, wrote the court, is to prevent conflicts between the client’s interests and the lawyer’s own financial interests. “[S]uch potential conflicts are rarely more present than during a contingency fee relationship where the attorney seeks to gain a property interest in the client’s business at the end of the representation.” It matters not, the court said, that a contingency agreement by its nature provides for a future interest.
The court cited other cases in jurisdictions “from sea to shining sea” to support its decision, as well as the ABA’s Formal Opinion 00-418 (July 7, 2000) (advising that lawyers can invest in clients, including stock in lieu of fees, but must comply with Rule 1.8(a)).
Bottom line for the law firm: both of its executed fee agreements with the client were void and unenforceable for failure to advise the client to get independent counsel before entering into them. The court remanded and the firm is now likely consigned to a quantum meruit recovery. (A motion for rehearing was denied.)
Takeaways and unanswered questions
- Before renegotiating fees with an existing client, you must consider whether Rule 1.8(a) applies.
- If a new fee arrangement might advantage you or your firm — either increasing the amount of the potential fee or the certainty of receiving it — you risk having the arrangement voided if Rule 1.8 is not followed.
- As always, local conditions count. Consult case law, rules and ethics opinions in the jurisdiction at issue.
This case deals with specific circumstances – an unsophisticated client and substantial economic advantage to the firm from the new agreement. But the opinion suggests that any new agreement with an existing client can be a “business transaction.” If so, then:
- Does Rule 1.8 apply to new matters for existing clients?
- Does Rule 1.8 apply to fee increases on existing matters?
- Does it make a difference who the client is?
Again, these answers may vary greatly based upon local rule and precedent. No matter what, it is important to consider these issues and address them before moving forward.