That new personal-injury client may come with baggage you’ll have to wrangle

Your new personal-injury client – the one who fired their previous lawyer without cause and then hired you – comes with baggage that the American Bar Association says you, as successor counsel, must carry.

The ABA’s most recent opinion, Op. 487,  interprets the Model Rules of Professional Conduct as imposing a myriad of obligations on the successor counsel, including that successor counsel must:

• Disclose to the client, in writing and preferably in the fee agreement, that the client’s previous lawyer has a potential claim on any recovery;

• Discuss with the client whether the successor counsel will help the client with a fee dispute with the previous counsel; and

• Not charge the client for any work resolving a dispute with previous counsel that only increases the successor counsel’s share of the fee and does not increase the client’s share of the recovery.

The opinion also addresses a more general issue: Because successor counsel will be sharing a fee with the previous lawyer, must successor counsel comply with the fee-sharing rule?

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Let’s say that a client, Clara, originally hired Preston to handle her PI case on a contingency. After he performs some work, she terminates him – without cause – and hires Sunny, who takes the case on the same terms as Preston and obtains a recovery. What are Sunny’s obligations?

1. Must Sunny, as successor counsel, comply with the fee-sharing rule?

The answer – no – is, I think, one of Op. 487’s two most important conclusions.

Lawyers who are not in the same firm may divide one fee only with restrictions. Model Rule 1.5(e) requires that:

(1)   the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;

(2)   the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and

(3)   the total fee is reasonable.

With one non-substantive difference, Arizona’s Ethical Rule (ER) 1.5(e)(1) and (3) track the Model Rule. But our version of (e)(2) requires that the client agree, in a signed writing, “to the participation of all the lawyers involved and the division of the fees and responsibilities between the lawyers.” The Model Rule does not require the writing to be signed nor that the client agree to how the lawyers will divide up the responsibilities.

The restriction on lawyers from different firms sharing one fee is rooted in the historical “hostility” to lawyers paying or collecting finder’s fees. See ABA/BNA Lawyers Manual on Professional Conduct § 41:702.

I was surprised to learn recently that some lawyers would believe that Preston (Clara’s previous lawyer) and Sunny (successor counsel) must comply with the fee-sharing rule because the two lawyers, in different firms, ultimately will divide one contingency fee out of any recovery.  I’ve always interpreted the fee-sharing rule to apply only when lawyers in different firms serve the client together, at the same time, not sequentially.

Op. 487, I’m happy to say, confirms my long-held view and reaches what I think is the appropriate conclusion: the fee-sharing rule applies to lawyers in different firms who are currently participating in representing a client and will divide a fee resulting from the case they are jointly handling. The opinion points out that the rule comment says the rule “facilitates association of more than one lawyer in a matter.” Sunny, as successor counsel, is not “associated” with Preston on Clara’s case.

The opinion also concludes that imposing the fee-sharing rule would make it difficult for a client to change lawyers. If the fee-sharing rule applied to lawyers hired sequentially, Rule 1.5(e)(1) would allow them to divide the fee only in two ways: in proportion to the services each performed or, if not in proportion to the services provided, then each lawyer must assume joint responsibility for the representation. If, in the Preston/Sunny situation, the fee is divided in proportion to the services performed, Clara’s right to change counsel may be hindered because, according to the opinion, “[a] simple fee negotiation between [Clara] and [Sunny] would turn into a three-way debate” involving Preston. Alternately, if the lawyers assume joint responsibility and therefore can divide the fee other than in proportion to services performed, Sunny “would at best be reluctant to accept the engagement” if she “would be responsible for [Preston’s] errors or omissions.”

The opinion’s conclusion that the fee-sharing rule doesn’t apply to the Preston/Sunny situation also seems a logical extension of a comment the ABA added in February 2002 to Model Rule 1.5. Comment [8] says that the fee-sharing rule “does not prohibit or regulate division of fees to be received in the future for work done when lawyers were previously associated in a law firm.” This means, for example, that if a lawyer who has worked on a contingency-fee case leaves her firm and takes the case to a new firm, the fee-sharing rule does not apply even though technically her old firm and her new firm will be sharing one fee, if and when she obtains a recovery for the client. If the fee-sharing rule doesn’t apply when the two firms actually have a common denominator (the lawyer who worked for each firm), why should it apply when Clara chooses to exercise her right to change counsel and moves to a totally different lawyer and law firm?

The way Arizona has customized the rule and its comment also makes the opinion’s conclusion even more apt under our rules. Not only does our ER 1.5(e)(2) require that the client agree “to the participation of all the lawyers involved and the division of the fees and responsibilities between the lawyers,” we have added comments that the rule “permits the lawyers to divide a fee by agreement between the participating lawyers” and that “any division of responsibility among lawyers working jointly on a matter should be reasonable.” (Emphasis added.) This language sends the message that the lawyers who are dividing a fee must be working together on the case. Preston and Sunny are not.

In the end, Preston and Sunny may share the one contingency fee, but they aren’t doing so in the way that requires application of the fee-sharing rule.

2. Sunny must disclose to Clara, in writing, that Preston may claim a portion of the contingency fee.

This is the other big takeaway from the ABA opinion.

The opinion concludes that Model Rule 1.5(b) and (c) together require Sunny to tell Clara, in writing and preferably in her fee agreement, that “some portion of the fee may be due to or claimed by” Preston.

Model Rule 1.5(b) generally requires that the lawyer communicate to the client the scope of representation and the basis or rate of the fee and expenses for which the client will be responsible, all preferably in writing. Model Rule 1.5(c) requires that all contingency-fee agreements be in writing and signed by the client and include specific information. Both of these rules, according to the opinion, are “designed to ensure that the client has a clear understanding of the total legal fee, how it is to be computed, when it is to be paid, and by whom.”

This is not an “unreasonable burden” on successor counsel like Sunny because a contingent fee agreement “that fails to mention that some portion of the fee may be due to or claimed by the first counsel in circumstances addressed by this opinion is inconsistent with” Model Rule 1.5(b) and (c) requirements.

Sunny knows she’s taking over a case that Preston previously handled. She also knows (or should know) that Preston will want a cut of any eventual contingency fee. That, in turn, will affect her contingency fee. Memorializing her fee as Model Rule 1.5(c) directs understandably requires disclosing that Preston’s claim may affect it.

The opinion also concludes that Sunny must discuss with Clara “whether [Clara] risks paying twice: one contingent fee to [Preston] and another to [Sunny].” This is important, the opinion says, because

[a] client cannot be exposed to more than one contingent fee when switching attorneys, given that under the Rule 1.5(a) factors, each counsel did not perform all of the services required to achieve the result. Thus, neither the predecessor nor the successor counsel ordinarily would be entitled to a full contingent fee.

The notice that “some portion of the fee may be due to or claimed by” Preston is best put in the fee agreement but could be in a separate document associated with a fee agreement and provided to the client at the same time, according to the opinion.

Requiring this written notice to Clara makes sense under Arizona’s rules. Our ER 1.5(b) goes a step further than the Model Rule and requires that all fee agreements, not just contingency agreements, be memorialized, because “[a] written statement concerning the terms of the engagement reduces the possibility of misunderstanding.” ER 1.5 cmt [2]. Explaining how Preston’s potential fee will impact Sunny’s fee – and Clara’s potential recovery – furthers this goal.

3. Will Sunny represent Clara in any Preston-versus-Clara fee dispute and, if so, how much can she charge?

The opinion concludes that Sunny also must discuss with Clara whether Sunny -- in addition to handling Clara’s PI case -- will help Clara if Clara disputes Preston’s fee. In her fee agreement, Sunny should say, in describing the scope of representation, whether she will represent Clara. She also could have an additional fee agreement with Clara under which Sunny agrees to represent Clara in any dispute with Preston over his fee.

If Sunny will represent Clara in any fee dispute with Preston, she cannot charge Clara for work that only increases Sunny’s share of the fee and does not increase Clara’s share of the recovery.

Also, because Sunny will have dual roles – she’s not only counsel for Clara but also a party interested in part of the proceeds – she will have a personal-interest conflict of interest and must obtain Clara’s informed consent to that conflict.

Sunny also will need to talk with Clara about whether Preston is even entitled to a fee.

4. What happens when Sunny receives the recovery?

Clara must consent to Sunny disbursing any money to Preston. Otherwise, Clara’s right to challenge Preston’s fee “would be impaired, if not extinguished.”

But Sunny could obtain Clara’s informed consent that she and Preston resolve their differences “without further need for consent or consultation” with Clara if the fees paid to both attorneys won’t affect Clara’s recovery.

If there is a disagreement between Preston and Clara or between Preston and Sunny about the amount of Preston’s fee, Sunny of course must keep the disputed amount in her trust account.

Finally, if Preston seeks part of Clara’s share of the recovery and if Sunny represents Clara in the Preston-versus-Clara dispute, Preston can’t communicate directly with Clara because Clara is represented by counsel.

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Must Arizona lawyers comply with this opinion?

ABA opinions only construe the Model Rules of Professional Conduct and, as the ABA’s website says, “are not binding authority in any jurisdiction without adoption in such a jurisdiction. They are persuasive authority and express [ABA] policy….”

Nothing specifically gives ABA opinions any power in Arizona. But ABA ethics opinions are persuasive if our rule is the same or comparable to the Model Rule, and we don’t have contrary authority, such as a court opinion, discipline ruling, or ethics advisory opinion.

We don’t have relevant authority, let alone contrary authority, on this particular fee-sharing issue or on the other conclusions. Parts of our ER 1.5 and its comment differ from the Model Rule, but not in any way that disagrees with the opinion. In fact, as discussed above, our differences support the ABA opinion’s conclusions.

So, in my view, yes, Arizona lawyers should comply with the ABA opinion’s conclusions. As a result:

1.     ER 1.5(e) doesn’t apply because Sunny is not technically dividing a fee with Preston.

2.     Sunny must tell Clara, in writing and preferably in her fee agreement, that a portion of any contingency fee may go to Preston, and that Preston also might make a claim against Clara’s share.

3.     Sunny must discuss with Clara whether Clara will be subject to two contingency fees.

4.     Sunny can’t claim the entire contingency fee for herself because she didn’t do all the work.

5.     In her fee agreement, Sunny should say, as part of describing her scope of representation, whether she will represent Clara in any fee dispute with Preston.

6.     If Sunny will represent Clara in Clara’s dispute with Preston, Sunny:

a.     Should talk with Clara about Preston’s entitlement to a fee.

b.     May not charge Clara for work that only increases Sunny’s share and does not increase Clara’s share.

c.     Must obtain Clara’s informed consent to conflicts, because Sunny will have dual roles as counsel for Clara and as a party interested in a portion of the proceeds.

d.     May get Clara’s informed consent to leave Clara out of the loop as long as any agreement between Sunny and Preston doesn’t affect Clara’s recovery.

7.     If Sunny is representing Clara on Clara’s dispute with Preston, Preston can’t communicate directly with Clara about the fee because she’s represented by counsel on the matter.

Artwork: Polidoro da Caravaggio, “Men and Women Carrying Barrels and Bundles,” late 16th century, Art Institute of Chicago