1.8:1120 CONTINGENT FEES [SEE ALSO SECTION]

• Jurisdiction: Arizona

1.8:1120 Contingent Fees [see also Section 1.5:400]

ER 1.8(i) provides, as an exception to the general rule that a lawyer may not acquire a proprietary interest in the cause of action or subject matter of litigation, that a lawyer may "contract with a client for a reasonable contingency fee in a civil case." The ethical rule that generally governs the subject of lawyers' fees is ER 1.5. The overriding requirement of ER 1.5(a), replicated in ER 1.8(i)(2), is that a lawyer's fee, whether fixed or contingent or calculated on some other basis, must be "reasonable." ER 1.5(a) sets out the following factors that are to be considered in gauging the reasonableness of a lawyer's fee:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill required to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the service; and

(8) the degree of risk assumed by the lawyer.

In addition, ER 1.5 contains certain provisions specifically applicable to contingent-fee arrangements. ER 1.5(c) requires not only that a contingent-fee agreement be in writing, but also that it be actually signed by the client. See ER 1.5(c). In addition, under ER 1.5(c), the contingent-fee agreement "shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated." Finally, ER 1.5(c) requires the lawyer, on the conclusion of a contingent-fee matter, to furnish the client with a written statement showing the outcome of the matter and, if there has been a recovery, showing the remittance to the client and the manner in which it was calculated.

ER 1.5(d) specifies two situations where a contingent fee will never be permissible. The Rule prohibits lawyers from entering into agreements for, or collecting. They are (1) any fee in a domestic relations matter, the payment or amount of which is contingent on the securing of a divorce or on the amount of alimony or support, or property settlement in lieu thereof; or (2) a contingent fee for representing a defendant in a criminal case.

The leading case in Arizona concerning the enforceability and ethical propriety of contingency fees in civil cases remains the decision of the Arizona Supreme Court in In re Swartz, 141 Ariz. 266, 686 P.2d 1236 (1984). That case arose under DR 2-106 of the former Code of Professional Responsibility, and concerned an agreement by respondent Swartz to represent an accident victim for one-third of all sums recovered on the client's behalf, either from the workmen's compensation carrier for the client's employer or from third-party claims. The client received a recovery from the industrial carrier (the State Compensation Fund), and respondent brought claims on the client's behalf against the driver of the vehicle in which the client had been a passenger when the accident that produced the client's injuries took place.

It appeared undisputed that the driver was intoxicated at the time of the incident in question, and the two liability carriers for the driver very shortly offered their policy limits of $100,000 and $50,000 respectively to settle the claim. In fact, the court estimated that respondent could not have spent more than twenty or thirty hours in handling and settling the claims. The problem was that the State Compensation Fund had a statutory lien, in the amount of approximately $100,000, on any recovery the client secured from third parties. Discharge of that lien, and payment to respondent of the one-third contingency fee virtually exhausted the recovery on behalf of the client. As the court observed: "From a practical...