Dear Lawyer: if You Decide It's Not Economical to Represent Me, You Can Fire Me as Your Contingent Fee Client, but I Agree I Will Still Owe You a Fee.

• Publication year: 2013

Dear Lawyer: If you decide it's not economical to represent me, you can fire me as your contingent fee client, but I agree I will still owe you a fee.

David Hricik

[Page 363]

Dear Lawyer: If you decide it's not economical to represent me, you can fire me as your contingent fee client, but I agree I will still owe you a fee.

by David Hricik^*

I. Introduction

Contingent fees are a relatively recent development in American law.¹ Once banned through common law doctrines, contingent fees have become a tool that allowed delivery of legal services to those who would otherwise be unable to front attorney fees in a case.²

No doubt in part because of the historic prohibition against contingent fees, and also because clients in the typical personal injury case in which they were used were not sophisticated consumers of legal services,

[Page 364]

courts, legislatures, and bar associations have since the outset heavily regulated their use.³ Yet, the regulation has not been Draconian. Instead, courts have balanced competing policies. For example, a client has an unfettered right to discharge counsel, yet, it is unfair to allow a client to discharge a lawyer in order to deprive the lawyer of a fee that has been earned but simply not collected.⁴ As a result, courts have permitted attorneys to recover under equitable remedies such as quantum meruit for work done prior to discharge.⁵ Likewise, courts have sometimes permitted lawyers to obtain "high" contingent fees in a particular case because they recognize that an occasional "high" fee is needed to offset the equally likely lower recovery, and thus allow for the economic operation of contingent fee arrangements.⁶

More recently, contingent fees have been utilized in class actions, complex commercial litigation, patent infringement suits, and other suits where the client is generally more sophisticated⁷ -no longer is the contingent fee arrangement limited to solo practitioners, small firm lawyers, and personal injury clients. Today, sophisticated clients represented by large law firms agree to representation on a contingent fee basis in business litigation.

As a matter of public policy, courts have generally held that a lawyer who is discharged with "good cause" will receive only quantum meruit for work done,⁸ and an attorney who withdraws without "just cause" will forfeit all right to compensation.⁹ I have reviewed many contingent, fee agreements over the course of my years in advising lawyers and law firms about legal ethics, and the cases discussed here confirm my experience was typical.

In some of the arrangements I have seen or which have been litigated or analyzed by the bar associations, lawyers have attempted to alter the aforementioned balance. Generally, the provisions (a) either restrict the client's ability to terminate the lawyer, or expand the lawyer's right to withdraw from representing the client; (b) increase the compensation

[Page 365]

due if the client terminates the lawyer or the lawyer withdraws; or (c) a combination of those two approaches. Lawyers have, for example, sought to require clients who discharge the lawyer to agree to pay, not just a quantum meruit award for the work performed prior to discharge, but compensation at full hourly rates. Some lawyers have even required that it be paid upon withdrawal and not be contingent upon recovery.¹⁰ This Article refers to any variant on this theme as "compensation on withdrawal provisions."

This Article thus analyzes clauses which seem to be increasingly used that seek to require their clients to pay if the lawyer decides to walk away from the case—not just if the client fires the lawyer, but if the lawyer fires the client. There has been no considered analysis of whether these clauses in contingent fee agreements are enforceable.¹¹

This Article fills this gap in the literature on an issue of importance to the bench and bar. It addresses whether clauses that seek either to increase the freedom of lawyers to withdraw from a representation beyond just cause, or to allow for any compensation if withdrawal is without just cause, are enforceable in contingent fee agreements. Put simply, can a client agree that if a lawyer decides it's not economical to represent the client, lawyers can fire the client as their contingent fee client and still be paid?

In getting to that question, this Article first briefly describes the fundamental principles necessary to understand regulation of termination on withdrawal provisions in contingent fee agreements. It then describes the jurisprudence from a few key jurisdictions analyzing what has historically allowed a lawyer to withdraw but be compensated-the requirement of "just cause." Finally, it turns to a complete analysis of whether a contractual provision enhancing the ability of a lawyer to voluntarily quit a contingent fee arrangement but obtain compensation should be enforceable, arguing that as a general principle, any provision that allows for lawyers to withdraw in circumstances beyond those defined as just cause under state law, or with any compensation if done without just cause, should be unenforceable, or at least left to the

[Page 366]

legislature or other rule-making body to regulate carefully, and not left to the slow and awkward development of the common law process.

II. An Overview of Public Policies Underlying Permitting but Regulating Contingent Fee Agreements

A. The Social Utility Served by Contingent Fee Agreements

Contingent fees are permitted because they are perceived to provide social utility. Among other things, they permit clients who otherwise could not afford to hire a lawyer to obtain justice and pay the costs out of any award from the opposing party.¹² At the same time, they permit lawyers to earn a living by bearing the risk of non-recovery for the client, but potentially obtaining recovery if successful.¹³

B. Pertinent Limitations on Contingent Fee Agreements

Probably the fundamental principle in understanding the law regarding lawyer compensation-on-withdrawal provisions is that a lawyer retained to handle a contingent fee case is deemed to have agreed to carry it through to completion: the fee is not earned until and unless the lawyer obtains a recovery for the client.¹⁴ As a consequence, a lawyer who withdraws from a case has breached the contract by failing to perform as agreed.¹⁵ He is entitled, as will be seen, to no compensation with the exception of when the client has given the lawyer just cause to withdraw (sometimes referred to as "justifiable cause" or occasionally the confusing term, "good cause").¹⁶

[Page 367]

The law regulates the flipside of the relationship as well: the client's ability to terminate the lawyer. Courts have long recognized that a client has a right to discharge counsel for good cause or no cause.¹⁷ However, courts have recognized that simply because a client controls the unfettered right to discharge a lawyer does not mean that the client can escape compensating the lawyer for the value of services rendered. Accordingly, although the client may fire the lawyer without any cause at all, a lawyer fired without good cause is entitled to compensation. A majority of courts permits recovery of only quantum meruit or the contingent fee amount, whichever is less. A minority permits recovery of whichever is greater.¹⁸ A lawyer fired for cause is generally limited to recovering quantum meruit for the value of services rendered prior to termination.¹⁹

Another fundamental feature of contingent fee agreements is that they must be contingent-if the client does not recover, the lawyer will receive nothing.²⁰ By definition, a fee that is earned, whether or not the client recovers, is not "contingent."²¹

[Page 368]

Another somewhat counter-intuitive but nonetheless critical principle is that sometimes a "high" contingent fee in a particular matter is reasonable, because those "high" fees balance out the risk that the lawyer will recover nothing in other cases.²² Thus, what may be a "high" fee in a particular case is generally not a basis to find the fee excessive.²³ Further, the potential for a high fee compensates the lawyer for delay between the delivery of legal services and the recovery of the fee.²⁴

This Article examines these interests and regulations further below, since all are implicated if a contingent fee agreement contains a provision allowing lawyers to walk away from the case when they deem it no longer worth the effort.

III. How Courts inSelect Jurisdictions Regulate Compensation Where the Lawyer Fires the Client

Although disagreeing on the particulars, courts generally determine how much compensation an attorney who is retained under a contingent fee contract but does not complete the case is entitled to by looking at who terminated the agreement-the client or the lawyer-and whether the termination occurred with or without sufficient cause.²⁵ The courts generally agree that different rules govern compensation due upon: (a) termination by the client; (b) termination by the lawyer; or (c) mutual abandonment.²⁶ This Article focuses on the middle circumstance.

[Page 369]

A. The General Requirement of "Just Cause" for Withdrawal is Universally Recognized as a Prerequisite to Compensation

As a preliminary matter, it may not be obvious why portions of this Article discuss disciplinary rules in determining whether a lawyer can enforce a fee agreement with a client. Disciplinary rules have an important but circumscribed role in that context. Although disciplinary rules are not intended to apply to legal issues, courts tend to give them some weight in determining liability issues, including enforceability of contingent fee agreements.²⁷ Thus, though they do not control, in many states disciplinary rules are pertinent to these issues.

The courts in all states have generally recognized that lawyers who withdraw from a contingent fee case forfeit all right to compensation unless they can establish that withdrawal...