Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

Modifying Fee Agreements: Ethical Implications

Changed circumstances may dictate a change in a fee arrangement between a client and her lawyer. For example, the scope of the representation may change or the hourly client’s litigation battle chest could run dry. And the present economic turmoil at the state, national, and global levels may make these issues (and others) more likely to arise than they historically have.

As noted in 2011’s ABA Formal Opinion 11-458 on this subject, “courts are generally in accord that once the initial contract has been formed and the fiduciary relationship of client and lawyer has begun, any change in the contract will be regarded with great suspicion.” But California Rules of Professional Conduct, rule 3-300 provides guidance for how to modify the agreement in an ethical manner, thereby avoiding a minefield of potential problems.

The rule, which may be subject to exceptions in certain circumstances, states that an attorney shall not enter into a business transaction with a client unless (1) the transaction and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client, (2) the client is advised in writing that the client may seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice, and (3) the client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.

Usually, rule 3-300 does not apply to an initial fee agreement--as is indicated in its “Discussion”. But that is because that contract is entered into as an arm’s length transaction. That dynamic changes once the attorney-client relationship is formed and the attorney undertakes fiduciary duties to the client. Because of the development of trust that presumably a client invests in the attorney, there may be an increased vulnerability for an abuse of that relationship. Accordingly, more care should be taken to ensure that a modification of the fee agreement does not result from such an abuse.

But that does not mean that modifying fee agreements is presumptively unethical. Indeed, they may greatly benefit the client. And it also does not mean that there is an ethical violation if rule 3-300 is not strictly followed.

For example, in Ramirez v. Sturdevant (1994) 21 Cal.App.4th 904, a discharged employee hired an attorney on a contingency fee basis to represent her in an action against her former employer. (Id. at pp. 910–911.) When the action ended with a judgment unfavorable to the employee, the attorney agreed to represent her on appeal, provided that she would accept any settlement offer of at least $150,000. (Id. at pp. 910–912.) The appellate court concluded that this limitation on the client’s authority to settle the action was valid and enforceable, as it promoted a settlement for a reasonable estimate of the value of the employee’s claims while preserving the attorney's right to compensation, and the attorney took no unfair advantage of the client in negotiating the limitation. (Id. at pp. 917–918.) Without analyzing the rule 3-300 factors beyond fairness to the client, the court stated: “We cannot fault an attorney who has spent, or who anticipates spending, a substantial amount of time prosecuting a case under a contingency fee agreement, for being concerned that the client might reject a reasonable settlement offer. Such a rejection risks that the client, and thus the attorney, ultimately will recover nothing and be out-of-pocket the incurred costs of litigation.” (Id. at p. 918.)

Whereas it seems unlikely that a lawyer would face discipline merely for failing to comply with rule 3-300 when modifying a fee agreement, the attorney could potentially be disciplined if the fee or the modification is unreasonable. So, when modifying any retainer agreement, the attorney should, at a minimum, be careful to ensure that a change is justified by changed circumstances, that the impact of the change in fees is related in degree to the change in circumstances, and that the net fee the client will pay remains conscionable.

Of course, compliance with the other rule 3-300 factors will later assist in defending against an argument that the modification was improperly entered into. Therefore, it may be a good practice, even if not a necessary one, to also make sure the client provides informed written consent after being advised and given a reasonable opportunity to seek independent legal advice regarding the fee modification.

-- David Majchrzak

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis.  Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**