ABA issues new guidance for splitting fees in contingency cases when a lawyer is replaced

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On Tuesday, the ABA’s Standing Committee on Ethics and Professional Responsibility released Formal Opinion 487, which addresses fee splitting arrangements when a lawyer in a separate firm replaces the first counsel rather than works together on a contingency-fee case.

Formal Opinion 487 clarifies that a lawyer, who is a successor counsel in a contingency-fee matter, must notify the client, in writing, that a portion of any fees recovered may be paid to the original counsel. The opinion addresses a common misunderstanding about which model rules apply to successor relationships in contingency-fee agreements, and the duties of successor counsel.

The original lawyer in a contingency-fee matter will often assert a lien on the proceeds. But if the client retains new counsel, they may not understand there is a continuing obligation to pay the original lawyer for the value that lawyer contributed or was entitled to under the original contract.

Often the original lawyer and the successor counsel mistakenly believe Model Rule 1.5(e) governs in these situations. But 1.5(e) only applies when there is division of fees between lawyers from different firms who are simultaneously representing a client or maintaining responsibility for the matter—not in the case of sequential representation. Rule 1.5(e) specifically requires that lawyers who are dividing a fee in a matter either split the fee in proportion to the services delivered or assume joint responsibility for the representation.

Comment 13 states, in part, “A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist.”

Where lawyers are original and successor lawyers, respectively, joint responsibility is not appropriate as the original lawyer is no longer representing or retaining responsibility to the client in any manner.

Instead, Rule 1.5(b) and (c) apply to the successor lawyer in the fee relationship with the client. As Comment 2 to the Rule states, “[A]n understanding as to fees … must be established.” Moreover, there is not a specific time frame in which that understanding must occur. The opinion notes that under 1.5(a), client consent must be obtained before the fee is divided—that includes up to the conclusion of the matter and prior to disbursement of any money.

The opinion presents a hypothetical where the client has a written contingency-fee agreement with a lawyer under which the lawyer is entitled to one-third of any recovery. Without cause, the client terminates the original lawyer and retains successor counsel on the same terms—a written contingency-fee agreement for one-third of any recovery. This successor agreement is silent on any obligation to the original lawyer. Opinion 487 notes that the duty to disclose the original lawyer’s potential claim and entitlement to some portion of the recovery does not constitute an “unreasonable burden” on the successor counsel.

While a client may discharge a lawyer at any time for any reason, they may be unaware of obligations to pay not only the successor lawyer, but also the original lawyer. Opinion 487 requires successor counsel to clear up any confusion and inform the client, in writing, that their original attorney may have a claim against the contigency fee.

In many jurisdictions, the original lawyer may be entitled to, at a minimum, quantum meruit, for the value added to the case or payment under a “termination” or “conversion” clause in the original client agreement. And while the exact recovery and division may not be known until the end of the case, successor counsel still has a duty to inform the client about a potential fee split.

The opinion notes that in many instances, the fees paid to both attorneys will not affect the client’s recovery, as a client cannot be exposed to more than one contingency fee when switching attorneys, under Rule 1.5(b). However, in a situation where the client’s original counsel was terminated for cause, they may not have any claim to recovered fees.

If the successor lawyer needs to negotiate fees with the original lawyer on the client’s behalf, the successor lawyer must advise and obtain a waiver from the client to avoid Rule 1.7 personal conflict of interest regarding the distribution of the funds.

And if a dispute arises regarding any distribution of the recovery, the successor lawyer has the obligation under Rule 1.15(e) to retain the funds in the client trust account pending resolution.

Dennis Rendleman is the lead senior ethics counsel at the ABA’s Center for Professional Responsibility in Chicago.

Updated on June 19 to correct a reference to Rule 1.5 subsections.

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