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New Guidance on Changing Fee Arrangements During Representation

By John W. Joyce, Litigation News Associate Editor – November 7, 2011

A recent opinion from the ABA Standing Committee on Ethics and Professional Responsibility provides guidance for attorneys seeking to modify existing fee agreements during the course of representation. Formal Opinion 11-458 emphasizes that changes must be reasonable under the circumstances at the time of the modification, and must be communicated to and accepted by the client.

The Opinion reminds lawyers that modifications that change the basic nature of the fee arrangement, or that significantly increase the lawyer’s compensation, will ordinarily be unreasonable. An important exception, however, exists for “[p]eriodic, incremental increases in a lawyer’s regularly hourly rate” that are communicated clearly to and accepted by the client at the outset of the relationship. Such increases generally are reasonable.

“I like the tone of this opinion, in that it places the burden on the lawyer to show the reasonableness of any fee modification” says Bruce A. Rubin, Portland, OR, cochair of the Legal Ethics Subcommittee of the ABA Section of Litigation’s Committee on Corporate Counsel. “I’m not sure this opinion breaks new ground,” counters Paul E. Lehner, Chicago, cochair of the Section of Litigation’s Solo and Small Firm Committee, “but it pulls together the basic rules for modifying fee agreements and in that respect is a helpful primer for anyone needing guidance in this area.”

Formal Opinion 11-458
Formal Opinion 11-458 rests on the basic premise that lawyers are fiduciaries to their clients. For that reason, and relying on Charles W. Wolfram’s Modern Legal Ethics, the Opinion observes that “any change” in the original fee arrangement is regarded with “great suspicion,” and the lawyer will bear the burden to show the “contract [modification] and the circumstances of its formation were fair and reasonable to the client. . . .”

When an attorney proposes to modify a fee agreement, he or she must “communicate the scope of the representation and the basis or rate of the fee and expenses to the client in a timely manner” as required under Model Rule 1.5 (b). The lawyer must also provide “[a]n explanation of the lawyer’s proposed modification of a fee arrangement, including the advice that the client need not agree to pay the modified fee to have the lawyer continue the representation. . . .” This mandate flows from Rule 1.4 (b), which requires that a lawyer explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

The proposed modification must also be reasonable under the circumstances (as required under Rule 1.5(a)), and the client must agree to the modification. The Opinion cautions that “absent an unanticipated change in circumstances, attempts by a lawyer to change a fee arrangement to increase the lawyer’s compensation are likely to be found unreasonable and unenforceable.”

What types of unanticipated circumstances justify change? “At the end of the day, you need to evaluate whether the lawyer is looking out for his best interests, or the best interests of the client,” maintains Rubin. “For example, it’s okay to modify a fee arrangement because the firm has to do more work than originally anticipated, but it’s not okay if the only reason is because the lawyer learns that potential damages are higher than anticipated,” he opines.

Examples of Fee Arrangement Modifications
Beyond the general principles applicable to all modifications, the Opinion provides a useful roadmap of the rules applicable to specific fee arrangement modifications. The most common situations are periodic hourly rate increases, converting from hourly to contingent, and obtaining a security interest in a client’s property.

Periodic Hourly Rate Increases
The Opinion observes that lawyers who bill hourly routinely increase their hourly rates, typically on a yearly basis, without separately negotiating each fee increase. So long as the client is informed of those billing practices at the outset of the engagement, and the increase is timely and clearly communicated to the client, the increases are generally permissible so long as the rate increases are reasonable.

Converting from Hourly Rate to Contingency
The Opinion notes that “[t]here may well be situations where changing an hourly fee arrangement to a contingent fee, or vice versa, is mutually beneficial to the lawyer and client.” In those situations, in addition to the requirements of Model Rules 1.4 and 1.5(a) and (b), the attorney must follow requirements for contingency fee contracts set forth in Rule 1.5(c). This includes obtaining a signed agreement memorializing the terms of the contingent agreement.

Obtaining a Security Interest in Client’s Property
Sometimes circumstances are such that a lawyer is not inclined to continue representation without some form of security. The Opinion recognizes that the Model Rules provide for this situation. When a lawyer acquires an additional interest in the client’s business, real estate, or other nonmonetary property under an existing fee agreement, he or she needs to comply with the disclosure, independent review, and consent provisions of Model Rule 1.8.

Practice Tips
The guidelines provided in the Opinion, and the rules themselves provide plenty of guidance. Section leaders also suggest implementing the following best practices in connection with mid-matter fee modifications.

  • Always send an engagement letter. Rule 1.5 requires signed engagement letters in contingency fee cases. Whether technically required or not, “always send an engagement letter, in which you reserve the right to review and revise your hourly rates” says Lehner. “It’s an easy thing to forget, especially with established clients, but the signed engagement letter needs to be one of the first documents in your file,” he adds.

  • Give the client a budget at the outset. Rubin points out that fee modifications often become an issue when a client loses staying power to fund a litigation. “The smart thing to do is to provide the client a detailed budget at the outset of the relationship,” suggests Rubin. “Then if complications arise, or unanticipated items become important,” he continues, “you can refer back to the budget and explain to the client why a fee modification is necessary.”

  • Communicate with your client. “Don’t delay. If you need to change the fee arrangement, raise it as soon as possible with your client,” advises Lehner. “If you wait too long, it can interfere with the attorney-client relationship and cause resentment down the road,” he concludes.

Keywords: litigation, ethics, fee agreements

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