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WHAT IS A “CONTINGENCY FEE” ARRANGEMENT WITH A LAWYER AND HOW DOES IT WORK?

| Feb 28, 2020 | Articles

“No fee unless we recover for you” … “The no fee promise” … “No charge unless we win!” …

TV and radio are full of lawyer advertisements who claim they will handle your case at “no cost” to you, the client.  If the case is won, the lawyer reimburses the firm for the costs paid out of the recovery, and then shares the result with the client, usually on a one-third/two-thirds bases although sometimes the lawyer will charge a larger percentage, such as forty percent.

California Business & Professions Code section 6147 authorizes such financial arrangements between lawyers and clients.  It provides:

(a) An attorney who contracts to represent a client on a contingency fee basis shall, at the time the contract is entered into, provide a duplicate copy of the contract, signed by both the attorney and the client, or the client’s guardian or representative, to the plaintiff, or to the client’s guardian or representative. The contract shall be in writing and shall include, but is not limited to, all of the following:

(1) A statement of the contingency fee rate that the client and attorney have agreed upon.

(2) A statement as to how disbursements and costs incurred in connection with the prosecution or settlement of the claim will affect the contingency fee and the client’s recovery.

(3) A statement as to what extent, if any, the client could be required to pay any compensation to the attorney for related matters that arise out of their relationship not covered by their contingency fee contract. This may include any amounts collected for the plaintiff by the attorney.

(4) Unless the claim is subject to the provisions of Section 6146 [relating to medical negligence claims], a statement that the fee is not set by law but is negotiable between attorney and client.

(5) If the claim is subject to the provisions of Section 6146, a statement that the rates set forth in that section are the maximum limits for the contingency fee agreement, and that the attorney and client may negotiate a lower rate.

(b) Failure to comply with any provision of this section renders the agreement voidable at the option of the plaintiff, and the attorney shall thereupon be entitled to collect a reasonable fee.

(c) This section shall not apply to contingency fee contracts for the recovery of workers’ compensation benefits.

Under Business and Professions Code section 6146, “medical negligence” claims:

(a) An attorney shall not contract for or collect a contingency fee for representing any person seeking damages in connection with an action for injury or damage against a health care provider based upon such person’s alleged professional negligence in excess of the following limits:

(1) Forty percent of the first fifty thousand dollars ($50,000) recovered.

(2) Thirty-three and one-third percent of the next fifty thousand dollars ($50,000) recovered.

(3) Twenty-five percent of the next five hundred thousand dollars ($500,000) recovered.

(4)  Fifteen percent of any amount on which the recovery exceeds six hundred thousand dollars ($600,000).

It is the lawyer’s and client’s choice as the fee arrangement to be entered into between them. Typically, contingency fee arrangements are used in personal injury cases, including medical negligence, but they are also used in other types of litigation to make a case “affordable” for the client.  However, the lawyer entering into these arrangements must be willing to “take the risk” of losing with the client, If the case does not have merit, the lawyer loses whatever he invests in the case – both time and money.

But where did these arrangements come from? And how did they develop into the wide-spread use that we see and hear constantly?  See for history, Peter Karsten, Enabling the Poor to Have Their Day in Court: The Sanctioning of Contingency Free Contracts, a History to 1940, 47 DePaul L. Rev. 231, (1998) (provides the history set forth below).[1]

The typical legal contingency fee agreement is a contract in which the fees are payable only if there is a favorable result.  Legal contingency fee agreements are typically calculated as a percentage of the client’s recovery through a settlement or trial verdict, and if there is no settlement or verdict, the attorney and client recovery.

These agreements trace their roots to thirteenth century England where the practice of third parties “financing” litigation, called champerty, was deemed illegal.  The prohibition originally sought to stop wealthy individuals from financing litigation against competitors in an effort to take their land and property to increase their own wealth through a proxy.

These prohibitions, however, had the ultimate effect of limiting the lower classes access to the courts.  Indeed, without the means to pay an attorney the poor were without a means to effectively enforce their rights. Even today, English courts manage lawyer funded litigation differently than the U.S.  English solicitors typically enter what known as a “conditional fee agreement.”  If the case is won, the solicitor may recover a nominal hourly fee, plus a “success fee” that is no greater than 100 percent of the nominal fee.

From the beginning, attitudes in America were quite different.  Indeed, America’s founders had the radical notion that the criminally accused had a right to counsel, which was preserved in the Constitution’s Sixth Amendment. England didn’t adopt a similar right to counsel for another 50 years. The belief in a right to an attorney and access to courts filtered into the civil justice system as well.  This notion pushed American courts to reject England’s “loser pays” system removing the Sword of Damocles over a losing party  potentially having to pay the winner’s attorney’s fees. And gradually, the same sentiment advanced the use and acceptance of contingency agreements.

In 1813, Pennsylvania Justice Hugh Henry Brackenridge wrote that “parties not monied” sometimes “stipulate for something out of what was recoverable,” with attorneys “taking what are called contingency fees.”  Though the practice was still not accepted by all courts and attorneys of the day, notable attorneys such as Henry Clay and Daniel Webster worked under contingency agreements.  Reported cases from across the country in the early 1800s illustrate America’s growing acceptance of contingency agreements, though they were still tinged with some skepticism.  For example, in 1823, arguing before the Kentucky Supreme Court, an attorney in Rust v. LaRue, noted “[a client] may not have anything else to give, and without the aid of the matter in this contest, he can never sue for his right, not having otherwise the means to employ counsel…”

By the mid-1800s, these agreements continued to gain approval.  In Lytle v. State, Arkansas Justice Scott in 1857 expressed the general sentiment spreading across the county that “rights are nothing without the means of enforcing them.”  And, around the same time, state legislatures were redefining (limiting?) the broad scope of champerty to provide for contingency fee agreements.  By 1875, U.S. Supreme Court Justice Morrison Waite in Write v. Tebbits noted the wide-spread use and acceptance stating that contingency fee agreements ‘legitimate and honorable.’

While these arrangements are typical, an attorney is not permitted to “enter into an agreement for, charge, or collect an illegal or unconscionable fee.”  (Rules Prof. Conduct, rule 4-200(A).) Whether a fee is unconscionable is determined by considering eleven factors:

  1. The amount of the fee in proportion to the value of the services performed.
  2. The relative sophistication of the member and the client.
  3. The novelty and difficulty of the questions involved and the skill requisite to perform the legal service properly.
  4. The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the member.
  5. The amount involved and the results obtained.
  6. The time limitations imposed by the client or by the circumstances.
  7. The nature and length of the professional relationship with the client.
  8. The experience, reputation, and ability of the member or members performing the services.
  9. Whether the fee is fixed or contingent.
  10. The time and labor required.
  11. The informed consent of the client to the fee.

Cal. Rules Prof. Conduct, Rule 4-200(B).

Unconscionability is assessed “at the time the agreement is entered into except where the parties contemplate that the fee will be affected by later events.” (Ibid.) The party asserting unconscionability has the burden to establish that condition. Woodside Homes of Cal., Inc. v. Superior Court (2003) 107 Cal.App.4th 723, 728. The simple fact that a contingency fee payable by a client ultimately exceeds the amount the attorney would have billed on an hourly basis does not, in and of itself, render a fee agreement unconscionable. Cotchett, Pitre & McCarthy v. Universal Paragon Corp. (2010) 187 Cal.App.4th 1405, 1423.[2]

[1] I found the reference to this article on the following website and thank that firm for some of what is published here.  https://www.holcombdunbar.com/origins-legal-contingency-fee-agreements/

[2] Link