Few subjects impact so many lawyers as broadly as their fees. Few subjects can cause as much trouble for lawyers as disputes over fees. Undoubtedly, fee disputes are often a facet of grievance complaints and malpractice suits, if not the precipitating force driving the disciplinary or malpractice matter.
The ethical propriety of fees charged or collected once again has been addressed in Texas Disciplinary Rule of Professional Conduct 1.04, as revised following the December, 1998 State Bar Referendum. In a further attempt to clarify what an ethical fee agreement will allow, the new rule introduces a mixture of substantive and non-substantive changes with which lawyers should become familiar.
The primary changes concern the prohibition of "illegal, unconscionable, or unauthorized" fees, certain divisions of fees, and issues regarding fees obtained through certain kinds of solicitation. Formerly, under DR 2-106 of the Texas Code of Professional Responsibility, attorneys were prohibited from entering into an agreement for, or charging or collecting "illegal or clearly excessive" fees. See, e.g., Ethics Opinion 446, May 1987.
Then Rule 1.04 came into being under the Texas Disciplinary Rules of Professional Conduct, and attorneys adjusted their fee-setting to a new standard, under which they were prohibited from entering into an arrangement for, or charging or collecting "illegal or unconscionable" fees. An "unconscionable" fee was defined as one about which "a competent lawyer could not form a reasonable belief that the fee is reasonable." See, e.g., Ethics Opinion 518, September 1996.
Now, Rule 1.04 (a) as revised states: "A lawyer shall not enter into an arrangement for, charge, seek to collect, or collect an illegal, unconscionable, or unauthorized fee." (New language underlined). Now, "A fee is illegal if prohibited by law," which language was not part of the former Rule. The unconscionable fee definition remains unaltered. The "unauthorized fee" does not refer to lack of authorization from the client, as one might first suppose. Instead, "[a] fee is unauthorized if prohibited by paragraph (f)" of Rule 1.04.
Unauthorized fees prohibited by Rule 1.04 (f) include four categories of fees:
(i) contingent fees for criminal defense cases;
(ii) divisions of fees between lawyers that violate Rule 1.04 (e);
(iii) fees resulting from violations of Rule 7.03 (a), (b), or (c) regarding improper solicitation or fee splitting with non-lawyers or improper referral fees;
(iv) fees from procuring or continuing employment in a matter (or ordering, encouraging, or knowingly permitting another to accept or continue employment in a matter), if in violation of 7.06(a), (b), or (c). Rule 7.06 has virtually been re-written and has narrowed the scope of impermissible fees, from those derived from violation of any Disciplinary Rule, to those based only on violations of Rules 7.01 - 7.05 and 8.04 (a)(2) or 8.04 (a)(9). Rules 7.01 - 7.05 have undergone some modification regarding distribution of information about legal services or solicition by law firms. Rule 8.04, concerning misconduct generally and 8.04 (a)(2) and (9) regarding criminal acts and barratry, has not been revised.
The standards set for fees that are ethical and fees that are enforceable in court are not identical. Still, one concept emerges: not only must a fee be fair in the ethical sense, the fee agreement needs to be sufficiently well-defined in documented form in order to enforce it. As stated in the current Disciplinary Rules, a written fee agreement is not absolutely required unless it is a contingent fee agreement. Rule 1.04 (d) requires that contingent fee agreements be in writing and they must state the method of determining the fee. In contrast, when using a non-contingent fee agreement and the lawyer has not regularly represented the client, Rule 1.04 (c) requires only that "the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation." [Emphasis added.] These provisions remain unchanged by the December 1998 referendum.
In comparison, the proof of a reasonable fee in court depends on doing more than simply meeting the ethical requirement of "communicating" the fee arrangements, in minimum compliance with the Disciplinary Rules. Since September 1, 1989, Section 82.065 (a) of the Government Code has required that a contingent fee contract not only must be written (as required in Rule 1.04(d)), it must be signed by both attorney and client. Further, to support a jury award of a contingent fee under Section 17.50(d) of the Deceptive Trade Practices Act requires proof of reasonable and necessary fees as a specific dollar amount, not merely proof of the contingent percentage as part of the judgment. Arthur Andersen & Co. v. Perry Equipment Corporation, 945 S.W.2d 812, 819 (Tex. 1997).
Our claims evaluation experience at TLIE suggests that when lawyers rely merely on unwritten communication of the fee terms and fail to have a written memorandum establishing a fee agreement, it becomes a recipe for a swearing match in a grievance proceeding or malpractice claim or both. Swearing matches create the kind of fact issues that make it difficult to obtain or sustain a summary judgment in defense of the lawyer. Additional troubles arise in defending grievance or malpractice claims, if the lawyer seeks to modify the fee arrangements during representation, or adds a mark-up or bonus to the basic fee terms (even if authorized in the original agreement). The approach that works best is to establish and collect a fee that goes further than meeting the minimum ethical requirements, since Disciplinary Rule 1.04 may be read by some as permitting unwritten fee agreements while merely suggesting that a written fee agreement is preferable.
To prevent grievances and malpractice claims, make it a habit to document clearly the terms of all fee agreements at the earliest opportunity, and keep accurate records in support of the fees and expenses whether or not the fee agreement is contingent.
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