Discussing fees generates more awkwardness and turmoil than nearly all other lawyer-client interactions. And yet, “[l]awyers have a duty, at the outset of the representation, to inform a client of the basis or rate of the fee and the contract’s implications for the client.” Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 565 (Tex. 2006). Handled properly, the lawyer and client have the foundation for a strong and mutually beneficial agreement. But dangerous rapids lurk around every bend.
This article helps Texas lawyers identify the banks of the Rubicon of unconscionable fees so that Texas lawyers can safely navigate downstream in their client relationships.
What is an Unconscionable Fee?
A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee. Texas Disciplinary Rule of Professional Conduct 1.04(a). As clear and shifting as the muddy current, Rule 1.04(a) also tells us that: “A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable.” Id. When evaluating reasonableness, courts may consider the list of non-exclusive factors from Rule 1.04(b). See Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812 (Tex. 1997). No one factor is determinative, but the factfinder may consider some or all of the following:
- Time and labor required, novelty and difficulty of the questions, and skill required;
- Likelihood of preclusion from other employment;
- Fee customarily charged in the locality for similar services;
- Amount involved and results obtained;
- Time limitations imposed;
- Nature and length of the professional relationship;
- Experience, reputation, and ability of the lawyer; and
- Whether the fee is fixed or contingent.
A fact finder will review these factors to determine whether a fee is reasonable. If the fee is unreasonable, then the question becomes whether a competent lawyer could not form a reasonable belief that the fee is reasonable such that fee is unconscionable.
The facts that help the “competent lawyer” form a “reasonable belief” of “reasonableness” of the fee are case specific, but TDRPC 1.04 and its comments, along with interpretative caselaw, provide some navigation assistance towards the meaning of the words defining an unconscionable fee.
General Guidance
The Texas Disciplinary Rules of Professional Conduct (TDRPC) and the Texas Supreme Court provide some general guidance worthy of mention before the article dives deeper into the factors listed in Rule 1.04(b) and Texas case law.
Although comment 7 to Rule 1.04 acknowledges the difficulty in determining whether a fee is unconscionable, comment 8 to the rule sets out two factors which might indicate that the fee is unconscionable. The first is overreaching by the lawyer, particularly when the client is “unusually susceptible” to overreach. Compared to a lawyer-client relationship with a sophisticated corporate client in an arms-length transaction, where the risk is lower, a lawyer-client relationship with an individual client who has little-to-no experience with lawyers and is in a back-against-the-wall situation carries a higher risk of overreach and will be heavily scrutinized.
The second is a failure by the lawyer to give at the outset a clear and accurate explanation of how a fee is to be calculated. Comment 8 recognizes that unclear terms run a higher risk of creating an unconscionable fee.
Finally, former Justice Gonzales of the Texas Supreme Court reminds in his concurrence in Lopez v. Munoz, Hockema & Reed, L.L.P. a fee is not reasonable simply because the contract calls for the fee—”it is not enough to simply say that a contract is a contract. There are ethical considerations overlaying the contractual relationship. Lawyers should be just as mindful of these ethical obligations as their contractual obligations.” 22 S.W.3d 857, 868 (Tex. 2000) (Gonzales, J., concurring).
The Navigation Map – How Unconscionability is Determined
Texas courts judge unconscionability in two parts, with the guidance of the factors from Rule 1.04(b).
Whether a fee is unconscionable involves both questions of fact and questions of law. Celmer v. McGarry, 412 S.W.3d 691, 705 (Tex. App.—Dallas 2013, pet. denied).
- Factual question: Whether a particular fee amount is unconscionable under the circumstances of the representation, e.g., does the fee comply with the Rule 1.04(b) factors? This is typically for the jury to decide.
- Legal question: Whether a fee agreement is unconscionable at the time it’s formed as a matter of public policy, e.g., was there unequal bargaining power, deception, surprise? The focus here is on the fairness of the resulting agreement. This is for the judge.
In other words, a jury may find a fee to not be unconscionable given the facts and circumstances of the work performed, but the court may later decide that the agreement is unconscionable as a matter of public policy due to circumstances surrounding the formation of the fee agreement.
In the disciplinary context, the consideration narrows to looking only at the circumstances at the time of formation. Comment 7 to Rule 1.04 acknowledges that the fee agreement is formed at “a time when many uncertainties and contingencies exist,” as opposed to after-the-fact time when the unconscionability claim is raised. TDRPC 1.04, comment 7. For this reason, lawyers are given the benefit of any such uncertainties for disciplinary purposes only. Except in very unusual situations, the circumstances at the time a fee arrangement is made should control in determining a question of unconscionability for disciplinary purposes.
When do Fees Cross the Rubicon?
Let’s look at actual cases where Texas courts and disciplinary authorities found fees unconscionable.
Example 1: The Benefits Billing Scheme
In Eureste v. Commission for Lawyer Discipline, 76 S.W.3d 184 (Tex. App.—Houston [14th Dist.] 2002, no pet.), the lawyer represented workers’ compensation claimants. Rather than billing for actual time worked, he routinely charged each client 2.5 hours per month for “file review” at $150 per hour—exactly $375 per month, which was at least 25% of their monthly income benefit and the maximum allowed under the worker’s compensation guidelines.
The lawyer crossed the Rubicon several ways: (1) he billed the same amount to each client every month regardless of how much work he actually did on each file; (2) he billed legal assistant time at the attorney rate; (3) he submitted other attorneys’ time as his own; (4) he billed for legal services that were not rendered; and (5) he billed in excess of twenty-four hours per day of his own time almost daily.
The Houston Court of Appeals affirmed findings that these fees were unconscionable (and illegal) because of the fees did not represent the time actually worked or the person who performed the work, and the court noted that the clients were particularly susceptible to overreach because many were uneducated, did not speak English, could not read and write, and were “not sophisticated.”
Interestingly, the court also rejected the lawyer’s arguments that, because the fees tracked the worker’s compensation rules, they were not unconscionable. The court found this argument to lack merit because even though tracking the rules created a rebuttable presumption of reasonableness, the lawyer had the ability to properly track and allocate the time spent by each person who worked on the file, which rebutted the presumption.
The lesson: Billing must be based on actual time expended and work performed. An attorney cannot bill for work by non-lawyers at lawyer rates. Cookie-cutter billing that prioritizes maximizing fees over accurately reflecting services crosses the Rubicon.
Example 2: The $56,000 DWI Fee
A commercial pilot facing a first-offense DWI hired a criminal defense lawyer, who charged the client at total of $56,000 in fees—$50,000 flat fee for the criminal matter, $5,000 flat fee for the administrative license revocation proceeding, and an additional $1,000. See Parsons v. Trichter & LeGrand, P.C., No. 14-21-00284-CV, 2022 WL 17099869 (Tex. App.—Houston [1st Dist.] Nov. 22, 2022, no pet.).
The client feared not only the state-level criminal and civil penalties, but he also believed conviction would negatively impact his pilot’s license from the FAA and therefore negatively affect his ability to earn a living.
After the lawyer failed to achieve positive results in a reasonable time, and after the client learned the fee was eight times more than the average fee in the area, the client fired the lawyer and hired another, who charged approximately 80% less than the original fee. With the new, less expensive lawyer, the pilot received deferred adjudication and also learned from the FAA he was not at risk of losing his license even if convicted for a first offense.
In the ensuing litigation and appeal, the appellate court reversed the trial court’s summary judgment in favor of the lawyer because the evidence raised fact issues about whether the fee charged was unconscionable given the facts and circumstances.
The lesson: Even highly skilled and experienced lawyers’ fees must bear some reasonable relationship to what competent lawyers customarily charge for similar services in the lawyer’s community, the difficulty of the questions involved, the time and labor required, and the results obtained. Taking advantage of a client’s fear or urgency to charge multiples of the going rate crosses the Rubicon into unconscionability.
Example 3: The “Present Value” Termination Fee
The client hired the law firm on a 28.66% contingent fee basis for an oil and gas royalty dispute. The fee agreement contained a termination clause stating that if the client fired the firm prior to the conclusion of the legal matter, he would “immediately pay the Firm the then present value of the Contingent Fee.” Hoover Slovacek LLP v. Walton, 206 S.W.3d 557, 559 (Tex. 2006). In other words, the client would still owe the fee if the client terminated the representation without regard to the amount the client ultimately recovered, if at all.
The client discharged the firm after becoming dissatisfied with their representation. At the time of termination, the defendant had made a $6 million settlement offer. The firm demanded $1.7 million (28.66% of $6 million), even though the client’s new lawyers ultimately settled the case for only $900,000.
The Texas Supreme Court considered whether this termination provision created an unconscionable fee agreement as a matter of law. The Court answered “yes,” because the agreement:
- Required immediate payment without regard to when or whether the client ultimately recovered.
- Could result in fees exceeding the client’s actual recovery.
- Gave the lawyer a proprietary interest in the claim.
- Shifted virtually all risk to the client.
- Created a perverse incentive for the lawyer to get fired after establishing case value.
- Failed to explain how “present value” would be measured.
The Court severed the unconscionable provision from the fee agreement, but said the firm was entitled to collect its fee from the $900,000 recovered assuming the evidence was legally and factually sufficient to show that the client failed to discharge the firm without good cause.
The lesson: A lawyer cannot contract around the basic protections clients have when discharging counsel. “Public policy strongly favors a client’s freedom to employ a lawyer of his choosing and, except in some instances where counsel is appointed, to discharge the lawyer during the representation for any reason or no reason at all.” Hoover, 206 S.W.3d at 562. Termination clauses that penalize clients for exercising their right to change lawyers cross the Rubicon into unconscionability and are against public policy. Additionally, contract provisions that result in “heads lawyer wins, tails client loses” (id. at 564) are unconscionable.
Example 4: The $4.8 Million Divorce “Gift”
The client hired the lawyer to represent her in a divorce and on an hourly rate fee agreement ($225-$300 per hour). The parties reached a settlement in which the client received property worth approximately $50 million. When the case settled, the lawyer represented to the divorce court his fee was $300,000 based on his hourly rates. Later, the client delivered 100,000 shares of stock worth $4.8 million to the lawyer, which he recorded as a “gift.” Goldstein v. Commission for Lawyer Discipline, 109 S.W.3d 810, 811 (Tex. App.—Dallas 2003, pet. denied).
The client later sued, alleging the stock was actually a contingency fee that violated by the TDRPC because it was not in writing and was unconscionable. The trial court directed a verdict that the $4.8 million payment was indeed an unconscionable contingency fee that was not in writing.
The Commission for Lawyer Discipline then brought a disciplinary proceeding alleging the lawyer charged an unconscionable fee and that, under Rule 1.04 comment 9, the contingency fee was not warranted in this divorce case.
The court in the disciplinary proceeding found Goldstein’s use of a contingency fee in a divorce case violated Rule 1.04(a). The court noted that “contingent and percentage fees in family law matters may tend to promote divorce” and are “rarely justified.” Id. at 812. The court of appeals affirmed the trial court’s determination that the attorney should be disbarred based on this and other ethical violations. Id.
The lesson: Contingency fees are required to be in writing. Further, in divorce cases, they cross the Rubicon into unconscionability and are rarely warranted.
Example 5: The Pro Bono Bait-and-Switch
A lawyer agreed to represent a client through the Houston Volunteer Lawyers Program on a pro bono basis, with any awarded attorney’s fees to be donated to HVLP. Over two years into the representation, on the eve of trial, the lawyer presented the client with a new fee-based contract. Then, after the jury returned a verdict in the client’s favor, the lawyer negotiated a settlement and took 40% as his fee on both the monetary and non-monetary portions of the settlement. McCleery v. Commission for Lawyer Discipline, 227 S.W.3d 99 (Tex. App.—Houston [1st Dist.] 2006, pet. denied).
The client was elderly, infirm, indigent, had only a grade school education, and had traveled from Louisiana for trial. The lawyer failed to tell the client he could have the agreement reviewed by another lawyer. The client settled for $50,000, the lawyer took $20,000 as his fee and did not donate it to HVLP.
The trial court found the fee unconscionable, noting that the new agreement changed the relationship from pro bono to fee-based for the lawyer’s sole benefit and that the client would not and did not receive any additional benefit from the new arrangement (almost all the work had already been done). Although debt forgiveness was relief sought in the case, the lawyer did not explain to the client that his fee would also be calculated on any non-cash award received.
The lesson: The timing and circumstances of fee agreements matter. Again, [l]awyers have a duty, at the outset of the representation, to inform a client of the basis or rate of the fee and the contract’s implications for the client.” Hoover, 206 S.W.3d at 565. TDRPC 1.04(c) also requires that the lawyer communicate the basis or rate of the fee to the client, preferably in writing, before or within a reasonable time after commencing the representation when the lawyer has not regularly represented the client. Presenting a new fee agreement at the 11th hour without sufficiently explaining the terms to a vulnerable client who has no real bargaining power, and who is not receiving any extra benefit for agreeing to the change, is textbook overreaching and crosses the Rubicon into unconscionability.
Example 6: The Secret Second Contingency Fee
A lawyer representing two clients on a contingency basis brought on an additional lawyer under a consent-to-associate signed by the clients. The associating lawyer then had the clients sign new fee agreements that provided for an additional contingency fee plus additional hourly-rate fees. See Curtis v. Commission for Lawyer Discipline, 20 S.W.3d 227 (Tex. App.—Houston [14th Dist.] 2000, no pet.). The original attorney did not know about these new agreements.
The clients eventually chose to continue only with the original attorney and demanded that the associating lawyer send their files to the original attorney. In response, the associating attorney demanded attorney’s fees based on the secret second fee agreements. The original attorney filed a grievance, and the Commission for Lawyer Discipline filed a disciplinary action which led to disciplinary sanctions.
When combined with the original agreements, the effective contingency fees ranged from 60% to 100% of any recovery, plus additional hourly rates of $150-$200. For example, one client faced attorney fees of 70% if her case settled before jury selection, 85% if it went to trial, and 100% if appealed, plus the hourly rate.
The court had “no difficulty” concluding these combined fees were unconscionable, noting they were “far in excess of what is reasonable and customary.” Id. at 233.
The lesson: A lawyer should be mindful that courts “scrutinize with jealousy” all modifications to a client fee agreement during the representation. Archer v. Griffith, 390 S.W.2d 735, 739 (Tex. 1964). “There is a presumption of unfairness or invalidity attaching to the contract, and the burden of showing its fairness and reasonableness is on the attorney.” Id. See also Texas Professional Ethics Committee Opinion 679 (September 2018) (renegotiating fee during representation) and ABA Formal Opinion 11-458 (2011) (“Changing Fee Arrangements During Representation”). Even if multiple lawyers are working on a case, the total fee to the client must comply with TDRPC 1.04(a) and be reasonable, or else the fee crosses the Rubicon into unconscionability. And, a lawyer who knows that the client may face double contingent fee liability but fails to explain that information to a client may be in violation of TDRPC 1.03. See also Texas Professional Ethics Committee Opinion 700 (February 2024).
Example 7: The Settled Case Contingency Fee
The clients hired the lawyer to review an already-negotiated settlement with their employer and to pursue separate third-party claims, all arising from an on-the-job injury. The lawyer charged a 35% contingent fee on everything, including the settlement that was already negotiated and accepted before the attorney was retained. Izen v. Laine, 614 S.W.3d 775 (Tex. App.—Houston [14th Dist.] 2020, no pet.) (op. on reh’g). The attorney claimed the fee was justified because it would be used to finance other litigation against third parties.
When the attorney sued the clients to enforce the fee, they counter-claimed that the contract was unconscionable. The appellate court confirmed that fee agreement was unconscionable as a matter of law because “there was no risk involved in [settlement] and little if any reasonably compensable work to be done by [the lawyer] on that settlement, as the settlement was already negotiated.” Id. at 786.
The lesson: Contingency fees are designed to compensate lawyers for risk. When there’s no risk and little if any reasonably compensable work to be done—i.e., the settlement is already negotiated—charging a contingency fee percentage crosses the Rubicon into unconscionability. It is also improper to disguise the fee as the payment of expenses incurred in a separate litigation. If you’re taking over a case where the heavy lifting is done, adjust your fee accordingly.
Example 8: Guardian Ad Litem Fees
Guardian ad litem fees receive heightened scrutiny because they are paid from the ward’s recovery, and the attorney is appointed by the court. In Goodyear Dunlop Tires North America, Ltd. v. Gamez, 151 S.W.3d 574 (Tex. App.—San Antonio 2004, no pet.), the appellate court found several ad litem lawyers’ billing practices unconscionable:
- Billing for sleeping while out of town;
- Billing more than 24 hours in a single day;
- Wildly inconsistent billing (0.10 to 4.00 hours to review a single deposition notice);
- Reviewing every document in a multi-plaintiff case regardless of relevance to the ad litem’s specific minor;
- Continuing to bill for trial preparation after the settlement was reached; and
- Billing for services in pursuit of their own interests, such as drafting their fee statements, preparing for the fee hearing and time spent defending their fees at the hearing.
The appellate court held “that billing time for sleeping and billing in excess of 24 hours for one day is per se unreasonable, as well as unconscionable.” It also found that hourly rates of $400-$500 for the ad litem were excessive when the attorneys’ customary rates were $150-$225, even accounting for the complexity of ad litem work.
The lesson: A lawyer serving as a guardian ad litem, must have scrupulous billing. Ad litems should only bill for work directly related to their ward. All attorneys – not just ad litems – should bill only for actual time spent in furtherance of the client’s legal matter, and at reasonable rates. Otherwise, the lawyer’s fees will cross the Rubicon into unconscionability.
Example 9: “Perceived Value” Billing
The lawyer’s duty to inform the client of the basis for his fees arises at the outset of the representation and includes the obligation to inform the client of all material facts along with a clear fee agreement.
In Spradley v. Orsak, this duty was put to the test. No. 01-19-186-CV, 2020 Tex. App. LEXIS 9849, (Tex. App.—Houston [14th Dist.] Dec. 15, 2020, no pet.). At the outset of the representation, the attorney informed the client that he would be billed an hourly rate and that the matter should completed for approximately $15,000. Id. However, the lawyer ended up billing the client nearly six times that amount. See id. at *3-4. During the ensuing fee dispute, the client learned that the lawyer did not actually bill by the hour for the actual time worked but instead billed for the “perceived value of the task,” resulting in a more substantial charge than had the agreed-upon hourly rate been applied the actual amount of time worked. See id. at *27, 30-31. The lawyer also admitted that most tasks took significantly less time than claimed on the invoice. Id. at *27.
The client alleged that the lawyer breached his fiduciary duty by misrepresenting his billing practices and benefiting himself at the client’s expense, an argument that the court of appeals ultimately said had support in the record. Id. at *31. The court of appeals also acknowledged that because the client sought fee forfeiture for the lawyer’s breach, the client was not required to prove causation or damages, which means that, to obtain fee forfeiture, the client need only prove that the lawyer breached his fiduciary duty.
The lesson: Lawyers must make their billing practices clear from the beginning and must abide by them throughout the representation, unless the parties agree to a change in terms. Telling the client you are going to bill hourly but then billing for “perceived value” violates this obligation and is a breach of fiduciary duty.
Example 10: Lawyer Cannot Enforce $70,000 Fee when No Work is Performed
In Davis Law Firm v. Bates, the client met with a staff employee of the law firm and signed a contingency fee for representation in the client’s personal injury matter. No. 13-13-209-CV, 2014 Tex. App. LEXIS 1582 (Tex. App.—Corpus Christi Feb. 13, 2014, no pet.). The contract provided for a 35% fee of any amount recovered before suit was filed and also prohibited the client from settling the case without the lawyers’ consent. Less than 24 hours later, the client changed her mind and decided to retain a different attorney. Her new counsel sent a letter to the firm advising the client was revoking the fee agreement.
The client ultimately reached a settlement, and the terminated law firm sought payment of its fee in the amount of $70,000. The client fought back, arguing that the agreement violated TDRPC 1.02(a)(2), which requires the attorney to abide by a client’s decision regarding whether to accept a settlement offer. The client also argued that the firm’s attempt to collect a $70,000 fee for no useful services to her was an attempt to collect an unconscionable fee. The court of appeals agreed on both fronts. Id. at *9-13. The provision which required the client to obtain the firm’s consent to settle violated rule 1.02(a)(2) and was unenforceable as against public policy. Davis, 2014 Tex. App. LEXIS 1582, *11. Additionally, the client properly terminated the agreement less than twenty-four hours after she signed the agreement and before she met or consulted with any attorney at the Davis firm. The firm failed to identify any legal work that it performed on the client’s behalf. Charging a $70,000 fee for no legal services performed is an unconscionable fee. Id. at *11-12.
The lesson: “An agreement concerning the scope of representation must accord with the Disciplinary Rules of Professional Conduct and other law. Thus, the client may not be asked . . . to surrender . . . the right to settle or continue litigation that the lawyer might wish to handle differently.” TDRPC 1.02, cmt. 5. Further, trying to charge or collect a fee from a client when the lawyer never met with the client and performed no work is unconscionable.
Conclusion
What is an unconscionable fee is fact-dependent, but these cases show where the banks are:
- the terms of the fee must be communicated to the client at the outset of the representation in clear terms;
- fees must be based on actual time spent and actual work performed, not on the purported or perceived value of the services;
- don’t charge attorney rates for work by non-lawyers;
- don’t charge fees that greatly exceed the normal and customary amounts for your locale;
- don’t bill for time spent sleeping or that equal more than 24 hours in a day;
- contingency fees must be in writing;
- don’t charge contingency fees when no work was actually performed;
- don’t charge contingency fees in divorce cases;
- don’t charge a combined fee of more than 100% of the client’s recovery or a fee that exceeds the client’s recovery;
- don’t force a client to sign an 11th hour agreement that changes the terms without any benefit to the client;
- don’t seek a contingency fee for settlements your client negotiated before your representation began;
- don’t create a termination fee that prohibits a client’s freedom to choose her lawyer;
- don’t charge for time in furtherance of your own interests or adverse to the client; and
- don’t engage in similarly shady behavior that takes advantage of the client such as “heads lawyer wins, tails client loses” fee provisions.
TLI has resources available to help insureds navigate down the river. If you have questions about your fee agreements or other elements of your client engagement, please contact us at rskmgmt@tlie.org. We’ll be happy to help!