The contingency-fee contract has been a staple of plaintiff-side practice for over a century. It provides an avenue for individuals who are otherwise unable to afford a lawyer the opportunity to have their claims pursued without the burden of paying fees unless and until the matter is resolved in their favor. And the contingency fee continues expanding beyond the personal injury world and into commercial disputes and other kinds of civil litigation, particularly as the disdain for the billable hour continues increasing.
Contingency-fee lawyers typically earn a percentage of the client’s recovery, sometimes depending on things like the stage of the litigation when the resolution occurs, e.g., 30% before suit is filed, 35% through verdict, etc. As explained by the Texas Supreme Court:
The contingent fee offers “the potential of a greater fee than might be earned under an hourly billing method” in order to compensate the attorney for the risk that he or she will receive “no fee whatsoever if the case is lost.” In exchange, the client is largely protected from incurring a net financial loss in connection with the representation.
Hoover Slavacek, LLP v. Walton, 206 S.W.3d 557, 561 (Tex. 2006) (citations omitted).
This “pay later” arrangement is not risk free to lawyers, and one of the more damaging risks is that a client terminates the lawyer’s services before a favorable resolution triggers payment of the contingency fee and reimbursement of costs covered or advanced by the lawyer. To help offset these risks, lawyers commonly include a provision in the contingency-fee agreement (i.e. an assignment or contractual lien) that preserves the lawyer’s fee and costs even if the client terminates the relationship before there is a resolution.
This article highlights some of the terminated lawyer’s options, the procedure available to the lawyer to enforce her rights against her former client, and the interplay with the Texas Disciplinary Rules of Professional Conduct and relevant ethics opinions.
Current Remedies in the Event of Termination before Resolution
Should a client exercise his right to terminate the lawyer’s services in a contingency fee matter, the lawyer is not without remedy. The Texas Supreme Court has long recognized the terminated lawyer’s right to “seek compensation in quantum meruit or in a suit to enforce the contract by collecting the fee from any damages the client subsequently recovers.” Hoover, 206 S.W.3d at 561 (citation omitted). Whether contract damages, quantum meruit, or both are available depends on whether the client terminated the lawyer’s services for good cause or without good cause.
Both contract damages (i.e. the contingency fee) and quantum meruit are available to the lawyer fired without good cause, and he may collect his contingency fee from any damages the client recovers (i.e. if and to the extent the client recovers). Hoover, 206 S.W.3d at 562 (citation omitted). However, the attorney fired for good cause may only recover in quantum meruit for the value of the services he’s already rendered.
Procedure to Seek the Remedies
Lawyers terminated prior to the end of the contingency fee matter may pursue their remedies by intervening in the client’s pending litigation. This ensures that the lawyer has a seat at the table to protect her right to her fee or to her equitable quantum meruit claim. The lawyer’s intervention is similar to interventions filed by insurance carriers to secure reimbursement for benefits paid out as a result of the underlying injuries or events.
Alternatively, the lawyer may choose to wait until after the client’s case is resolved and file a lawsuit when the client fails to pay the lawyer’s fee. This wait-and-see approach creates some burdens though, including the fact that the lawyer will have to closely monitor the litigation even though she’s no longer involved in it.
Restrictions on the Scope of the Remedies
The Texas Disciplinary Rules of Professional Conduct (TDRPC”), the Professional Ethics Committee, and the Texas Supreme Court have imposed some limitations on the scope of the remedies.
Contract damages and quantum meruit are both subject to TDRPC 1.04’s rule against charging or collecting an unconscionable fee, and the fee agreement itself may also be compared to public policy and evaluated for unconscionability like any other contract. See Hoover, 206 S.W.3d at 562 (citation omitted). Although each fee agreement is judged on its own terms and the surrounding circumstances, generally, a fee agreement that grossly favors the lawyer (“heads lawyer wins, tails client loses”), that provides a fee greater than the client’s recovery, or that burdens the client’s right to a lawyer of her choice may be found unenforceable as unconscionable and/or against public policy. See Hoover, 206 S.W.3d at 562-65.
TDRPC 1.08 also impacts the remedies by prohibiting lawyers from obtaining a proprietary interest in the cause of action or subject matter of the litigation, except for 1) a lien granted by law to secure the lawyer’s fee or expenses; or 2) a contingency fee that complies with TDRPC 1.04. An improper proprietary interest arises when the fee agreement gives the lawyer the right to a percentage of the claim without regard to the actual results of the case. See Hoover, 206 S.W.3d at 563-64. For example, in Hoover, the improper proprietary interest arose because the fee agreement authorized a percentage fee based on the value of the claim at the time of termination, not at the time of final resolution.
In Opinion 610, the Texas Professional Ethics Committee considered whether a lawyer’s security interest in the client’s cause of action that was the subject matter of the litigation to secure payment of the contingency fee was an improper proprietary interest. The Opinion reasoned that the security interest at issue was different than the contingency fee interest allowed by Rule 1.08(h). Additionally, the Opinion distinguished the security interest from a “lien granted by law” which includes the lawyer’s common law right to retain a client’s papers, property, and money to ensure the fee is paid (subject to the lawyer’s obligation under TDRPC 1.16(d) to not prejudice a client’s case by retaining the client’s material). The Committee determined that because the lien was not something permitted by 1.08(h), it was an improper proprietary interest. Notably, this Opinion faced some criticism[1] and at least one court determined that Opinion 610 conflicted with Texas Ethics Opinion 449 which did allow such a lien to secure a lawyer’s fee if taken in good faith. See, Mount Spelman & Fingerman, P.C. v. GeoTag, Inc., 70 F.Supp.3d 782, 785-787 (E.D.Tex. 2014).
Rule 1.08(a) was recently amended to specifically include transactions in which lawyers “acquire” an “ownership, possessory, security or other pecuniary interest adverse to a client[.]” Now, business transactions with clients as well as situations where the lawyer acquires an interest adverse to the client must comply with a three point checklist as set out in the rule. (TLI discussed these requirements in its September 26, 2024 Top Tip). While contingency-fee agreements would seem to be transactions in which the lawyer is acquiring an interest adverse to a client, Comment 1 to Rule 1.08 specifically excludes “ordinary fee agreements between a client and lawyer” from Rule 1.08(a). What would be included, however, are fee agreements where the lawyer accepts an interest in the client’s business as payment for all or part of a fee, or when the lawyer makes material changes to an existing fee arrangement during the course of a representation. See, Cmt. 1 to Rule 1.08.
Considering these authorities, a lawyer with a Rule 1.04-compliant contingency fee contract should be entitled to contract damages and/or quantum meruit and can “secure” payment by retaining the terminating client’s papers, money, and property but only if the retention does not prejudice the client’s case. However, given the uncertainty about whether Opinion 610 or Opinion 449 controls, and as we stated in a May 2015 article, lawyers should exercise caution when deciding whether to include a provision in their fee agreement that grants them a security interest in or an assignment of a client’s cause of action to secure payment of a contingent fee.
Practical Non-Litigation Option for the Terminated Lawyer
Assuming the terminated lawyer has a proper contingency-fee agreement with the terminating client, the lawyer has a non-litigation option to recover payment of the fee. This non-litigation option may be preferable because if a lawyer sues or intervenes for his or her portion of the fee, the lawyer could find themselves facing a malpractice claim by the client. As a friendly reminder, malpractice claims are compulsory counterclaims in litigation between a lawyer and a client. Additionally, clients use malpractice and breach of fiduciary duty claims to avoid paying the fee that would otherwise be owed.
The contingency-fee agreement gives the lawyer fired without cause a right to her fee percentage when the client’s matter is favorably resolved, even if resolved by a different lawyer. This exposes the client to substantially diminished recovery should he have to pay contingency fees to two different lawyers. But this also gives the terminated lawyer a negotiating point between her, the terminating client, and the new lawyer to avoid litigation in exchange for payment of a reduced fee, or some similar arrangement. Negotiating this kind of resolution avoids the risk and expense of litigation and also provides an avenue for the client to retain a larger portion of his recovery.
TLI traditionally discourages suing clients over fees but also acknowledges the extreme expense and effort a contingency-fee lawyer may put forward for a client and the damaging effect of a termination prior to resolution. TLI has tools and resources available to help guide a terminated lawyer through her options and strongly encourages the terminated lawyer to seek TLI’s assistance and a resolution of the issues through negotiations without resorting to litigation. TLI insureds can contact rskmgmt@tlie.org to discuss best practices and risk management issues related to contingency fee arrangements.
[1] One Lawyer’s Perspective: A Second Look at Ethics Opinion 610, by Frederick C. Moss (Texas Bar Journal, vol. 75, no. 9. (Oct. 2012)