Mediation Message No. 40

FEE SHARING BY ATTORNEYS WITH CLIENTS IN EMPLOYMENT CASES

The propriety of attorneys sharing their court-awarded fees in employment cases with their clients is an appropriate subject for a mediation message because such fees are often a factor in the settlement of employment cases.

On its face, Rule of Professional Conduct 1-320(A), which states that “Neither a member nor a law firm shall directly or indirectly share legal fees with a person who is not a lawyer,” except in four situations that are not applicable to this analysis, appears to prohibit lawyers from giving any portion of their court awarded fees to their clients. McIntosh v. Mills (2004) 121 Cal.App. 4th 333 carves out a narrow exception to this rule.

Flannery v. Prentice (2001) 26 Cal.4th 572 holds that attorney’s fees awarded under Government Code section 12965 in FEHA cases, in the absence of an enforceable contract between the attorney and the client, belong to the attorney. (Id. at p. 577.) Flannery, however, does not stand for the converse that such fees can be shared when there is a contract, because it did not take 1-320(A) into account in resolving the problem. (Id. at pp. 587-588.) To some extent, however, McIntosh v. Mills has clarified the issue. In that matter, the appellate court held that the fee-sharing arrangement with a non-lawyer violated rule 1-320(A) but that, nonetheless, a client who was not in pari delicto with the attorney could share the proceeds. McIntosh (the client) was denied a right to the attorney’s fees awarded to Mills in two class actions because a second attorney (McIntosh’s agent), who had negotiated the agreement with Mills, was bound by the Rules of Professional Conduct. Moreover, McIntosh attempted to hide from the class defendants that he was being compensated for helping Mills in the litigation.

Attorneys, even when not attempting to share their statutory fees with clients, still face potential ethical issues in the receipt of such fees. In the Matter of Yagman (Review Dept. 1997) 3 Cal. State Bar Ct. Rptr. 788 holds that the combined contingency and court-awarded fees may be unconscionable, pursuant to Rule of Professional Conduct 4-200(A). (Id. at p. 799.) In Yagman, the attorney was disciplined, in part, for obtaining gross verdicts of $44,000 on behalf of several clients who had sued the City of Los Angeles for the deaths of loved ones who had been killed by the LAPD during the commission of a robbery. After taking out his 45% commission and unrecovered costs from the $44,000, the attorney gave each client $810. The attorney was also awarded $378,175 for his successful prosecution of the section 1983 civil rights matter. The total of his contingent and court-awarded fees was found to be disproportionate to what the clients had received and, therefore, unconscionable. (Id. at p. 400.)

I also believe that an attorney who has not contracted with his or her client to share statutory attorney’s fees must comply with Rule of Professional Conduct 3-300 when an offer has been made to settle the case, the offer does not specify that certain sums shall be given only to the attorney for his or her fee and the attorney believes that he or she may receive much more in court awarded fees if the case is tried and won than what he or she would receive as part of the agreed-upon contingency fee from the settlement.

In summary, rule 1-320(A) prohibits the sharing of statutory attorney’s fees with a client. In other words, an attorney who does so, even if the client is entitled to the fees, could be disciplined for that violation. Regardless, the client is entitled to share in the fees if the agreement to do so has not been negotiated by an attorney on his or her behalf and the client is not otherwise in pari delicto with the attorney. Next, where no fee sharing arrangement exists, attorneys should be careful that the combination of their contingent and statutory fees is not so excessive as to “shock the conscience.” Lastly, attorneys should consider obtaining a written waiver from the client, pursuant to rule 3-300, of the potential conflict that may exist where it appears that the attorney is motivated to advise the client to reject a settlement offer, which does not include separate fees above and beyond the attorney’s contingency arrangement with the client, and where the attorney believes that he or she may receive statutory fees if the case is tried and won.

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2 Rule of Professional Conduct 3-300 provides that “A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied: 1. The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and 2. The client is advised in writing that the client may seek the advice of an independent lawyer of the client’s choice and is given a reasonable opportunity to seek that advice; and 3. The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.”

Copyright, Michael D. Marcus, October 2007

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