Attorney's Fees

Concerns with fees

1) Thoughts on the regulation of fees: a) Regulation of fees is most desirable at the point the point of market failure, the point where the various fee structures create incentives for attorney misbehavior and cause the interests of the client and the lawyer to diverge. i) What are those points of incentive misalignment? What kind of misbehavior will they cause? ii) Is this where we actually see regulation? iii) Do the help solve these problems? Is the Rules' primary focus the fee's size misplaced? b) The Ethics Rules interfere with the market (of & for fee contracts) at a point where the parties have explicitly discussed the deal (contra conflicts, where the client won't always ask the right Qs) c) The Ethics Rules intervene primarily when there is a very large fee arrived at via the contingent fee or value billing. d) Complaints about contingent fees happen after the fact: a fee that seemed reasonable up front looks unreasonable in hindsight, in part because the contingent fee reflects a risk premium, which is easy to neglect after the case has proved to be a good bet i) Many jurisdictions disallow mixed-fee contracts (specifying the higher of an hourly rate or a percentage) b/c without a risk premium there is much less justification for the contingent fee e) Different fee structures different incentives attorney misbehavior

When do fee disputes occur?

4) Fee disputes typically show up in two contexts: a) A lawyer brings an action to recover a fee a client is refusing to pay b) A client sues the lawyer after the fact: breach of K; breach of fiduciary duty; malpractice

Fee Capping Statute--Florida

A) Florida Statute uses Fee Caps. They progressively cut out more of the fee as the overall recovery gets higher. B) CRITICISMS/Costs of Fee Caps (4)-- i. Misaligned Incentives/Agency Problem: Fee caps create bad incentives— a. To take the case in the first place b. To work hard on the case c. To go to trial d. To hold out for a better settlement ii. SoP: May raise SoP. concerns if adopted as Ethics Rules and not through the democratic process a. This is especially true if fee caps, buy reducing the available supply of services, function to reduce or eliminate certain types of litigation b. We have to distinguish Ethics Rules that are truly about client welfare from those that are just end runs around the democratic process. 1. The way to do that: Support Rules w/ empirical data iii. Transaction Costs: May add transaction costs via safety valve provisions that require judicial approval iv. Lack empirical justification: the argument that lay people need protection and can't look out for their own interests assumes the market won't work to prevent excessive fees a. And even the point of the rule is to protect unsophisticated clients, it shouldn't do that by focusing only on contingent fees. C) ISSUE--Cost-Benefit Analysis: Given the costs and the seemingly minimal benefits, we should consider whether Fee Caps are worthwhile.

Fee Rules: TX 1.04 & ABA 1.5

A) Rules' Focus Reasonableness/Size: The Rules are generally concerned with the size of fees, and require that they be "reasonable." i. Rules intervene primarily when there is a very large fee arrived at via the contingent fee or value billing. ii. BIG ISSUE: Should reasonableness be gauged at Time 1 or Time 2? B) Sophistication Matters (Implicitly): Whether a fee is determined to be "Unreasonable" often depends on the sophistication of the client, even though this isn't explicitly a factor i. Several factors in the Rules hint at this-- a. EX (ABA 1.5): Difficulty of the problem, expertise required, customary fee charged in that locality for similar services.

The Rules' Main Focus is on the amount of the fee, pric:

a) Fee caps, as a manifestation of that focus: i) may raise SOP concerns if adopted as Ethics Rules and not through the democratic process a. This is especially true if fee caps, buy reducing the available supply of services, function to reduce or eliminate certain types of litigation b. We have to distinguish Ethics Rules that are truly about client welfare from those that are just end runs around the democratic process. i. The way to do that: Support Rules w/ empirical data ii) may add transaction costs via safety valve provisions that require judicial approval iii) may deter people from signing up with lawyers at all iv) lack empirical justification: the argument that lay people need protection and can't look out for their own interests assumes the market won't work to prevent excessive fees v) may deter lawyers from taking the most difficult, riskiest, long-shot cases b) The Rules' focus on price doesn't address any of the three core agency problems created by the contingent and hourly fee: i) Settlement: Hourly = settle too late and not caring enough about the amount of the settlement. Contingent = settle too soon and maybe for too little. ii) Trial: Hourly = too much incentive to take a case to trial. Contingent = too much incentive to avoid trial iii) Work: Hourly = incentive to do too much, regardless of whether it's useful. Contingent = incentive not to do enough, even when it would be useful, and to employ non-lawyers to do it. c) That focus is unnecessary: It is easy for clients to: i) gain information about price by comparison shopping by price; ii) to know and monitor what they're being charged. iii) "Our fee rule is akin to having a requirement that gas stations post the price of their gas. They're going to do that anyway." d) That focus has undesirable unintended consequences: i) As to agency costs, there is no reason to prefer the contingent fee over the hourly rate: Each poses the same three problems in mirror image form. Yet the Rules evince a preference for the hourly rate that is without theoretical or empirical foundation. ii) Regulations impose error costs: the Rules allow courts to scrutinize fees after the fact, which will cause some legitimate, bargained-for fee agreements to be voided (esp. contingent fees, since the risk premium is difficult to evaluate ex post). a. Those costs will be passed through to clients, and the costs vastly exceed the benefits. iii) To the extent the Rule looks like it is addressing problems with fees, it deters investigation into other, more pressing issues related to fees, such as agency problems. e) The Rules' regulation of fees is discriminatory. Certain client groups are treated differently from others: i) Who benefits from this discriminatory treatment? ii) Why are the rules discriminatory, not of general applicability? iii) Is there an empirical basis for that discrimination? f) What kind of a Rule would address these agency concerns?

Fees: Hourly Rate

a) Hourly rate i) Facts: long the standard fee arrangement; quietly presumed to be the baseline throughout the Rules ii) Advantages: a. Client knows the rate in advance i. (But not the # of hours) b. Client can stipulate a limited number of hours i. (Requires sophistication & comfort with bargaining) iii) Disadvantages: a. Incentive to accept any case, no matter how frivolous, if the client can pay b. Incentive to do extra, needless work c. Incentive to work slowly d. Incentive not to settle (esp. group settlements) e. Incentive to litigate and take cases to trial f. May not always reflect the value the lawyer is adding to the transaction

Fees: Contingent Fee

b) Contingent Fee i) Facts: Relatively recent innovation ii) Advantages: a. Keyed to the amount of recovery, which creates an alignment of attorney incentives with client concerns b. Provides access to the best lawyers and the courts for people who otherwise could not afford to pay c. Incentive to turn away meritless cases less frivolous litigation iii. Advantages to Client a. Creates an alignment of attorney incentives with client concerns b. Provides access to the best lawyers and the courts for people who otherwise could not afford to pay 1. Prevents a class-based justice system. c. Incentive to provide fair (or even conservative) estimate of case good cases get litigated d. Incentive to turn away meritless cases less frivolous litigation (except class actions) e. Don't have to pay if you lose. iv. Disadvantages to Client a. Incentive to settle too soon or for too little, b/c lawyer will get a lot anyway 1. Note: This is the main imperfection in interest alignment. 2. COUNTER: Reputational interests check this. 3. COUNTER—Market Deterrents i. Cheap settlement will hurt attorney by setting too low a benchmark for future claims against that D ii. Attorney needs to litigate some claims to trial to establish market values for future settlements b. Incentive to resist taking cases to trial: high costs, a known large cash outlay; uncertainty of outcome; uncertainty following successful verdict; difficulty of collection c. Incentive to do less work, even work that needs to be done 1. May do "just enough" work to get by. d. Less work done by actual attorneys 1. Especially true at P's firms, which often employ many non-legal personnel (ex: paralegals, nurses for medical cases) 2. COUNTER: sometimes, this is a good thing a non-attorney will be more excited about the case and will work harder for you. e. Less attorney contact f. Fee percentage (ex: 40%) may reflect an inflated risk premium seems like attorney got a windfall. 1. COUNTER: uniformity in the market suggests there are standardized, predictable costs and that this is the lowest profitable percentage; also doesn't push toward lawyer misbehavior. g. Fee percentage is still high for high value claims, but client may see to pay so much more for the same work 1. COUNTER: But it's reasonable to assume high value claims require more work, more difficult work, and more risk.)

Fees: Salary

c) Salary i) Facts: In-house counsel; associates at firms ii) Advantages: Cost certainty iii) Disadvantages: No incentive to work hard or more

Problems with Ethics rules on Fees

c. MITIGATING FACTOR--Clients & Capital: Agency problem is mitigated when a firm has a lot of willing clients and a lot of capital. 1. EX: If you have lots of clients, you're not gonna work slowly under an hourly rate. You'll work quickly and move to the next client. 2. EX: Decision to take a case/go to trial is much easier to make when you have capital backing you. 3. BUT: Ethics rules don't mention either of these things. They don't regulate based on clients or capital (and we probably shouldn't...) d. CRITICISM of ETHICS RULES: Do the ethics rules regarding fees mitigate these agency problems? If not, how to justify the rules?

Fees: Flat Rate

d) Flat rate i) Facts: Transaction fees for relatively routine deals ii) Advantages: a. Puts a price on a standardized service where an hourly fee wouldn't fully reflect the value of the service to the client b. Incentive for speed and efficiency c. Rewards repetitive expertise, reflects the value to the client of having a lawyer for whom a particular type of difficult, intricate project is routine iii) Disadvantages: a. Incentive for carelessness, too much standardization, and too little personalization

Fees: "Value Billing"

e) "Value Billing" i) Facts: Taking a cut of deals a la investment bankers; somewhat similar to a contingent fee ii) Advantages: a. Like the contingent fee, keyed to value added and results b. Maybe a better reflection of the worth of a 'great idea' c. "Star system:" The very best lawyers can charge more i. (But this is a tiny % of all lawyers) d. Reflects a risk premium (esp. in IPO context) iii) Disadvantages: a. Maybe the amount of payment is arbitrary i. (But market forces constrain) b. Very risk for the lawyer (esp. in IPO context)

Fees: Retainer

f) Retainer i) Facts: a. Almost never used by themselves; usually combined with a flat rate or hourly rate deal b. Sometimes hours worked are charged against the retainer, sometimes not c. Serves to finalize a hiring or buy space at the top of the lawyer's priority list ii) Advantages: a. Compensate attorneys for opportunity costs that are difficult to quantify (time set aside; clients turned away; conflicts created) b. Encourage attorneys to take on work iii) Disadvantages: a. Non-refundable retainers thought to deter clients from exercising their right to fire their lawyers b. Can be used strategically/opportunistically in connection with the conflicts rules

Fees: Fee shifting

g) Fee-shifting i) Facts: Typically this only happens by statute in the context of public interest litigation ii) Advantages: a. Compensates victorious lawyers where a contingent fee would not do so (e.g. winning injunctive relief in civil rights cases) b. Provide access to counsel for underserved populations c. Give lawyers an incentive to bring claims that provide remedies for important, non-monetizable rights

Criticism of how the rule operates?

i. EXAM QUESTION: What kind of Rule would better go to the Agency problem ii. Don't Go to Agency Problem/Market Failures: By only focusing on the size, the Rules ignore both Agency concerns as well as the variables affecting those concerns—capital, client base, etc. a. EX: Limiting hourly rate to a "Reasonable" amount does nothing to change the incentives of the attorney to work slowly, to go to trial rather than settle, etc. iii. Price Focus = Doubles up on Client's Own Capability: Price is the aspect consumers can most easily monitor for themselves ("search" characteristic). Yet, the Rules go to price, rather than going to aspects that consumers can't easily monitor ("experience" characteristics). a. "Our fee rule is akin to having a requirement that gas stations post the price of their gas. They're going to do that anyway." iv. Ineffectiveness (Empirical Data): Even to the extent that the Rules loosely attempt to solve certain types of agency problems, empirical data suggests that regulation of fee size under existing rules is not providing any benefit to clients. v. Ex Post Analysis = Flawed a. Looking at fees from T2 (which rules encourage, see ex: ABA 1.5(a)(4)) gives courts the benefit of hindsight that attny and client didn't have when they agreed to it 1. Troublesome in itself. b. Also troublesome in contingent fee context b/c the risk premium aspect of CF is routinely forgotten, especially once the case turns out to be a slam dunk. This makes a reasonable CF at T1 look awful at T2. 1. One Solution: Many jurisdictions disallow mixed-fee contracts (specifying the higher of an hourly rate or a percentage) b/c without a risk premium there is much less justification for the contingent fee vi. Interfere with Right to Contract: The Rules interfere with clients and lawyers ability to freely contract with each other. a. CONTRA—Conflicts: Regulation doesn't "interfere" with anything since client won't always ask the right questions up front. Regulations are necessary. vii. Social Costs (2) a. Administrative/Judicially-Caused Harm ("Error Costs"): Because Rules produce no benefit (above), enforcing them may only cause social harm by interfering with contractual agreements. This passes on costs to the clients. 1. Rule should ALWAYS should be directed at some problem and providing a benefit. If not, this is a very possible result all costs, no benefit. b. Misdirected Attention: Rules' existence may cause us to think we've solved the market failure/agency problem, when in fact we haven't. viii. Disparate Treatment: Rules treat different types of fees differently, with no justification. a. There is not One Legal Profession b. EX: There's no legitimate reason to prefer hourly rates to contingent fees, but by focusing so much on size, that's what the Rules do larger fees (typically contingent) are subject to more scrutiny. c. EX (ABA 1.5(c)): Contingent fees must be in writing, and there must be a final "written statement" at the conclusion of the matter. But there is no similar writing req for other fees. 1. CRITICISM: If the concern is that certain categories of clients are less sophisticated and need to be protected, the Rule should target that more broadly, and not specifically target contingent fees, which certainly aren't the ONLY fees which attract unsophisticated clients. d. Be Skeptical/Three Questions: As always, anytime we see disparate treatment, ask the three questions.

Litigation of a Fee Arrangement

i. Fee litigated as breach of K/invalid K ii. Client has failed to pay bill; attorney seeks payment; client uses problem with agreement as a defense.

Goldfarb

i. Rule: Fixed minimum fee scale is a violation of antitrust law, even if promulgated by state/county bar. a. Rat: Nothing in Sherman Act specifies that legal profession is different b. Rat: Fact that it's a "learned" profession is irrelevant. c. Rat: No "irreparable benefit" by fee schedule." ii. BUT: However, nothing in antitrust laws prohibits a cap that's why we have cap in Florida.

Fordham (CB 129)

i. Rules a. Hourly Rate Baseline: Reasonableness of an hourly rate fee for a routine service administered to the public will be determined in reference to a baseline total amount, not simply the rate itself. 1. EX: Even if you charge the same rate as everyone else, may be unreasonable if your total amount was 2x as much because you took 2x as long. 2. Rare Result: Very rarely will a court strike down an hourly fee based on the total number of hours charged, as they did here. b. Relevance of Inexperience: Inexperience of lawyer cannot justify charging a larger overall fee b/c he's taking more time. Cut hourly rate if you have to. 1. Client Can't Agree: Client cannot contract around this rule by saying "I understand that attorney has never done this." c. T2 Can be Used Court can use hindsight to determine fee. 1. CONTRA—Broback ii. Holding: Lawyer couldn't charge 3x as many hours b/c he was inexperienced and had to look up DUI laws, even though client won on a novel defense! iii. CRITICISMS a. All we're looking at here is the size of the fee (again: this is a problem) b. We're comparing size of inexperienced attorney's fee to experience attorney's fee c. Focuses on T2 creates hindsight problem d. Biggest CRTICISM: Court is so willing to rewrite client's contract and not allow them to contract around this at all. ii) RATIONALE: The client can't be required to pay for self-education. A rule that says "the less experience you have in this area, the more you can charge" would be bad policy. iii) Baker: This case is unusual: Rarely will a court strike down an hourly bill on account of too many hours billed.

Cooperman (CB 131)

i. Rules a. Nonrefundable Retainers = Not allowed: Nonrefundable retainers violates public policy chills client's ability to move/fire attorney/etc. b. BUT: Minimum fee schedules are okay, as long as it's earned 1. TX 1.15(d) and ABA 1.16(d): Fees must be earned. If not, they have to be returned. a) RATIONALE: Non-refundable retainers create an illegitimate, economically punitive deterrent to the client's exercise of the right to fire the attorney. i) Model Rules (Rule 1.16(d)): lawyer must return that portion of the retainer that is "unearned" b) That the attorney was charging these fees to unsophisticated clients probably was a factor as well. c) CRITICISM: This is an overly formalistic rule that allows all retainers to be rewritten as minimum fees. d) CRITICISM: This rule flies in the face of the policy reasons that support retainer fees: i) Compensating attorneys for opportunity costs: time reserved, conflicts created, and business foregone a. Crucial concern: Any time a fee agreed to ex ante is judged for reasonableness ex post, two factors very likely to be underweighted: opp. cost & risk premium ii) Ensuring the attorney receives the money owed a. Esp. important in criminal cases that end in conviction or a plea; clients often feel they got no value from the fee iii) Providing value to the client: Attorneys are paid to find attractive resolutions as quickly as possible. In some cases, value provided is inversely proportional to time taken (e.g. getting someone out of jail) a. This is a policy argument against the hourly rate iv) Monetizing value of attorney's reputation v) Providing cost certainty to the client e) BOTTOM LINE: Substantial deviation from the hourly rate model produces a lot more controversy than a huge number of hours billed at what seems like a reasonable rate. iii. Baker's Hypothesis: What's really going on here is that lawyer at issue was not particularly prestigious. If this guy was Johnnie Cochran, they may very well have allowed nonrefundable retainer

Broback (122)

i. Rules (most applicable to sophisticated corporate clients) a. Test for Unreasonable Fee: Whether contract was so unconscionable that no man in his senses not under delusion would make on the one hand, and no man would fairly accept on the other 1. Note: This is a very high standard for unreasonableness. b. Relevant Time Frame = T1: Time frame for considering reasonableness is when the fee was contracted (T1). NO hindsight allowed. ii. Holding: Fee of $1 million for cert petition for a sophisticated corporate client. not unconscionable at time 1. a. Rat: At T1, it was a completely arm's length transaction with two sophisticated clients. Client is merely upset that he got what he wanted and now wants court o bail him out. iii. Point of Significance: This case underlies a truth that is always implicit but rarely stated the sophistication of the client matters in determining the reasonableness of a fee.

BIG NOTE: The regulation of attorney's fees goes beyond contract law

i. Three Layers of Protection a. We could let attorneys fees be handled solely by contract law ("If fee arrangement wasn't procured by duress/fraud/mistake, then you're stuck with it"). 1. DISTINGUISH--Conflicts Rules: With conflicts, client won't have always asked the right questions up front, so there's no possibility of relying on some mechanism like contract law. Have to have regulations. b. But, instead of just relying on contract law, we have three layers of protection for fees-- 1. Contract law 2. Rules regulating attorneys fees 3. Sua sponte reexaminations of fees by courts i. Prominent in federal courts ii. Stems from inherent power to regulate courts C) The Key ISSUE: When should the Rules step in and impose requirements that supersede contract law? i. Possible Answer—Market Failure/Interest Misalignment (Walmart Theory): Regulation of fees - thus going beyond contract law -- is most desirable at the point of market failure, where the fee structures create agency problems - i.e. misaligned incentives. a. Rules Should Mention Concerns: If this is the purpose of fee rules, we should expect Rules (or comments) to mention these concerns (esp. the 4 specific concerns). ii. Another Answer: Rules should step in when there are problems with access.

Controversy of Contingent Fees

ii. Controversy: Unlike the hourly rate, contingent fee generates a lot of suspicion and controversy. There are four primary reasons for this-- a. Jealously about large fees 1. COUNTER: All the losses, costs, claims investigated, etc. aren't as publicized. These things take away from the lawyer's overall bounty. 2. COUNTER: Large fee reflects big recovery, which means lawyer did well. So it's not as though lawyer didn't deserve it 3. COUNTER: In other professions large fees are equated with success. We shouldn't treat the law differently. i. Legal ethics is not an oxymoron 4. COUNTER: Large fee reflects a risk premium. Critics are viewing the large fee ex post, and often fail to acknowledge that ex ante there was a substantial chance of losing all that time and money. b. Extortion of Defendant: People think defendant was extorted for his money. 1. This may help explain why people are only skeptical about rich lawyers in other professions, the professionals $$ comes from a willing employer, not a court who is taking money from an unwilling D. c. Client Paid Too Much/Knew Too Little: Some people are concerned about client knowledge gap and assume that client was exploited on the fee amount. d. Gain off Client Misery: Some people don't like the fact that lawyer is making money off a hurt client. 1. Worse off Client: Some people argue that a worse off client makes lawyer's job of winning easier, and thus lawyer should win LESS, not MORE.

Arguments for and against contingency fees

v. Arguments For and Against the Reasonable of Large Contingent Fees: a. PRO: Contingent fee lawsuits are often the only way poor people can get a lawyer. Lawyers prefer a contingent fee structure if the case 1. has a likelihood of success; and 2. has a lot of upfront costs, so the only way to realize that success is for the lawyer to front the bill b. CON: A lot of the benefit to the client in the CF structure is credit, that the lawyer has gathered a war chest up front and will loan some of it to the client. As a result, some people criticize 40% contingent fees as usurious. On the reasonableness of contingent fees: a) PRO: Contingent fee lawsuits are often the only way poor people can get a lawyer. Lawyers prefer a contingent fee structure if the case i) has a likelihood of success; and ii) has a lot of upfront costs, so the only way to realize that success is for the lawyer to front the bill b) CON: A lot of the benefit to the client in the CF structure is credit, that the lawyer has gathered a war chest up front and will loan some of it to the client. As a result, some people criticize 40% contingent fees as usurious. i) Baker: Hard to get a loan w/o good credit ii) Baker: 30% rates on credit cards iii) Baker: The CF % reflects a risk premium