Wednesday, March 11, 2009

Reverse Contingent Fees

A recent opinion of the D.C. Bar Legal Ethics Committee concludes:

A reverse contingent fee is a fee that is based upon the difference between the amount a third party demands from a lawyer’s client, and the amount ultimately obtained from the client, whether by settlement or judgment. The Rules of Professional Conduct (“Rules”) do not prohibit reverse contingent fees, and a fee arrangement of this nature may align the lawyer’s and client’s interests more closely than hourly or fixed fee arrangements. Like all fees, reverse contingent fees must be reasonable. Beyond the requirement of reasonableness, entering into a reverse contingent fee arrangement places increased burdens of disclosure on the lawyer in order to obtain informed consent to such a fee arrangement. The lawyer is in a better position to assess the likely outcome of a dispute than a client is, and the lawyer must fully and fairly communicate that assessment to the client in any discussion concerning a reverse contingent fee. In addition, a lawyer should take particular care in setting the percentage of the reverse contingent fee, because unlike contingent fees based upon a client’s recovery, there is little established practice upon which a client and lawyer can rely. Finally, as with other Rule provisions, the degree and nature of the disclosure required of the lawyer and the ensuing scrutiny of the fee arrangement may vary based upon the experience and sophistication of the client.

There is a partial dissent from three non-lawyer members of the committee, including my friend and colleague David Luban. The final paragraph summarizes the concerns with the majority opinion:

It may well be that RCFs [reverse contingent fees] will mostly be proposed by sophisticated clients who understand quite well—maybe better than the lawyer—how to value cases. An insurer, for example, has extensive data on the settlement value of automobile collision cases. That insurer might well propose a flat fee with an RCF “bonus” to defense counsel who can beat the averages. In such cases, we agree with the Committee’s opinion: when the client proposes the terms of a RCF, the written agreement need say nothing beyond noting that fact. That satisfies the letter of the rule. But when the lawyer proposes a RCF and a baseline for calculating it, a written agreement that includes the baseline value but not even a hint of the method the lawyer used to arrive at that baseline violates the rule and under-protects clients. The Brown & Sturm case that the opinion discusses shows that lawyer overreaching in a RCF is not merely a hypothetical danger to clients.

It's nice to see the non-lawyer members of the committee expressing concern that the opinions of the lawyer members may be overly protective of the profession to the detriment of clients. (Mike Frisch)

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