Value Challenge: Alternative Fee Agreements May Create Financial and Ethical Risk


 

Michael O'Donnell | Firm Chair
Biography

Alternative Fee Agreements (“AFAs”) are increasingly a part of doing business in today’s legal industry as clients demand clarity and predictability in pricing. Attorneys and pricing professionals should understand, however, that courts do not always view AFAs favorably and are not afraid to wade into the murkier terms of such agreements and demand specificity—often at a cost to the attorneys and firms that draft, apply, and attempt to enforce those agreements.

Even well-meaning attorneys have run afoul of the courts when attempting to collect on AFAs. We therefore suggest that attorneys apply the three following guidelines to help your firm, your clients, and the courts clearly appreciate the spirit and the letter of your AFAs.

I. Drafters Beware: AFAs are Contracts

AFA language may be creative and experimental as firms strive to meet client demands, innovate proactively, or stand out in pitch contests. Yet, as a result of such AFAs, lawyers may ultimately lose out on fees, fight with their clients, and face discipline for failing to appreciate that an AFA is a contract and may be construed against the drafter—the lawyer—when disputes arise. 

A fee agreement in any form is a contract between lawyer and client and is subject to interpretation according to general principles of contract law. If a law firm expects specific payment for efforts expended and knowledge provided, the law firm must clearly articulate as much at the outset. Courts are not generally sympathetic to law firms that seek to recover fees not clearly provided for in a fee agreement. Draft your AFAs carefully to avoid pitfalls.  

The Court concluded the success fee language was merely an agreement to agree in the future and was unenforceable as a matter of law. 

Too Broad

In Salussolia v. Nunnari, 215 So. 3d 156, 157 (Fla. Dist. Ct. App. 2017), a Florida law firm entered into an AFA with a client that hired the firm to reduce a $13 million judgment against the client. The fee agreement provided for a monthly retainer and a success fee. Of the success fee, the agreement included the following language: 

For example, if Client owes $10,000.00 on the Judgment and through the Appeal and/or the Settlement, that amount is reduced to $6,000.00, saving Client $4,000.00, then the Firm success fee shall be a percentage of $4,000.00.


The firm successfully reduced the judgment by several million dollars, yet the client refused to pay the ill-defined success fee. The Florida Court of Appeals sided with the client, concluding the success fee language as drafted was merely an agreement to agree in the future and was unenforceable as a matter of law because it did not include the specific percentage that would be awarded as a success fee. 

Too Narrow

On the flip side, a prominent New York law firm suffered a similar fate when the Court of Appeals determined that the firm defined success too narrowly to recover any success fee. The fee agreement involved litigation for a flat fee of $1 million dollars plus a success fee equal to 20% of the amounts recovered above $4 million in the litigation. Kasowitz, Benson, Torres & Friedman, LLP v. Reade, 98 A.D.3d 403, 405, 950 N.Y.S.2d 8 (2012), aff’d, 20 N.Y.3d 1082, 987 N.E.2d 631 (2013). 

The firm recovered approximately $1.75 million for the client—well below the $4 million success fee threshold. The law firm argued, however, that the monetary benefit to the client exceeded the damages in the litigation, based on the value of the new deal entered into by the client as part of the resolution of the litigation. Based on the plain language of the agreement, the Court of Appeals found that the success fee was discretely tied to the monetary recovery in the litigation. Thus, the court held that if the law firm intended to recover a contingent fee for other developments, such as long-term value, the firm should have explicitly stated as much in the agreement in order to be enforced.

II. Ambiguity Hurts Law Firms

A ruling in New York involved a dispute in which a fee agreement provided for “phase-related” caps on fees, as well as a contingency fee the law firm termed a “success fee.” Morrison Cohen Singer & Weinstein, LLP. v. Network Indus. Corp., 292 A.D.2d 153, 739 N.Y.S.2d 39 (2002). The law firm was paid for each phase of litigation, and the success fee language contemplated the firm receiving 15% of the gross settlement if the case resolved prior to trial, less legal fees, costs, and expenses already paid. 

The case settled before trial for $2.2 million. The client and law firm, however, disputed how to calculate the success fee. The law firm argued that the already paid legal fees and expenses should be deducted from the $2.2 million first and the firm would receive 15% of the remainder. 

The New York Supreme Court Appellate Division, however, agreed with the client’s interpretation. The Court took 15% of $2.2 million, subtracted the fees paid for the capped phases, and determined the law firm was entitled to 15% of the balance of that—$170,000. The Court crisply reminded the law firm that it was a sophisticated drafter of the agreement and any ambiguity would be construed against the law firm.      
 

III. Poorly Drafted or Unreasonable AFAs
May Lead to Disciplinary Action

Adverse decisions involving finances are but one consequence of loose AFAs. Disciplinary action is another, and very real, outcome. This is especially true when an AFA that may at first blush seem reasonable becomes unreasonable as the course of a representation unfolds. 

No matter the jurisdiction, a key component to any fee agreement is that the fee be reasonable. Although the factors that go into a reasonableness determination vary from case to case, a windfall to the lawyer may be deemed unreasonable with the benefit of hindsight. 

The fee was reduced 80% in arbitration and the lawyer was suspended for 120 days.

Consider an Indiana lawyer suspended for four months for a contingent fee agreement that contemplated the lawyer receiving one-third of any funds in trust that he was able to secure for his client. The lawyer succeeded in obtaining nearly $45,000 for his client within just three days. Per the fee agreement, the lawyer collected one-third of the recovered funds, resulting in a total fee of over $14,000. In re Powell, 953 N.E.2d 1060, 1062-63 (Ind. 2011). 

The fee was reduced nearly 80% in fee arbitration, however, and the lawyer was suspended for 120 days. The Indiana Supreme Court noted that although a contingent fee need not be reduced every time a case proves more lucrative than contemplated, the fee is nevertheless unreasonable if it gives the attorney an unconscionable windfall. The Court wrote that while it was reasonable to believe at the outset that the matter would be contested and complicated, the lawyer found out within two or three days that the case would not involve a prolonged time commitment, opposition, or risk of no recovery and, consequently, the arrangement should have been modified to be more reasonable.  

Various courts around the country have concurred with this reasonableness principle in evaluating a lawyer’s fee after the fact in light of the criteria found in the Rules of Professional Conduct. Lawyers using an AFA are well advised to ensure that if circumstances change, the AFA should be revisited with the client to avoid a fee dispute or disciplinary action down the road. “But the client agreed to it” will never be a successful argument by itself.

Beware the Blended Rate

Lawyers have also faced disciplinary ramifications for using a blended rate when that rate is later evaluated for reasonableness. One factor in determining whether a fee is reasonable is the skill and knowledge necessary to complete the task. A lawyer in Wisconsin was suspended for two years for using a blended rate to charge for legal and non-legal services. In re Disciplinary Proceedings Against Gilbert, 227 Wis. 2d 444, 595 N.W.2d 715 (1999). The disciplinary authority in Wisconsin determined that the charge for non-legal services was unreasonably high. 

Firms employing a blended rate that includes non-lawyer time should ensure that the ultimate rate is reasonable for the tasks performed. Remember that when lawyers use a blended rate to bill a client and then seek to recover attorneys’ fees as a prevailing party, several jurisdictions have rejected the blended rate and converted the rates to those customarily charged in similar matters in the locality in determining the amount of fees to award.  
 

Must We Only Bill by the Hour? No, but . . .

Many clients and lawyers agree that moving away from the billable hour model is a good thing. But lawyers must do so with caution and thought. It is easy to explain why your hourly rate is in line with what similarly positioned lawyers charge for similar services. It is harder to show the value provided by your services, something AFAs aspire to reward more aggressively. There is no one-size-fits-all with AFAs, and they are subject to scrutiny and revision after the fact. 

Craft AFAs carefully and in well-defined terms. This will increase the likelihood that you and your firm get paid in full and avoid the negative consequences of litigation and discipline. And before you send the final bill, pick up the phone. Talk with your client about the expectations memorialized in the fee agreement and document that confirmation. One simple conversation may avoid significant consternation and consequences.

Defending Lawyers & Law Firms When it Matters Most

Wheeler Trigg O'Donnell defends lawyers and law firms against high-stakes professional liability claims. Our team has successfully represented lawyers and law firms in at least 12 states.

In the past three years alone, WTO has won for lawyers and law firms in the Colorado Supreme Court, the Tenth Circuit Court of Appeals, and numerous state district and appellate courts.

Recent victories include:

  • Won an arbitration award for a lawyer and law firm against malpractice claims related to a real estate deal and potential damages of $3 million plus interest. The arbiter ruled for WTO's client and found that no malpractice occurred.
  • Won a complete defense verdict for a lawyer and law firm accused of malpractice in the handling of a sale of interests in the plaintiff's company.
  • Won an arbitration for a law firm client that sued its former client for unpaid fees and was countersued for malpractice. The arbitrator rejected the malpractice claims and awarded WTO's client its unpaid fees plus interest, as well as its legal fees and costs incurred in the arbitration.
  • Obtained Rule 12 dismissal for an AmLaw 200 firm facing claims exceeding $500 million in state court in Kentucky.
  • Won a complete defense verdict in a professional liability claim against a law firm and lawyer. The plaintiff alleged that WTO's client was negligent, yet the jury found that not only was our client not negligent, but that the alleged negligence didn't cause the claimed damages.

We understand how personal these claims can be. We also appreciate that staying out of court may be a client’s ultimate goal. Whether you wish to resolve claims creatively and discreetly or defend them vigorously before judge and jury, WTO will help.

About Wheeler Trigg O'Donnell

Wheeler Trigg O’Donnell lawyers have taken more than 1,100 trials, arbitrations, and appeals to verdict, award, or opinion all across the nation, with exceptional results for our clients.

Established in 1998, WTO currently numbers 100 lawyers in three offices. The firm represents sophisticated clients in high-stakes civil trials, appeals, and related litigation ranging from complex commercial to class actions to multidistrict litigation.

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