12 STEPS TO A HEALTHIER LAW PRACTICE IN 2020: STEP 4 – MONEY DOES NOT BUY HAPPINESS

Happy April! In November 2018, 69 new or amended California Rules of Professional Conduct (“CRPC”) were thrust upon California’s more than 250,000 lawyers. These rules were renumbered and reorganized to align with the American Bar Association’s (“ABA”) Model Rules and replaced the 46 ethics rules that California lawyers had been following for nearly 30 years.  Despite each of us having been responsible for adhering to these rules over the last year, many California lawyers and law firms still do not know, or do not fully appreciate, the significance of the modifications. Therefore, as we enter into this new decade and the second full year of these rules being in effect, I invite you and your firm to join my 12-step program to a healthier law practice in 2020 and the years to come. Each month I will feature an article on the key ethics rule changes aimed at guiding you and your firm to a healthier law practice by better managing your risk of liability.  “Step 1 – Take Responsibility” was published in January; “Step 2 – Treat Others The Way You Want To Be Treated” was published in February; and “Step 3 – Avoid Conflict” was published in March 2020.

You can access each article directly on this blog page or you can subscribe to this blog to ensure that you don’t miss any of the 12-steps.  Please note that the articles on this blog are not legal advice and do not take into account specific facts or circumstances for which a tailored analysis and risk management plan is recommended.

STEP 4 – MONEY DOES NOT BUY HAPPINESS

When I consider the underlying rationale for the ethics rules concerning legal fees, I can’t help but be reminded of the seven deadly sins, or at least six of them: Pride, Greed, Lust, Envy, Gluttony, and Sloth. A negative connotation of the sin of pride means a foolish and irrational sense of one’s personal value, status, or accomplishments.  Greed is an inordinate longing for material gain, whether it is for money, status, or power. Lust is often considered a sin of a sexual nature, but it is really just an intense, emotional desire for something, which can include money and power. Envy is an emotion that occurs when someone wants another’s good fortune, achievement, or possession. Gluttony is not just about food, but rather the overindulgence or overconsumption in anything, including wealth and power. Finally, sloth is the sin of laziness.

Under the ethics rules, a lawyer cannot succumb to these sins to the detriment of clients. However, this is often the very reputation that proceeds us.  A law practice driven by money and power is risky in a service-based industry regulated by rules intended, in relevant part, to protect the public and the integrity of the legal system and to promote confidence in the legal profession.  Lawyers who instead focus on the quality of their services should not only develop better client relationships, but any job well done ought to ultimately breed success. Therefore, money may not buy happiness, but professionalism may.

The Basics

Like old rule 4-200, current rule 1.5 prohibits lawyers from making an agreement for, charging, or collecting an unconscionable or illegal fee.  Thus, a legal fee must be based on all the facts and circumstances existing at the time the agreement is entered into except where the parties contemplate that the fee will be affected by later events.  The factors to be considered in determining unconscionability are: the amount of the fee in proportion to the value of the services performed; the sophistication of the lawyer; the novelty and difficulty of the questions involved and the skill needed to perform the services properly; the likelihood that the acceptance of the employment will preclude other employment by the lawyer; the amount involved and the results obtained; the time limitations involved; the experience, reputation and ability of the lawyer; whether the fee is fixed or contingent; the time and labor required; whether the client gave informed consent to the fee; and, as added to the current rule, whether the lawyer engaged in fraud or overreaching in negotiating or setting the fee, and whether the lawyer failed to disclose material facts.  Rule 1.5(b)(1-13).  Rule 1.5 also precludes a lawyer from being paid a contingency fee for representing a defendant in a criminal case or a client in a family law matter where the fee is based on securing a marriage dissolution or nullity or upon the amount of spousal or child support received or property settlement in lieu thereof. Rule 1.5(c)(1-2).

Rule 1.5 also goes hand-in-hand with Business & Professions Code sections 6147 (Contingency Fee Contracts) and 6148 (Non-Contingency Fee Contracts). These statutes respectively require contingency fee agreements and any other fee agreements exceeding one thousand dollars ($1,000) to be in a writing signed by all parties and subject to certain requirements.

Retainers

A true retainer is a fee that a client pays to a lawyer to ensure the lawyer’s availability to the client during a specified period or on a specified matter.  It is NOT compensation for legal services performed or to be performed, such as a deposit or flat fee. Therefore, a true retainer is earned when received. 

A true retainer may be a single payment made before the representation commences or it can be a reoccurring payment to assure the lawyer’s availability.  True retainers are essentially option agreements, paid to secure the attorney’s commitment to take on future legal work, regardless of inconvenience, client relations or workload constraints.  Banning Ranch Conservatory v. Superior Court (2011) 193 Cal.App.4th 903, 917.  Practically, an attorney who is paid a true retainer for his or her “availability” will be paid additional fees for any legal services rendered.

Although not previously prohibited in California, true retainers are not a common practice, and rarely used correctly. Rule 1.5 subsection (d), expressly allows a lawyer to make an agreement for, charge, or collect a fee that is denominated as “earned on receipt”, “non-refundable,” or in similar terms, but ONLY if the fee is a true retainer and the client agrees in writing after the disclosure that the client will not be entitled to a refund of all or part of the fee charged.  Lawyers must be careful to correctly disclose the nature of the true retainer to the client in order to effectively obtain the client’s consent.  A payment identified in an engagement agreement as non-refundable will not be treated as such if the funds are for payment of services.  In other words, the actual treatment of the funds will override the language of the agreement.  A retainer or deposit that will be drawn from as legal fees are incurred cannot be designated as non-refundable.  In cases where an attorney has failed to properly structure a true retainer, a refund to the client of unearned fees has been ordered.

Referral Fees

Unlike most other states, California permits pure referral fees between lawyers.  This means that in California a lawyer is permitted to receive a fee for simply referring work to another lawyer without requiring that the referring attorney either be paid in proportion to the actual work completed or accept joint responsibility for the representation. (See the difference between Model Rule 1.5(e) and CPRC Rule 1.5.1). Rule 1.5.1 requires that the client must consent in writing to the referral and fee-splitting arrangement, either at the time the lawyers enter into the agreement to divide the fee or as soon thereafter as reasonably practicable and after full written disclosure to the client of: (1) the fact that a division of fees will be made; (2) the identity of the lawyers or law firms that are parties to the division; and (3) the terms of the division.  Further, the total fee charged by all lawyers cannot be increased solely by reason of the agreement to divide fees. Rule 1.5.1; Chambers v. Kay (2002) 29 Cal.4th 142. Rule 1.5.1 also requires that the fee-sharing agreement between the lawyers must be in writing.  The California Supreme Court has confirmed that the rules regarding fee-splitting “do[] not limit its application to ‘pure referral fees’ . . . , in which one lawyer receives a percentage of a contingent fee for doing nothing more than obtaining the signature of a client upon a retainer agreement while the lawyer to whom the case is referred performs the work[,]” but “encompass any division of fees where the attorneys working for the client are not partners or associates of each other, or are not shareholders in the same law firm, and a lawyer’s failure to comply with [the rules] precludes him from sharing fees pursuant to a fee splitting agreement.” Chambers v. Kay (2002) 29 Cal. 4th 142, 145 and 148 (citations omitted).  See also Rule 7.2(b)(4).

Compliance with Rule 1.5.1 is non-delegable.  Failure to comply with Rule 1.5.1 will prohibit any referral or fee-splitting arrangement.  See Compagna v. City of Sanger (1996) 42 Cal.App.4th 533 [further holding that a subsequently negotiated referral fee must be disclosed to the client and, if not, the referral fee reverts to the client].  Therefore, if the referring attorney wants to be paid, he or she must confirm that a fee-sharing agreement between the attorneys is executed and that the client’s informed, written consent to the division of fees has been obtained.  See Margolin v. Shemaria (2000) 85 Cal.App.4th 891

Trust Accounts

A trust account is an identifiable bank account maintained in the State of California, or, with the written consent of the client, in any jurisdiction where there is a substantial relationship between the client or the client’s business and the other jurisdiction.  Rule 1.15(a).

Old rule 4-100 required: “(A) All funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses…” be deposited into a client trust account.  This old rule did not force lawyers or law firms to deposit advance fee retainers or fee deposits into a trust account, so some California lawyers did not maintain a trust account because such payments could be deposited directly into an operating account.

Through the addition of the word “fees” to the text of current rule 1.15 (“…, including advances for fees, costs and expenses…”), advance payments for legal services must now be deposited into a client trust account. This includes any “payment intended by the client as an advance payment for some or all of the services that the lawyer is expected to perform on the client’s behalf.” Therefore, true retainers under Rule 1.5(d) would not be required to be placed in a trust account because “[f]unds belonging to the lawyer or the law firm shall not be deposited or otherwise commingled with funds held in a trust account,” with certain limited exceptions.  Rule 1.15(c). 

On the other hand, a flat fee, which is fixed fee amount that constitutes complete payment for the performance of described services regardless of the amount of work ultimately involved, and which may be paid in whole or in part in advance of the lawyer providing those services (Rule 1.5(e)), must be deposited into a trust account UNLESS the client agrees otherwise after the lawyer discloses to the client in writing that (1) the client has the right to require that the flat fee be deposited in the trust account until the fee is earned; and (2) the client is entitled to a refund of any amount of the fee that has not been earned in the event the representation is terminated or the services for which the fee has been paid are not completed.  Rule 1.15(b)(1).  If the flat fee exceeds $1,000, the client must agree to the terms in writing by signing the written disclosure.  Rule 1.15(b)(2).

Importantly, this rule applies retroactively, so compliance requires that any client funds being held in an operating account that were received prior to November 1, 2018, must be identified, traced, and deposited into a trust account under this rule.  If you are still operating your law practice without a trust account, you should analyze this rule in detail to ensure proper compliance.

Up Next

The ethics rules concerning financial arrangements between lawyers and nonlawyers are hot topics underlining the access to justice debates presently taking place in California and around the country.  Due to the current scrutiny these rules are under, they will be addressed in a separate blog post.  In the meantime, please review the proposed revision to rule 5.4 (Financial and Similar Arrangements with Nonlawyers), which was recently released for public comment by California’s Task Force on Access Through Innovation of Legal Services (ATILS).  In sum, the revision by ATILS does not recommend new exceptions to the prohibition of sharing legal fees with a nonlawyer, but merely recommends expanding the existing exception for fee-sharing arrangements with a nonprofit organization by allowing a lawyer to share or pay a legal fee that is not court awarded, but arises from a settlement or other resolution of the claim or matter, with a properly qualified nonprofit organization.  The deadline to submit public comment on this revision to rule 5.4 is May 18, 2020.

Please contact author, Kendra Basner, if you have any questions about this article or if you would like guidance as to the application of or compliance with these rules. 

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