California
Attorney Ethics Counsel

December 31, 2020

12 Steps to a Healthier Law Practice in 2020: Step 12 – Begin How You Want To End

Happy, and hopefully healthy, Holidays! Many thanks to all of you who have subscribed or simply followed along with this 12-step program.  Step 12 brings us full circle by taking us back to the very beginning of the attorney-client relationship.  2020 has shown us that so much in life is unpredictable, but your client relationships don’t necessarily have to be.  Although you can’t foresee or control every aspect of your dealings with your clients, there are certain precautions you can take to better manage your risk of liability and other headaches.  Start the new year off right by making sure that your engagement agreements are not only compliant and up-to-date, but that you set the tone for happy and healthy attorney-client relationships.

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 since the end of 2018, 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 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 risks of liability.  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.  The steps do not have to be reviewed in order, but you are encouraged to read each step to optimize the value of this program. To date, the following steps have been published:

• Step 1 – Take Responsibility;
• Step 2 – Treat Others The Way You Want To Be Treated;
• Step 3 – Avoid Conflict;
• Step 4 – Money Does Not Buy Happiness;
• Step 5 – Sharing is Caring;
• Step 6 – Advise on the Law;
• Step 7 – The Practice of Law is Not a Dating Service;
• Step 8 – Communication is Key;
• Step 9 – Location Matters;
• Step 10 – Three’s A Crowd;
• Step 11 – Actions Speak Louder Than Words

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 12 – BEGIN HOW YOU WANT TO END

The well-known proverb, “a good beginning often makes a good ending,” could not be truer than in an attorney-client relationship.  Starting your client engagement off right can minimize your risk of liability down the road.  Your engagement agreement sets the tone for your client relationship and is supposed to act as a road map for future interactions, including how things should end.  After reviewing hundreds of attorney engagement agreements and litigating numerous civil cases and discipline defense matters on behalf of lawyers, it is clear that there are several common misconceptions that impair a lawyer’s client relationships before they even get started. Discussed here are some of the most frequently seen missteps made by lawyers in engagement agreements.  As we move into 2021 with hopeful expectations, the best way to minimize surprises in your professional life is by making sure your engagement agreements are up-to-date, compliant, and set reasonable expectations for successful attorney-client relationships.

Set the Stage

CRPC 1.5 (Fees for Legal Services) and B&P Code sections 6147 (Contingency Fee Contract) – 6148 (Written Fee Contract) set the requirements for written fee agreements. Required (as in most cases) or not, a written attorney-client engagement agreement is certainly a best practice. Form agreements are NOT recommended. The first thing a legal malpractice attorney or State Bar investigator/attorney looks to in an attorney-client dispute is the written engagement agreement.  Defining the scope of your services not only sets the client’s expectations, but it helps to determine your legal duty to the client – your standard of care – and outlines the duration of your representation.  Therefore, the scope should be narrowly tailored for each client by identifying the specific case or matter you will assist with; the particular tasks you were hired to perform; and, importantly, the tasks you were not hired to perform. The State Bar of California has published sample hourly and contingent fee agreements to be used as guides when drafting your own agreement.

Identify the Client

Identifying your client may seem simple, and, hopefully, on most occasions it is.  However, that does not mean it is not a crucial step in managing your liability risk. It is extremely important that you specify in your engagement agreement to whom you owe your duties.  Failing to properly identify your client could open up your liability to third-parties.  This is especially important when dealing with entity clients (CRPC 1.13 – Organization as Client) or joint clients (CRPC 1.7 – Conflicts of Interest: Current Clients). Even if you haven’t agreed to represent an entity or multiple clients, confirming this in the engagement agreement should help to minimize your risk of being held accountable to anyone other than your client in the future.  Further, when taking on the representation of joint clients, a lawyer is required to make certain disclosures so each client can give informed, written consent to the representation. See CRPC 1.4, 1.4.1, 1.5, 1.6, 1.7 and 1.8.7.  The California State Bar takes the position that representation of multiple parties in the same or related matters constitutes the representation of potentially conflicting interests and always requires written conflict waivers. See In Re Matter of Sklar 2 Cal. State (rev. Dept. 1994), 2 Cal. State Court Bar Reporter 602.

Charge Reasonable Fees:

• Legal Fees are Refundable

The sample fee agreements provided by the California Bar provide examples of contractual language or provisions that could be used if applicable under your specific circumstances.  However, the Bar fails to identify provisions that should not be used in violation of the ethical standards and/or California law. For example, it should never be stated that your legal fees are non-refundable. All fees paid for the performance of your legal services are refundable by law if not earned. CRPC 1.5, Comment [3]; CRPC 1.16(e)(2).  Only a true retainer, which is paid to secure a lawyer’s availability to the client during a specific period or for a specific matter and is not paid for your legal services, is allowed to be non-refundable in California.  CRPC 1.5(d).  A true retainer is very rare and, as clarified in Step 4, no matter how you define it in your fee agreement, your treatment of the funds will determine its purpose.

• Notice Required

Your duty to represent the client’s objectives of representation and the means by which those objectives are pursued under CRPC 1.2, as well as your duty to communicate with your client under CRPC 1.4, requires you to inform the client of any alterations to the fee arrangement the client previously agreed upon.  In other words, you should not state in your engagement agreement that your rates are subject to increase at any time without notice to the client.  Further, a client cannot give advance informed consent to such a blanket rate change without knowing the new rate and the circumstances of the representation at the time such a rate will become effective.  Notice is required and must be explained to the extent reasonably necessary to permit the client to make an informed decision about whether to move forward with the representation at that time. See CRPC 1.4(b).

Sharing hourly or contingent legal fees with a lawyer outside of your law firm is permitted in California regardless of the actual role each lawyer plays in the representation, so long as the client’s informed, written consent is obtained.  CRPC 1.5.1.  It is highly recommended that all attorneys/firms who are sharing in the fees sign the client’s fee agreement in order to ensure that CRPC 1.5.1 has been followed. Relying on an outside lawyer to adhere to these requirements is risky because failure to comply could result in a loss of some or all of the fees you were promised.

Additionally, you cannot deposit an advanced flat fee into your operating account without certain written disclosures and acknowledgment by the client. CRPC 1.5(e) and 1.15(b). See Step 4 for a more detailed discussion on fees.

• Interest Charges Can Amount to an Unconscionable Fee

Charging an unreasonable rate of interest on late fees could void the fee agreement in its entirety. Although it is legally and ethically proper to charge interest on fees, if charged, it must be reasonable so as not to violate either the prohibition against unconscionable fees (CRPC 1.5) or the usury provisions of the California Constitution.  A periodic interest rate that does not exceed 10% per annum simple interest should not violate California’s usury law. Generally, interest should begin running only after a certain specified period, i.e., thirty, sixty or ninety days after the billing invoice is rendered, if not paid within that time.  Further, charging interest from the moment the fee becomes due, without allowing the client a reasonable time to review the charges and make payment, could be determined to be both unreasonable and seen as a contractual penalty against public policy.

• Recognize Third-Party Payors

Don’t just accept fee payments from someone other than your client.  Accepting money from a third-party creates conflicts that must be disclosed and client consent must be obtained under CRPC 1.8.6.  A third-party payor is not a part of the attorney-client relationship, so lawyers are not obligated to provide the same duties to a third-party payor unless the client otherwise provides informed consent.  As explained in Step 10, making sure that both your client and the third-party payor understand their roles, your role, and the responsibilities you have to each of them is critical to setting boundaries and curbing expectations.

Costs of Representation:

It is generally is held, and reasonably expected by clients, that in the absence of an agreement to the contrary, an attorney may not charge a client for normal overhead expenses associated with properly maintaining, staffing, and equipping an office. Rest.3d Law Governing Lawyers § 38(3)(a); ABA Opn. 93-379; SDCBA Opn. 2013-3.  Overhead expenses could include, but are not limited to, the cost of renting office space, paying for malpractice insurance, and utility charges.  SDCBA Opn.  2013-3; ABA Opn. 93-379; see also In the Matter of Kroff (Rev. Dept. 1998) 3 Cal. State Bar Ct. Rptr. 838. However, a lawyer may recoup costs and expenses reasonably incurred in connection with the client’s matter for non-overhead costs, including but not limited to services performed in-house, such as photocopying, long-distance telephone calls, computer research, special deliveries, secretarial overtime, and other similar services so long as the charge reasonably reflects the lawyer’s actual cost for the services rendered.  SDCBA Opn. 2013-3; ABA Opn. 93-179.

A lawyer may not add a profit element or mark-up on top of actual costs incurred, except where the client gives informed written consent to such a profit element. ABA Opn. 93-379; see also Matter of Kroff; SDCBA Opinion 2013-3. Further, a lawyer should pass along to the client any discount received from a third-party vendor.  ABA Opn. 93-379.  Charging a client a flat rate for costs may be permitted if it is reasonable under the circumstances.  On the other hand, an administrative fee charged to a client in addition to costs incurred will likely raise red flags.  Such expenses remain subject to scrutiny for necessity, reasonableness, and fairness, whether they are billed periodically to the client or charged against the client’s recovery under a contingent fee contract.

A lawyer may ethically charge interest and impose late charges on past-due fees and costs provided the attorney obtains the client’s informed consent and complies with applicable law. CA Bar Opn. 1980-53; ABA Opn. 388 (1974); LABA Opns. 370 (1978) & 374 (1978) & 499 (1999) (interest on costs); BASF Opn. 1970-1; SDCBA Opn. 1983-1; Rest.3d Law Governing Lawyers § 38, Comment “h”. On the other hand, for example, the interest charged on costs incurred each month until a recovery is obtained in a contingency fee matter could be determined to be unethical and as an imposition of a penalty assessed to the client for pursuing litigation of the matter rather than settling at the first opportunity.  Such a contractual penalty could be found to be void as contrary to public policy.

Secure Your Fees

An attorney lien on a judgment or other client recovery is not automatic, but it may be created by contract. Del Conte Masonry Co. v. Lewis (1971) 16 Cal.App.3d 678, 680.  Securing your hourly legal fees incurred through a lien on your client’s recovery requires compliance with CRPC 1.8.1, which mandates a lawyer to advise the client in writing of the adverse consequences of the lien and advise the client of his or her right to obtain an independent attorney to review the lien provision before the client signs the fee agreement.  See Carroll v. Interstate Brands Corp. (2002) 99 Cal. App. 4th 1168, 1178; Fletcher v. Davis (2004) 33 Cal. 4th 61, 66 (“charging lien”); CA Bar Opn. 2006-170; B&P Code § 6147.  Even if it could be argued that an attorney’s lien on a client’s case could be implied, it is a best practice to place an “attorney lien” provision in the engagement agreement in order to establish the effective written lien date for priority purposes.  See, i.e., County of San Bernardino v. Calderon (2007) 148 Cal.App.4th 1103.

Further, a provision in the engagement agreement that the lawyer shall receive the full contingency fee if discharged prior to obtaining recovery is unenforceable.  The amount involved and the result obtained are significant to the determination of a reasonable fee; and premature termination of employment should not give counsel any greater right than he or she would have had, had employment continued through settlement or judgment.  Fracasse v. Brent (1972) 6 Cal.3d 784, 791. A lawyer who is discharged before completing the performance of a contingent fee contract is limited by law to the recovery of the reasonable value of his or her services rendered.  Id. at 792-793. Whether charging by the hour or on a contingency basis, be sure to maintain accurate and complete records of the time you actually spend on each client’s matter as evidence of the reasonable value of your services and to support any future claims.

Define Attorney-Client Authority:

In an effort to inform the client and later avoid misunderstandings, the written fee agreement should define the lines of authority, making clear what matters require the client’s consent and what matters are reserved for the lawyer’s decision. B&P Code § 6148(a)(3).  The attorney-client relationship does not vest the lawyer with absolute authority to make all decisions on the client’s behalf. A lawyer cannot impair the client’s “substantial rights or the cause of action itself.” A client has “the ultimate authority to determine the purposes to be served by legal representation, within the limits imposed by the law and the lawyer’s professional obligations.” Rule 1.2, Comment [1].  Lawyers can only provide advice to a client on matters affecting the substance of the case, but the final decision rests with the client.  Blanton v. Womancare, Inc. (1995) 38 Cal.3d 396, 404-405; Levy v. Sup.Ct. (1995) 10 Cal.4th 578, 584. Absent the client’s express authority, stipulations by counsel that substantially resolve the case are not binding upon the client and may be set aside by the client. Blanton at 405-408; see Marriage of Helsel (1988) 198 Cal.App.3d 332, 338. On the other hand, a lawyer representing a client has the right to make procedural or tactical decisions that affect only the procedure or remedy as opposed to a cause of action itself, such as whether to call a particular witness, seek an extension of time to plead or conduct discovery. Blanton at 404.

For example, the client’s express authority is required to commence legal proceedings, settle a claim, agree to entry of a default judgment, or voluntarily dismiss a pending suit “with prejudice.” Blanton at 404-405; see Romadka v. Hoge (1991) 232 Cal.App.3d 1231, 1235-1237 (voluntary dismissal).  Therefore, a client cannot waive his or her right to settle a case or invest such a right with the lawyer. The right to settle on particular terms, refuse to settle, or otherwise terminate the matter is one of the client’s substantial rights that cannot be compromised or impaired by counsel. CRPC 1.2(a); Hall v. Orloff (1920) 49 Cal.App. 745, 749; Lemmer v. Charney (2011) 195 Cal.App.4th 99, 103-104.  Lawyers are required to communicate settlement offers to their clients so the client can accept or reject the offer.  CRPC 1.4; 1.4.1. A settlement agreement cannot be enforced through the entry of judgment under Code of Civil Procedure section 664.6 unless the settlement is signed by the party/litigants or stipulated to orally before the court by the parties. The signature or stipulation of an attorney is insufficient. Williams v. Saunders (1997) 55 Cal. App. 4th 1158, 1163.

A provision in the engagement agreement that states the client may not settle without counsel’s consent is void and unenforceable. Matter of Van Sickle (Rev. Dept. 2006) 4 Cal. State Bar Ct. Rptr. 980, 989; Lemmer v. Charney (2011) 195 Cal.App.4th 99, 104-105 (“the law will not enforce an agreement …constraining a client to pursue an unwanted lawsuit.”).  A fee agreement also cannot require a client to give advance consent to settlement at the beginning of the case because such consent is not informed without the client knowing the offer or the applicable circumstances. See Ramirez v. Sturdevant (1994) 21 Cal.App.4^th 904.  Further, a lawyer representing a client on a contingency fee basis does not have a cause of action for damages against the client for dismissing or settling the lawsuit without the attorney’s consent. CRPC 1.2(a); Lemmer at 103-104 [client who agreed to “walk-away” settlement was not liable to the attorney for breach of contract or fraud based on contingency fee agreement provision requiring a client to take the case to settlement or trial (provision unenforceable); see also In re Guzman (Rev. Dept. 2014) 5 Cal. State Bar Ct. Rptr. 308, 314-31 [retainer agreement provision giving attorney unfettered authority to settle claim evidenced “overreaching”]; In re Van Sickle (Rev. Dept. 2006) 4 Cal. State Bar Ct. Rptr. 980, 98 [retainer agreement provision prohibiting the client from settling without the attorney’s consent void as “an improper intrusion on the unilateral right of clients to control the outcome of their cases”].

End of Representation:

A client can terminate a lawyer at any time without cause.  A lawyer, on the other hand, cannot terminate the attorney-client relationship at any time for any reason, so this should not be stated in an engagement agreement. Lawyers must adhere to Rule 1.16 when ending the attorney-client relationship. A client also cannot give advance blanket consent to a lawyer’s withdrawal in the fee agreement.

For example, it is improper for a fee agreement to provide that the attorney may “automatically withdraw” from the case upon the client’s failure to pay fees and costs. Withdrawal from representation requires client consent or court approval. CRPC 1.16; see also SDCBA Opn. 1978-7. Further, a fee agreement provision prohibiting the client from substituting another lawyer without cause violates public policy because of the client’s power to discharge an attorney with or without cause is absolute. Matter of Van Sickle (Rev.Dept. 2006) 4 Cal. State Bar Ct.Rptr. 980, 989.

Return of the Client’s File:

The client is entitled to the original file at the end of the representation at the client’s request.  CRPC 1.16(e)(1).  A lawyer cannot withhold the client file as a lien on unpaid fees or charge the client for the expense of copying the client’s file.  CRPC 1.16(e)(1); see Kallen v. Delug (1984) 157 Cal.App.3d 940, 949-951; Academy of Calif. Optometrists, Inc. v. Sup. Ct. (1975) 51 Cal.App.3d 999, 1006; LABA Opns. 360 (1976), 362 (1976), 425 (1984); BASF Opns. 1984-1, 1973-12; SDCBA Opns. 1977-2, 1977-3, 1984-3.  Therefore, such provisions should not be included in an engagement agreement.  A lawyer may make a copy of the client’s original file at the lawyer’s own cost, which cannot be passed along to the client.

Sign, Seal & Deliver:

Make sure that the client reads and understands the engagement agreement.  Discuss the agreement with the client and be available to answer any questions.  Out of an abundance of caution, you may wish to advise that the client may obtain independent counsel to review the agreement, even if not mandated.  Require the client to additionally sign or initial key provisions of the agreement in an effort to ensure that the client provided informed consent. Don’t forget to provide a signed copy of the engagement agreement to the client as required under B&P Code §6148.  References to the agreement should be communicated to the client as needed throughout the representation, and preferably in writing.

As Abraham Lincoln said, “the best way to predict the future is to create it.” Happy 2021!

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.