How to Lose Your Legal Fee, Part 1: Excessive Fees

For the most part, lawyers in New York are free to set their own fees. Except for particular areas where specific court or ethics rules govern—most notably, personal injury and medical malpractice—lawyers have wide latitude in setting the financial terms of their engagements with clients. Courts generally will enforce those terms, no matter how unfair to the clients they may seem. Still, there are limits. Applying ethics rules, other court rules and the law of contracts and fiduciary duty, courts have, in certain circumstances, found reasons to declare client-attorney fee agreements unenforceable, resulting either in a quantum meruit recovery or, worse, no recovery at all.

This is the first in a three-part series discussing ways lawyers can lose their right to collect their contractual fee. In this article, we will discuss excessive fees. In future issues, we will address fee forfeiture (Part 2) and unique New York rules limiting fee agreements (Part 3).

The Law of Contracts and Excessive Fees

New York courts generally determine claims of excessive legal fees under the law of contracts. (The ethics rule for excessive fees, New York Rule of Professional Conduct (RPC) 1.5(a), will be discussed below.) This comports with N.Y. Jud. Law §474, which states, in pertinent part, “[t]he compensation of an attorney or counsellor for his services is governed by agreement, express or implied, which is not restrained by law…” (emphasis added). Thus, courts will ordinarily enforce a fee agreement unless it is somehow deemed illegal—for example, by exceeding statutory or court-imposed limits on certain kinds of contingent fees (see, e.g. N.Y. Jud. Law §474-a (setting limits on contingent fees for medical, dental and podiatric malpractice cases)) or by charging usurious interest rates on unpaid fees (see, e.g., Bryan L. Salamone, P.C. v. Cohen, 40 Misc. 3d 338, 342–43 (Sup. Ct. Suffolk Co. 2013)).

But, as with any contract, an attorney-client fee agreement may not be enforced if it is unconscionable. “In general, an unconscionable contract has been defined as one [in] which … [there is] an absence of meaningful choice on the part of one of the parties together with contract terms which are unreasonably favorable to the other party.” King v. Fox, 7 N.Y.3d 181, 191 (2006) (hereafter, King) (citation omitted). In making this determination, courts “give particular scrutiny to fee arrangements between attorneys and clients, casting the burden on attorneys who have drafted the retainer agreements to show that the contracts are fair, reasonable and fully known and understood by their clients.” Shaw v. Manufacturers Hanover Trust Co., 68 N.Y.2d 172, 176 (1986), (citing Jacobson v. Sassower, 66 N.Y.2d 991, 993, (1985)).

Procedural Unconscionability

The New York Court of Appeals has recognized two types of unconscionability relating to fee agreements. The first is “procedural unconscionability.” “To determine whether an agreement is procedurally unconscionable, we must examine the contract formation process for a lack of meaningful choice. The most important factor is whether the prospective client was fully informed upon entering the agreement.” In re Lawrence, 24 N.Y.3d 320, 337 (2014), rearg. denied, 24 N.Y.3d 1215 (2015) (citing King, 7 N.Y.3d at 192). This in turn involves several considerations. One is the clarity of the agreement, with the understanding that “an agreement between lawyer and client [shall] be construed most favorably for the client.” Shaw, 68 N.Y.2d at 177 (citation omitted) (lawyer required to continue representing the client through appeal and to advance all expenses because retainer agreement failed to specify length of retention and circumstances under which client would advance expenses). Another factor in evaluating unconscionability is the relative bargaining power between the lawyer and the client. Compare King, 7 N.Y.3d at 185, 190 (deal between musician and attorney for ongoing royalty stream from hit song arguably unconscionable) with Lawrence, 23 N.Y.3d at 337-38 (though client an octogenarian, no procedural unconscionability because she “was involved in every detail of the case,” was a “sophisticated businesswoman,” and had her accountant review the fee agreement).

A third consideration relates to the circumstances under which the agreement was entered. Particularly important is whether the agreement was made after an attorney-client relationship, with its concomitant obligations, had been formed. “A revised agreement entered into after the attorney has already begun to provide legal services is reviewed with even heightened scrutiny because an attorney-client relationship has been established and the opportunity for exploitation of the client is enhanced.” Lawrence, 23 N.Y.3d at 336 (citing In re Howell, 215 N.Y. 466, 472 (1915)). In Howell, the Court disallowed a retainer agreement entered into with a 78-year-old widow near the close of the case, which gave the lawyer an additional $1,000 in fees directly from a trust fund already depleted by the trustee’s mismanagement. Id. In Mar Oil, S.A. v. Morrissey, 982 F.2d 830, 838-39 (2d Cir. 1993), the Second Circuit disallowed a post-retention modification in the fee arrangement where the lawyer tucked the new retainer agreement into a stack of papers the client signed in a car en route to the airport. Similarly, in Brooks v. Lewin, 48 A.D.3d 289, 290-91 (1st Dept. 2008), the Court disallowed a post-retention fee change obtained under the attorney’s threat that he would stop working if the client did not agree to it. See also NYSBA Op. 719 (1999) (declaring this conduct unethical). The Lawrence case, which also involved a post-retention change in the fee arrangement (from an hourly fee to a 40% contingency), stands in contrast to these, but as noted previously it involved an unusually sophisticated client who relied on an outside accountant to advise her on the new fee arrangement.

Substantive Unconscionability

The second type of unconscionability is substantive unconscionability. “Agreements not unconscionable at inception may become unconscionable in hindsight if ‘the amount becomes high enough to be out of all proportion to the value of the services rendered.’” Lawrence, 23 N.Y.3d at 338 (citing King, 7 N.Y.3d at 191). But in Lawrence, the Court was quick to point out that this “hindsight” review has only a “narrow application,” and should be confined to situations where “‘the amount of the fee, standing alone and unexplained, may be sufficient to show that an unfair advantage was taken of the client or, in other words, that a legal fraud was perpetrated upon him.’” Lawrence, 23 N.Y.3d at 338 (citing Gair v. Peck, 6 N.Y.2d 97, 106 (1959)). Particularly in a contingent fee context, the courts are loathe to question in hindsight the size of a contingent fee, no matter how great, in light of the risks the lawyer took: risks that the lawyer would “do much work and earn nothing” (Lawrence v. Miller, 11 N.Y.3d 588, 596 (2008)), that the client would reject an early, lucrative settlement offer and recover less after trial (ABA Formal Op. 94-389 at 9(1994)), and that the client would fire the lawyer and relegate her to a quantum meruit recovery. Id. at 10; Lawrence, 23 N.Y.3d at 338.

The upshot is that an attorney is entitled to a “risk premium” for taking a case on a contingency-fee basis. In fact, contingency arrangements as high as 40–50% have been upheld as long as there was no indicia of either fraud or breach of the agreement or of court rules. Schweizer v. Mulvehill, 93 F. Supp. 2d 376, 403 (S.D.N.Y. 2000); Lester Brickman, Contingency Fee Abuses, Ethical Mandates and the Disciplinary System: The Case Against Case-by-Case Enforcement, 53 Wash. & Lee L. Rev. 1339 (1996) (nationally, allowable contingency fees range from 33% to 50%). This is true even where the lawyer knows from the outset she will obtain something, as when a settlement offer is already on the table. Thus, in Schweizer, the court upheld a 33% contingency agreement even though the lawyer’s efforts resulted in just a 7% increase in the settlement offer over the initial offer (made before the lawyer got involved). 93 F. Supp. 2d at 386–87, 403-04; see ABA Formal Op. 94-389 (1994) (no ethical prohibition on lawyer receiving full contingent recovery on a settlement amount that was the subject of an earlier settlement offer the plaintiff had rejected). There are instances where low risk contingency arrangements have been deemed excessive, but they are rare. See, e.g., In re HoganWillig, PLLC v. Hendel, 126 A.D.3d 1311, 1312 (4th Dept. 2015) (despite contingent arrangement, reducing fees to approximately 5% of agreed contingency because of the small “amount of legal work performed by petitioner on respondent’s behalf and the minimal risk that petitioner faced of not being paid for its services”; decision rendered before recent Lawrence decision); Wade v. Clemmons, 84 Misc. 2d 822, 826 (Sup. Ct. Kings Co. 1975) (unfair to have plaintiff recover nothing, because settlement went to lienholder, while lawyer gets entire contingency fee).

It is even rarer for a New York court to disallow an hourly fee arrangement on the basis of excessiveness or unconscionability. This, of course, is different than reducing fee claims made under fee shifting statutes or contract provisions because the hourly fees claimed are deemed unreasonable. See, e.g., In re Citigroup Inc. Sec. Litig., 965 F.Supp.2d 369, 392–95 (S.D.N.Y. 2013) (reducing lodestar because of waste and inefficiency). (This will be discussed further in Part 3 of this series.) One example of the judicial disdain for excessiveness arguments is Paul, Weiss, Rifkind, Wharton & Garrison v. Koons, 4 Misc.3d 447, 451 (Sup. Ct. N.Y. Co. 2004), where the court rejected famous artist Jeff Koons’s contention that Paul Weiss’s total fee of $3,942,024.95 for handling his divorce—which involved his ex-wife kidnapping his child—violated the predecessor to RPC 1.5(a). The Court noted that Koons had not objected to any of the fees as they were being accrued, and indeed had asked his lawyers to “‘leave no stones unturned’” in pursuing the return of his child. Id. at 448. The court called Koons’s effort “an extravagant effort of defendant through a top-notch law firm to control and dictate the terms of the dispute with defendant’s former wife,” and declared: “[t]his court will not police the conduct of wealthy litigants who choose to share their wealth with counsel through extravagant litigation.” Id. at 451.

The Ethics Rules and Excessive Fees

The Koons case is actually a rare example of a court deciding whether RPC 1.5(a) or its Code predecessor, DR 2-106 would apply to a civil fee dispute. The first sentence of RPC 1.5(a) is crystal clear: “A lawyer shall not make an agreement for, charge, or collect an excessive or illegal fee or expense.” But determining if a fee is ethically “excessive” is not so clear. The next sentence of the Rule is confusingly circular: “A fee is excessive when, after a review of the facts, a reasonable lawyer would be left with the definite and firm conviction that the fee is excessive.” It then goes on to list ten factors which “may” be considered in determining excessiveness, including (1) the time and labor required; (2) the novelty and difficulty of the question presented; (3) the skill needed to perform the task; (4) the likelihood that acceptance of the employment would preclude the lawyer from taking on other work; (5) the fee “customarily charged in the locality for similar legal services”; (6) the amount involved and the results obtained; (7) the time limitations “imposed by the client or by circumstances”; (8) the nature and length of the professional relationship with the client; (9) the “experience, reputation and ability of the lawyer performing these services”; and (10) whether the fee is fixed or contingent. These factors “are not exclusive, nor will each factor be relevant in each instance.” RPC 1.5(a), Comm. 1. According to one New York ethics opinion, the penultimate factor—the “experience, reputation and ability” of the lawyers performing the task—is considered “the most important.” NYSBA Comm. on Prof. Ethics Op. 1004 (2014) (citing Roy Simon, Simon’s New York Rules of Professional Conduct Annotated, 2013 ed. at 134).

These factors have been employed to impose discipline in other states (see, e.g., In re Fordham, 423 Mass. 481 (1996), cert denied, 519 U.S. 1149 (1997) (imposing discipline for charging more than $50,000 to successfully defend DWI case, where ordinary charge in locality for such a case was $3,000–10,000). We have, however, found only one excessive fee disciplinary case in New York, In re Cooperman, 83 N.Y.2d 465 (1994), and it is unusual. There, Cooperman, a criminal lawyer, required his clients to pay a non-refundable retainer at the start of the case, allowing him to keep the entire retainer even if the client fired him the next day. The Court of Appeals said such an arrangement “clashes” with the public policy supporting “the unqualified right [of the client] to terminate the attorney-client relationship at any time.” Id. at 472. Permitting the lawyer to keep the fee would “economically chill[]” the client’s “unbridled prerogative to walk away from the lawyer.” Id. It would also allow the lawyer to keep a fee he or she never earned. Id.

Although the Court cited the predecessor to RPC 1.5(a) as the basis for imposing discipline, it is not clear that the Court found the fee excessive. Cooperman had argued that his nonrefundable retainer was proper because it was not “excessive.” The Court rejected any analysis based on the size of the fee, noting the following: “[T]he reasonableness of a non-refundable fee cannot rescue an agreement that impedes the client’s absolute right to walk away from the attorney. The termination right and the right not to be charged excessive fees are not interdependent in this analysis and context.” Id. at 474 (emphasis added). The focus seemed to be on the client’s right to fire the lawyer—a concept found in RPC 1.16(b) (requiring lawyer to withdraw if terminated)—rather than excessiveness under RPC 1.5(a).

The reluctance of courts and disciplinary authorities to rely on RPC 1.5(a) is easily explained: the Rule’s fact-driven focus makes drawing hard and fast lines between ethical and unethical conduct difficult. Also, the few ethical opinions in this area have tended to discourage second-guessing of the attorneys’ and clients’ free contractual choice. See ABA Formal Op. 94-389 at 6 (noting that contingent fees are used by both indigent and wealthy clients; “it may very well be in the client’s best interests, whatever the client’s apparent ability to pay the fee, to agree to pay a fixed percentage of any possible recovery, rather than assume liability for a possibly prohibitively expensive legal bill that will be owed even if the client recovers nothing”).

Still, claims of excessiveness and unconscionability remain a constant threat. To avoid them, lawyers should: (a) offer clients alternatives to contingency arrangements; (b) give clients adequate time to read and understand the retainer agreement; (c) keep the size of any contingency within customary bounds (generally one-third, but certainly no more than 40%); (d) make sure that fee terms are written in plain English, and comport with court rules; and (e) use extra care when changing the fee arrangement after the representation has begun, including making clear in writing that the client should consult independent counsel. Finally, if a client complains about fees, think hard before allowing the dispute to escalate: a small discount to mollify the client can save much more in litigation costs later.

Ronald C. Minkoff is a Shareholder and Director of Frankfurt Kurnit Klein & Selz, P.C. and is the Chair of the firm’s Professional Responsibility Group.

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Attorney Fees Excessive Fees Fee Agreements Ronald C Minkoff