Ethics Counsel on www.OKbar.org

OBA Ethics Counsel

Ethics Opinion No. 324

Inquiry: May a law firm or lawyer contract with a client that an award of attorney fees and costs made in connection with a discovery dispute authorized under 12 O.S. § 3237 and Fed. R. Civ. P. 37 be retained by the lawyer in addition to the agreed upon contingency fee?

Opinion: The answer to the Question of the Inquiry is in the negative. The Oklahoma Supreme Court has held that it is a violation of Rule 1.5 of the Oklahoma Rules of Professional Conduct for an attorney to collect both the full amount of an agreed upon contingent fee from the client’s recovery and an attorney fee awarded either by statute or settlement. State ex. rel. Oklahoma Bar Ass'n' v. Weeks, 1998 OK 83, ¶ 48, 969 P.2d 347, 358. The public policy concerns expressed by the Oklahoma Supreme Court in Weeks, as well as the nature of statutory or rule based attorney fee and cost awards, would indicate that an attorney is required to offset a sanctions based, attorney fee award, under 12 O.S. § 3237 or Fed R. Civ. P. 37, from the agreed upon contingency fee agreement amount,1 unless the attorney elects to receive the full amount of attorney fees awarded by statute or settlement.

The Nature Of Contingency Fee Agreements.

In Oklahoma, the upper limit for a contingency fee is set by statute at fifty percent (50%) of the net amount of the judgment recovered, or compromise negotiated. 5 O.S. § 7. So long as the contingency fee agreement is not based on an illegality, and is not prohibited by statute or rule, an attorney and client are otherwise free to contract between themselves for the nature and amount of a contingency fee. State ex rel. Howard v. Okla. Corp. Com'n, 1980 OK 96, ¶ 21 at n. 5, 614 P.2d 45, 49. Indeed, the only cases in which it appears that a court refused to enforce a bargained-for contingency fee within the statutory limit are those in which the contingency fee contract was “obtained by fraud, mistake, undue influence, or suppression of facts on the part of the attorney or in a manner contrary to public policy.” Oklahoma Turnpike Authority v. New Life Pentecostal Church of Jenks, 1994 OK 9, ¶ 13 at n. 7. 870 P.2d 762, 766.

However, a contingency fee agreement must be reasonable. Rule 1.5, Oklahoma Rules of Professional Conduct, 5 O.S. Chapter 1, Appendix 3-A. Courts may also refuse to enforce a contingency fee agreement if the fee is excessive. Abel v. Tisdale, 1980 OK 161, ¶ 16, 619 P.2d 608, 611. Furthermore, in determining the amount of a statutory based attorney fee, a court is not bound by the terms of a contingency fee agreement between the attorney and client. Thompson v. Andover Oil Co., 1984 OK CIV APP 51, ¶ 28, 691 P.2d 77, 84-85.

The Nature Of An Oklahoma Statutory Based Attorney Fee Award.

With respect to the award of a prevailing party attorney fee, Oklahoma is firmly committed to the American Rule. Kay v. Venezuelan Sun Oil Co., 1991 OK 16, ¶ 5, 806 P.2d 648, 650. Under the American Rule, each litigant bears the cost of his/her own legal representation and Oklahoma courts lack the authority to award attorney fees in the absence of a statute or specific contractual authority. Id.

Even though it does not appear that the Oklahoma Courts have expressly ruled on this exact issue, since a party litigant must bear the cost of his or her own legal representation, it follows that the right to collect statutory, or contractually, based attorney fees and costs should rest with the prevailing party client, and not his or her attorney. Indeed, a fair reading of 12 O.S. § 3237 supports this proposition, when it states, in part:

AWARD OF EXPENSES OF MOTION. If the motion is granted, the court shall, after opportunity for hearing, require the party or deponent whose conduct necessitated the motion or the party or attorney advising such conduct or both of them to pay to the moving party the reasonable expenses incurred in obtaining the order, including attorney fees, unless the court finds that the opposition to the motion was substantially justified or that other circumstances make an award of expenses unjust.

If the motion is denied, the court shall, after opportunity for hearing, require the moving party or the attorney advising the motion or both of them to pay to the party or deponent who opposed the motion the reasonable expenses incurred in opposing the motion, including attorney fees, unless the court finds that the making of the motion was substantially justified or that other circumstances make an award of expenses unjust.

If the motion is granted in part and denied in part, the court may apportion the reasonable expenses incurred in relation to the motion among the parties and persons in a just manner.

12 O.S. § 3237(A)(4) (Emphasis added).2

It is true that the purpose of 12 O.S. § 3237 is “to address abusive discovery practices and deter abusive resort to the judiciary.” Brown v. Curtis, 2003 OK CIV APP 47, ¶ 27, 71 P.3d 34, 39-40. The statute is also designed to “deter misconduct.” Payne v. DeWitt, 1999 OK 93, ¶ 8 at n. 7, 995 P.2d 1088, 1092. It is also certainly true that discovery abuses add to the legal cost of litigation, and may make an attorney’s potential recovery under a contingency fee agreement less valuable due to the extra legal hours incurred in the litigation. However, that does not mean an attorney should therefore be entitled to receive the payment of expenses and/or attorney fees, under 12 O.S. § 3237, in addition to the other fees to be received under a contingency fee agreement.

The Effect of The Oklahoma Supreme Court’s Ruling in Weeks.

In Weeks, the Oklahoma Supreme Court did not expressly prohibit an attorney from retaining sanction based attorney fees in addition to the percentage of fees received under a contingency fee agreement. However, the Oklahoma Supreme Court’s reasoning in Weeks strongly suggests that an attorney should not be entitled to retain such fees in addition to the percentage of fees to be recovered under the contingency fee agreement.

In Weeks, the Oklahoma Supreme Court began its analysis with the recognition that:

  1. Statutory attorney fee awards can coexist with private fee arrangements [citing Venegas v. Mitchell, 495 U.S. 82, 88, 110 S.Ct. 1679, 1683 (1990)]; and
  2. Contingent fee agreements do not impose an automatic ceiling on the award of statutory attorney’s fees [citing Blanchard v. Bergeron, 489 U.S. 87, 92, 109 S.Ct. 939, 944 (1989)].

Weeks, 1998 OK 83 at ¶ 29, 969 P.2d at 354. However, the Court also favorably cited the general rule set forth in the annotation entitled: “Effect of Contingent Fee Contract on Fee Award Authorized by Federal Statute”, 76 A.L.R.Fed.347, 352 (1983), which states:

In general, the cases explicitly or implicitly hold that the statutory award of attorney fees should not be treated as an amount in addition to that received or to be received by the attorney under a contingent fee contract, with many courts explicitly holding that the award is to be credited against the amount owed to the attorney under the contract, and if the award equals or exceeds the contractual fee, that amount is deemed paid and satisfied.

(Emphasis added). Id. at ¶ 36, 969 P.2d at 357.

The Oklahoma Supreme Court then examined several federal cases dealing with the issue of an attorney’s recovery of both a statutory based, and a contingent fee based, fee in the same litigation, none of which allowed such a recovery. For example, the Third Circuit Court of Appeals ruled an attorney should recover the contingent amount or the statutory amount, whichever is greater. If the contingent fee was greater, the client would have to pay the attorney the difference between the two fees. If the statutory fee was greater, the client’s contingent obligation to the attorney should be deemed settled. Id. at ¶ 38, 969 P.2d at 357, citing Sullivan v. Crown Paper Bd. Co., Inc., 719 F.2d 667, 670 (3rd Cir. 1983).

The Second Circuit Court of Appeals also held that where the attorney has been paid a contingent fee in an amount equal to or above the amount of a statutory fee award, the client should be reimbursed for any excess over the amount of the contingent fee agreement received by the attorney. Id., citing Sargeant v. Sharp, 579 F.2d 645, 648 (1st Cir. 1978). Similarly, the Second Circuit Court of Appeals determined that the client’s fee obligation to his attorney was “deemed paid and satisfied” to the extent of the statutory attorney fee award ordered. Id. at ¶ 39, 969 P.2d at 357, citing Wheatley v. Ford, 619 F.2d 1037, 1041 (2nd Cir. 1982).3

The Oklahoma Supreme Court’s reasoning, and favorable references to the foregoing legal authority in Weeks, is a compelling indication that it would probably not permit an attorney to retain a sanction based, statutory attorney fee award, under 12 O.S. § 3237 or Fed. R. Civ. P. 37, in addition to the fee to be recovered under a contingency fee agreement.

Other Decisional Authority Outside Of Oklahoma.

Other federal courts have examined whether an attorney is entitled to retain a sanction based attorney fee, under Fed. R. Civ. P. 37, in addition to any fee owed by the client under a contingency fee agreement.4

For example, the District of Columbia Circuit Court of Appeals held that an attorney was not entitled to retain a sanction based attorney fee, in addition to fees recovered under a contingency fee agreement, in the absence of a specific provision allocating the sanction based attorney fee to the attorney in the contingency fee agreement. Hamilton v. Ford Motor Company, 636 F.2d 745, 748, 749-50 (D.C. Cir. 1980).

The District of Columbia Circuit Court reasoned that the principal purpose of Fed. R. Civ. P. 37(b) is punitive, not compensatory. Thus, Rule 37(b) could be construed to allow such a sanctions based award directly to attorneys since it is “silent as to whom the judge may award attorneys’ fees.” Id. at 747-48. However, the Court determined that the issue could only be presented “if the [contingency fee] Agreement authorizes such a result.” Id. at 748.

While, at first blush, it appears that this opinion supports an award of such a sanction based attorney fee to the attorney, if the contingency fee agreement specifically allows such an allocation. Nevertheless, the District of Columbia Circuit Court’s reasoning ignores the express provisions for the award of such fees to a “party” that appears throughout Fed. R. Civ. P. 37. Considering that this same language also appears in 12 O.S. § 3237, it is doubtful that the Oklahoma Supreme Court would agree with the holding contained in Hamilton.

However, in another District of Columbia Circuit case, the District of Columbia Circuit Court of Appeals affirmed a district court magistrate’s grant of Fed. R. Civ. P. 37(b) attorney fee’s and costs awarded directly to the attorney. Joshi v. Professional Health Services, Inc., 875 F.2d 350 (D.C. Cir. 1989), 1989 U.S. App. LEXIS 7240, *3. Nevertheless, in Joshi, the party objecting to the award was the appellant, against whom the award was imposed, and not the attorney’s client. Additionally, the Joshi decision is unpublished, and is of questionable precedential authority. Id.

In David v. Hooker, Ltd., 560 F.2d 412 (9th Cir. 1977), the Ninth Circuit Court of Appeals affirmed a trial court order directing that a Fed. R. Civ. P. 37(b) award be paid directly to the plaintiff's attorney. However, the David opinion is of little assistance to this inquiry because the case never discussed the nature of the fee agreement between the client and his attorney.

Again, in both Stengel v. Kawasaki Heavy Industries, Ltd., 116 F.R.D. 263, 269 (N.D. Tex. 1987), and Swain, M.D. v. Encore Medical Corp., 2006 U.S. Dist. LEXIS 89607, *11 (W.D. Pa.), Fed. R. Civ. P. 37(b) attorney fee awards were ordered to be paid directly to the plaintiffs’ attorneys in these cases. However, in both Stengle and Swain, the attorneys were directed to offset these awards against any amount owed by the plaintiffs under their respective contingency fee agreements. Id. Consequently, these two cases are actually more in line with the Oklahoma Supreme Court reasoning expressed in Weeks. Indeed, no other cases have been found authorizing the payment of sanction based attorney fees directly to an attorney, in addition to any percentage of recovery based fee owed by the client under a contingency fee agreement, without offset pre-conditions being placed on such an award.

Ethical Considerations Under 5 O.S. § 7
And
Rule 1.5 Of The Oklahoma Rules Of Professional Conduct, 5 O.S. Chapter 1, Appendix 3-A.

While the contingency fee agreement in Weeks originally required the payment of fifty percent (50%) of any judgment or settlement paid by defendants therein,5 in addition to any court award or negotiated attorney fee, it is important to point out that the Oklahoma Supreme Court’s ruling was not based on a violation of 5 O.S. § 7. Rather, it was predicated upon a violation of Rule 1.5 of the Oklahoma Rules of Professional Conduct, 5 O.S. Chapter 1, Appendix 3-A. Weeks, 1998 OK 83 at ¶¶ 43-44, 969 P.2d at 357.

Rule 1.5 of the Rules of Professional Conduct currently provides:

  1. A lawyer's fee shall be reasonable. The factors to be considered in determining the reasonableness of a fee include the following:
    1. the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
    2. the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
    3. the fee customarily charged in the locality for similar legal services;
    4. the amount involved and the results obtained;
    5. the time limitations imposed by the client or by the circumstances;
    6. the nature and length of the professional relationship with the client;
    7. the experience, reputation, and ability of the lawyer or lawyers performing the services; and
    8. whether the fee is fixed or contingent.
  2. When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.
  3. A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, whether the client is to be liable for reimbursement of litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter, and, if there is a recovery showing the remittance to the client and the method of determination.
  4. A lawyer shall not enter into an arrangement for, charge, or collect:
    1. any fee in a domestic relations matter, the payment or amount of which is contingent upon the result obtained, other than actions to collect past due alimony or child support; or
    2. a contingent fee for representing a defendant in a criminal case.
  5. A division of fee between lawyers who are not in the same firm may be made only if:
    1. the division is in proportion to the services performed by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation;
    2. the client is advised of and does not object to the participation of all of the lawyers involved; and
    3. the total fee is reasonable.

5 O.S. Chapter 1, Appendix 3-A.

The foregoing current version of Rule 1.5 of the Rules of Professional Conduct will be superseded, effective January 1, 2008, and replaced by the following:

  1. A lawyer shall not make an agreement for, charge or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:
    1. the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
    2. the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
    3. the fee customarily charged in the locality for similar legal services;
    4. the amount involved and the results obtained;
    5. the time limitations imposed by the client or by the circumstances;
    6. the nature and length of the professional relationship with the client;
    7. the experience, reputation, and ability of the lawyer or lawyers performing the services; and
    8. whether the fee is fixed or contingent.
  2. The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.
  3. A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. A contingent fee agreement shall be in writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter, and, if there is a recovery, showing the remittance to the client and the method of determination.
  4. A lawyer shall not enter into an arrangement for, charge, or collect:
    1. any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or
    2. a contingent fee for representing a defendant in a criminal case.
  5. A division of a fee between lawyers who are not in the same firm may be made only if:
    1. the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;
    2. the client agrees to the arrangement and the agreement is confirmed in writing; and
    3. the total fee is reasonable.

5 O.S. Chapter 1, Appendix 3-A.

The new Rule 1.5 is indicative of current Oklahoma case law that requires attorney fee agreements to be reasonable and not excessive in scope. However, a contingency fee agreement, which contains a provision allowing an attorney to retain legal fees awarded under 12 O.S. § 3237 could create ethical problems for an attorney in at least two (2) ways. For example:

  1. Even where the percentage of recovery in a contingency fee agreement is less than the fifty percent (50%) maximum authorized under 5 O.S. § 7, if the attorney was allowed to retain the sanction based legal fee in addition to the contractual percentage of recovery, it is possible that these additional fees could push the attorney’s percentage of recovery over the fifty percent threshold, thus violating 5 O.S. § 7 and triggering an ethical violation under Rule 1.5. As stated by the Oklahoma Supreme Court in Weeks, “an unwarranted fee is a per se unreasonable fee.” 1998 OK 83 at ¶ 44, 969 P.2d at 357.
  2. While Weeks does not expressly prohibit an attorney’s retention of a sanction based legal fee in addition to the contractual percentage of recovery under a contingency fee agreement, the Oklahoma Supreme Court has clearly stated that a dual recovery of such fees is an unwarranted windfall which constitutes an unreasonable attorney fee in violation of Rule l.5(a). Id. at ¶ 13, 969 P.2d at 351-52. Thus, an attorney who attempts to secure such a dual recovery would most likely be subject to discipline under the rationale expressed in Weeks.

Consequently, the most prudent solution is to insert a provision into the contingency fee agreement that any statutory attorney's fee recovered by settlement or court award, which exceeds the contractually required percentage of recovery, should be applied against the contingent amount owing under the agreement with the client, rather than in addition to it. Id.

Conclusion: Certainly, if an attorney had an hourly based fee agreement with the client, he or she would be required to offset any sanction based legal fees or costs awarded and received under 12 O.S. § 3237 from the balance due under the hourly based fee agreement. There is no compelling reason why the same should not be true under the terms of a contingency fee agreement. For these reasons it is the opinion of the Legal Ethics Advisory Panel that the Inquiry must be answered in the negative, and that a lawyer should not be able to retain an award of attorney fees and costs made in connection with a discovery dispute authorized under 12 O.S. § 3237 and Fed. R. Civ. P. 37, in addition to an agreed upon contingency fee.

1. Additionally, since the rights of the attorney and client in contingency fee agreements must be determined by the net amount recovered, Schaff v. Richardson, 1926 OK 334, ¶ 2, 254 P. 496, 498, 5 O.S.§ 7, costs awarded under 12 O.S. § 3237 or Fed R. Civ. P. 37 would also have to be offset from the amount of recovery before the amount of the contingency fee can be determined.

2. Admittedly, 12 O.S. § 3237(B) does not expressly state that any expenses and/or attorney fees are to be paid to the party as a sanction. However, 12 O.S. § 3237(D) & (F) do require that such expenses and/or attorney fees are to be paid to the “party”. Furthermore, 12 O.S. § 3237(E) references protective orders entered under 12 O.S. § 3226(C)(2), which authorizes the payment of expenses under 12 O.S. § 3237(A)(4) that does expressly require such payments are to be made to the “party.”

3. The United States Supreme Court, in affirming a decision of the Ninth Circuit Court of Appeals, also ruled that a client should be required to pay the difference between the statutory fee and the greater contingency agreement amount, and left no doubt that the dual recovery of such fees was improper. Id. at ¶ 41 969 P.2d at 357‑58, citing Venegas v. Mitchell, 495 U.S. at 89-90, 110 S.Ct. at 1683-84 (1990).

4. 12 O.S. § 3237 is patterned on, and parallels precisely, the terms of Fed. R. Civ. P. 37. Consequently, since 12 O.S. § 3237 is virtually identical to Fed. R. Civ. P. 37, federal jurisprudence is instructive in interpreting this statute. Payne v. DeWitt, 1999 OK 93, ¶ 8 at n. 6, 995 P.2d 1088, 1092.

5. This amount was subsequently reduced to forty percent (40%) by agreement. Weeks, 1998 OK 83 at ¶¶ 4-5, 969 P.2d at 350.