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OBA Ethics Counsel

Ethics Opinion No. 325

Inquiry:
May a law firm or lawyer contract with a client that an award of statutory awarded attorneys fees be added to the amount of damages award and that the contingency fee percentage will be taken from the aggregate of the two amounts?

Opinion:
A law firm or lawyer may contract with a client agreeing that an award of statutory attorney fees be added to the award of damages and the contingency fee percentage will be taken from the aggregate of the two amounts when the contingency fee agreement complies with the statutory maximum1 and the Oklahoma Rules of Professional Conduct2. However, a lawyer may not contract with a client agreeing that the lawyer will receive the total amount of both the statutory attorney fee and the contingency fee.

I

Rule 1.5(a) of the Oklahoma Rules of Professional Conduct requires that in every instance, a lawyer’s fee be reasonable3. Contingent fees are controlled by Rule 1.5(c) which requires that:

“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.”

Contingent fees are not appropriate in every case. Rule 1.5(d) states that:

d) 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 child support, or property settlement in lieu thereof; or
(2) a contingent fee for representing a defendant in a criminal case.

Okla. Stat. tit. 5 ch. 1 App. 3-A Rule 1.54. See also State ex rel. Okl. Bar Ass’n. v. Fagin, 1992 OK 118, 848 P.2d 11 (1992).

II

Normally each party is responsible for paying its own attorney fees. However, attorney fees may be awarded when authorized by statute. See Okla. Stat. tit. 12 § 696.4(A) (providing that “[a] judgement, decree, or appealable order may provide for costs, attorney fees, or both of these items . . . .”) See also American Biomedical Group, Inc. v. Norman Regional Hospital Authority, 1993 OK CIV APP 83 ¶ 50 n. 11; 855 P.2d 1074 (citing Burrows Construction Company v. Independent School District No. 2 of Stephens County, 1985 OK 57 ¶ 6 n.2; 704 P.2d 1136, 1137). Attorney fees may also be awarded under the terms of an enforceable contract. See Id.; see also Okla. Stat. tit. 12 § 1101.1(A) (requiring that a settlement offer of judgment will be deemed to include any costs or attorney fees otherwise recoverable unless it expressly provides otherwise”). Under fee-shifting statutes prevailing plaintiffs are entitled to recover attorney fees from the defendants.5

Statutorily-awarded attorney fees are treated similarly to statutorily-awarded costs in that they are taxed and collected as are other costs of the action. However, unless stated otherwise, attorney fees are not included in costs. See Finnell v. Jebco, 2003 OK 35 ¶ 9 , 67 P.3d 339 (citing Okla. Stat. tit. 12 § 940(A) which states that “[i]n any civil action to recover damages for the negligent or willful injury to property and any other incidental costs related to such action, the prevailing party shall be allowed reasonable attorney's fees, court costs and interest to be set by the court and to be taxed and collected as other costs of the action"). See also GRP of Texas, Inc., v.Eateries, Inc., 2001 OK 53, 27 P.3d 95 (noting that pursuant to Okla. Stat. tit. 12 § 978, “statutory allowance of costs does not include attorney's fees, unless stated otherwise, Wilson v. Glancy, 1995 OK 141, 913 P.2d 286, 291, and these costs are taxed ‘of course’ by the Clerk” ) (citations omitted); Chamberlin v. Chamberlin, 1986 OK 30, ¶ 14, 720 P.2d 721, 728 (explaining that counsel fees on appeal, like taxable appellate costs, must be authorized by an appellate court in the case in which the services were performed); Goodman v. Norman Bank of Commerce, 1977 OK 113, 565 P.2d 372 (reversing and remanding where the trial court awarded attorney fees, discovery costs and general fees in one lump sum with instructions to eliminate the improper attorney fees from the total amount awarded as costs and to award only the costs of the appeal).

The attorney fee award belongs to the prevailing party, not the lawyer, and it is that party’s right to waive, settle, or negotiate that eligibility. See State ex. rel. Okla. Bar Ass’n. v. Weeks, 1998 OK 83 ¶ 25, 969 P.2d 347 (citing Evans v. Jeff D., 475 U.S. 717, 106 S. Ct 1531 (1985)). See also Calif. State Bar’s Standing Committee on Professional Responsibility and Conduct, Formal Opinion # 1989-114, 1989 WL 253262 (1989) (requiring that in representing a plaintiff in a federal civil rights action or similar action, an attorney is obligated to inform the client that statutory attorney's fees are the client's property which the client may waive as a condition of settlement); Calif. State Bar's Standing Committee on Professional Responsibility and Conduct, Formal Opinion # 1994-136, 1994 WL 621614 (1994) (finding that private agreements that require the client to be personally responsible for attorney fees if the client chooses to waive or otherwise impair the attorney’s ability to pursue the recovery of fees from the defendant are not prohibited so long as the agreement is fair and equitable, with sufficient disclosure to the plaintiff); Association of the Bar of the City of NY, Committee on Professional and Judicial Ethics, Formal Opinion # 1987-4, 1987 WL 346194 (5/13/87) (noting that pursuant to the U.S. Supreme Court’s decision in Jeff D., it is not unethical per se for defense counsel to propose settlements conditioned on the waiver by plaintiffs of attorney's fees under fee-shifting statutes). III

Courts have recognized that statutory fee awards can coexist with private contractual fee arrangements, including contingency fee arrangements. See Pony v. L.A. County, 433 F.3d 1138, 1145 (9th Cir. 2006), cert denied, Mitchell v. L.A. County, 547 U.S. (2006) (holding that civil rights plaintiffs may “freely assign the proceeds of [the] judgment or the value of [the] recovery” to become “contractually and personally bound to pay an attorney a percentage of the recovery, if any. . . .”) See also Cambridge Trust Co. v. Hanify & King Prof’l. Corp., 721 N.E.2d 1, 6 (Mass. 1999) (observing that “[a]n attorney is free, subject to the provisions of the rules of professional conduct, to negotiate such terms as attorney and client may agree on concerning the manner in which awards of attorney fees are to be divided”); Bishop Coal Co. v. Salyers, 380 S.E.2d 238, 249 n. 10 (W. Va. 1989) (recognizing that fee shifting statutes do not impair the right of the lawyer and client to make a private fee arrangement).

As a general rule, when a contingent fee agreement is ambiguous or silent as to how statutory fee awards are to be treated, the contingent percentage should be calculated on the total amount minus the court-awarded fees, with the attorney awarded the greater of the two amounts. Cambridge Trust Co., 721 N.E.2d at 7; see also Heldreth v. Rahimian, 637 S.E.2d 359, 369 n. 16 (W. Va. 2006) (noting the preferred approach, absent a specific agreement, is to use the statutory fee award to offset the amount owed under the contingency fee agreement).

This approach was utilized in Venegas v. Mitchell, 495 U.S. 82, 88, 110 S. Ct. 1679 (1990), where the contractual contingency fee was greater than the statutory fee award. The Plaintiff brought an action under 42 U.S.C. § 1983 alleging that police officers falsely arrested him and conspired to deny him a fair trial through the knowing presentation of perjured testimony. The Plaintiff and his attorney signed a contingent fee contract providing that the attorney would receive a fee of forty per cent (40%) of the gross amount of any recovery. The contract stated that any statutory attorney fee would be applied dollar for dollar to the amount of the contingency fee. The Plaintiff obtained a judgment in the amount of $2.08 million of which $406,000 was due the attorney under the terms of the contingency fee agreement. The Court awarded $117,000 in attorney's fees, of which $75,000 was attributable to work done by this attorney. Id. at 85.

The Court determined that the contractual contingency fee agreement was not invalidated by the statutory fee award; rather, the statutory fee award belonged to the client for the purpose of offsetting the contractual contingent fee. The Court noted the purpose of fee-shifting in the federal civil rights act is to assist potential plaintiffs in securing reasonably competent counsel, not to avoid honoring their contractual agreements even if their contractual liability is greater than the statutory award that they may collect from losing opponents. Id. at 89. The Court emphasized that:

[i]f . . . plaintiffs may waive their right to seek an attorney fee entirely, there is little reason to believe that they may not assign part of their recovery to an attorney if they believe that the contingency arrangement will increase their likelihood of recovery. A contrary decision would place . . . plaintiffs in the peculiar position of being freer to negotiate with their adversaries than with their own attorneys.

Id. at 88. The Court held that the contractual contingent fee agreement was clearly enforceable despite the fee shifting statute, and despite the fact that the contingency agreement was greater than the statutory fee award.

IV

Although the terms of a statutory fee award may be negotiated and agreed to in the fee contract, a client may challenge the agreement when its terms are "plainly unreasonable" under the Rules of Professional Conduct. See Cambridge, 721 N.E.2d at 7. In Oklahoma, a contingency fee agreement that entitles the attorney to keep the total amount of both the contingency fee and the statutory fee award is unreasonable and will not be enforced. State ex. rel. Okla. Bar Ass’n. v. Weeks, 1998 OK 83, 969 P.2d 347.

In Weeks, the statutory attorney fee award was greater than the contingency fee amount. The plaintiff in a civil rights action signed a fee agreement with the attorneys which provided that the attorneys would retain the full amount of any court awarded or negotiated fee and fifty percent (50%) of any judgment or settlement paid by the defendants. The attorney intentionally designed the agreement to provide that the statutory fee would be retained “in addition” to the contingent fees. Id. at ¶ 32. The attorneys then negotiated a settlement for damages in the amount of $50,000 and agreed to accept a reduced contingency fee of forty percent (40%) which was $20,000.

Thereafter, without advising or consulting the plaintiff, the attorneys negotiated a settlement with the defendants for attorney’s fees and costs in the amount of $23,417.68 The plaintiff was unable to find out from his attorneys the total amount of money the attorneys collected; he finally learned the total settlement amount by going to the federal courthouse and checking the court file. Id. at. ¶ 7. Of the $73,417.68 total amount paid by the defendants for damages and fees, the plaintiff received $30,000 while the attorneys kept $43,417.68 for themselves which was unwarranted under existing law6. The Court held that dual recovery of both the full statutory award and the contingent fee was per se unreasonable in violation of Rule 1.5(a) of the Oklahoma Rules of Professional Conduct. Id. at ¶ 44.

In addition, the Court found the attorneys violated Rule 1.4 of the Oklahoma Rules of Professional Conduct for failing to communicate with the plaintiff about the negotiation and settlement of the statutory attorney fee7. Id. at ¶ 45. The Court noted that the attorneys’ failure to communicate with the client regarding the negotiations and settlement of the statutory attorney fee interfered with the client’s right to “waive, settle or negotiate that eligibility.” Id. at ¶ 46 (citations omitted). Thus, the Court recognized the client’s right to enter into a contractual agreement with the attorney regarding statutory fee awards; however, the Court found that an agreement affording the attorney the full amount of both the contingent fee and statutory fee award was not enforceable.

V

The Weeks case did not involve a contingency fee contract that included a negotiated percentage of the aggregate of the statutory awarded attorney fee and the damage award. This type of agreement has not been specifically addressed in Oklahoma. However, the Oklahoma Supreme Court has held that attorney fees are a proper part of a client’s cause of action or claim. See Truelock v Dell City, 1998 OK 64 ¶ 19, 967 P.2d 1183 (denying additional attorney fees under Okla. Stat. tit. 12 § 940 where the plaintiffs received the full amount allowable under the Governmental Tort Claims Act, explaining that the "claim for attorney fees under § 940 was a part of their 'claim' arising out of [the defendant’s] negligence").

Other jurisdictions have acknowledged that such agreements are enforceable. See Heldreth v. Rahimian, 637 S.E.2d 359, 369 n. 16 (W. Va. 2006)(citations omitted) (noting that “[d]epending on the terms of the contract, 'reasonable attorneys' fees' can either be taken as a credit toward the lawyers's contingent share or they can be added to the gross award and the total sum split.”) In Cambridge Trust Co. v. Hanify & King Prof’l. Corp., 721 N.E.2d 1 (Mass. 1999), the court affirmed a judgment allowing an attorney fee pursuant to a contingent fee agreement that included damages and a percentage of the attorney fee award. The court noted: “[w]e can find no authority that makes it per se unreasonable for an attorney and client to agree that the attorney is to be paid a percentage of a total award, which may include damages as well as court-awarded attorney's fees.” Id. at 6. (Emphasis added).

The Cambridge decision is consistent with section 38 of the Restatement (Third) of the Law Governing Lawyers (2000) (hereinafter, the "Restatement"). According to Comment f to Section 38, the lawyer may share in the fee award "if the parties had reached an enforceable contract so providing or if the law or the tribunal so directed." The Comment further states that "[s]uch a contract . . . would not ordinarily constitute a client-lawyer business arrangement subject to § 126 [Business Transactions Between a Lawyer and a Client]." The Reporter's Note to Comment f to Section 38 of the Restatement is instructive:

Payments by an opposing party. For payment of litigation sanctions to the client, see Hamilton v. Ford Motor Co., 636 F.2d 745 (D.C. Cir. 1980). Authority holding that attorney-fee awards should be credited against the client's contractual fee debt to the lawyer unless the contract provides otherwise includes Wilmington v. J.I. Case Co., 793 F.2d 909 (8th Cir.1986); Wheatley v. Ford, 679 F.2d 1037 (2d Cir. 1982); Chalmers v. Oregon Auto. Ins. Co., 502 P.2d 1378 (Or. 1972); Commercial Union Ins. Co. v. Estate of Plute, 356 So.2d 54 (Fla. Dist. Ct. App. 1978); Luna v. Gillingham, 789 P.2d 801, 805 (Wash. Ct. App.1990); see In re Atencio, 742 P.2d 1039 (N.M.1987) (disciplinary proceeding). When the attorney-fee award is larger than the contractual fee, some courts allow the lawyer to keep the surplus even without a contractual provision so stating. Sullivan v. Crown Paper Bd. Co., 719 F.2d 667 (3d Cir. 1983); Cooper v. Singer, 719 F.2d 1496, 1507 (10th Cir. 1983); see Sargeant v. Sharp, 579 F.2d 645, 649 (1st Cir. 1978). Blanchard v. Bergeron, 489 U.S. 87, 109 S.Ct. 939, 103 L.Ed.2d 67 (1989), seems to assume this result. The contrary view is supported by the principles of construction of § 18 and by the Supreme Court's conclusion that attorney-fee awards belong to the client, not the lawyer. Evans v. Jeff D., 475 U.S. 717, 730-32, 106 S.Ct. 1531, 1538-40, 89 L.Ed.2d 747 (1986); Venegas v. Mitchell, 495 U.S. 82, 110 S.Ct. 1679, 109 L.Ed.2d 74 (1990). See Benalcazar v. Goldsmith, 507 N.E.2d 1043 (Mass. 1987). A client-lawyer contract might alter the result, but courts have held unreasonable and unenforceable contracts that give the lawyer both a contractual and a statutory fee. Harrington v. Empire Constr. Co., 167 F.2d 389 (4th Cir. 1948); In re Atencio, 742 P.2d 1039 (N.M. 1987); see Farmington Dowel Prods. Co. v. Forster Mfg. Co., 421 F.2d 61 (1st Cir.1969). But see Jensen v. Dept. of Transportation, 858 F.2d 721 (Fed. Cir. 1988).

(emphasis added). As the Weeks Court emphasized, pursuant to Rule 1.4, the attorney has an obligation to adequately explain the client’s obligation to pay for the attorney’s services in the pursuit and collection not only of the damage award, but also of a statutory attorney fee award. The client may prefer to enter into a contingency fee agreement for both rather than to pay an hourly rate for either8. When that occurs, the attorney-client contingency fee contract may include an attorney fee based upon a percentage of both the damage award and statutory fee award, assuming the percentage is consistent with Oklahoma law.

VI

In conclusion, contractual contingent fee agreements may be based upon the aggregate of damages and statutorily-awarded attorneys fees if the agreement is consistent with the Oklahoma Rules of Professional Conduct, the agreement complies with the fifty percent (50%) maximum required by Okla. Stat. tit. 5 § 7, the agreement involves a full, fair and equitable disclosure, discussion and understanding regarding such an aggregation, and the total fee is reasonable.

1. “It shall be lawful for an attorney to contract for a percentage or portion of the proceeds of a client's cause of action or claim not to exceed fifty percent (50%) of the net amount of such judgment as may be recovered . . . .” Okla. Stat. tit. 5 ch. 1 § 7.

2. The current Oklahoma Rules of Professional Conduct have been amended; the amended Rules will become effective on January 1, 2008. This opinion provides the amended Oklahoma Rules of Professional Conduct. See In re Application of the OBA to Amend The Rules of Professional Conduct, 2007 OK 22, P.3d .

3. Okla. Stat. tit. 5 ch. 1 App. 3-A Rule 1.5. 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.”

Id. The amended comment (3) to Rule 1.5 explains:

Paragraph (a) requires that lawyers charge fees that are reasonable under the circumstances. The factors specified in (1) through (8) are not exclusive. Nor will each factor be relevant in each instance.

4. The amended Comment (3) to Rule 1.5 states:
Contingent fees, like any other fees, are subject to the reasonableness standard of paragraph (a) of this Rule. In determining whether a particular contingent fee is reasonable, or whether it is reasonable to charge any form of contingent fee, a lawyer must consider the factors that are relevant under the circumstances. Applicable law may impose limitations on contingent fees, such as a ceiling on the percentage allowable, or may require a lawyer to offer clients an alternative basis for the fee. Applicable law also may apply to situations other than a contingent fee, for example, government regulations regarding fees in certain tax matters.

5. There are more than sixty federal fee-shifting statutes. See generally Marek v. Chesny, 473 U.S. 1, 43-51, 105 S. Ct. 3012 (1985) (Appendix to opinion of Brennan, J., dissenting - listing sixty-three statutes).

6. The attorneys’ portion constituted approximately sixty percent (60%) of the total recovery which exceeded the statutory maximum of fifty percent (50%) set by Oklahoma law. See Okla. Stat. tit. 5 § 7.

7. Amended Rule 1.4 [Communication] states that:

  1. A lawyer shall:
    1. promptly inform the client of any decision or circumstance with respect to which the client's informed consent, as defined in Rule 1.0(e), is required by these Rules;
    2. reasonably consult with the client about the means by which the client's objectives are to be accomplished;
    3. keep a the client reasonably informed about the status of the matter;
    4. promptly comply with reasonable requests for information; and
    5. consult with the client about any relevant limitation on the lawyer's conduct when the lawyer knows that the client expects assistance not permitted by the Rules of Professional conduct or other law.
  2. A lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.

8. Amended Comment (5) to Rule 1.5 explains: An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client's interest. For example, a lawyer should not enter into an agreement whereby services are to be provided only up to a stated amount when it is foreseeable that more extensive services probably will be required, unless the situation is adequately explained to the client. Otherwise, the client might have to bargain for further assistance in the midst of a proceeding or transaction. However, it is proper to define the extent of services in light of the client's ability to pay. A lawyer should not exploit a fee arrangement based primarily on hourly charges by using wasteful procedures. See also Comment (3) to Rule 1.5 supra n. 4.