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BRAVE NEW WORLD OR MORE OF THE SAME?
THE NEW REFERRAL FEE RULE
By:
JAMES L. CORNELL Cornell & Pardue
[email protected] 2727 Allen Parkway Suite 1675
Houston, Texas 713.526.0500
State Bar of Texas 2ND ANNUAL ADVANCED
INSURANCE LAW COURSE March 31–April 1, 2005
Dallas
CHAPTER 5
JAMES L. CORNELL PROFESSIONAL ACTIVITIES: Cornell & Pardue L.L.P. 2004 to present
Haynes and Boone, L.L.P. 1997 to 2004 Gilpin, Paxson & Bersch, L.L.P. 1987 to 1997 Porter & Clements 1983 to 1987 Fellow - The Texas Bar Foundation Fellow - The Houston Bar Foundation Member - State Bar of Texas: Insurance Law Section, Consumer Law Section, Litigation Section, Construction Law Section, Appellate Law Section Graduate - Attorney-Mediators Institute August, 1993 Graduate - Advanced Mediator Training, Attorney-Mediator Institute December, 1993
PUBLICATIONS, PRESENTATIONS AND AFFILIATIONS
Cornell’s Texas Insurance Law Digest - Author, James Publishing Co. - November, 1998, November, 1999 and November, 2000
Texas Journal of Insurance Law - Winter,1999 - Coverage For Trade Dress Infringement
State Bar of Texas: Chair of Insurance Law Section 2003-2004
Council and Founding Member of Insurance Law Section Chair Elect - Insurance Law Section 2002-2003 Secretary - Insurance Law Section 2001-2002 Treasure - Insurance Law Section 2000-2001 Co-author - Class Actions After Bernal, The Advocate, Vol. 19 No. 3, Fall 2000 Author - A Roadmap of Coverage: Uninsured/Underinsured Motorist Coverage Texas Bar Journal, Vol 62, No. 4, pp. 342-348, April 1999 Author - Piercing the Iron Curtain of Silence: The Doctrine of Offensive Use Waiver, Texas Bar Journal, Vol. 60, No. 4, pp. 304-309 Co-author - Insurance Law Update, The Advocate, Vol. 15 No.4, Winter 1996 Author - Insurance Law Update, The Advocate, Vol. 15 No. 3, Fall 1996 Co-author - Advanced Evidence and Discovery Course - Evidentiary Privileges Under State Statutes 1991
Houston Bar Association: Chair - Continuing Legal Education Committee - 1999-2000 Chair - Continuing Legal Education Institutes Committee- 1998-1999 Chair - Insurance Institute, Everything You Need to Know About Insurance Law - May, 1998 and May 1999 Director - Board of Directors, Litigation Section - 1997-1999 Member - Continuing Legal Education Committee - 1995-2000 Member - Bench Book Committee - 1995-2000 Member - Editorial Board Committee - The Houston Lawyer, 1992-1994, 2000-2001
South Texas College of Law: Presentation: Late Notice, Prejudice and Material Breach: When Is Late Too Late? January, 2005
Presentation: Insurance Law Update: Ten Key Cases January, 2003 Presentation: Class Actions in Insurance Cases November 2000 Planning Committee Member and Moderator Texas Insurance Law Symposium, November, 1999, 2001, 2002, 2003 and 2004 Chair - Texas Insurance Law Symposium, July, 1998 Chair - Texas Insurance Law Symposium, September, 1997
University of Houston Law Center:
Author - Disputes Among Insurance Carriers- Advanced Personal Injury Seminar; June-August, 1996, July-August, 1997 and August. 1999 Author and speaker - The DTPA In Business Litigation Insurance Law Seminar, 1993 Co-author and speaker - The Interaction of the DTPA and the Insurance Code Insurance Law Seminar, 1993
The Houston Lawyer:
Case Note: Offer to Repair Was Unreasonable as a Matter of Law - Jan./Feb. 1997, Vol. 34, No. 4, p. 43 Case Note: Insurance Carrier Does Not Owe Duty of Good Faith and Fair Dealing to Its Insured In Third-Party Action - Jan./Feb. 1997, Vol. 34, No. 4, p. 24 Case Note: Bifurcated Settlement Demands Partially Within Policy Limits Sufficient to Create Stowers Duty - Nov./Dec. 1996, Vol. 34, No. 3, p. 13 Book Review: A Guide to Divorce Mediation: How to Reach a Fair, Legal Settlement at a Fraction of the Cost - July/August Vol. 32, No. 1, p.61
Texas Lawyer, November, 1999 - Insurance and IP Infringement
International Association of Drilling Contractors - Affiliate Member EDUCATION:
B.A. in English with Honors, Houston Baptist University, 1974 M.A. in English, University of Houston, 1977 J.D. University of Houston - Order of the Barons, 1983
The New Referral Fee Rule Chapter 5
1
THE NEW REFERRAL FEE RULE
By: James L. Cornell Cornell & Pardue
Effective March, 1, 2005, Texas adopted a new referral fee rule, Rule 1.04. The new Rule is intended to reform the way cases and compensation are referred among attorneys.
The new Rule is mandatory. A referral fee may be received only if its provisions are followed. The referral fee is called a “division of fees” in the new Rule. I. NEW THE RULE:
A division of fees between lawyers who are not in the same firm may be made only if:
1. The division is:
A. In proportion to the professional services performed by each lawyer; or
B. Made between lawyers who assume joint responsibility for the representation; and
2. The client consents in writing to the terms of
the arrangement prior to the time of the association or the referral proposed, including
A. The identity of all lawyers or law firms
who will participate in the fee sharing arrangement, and
B. Whether fees will be based on the proportion of services performed or by attorneys agreeing to assume joint responsibility for the representation, and
C. The share of the fee that each lawyer or firm will receive or, if the division is based on the proportion of the services performed, the basis on which the division is made; and
D. The aggregate does not violate the provisions of paragraph (a) of Rule 1.04 prohibiting unconscionable fees.
II. PROPORTIONAL SERVICES OR JOINT
RESPONSIBILITY? The division of fees must either proportional to
the services rendered, or made between lawyers who assume joint responsibility of the representation. The two alternatives are presented in the disjunctive and must offer two different choices. Division of fees proportional to the services rendered is easy to understand. It is somewhat objective and can be
quantified. Division of fees based on joint responsibility is less precise. The comments provide some help:
12. A division of a fee based on the proportion of services rendered by two or more lawyers contemplates that each lawyer is performing substantial legal services on behalf of the client with respect to the matter. In particular, it requires that each lawyer who participates in the fee have performed services beyond those involved in initially seeking to acquire and being engaged by the client. There must be a reasonable correlation between the amount or value of services rendered and responsibility assumed, and the share of the fee to be received. However, if each participating lawyer performs substantial legal services on behalf of the client, the agreed division should control even though the division is not directly proportional to actual work performed. If a division of fee is to be based on the proportion of services rendered, the arrangement may provide that the allocation not be made until the end of the representation. When the allocation is deferred until the end of the representation, the terms of the arrangement must include the basis by which the division will be made. 13. Joint responsibility for the representation entails ethical and perhaps financial responsibility for the representation. The ethical responsibility assumed requires that a referring or associating lawyer make reasonable efforts to assure adequacy of representation and to provide adequate client communication. Adequacy of representation requires that the referring or associating lawyer conduct a reasonable investigation of the client’s legal matter and refer the matter to a lawyer whom the referring or associating lawyer reasonably believes is competent to handle it. See Rule 1.01. Adequate attorney-client communication requires that a referring or associating lawyer monitor the matter throughout the representation and ensure that the client is informed of those matters that come to that lawyer’s attention and that a reasonable lawyer would believe the client should be aware. See Rule 1.03. Attending all depositions and hearings, or requiring that copies of all pleadings and correspondence be provided a referring or associating lawyer, is not necessary in order to meet the
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monitoring requirement proposed by this rule. These types of activities may increase the transactional costs, which ultimately the client will bear, and unless some benefit will be derived by the client, they should be avoided. The monitoring requirement is only that the referring lawyer be reasonably informed of the matter, respond to client questions, and assist the handling lawyer when necessary. Any referral or association of other counsel should be made based solely on the client’s best interest.
Joint responsibility includes:
A. A reasonable investigation of the matter and the attorney to whom you are referring to make sure the attorney is competent.
B. Monitoring the case throughout the representation.
C. Keeping the client informed. Joint responsibility does not include attending depositions or hearings, or reviewing pleadings. It only requires that the referring attorney be reasonably informed.
The comments make clear that the minimum activities are substantially greater than under the prior rule.
It appears that if the attorneys agree to a division of fees based on the joint responsibility provision, the attorneys may agree on any division as long as the client is informed and consents. III. CLIENT CONSENT:
In order to be effective, the agreement must satisfy the following requirements:
A. Consent: The client must consent in writing before the referral;
B. Identify: The identity of all lawyers or law firms must be revealed;
C. Disclosure: The client must be informed if the arrangement is based on proportion of services or joint responsibility; and
D. Explanation: The share of the fees and, if the arrangement is based on proportionate services, the basis on which the division is made.
IV. EFFECT OF JOINT RESPONSIBILITY
Does the new rule impose new liability on the referring attorney by virtue of the joint responsibility provision? The comment foreshadows that possibility. It states that:
Whether such activities, or any additional activities that a lawyer might agree to undertake, suffice to make one lawyer participating in such an arrangement responsible for the professional misconduct of another lawyer who is participating in it and, if so, to what extent, are intended to be resolved by Texas Civil Practice and Remedies Code, ch. 33, or other applicable law.
Thus, the monitoring required under the new Rule could lead to exposure which was not experienced under the prior rule.
The New Referral Fee Rule Chapter 5
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SELECTION OF COUNSEL
By: James L. Cornell Cornell & Pardue
2727 Allen Parkway Suite 1675 Houston, Texas 77019
713.526.0500 [email protected]
The New Referral Fee Rule Chapter 5
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SELECTION OF COUNSEL
By: James L. Cornell Cornell & Pardue
Commercial general liability (“CGL”) policies offer two primary benefits to the insured: indemnification and defense. Often, the defense is just as or even more important to the policyholder than the indemnification.
The CGL typically provides that the carrier has the right and the duty to defend the insured. Carriers interpret this provision as the right to select and retain counsel of their choice and the right to control the defense and settlement.
Carriers typically have “panel counsel” with whom they have an established relationship. Panel counsel are attorneys or firms who have been approved by the carrier and who often receive repeat business from the carriers. Carriers know and trust the panel counsel because of a pre-existing and often long-standing relationship. Frequently, panel counsel agree to follow “litigation guidelines” provided by the carrier that govern the pre-trial development of the case, including providing periodic status reports, and obtaining pre-approval for litigation tasks such as conducting research, retaining experts or taking depositions. The guidelines are designed and intended to control defense costs. Often, policyholders are unaware of the “panel counsel” arrangements and relationship between insurance defense counsel and the carrier.
Like the carrier, policyholders may also have a long-standing relationship with their own counsel whom they trust. Unlike insurance carriers, policyholders frequently are unfamiliar with litigation. Policyholders often feel more comfortable retaining their own counsel to defend them in their case. It may come as a surprise to an inexperienced and unsophisticated policyholder that the duty to defend also may mean that the carrier has the right to select and retain its preferred panel counsel to defend the insured.
However, there are certain situations where the insured has the right to select and retain counsel at the expense of the insurance carrier. These situations are discussed in the case law below. Conflict Entitles Policyholder to Select Counsel: Rhodes v. Chicago Ins. Co., 719 F.2d 116 (5th Cir. 1983). One of the earliest cases applying Texas law addressing the issue of the insured’s right to select counsel is Rhodes v. Chicago Ins. Co., 719 F.2d 116 (5th Cir. 1983). In Rhodes, the carrier offered to hire counsel for the insured to defend against the underlying lawsuit. However, the carrier also issued a reservation of rights to deny coverage. Id. at 118.
The policyholder refused the carrier’s tender of a conditional defense, and hired its own counsel. The policyholder then sought recovery from the carrier for defense costs. The Fifth Circuit observed that there was a potential conflict of interest inherent in the reservation of rights:
The insurer’s duty to defend the insured may conflict with the insurer’s right to raise defenses against the insured. The reservation of rights serves as notice to the insured of the potential conflict of interest . . . .
Rhodes, 719 F.2d at 120 n.6. (Emphasis added)
The Fifth Circuit concluded that the potential conflict caused by a reservation of rights entitles the policyholder to its selection of counsel:
When a reservation of rights is made, however, the insured may properly refuse the tender of defense and pursue his own defense. The insurer remains liable for attorneys’ fees incurred by the insured and may not insist on conducting the defense. Refusal of the tender of defense is particularly appropriate where, as here, the insurer’s interests conflict with those of the insured.
Id. at 120-21. (Emphasis added) The Defense Attorney As Agent or Independent Contractor?: State Farm Mut. Auto. Ins. Co. v. Traver 980 S.W. 2d 625 (Tex. 1998). In Traver, State Farm simultaneously represented two policyholder drivers who were involved in a single collision. One of the insured drivers was carrying a passenger who was injured and who sued both drivers seeking to recover for her injuries. At trial, the jury found one of the drivers liable for the entire accident. Each insured driver was represented by separate counsel whom State Farm had retained. After the verdict, the driver who was found responsible passed away.
Traver was the executor of the deceased driver’s estate. Traver claimed that the defense counsel committed malpractice in defending the underlying litigation, and that, as a result, the deceased driver was assessed a judgment that exceeded the policy limits. Id. at 626. Traver sought recovery against State Farm for negligence, breach of its duty to defend, breach of the Stowers duty, breach of the duty of good faith and
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fair dealing, and violations of the Deceptive Trade Practices Act and Insurance Code.
The issue in Traver was whether the carrier could be held vicariously liable for the conduct of the defense counsel which the carrier selected and retained. Traver argued that the attorney committed malpractice in defending a claim against the decedent resulting in a judgment in excess of the policy limits and deliberately orchestrated malpractice to avoid a potential Stower’s liability by shifting liability from one of its insureds to the other, the deceased driver. Traver argued that State Farm was vicariously liable for the attorney’s malpractice.
The Texas Supreme Court disagreed and held that:
• In determining whether a principal is vicariously liable for the conduct of an agent, the key question is whether the principal has the right to control the agent with respect to the details of that conduct.
• The liability policy may give the insurer the right to take “complete and exclusive” control of the insured’s defense.
• The insurer’s control of the defense includes the authority to accept or reject settlement offers and to make other decisions that would normally be vested in the client, here the insured.
• Assuming that the insurer possesses a level of control comparable to that of the client, this does not meet the requisite for vicarious liability.
• A defense attorney, as an independent contractor, is not subject to the client’s control regarding the day to day control of the details of the defense.
• While the attorney may not act contrary to the client’s wishes, the attorney is in complete charge of the minutiae of the court proceedings and can withdraw of he is not permitted to act as he thinks is best.
• The lawyer owes the insured unqualified loyalty and must at all times protect the interests of the insured if those interests would be compromised by the insurer’s instructions.
• Under these circumstances, the insurer cannot be vicariously responsible for the attorney’s conduct.
• The language in Ranger County Mut. Ins. Co. v. Guin, 723 S.W. 2d 656 (Tex. 1987) that the attorney is the sub agent of the carrier and the insurance company is responsible for and liable to the insured for the conduct of the sub agent was dicta.
• A liability carrier is not responsible for the conduct of an independent attorney it selects to defend an insured.
The Texas Supreme Court begins its analysis by placing the carrier-counsel relationship in the context of a principal-agent relationship, with the carrier being the principal. The Texas Supreme Court stated that “in determining whether a principal is vicariously liable for the conduct of an agent, the key question is whether the principal [i.e.—carrier] has the right to control the agent with respect to the details of that conduct.” Id. at 627. The Texas Supreme Court observed that the liability policy may give the insurer the right to take “complete and exclusive” control of the insured’s defense.
With regard to the attorney retained by the carrier, the Texas Supreme Court observed that he/she is not subject to the client’s control regarding the day to day control of the details of the defense. While the attorney may not act contrary to the client’s wishes, the attorney is in complete charge of the minutiae of the court proceedings and can withdraw of he is not permitted to act as he thinks is best.
Thus, in the context of the tri-partite relationship, (i) the carrier has absolute control of the settlement and the defense; and (ii) the defense attorney is not subject to the client’s control. Despite this, the Texas Supreme Court concluded that “even assuming that the insurer possesses the level of control comparable to that of the client, this does not meet the requisite for vicarious liability.” Id. at 627.
In analyzing the relationship, the Texas Supreme Court seems to concede that the defense attorney is the agent of the carrier, even though at the same time it expressly rejects the dicta in Ranger v. Guinn indicating that the defense attorney is the sub-agent of the carrier. Certainly, in defending the insured, the defense attorney is acting within the scope of the authority bestowed on him by the carrier. The principal—the carrier—retains the attorney for that very purpose. In addition, the carrier frequently requires the attorney to adhere to “litigation guidelines” which can be quite detailed and comprehensive in their scope. The Supreme Court also recognizes that the attorney has control of the minutiae of the litigation and the day-to-day decision-making in the case. In the Supreme Court’s analysis, the client has the least amount of control. The carrier has authority to accept or reject settlement and control defense, the attorney hired by the carrier has control over the day-to-day decisions in the defense. Nevertheless, the Supreme Court concluded that the carrier does not have vicarious liability for the actions of the counsel retained by the carrier.
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One or Two Clients? American Home Assurance Co., Inc. v. Unauthorized Practice of Law Committee, 121 S.W.3d 831 (Tex. App.—Eastland 2003, no pet. hist.) American Home and Travelers Indemnity brought a declaratory judgment action requesting the court to declare that the use of staff attorneys who were employees of the carriers did not constitute the unauthorized practice of law. The carriers argued that the use of staff attorneys resulted in lower costs to the carriers and lower premiums to insureds. In response, the Unauthorized Practice of Law Committee (“UPLC”) argued that (1) a lawyer can serve only one client; (2) the insurers’ right of control violates a lawyer’s professional responsibilities; and (3) the employee-lawyer is subject to an irreconcilable conflict between the insurer and the insured.
The court rejected the argument that an employee-attorney owes an absolute duty of loyalty to his employer. The court reasoned that although a staff attorney may face conflicts, those are not irreconcilable. Further, the court stated that nothing in the Texas Rules of Professional Responsibility supported the conclusion that staff counsel cannot ethically represent insureds.
The court addressed the issue of whether defense counsel represents the insured, the insurer, or both. Significantly, the court concluded that defense counsel has two clients, as indicated by the following passage:
Reality and common sense dictate that the insurance company is also a client. The insurance company retains the attorney, controls the legal defense, decides if the case should be settled, and pays any judgment or settlement amount up to policy limits. It is a fiction to say that the insured is the only client in view of the contractual relationships. We agree that the insured is the primary client and that ethical choices must be resolved in favor of the insured. But under contract law, the attorney can have two clients… We conclude that there is nothing in the Texas Rules [of Professional Responsibilty] that would be a basis for finding that American Home and Travelers have engaged in the unauthorized practice of law.
The Texas Supreme Court Defines Circumstances Under Which the Policyholder May Select Counsel: Northern County Mut. Ins. Co. v. Davalos, 140 S.W.3d 685 (Tex. 2004). Davalos, the policyholder was involved in a car accident in Dallas County. Davalos sued the other driver in Matagorda County. The other driver sued Davalos in Dallas County. Davalos’ Matagorda County attorney answered the
Dallas County suit and moved to transfer to Matagorda County. He then notified Davalos’ carrier, Northern County, about the suit. Northern County wanted the Matagorda case transferred to Dallas County, but Davalos’ attorney resisted. In essnce, Davalos, the policyholder, refused the carrier’s offer of defense because of a disagreement over the venue of the case. The issue before the Texas Supreme Court was:
“Whether a disagreement over venue is a sufficient reason for the insurer to lose its right to conduct the defense while still obligated to pay for it.”
The Texas Supreme Court held that:
“[T]his venue impasse was not a sufficient reason to take the contractual right to conduct the defense away from the insurer.”
Davalos, the policyholder, rejected the defense offered by the carrier, and advised the carrier that he thought the carrier’s demands to be unconscionable and actionable. Davalos’ attorney also advised that Northern County could not select defense counsel because of its conflict with Davalos over the venue motion. The Matagorda suit was transferred to Dallas, and the case was settled at no cost to Davalos.
Davalos sued Northern County in Matagorda County asserting breach of contract, bad faith and violation of the Texas Insurance Code. The trial court entered judgment in favor of Davolos for breach of contract and violation of Art. 21.55. The Court of Appeal affirmed.
Davalos argued that Northern County by attaching improper conditions to the defense, Northern County forfeited its right to conduct the defense. According to Davalos, the disagreement about venue was a sufficient conflict of interest to defeat Northern County’s contractual right to conduct the defense.
The Texas Supreme Court stated that:
• Whether the insurer has the right to conduct the defense is a matter contract.
• The right to conduct the defense includes the authority to select the attorney who will defend the claim and make the other decisions that would normally be vested in the insured as the named party.
• Under certain circumstances, the insurer may not insist on its contractual right to defend the defense.
• The existence or scope of coverage is a basis for a disqualifying conflict. However, where the disagreement is over coverage but the insurer defends unconditionally, there is,
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because of the application of estoppel principals, no potential for a conflict of interest exists.
• Other types of conflicts may justify the insured’s refusal of an offered defense:
• When the defense tendered is not a
complete defense under circumstances in which it should have been;
• When an attorney hired by the carrier acts unethically, and, at the carrier’s direction, advances the carrier’s interests at the expense of the insured’s;
• When the defense would not, under governing law, satisfy the insurer’s duty to defend;
• When, although the defense is otherwise proper, the insurer attempts to obtain some type of concession from the insured before it will defend.
Citing 1 Allan Windt, Insurance Claims and Disputes, Sec. 4.25 at 393 (4th ed. 2001).
The insured may rightfully refuse an inadequate defense and may also refuse any defense conditioned on an unreasonable, extra-contractual demand that threatens the insured’s independent legal rights. Here, the dispute was over the appropriate venue for the defense of a third party claim. The Texas Supreme Court stated that “It is difficult to imagine a set of circumstances in which a choice of venue might amount to a disqualifying conflict of interest.” The Texas Supreme Court further stated that:
“In this case, Davalos chose to reject Northern’s tender of defense and conduct his own defense because he did not want the case defended in Dallas. That was his right. But having rejected the insurer’s defense without a sufficient conflict, Davalos lost his right to recover the costs of that defense.”
Davalos Applied: Housing Authority of the City of Dallas v. Northland Ins. Co. 333 F. Supp. 2d 595 (N.D. Tex. 2004).
Northland issued a Nonprofit Organizational Liability Policy to Dallas Housing Authority (“DHA”). The policy provided that:
“[I]t shall be the right and the duty of the Underwriter to defend claims, however the Insured shall be given the opportunity to confer with the Underwriter regarding the
selection of the counsel and defense of Claims.”
DHA was sued for alleged violations of law that were covered under the policy. DHA hired its own counsel. Northland hired another firm, which DHA did not accept. DHA’s chosen counsel defended DHA in the underlying suit. Northland refused to pay of any of the defense costs.
DHA filed suit for breach of contract and violations of Art.21.55.
The Northern District Court observed that Northland undertook the defense of DHA under a reservation of rights reserving its rights to later deny coverage if it was determined that (i) DHA interfered with its right to defend by failing to provide information, assistance or cooperation; (ii) the claim is based upon, arises from or is in consequence of any fraudulent act or omission or any willful violation of any statute; (iii) the claim is based on any act that DHA knew was wrongful; or (iv) the claim is for damages due in any part for actual or alleged bodily injury, sickness, disease, or emotional distress.
The Northern District cited Rhodes v. Chicago Ins. Co. 719 F.2d 116, 120 (5th Cir. 1983) for the proposition that whenever a reservation of rights is made, the insured may properly refuse the tender and pursue his own defense, and look to the carrier to pay the attorney’s fees.
In the underlying case, the claimant alleged violations of Title VII and characterized DHA’ss conduct as willful. Thus, the facts to be decided in the underlying cases were, in part, the same facts to be decided in the coverage suit. A disqualifying conflict existed. Therefore, DHA was entitled to reimbursement of its defense costs.
Rule 1.04 Fees (reflecting changes effective March 1, 2005)
(a) A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or
unconscionable fee. A fee is unconscionable if a competent lawyer could not form a
reasonable belief that the fee is reasonable.
(b) Factors that may be considered in determining the reasonableness of a fee include,
but not to the exclusion of other relevant factors, 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 on results obtained or uncertainty of
collection before the legal services have been rendered.
(c) 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.
(d) 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 (e) or
other law. A contingent fee agreement shall be in writing and shall state the method by
which the fee is to be determined. If there is to be a differentiation in the percentage or
percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, the
percentage for each shall be stated. The agreement shall state the 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 describing the
outcome of the matter and, if there is a recovery, showing the remittance to the client and
the method of its determination.
(e) A lawyer shall not enter into an arrangement for, charge, or collect a contingent fee
for representing a defendant in a criminal case.
(f) A division or arrangement for division of a fee between lawyers who are not in the
same firm may be made only if:
(1) the division is:
(i) in proportion to the professional services performed by each lawyer; or
(ii) made between lawyers who assume joint responsibility for the
representation; and
(2) the client consents in writing to the terms of the arrangement prior to the time
of the association or referral proposed, including
(i) the identity of all lawyers or law firms who will participate in the fee-
sharing arrangement, and
(ii) whether fees will be divided based on the proportion of services
performed or by lawyers agreeing to assume joint responsibility for the
representation, and
(iii) the share of the fee that each lawyer or law firm will receive or, if the
division is based on the proportion of services performed, the basis on
which the division will be made; and
(3) the aggregate fee does not violate paragraph (a).
(g) Every agreement that allows a lawyer or law firm to associate other counsel in the
representation of a person, or to refer the person to other counsel for such representation,
and that results in such an association with or referral to a different law firm or a lawyer
in such a different firm, shall be confirmed by an arrangement conforming to paragraph
(f). Consent by a client or a prospective client without knowledge of the information
specified in subparagraph (f)(2) does not constitute a confirmation within the meaning of
this rule. No attorney shall collect or seek to collect fees or expenses in connection with
any such agreement that is not confirmed in that way, except for:
(1) the reasonable value of legal services provided to that person; and
(2) the reasonable and necessary expenses actually incurred on behalf of
that person.
(h) Paragraph (f) of this rule does not apply to payment to a former partner or associate
pursuant to a separation or retirement agreement, or to a lawyer referral program certified
by the State Bar of Texas in accordance with the Texas Lawyer Referral Service Quality
Act, Tex. Occ. Code 952.001 et seq., or any amendments or recodifications thereof.
Comment: 1. A lawyer in good conscience should not charge or collect more than a reasonable fee,
although he may charge less or no fee at all. The determination of the reasonableness of a
fee, or of the range of reasonableness, can be a difficult question, and a standard of
reasonableness is too vague and uncertain to be an appropriate standard in a disciplinary
action. For this reason, paragraph (a) adopts, for disciplinary purposes only, a clearer
standard: the lawyer is subject to discipline for an illegal fee or an unconscionable fee.
Paragraph (a) defines an unconscionable fee in terms of the reasonableness of the fee but
in a way to eliminate factual disputes as to the fees reasonableness. The Rules
unconscionable standard, however, does not preclude use of the reasonableness standard
of paragraph (b) in other settings.
Basis or Rate of Fee
2. When the lawyer has regularly represented a client, they ordinarily will have evolved
an understanding concerning the basis or rate of the fee. If, however, the basis or rate of
fee being charged to a regularly represented client differs from the understanding that has
evolved, the lawyer should so advise the client. In a new client-lawyer relationship, an
understanding as to the fee should be promptly established. It is not necessary to recite all
the factors that underlie the basis of the fee, but only those that are directly involved in its
computation. It is sufficient, for example, to state that the basic rate is an hourly charge or
a fixed amount or an estimated amount, in order to identify the factors that may be taken
into account in finally fixing the fee. When developments occur during the representation
that render an earlier estimate substantially inaccurate, a revised estimate should be
provided to the client. A written statement concerning the fee reduces the possibility of
misunderstanding, and when the lawyer has not regularly represented the client it is
preferable for the basis or rate of the fee to be communicated to the client in writing.
Furnishing the client with a simple memorandum or a copy of the lawyers customary fee
schedule is sufficient if the basis or rate of the fee is set forth. In the case of a contingent
fee, a written agreement is mandatory.
Types of Fees
3. Historically lawyers have determined what fees to charge by a variety of methods.
Commonly employed are percentage fees and contingent fees (which may vary in
accordance with the amount at stake or recovered), hourly rates, and flat fee
arrangements, or combinations thereof.
4. The determination of a proper fee requires consideration of the interests of both client
and lawyer. The determination of reasonableness requires consideration of all relevant
circumstances, including those stated in paragraph (b). Obviously, in a particular situation
not all of the factors listed in paragraph (b) may be relevant and factors not listed could
be relevant. The fees of a lawyer will vary according to many factors, including the time
required, the lawyers experience, ability and reputation, the nature of the employment,
the responsibility involved, and the results obtained.
5. When there is a doubt whether a particular fee arrangement is consistent with the
clients best interest, the lawyer should discuss with the client alternative bases for the fee
and explain their implications.
6. Once a fee arrangement is agreed to, a lawyer should not handle the matter so as to
further the lawyers financial interests to the detriment of the client. For example, a lawyer
should not abuse a fee arrangement based primarily on hourly charges by using wasteful
procedures.
Unconscionable Fees
7. Two principal circumstances combine to make it difficult to determine whether a
particular fee is unconscionable within the disciplinary test provided by paragraph (a) of
this Rule. The first is the subjectivity of a number of the factors relied on to determine the
reasonableness of fees under paragraph (b). Because those factors do not permit more
than an approximation of a range of fees that might be found reasonable in any given
case, there is a corresponding degree of uncertainty in determining whether a given fee is
unconscionable. Secondly, fee arrangements normally are made at the outset of
representation, a time when many uncertainties and contingencies exist, while claims of
unconscionability are made in hindsight when the contingencies have been resolved. The
unconscionability standard adopts that difference in perspective and requires that a
lawyer be given the benefit of any such uncertainties for disciplinary purposes only.
Except in very unusual situations, therefore, the circumstances at the time a fee
arrangement is made should control in determining a question of unconscionability.
8. Two factors in otherwise borderline cases might indicate a fee may beunconscionable.
The first is over-reaching by a lawyer, particularly of a client who was unusually
susceptible to such overreaching. The second is a failure of the lawyer to give at the
outset a clear and accurate explanation of how a fee was to be calculated. For example, a
fee arrangement negotiated at arms length with an experienced business client would
rarely be subject to question. On the other hand, a fee arrangement with an uneducated or
unsophisticated individual having no prior experience in such matters should be more
carefully scrutinized for overreaching. While the fact that a client was at a marked
disadvantage in bargaining with a lawyer over fees will not make a fee unconscionable,
application of the disciplinary test may require some consideration of the personal
circumstances of the individuals involved.
Fees in Family Law Matters
9. Contingent and percentage fees in family law matters may tend to promote divorce
and may be inconsistent with a lawyers obligation to encourage reconciliation. Such fee
arrangements also may tend to create a conflict of interest between lawyer and client
regarding the appraisal of assets obtained for client. See also Rule 1.08(h). In certain
family law matters, such as child custody and adoption, no res is created to fund a fee.
Because of the human relationships involved and the unique character of the proceedings,
contingent fee arrangements in domestic relations cases are rarely justified.
Division of Fees
10. A division of fees is a single billing to a client covering the fee of two or more
lawyers who are not in the same firm. A division of fees facilitates association of more
than one lawyer in a matter in which neither alone could serve the client as well, and
most often is used when the fee is contingent and the division is between a referring or
associating lawyer initially retained by the client and a trial specialist, but it applies in all
cases in which two or more lawyers are representing a single client in the same matter,
and without regard to whether litigation is involved. Paragraph (f) permits the lawyers to
divide a fee either on the basis of the proportion of services they render or if each lawyer
assumes joint responsibility for the representation.
11. Contingent fee agreements must be in a writing signed by the client and must
otherwise comply with paragraph (d) of this Rule.
12. A division of a fee based on the proportion of services rendered by two or more
lawyers contemplates that each lawyer is performing substantial legal services on behalf
of the client with respect to the matter. In particular, it requires that each lawyer who
participates in the fee have performed services beyond those involved in initially seeking
to acquire and being engaged by the client. There must be a reasonable correlation
between the amount or value of services rendered and responsibility assumed, and the
share of the fee to be received. However, if each participating lawyer performs
substantial legal services on behalf of the client, the agreed division should control even
though the division is not directly proportional to actual work performed. If a division of
fee is to be based on the proportion of services rendered, the arrangement may provide
that the allocation not be made until the end of the representation. When the allocation is
deferred until the end of the representation, the terms of the arrangement must include the
basis by which the division will be made.
13. Joint responsibility for the representation entails ethical and perhaps financial
responsibility for the representation. The ethical responsibility assumed requires that a
referring or associating lawyer make reasonable efforts to assure adequacy of
representation and to provide adequate client communication. Adequacy of
representation requires that the referring or associating lawyer conduct a reasonable
investigation of the client’s legal matter and refer the matter to a lawyer whom the
referring or associating lawyer reasonably believes is competent to handle it. See Rule
1.01. Adequate attorney-client communication requires that a referring or associating
lawyer monitor the matter throughout the representation and ensure that the client is
informed of those matters that come to that lawyer’s attention and that a reasonable
lawyer would believe the client should be aware. See Rule 1.03. Attending all depositions
and hearings, or requiring that copies of all pleadings and correspondence be provided a
referring or associating lawyer, is not necessary in order to meet the monitoring
requirement proposed by this rule. These types of activities may increase the
transactional costs, which ultimately the client will bear, and unless some benefit will be
derived by the client, they should be avoided. The monitoring requirement is only that
the referring lawyer be reasonably informed of the matter, respond to client questions,
and assist the handling lawyer when necessary. Any referral or association of other
counsel should be made based solely on the client’s best interest.
14. In the aggregate, the minimum activities that must be undertaken by referring or
associating lawyers pursuant to an arrangement for a division of fees are substantially
greater than those assumed by a lawyer who forwarded a matter to other counsel,
undertook no ongoing obligations with respect to it, and yet received a portion of the
handling lawyer’s fee once the matter was concluded, as was permitted under the prior
version of this rule. Whether such activities, or any additional activities that a lawyer
might agree to undertake, suffice to make one lawyer participating in such an
arrangement responsible for the professional misconduct of another lawyer who is
participating in it and, if so, to what extent, are intended to be resolved by Texas Civil
Practice and Remedies Code, ch. 33, or other applicable law.
15. A client must consent in writing to the terms of the arrangement prior to the time of
the association or referral proposed. For this consent to be effective, the client must have
been advised of at least the key features of that arrangement. Those essential terms,
which are specified in subparagraph (f)(2), are 1) the identity of all lawyers or law firms
who will participate in the fee-sharing agreement, 2) whether fees will be divided based
on the proportion of services performed or by lawyers agreeing to assume joint
responsibility for the representation, and 3) the share of the fee that each lawyer or law
firm will receive or the basis on which the division will be made if the division is based
on proportion of service performed. Consent by a client or prospective client to the
referral to or association of other counsel, made prior to any actual such referral or
association but without knowledge of the information specified in subparagraph (f)(2),
does not constitute sufficient client confirmation within the meaning of this rule. The
referring or associating lawyer or any other lawyer who employs another lawyer to assist
in the representation has the primary duty to ensure full disclosure and compliance with
this rule.
16. Paragraph (g) facilitates the enforcement of the requirements of paragraph (f). It
does so by providing that agreements that authorize an attorney either to refer a person’s
case to another lawyer, or to associate other counsel in the handling of a client’s case, and
that actually result in such a referral or association with counsel in a different law firm
from the one entering into the agreement, must be confirmed by an arrangement between
the person and the lawyers involved that conforms to paragraph (f). As noted there, that
arrangement must be presented to and agreed to by the person before the referral or
association between the lawyers involved occurs. See subparagraph (f)(2). Because
paragraph (g) refers to the party whose matter is involved as a “person” rather than
as a “client,” it is not possible to evade its requirements by having a referring lawyer not
formally enter into an attorney-client relationship with the person involved before
referring that person’s matter to other counsel. Paragraph (g) does provide, however, for
recovery in quantum meruit in instances where its requirements are not met. See
subparagraphs (g)(1) and (g)(2).
17. What should be done with any otherwise agreed-to fee that is forfeited in whole or in
part due to a lawyer’s failure to comply with paragraph (g) is not resolved by these rules.
18. Subparagraph (f)(3) requires that the aggregate fee charged to clients in connection
with a given matter by all of the lawyers involved meet the standards of paragraph (a) —
that is, not be unconscionable.
Fee Disputes and Determinations
19. If a procedure has been established for resolution of fee disputes, such as an
arbitration or mediation procedure established by a bar association, the lawyer should
conscientiously consider submitting to it. Law may prescribe a procedure for
determining a lawyer’s fee, for example, in representation of an executor or
administrator, or when a class or a person is entitled to recover a reasonable attorney’s
fee as part of the measure of damages. All involved lawyers should comply with any
prescribed procedures.
Form Language Authorizing Referral or Association of Counsel 1. General Provision which might be inserted in power of attorney or contingent fee contract. If the General Provision is included in the contract, paragraphs 1a, 1b or 1c must also be included either in the contract or in a separate written consent form executed by the client. Paragraphs 1a, 1b, and 1c may be used without the General Provision. Referral or Association of Additional Counsel: Client agrees that Attorneys may refer this matter to another lawyer or associate additional lawyers to assist in representing Client and prosecuting the Client’s cause of action. Prior to the referral or association becoming effective, Client shall consent in writing to the terms of the arrangement after being advised of (1) the identity of the lawyer or law firm involved, (2) whether the fees will be divided based on the proportion of services rendered or by lawyers agreeing to assume joint responsibility for the representation, and (3) the share of the fee that each lawyer or law firm will receive or, if the division is based on the proportion of services performed, the basis on which the division will be made. The referral or association of additional attorneys will not increase the total fee owed by the Client. 1a. Referral Fee provision where referring lawyer agrees to assume joint responsibility. Referral: Attorneys are authorized to refer this matter to [insert lawyer’s name or name of law firm] to [“represent Client’s interests in the matter” or “prosecute Client’s cause of action”]. Attorneys will assume joint responsibility for the [“representation of Client’s interest in the matter” or prosecution of Client’s cause of action”] with [insert lawyer’s name or name of law firm]. At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney’s fee of (___ %)1, (___ %) will be paid to Attorneys and (___ %) to [insert lawyer’s name or name of law firm]. The referral fee to be paid will not increase the total fee owed by the Client. Client’s signature at the end of this agreement indicates his/her understanding and consent to the division of fees and the referral fee which will be paid. 1b. Association of Counsel Provision where division of fee is based on assumption of joint responsibility. Association of Additional Counsel: Attorneys are authorized to associate [insert lawyer’s name or name of law firm] (“Associated Counsel”] to assist Attorneys in [“representing client’s interest in the matter” or “prosecuting Client’s cause of action”]. Attorneys will assume joint responsibility for [“representation of Client’s interest in the matter” or prosecution of Client’s cause of action”] with Associated Counsel. At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney’s fee of (___ %)2, (___ %) will be paid to Attorneys and (___ %) will be paid to Associated Counsel. The fee to be paid to Associated Counsel will not increase the total fee owed by the Client. Client’s signature at the end of this agreement indicates his/her understanding and consent to the division of fees and the referral fee which will be paid.
1 If the power of attorney provides that Attorney’s fees will vary depending on whether a case is settled before trial or otherwise (Ex. 33 1/3% if settled before suit filed, 40% after suit is filed and 45% after appeal) the following language can be inserted: At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney’s fee conveyed to Attorneys in paragraph __ of this Agreement, (___ %) will be paid to Attorneys and (___ %) to [insert lawyer’s name or name of law firm]. 2 See footnote 1.
1c. Association of Additional Counsel where division of fee based on proportion of services to be rendered. Association of Additional Counsel: Attorneys are authorized to associate [insert lawyer’s or name of law firm] (“Associated Counsel”) to assist Attorneys in representing Client and/or in prosecuting Client’s cause of action. Attorney’s fees shall be divided based on the proportion of services to be performed by Attorneys and Associated Counsel. Attorneys agree that Associated Counsel will provide the following services: (describe how services will be divided). At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney’s fee of (___%)3, (___ %) will be paid to Attorneys and (___ %) will be paid to Associated Counsel. The fee to be paid Associated Counsel will not increase the total fee owed by the Client. Client’s signature at the end of this agreement indicates his/her understanding and consent to the division of fees and the referral fee which will be paid. 2. Provision to be inserted in handling lawyer’s power of attorney or contingent fee contract when Client is referred and no power of attorney or contingent fee contract was executed with referring lawyer. Referral: Client was referred to Attorneys by [insert lawyer’s name or name of law firm] “Referring Attorneys” to prosecute Client’s cause of action. Referring Attorneys will assume joint responsibility for the prosecution of Client’s cause of action with Attorneys. At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorneys fee of (___ %)4, (___ %) will be paid to Attorneys (___ %) and (___%) will be paid to Referring Attorneys. The referral fee to be paid will not increase the total fee owed by the Client. Client’s signature at the end of this agreement indicates his/her understanding and consent to the division of fees and the referral fee which will be paid
3 See footnote 1. 4 See footnote 1.
3. Separate Consent to Refer Form which must be used if referring lawyer only has general provision authorizing referrals or associations.
CONSENT TO REFER
[Name of Client] (“Client’) has previously executed a Contingent Fee Agreement / Power of Attorney / Engagement Agreement dated month day, 2005 (“The Agreement”) retaining [insert lawyer’s name or name of law firm] (“Referring Attorneys”) to represent Client in regard to certain matters and/or causes of action identified in The Agreement. The Agreement also provides that Referring Attorneys, with Client’s written consent, may refer the Client’s matter to another attorney to prosecute the Client’s cause of action if it is in the best interests of the Client. Referring Attorneys have recommended that the Client’s matter be referred to [name of lawyer or law firm] (“Associated Counsel”) to represent Client and to prosecute his/her cause(s) of action. Client agrees that Referring Attorneys may refer his/her matter to Associated Counsel to prosecute Client’s cause of action. It is further agreed and understood that: a. the referral fee to be paid will not increase the total attorneys fee owed by Client; b. the Referring Attorneys will assume joint responsibility for the representation of Client with Associated Counsel; and c. if a recovery is made on behalf of the Client, of the total attorney’s fee of (___ %)5, (___ %) will be paid to Referring Attorneys and (___ %) will be paid to Associated Counsel. Client’s signature indicates his/her understanding and consent to the referral of his/her matter and the referral fee to be paid in the event of a successful recovery on his/her part. Signed this ___ day of ___________, 2005.
______________________________ Client ___________________________ Referring Attorney ____________________________ Associated Counsel 5 If the power of attorney provides that Attorney’s fees will vary depending on whether a case is settled before trial or otherwise (Ex. 33 1/3% if settled before suit filed, 40% after suit is filed and 45% after appeal) the following language can be inserted: At the conclusion of the case, if a recovery is made on behalf of Client, of the total attorney’s fee conveyed to Referring Attorneys in paragraph __ of The Agreement, (___ %) will be paid to Attorneys and (___ %) to [insert lawyer’s name or name of law firm].
