Opinion 2001-1
(June 2002)

This inquiry has sparked intense debate.  This opinion sets out (for guidance) the majority opinion, but also sets out (for information) the dissent. The inquirer may rely on the majority opinion in proceeding, such reliance being limited only by the import of the Committee's long-standing caveat, which is part of this opinion.

Majority Opinion

The inquirer's written contingent-fee agreement contains two provisions relating to settlement.  The inquirer has asked whether there is any ethical proscription against either provision.  The first provision addresses the situation where the client refuses to accept a settlement that the inquirer recommends:

In the event [client] refuses to accept a settlement which [law firm] in its professional judgment has recommended, [firm] has the option to (a) continue the representation under the existing fee agreement, (b) withdraw from the representation and receive as payment for its work to date from any subsequent proceeds of the case a fee computed on the basis of its standard hourly rate or on the basis of a quantum meruit calculation (whichever is greater), or (c) continue the representation on the basis of a fee computed on its full standard hourly rates for [all] [any subsequent] time which is recorded on the matter.

The second provision addresses the situation where the client elects to accept a settlement offer that the inquirer recommends against:

If [the client] elects to accept a settlement offer which [firm] in its professional judgment has recommended against, then [firm] has the option to take in lieu of a contingent fee a fee that is based on its full standard hourly rates from the inception of the case plus an additional fifteen percent (15%) of that amount in addition to reimbursement for all expenses advanced by [the firm] on the matter.

The principal issue raised by this inquiry concerns whether the quoted provisions of the inquirer's fee agreement impermissibly abridge a client's right to make a settlement decision. Pennsylvania Rule of Professional Conduct (the "Rules")  1.2(a) provides in part that:  "A lawyer shall abide by a client's decision whether to accept an offer of settlement of a matter." Webster's New Collegiate Dictionary defines "abide" in this regard as "to accept without objection."  The comment to Rule 1.2(a) further states that it is improper to ask a client to surrender his or her right to determine whether to settle litigation.  In this regard, the comment provides in part that "the client may not be asked to . . . surrender the right to terminate the lawyer's services or the right to settle litigation that the lawyer might wish to continue."

The Committee concludes that, as written, each provision in this inquiry violates the requirement in Rule 1.2(a).  Imposing adverse financial consequences on a client due to his or her settlement determination is inconsistent with the mandate of Rule 1.2. Each provision raises the distinct possibility that the client may suffer significant adverse financial consequences if he or she does not agree with the lawyer's settlement recommendation.  Under the terms of the agreement, these consequences potentially include incurring a significant liability for counsel fees - - calculated on the basis of inquirer's standard hourly rates or "quantum meruit"  - - where the client wishes to reject the inquirer's recommendation concerning settlement of the matter.

Although a lawyer and a client obviously may agree to base a fee on the standard hourly rates charged by that lawyer, the provisions of this agreement permit the lawyer to exercise discretion about whether to accept a settlement offer and enforce his or her will by changing the nature of the fee and imposing on the client potentially adverse financial consequences in the event the client disagrees with the lawyer's settlement recommendation.  We believe that these provisions run afoul of Rule 1.2(a).  See Connecticut Bar Association, Committee on Professional Ethics, Informal Opinion No. 99-18 (June 17, 1999) (Rule 1.2(a) violated by contingent fee agreement that "client would become obligated to compensate [lawyer] for services rendered at [lawyer's] usual hourly rate(s) if the client rejects a settlement offer that [lawyer] recommended, and thereafter the defendant prevails"); Nebraska Ethics Opinion No. 95-1 (prohibiting a lawyer from using a contingent fee agreement that requires client to pay the higher of the contingent fee or hourly rate in the event the client accepts a settlement offer that the lawyer deemed unacceptable).  See also Philadelphia Bar Association, Professional Guidance Opinion No. 88-16 (July 25, 1988) (disapproving contingent fee agreement in which costs of litigation would be contingent on recovery, but requiring client to pay costs "where the client has rejected an offer of settlement which appears to counsel to be 'fair and reasonable under the circumstances. . .'"). We note, however, that Rule 1.2(c) provides that a lawyer may limit the objectives of the representation if the client consents after consultation and a full disclosure of the circumstances.  In addition, Rule 1.7(b) does not preclude a lawyer from representing a client where the representation "may be materially limited by the lawyers' own interests," so long as: 1) "the lawyer reasonably believes the representation will not be adversely affected . . ."; and 2) the client consents after full disclosure and consultation.

In this context, we believe that Rules 1.2(c) and 1.7(b) permit a lawyer to include conversion provisions similar to those presented by the inquirer, if a clear objective is specified in the agreement and full disclosure is provided to the client.  For example, a lawyer and client could agree that the objective of a particular representation is to seek some form of declaratory or injunctive relief directed towards particular corporate conduct.  If the client later changes his or her mind about the objective and elects instead to accept a financial settlement, we believe the rules permit the lawyer and client to have agreed in advance about the consequences of such a change without violating Rule 1.2(a).  Thus, a lawyer and client can specify certain objectives of a representation in advance and provide for alternative fee arrangements in the event the client changes his or her mind regarding those objectives, provided that the agreement clearly specifies those objectives, the lawyer adheres to Rule 1.7(b) and the fee agreement otherwise complies with Rule 1.5.  The agreement provided by the inquirer, however, does not specify the objectives of the representation or tie the alternative fee arrangement to a decision by the client to depart from those objectives.  Instead, the lawyer is free in this inquiry to make a settlement decision without regard to any previously discussed and accepted objective.  Without a clearly articulated objective, the provisions run afoul of Rule 1.2(a).

Dissent

A per se  prohibition unnecessarily limits the right of a client, who understands and accepts  what is at stake with the "conversion" provisions, to select counsel of their choice.  In this view, if the attorney can demonstrate compliance with Rule 1.5 (which prohibits charging or collecting "clearly excessive fees") and with Rule 1.7 (which requires both client "consent after full disclosure and consultation" and the lawyer's "reasonable belief" that the "representation will not be adversely affected") then the provisions would not be unethical. Such demonstration would need to apply those rules both at the time of signing the agreement and under the facts extant at the time of the proposed "conversion."

We do not here propose to set forth all of the measures which the inquirer might take to demonstrate such compliance.  However, the client's right to discharge counsel at any time pursuant to Rule 1.16(3) is significant.  Thus, such right must necessarily be explicitly set forth.

A client does not have the right to easy choices at each juncture of any given litigation. Difficult financial considerations often affect choice during litigation. For example, an attorney may ethically agree with a client that the client will be responsible for litigation costs.  Thereafter, if a settlement is rejected, the costs of experts at trial may be ruinous for the client if the matter is not won at trial. Such a dilemma for the client does not reflect any unethical conduct on the part of the attorney.

The inquiry does not set forth any facts which would show whether Rules 1.5 and 1.7 would (or could) be met.  In general, it would appear that a sophisticated, well-financed client could enter such an agreement.  However, a less sophisticated client, or a client who could not personally pay the attorney's "standard hourly rate," but would be required to do so after "conversion" of the fee arrangement, probably could not enter such an agreement.
 
         

The Philadelphia Bar Association's Professional Guidance Committee provides, upon request, advice for lawyers facing or anticipating facing ethical dilemmas. Advice is based on the consideration of the facts of the particular inquirer's situation and the Rules of Professional Conduct as promulgated by the Supreme Court of Pennsylvania. The Committee's opinions are advisory only and are based upon the facts set forth. The opinions are not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. They carry only such weight as an appropriate reviewing authority may choose to give it.