Attorneys' Fee Disputes: Will Your Agreement Hold Up?

The old saw about an attorney who represents himself having a fool for a client is probably a bit harsh, but it is probably true that attorneys generally give less attention to their own business law issues than to their clients'. The decisions of the Colorado Supreme Court are solemn testimony to the woeful lack of attention or skill of lawyers in their own contracts, collections, and liens.

An entire course might be taught on drafting retainer, engagement, non-engagement and withdrawal letters alone. The goal of this article is more modest: to identify the hot issues in retainer agreements today under Colorado law.

Contingent Fee Agreements

As detailed in part III. 4 of these materials, contingent fee agreements have been a recent source of attention by the Colorado Supreme Court.

The three principal lessons of these cases are: (1) Chapter 23.3, Colo. R. Civ. P. will be observed and must be followed, (2) Chapter 23.3 is only a starting point, and does not even come close to stating all the possible contingencies that should be anticipated and provided for, including rightful or wrongful discharge of the attorney and consensual withdrawal by the attorney prior to the occurrence of a stated contingency, and (3) artful lawyering and even not-so-creative legal theories will not save a contingency fee for the attorney who ignores lessons (1) and (2). See generally, Part III. 4, Quantum Meruit!?: The Rights of the Discharged Contingent Fee Lawyer. Given the potential sums at stake, the contingent fee lawyer may be well advised to seek independent legal counsel in drafting the contingency fee agreement.

Referral Fees

Referral fees in Colorado are prohibited. R.P.C. 1.5(e). See People v. Shipp, 793 P.2d 574 (Colo. 1990) (interpreting prior DR 2-103(B)). Yet it is not unheard of in Colorado for an attorney to refer a matter to another attorney with greater expertise or resources in a particular area -- particularly in a contingent fee matter in which substantial expenses are anticipated -- and for the attorneys to agree to some type of fee splitting arrangement. Nor is such an arrangement per se unethical. However, unless the referring attorney takes great care in making the reference, and adheres to the other edicts of the Colorado Rules of Professional Conduct, it is very likely that, when the champagne at the multi-million dollar settlement/verdict party is being poured, his glass will be empty. Moreover, given the inherent distaste routinely evidenced by the courts in these money squabbles, the unlucky attorney is likely to find little judicial sympathy, but instead a close scrutiny of his own conduct.

(d) 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 and responsibility assumed by each lawyer;

(2) the client consents to the employment of an additional lawyer after a full disclosure of the division of fees to be made;

(3) the total fee is reasonable; and

(4) the division is set forth in writing signed by the lawyers and by the client with informed consent. (Emphasis added.)

R.P.C. 1.5. The disclosure, consent and writing requirements of Rule 1.5 are unsurpassed anywhere in the Colorado Rules of Professional Conduct. Informed consent is undefined by the Colorado Rules, but probably requires at least the equivalent of, and probably greater disclosure than mere "consultation":

"Consult" or "consultation" denotes communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.

Colorado Rules of Professional Conduct, Preamble, Terminology. R.P.C. 1.5(d)(2) implies that the written informed consent must be obtained at the outset of the additional representation; certainly the attorney to whom the matter is referred would be wise to be sure the required consent has been obtained by the referring attorney before investing substantial time or money in the matter. This is absolutely essential in a contingency fee representation.

The total reasonableness of the fee presents few interpretative difficulties. Generally division of a contingent fee totaling 1/3 of the gross outcome will be reasonable, as will non-duplicative work billed at an agreed upon and reasonable hourly rate. Increasing a contingency percentage merely because there are more lawyer-cooks in the kitchen will probably be met with disapproval.

The more difficult and recurring issue is subsection (d)(1)'s requirement that "the division is in proportion to the services performed and responsibility assumed by each lawyer." (Emphasis added.) Colorado Rule 1.5 differs markedly from the ABA Model Rule, which permits the fee split to be based either in the proportion to each attorney's relative contribution or services, or, with the client's written consent, upon the assumption of "joint responsibility" for the representation. Thus, in a state which has enacted the ABA Model Rule, a more experienced attorney could split equally a reasonable total fee with the attorney providing the substantial majority of the services, so long as the attorney "assume[d] joint responsibility for the representation." In contrast, Colorado Rule 1.5(d)(1) uses the conjunctive, rather than disjunctive with regard to "services" and "responsibility." The Colorado Committee Comment to Rule 1.5 makes clear that subsection (d)(1) should be read as written: "The fee splitting provisions of Model Rule 1.5(e), now 1.5(d), have been revised to resemble more closely DR 2-107(A) and to tighten up the client consent requirements."

Thus, in Colorado, the referring attorney must be prepared to and actually perform services and assume responsibility for the representation in proportion to the agreed upon fee split. Still, courts construing Colorado Rule 1.5(d)(1) would be wise to not approach the requirement in an arithmetic fashion by simply comparing hours spent and fees advanced. Factors such as the relative experience of the attorneys and the overall efficiency and benefit of the fee division should be considered at least equally as important.

Arbitration Provisions

Another "hot issue" in attorney fee agreements is the enforceability of an arbitration clause against a client. A textbook example of how Colorado courts will approach these disagreements was recently offered in Flemmer v. Holme, Roberts & Owen, L.L.C., et. al., No. 96 CV 1101, slip op., (Colo. Dist. Ct., 20th Judicial District, Dec. 23, 1996). In that case, client and attorneys became embroiled in a fee dispute, the byproduct of a costly divorce proceeding. Unable to agree upon alternative dispute resolution, client sued attorneys for alleged malpractice. Attorneys served a demand for arbitration under their fee agreement, which provided:

If these is any dispute between [attorneys] and [client] about [attorneys'] legal fees and costs, such dispute shall be resolved by arbitration in Denver, Colorado, . . . , and arbitration shall be the exclusive remedy for any such dispute.

Attorneys moved to dismiss the malpractice litigation based on the arbitration clause, claiming it was a subterfuge to force acceptance of a lesser fee. Client cross-moved to void the fee agreement, based upon an alleged conflict of interest.

Finding that it had jurisdiction to determine the effectiveness and scope of the fee agreement and arbitration clause, the court observed:

Attorneys have an obligation to be fair and frank in specifying the terms of the attorney-client relationship. . . . When regulating the conduct of attorneys and interpreting fee agreement contracts, courts have been consistent in construing any ambiguity against the attorney who drew the agreement and liberally in favor of the client. Elliot v. Joyce, 889 P.2d 43 (Colo. 1994). The ABA Model Rules of Professional Conduct cautions [sic] lawyers against writing misleading arbitration clauses into fee agreements aimed at binding a client to arbitration for any claim arising from the attorney-client relationship -- not merely fee disputes -- unless the client knowingly consents to the broad scope in writing. ABA Model Rules of Professional Conduct, Comment to Rule 1.5. (Some citations omitted.)

Slip op. at 6. Accordingly, finding that the arbitration clause should be construed as being limited to fee disputes, and finding that the issues between the malpractice claim and the fee dispute were intertwined, the court denied attorneys' motion to dismiss the malpractice claim, and granted client's motion to stay the fee arbitration. Id. at 7. Compare McGuire, Cornwell & Blakey v. Grider, 765 F. Supp. 1048 (D. Colo. 1991) (reaching opposite result, where scope of arbitration clause was more expansive, and client was found to be a sophisticated businessman).

It has been observed that the negotiation and drafting of retainer agreement creates an immediate conflict of interest between attorney and potential client, but that, in their wisdom, courts have not required a client to be separately represented to render the retainer agreement enforceable, which would lead to an absurd and endless succession of reviewing counsel. Nor, as a mater of ethics, should separate representation of the client be required to make valid a clearly drafted arbitration agreement, even one submitting all claims to arbitration. It is, however, probably wise for attorneys to routinely advise their clients, in writing, of the opportunity for and value of independent review of retainer agreements by disinterested counsel, prior to executing them. Cf. Colo. Bar Ass'n Ethics Committee Opinion 85, Release and Settlement of Legal Malpractice Claims (May 19, 1990) (attorney should advise client, preferably in writing, to secure independent counsel to review settlement or release of potential malpractice claims).