The inquiry was submitted by letter and was reviewed by the Committee at the June and July, 1993 meetings.
The inquirer's law firm represents private and governmental clients in collection matters. The Inquirer's letter raises questions with regard to two proposed contingency fee arrangements which the law firm may wish to utilize in representing these clients. One arrangement has been proposed by the inquirer's government client, a Department, which currently pays the firm on a contingency fee basis, and reimburses the firm for the costs advanced by the firm. 1 The second arrangement about which the inquirer seeks advice is a two-tiered contingency fee agreement, where the regular fee rates are increased only on litigated matters.
I. GOVERNMENT PROPOSED FEE ARRANGEMENT.
The Department evaluated the current fee arrangement with the inquirer's firm and concluded that the accounting practices involved in the reimbursement of costs are burdensome. As such, the Department wishes to discontinue the arrangement of paying for costs on a case-by-case basis, thereby obviating the Government's processing and verification of such costs and to eliminate the problems and work inherent in the present reimbursement process.
The Department therefore requested that the inquirer's firm, as well as other firms doing similar work for the Department, rebid their contingency fee agreements without any requirement of a case-by-case accounting for costs advanced. The new fee agreements would be formulated with the understanding that counsel will not be reimbursed on a case-by-case basis but, instead, the contingency rates will be somewhat increased so that on the whole, the Government's payments of the higher rate will reimburse counsel for their advances of costs, without matching the reimbursement payments to the exact costs in each case. The new bids will be favorably considered by the Government depending, in principal part, on how closely the new bid reflects the total amount the Government office was paying counsel under the old plan, in the form of a contingency fee, plus costs. Specifically, the Government's new proposed payment plan suggests an increase over counsel's prior contingency rate to cover such costs. Statistical material was furnished to counsel by the Government showing the actual approved reimbursement of costs under the current arrangement, for the stated purpose of allowing counsel to calculate the new contingency rates with regard to the likely amount of costs to be advanced on future cases.
The Government's proposal of the new arrangement to counsel included this suggestion:
Please keep in mind that we expect some kind of average increase from you. That is, we cannot accept a new contingency fee that is so high that it will enable you to recover every cent you may have to spend under every conceivable circumstance in every case. I suggest that you should try to reach a figure that will provide you with an amount somewhat less than you might have to expend in extraordinary cases, and yet in excess of your anticipated actual costs in the vast majority of your routine cases, so that things should even out over time.
The inquirer wishes to know whether the Pennsylvania Rules of Professional Conduct would preclude his/her office from entering into such a fee arrangement with the Government. 2
The Professional Guidance Committee has concluded that the proposed fee arrangement would be proper under the Rules of Professional Conduct. The applicable rules are Rule 1.8(e), Conflict of Interest: Prohibited Transactions and Rule 1.5, Fees. Rule 1.8(e) provides as follows:
(e) A lawyer shall not provide financial assistance to a client in connection with pending or contemplated litigation, except that:
- A lawyer may advance court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; and
- A lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.
Rule 1.5 provides, in part:
(a) A lawyer should not enter into an agreement for, charge, or collect an illegal or clearly excessive fee....
A review of the Pennsylvania Rule of Professional Conduct 1.8 Code Comparison reveals that when Pennsylvania adopted the Rules of Professional Conduct, and replaced the Code of Professional Responsibility, there was a change made to the relevant section of this rule. Rule 1.8(e)(1) is similar to [Code Provision] DR5-103(B), but eliminates the requirement that 'the client remain ultimately responsible for expenses'. Pa. Rule of Professional Conduct 1.8, Code Comparison. 3
The Philadelphia Guidance Committee bases its conclusion that the proposed fee arrangement would be proper on the fact that costs, which would be advanced by the inquirer's firm, would be paid through the contingent fee and recovered over the long run. This is true because the increased contingent fee is to be based on past expenses, and thus the fees will approximate and cover the actual costs advanced by the law firm over the long term. It was further concluded that this is not prohibited financial assistance under Rule 1.8(e) and that the proposed fee arrangement is designed to save the firm and the client money. The Committee considered the fact that Rule 1.5 provides that a fee can be computed based on gross or net recovery in a case, and this also indicates that an attorney taking his costs as part of an increased fee is permissible.
For the reasons stated, the inquirer is advised that the proposed fee arrangement is proper in Pennsylvania under the facts as stated to the Committee.
II. TWO-TIERED CONTINGENCY FEE AGREEMENTS
This Committee has addressed the issue of whether a graduated contingent fee (the percentage payable to a lawyer changing at various stages in the representation before the funds are generated) is permissible under the rules. In Opinion 93-11, the Committee stated that Rule 1.5 appears to specifically permit graduated percentage agreements. Citing subsection (c) of Rule 1.5, the Committee stated that the Rule contemplated that more than one percentage may apply to the same representation.
The inquirer has proposed an arrangement in which a client would be charged a two-tiered contingency fee rate, where the regular contingency fee rates would be increased on litigated matters. This is a similar arrangement to that addressed by Opinion 93-11 which the committee concluded was permissible under the rules. The Committee did set forth a caveat in Opinion 93-11 based upon the comment to rule 1.5. The comment provides: A lawyer should not exploit a fee arrangement based primarily on hourly charges by using wasteful procedures. The Committee stated in Opinion 93-11 that the same would apply to a graduated percentage fee arrangement; it should never be exploited by the lawyer's advantage.
The inquirer states in his letter that the higher contingency fee rate would be utilized solely to defray the additional court costs incurred on the litigated matters and that the client would not be required to reimburse the lawyer for court costs. For the reasons set forth in the first section of this opinion, and in accordance with Opinion 93-11, such an arrangement is permissible under the rules subject to the caveat expressed in the quoted comment to Rule 1.5.
2. In its opinion, the Professional Ethics Committee of the Bar Association of Nassau County, New York, concluded that such an arrangement was prohibited by the New York State Disciplinary Rules and Ethical Considerations. It is noted that the rule upon which the New York Committee based its conclusion differs from the corresponding Rule of Professional Conduct which applies to this situation in Pennsylvania. 3. The corresponding New York rule, upon which the New York Ethics Committee relied, is DR5-103 (b) which provides in part: The New York Committee ultimately decided that due to the specific language emphasized above, an agreement providing for reimbursement on a case-by-case expenditure basis is required by the [New York State] code. Opinion #93-12, Bar Association of Nassau County, New York, Committee on Professional Ethics.
1. The fee arrangement proposed by the Department is described in an opinion from the Professional Ethics Committee of the Bar Association of Nassau County, New York. The inquirer provided this opinion to the Professional Guidance Committee, stating that the facts of the opinion pertain to the inquirer's office in its representation of private and government clients.
1. A lawyer may advance or guarantee the expense of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses (emphasis added).
2. In its opinion, the Professional Ethics Committee of the Bar Association of Nassau County, New York, concluded that such an arrangement was prohibited by the New York State Disciplinary Rules and Ethical Considerations. It is noted that the rule upon which the New York Committee based its conclusion differs from the corresponding Rule of Professional Conduct which applies to this situation in Pennsylvania.
3. The corresponding New York rule, upon which the New York Ethics Committee relied, is DR5-103 (b) which provides in part:
The New York Committee ultimately decided that due to the specific language emphasized above, an agreement providing for reimbursement on a case-by-case expenditure basis is required by the [New York State] code. Opinion #93-12, Bar Association of Nassau County, New York, Committee on Professional Ethics.