Division of Fees Between Discharged Counsel and Successor Counsel in Contingent Fee Cases

When a client terminates, without cause, its legal representation in a contingent fee matter and subsequently retains new counsel from a different firm, the Rules of Professional Conduct related to the division and disbursement of fees impose certain requirements on the successor attorney. The American Bar Association recently issued Formal Opinion 4871 (the “Opinion”) to identify the applicable rules, and to clarify the duties owed to the client by the successor attorney.

The Opinion explains that Model Rule 1.5(e) (or its state equivalent) has no application to the division of fees in cases of successive representation.2 Such situations are governed by Rule 1.5(b)- (c), which according to the Opinion, require the successor counsel to “notify the client, in writing, that a portion of any contingent fee earned may be paid to the predecessor attorney.”

Specifically, Rule 1.5(b) requires attorneys to communicate the rate or basis of legal fees, and Rule 1.5(c) requires that the written fee agreement include the method of determining the fee. Both subsections are designed to ensure that the client has a clear understanding of the total legal fee, how it will be computed, and when and by whom it will be paid. When a client replaces its original counsel with new counsel in a contingent fee matter, the discharged attorney may have a claim for fees under quantum meruit or pursuant to a clause in the contingency fee agreement; and the successor counsel’s failure to communicate to the client the existence of such claim would run afoul of Rule 1.5(b)-(c). Therefore, even if the exact amount or percentage (if any) owed to the first attorney is unknown at the time, it is incumbent on the successor attorney to advise a contingency client of the existence and effect of the predecessor attorney’s claim for fees as part of the terms and conditions of the engagement from the outset.

The role of the successor attorney with respect to the discharged attorney’s claim for fees should also be set forth in the engagement agreement. The Opinion advises that the engagement agreement should expressly state whether the issue is one to be decided between the discharged attorney and the client or, alternatively, whether the successor attorney will represent the client in connection with the resolution of prior counsel’s fee interest. If the latter, the successor attorney must obtain the client’s informed consent to the conflict of interest arising from his/her dual role “as counsel for the client and a party interested in a portion of the proceeds.” (emphasis in original)

In many situations, the fees paid to the discharged and successor attorneys may not affect the client’s ultimate recovery, and the client may make an informed decision to leave the matter for the two attorneys to determine amongst themselves. In resolving any such dispute, both attorneys remain bound by Rule 1.6 confidentiality or pursuant to any confidentiality provisions in any underlying settlement agreement.

Upon recovery, the successor attorney must comply with Rule 1.15(d) by notifying the discharged attorney of the receipt of funds. However, client consent is required prior to disbursement of any fees that may be payable to the discharged attorney.3 If there is a disagreement about the discharged attorney’s claim or the amount owed, the successor attorney must hold the disputed fees in a client trust account under Rule 1.15(e) until the dispute is resolved.

The Opinion’s guidance is valuable to lawyers handling contingent fee cases because many often fail to engage in earnest efforts to resolve the respective fee interests promptly after successor counsel is retained, leaving the unsuspecting client exposed to complications, potential litigation and delays over the allocation of fees and costs following an award or settlement.

When asked by a prospective client to replace the client’s counsel in a pending contingency fee case, attorneys and firms should be mindful of the duties imposed by the Opinion on successor counsel, as well as the specific Rules of Professional Conduct in the relevant jurisdiction and any other applicable substantive law or authority. In many cases compliance with the new guidance will require updating contingent fee agreements, as well as ensuring the client is adequately informed of the prior counsel’s fee interest and how it will be addressed in the event of a recovery.

1 ABA Formal Opinion 487 (Fee Division with Client’s Prior Counsel), June 18, 2019.

2 Model Rule 1.5(e) applies to the division of fees between lawyers of different firms who are representing the client concurrently or who maintain joint ethical and financial responsibility for the matter as a whole. See cmt. [2].

3 See Model Rule 1.5(a).

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Last modified: November 12, 2020

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