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Formal Opinion 1987-4

May 13, 1987

ACTION: Formal Opinion

OPINION:

The Committee hereby withdraws its Opinions 80-94 and 82-80 in light of the decision of the Supreme Court of the United States in Evans v. Jeff D., 106 S. Ct. 1531 (1986). n1

n1 The Committee has carefully considered, but has determined not to follow, the recommendations of the Association's Committee on Civil Rights, Committee on Professional Responsibility and Committee on Sex and Law, as well as of the Plaintiff Employment Lawyers' Association, that Opinions 80-94 and 82-80 not be withdrawn.

As more fully explained below, the decision in Jeff D. has led us to conclude that it is not unethical per se for defense counsel to propose settlements conditioned on the waiver by plaintiffs of an award of attorneys' fees authorized by statutes in civil rights and civil liberties cases. At the same time, we wish to emphasize that no inference should be drawn from the Committee's action that conduct previously deemed unethical by the Committee is now necessarily being sanctioned. Rather, in the future these questions will be dealt with on a case-by-case basis.

Prior Opinions

In Opinion 80-94, with a substantial minority dissenting, this Committee held:

(1) It is unethical for defense counsel to propose settlements conditioned on the waiver by plaintiffs of an award of attorneys' fees authorized by statutes designed to encourage the enforcement of civil rights and civil liberties;

(2) It is unethical for defense counsel to attempt to negotiate the fee award under such statutes simultaneously with the negotiation of the settlement of the merits; and

(3) Defense counsel should not be permitted to use the merits of the settlement as a "lever" to extract effectively a waiver of part of the fee.

The Opinion was expressly limited to cases involving enforcement of civil rights and civil liberties and was not an expression of the Committee's views with regard to demands for waiver of statutory fees, or simultaneous negotiation of fees and the merits, in any other context.

In Opinion 82-80, again with a substantial minority dissenting, the Committee decided not to reconsider Opinion 80-94. The Committee did make clear, however, that it would not be ethically improper for defense counsel, in the course of settlement discussions, to request that plaintiffs' counsel provide information relating to the fee which counsel might seek in a fee application so long as neither the request nor any information supplied was used by defense counsel in such a manner as to violate Opinion 80-94. In addition, the Committee stated that its prior Opinion should not be read to suggest that there is any ethical impropriety in attempting to negotiate attorneys' fees after a settlement of the merits has been achieved.

The Opinions were based in large part on the Committee's interpretation of the legislative policies underlying the civil rights and civil liberties statutes and the furthering of what the Committee believed was a clearly articulated legislative goal to make counsel available and to facilitate use of the judicial process to enforce fundamental rights. n2 The provisions of the Code of Professional Responsibility invoked by the Committee were DR 1-102(A)(5), which provides that "A lawyer shall not: Engage in conduct that is prejudicial to the administration of justice;" EC 2-25, which states that "The rendition of free legal services to those unable to pay reasonable fees continues to be an obligation of each lawyer. . . . Every lawyer should support all proper efforts to meet this need for legal services"; and, in actions against a government, EC 7-14, which provides that "A government lawyer . . . should not use his position . . . to bring about unjust settlements or results."

n2 The Committee also reasoned that demands by defendants' lawyers for waiver of statutory fee awards in the settlement of civil rights and civil liberties cases are unethical because they have the effect of placing the personal interests of plaintiffs' lawyers in conflict with the interests of their clients.

The Jeff D. Decision

In Jeff D., the plaintiffs brought a class action in Federal District Court alleging that deficiencies in educational programs and health care services provided by the State of Idaho to mentally handicapped children violated the Federal and State Constitutions and various federal and state statutes. Injunctive relief and an award of costs and attorneys' fees, but not damages, were sought. The District Court approved a settlement granting the injunctive relief but also providing for a waiver by plaintiffs of any claim for attorneys' fees. The Court of Appeals for the Ninth Circuit invalidated the fee waiver, left standing the remainder of the settlement and remanded the case to the District Court for the limited purpose of making a determination of reasonable fees.

The Supreme Court (in a 6 to 3 decision) reversed the Court of Appeals. The Supreme Court held that under the Civil Rights Attorney's Fees Awards Act of 1976 (the "Fees Act"), the District Court had the power, in its discretion, to approve the waiver of attorneys' fees. The Supreme Court further held that in the circumstances of the case the District Court did not abuse its discretion in approving a waiver of attorneys' fees as part of a settlement that secured broad injunctive relief greater than that which plaintiffs could reasonably have expected to achieve at trial. The Court noted that there was nothing in the record to indicate that the State of Idaho had a uniform policy of insisting on fee waivers as a condition of settlement of civil rights litigation, or that the defendants' request to waive fees was a vindictive effort to deter attorneys from representing plaintiffs in civil rights suits.

 

Reason for Withdrawal

As noted, Opinions 80-94 and 82-80 were based in large part on the Committee's belief that in the context of settlement of civil rights and civil liberties cases, demands that plaintiffs' counsel waive statutory fees would seriously interfere with the legislative objective of making counsel available for persons having claims under these statutes and that authorization of fee awards under such statutes is critical to the administration of justice.

Regardless of whether enforcement of statutory goals is within the proper province of ethics committees, our Committee has had to recognize that the principal underpinning of its prior Opinions has been removed by the Supreme Court's decision in Jeff D. and that the reasoning of those Opinions is, to a significant degree, inconsistent with the reasoning of the Supreme Court in interpreting and applying the Fees Act. In Jeff D., the Supreme Court held that neither the Fees Act nor its legislative history suggests that Congress intended to forbid all waivers of statutory attorneys' fees. The Court stated:

"Thus, while it is undoubtedly true that Congress expected fee-shifting to attract competent counsel to represent citizens deprived of their civil rights, it neither bestowed fee awards upon attorneys nor rendered them nonwaivable or nonnegotiable; instead, it added them to the arsenal of remedies available to combat violations of civil rights, a goal not invariably inconsistent with conditioning settlement on the merits on a waiver of statutory attorney's fees." 106 S. Ct. at 1539-40.

The Court stressed that permitting defendants to negotiate fee waivers, and thus to limit their total liability, would promote both settlements and civil rights, and the Court was not persuaded that permitting waivers would lessen the number of competent lawyers willing to represent plaintiffs in such cases.

Because of the Jeff D. decision, and solely for this reason, the Committee has determined that Opinions 80-94 and 82-80 must be withdrawn.

Future Inquiries

The Committee considered at great length whether, in conjunction with the withdrawal of Opinions 80-94 and 82-80, it should issue a general opinion as a guide to future conduct for both plaintiffs' counsel and defendants' counsel on the question of waiver of statutory fee awards in civil rights and civil liberties cases, or indeed on the broader questions of the ethical obligations of lawyers in the charging, and in the relinquishment or waiver, of reasonable attorneys' fees in other contexts as well. A majority of the Committee has decided that the Committee can better carry out its mission by dealing with such difficult and sensitive questions in concrete factual settings. The majority's decision results in part from consideration of the many factual contexts in which the fee waiver issue may arise; for example, it may be relevant to that issue whether the attorney expects to be compensated or is serving without charge, whether the attorney is employed by a legal services organization, whether there is a retainer agreement which addresses the subject of a fee waiver or limitation, whether the fee is contingent, whether the sole or primary relief sought is monetary damages or injunctive relief, whether a settlement requires court approval, whether opposing counsel seeks a total fee waiver or simultaneous negotiation of fees and the merits, whether there is a clear legislative policy to shift the burden of the fee to the losing party, and whether the subject of fee waiver or limitation has been initiated by plaintiffs' counsel or by defendants' counsel.

In any one or more of these contexts, there are at least two questions that arise from the withdrawal of the Committee's prior Opinions. First, does the withdrawal mean that it is ethical for defense counsel in a civil rights or civil liberties case to ask for a full or partial waiver of statutorily authorized attorneys' fees as part of an overall settlement of the case? Second, if defense counsel asks, may plaintiffs' counsel ethically decline to agree?

As to the first question, it is clear in the wake of Jeff D. and this Committee's withdrawal of its prior Opinions that there is no binding ethical authority in this State which forbids defense counsel from ever asking for a settlement or waiver of attorneys' fees. One possible answer to the first question is that there can rarely be an ethical problem with such a request. Another possible answer is that such a problem may arise when the effect of the offer is coercive, or perhaps it may arise in other circumstances as well. Further deliberation by our Committee will await the submission of concrete inquiries.

As to the second question, it is clear that there is no binding ethical authority in this State which requires plaintiffs' counsel always to agree to the waiver or negotiation of a reasonable fee, or which prevents plaintiffs' counsel from ever agreeing in advance with his or her client that there will be no such waiver or negotiation. One possible answer to the second question is that there can rarely, or perhaps even never, be an ethical problem with refusing to waive or negotiate the payment of a reasonable fee. Those subscribing to this view may believe that any problem can be avoided by an agreement with one's client in advance that statutorily authorized attorneys' fees will not be reduced or waived as part of a settlement. Another possible answer is that a lawyer's duty of loyalty to his or her client will usually require the lawyer to negotiate regarding, or even waive, the full amount of statutorily authorized fees. Here again, further deliberation by our Committee will await the submission of concrete inquiries.

Accordingly, with respect to the ethical obligations of both plaintiffs' counsel and defendants' counsel, the Committee will treat this subject only by responding to inquiries in specific cases.

Regarding the Minority Separate Statement

A minority of the Committee has issued a Separate Statement to this Formal Opinion because those members believe that it is "appropriate -- without awaiting specific factual inquiries -- to provide the Bar with guidance on some of the issues that now arise due to the withdrawal of those Opinions [80-94 and 82-80]." (Separate Statement p. 11). The minority is of this view notwithstanding that the prior Opinions hardly addressed the issues discussed in the Separate Statement.

As noted above, a majority of the Committee has concluded that it would be inappropriate for the Committee to publish abstract general principles defining ethically permissible conduct in the charging, and in the relinquishment or waiver, of attorneys' fees. We do not agree that the withdrawal of our prior Opinions provides an occasion to do so. In particular, a majority of the Committee is concerned that the Separate Statement has been issued with insufficient study and deliberation by the Committee as a whole, especially given the sweeping nature of the conclusions reached. The Bar and the public are therefore cautioned that the conclusions set forth in the Separate Statement are solely the individual views of the minority members of the Committee who have joined in that Statement. Members of the Bar may not rely on the Separate Statement as a pronouncement of this Committee in considering their own prospective conduct but should, if they wish assistance from this Committee, submit written inquiries setting forth the specific questions and facts as to which they seek guidance.

COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS

Elkan Abramowitz *

Hon. Bruce Allen *

Marvin V. Ausubel *

Bruce A. Baird

Seymour Boyers *

Nancy F. Brodie

Bernard Cedarbaum

Michael A. Cooper

John M. Delehanty

Dan S. Dunham +

 

Hon. Cecelia H. Goetz *

George Gottlieb

Peter E. Greene

Hon. Sharon E. Grubin **

** Dissenting from the ultimate conclusions reached in Formal Opinion No. 1987-4 and the Minority Separate Statement.

Alvin K. Hellerstein

Jonathan M. Herman *

Gary Hoppe

Stephen Rackow Kaye * Chair

David G. Keyko +

P. B. Konrad Knake, Jr.

Douglas B. Levene +

+ Also Joining in Concurring Opinion.

Susan B. Lindenauer *

Michael Malina

Darren O'Connor *

Bruce E. Pindyck *

* Joining in Minority Separate Statement.

William J. Thomashower Vice-Chair

Prof. Diane L. Zimmerman

Mark P. Zimmett

CONCUR: CONCURRING OPINION

We join the Committee's Formal Opinion No. 1987-4, and write separately to state briefly our differences with the minority's "Separate Statement."

The Separate Statement assumes that it is the plaintiff's attorney, as opposed to the plaintiff, who is entitled to statutory attorneys' fees. (Separate Statement nn. 1 & 11). It then poses the question as whether the attorney is obligated, in the circumstances raised by Evans v. Jeff D., 106 S. Ct. 1531 (1986), to waive his right to fees and concludes that the "lawyer has no ethical duty to relinquish or waive all or part of a reasonable fee (in any context, including settlement), even if to do so would be in the client's interest or if the client were so to direct." (Separate Statement p. 11). We respectfully disagree. In our view, the assumption from which the minority proceeds is false and the question that it answers is not posed by Jeff D. No question is raised of the attorney's "ethical duty to relinquish or waive" his fee because it is only the client and not the attorney who has the right to collect statutory fees from the adverse party and it is only the client who has the power to waive them.

In Evans v. Jeff D., 106 S. Ct. at 1539 & n.19, the Supreme Court made clear that statutory attorneys' fees are an element of the relief to which the prevailing party, and not his attorney, is entitled. The purpose of the fee-shifting provision was to correct the historical anomaly (i.e., the so-called American Rule) that prevented civil rights plaintiffs from recovering one of the elements of damages incurred by anyone who seeks to assert rights that have been infringed, namely the cost of retaining a lawyer to assert those rights. The statute corrected this by giving the plaintiff the right to recover the attorneys' fees incurred by him in prosecuting the action. Such statutory attorneys' fees can no more be claimed by the plaintiff's attorney as the attorney's right than can any other element of damages to which the plaintiff is entitled. It follows that it is only the plaintiff, and not his attorney, who can waive the right to an award of statutory attorneys' fees.

Although it is the client's right to collect statutory attorneys' fees from the adversary, the attorney may in turn have a right (either in contract or restitution) to collect a fee from his client. n1 In some cases (particularly in public interest cases), the attorney may agree not to collect a fee except to the extent that the client recovers an award of attorneys' fees from the adversary. Even without such an agreement, the attorney may as a practical matter be unable to collect any fee without a fee award to the plaintiff. However, in neither event would the decision of the client to waive a fee award as part of a settlement entail in any way a waiver by the attorney of his right (if any) to a fee. The attorney would have exactly the same legal rights to a fee after such a waiver by the client as before.

n1 An attorney's right in contract or restitution to a fee is a question of law beyond the province of this Committee.

This is not to say that the attorney whose only realistic prospect for payment is through an award to his client of statutory attorneys' fees can do nothing to assure himself of a reasonable prospect of being paid. It may be, as the Separate Statement concludes, that it is ethically permissible under the New York Code of Professional Responsibility for an attorney to include in his retainer agreement a covenant by the client not to waive the client's right to statutory attorneys' fees. n2 In a civil rights case seeking injunctive relief, such a covenant would amount to an agreement by the client that if the case is settled, the client would forego part of the relief to which he would otherwise be entitled in order to induce the defendant to pay the client's attorney's fees. We see no economic difference between this and the ordinary contingency fee case in which the client agrees to forego a percentage of the damages to which he would be entitled in order to pay his attorney's fees. The form in which the client pays the economic costs that legal services necessarily entail should not matter.

n2 However, we doubt whether an outright assignment to the attorney of the client's rights to statutory attorneys' fees would be permissible under DR 5-103.

The inclusion of such covenants in retainer agreements would at best give the lawyer a contractual right against his client and would not give him any rights under the statute or any interest in the lawsuit, let alone any rights under the Code of Professional Responsibility. Even if such covenants were construed to give the lawyer an interest in the lawsuit, n3 however, the decision to settle the case -- including the decision whether to waive statutory attorneys' fees -- would remain the client's decision "exclusively." EC 7-7. Ethically, the lawyer could no more prevent such a client from settling on terms that would diminish or even eliminate the prospect of the lawyer's recovering a fee from the client than a contingency-fee lawyer could prevent a client from accepting a settlement providing for nominal damages and an admission of wrongdoing in place of a potentially large damage award following a trial. In short, we doubt that an attorney can ever ethically force a client to the hazards of trial in order to preserve the attorney's prospects of recovering a fee. n4

n3 Such a construction might well place the attorney in violation of DR 5-103, which provides that "[a] lawyer shall not acquire a proprietary interest in the cause of action. . . ."

n4 Although it is for the client alone to determine whether to accept a settlement offer conditioned on a waiver by the client of an award of statutory attorneys' fees, the question remains whether the attorney may ethically counsel or advise his client not to accept such an offer. We do not address that issue here. Nor do we address the question of the remedies, if any, that an attorney may ethically pursue in cases where the client breaches or attempts to breach a covenant not to waive statutory attorneys' fees.

 

MINORITY SEPARATE STATEMENT

Several members of the Committee, including the Chair, who join in the conclusion of Formal Opinion No. 1987-4 to withdraw Formal Opinion Nos. 80-94 and 82-80 due to the Supreme Court's decision in Evans v. Jeff D., believe it is appropriate -- without awaiting specific factual inquiries -- to provide the Bar with guidance on some of the issues that now arise due to the withdrawal of those Opinions.

These members believe there are relevant and indisputable general principles, first summarized and later discussed below, that define ethically permissible conduct for attorneys, including attorneys engaged in public interest representation, in seeking to collect fees for professional services rendered, and in considering requests by clients and adversary counsel to relinquish or waive such fees.

Summary of Principles

Under the New York Code of Professional Responsibility, whether in a typical representation where the fee is being paid by the client, or in a usual contingent fee arrangement where the client technically pays the fee but the source of the funds is the adverse party, it is ethically permissible for a lawyer (or law firm) to charge and collect a reasonable fee for services rendered. Additionally in the case of contingent fee arrangements, fees may be charged and collected only in accordance with the retainer agreement, assuming that agreement complies with all other legal and ethical requirements. In both situations, and regardless of whether the lawyer is representing a plaintiff, a defendant, a contracting party or a client in some other capacity, under the Code the lawyer has no ethical duty to relinquish or waive all or part of a reasonable fee (in any context, including settlement), even if to do so would be in the client's interest, or if the client were so to direct.

No difference exists under the Code between those forms of representation and a public interest representation, in which the client (or the class representative) does not pay attorney's fees and where the award of such fees and their payment by the adverse party are determined by a court pursuant to statutory right. Thus, in a public interest representation (a) it is ethically permissible for the lawyer to seek a court award and obtain the payment of reasonable fees (assuming that, and only if and to the extent that, the lawyer may do so as a matter of statutory, contractual or other legal right), n5 and (b) the lawyer has no ethical duty to relinquish or waive any right he may possess to seek to obtain such an award and payment in any context, including settlement, even if to do so would be in the client's best interest, or if the client were so to direct. Moreover, there is no ethical prohibition against a lawyer in a public interest representation entering into an agreement with the client at the inception or during the course of the engagement, in which the client agrees to exercise any statutory right he may possess to seek and obtain a judicial award of reasonable attorneys' fees; to cooperate with the attorney for that purpose; and not to take any action in settlement negotiations or other context that would forego or derogate either the client's or the attorney's right to seek and obtain such an award.

n5 The ethical principles and discussion relating to public interest representation (as well as all other types of representation) are predicated on this assumption, and hence are limited to that extent. We believe, respectfully, that the Concurring Opinion is therefore wrong in stating (p. 8) that this Separate Statement assumes that a plaintiff's attorney, rather than the plaintiff, is entitled to statutory fees. That is a question of law on which this Committee cannot pass, and as to which no conclusions are suggested or reached in this Separate Statement. See note 10 below.

The Code has not created principles of ethical conduct for the compensation of attorneys engaged in public interest cases different from those for attorneys engaged in other types of litigation or practice. Accordingly, in no case is an attorney ethically obliged to relinquish or waive any statutory, contractual or other legal right he may possess to seek and obtain a reasonable fee, even assuming it is ethical for an attorney for an adverse party to propose a settlement that is conditioned on the waiver of fees, or on the waiver of a right to seek fees, by the other party's attorney. This, of course, may create difficulties in achieving settlement of public interest and other similar cases (see, e.g., Huertas v. East River Housing Corp., 813 F.2d 580 (2d Cir. 1987)). Nevertheless, the resolution of these difficulties does not lie in inventing ethical duties for lawyers in public interest cases that are not embodied in the Code of Professional Responsibility and that have never existed for lawyers in other kinds of cases.

As to whether it is ethically permissible for a lawyer in a public interest case to propose a settlement conditioned on the adverse attorney's waiver of fees or right to seek a fee, the members of the Committee joining in this Separate Statement believe, as does the Committee majority, that the resolution of that question should await specific factual inquiries.

Discussion

A. Attorneys' Fees in the Typical Representation

In the typical representation, it is permissible as a matter of law n6 and ethics n7 for an attorney to charge and collect from the client a reasonable attorney's fee for services actually rendered. This is nothing more and nothing less than compensation for services, the pay for work performed.

n6 "In the United States the lawyer has always been regarded as having a legally enforceable right to compensation for his professional services, whether by virtue of special agreement or on a quantum meruit. . . ." Drinker, Legal Ethics 170 (1953).

n7 Under the Code of Professional Responsibility, an attorney may enter into an agreement for, charge or collect a reasonable fee, but is ethically forbidden to seek or obtain an illegal or clearly excessive fee. DR 2-106(A) provides that: "A lawyer shall not enter into any agreement for, charge or collect an illegal or clearly excessive fee." The affirmative implication of this prohibition is that a lawyer may seek or obtain a fee that is neither illegal or clearly excessive, i.e., it is ethically permissible, as it is legally permissible, for a lawyer to seek and obtain a reasonable fee. Moreover, under DR 2-110(C)(1)(f) it is ethically permissible for a lawyer to request withdrawal from a representation if the client deliberately disregards an agreement or obligation to the lawyer as to expenses or fees.

A number of other Code provisions reinforce the principle that it is ethically permissible for a lawyer to seek and obtain a reasonable fee. EC 2-17 states that "a lawyer should not charge more than a reasonable fee. . . ." EC 2-18 and DR 2-106(B) describe factors to be considered as guides in determining the reasonableness of fees. EC 2-20 states that "a lawyer generally should decline to accept employment on a contingent fee basis by one who is able to pay a reasonable fixed fee. . . ." DR 4-101(C)(2) goes so far as to permit a lawyer to reveal "[c]onfidences or secrets of a client necessary to establish or collect his fee. . . ." In addition, EC 2-24 and EC 2-25 concern representation of "persons unable to pay reasonable fees" and DR 2- 107(A)(3) forbids a total fee to lawyers dividing such a fee that exceeds "reasonable compensation for all legal services" rendered to the client.

See also Drinker, Legal Ethics 169-182, 301-03, 312-13, 321, and 343-45 (1953) and Wise, Legal Ethics 229-54 (2d ed. 1970) for a discussion of ethical precepts and decisions concerning fees under the Canon of Ethics and earlier codes, as well as the relevant Canons and provisions of those codes. For a discussion of attorneys' fees under both the Code of Professional Responsibility and the Model Rules of Professional Conduct, see Hazard & Hodes, The Law of Lawyering, Rule 1.5, at 69-87 (1986); Wolfram, Modern Legal Ethics 495-562, 931-32 (1985).

Nothing in law, or in ethics as discussed in this Statement, obligates such an attorney in any circumstances (whether representing a plaintiff or a defendant in a litigation, or a party in non-litigious or other circumstances) to relinquish or waive all or a portion of the compensation -- a reasonable attorney's fee -- that has been earned. Certainly, in most conceivable cases (whether for a plaintiff or a defendant that settles, wins or loses a lawsuit; or for a party that is negotiating a contract and is compelled to compromise on monetary issues, or in most other settings), the client would be better off, and his interest better served, if his attorney surrendered his fee or simply did not charge one.

Aside from the obvious immediate financial benefit to a client resulting from his attorney's decision to surrender his fee, such a decision can also play a critical role in various other situations relating to the representation. In settlement negotiations, a decision by the attorney for one party or the other to relinquish or waive his fee is likely to have a significant impact on the negotiating process.

Assume, for example, that a defendant in a contract dispute were willing to expend no more than a total of $100,000 to settle a pending lawsuit, including payment of his own attorney's fees already amounting to $25,000. In such a situation, the defendant would be prepared to offer to settle the case for $75,000.

But assume further that the plaintiff were unwilling to settle for less than $100,000. If counsel for the defendant waived his $25,000 fee, the defendant could then settle the case for $100,000. Thus, the "client's best interest" would be served by the waiver of attorney fees by the defendant's attorney. Certainly, by logical extension, in most, if not all settlement situations the waiver of attorney fees by both sides would enhance settlement possibilities and be in the best interests of all the clients, however detrimental such a waiver may be to the financial interests of the lawyers.

Accordingly, if the "client's best interest" were the applicable ethical standard, in most if not all cases attorneys would not be ethically allowed to charge and collect a reasonable attorney's fee. As demonstrated by the references cited in footnote 3, such a conclusion (a) has no basis in the Code of Professional Responsibility or in any prior code of legal ethics; (b) would demolish the entire ethical structure concerning attorney compensation that is contemplated by the Code; and (c) would ignore the obvious fact that most lawyers practice law as a means of earning a living.

Moreover, there is no provision of the Code (or, for that matter, of the Model Rules, or of any statutory lawyer code such as that in California, or of any predecessor code of legal ethics) that in any way obliges an attorney in a typical representation to relinquish or waive all or any portion of a reasonable attorney's fee earned for rendering services.

EC 5-1, EC 5-2 and DR 5-101(A) -- expressing general principles of a lawyer's duty of uncompromising loyalty to his client and the lawyer's duty to place the client's interests ahead of and out of conflict with the lawyer's personal interests -- make no reference to attorneys' fees. There is not the slightest suggestion that charging or collecting a reasonable attorney's fee creates a personal interest for the lawyer that dilutes his loyalty to the client or conflicts with the client's interests. n8 Similarly, EC 7-7, EC 7-8 and EC 7-9, which compel a lawyer to comply with client decisions within the framework of the law (including settlement offers and other matters), and which again express the general principle that a lawyer should always act in a manner consistent with the best interest of the client, make no reference to attorneys' fees. Nor is there the slightest suggestion that whether to charge and collect a reasonable attorney's fee for services rendered is a matter left entirely to the client's discretion, or that the fee need not be paid because to do so may not be in the client's interest.

n8 There is, of course, an immediate and continuing tension between attorney and client in every relationship where it is contemplated or agreed the client will compensate the attorney. Generally, the interest of the client is to pay as little as possible, while achieving the best possible result. Because this tension is inevitable, and to avoid later misunderstanding, the Code enjoins lawyers to reach a "clear agreement," usually in writing, concerning the fee understanding and the basis for the charges. EC 2-19.

But this tension is not characterized in the Code or in prior codes and decisions as a potential or actual "conflict of interest," no less one that ethically requires the lawyer to accept a fee that is less than what is reasonable. See also Hazard & Hodes, The Law of Lawyering, Rule 1.5 at 70-72 (1986), which does characterize the tension as a "potential conflict of interest," whose resolution in the Model Rules is achieved -- not by requiring relinquishment or waiver of reasonable fees -- but by importing into Rule 1.5, "loyalty-related concepts of communication and consent" that are contained in Rules 1.4 and 1.7.

Nevertheless, these very provisions of the Code have been cited in the public interest representation situation, for the propositions that the lawyer's duty of undivided loyalty to the client, his duty to act in the client's best interest, and his duty to abide by client decisions as to matters of substance relating to settlement, may or do create an ethical obligation to relinquish or waive a reasonable attorney's fee. n9

n9 See this Committee's prior Opinion in N.Y. City 80-94, at 4-5, now being withdrawn; Evans v. Jeff D., 106 S. Ct. 1531, 1537-38 & n.14 (majority opinion), 1552 & n.8 (minority opinion) (1986). See also, White v. New Hampshire Dep't of Empl. Sec., 455 U.S. 445, 453-454 n.15 (1982). But see Lazar v. Pierce, 757 F.2d 435, 438-439 (1st Cir. 1985), where it was observed that while the Equal Access to Justice Act "supplies counsel without charge to the plaintiff, this does not mean counsel with an ethical obligation to forego a fee" (emphasis supplied).

In the typical representation, however, such an interpretation of those and any other provisions of the Code lacks any basis in the text or history of those provisions or in any prior code or decision; n10 contradicts the legal and ethical rights of attorneys to obtain reasonable compensation for the professional services they have rendered; is in direct conflict with reality; and would additionally give rise to serious side-effects.

n10 See, e.g., Drinker, Legal Ethics (1953), and Wise, Legal Ethics (2d ed. 1970), where no suggestion is made in the Canons of Ethics, in any prior codes of legal ethics or in any ethics opinion or decision that is discussed or cited, that any ethical duty exists for a lawyer to relinquish or waive the right to seek or obtain a reasonable fee. See also Evans v. Jeff D., 106 S. Ct. 1531, 1557 n.20 (minority opinion) (1986); Hazard & Hodes, The Law of Lawyering 69-87 (1986); Wolfram, Modern Legal Ethics 495-562, 931-32 (1985).

From the very inception of any attorney-client relationship in which a fee is contemplated, an actual conflict between the client's interests and the attorney's professional interests in compensation would immediately and continuously exist if the principle that a lawyer is entitled to be paid were subverted. The attorney would be compelled to surrender the fee if payment of that fee is not in the best interests of the client, and the decision whether or not to pay would, of course, be entirely under the control of the client. Obviously, this would produce a substantial professional segment of our society deprived of right to compensation for work performed and indeed cast lawyers into a new form of involuntary servitude. Thus, neither the propositions themselves, nor the results that would flow from their implementation, have any justification in legal ethics.

 

In addition, ECs 5-1 through 5-8, and DR 5-103 and DR 5-104, contain a number of prohibitions against self-interested lawyer conduct because of the creation of actual or potential conflict between the interests of the client and the personal interests of the lawyer. In none of these provisions (except EC 5-7 and DR 5-103 concerning contingent fee arrangements, discussed below) is there any reference to, or suggestion that, an attorney's right to charge and collect a reasonable fee for professional services rendered, creates a personal interest for the lawyer that gives rise to an actual or potential conflict, or dilutes the attorney's uncompromising duty of loyalty.

From all the foregoing, it can be concluded as a matter of general ethical principle that under the Code in a typical representation, (a) it is ethically permissible for a lawyer to charge and collect from a client a reasonable fee for services rendered and (b) the lawyer has no duty to relinquish or waive all or any part of that fee even if to do so would be in the client's best interest, or if the client were so to direct.

B. Attorneys' Fees in the Usual Contingent Fee Arrangement

Subject to the very strong cautionary, and in some instances prohibitory, provisions of EC 2-20, DR 2-106(C), EC 5-7 and DR 5-103(A), a contingent fee arrangement is ethically permissible pursuant to and within the ambit of those provisions even though it gives the lawyer a proprietary interest in a cause of action and its outcome -- and thus becomes one of the two exceptions specified in DR 5-103(A) to the general prohibition against a lawyer's acquisition of such an interest.

Contingent fee arrangements are tolerated as a matter of ethics, notwithstanding the potential conflict between the interest of the client and the interest of the lawyer that such arrangements engender. These arrangements are permitted, despite their inherent shortcomings, because of the need to provide legal services to people who would not otherwise be able to afford them -- both poor people as well as, in certain circumstances, people of means (see EC 2-24). At the same time, by permitting clients who would otherwise not be able to do so to have their legal matters handled, the contingent fee arrangement provides a mechanism by which attorneys who agree to handle such matters can obtain compensation for services they render -- generally only if the rendition of those services produces a positive result. Thus, while the attorney is at greater risk than in the typical representation, the clear contemplation and objective is that that lawyer will earn a fee for the services to be rendered upon the happening of the specified contingent event. n11 (This assumes that the attorney has complied with all other ethical and legal requirements relating to contingent fee arrangements.)

n11 In a contingent fee arrangement (no differently than in a non-contingent fee arrangement), the client retains the right to decide whether or not to compromise or settle the claim. EC 7-7. While the client's exercise of that right may affect the amount of the fee, it does not involve a waiver or relinquishment by the attorney of his right to a fee to the extent earned in accordance with the retainer agreement.

Nothing in the practice or principles relating to contingent fee arrangements suggests explicitly or inferentially that (a) the contingent fee lawyer should relinquish or waive the fee earned in accordance with the retainer agreement if that will be in the best interests of the client or (b) that such a relinquishment or waiver should take place if the client so requests or directs.

Indeed, the proposition that the client's interests are best served by having the attorney waive his fee is also illustrated in the contingent fee circumstances, and regardless of whether the attorney is representing the plaintiff or the defendant. Assume for example, the defendant offers a $100,000 settlement and the plaintiff's attorney's fee is one-third. Obviously, the plaintiff will be more impelled to accept the settlement if his lawyer will surrender the fee, so that he can keep the entire $100,000. Conversely, the possibility of a settlement for the defendant who wants his total exposure not to exceed $100,000 is greater (and therefore that client's best interests would be served) if the defendant's lawyer agrees to relinquish his non-contingent fee of, let us suppose, $25,000. The failure of defense counsel to relinquish that fee would only enable the defendant to offer a $75,000 settlement, or would require the payment of a total of $125,000 to settle the case.

No one would seriously suggest that counsel for either the plaintiff or defendant in this or in any other similar situation has an ethical duty under any of the provisions of Canon 5 or Canon 7 to relinquish or waive a reasonable attorney's fee to serve his client's "best interests" or to follow his client's direction. n12 Indeed, there is nothing in the Code or in the structure of lawyering and in the representation of clients that suggests otherwise.

n12 Cf. Hazard & Hodes, The Law of Lawyering 74-75 (1986), providing an illustration of where, in a contingency fee arrangement, a lawyer might be required to reduce the amount of his fee to avoid charging an excessive or unreasonable fee.

Based on this further discussion, it can be concluded as a matter of general ethical principle that under the Code in a contingent fee arrangement, and assuming all other legal and ethical requirements have been fulfilled, (a) it is ethically permissible for a lawyer to charge and collect a fee for services rendered in accordance with the retainer agreement and (b) the lawyer has no duty to relinquish or waive all or any part of that fee, assuming it is reasonable in amount, even if it would be in the client's best interest to do so, or even if the client were so to direct.

C. Attorneys' Fees in Public Interest Representation

The situation discussed here differs from a contingent fee arrangement only in that the lawyer or law firm engaged in a public interest case does not look to the client or the class that is represented for the payment of fees and reimbursement of costs that may be obtained on achieving positive results in a litigation. Rather, the lawyer must look directly to the adversary when seeking a judicial award pursuant to statutory right. The two situations are nevertheless very closely related. In both situations, the clients obtain the services of a lawyer obligated to perform throughout the litigation in the expectation of compensation only if positive results are achieved. Thus in the public interest case, no differently than in the contingent fee arrangement, it would be unfair for a client who obtained the services of a lawyer on that basis to take action at a later stage of the litigation that negates the attorney's compensation; and it would be doubly unfair for any interpretation of legal ethics to countenance, no less require, such a result. Moreover, in a contingent fee arrangement, while the lawyer technically looks to the client for a percentage of the recovery, in substance the adversary is making the total payment from which a percentage is taken for the attorney's fee.

Thus the real difference between the contingent fee arrangement and the public interest representation lies only in the mechanism by which the plaintiff's attorney's fee, if earned, is determined. While this is a meaningful difference for a defendant in a settlement context who wants to measure his total exposure, n13 the question here becomes whether that difference produces a different ethical result concerning the relinquishment or waiver of the plaintiff's attorney's fee. n14

n13 In addition to public interest cases, there are a number of other situations in which the right of a party or lawyer or both to payment of attorneys' fees is dependent on judicial award pursuant to statutory provision or equity principle. These include, among others, class action securities or antitrust cases, equity derivative suits, workers compensation cases, and the settlement or compromise of wrongful death actions and claims of infants, incompetents and conservatees.

In some instances, the defendant's total exposure can be measured since the attorneys' fees are paid from the total settlement fund supplied by the defendant. In other instances, including those in which only injunctive relief is sought, the defendant's total exposure cannot be measured until after court determination of attorneys' fees and costs. Additionally, in certain corporate derivative suits and other cases, attorneys' fees are not paid from the settlement fund but are fixed independently subsequent to settlement of the merits. Indeed, it has long been considered unethical for plaintiffs' and defendants' attorneys in those cases to negotiate the plaintiff's fees while negotiating such a settlement, or for a plaintiff's attorney to condition such a settlement on the payment of his fees in a particular amount. Thus, the problem of a defendant determining total exposure arises in various representational contexts and is not unique to public interest cases.

n14 The discussion here of ethical principles relating to compensation of lawyers in public interest cases or other types of representation is predicated on, and limited by the assumption that, the lawyers involved possess statutory, contractual or other legal rights to seek and obtain reasonable fees. That assumption involves legal questions on which this Committee cannot pass. If an attorney has no statutory, contractual or other legal right to seek compensation in a particular situation or under a particular statute, then the ethical issues do not arise. Therefore, there is no basis for the concerns expressed in the Concurring Opinion. See the discussion below concerning compensation agreements with clients or class representatives.

It should be noted, however, that under various federal statutes providing for the award of attorneys' fees, there is a dispute among the courts whether the statutory right to the award belongs to the party or to the attorney.

On the one hand, there is a substantial line of authority to the effect that, regardless of the statutory language, the right to an award and payment belongs to the attorney; or the party has only a nominal right, to be exercised by the attorney in filing his own fee application; or the attorney is the "real party in interest" for purposes of seeking a fee award and appealing from the denial of such an award. Jonas v. Stack, 758 F.2d 567, 569-70 & n.7 (11th Cir. 1985); James v. Home Constr. Co. of Mobile, 689 F.2d 1357, 1358-59 (11th Cir. 1982); Lipscomb v. Wise, 643 F.2d 319, 320-21 (5th Cir. 1981); Dennis v. Chang, 611 F.2d 1302, 1309 (9th Cir. 1980); Rodriguez v. Taylor, 569 F.2d 1231, 1245 (3rd Cir. 1977), cert. denied, 436 U.S. 913 (1978); Hairston v. R & R Apartments, 510 F.2d 1090, 1093 (7th Cir. 1975); Miller v. Amusement Enterprises, 426 F.2d 534, 539 (5th Cir. 1970), and other cases cited in these authorities.

On the other hand, there is a substantial line of authority supporting the position that statutes providing for fee awards to "prevailing parties" mean what they say literally, and therefore it is the right of the client, and not of the attorney. This includes the emphasized text and strongly worded observations in footnote 18 in Evans v. Jeff D., 106 S. Ct. 1531, 1539 (1986), several cases cited in that footnote, and other holdings of the Second and District of Columbia Circuits. See Freeman v. B & B Associates, 790 F.2d 145, 148-49 (D.C. Cir. 1986); Brown v. General Motors Corp., 722 F.2d 1009, 1011 (2d Cir. 1983); Oguachuba v. INS, 706 F.2d 93, 97 (2d Cir. 1983).

To whatever extent these issues may be implicated in a particular situation, and in whatever way they ultimately may be resolved in the courts, the problems they have engendered may be avoidable, regardless of the statutory language, if an enforceable agreement is made in which the client or class representative agrees in advance to seek and cooperate in obtaining an attorney's fee award. See the discussion of this subject in the text at pages 23-24.

Initially, it cannot be overlooked that nothing in the Code states explicitly or inferentially that a lawyer engaged in representing clients in public interest cases has an ethical obligation to relinquish or waive a right he may possess to seek or obtain a reasonable fee if to do so is in the best interests of the client (or class), or if the client so directs. n15 The only "sources" for such a conclusion are the Code provisions discussed in Section A above (pp. 15-17), which impose no such ethical duties on lawyers in general, or on any category of lawyers in particular.

n15 Of course, as has been pointed out, there is no ethical prohibition against a lawyer waiving or relinquishing a fee. See EC 2-25; Evans v. Jeff D., 106 S. Ct. 1531, 1537 (1986).

In public interest cases where only injunctive relief is sought and the defendant offers to settle by agreeing to that relief provided the plaintiff's lawyer waives any fee, the argument is made that the plaintiff's attorney has a special ethical duty to do so because he cannot be permitted to block the client or class from obtaining all that was sought. That argument however, cannot withstand analysis. All that was sought was not merely injunctive relief, but a lawyer from start to finish of the case willing to perform services in pursuit of that relief, with an expectation and opportunity to obtain compensation by judicial award only if the suit were successful. Nothing in legal ethics allows a client to reap the benefits of that success, and at the same time, to defeat the lawyer's opportunity to seek and obtain such compensation.

 

In addition, no argument has ever been advanced that defendants' lawyers in public interest cases have a correlative ethical duty to relinquish or waive their fees to better serve their clients -- and there is no basis for inventing such a duty. Why should lawyers for plaintiffs in these type of cases be treated any differently so that they can be compelled as a matter of ethical principle to waive a statutory, contractual or other legal right they may possess to seek to obtain reasonable compensation for effective services they have rendered? Nothing in the Code, in law or in policy dictates any such result. n16

n16 It can be added as a matter of policy -- not ethics -- that since public interest lawyers and firms serve a public interest and, like other lawyers and firms, can utilize financial support when and where they can properly obtain it, there is no reason to compel such lawyers and firms to waive or relinquish their rights to seek fees. Indeed, creating an ethical rule requiring such a relinquishment or waiver to facilitate settlements would result in eliminating a significant source of funding for public interest lawyers and plainly disserve the public interest by reducing the number of lawyers or firms willing to engage in such work.

For these and the reasons previously discussed, it can be concluded as a matter of general ethical principle under the Code that in public interest cases, where parties or attorneys are judicially awarded fees pursuant to statutory or other right, (a) it is ethically permissible for a lawyer to seek a court award and obtain the payment of reasonable fees (assuming the lawyer has a statutory, contractual or other legal right to do so, a question on which this Committee cannot pass) and (b) the lawyer has no duty to relinquish or waive any right he may possess to seek such an award and payment, even if it would be in the client's best interest to do so or the client were to so direct, and even assuming it were ethical for the adverse attorney to propose settlement conditioned on such relinquishment or waiver.

Plainly, the unwillingness of a lawyer in a public interest, or other similar case, n17 to relinquish or waive a fee or a right he may possess to seek one can create difficulties in settlement negotiations that may indeed thwart the settlement itself. This has been most recently illustrated in Huertas v. East River Housing Corp., 813 F.2d 580 (2d Cir. 1987). In that public interest case, a judgment on settlement was vacated on authority of the Supreme Court's decision in Evans v. Jeff D., where the district court had entered an award for plaintiff's attorney's fees that exceeded and did not comport with the conditional settlement offer made by defendants.

n17 See note 9.

In remanding for further proceedings, the Court of Appeals expressed the hope that the district court's adroit mediative skills would be used to assist the parties in reaching agreement "upon a reasonable attorney's fee, and thereby avoiding the obvious hazards of a court adjudicated disposition of the entire proceeding." Id. at 582. The court did not suggest that plaintiff's attorney had an ethical duty to avoid that or any other possible hazard by reducing or waiving his claim for a fee award. Indeed, the resolution of any possible difficulties, however extreme, does not lie in fashioning ethical duties for public interest lawyers that are not found in the Code and that have never been said to exist with respect to attorneys in other representational contexts.

In public interest cases the avoidance of such problems may lie in an agreement entered into at the inception or during the course of the engagement in which the client agrees to exercise any statutory right he may possess to seek and obtain a judicial award of reasonable attorneys' fees, to cooperate with the attorney for that purpose, and not to take any action in settlement negotiations or other contexts that would forego or derogate either the client's or attorney's right to seek and obtain such an award. As to individual and class clients, such an agreement would be ethical under the Code, provided all its requirements concerning disclosure and consent were fulfilled, n18 and for class representatives, provided any additional legal requirements are also fulfilled. n19 Certainly from an ethical standpoint such an agreement would be fair and not subject to a claim of overreaching, inasmuch as (a) the allowance and amount of the fee would be subject to judicial discretion and determination (an even greater protection than that afforded in contingent fee arrangements); and (b) a lawyer or law firm could rightly refuse to undertake or continue a public interest representation where the individual client or class representative refused to assure the lawyer or law firm that it would have the opportunity to seek a judicial award of compensation pursuant to statutory right in the event positive results were achieved. If such an agreement were entered into, the client or class would not be able to get the benefit of the lawyer's services and then on settlement of the litigation renounce the lawyer's opportunity to obtain compensation.

n18 See e.g., EC 2-19, 2-20, 2-24, 2-25; Evans v. Jeff D., 106 S. Ct. 1531, 1557 & n.20 (minority opinion) (1986); and, as to the Model Rules, Hazard & Hodes, The Law of Lawyering, Rule 1.5, at 70-72 (1986).

n19 Whether, when and in what form judicial approval is required for an enforceable agreement between an attorney and a putative or certified class representative are questions of law on which this Committee cannot pass. See, inter alia, Rule 23 of the Fed.R.Civ.P. and Rule 907 of the C.P.L.R.

Thus, as a practical matter, the systematic use by public interest lawyers of this consensual mechanism, provided all other ethical and legal requirements are met, may go a long way toward minimizing, if not eliminating, the kinds of difficult problems that may otherwise arise in public interest and other cases.

Ethical Questions Arising From Settlement Proposals Conditioned on the Waiver of Attorneys' Fees or Any Rights to Seek Them

All of the principles so far discussed arise even assuming it is ethical for a lawyer to present a settlement proposal conditioned on the relinquishment or waiver of the adverse attorney's right to a reasonable fee or any statutory right to seek judicially awarded fees.

Because of the many potential and possibly varying considerations and circumstances, whether such conduct is ethical or unethical per se, or whether such conduct is ethical or prohibited in particular fact patterns (see, e.g., Evans v. Jeff D., 106 S. Ct. 1531, 1544 (1986)), are questions that are better left for disposition in this Committee's responses to particular inquiries based on specific facts.