ETHICS OPINION
The Supreme Court of Texas appoints the chair and the nine members of the Professional Ethics Committee from the bar and the judiciary. According to section 81.092(c) of the Texas Government Code, “Committee opinions are not binding on the Supreme Court.”
Opinion No. 679, September 2018
QUESTION PRESENTED
May a lawyer renegotiate his fixed, flat fee for representing a
client in litigation after the litigation is underway if the matter
turns out to be greater in scope and complexity than the lawyer and
client contemplated?
Statement of Facts
A Texas lawyer and his client agree in writing to a fixed, flat fee
for the lawyer to represent the client in litigation. During the
representation, the complexity and scope of the matter increase
significantly beyond what the lawyer and client contemplated at the
start of the engagement. The lawyer now wishes to renegotiate the fee
arrangement.
Discussion
Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct
governs fees. Flat-fee agreements are not uncommon and are contemplated
in the Rule. See Comment 3 to Rule 1.04 (“Historically lawyers
have determined what fees to charge by a variety of methods. Commonly
employed are percentage fees and contingent fees (which may vary in
accordance with the amount at stake or recovered), hourly rates, and
flat fee arrangements, or combinations thereof.”).
Rule 1.04 and its comments do not expressly address the propriety of a
lawyer’s renegotiating fee agreements after representation has
commenced. Texas courts, however, have done so.
In Jampole v. Matthews, 1997 WL 414637 (Tex. App.—Houston
[1st Dist.] 1997, no writ), the court summarized Texas law as follows:
“An attorney and client may modify the fee agreement during the
existence of the attorney-client relationship. However[,] a presumption
of unfairness arises, and the attorney has the burden to show the fee
modification is fair under the circumstances.” Id. at *10
(discussing Archer v. Griffith, 390 S.W.2d 735, 739 (Tex. 1964)
and Robinson v. Garcia, 804 S.W.2d 238, 248 (Tex. App.—Corpus
Christi 1991), writ denied per curiam, 817 S.W.2d 59 (Tex.
1991)). This special scrutiny is required because the client is at a
disadvantage: Changing lawyers during the representation is burdensome
and “[a] client might hesitate to resist or even to suggest changes in
new terms proposed by the lawyer, fearing the lawyer’s resentment or
believing that the proposals are meant to promote the client’s good.”
Restatement (Third) of the Law Governing Lawyers § 18, comment e (2000).
Moreover, a lawyer “usually has no justification for failing to reach a
contract at the inception of the relationship or pressing need to modify
an existing contract during it. The lawyer often has both the
opportunity and the sophistication to propose appropriate terms before
accepting a matter.” Id.
Whether modification of an existing fee agreement is “fair under the
circumstances” will depend on several factors. In negotiating an initial
fee agreement, Comment 2 to Rule 1.04 discusses the relevance of the
length of the relationship between the attorney and client:
“When the lawyer has regularly represented a client, they ordinarily will have evolved an understanding concerning the basis or rate of the fee. If, however, the basis or rate of fee being charged to a regularly represented client differs from the understanding that has evolved, the lawyer should so advise the client. In a new client-lawyer relationship, an understanding as to the fee should be promptly established. It is not necessary to recite all the factors that underlie the basis of the fee, but only those that are directly involved in its computation. It is sufficient, for example, to state that the basic rate is an hourly charge or a fixed amount or an estimated amount, in order to identify the factors that may be taken into account in finally fixing the fee.”
Similarly, the Committee concludes that
longstanding client relationships should be distinguished from new
lawyer-client relationships when considering whether the renegotiation
of a flat-fee agreement would be “fair under the circumstances.”
Consider, for example, a lawyer who represents a lender. The lawyer
and the client have a flat-fee agreement under which the lawyer
represents the lender in pursuing collection of delinquent promissory
notes. The matters are either resolved by settlement or litigation that
usually results in a summary judgment against the borrower. In one
matter, however, a borrower and her lawyer file a counterclaim,
asserting a class action against the lender for usury and other illegal
conduct. The counterclaim alleges a class of hundreds of borrowers, the
amount in controversy is enormous, and discovery in the case is expected
to include numerous depositions, the exchange of thousands of documents,
and require years to complete. In such a situation, neither the lawyer
nor the client could reasonably anticipate that the scope of work to be
included in the flat-fee agreement would be so grossly
underestimated.
Furthermore, based upon the history of their relationship, neither the
lawyer nor the client expected that the lawyer’s flat fee would include
any work except pursuing delinquent accounts. Renegotiating the fee
would therefore be “fair under the circumstances.”
On the other hand, modifying a fee agreement would likely be
inappropriate in a situation like this: A lawyer agrees to represent a
new client who was terminated from her employment and then went to work
for her former employer’s competitor. Based upon the facts disclosed by
and discussed with the client, the lawyer concludes that the client has
a basis for pursuing a claim for wrongful termination. The lawyer agrees
to represent the client in bringing such claim for a fixed, flat fee.
After filing suit on the client’s behalf, the employer counterclaims,
alleging that the client, during her employment, breached her
non-disclosure agreement and her fiduciary duties by sharing the
employer’s trade secrets with her new employer.
In this situation, the lawyer and client do not have a longstanding
relationship that forms the basis for their expectations about the fee.
Their expectations are instead based upon the existing fee agreement
alone. From the client’s perspective, her agreement with her lawyer was
for representation concerning all aspects of her relationship with her
former employer. Under the circumstances, renegotiating the fee
agreement would likely not be fair to the client. Additionally, a
lawyer, after making a reasonable investigation, should have anticipated
that the former employer might bring such counterclaims against the
client.
The fundamental nature of a flat or fixed fee is that there is risk to
the lawyer that the legal work and time required may exceed what the
lawyer might have earned if the lawyer instead billed by the hour. The
client knows with certainty that the total fee charged, no matter how
much lawyer time or effort is involved, will not exceed the fixed
amount. The client’s risk in a flat or fixed fee agreement is the
possibility of paying more than the client would have paid under an
hourly billing agreement if the lawyer is able to complete the
representation is less time than originally expected. Because the lawyer
is better able to anticipate the time and legal work required, the
lawyer should be mindful that he knowingly assumed this risk—and should
not unreasonably seek to change the fee agreement simply because the
lawyer agreed to a fixed fee that, in hindsight, is no longer
adequate.
The client’s level of sophistication is another factor that the
Committee concludes is relevant to considering whether renegotiating a
fee agreement is “fair under the circumstances.” As the above examples
illustrate, an institutional client such as a lender is likely to have
experience regarding litigation matters routinely involved in its
business. An experienced client is therefore better informed about the
costs associated with litigation and the fees charged for
representation. By contrast, a client with little or no experience as a
litigant has no such point of reference and is unlikely to know much
about the potential scope of litigation or its expected costs.
This Committee previously expressed the view that Rule 1.08(a),
regarding business transactions between lawyer and client, does not
apply to the transaction of establishing the lawyer-client relationship.
See Professional Ethics Committee Opinion 586 (Oct. 2008)
(concluding that a lawyer may include a binding arbitration clause in a
fee agreement). Likewise, the Committee concludes here that Rule 1.08(a)
does not apply to renegotiating a fee agreement. Nevertheless, as the
Committee also noted in Opinion 586, “[a]s a general principle, all
transactions between client and lawyer should be fair and reasonable to
the client.” Comment 2 to Rule 1.08. Thus, any renegotiation of an
existing fee agreement, although not a “business transaction with a
client” within the meaning of Rule 1.08(a), must still be on terms that
are fair and reasonable for the client.
A modified fee agreement is, of course, subject to Rule 1.04’s
prohibition against illegal or unconscionable fees. Additionally, the
lawyer must be mindful, both during efforts to renegotiate a fee
agreement and after renegotiation of a fee agreement, of the possibility
of not being able to continue to represent the client if, under Rule
1.06(b), the representation of the client “reasonably appears to be or
become adversely limited by … the lawyer’s or law firm’s own
interests.”
Conclusion
A lawyer may renegotiate his fixed, flat fee for representing a client
in a litigation matter after the litigation is underway if modification
of the fee agreement is fair under the circumstances. The burden of
proving fairness is the lawyer’s and will depend upon factors such as
the length of the lawyer-client relationship, whether the reason for the
renegotiation could have been anticipated at the outset of the
representation, and the client’s level of sophistication. Before seeking
to renegotiate a fixed fee, the lawyer should be mindful of the risks
that the lawyer voluntarily assumed when proposing or agreeing to that
fee—including the possibility that the fixed fee might not be adequate
to compensate the lawyer when compared to other fee
arrangements.TBJ
