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Bonus Points

Bonus Provisions Agreed To By Attorneys And Their Clients Will Likely Be Enforceable If The Agreement Clearly Delineates An "Extraordinarily Favorable Result"

By Ellen A. Pansky

Ellen A. Pansky, a principal in the law firm of Pansky & Markle in South Pasadena, specializes in representing and advising attorneys in professional liability and legal ethics matters. 

Most lawyers intuitively understand that the fee agreement executed at the outset of representation binds the attorney as well as the client to general principles of fair dealing. Traditionally, attorneys have billed pursuant to a straightforward formula based on a fixed rate or a contingent fee basis. Now, with the concept of value billing receiving more attention, confusion reigns as to whether a bonus or premium may be collected in addition to the fixed fee.

May an attorney craft a fee agreement in which the attorney is paid a premium or bonus for exceptional legal services? This question does not have a clear answer. There is no ethics rule or ethics opinion that establishes an attorney's right to collect a bonus or premium from a client based on favorable results or extraordinary effort. Presumably, an attorney is being paid his or her customary rate for doing a good and competent job. So why should a good result warrant a special bonus? Nonetheless, some commentators are in favor of value billing as well as other alternative fee arrangements that permit an attorney to collect a supplemental fee based on the ultimate result. Moreover, these arrangements typically contemplate the attorney's obligation to charge a lower fee if the results obtained are not favorable.

Before incorporating a bonus or premium provision into a fee agreement, attorneys must address several considerations:

  • Does the client's matter warrant any sort of bonus arrangement?      
  • How is an ethical and enforceable bonus arrangement structured?      
  • What ethical considerations militate against charging a bonus?

Identifying the type of representation in which a bonus arrangement may be appropriate involves the consideration of professional and ethical concerns. In the routine matter, the attorney receives a fixed hourly rate for the number of hours expended or a finite, contingent percentage fee that implicitly rewards the attorney with a higher fee if the result is better than usual. To determine when a bonus fee arrangement is acceptable, attorneys must consider whether the type of representation lends itself to the parties' being able to define, with particularity, what an "extraordinarily favorable result" is.1 Some examples of these representations include 1) representing an entity that expects to embark on an initial public offering (and accepting shares of stock as part of the fee arrangement), 2) representing a land developer in acquiring land use entitlements, and 3) representing sports, entertainment, or literary talent in contract negotiations.

In the booming and uncharted frenzy of e-commerce, it has become fairly common for law firms to negotiate alternative fee arrangements with start-up e-businesses.2 The typical arrangement involves the client's paying a minimal retainer and the law firm's taking a percentage interest in the start-up in lieu of fees. It is not uncommon for senior partners in such firms to take positions on the boards of directors of their client e-businesses. This alternative fee arrangement is structured with an eye toward taking the start-up public, with vast amounts of money to be made for both client and law firm if the stock does well.

Ethical issues may arise when a law firm becomes part of the business of its clients. In addition, serving in the dual capacity of attorney and officer or director may constitute a conflict. However, by its capacity to quantify an extraordinarily favorable result, the e-commerce fee arrangement lends itself well to incorporating a bonus.3 For example, assume an e-commerce start-up needs $10 million of venture capital for the first phase of its business plan. The attorney and the client could agree that the law firm's percentage ownership of the business would be increased by a fixed amount if the law firm is responsible for raising the $10 million within a defined and agreed-upon amount of time. As in the typical contingent fee arrangement, the lawyer bears the risk of not receiving fair compensation despite providing substantial services if, in this case, the client's stock does not do well.

Another method for incorporating a bonus into a fee arrangement with an e-business is for the attorney and the client to agree that once the e-business goes public, the client will give additional stock options to the firm if the stock hits a certain value and remains at that value for a set period of time. Again, the law firm will be rewarded for its part in reaching a quantifiably favorable result for its client-with the risk that the law firm will receive less than its customary rate if the client does not succeed.

The relationship between land use counsel and their clients also allows an attorney and his or her client to define an extraordinarily favorable result. Typically, land use attorneys incorporate municipal advocacy into their services. Thus attorneys may add value to their legal services by cultivating relationships with local elected and appointed officials as well as government agency staff with an aim toward securing more favorable conditions on discretionary permits and ensuring that applications advance more rapidly through the bureaucratic maze. Depending upon the difficulty of the client's position, attorney and client could define an extraordinarily favorable result as securing all necessary entitlements and permits in a time frame that would not normally be achievable without the assistance of counsel or successfully defeating the administrative appeals of the client's opponents. If the engagement involves a low likelihood of success, particularly novel issues, or other special considerations, the land use attorney may be entitled to a fixed amount as a bonus in addition to hourly fees.

An extraordinarily favorable result is also quantifiable in the negotiation of contracts for professional athletes, writers, and entertainers. An attorney for talent typically receives 5 percent to 15 percent of the contract negotiated for the client. The percentage is largely a matter of industry practice. Nevertheless, the nature of these negotiations is ripe with opportunities to define an extraordinarily favorable result.

These examples are by no means exhaustive of the types of matters appropriate for attorney bonuses. They demonstrate a guiding principle in identifying when a bonus relationship is appropriate: the nature of the engagement permits attorneys and their clients to quantify or otherwise define with particularity an extraordinarily favorable result. If there is a distinction in a given matter between a typically favorable result and an extraordinarily favorable result, the attorney may then propose a bonus arrangement to the client.

Legal Bases for Fee Enhancements
Attorney fee enhancement is not a novel concept. Fee enhancements based on the result attained have been thoroughly addressed by courts applying the "lodestar" multiplier in civil rights and private attorney general cases.4 The court may adjust the "benchmark," or contractual hourly fee, in these cases and typically does so based on extraordinary services rendered, novel or extremely difficult issues, unusual skill on the part of the attorney, and similar special factors. Federal courts apply the presumption that the regular hourly rate is the appropriate fee.5

The lodestar multiplier establishes a legal history of fee enhancements determined by a neutral judge. A different dynamic is involved when an attorney contracts or negotiates for a fee enhancement. In 1999, a contract in which a city expressly agreed that the ultimate fees would be based on benchmark rates plus other factors so that the final fees might "exceed the hourly rate" was declared enforceable by a federal district judge. The court described the agreement as "a contract based on a legally sufficient, mutually agreed standard of compensation."6 Rejecting the attorneys' claim for a lodestar multiplier of 2.85, the court found that, absent a specific contractual agreement authorizing a "major adjustment" of the fee, only a modest additional fee of approximately 12 percent of the hourly fee was permitted.

Thus it may be that, in an appropriate case, an attorney's specific contractual arrangement for an enhanced fee will be upheld by the court. The enforcement of such an agreement will likely require the fee provision to be explicit and unambiguous and, if it is not, it will be construed against the attorney drafter. Moreover, courts are unlikely to enforce a bonus that is considered to be excessive.7

Obtaining a client's written consent to a bonus fee arrangement prior to beginning a representation is the best method for ensuring that a bonus fee arrangement will be enforceable. The initiation of the attorney-client relationship is generally deemed to be an arm's-length transaction.8 There are no fiduciary duties flowing from the attorney to the client prior to the commencement of the attorney-client relationship, and the attorney is free to bargain with the client regarding the terms of the representation. Indeed, in the statutory requirements for written fee agreements set forth in the Business and Professions Code,9 a contingent fee agreement-other than one governed by the Medical Injury Compensation Reform Act (MICRA)-must include a statement that "the fee is not set by law, but is negotiable between attorney and client."10

Generally, a written fee agreement should be executed by attorneys and their clients in each and every case. If a bonus arrangement is warranted, the extraordinarily favorable result triggering the bonus should be set forth clearly within the written fee agreement. Attorneys seeking to collect the bonus will be well served when they can point to a specific provision in the fee agreement that contains the precise circumstances warranting the bonus. The provision should leave little room for debate over whether the bonus has been earned or whether the client understood the terms of the agreement.

Equally important is the fee agreement provision describing the services to be provided. Unless the nature and scope of the contemplated services are set forth, it may be difficult to explain how those anticipated services were supplemented. The agreement should distinguish the exceptional service that will trigger the bonus.

Although the requirement of a written retainer agreement is a legislative mandate that does not necessarily involve ethical considerations, the penalty for failing to comply with the applicable statutes is that the client may declare the contract void at the client's option.11 Should the client elect to void an unwritten or otherwise voidable contract, the attorney is limited to the quantum meruit value of the services provided. Quantum meruit is unlikely to include an extra premium over and above a reasonable fee.

Even if a bonus is clearly set forth in a written agreement, all attorney-client fee arrangements in California are limited by the provisions of Rule 4-200 of the Rules of Professional Conduct, which precludes unconscionable fees. The evaluation of the conscionability of fees is based on a multifactor test, including:

  • The amount charged in relation to the value of the services.      
  • The relative sophistication of the attorney and the client.      
  • The novelty and difficulty of the issues involved.      
  • The results obtained.      
  • The experience, reputation, and ability of the attorney.      
  • Whether the fee is fixed or contingent.      
  • The informed consent of the client to the fee.

The California Supreme Court has declared that a fee is unconscionable if it is "so exorbitant and so wholly disproportionate to the services performed as to shock the conscience."12 Indeed, nearly 70 years ago, the court found an attorney's fee so disproportionate to the services performed that it constituted a violation of the duty of honesty and fair dealing required of all attorneys in their relations with clients.13 Thus an exorbitant bonus charged in addition to a reasonable fee may constitute an unconscionable fee that will violate the attorney's duty to the client.

A lawyer-client agreement for a particular amount of fees must be express, according to Grossman v. State Bar.14 In that case, attorney Grossman, who had been retained in a personal injury action on a 331/3 percent contingency fee basis, deducted 40 percent of the settlement proceeds as his fee. When questioned by the client, Grossman responded that he believed the fee to be fair and typical of the contingency customarily charged by personal injury attorneys. The California Supreme Court found that Grossman's action constituted a breach of ethics warranting discipline:

    [I]t is well settled that under a fixed fee contract, an attorney may not take compensation over the fixed fee without the client's consent to a renegotiated fee agreement. This is true even if the work becomes more onerous than originally anticipated.15

In accord is the State Bar of California's Standing Committee on Professional Responsibility and Conduct, which has opined that an attorney may not value bill a client for amounts over and above an agreed upon hourly rate.16 Additionally, in Martino v. Denevi,17 the court held that an attorney's claim for a flat rate fee based on a "general feeling" about the value of the case and the amount of work done on the client's behalf was not sufficient to support a $40,000 fee.

Fiduciary Duties
Once representation commences, obtaining a bonus that was not agreed to prior to the representation is fraught with difficulty. Although an arm's-length relationship is presumed to exist prior to the commencement of representation, courts traditionally have held that an attorney's fiduciary duties to a client require the attorney to give the same advice against himself or herself as the attorney would provide to the client in opposing a third party. Some authorities, such as the court in Ball v. Posey, have imposed an even higher standard: "When a fiduciary gains an advantage, a presumption of undue influence arises."18 The court in Gold v. Greenwald19 held that the presumption of undue influence applies to all dealings between attorney and client that benefit the attorney.20

A fiduciary duty has been applied to attorneys who seek to modify fee agreements after representation has begun.21 In Severson & Werson v. Bolinger,22 the court addressed the situation in which an attorney increased the hourly billing rates charged to clients without prior notification to the client in the litigation. Severson holds that, as a matter of law, an attorney may not unilaterally change hourly rates:

    Attorneys have always had a professional responsibility to make sure clients understand their billing procedures and rates. This responsibility logically precludes any changes in agreed-upon rates without notification.23

By contrast, Ramirez v. Sturdevant24 upheld an attorney's fee agreement-reached at arm's length with an "intelligent, experienced and sophisticated client"-in which the client agreed in advance to any settlement involving payment of at least $150,000. The Ramirez court found that the attorney was entitled to collect fees after withdrawing from the representation because the client refused to accept a $150,000 settlement. However, the court remanded the case for further consideration of an alleged conflict based on the attorney's negotiation of a separate attorney's fee payment that exceeded the amount of the client's recovery. The Ramirez decision authorized the attorney's withdrawal based on the client's refusal to comply with the terms of the conscionable fee agreement and distinguished cases such as Estate of Falco25 and Hensel v. Cohen,26 which held that "an attorney who withdraws from a case without justifiable cause waives his or her claim for fees based on quantum meruit." The Ramirez court concluded that the negotiation of a supplemental retainer agreement after the commencement of an attorney-client relationship does not implicate the presumption of undue influence27-a position at odds with most other reported decisions.

Moreover, the taking of fees without the client's approval is a breach of the attorney's fiduciary duty-"even," according to the supreme court in Silver v. State Bar, "if [the] services in truth were worth that figure."28 In Silver, the supreme court determined that absent a contractual lien for attorney's fees, the attorney was not entitled to deduct earned fees from client trust funds and the attorney should have paid the client the full balance of the funds. The court stated that if the client was unwilling to pay the attorney the requested fee, the attorney's sole remedy consisted of independent legal action for the reasonable value of the attorney's services.

Based on these authorities, attorneys who unilaterally pay themselves an additional fee after the client objects to the attorney's collection of the bonus in addition to the agreed-upon fees act at their own peril and may be disciplined by the State Bar. Thus, once a bonus fee agreement is made, either before or after representation begins, attorneys must take steps to ensure that they actually hold an enforceable contractual lien prior to unilaterally deducting fees from a client's recovery. An attorney who unilaterally distributes the attorney's fee portion of a recovery over the client's objection may be found to have violated a separate duty. In Bell v. Shine, Browne & Diamond, the court noted that "the law is clear that the only circumstance under which an attorney can claim an attorney's lien with respect to a future award or settlement is when he has a contract directly with the client which either expressly or impliedly provides that he is to share in that award or settlement."29

Indeed, an attorney's seizure of funds not previously agreed to by the client may also constitute fraud. The court in Neel v. Magana, Olney, Levy, Cathcart & Gelfand30 held that an attorney's lack of full disclosure of all facts that affect the client's rights "will amount to fraud, because the fiduciary's obligation is affirmative." Apparently, an attorney who purports to consent to a certain fee for the purpose of inducing a client to agree to an engagement while secretly intending to collect a larger fee may be deemed to have committed fraud.

Attorneys thus must act affirmatively to clarify the terms of a fee agreement in order to avoid overreaching or lack of good faith. They also must heed the client's objection to the distribution of the client's funds if a bona fide dispute develops.

Finally, before attorneys even begin to incorporate a bonus fee arrangement into a fee agreement, they must visit their consciences. Although the types of matters an attorney handles may lend themselves to bonus fee arrangements, and the attorney is able to form legally enforceable agreements for such bonuses, bonus fee arrangements must ultimately be consistent with the attorney's sense of commitment to the interests of the client. A bonus for providing legal services should raise in every attorney's mind the question of whether the bonus is merely intended to secure an attorney's maximum effort as opposed to providing a means of legitimately compensating an attorney for efforts not already included in the hourly fee.

The principle that a client deserves an attorney's zealous representation is fundamental to the attorney-client relationship. Therefore, an attorney who expects a bonus as a quid pro quo for maximum effort runs the risk of cheating his or her client by requiring a premium in exchange for what should be included in the performance of competent legal services. Similarly, charging a bonus for an extraordinarily favorable result that is not the direct result of the attorney's efforts may also be improper-a fee not truly earned by the attorney. Nevertheless, if a bonus is incorporated as a means of compensating an attorney for efforts or costs not otherwise covered by the hourly fee, the bonus is not unfair to the client.

The bonus fee arrangement is not merely an alternative billing option that requires attention only on the issue of whether it is structured properly. Bonus fee arrangements are tests of an attorney's moral fiber, not to be entered into without careful thought and reflection on the meaning of the fundamental good faith and fair dealing required of attorneys toward clients.

 

1 County of Orange v. Merrill Lynch & Co. Inc., 241 B.R. 212 (C.D. Cal. 1999) (citing with approval Alderman v. Hamilton, 205 Cal. App. 3d 1033, 1037 (1988)).

2 Susan Beck, Show Me the Equity, The American Lawyer, Apr. 2000, at 63.

3 Mallen & Smith, Legal Malpractice §24.11 (4th ed. 1996). But see Passante v. McWilliam, 53 Cal. App. 4th 1240, 1247 (1997) ("[T]here is an inherent conflict of interest created by any situation in which the corporate attorney for a fledgling company in need of capital accepts stock as a reward for past service.").

4 Serrano v. Priest, 20 Cal. 3d 25 (1977); Weeks v. Baker & McKenzie, 63 Cal. App. 4th 1128, 1172 (1998).

5 Blum v. Stenson, 465 U.S. 886, 898-901 (1984).

6 County of Orange v. Merrill Lynch & Co., Inc., 241 B.R. 212 (C.D. Cal. 1999).

7 In re Goldstone, 214 Cal. 490 (1931); In re Hessinger & Assocs., 171 B.R. 366 (Bankr. N.D. Cal.1994), appeal dismissed, 178 B.R. 807, aff. in part and rev. in part, 192 B.R. 211.

8 Setzer v. Robinson, 57 Cal. 2d 213 (1962); Baron v. Mare, 47 Cal. App. 3d 304 (1975).

9 Bus. & Prof. Code §§6146 et seq.

10 Bus. & Prof. Code §6147(a)(4).

11 Bus. &Prof. Code §§6147, 6148.

12 Tarver v. State Bar, 37 Cal. 3d 122 (1984).

13 Goldstone v. State Bar, 214 Cal. 490 (1931).

14 Grossman v. State Bar, 34 Cal. 3d 73 (1983).

15 Id. at 78 (emphasis added).

16 State Bar of California, Standing Committee on Professional Responsibility and Conduct, Formal Op. No. 1996-47, n.3.

17 Martino v. Denevi, 182 Cal. App. 3d 553, 559 (1986).

18 Ball v. Posey, 176 Cal. App. 3d 1209 (1986)(emphasis in original). See also Baron v. Sarlot, 47 Cal. App. 3d 304 (1975).

19 Gold v. Greenwald, 247 Cal. App. 2d 296 (1966).

20 But compare Ramirez v. Sturdevant, 21 Cal. App. 4th 904 (1994).

21 Rader v. Thrasher, 22 Cal. App. 3d 883 (1972); Bradner v. Vasquez, 43 Cal. 2d 147 (1954); see also Los Angeles County Bar Association Professional Responsibility and Ethics Committee, Ethics Op. No. 479.

22 Severson & Werson v. Bolinger, 235 Cal. App. 3d 1569 (1991).

23 Id. at 1573.

24 Ramirez, 21 Cal. App. 4th 904.

25 Estate of Falco, 188 Cal. App. 3d 1004 (1987).

26 Hensel v. Cohen, 155 Cal. App. 3d 563 (1984).

27 Ramirez, 21 Cal. App. 4th at 917.

28 Silver v. State Bar, 13 Cal. 3d 134, 141 (1974).

29 Bell v. Shine, Browne & Diamond, 36 Cal. App. 4th 1011 (1995).

30 Neel v. Magana, Olney, Levy, Cathcart & Gelfand, 6 Cal. 3d 176, 188-89 (1971).

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