Quantum Meruit Recovery of Attorney Fees: Work Performed under Fee Sharing Agreements Absent Client's Written Consent
LACBA Update, May 2004
By Russell I. Glazer of Troy & Gould Professional Corporation. Glazer is a member of LACBA's Professional Responsibility and Ethics Committee. The opinions expressed are his own.
California Rule of Professional Conduct 2-200 provides that a lawyer may not divide a fee for services with another lawyer who is not a partner of, associate of, or shareholder with the lawyer unless (1) the client has consented in writing to the fee division after full written disclosure of the arrangement, and (2) the total fees charged are not increased on account of the fee division. In a recent decision, Huskinson & Brown, LLP v. Wolf, 32 Cal. 4th 453 (2004), 9 Cal. Rptr. 3d 693, the California Supreme Court held that "a law firm that is barred from dividing fees under Rule 2-200 may nonetheless recover from the other law firm in quantum meruit for the reasonable value of the services it rendered to advance the client's case." 32 Cal. 4th at ___, 9 Cal. Rptr. 3d at 695. Yet, to ensure compliance with Rule 2-200, the Supreme Court has refused to permit attorneys to recover a percentage of the total fees collected. Instead, attorneys who fail to comply with Rule 2-200 may only recover an hourly rate for their efforts.
Huskinson & Brown involved a dispute between two law firms over a contingent fee recovered in a medical malpractice action. The first firm orally agreed to provide the second firm 25 percent of any attorneys' fees recovered. The first firm recovered nearly $75,000 in attorneys' fees but refused to honor its agreement to share the fees with the second firm. Following a bench trial, the trial court held that the second firm could not collect under the fee-sharing agreement (which would have entitled the firm to more than $18,000) because, in violation of Rule 2-200, the client was not provided written disclosure of the agreement and did not consent to it in writing. At the same time, the trial court held that the firm could recover in quantum meruit the reasonable value of the legal services it had provided, calculated on an hourly basis (which came to $5,800). The Court of Appeal affirmed the trial court's decision that the plaintiff could not recover on its breach of contract claim but reversed trial court's ruling that the plaintiff could recover under quantum meruit. According to the Court of Appeal, Rule 2-200 precluded the plaintiff from recovering attorneys' fees under any legal theory.
The Supreme Court upheld the trial court's ruling. It held that while Rule 2-200 precluded enforcement of the law firms' agreement to divide the attorney fee award, the plaintiff was nonetheless entitled to recover under quantum meruit, because "plaintiff did not gratuitously offer [its] services" and "all parties . . . expected plaintiff would be compensated in the event that attorney fees were recovered." 32 Cal. 4th at ___, 9 Cal. Rptr. 3d at 696. In reaching this conclusion, the Supreme Court distinguished between ethical rules that "proscribed the very conduct for which compensation was sought" and those that -- like Rule 2-200 -- merely render a particular fee agreement unenforceable. Id. at 7. The court held, "Where services are rendered under a contractual compensation arrangement that is unenforceable as against public policy, but the subject services are not otherwise prohibited, quantum meruit may be allowed." Id. at 6.
Huskinson & Brown was the Supreme Court's second decision construing Rule 2-200 in the past two years. In Chambers v. Kay, 29 Cal. 4th 142 (2002), as in Huskinson & Brown, two lawyers agreed to share a fee award but failed to obtain the client's informed written consent for the agreement. 29 Cal. 4th at 146. Kay received a fee award but refused to share it with Chambers. Chambers argued that he should be entitled to recover his agreed-upon portion of the fees under a quantum meruit theory. The fee division agreement had been divulged to the client, the client did not object to the arrangement, and the division would not have increased the fees paid by the client. Nonetheless, in a unanimous ruling, the Supreme Court held that Chambers could not recover a percentage share of the fees under quantum meruit. As the Supreme Court saw it, allowing Chambers to recover would "accomplish indirectly a division of fees under the guise of a quantum meruit claim." 29 Cal. 4th at 163. The Supreme Court reasoned, "Chambers, in effect, seeks the aid of this court in dividing the fees of a client without satisfaction of the rule's written consent requirement. We decline such aid." Id. at 156.
Taken together, Huskinson & Brown and Chambers stand for the proposition that an attorney can recover an hourly fee in quantum meruit but cannot obtain a fee calculated as percentage of the total fees recovered. True application of quantum meruit would not impose such a limitation. As the Court of Appeal put it in Cazares v. Saenz, 208 Cal. App. 3d 279, 286-287 (1989), "[b]ecause the hourly fee is the prevailing price structure in the legal profession, it is sometimes assumed that the quantum meruit standard applied to legal services includes nothing more than a reasonable hourly rate multiplied by the amount of time spent on the case." Yet the court recognized "this is an overly narrow view of the quantum meruit standard applied in the context of a contingent fee agreement which, through no fault of either party, could not be performed." Id. at 287. The Court of Appeal noted that a variety of factors may justify a higher quantum meruit award to an attorney who has agreed to handle a matter on a contingent fee basis. A reasonable contingent fee may be higher because the attorney has agreed to accept the risk that the attorney will recover nothing if the plaintiff loses. Thus, "in theory, a contingent fee in a case with a 50 percent chance of success should be twice the amount of a non-contingent fee for the same case." Id. at 288. A lawyer working for a contingent fee also accepts the risk that the case may produce a smaller recovery than would be necessary to yield a fair level of compensation. Finally, the lawyer agrees to accept nothing until the conclusion of the case and therefore "in effect finances the case for the client during the pendency of the lawsuit." Id. As a result, an hourly rate does not reflect the reasonable value of the services performed under a contingent fee arrangement. Id. at 289. In Cazares, the Court of Appeal considered whether a law firm that was a party to a valid fee sharing agreement could recover a portion of the contingent fees received even though it had been forced to withdraw from the matter because the attorney responsible for the case had been appointed to the bench. The Court of Appeal's analysis, however, could apply equally to quantum meruit claims of attorneys providing services under a faulty fee sharing agreement.
If an hourly fee does not fairly compensate a contingent fee lawyer who is a party to an invalid fee sharing agreement, how should such fees be calculated? The Cazares court suggested that the failed fee agreement may provide an accurate measure of the quantum meruit value of a contingent fee lawyer's services. 208 Cal. App. 3d at 288. In the alternative, courts could apportion the fees recovered between the two firms "in proportion to the time spent on the case by each." De Loreto, Inc. v. O'Neill, 1 Cal. App. 4th 149, 156 (1991). This is precisely what courts have done in cases in which the fee recovered is insufficient to satisfy the quantum meruit claims of successive counsel. Id.; Spires v. American Bus Lines, 158 Cal. App. 3d 211, 215-216 (1984).
The Supreme Court has refused to follow these principles when applying quantum meruit to Rule 2-200 cases for two reasons. First, it has concluded that basing recovery on the total fees paid would offend Rule 2-200's stricture against a "division" of attorney's fees. In reaching this conclusion, the Supreme Court looked to Formal Opinion No. 1994-138 of the State Bar of California Standing Committee on Professional Responsibility and Conduct. Chambers, 29 Cal. 4th at 154, Huskinson & Brown, 32 Cal. 4th at ___, 9 Cal. Rptr. 3d at 697. In its opinion, the State Bar Committee observed, "Rule 2-200 does not define what is meant by a division of fees, and no court in California has analyzed the issue." State Bar, Formal Opn. No. 1994-138 at 2. Relying in part on a series of opinions from the Los Angeles County Bar Association Professional Responsibility and Ethics Committee, the State Bar Committee held, "the criteria for determining whether a compensation method constitutes a division of fees should focus on the division of specific fees paid by a client rather than on compensation arrangements which are not directly tied to a client's payment of fees." Id. at 3. Following the State Bar's lead, the Supreme Court has decided that Rule 2-200's prohibition of unauthorized fee divisions precludes any recovery that is based on a percentage of the fees actually recovered, whether or not such fees properly measure the value of the attorneys' services. In Chambers, the Supreme Court affirmed the Court of Appeal's determination that a quantum meruit award "cannot be based upon a division of the contingency fee." 29 Cal. 4th at 162. Likewise, in Huskinson & Brown, the Supreme Court held that a quantum meruit award based on an hourly rate did not offend Rule 2-200 because "an award of compensation based on the number of hours plaintiff worked on [the client's] case would not divide or be otherwise tied to the specific legal fees she paid." 32 Cal. 4th at ___, 9 Cal. Rptr. 3d at 697.
Second, the Supreme Court has limited permissible quantum meruit recovery to ensure that attorneys remain motivated to provide the written disclosure and obtain the written consent that the rule requires. In both Huskinson & Brown and Chambers, the Supreme Court observed, "the purpose of rule 2-200's disclosure and consent requirements is to safeguard the right of clients to know how their legal fees will be determined and the extent of, and the basis for, the attorneys' sharing of fees." Huskinson, 32 Cal. 4th at ___, 9 Cal. Rptr. 3d at 697; Chambers, 29 Cal. 4th at 156-157. The Supreme Court concluded that allowing a division of fees without satisfying Rule 2-200 "would, in effect, be both countenancing and contributing to a violation of a rule we formally approved in order 'to protect the public and to promote respect and confidence in the legal profession.'" Chambers, 29 Cal. 4th at 1589 (quoting Rule 1-100(A)). Indeed, one appellate court has suggested that, absent written consent from the client, a lawyer who honors a fee sharing agreement would "subject himself to possible disciplinary action by the State Bar of California." Margolin v. Shemaria, 85 Cal. App. 4th 891, 894 (2000). Limiting the recovery of attorneys who fail to comply with Rule 2-200 provides an incentive to obtain the informed written consent the rule requires. In Huskinson & Brown, the Supreme Court reasoned that allowing recovery of an hourly rate "would not discourage compliance with rule 2-200" because a lawyer would always prefer to have an enforceable fee sharing agreement rather than be confined to recovering the "typically lesser amounts representing the reasonable value of the work performed." 32 Cal. 4th at ___, 9 Cal. Rptr. 3d at 697.
In short, Huskinson & Brown does little to lessen the importance of complying with Rule 2-200. As the Supreme Court put it in Chambers, the plaintiff "could have protected his interests, and at the same time fulfilled the beneficial purposes of the rule and acted in [his client's] best interests, by requesting proof of her written consent to the fee division before committing himself to her case." 29 Cal. 4th at 162. Attorneys would be far better off obtaining a client's informed written consent to any fee sharing agreement rather than relying on the limited quantum meruit recovery the Supreme Court has allowed in the absence of such consent.