Modifying Fee Agreements, or How I Learned to Stop Worrying and Love California Rule of Professional Conduct 3-300
LACBA Update, June/July 2009

By David B. Parker, member, LACBA Professional Responsibility and Ethics Committee, and Justin D. Denlinger, both of Parker Mills LLP. The opinions expressed are their own.

The whirlwind of recent political and economic upheaval is a reminder that the only future certainty is change. And so it is an inevitable fact of life as a lawyer that clients will seek, indeed sometimes we ourselves will seek, to modify the original terms of the relationship, whether to alter the scope of the engagement, change the financial arrangements, provide for enhanced security for payment of fees, or add dispute resolution provisions.

Renegotiating fee agreements with existing clients invites a host of ethical considerations that must be carefully considered. A recent hot topic in this area concerns whether an attorney must comply with Rule 3-300 of the California Rules of Professional Conduct when renegotiating an existing client’s fee agreement. The answer, it turns out, is not clear.

Rule 3-300 concerns lawyer-client “business transactions” and the creation of “adverse interests” with clients. This article focuses on the latter prong of the rule.

A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied: (A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and (B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and (C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition. Cal. Rules of Prof’l Conduct R. 3-300. 

Surprisingly, few of the Rules of Professional Conduct concern fee arrangements. Rule 4-200 prohibits “unconscionable fees.” Rule 3-310(F) imposes the requirement of written informed consent where the lawyer’s fees are to be paid by a third party. The Official Discussion to Rule 3-300 makes clear that the rule is not intended to apply to initial fee agreements that are negotiated at a point when the parties are generally at arms’ length.1 However, neither the rule nor the Official Discussion squarely addresses whether modification of fee agreements during the attorney-client relationship is covered by the rule.2

To date, there are no court decisions that squarely address whether modifications of fee agreements during the existence of the attorney-client relationship are nonetheless to be regarded as a “business transaction” or an “adverse [pecuniary] interest.” In fact, there is scant authority as it relates to the ethical considerations associated with renegotiated fee agreements in general, with most of the published decisions emanating from the State Bar Court.3

The clearest indication that attorneys are caught in uncharted ethical waters is the fact that bar associations, ethics committees, and respected ethicists all across the state have come out on both sides of the question of whether any change in the financial terms of a fee agreement are subject to compliance with Rule 3-300.4 This is best exemplified by the debate engendered by the State Bar Committee on Professional Responsibility and Conduct’s attempt to clarify the point.

COPRAC is charged with developing the State Bar’s nonbinding, advisory ethics opinions. Last year, COPRAC drafted Proposed Formal Opinion Interim No. 05-0001,5 which concluded that Rule 3-300 does not apply to the modification of fee agreements with clients but that certain client protective measures must be taken when modifying fee agreements with existing clients. The measures prescribed by the Proposed Opinion largely track the language of Rule 3-300 in that the Proposed Opinion states that any substantial modification of an existing fee agreement’s financial terms will be subject to close scrutiny to determine if it is fair, reasonable, fully explained, and consented to by the client. The Proposed Opinion’s only real departure from Rule 3-300’s framework is the rule’s requirement that an attorney admonish a client in writing that he or she has the right to consult independent counsel and provide a reasonable opportunity to do so. 

The Proposed Opinion was distributed for public comment last summer and generated substantial controversy. Ultimately, the Proposed Opinion did not receive the necessary green light from the Board of Governors’ Committee on Regulation, Admissions and Discipline, in the face of the strong opposition of the Office of Chief Trial Counsel, the disciplinary arm of the State Bar.6

Pending further clarification from the California Legislature and/or the courts, it appears that the only true “safe” course of action when modifying a fee agreement with a client is to comply with the strictures of Rule 3-300.

1 “Rule 3-300 is not intended to apply to the agreement by which the member is retained by the client, unless the agreement confers on the member an ownership, possessory, security or other pecuniary interest adverse to the client.”

2 There is a similar carve-out for trustee (fiduciary) relationships generally in Probate Code §16004.

3 See authorities cited in COPRAC’s Proposed Opinion.

4 Clearly, if the modification involves creating a lien, deed of trust, or other traditionally recognized security instrument that constitutes an “adverse interest,” then Rule 3-300 applies whether the interest is created by an initial fee agreement or by way of modification. The Official Discussion concludes: “Rule 3-300 is intended to apply where the member wishes to obtain an interest in client's property in order to secure the amount of the member's past due or future fees.”

5 The Proposed Opinion can be located at http://calbar.ca.gov/state/calbar/calbar_generic.jsp?cid=10145&n=92062.

6 Among those that approved (or approved with suggested revisions) of the Proposed Opinion were the San Diego County Bar Association and the Los Angeles County Bar Association. Prominent opponents of the Proposed Opinion included the Bar Association of San Francisco Legal Ethics Committee and the State Bar Committee on Mandatory Fee Arbitration.