Discounting Your Fees: Is It an Ethical Violation?
LACBA Update, February 2011

By Robert K. Sall, who practices with The Sall Law Firm APC in Laguna Beach and is a member of the LACBA Professional Responsibility and Ethics Committee. His practice focuses on business litigation, legal malpractice litigation, and attorney-client fee disputes. He can be reached at rsall@Sall-Lawoffice.com. The opinions expressed are his own.

A recent court of appeal decision resolved the question of whether it is unethical for a lawyer to offer to discount legal fees to encourage a client to settle an action. In Chan v. Lund, 188 Cal. App. 4th 1159 (2010), the Sixth Appellate District concluded that the attorney’s offer does not constitute a “business transaction” subject to the disclosure requirements of Rule 3-300 of the Rules of Professional Conduct.

The Chan case also addressed issues of the ethics of withdrawal from representation, enforcement of settlement under Code of Civil Procedure Section 664.6, economic coercion as a basis for rescission, and mediation confidentiality.

The case involved a dispute between adjoining landowners regarding overhanging trees. An eve-of-trial mediation resulted in a settlement that the client later refused to perform. On motion of the adverse party, judgment was entered under Section 664.6 to enforce the settlement.

On appeal, the client sought to vacate the judgment, claiming that the settlement was procured by the undue influence and fraud of his own attorney, and by economic duress when the adverse party applied for judgment after knowing of the wrongful conduct of the attorney. The client argued that the settlement was extorted, referring to the actions of his attorney that he claimed were sufficient to justify rescission. The client alleged that the attorney made an unethical threat to withdraw the day before trial, while concealing from the client the professional ethical requirements of Rule 3-700 that prohibit the attorney from seeking withdrawal without first taking steps reasonably necessary to avoid foreseeable prejudice to the client. The client also asserted the attorney’s concealment of the fact that court approval would be required before he could withdraw.

The client claimed that his decision to participate at mediation and to accept the settlement was based entirely on criminal and fraudulent conduct, the lawyer’s improper threat to withdraw, coupled with his lawyer’s inducement coercing him by offering a $10,000 discount on his fees—an offer that, the client contended, was illegal because the lawyer never complied with the disclosure requirements of Rule 3-300.

Rule 3-300 generally requires that a lawyer may not enter into a business transaction with a client unless the terms of the transaction are fair and reasonable to the client; that the terms are fully disclosed to the client in writing in a manner reasonably understandable to the client; that the client is informed in writing of the right to consult with independent counsel and is given the reasonable opportunity to do so; and thereafter, the client consents to the transaction in writing.

Significantly, the court held that attorneys are not exempt from the principles of extortion in their conduct while representing a client. However, it held that Rule 3-300 was not applicable to the offer to discount the fees, and there was no ethical violation that would warrant rescission of the settlement as to the adverse party. Relying upon its interpretation of the official comments to the rule, the court concluded that Rule 3-300 is not applicable to the arm's-length dealings between the attorney and the client regarding fees, unless the agreement confers upon the attorney an ownership, possessory, security, or pecuniary interest in client property, adverse to the client. The mere offer to discount fees was not subject to the rule, and the lawyer did not acquire an adverse interest in the client’s third-party claim or settlement proceeds. 

The court did not expressly address whether Rule 3-300 would be applicable to a more substantive modification of the fee agreement, such as one that favored the lawyer’s interests. However, a simple discount in this context was not enough to trigger the rule. 

The court of appeal also concluded that there was no basis for rescission of the settlement agreement on grounds of economic coercion in the absence of evidence that the adverse party, in entering the settlement, had connived with the attorney or was even aware of the alleged wrongful conduct. The court concluded that even if the attorney had improperly threatened withdrawal on the eve of trial, such conduct would not undo the settlement agreement because the attorney was not a party to the settlement, and there was no evidence of connivance in the wrongful conduct by the adverse party as to whom the client sought to rescind.

The client also sought to vacate the judgment by a lack-of-due-process constitutional attack on mediation confidentiality, claiming that such confidentiality deprived him of the right to call the mediator as a witness to the claim of extortion. The court of appeal declined to address the constitutional question as to the statutory requirements of mediator confidentiality because there was no record to support that testimony of the mediator was ever proffered, and no offer of proof had been made. Thus, the question of whether mediation confidentiality might violate due process remains undecided. 

Two useful lessons derive from the Chan decision. Misconduct by the client’s own attorney will not automatically be a basis for the client to undo a settlement, absent evidence of collusion or connivance with the adverse party; and an attorney’s willingness to reduce a fee to encourage settlement, without more, is not an ethical violation under Rule 3-300. Though not driven by this ruling, basic compliance with Rule 3-300 is a relatively simple step. As an ounce of prevention, it is prudent for lawyers to always make the Rule 3-300 disclosures whenever the fee arrangement is being modified with an existing client.