A Critical Update: New York’s New

Mandatory Contingent Fee Retainer Rule

AMENDED APPELLATE DIVISION

RULES FOR RETAINERS IN

PERSONAL INJURY AND

WRONGFUL DEATH CASES

PROPOSED INSERT TO RETAINER

AGREEMENTS BY THE NEW YORK

STATE ACADEMY OF TRIAL

LAWYERS(Available at: http://www.trialacademy.org/docDownload/668661)

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PR OPOSE D INSE R T T O R E T A IN E R A G R E E M E N TS

In consideration of the services rendered and to be rendered by the Firm, the Client hereby agrees

to pay the Firm legal fees which shall be: Thirty-three and one-judgment, settlement or otherwise.

The Client has been given the following options with respect to how such percentage shall be computed, and has made the selection of how the percentage shall be computed as reflected by the checking and initialing of the appropriate box below:

Proposed insert to retainer agreements for attorneys representing clients in claims and actions for personal injury and wrongful death matters.

Important Note: All four of the Appellate Divisions recently adopted a new rule governing contingent fees in claims and actions for personal injury and wrongful death. The new rule is mandatory. The rules for the respective Appellate Divisions are: F irst Judicial Department (22 N .Y.C .R.R. Section 603.7[e]); Second Judicial Department (22 N .Y.C .R.R. Section 691.20[e]); Third Judicial Department 22 N .Y.C .R.R. Section 806.13[c]); and Fourth Judicial Department (22 N .Y.C .R.R. Section 1022.31[c]). (Copies of the new rules are linked above.) Lawyers should be aware that the language varies slightly among the different Judicial Departments. Please note, these changes do NOT apply to medical malpractice cases, which are NOT subject to the new rules and must be handled in accordance with 474-a. The new ommittee believes that it is important to provide information to its Members concerning these rules. The difficulty faced by Academy Members is that the Academy is not aware of any court decision, court statement or definitive bar opinion which addresses or clarifies the scope, reach or even intent of the new rules. Accordingly, believes it is in the interests of the Academy Membership to suggest language for insertion into the retainers of Academy Members which is concededly conservative, but which is believed to satisfy the new rules in the four Appellate Divisions. Nonetheless, every lawyer who reads this document must consider the issues; review the applicable rules; and make his or her own informed decision concerning what to insert into his or her retainer agreements. In other words, because of the lack of authority, each lawyer proceeds at his or her own risk. Readers of this document should keep in mind that the language set forth below does not represent a full retainer agreement but, rather, represents only specific language applicable to the new rules. Academy Members should take care to ensure: 1) that all other necessary and relevant provisions of their retainer agreements are retained; and 2) consistency between the new language and any other language in their retainer agreements. Stated another way, Academy Members are expected to police their own retainer agreements to ensure compliance with all relevant statutes, court rules and rules of professional responsibility. New York State Academy of Trial Lawyers Executive Committee

April 25, 2014

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_____________ Option Number One: C lient Remains L iable for Repayment of A ll Costs and Expenses, Regardless of the Outcome of This Matter. Percentage is computed on the net sum recovered after deducting from the amount recovered expenses and disbursements for expert1 testimony and investigative or other services properly chargeable to the enforcement of the claim or prosecution of the action;

O R

_____________ Option Number Two: The F irm Agrees to Pay and Remain L iable for A ll Costs and Expenses, Regardless of the Outcome of This Matter . Percentage is computed on the gross sum recovered before deducting expenses and disbursements. The Firm agrees to pay all costs and expenses of the action and the Client will not remain responsible for all expenses and disbursements in the event the claim or action is dismissed or otherwise rejected by any court of competent jurisdiction.

The following reflects the financial consequences of each of the above two Options, using as an example a case in which there is a recovery of $100,000 and this number is used only as an example that is easy to understand and the expenses and disbursements in the case are $10,000:

1 For attorneys who are admitted to practice, reside in, commit acts in, or who have offices in the Second Judicial

Option Number One Example (The Client Remains Liable for Repayment of All Costs and Expenses, Regardless of the Outcome of This Matter): Total recovery $100,000.00 Less expenses and disbursements: -$10,000.00 Less -$30,000.00

$60,000.00

Option Number Two Example (The F irm Agrees to Pay and Remain Liable for All Costs and Expenses, Regardless of the Outcome of This Matter): Total recovery: $100,000.00

-$33,333.33 Less expenses and disbursements: -$10,000.00

$56,666.67

The Client understands and agrees that, if the Client has selected Option Number One, the Firm reserves the right, in its sole discretion, to elect to make payment in the first instance of some or all costs, expenses and disbursements, so as not to hinder the enforcement of the claim or prosecution of the action. If the Firm has advanced these payments, the Client understands that he or she remains fully responsible to reimburse the Firm for such costs, expenses and disbursements. If the Firm elects not to make payment in the first instance of some or all costs, expenses and disbursements, the Client will advance and prepay to the Firm all such costs, expenses and disbursements as they are incurred or anticipated for the enforcement of the claim and the prosecution of the action. The Firm may, in its discretion, require the Client to deposit with the Firm a specified amount of money, as the Firm deems appropriate, in order for such costs, expenses and disbursements to be paid. Should the Client not comply with his or her financial obligations under Option Number One, the Client understands and agrees that such failure to comply shall constitute good cause for the Firm to withdraw in accordance with this agreement and the applicable rules of professional conduct.

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Examples of expenses and disbursements for expert medical and other testimony and investigative or other services properly chargeable to the enforcement of the claim or prosecution of the action include, but are not limited to, charges for: retaining investigators; storage fees relating to the preservation of evidence; obtaining medical records; retaining expert witnesses and consultants, including locating and preparing expert witnesses and consultants, obtaining reports and testimony, and related transportation, parking, mileage, meals and hotel costs; court filing fees; service of process fees; subpoena fees; costs associa video teleconferencing costs; court reporter fees; notary fees; mediator, arbitrator and/or special master fees; specialized medical and legal research fees; computerized research fees; expenses for focus groups and jury consultants; photography; preparation of exhibits; photocopying and other reproduction costs; fees and expenses of non-expert witnesses; postage and delivery fees; travel costs, including parking, mileage, transportation, meals and hotel costs; long distance telephone and fax charges; and all other necessary and incidental expenses and disbursements incurred on the This list is not exclusive. In computing the fee, the costs as taxed, including interest upon a judgment, shall be deemed part of the amount recovered. For the following or similar items there shall be no deduction in computing such percentages: Liens, assignments or claims in favor of hospitals, for medical care and treatment by2 doctors and nurses, or self-insurers3 or insurance carriers. The Client understands and agrees that, without regard to whether the Client has selected Option Number One or Option Number Two, under no circumstances will the Firm be responsible for the payment of any judgment that may be entered against the Client arising out of either the incident or the prosecution of the action, including any bill of costs.

2 For attorneys who are admitted to practice, reside in, commit acts in, or who have offices in the First Judicial

Department, the

3 For attorneys who are admitted to practice, reside in, commit acts in, or who have offices in the First Judicial Department, and for attorneys who are admitted to practice, or have offices or practice within the Fourth Judicial Department,

- -

MEMORANDUM OF JOHN W.MCCONNELL (WITH EXHIBITS),

COUNSEL TO THE STATE OF NEW

YORK UNIFIED COURT SYSTEM(Available at: http://www.courts.state.ny.us/rules/comments/PDF/AD-ContFeePC-Packet.pdf)

STATE OF NEW YORK UNIFIED COURT SYSTEM

25 BEAVER STREET NEW YORK, NEW YORK 10004

TEL: (212) 428-2150 FAX: (212) 428-2155

A. GAIL PRUDENTI Chief Administrative Judge

MEMORANDUM JOHN W. McCONNELL Counsel

TO:

FROM:

RE:

March 18,2013

All Interested Persons

John W. McConnell

Proposed amendment of the Rules of the Appellate Division relating to contingent fee computation in personal injury and wrongful death actions.

Attorneys practicing in the field of personal injury law have proposed an amendment of the Rules of the Appellate Division ("Rules") governing contingent fees in personal injury and wrongful death actions to permit an attorney's contingency fee to be calculated from the gross amount recovered in the action, before litigation expenses are deducted. The Rules currently mandate that an attorney's contingency fee be calculated from the net recovery, after litigation expenses are deducted. I In a memorandum in support of this proposal (Exh. A; "Memo"), the proponents have proffered the following arguments for consideration:

• The proposed method of calculation will provide greater incentives for attorneys to assume litigation costs, increase a lawyer's ability to effectively prosecute a claim on behalf of a client who is unable to underwrite essential costs, increase the likelihood that cases will be brought on behalf of indigent clients, and promote the lawyer's duty of loyalty to clients (Memo Exh. 1 ["Memorandum in Support of Clarifying Amendment to Judiciary Law § 488"], p. 3).

1 See 22 NYCRR § 603.7[e][3][lst Dept]; 22 NYCRR § 691.20[e][3][2d Dept]; 22 NYCRR § 806.1 3 [c][3d Dept]; 22 NYCRR § 1022.31 [c][4th Dept]. The relevant language of the Appellate Division Rules is identical in all four Departments:

[The attorney's contingency fee] percentage shall be computed on the net sum recovered after deducting from the amount recovered expenses and disbursements for expert testimony and investigative or other services properly chargeable to the enforcement of the claim or prosecution of the action.

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•

•

• ••

•

The current Rules are inconsistent with Judiciary Law § 488(2) (which permits a lawyer to advance or pay court costs and litigation expenses) because they effectively require an attorney to fund a portion of those litigation expenses (Memo, pp. 6-9).

The Rules are inconsistent with Judiciary Law § 474, whiCh provides that attorneys and clients are free to enter into fee agreements "not restrained by law . .. ." (Memo, pp. 9-10).

The Rules "impermissibly create substantive law" (Memo, pp. 10-12).

Inasmuch as Judiciary Law § 474-a(3) requires that contingent fees in medical, dental or podiatric malpractice be calculated on the "net sum recovered" after deducting expenses, but imposes no similar requirement in personal injury and wrongful death cases, the Rules are barred under the priQciple ofinc1usio unius est exclusio alterius (Memo, p. 2, n. 1).

"Bar opinions and court decisions throughout the country [recognize] that basing a contingency calculation on gross recovery can be fair and ethical" (Memo, p. 12).

Persons wishing to comment on this proposal should e-mail their submissions to ADcontingfeerules@nycourts.gov or write to: John W. McConnell, Esq., Counsel, Office of Court Administration, 25 Beaver Street, 11 th Fl., New York, New York 10004.

All public comments will be treated as available for disclosure under the Freedom of Information Law, and are subject to publication by the Office of Court Administration.

Comments must be received no later than May 22, 2013.

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EXHffiITA

ISSUE PRESENTED

Do the Appellate Division rules of all four Departments requiring that, in personal injury

and wrongful death actions, an attorney's contingency fee be calculated from the net recovery

after expenses are deducted violate the New York State Constitution because they are

inconsistent with N.Y. Jud. Law §§ 474 and 488?

SHORT ANSWER

Yes. Because such rules reduce the portion of the recovery in which an attorney shares

by the amount of the client's litigation expenses, and thus effectively require an attorney to fund

a portion of those expenses, the rules are inconsistent with N.Y. Jud. Law §§ 474 and 488, which

specifically pennit attorneys to recover all such expenses and generally encourage freedom to

contract between attorney and client. This inconsistency renders the rules unconstitutional. This

inconsistency is particul~ly egregious because cases and ethics opinions in New York and other

states have consistently found no impropriety in calculating the contingency fee based on the

gross recovery.

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ARGUMENT

I. BACKGROUND

Each of the four Appellate· Divisions has adopted rules concerning the calculation of the

contingency payment due to plaintiffs' attorneys in personal injury and wrongful death actions.

These rules - which are identical in each of the four judicial departments - provide, in relevant

part, that

[The attorney's contingency fee] percentage shall be computed on the net sum recovered after deducting from the amount recovered expenses and disbursements for expert testimony and investigative or other services properly chargeable to the enforcement of the claim or prosecution of the action.

N.Y. COMPo CODES R. & REGS. tit. 22, §§ 603.7{e){3); 691.20(e)(3); 806.13(c); l022.31(c)

(2009) (emphasis added). Hereinafter, these rules collectively shall be referred to as the Expense

Rules.

The Expense Rules have no basis in New York statutes - indeed, they are inconsistent

with them. Before being amended in 2006, the New York Judiciary Law did not address the

calculation of expenses and disbursements in personal injury and wrongful death contingency

actions. 1 As a result of the 2006 amendments, however, N.Y. Jud. Law § 488 ("Section 488")

now pennits lawyers to advance litigation expenses for their clients under certain circwnstances

and, more importantly for present purposes, to recover those expense payments, in full, as well.

See N.Y. JUD. LAW § 488(2)(d) (2009) ("in [a contingency case], the fee paid to the attorney

from the proceeds of the action may include an amount equal 10 such costs and expenses

----------------~.--- . 1 By contrast, the Legislature has adopted language identical to the Appellate Division

rules concerning the caIcUIation of contmgency fees and expenses In me<licil, dental and podiatric malpractice actions. N.Y. JUD. LAW § 474-a(3) (2009).

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incurred"). Neither Section 488 nor any other statute mandates the precise method by which an

attorney's recovery is to be calculated from the total recovery in personal injury and wrongful

death cases. In the absence of such legislative directive, the attorney's rights are governed by

Section 474 of the judiciary Law ("Section 474"), which provides that "[t]he compensation of an

attorney or counsellor for his services is governed by agreement, express or implied, which is not

restrained by law ... " N.Y. JUD. LAW § 474 (2009). Crucially, the only method of calculating the

contingent recovery that allows an attorney to fully recover her expenses without reducing the

contingent payment - as Section 488 permits - is to allow the contingency to be calculated on

the gross amount, and to deduct expenses thereafter.

Under the current regime, an attorney who wishes to structure such an arrangement with

her client potentially faces judicial and disciplinary sanctions. Although New York statutory law

pennits this agreement, the Expense Rules provide that, in personal injury and wrongful death

actions, attorneys' fees must be calculated from the net recovery (Le., after expenses are

deducted from the client's total recovery). The effect of the Expense Rules is that the attorney

contributes to the payment of the client's expenses from her contingency fees, regardless of

whether the attorney and client have agreed otherwise. Because the Expense Rules are

inconsistent both with the attorney's general right to contract freely with the client on fees under

Section 474 and with the right to recover expenses in full under Section 488, they constitute an

unconstitutional exercise of power by the Appellate Divisions. Moreover, by creating a

substantive limitation on the way contingency fees may be calculated in personal injury and

wrongful death cases, the Expense Rules impermissibly encroach upon the province of the

Legislature. Accordingly, they must be invalidated.

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n. THE EXPENSE RULES CONFLICT WITH NEW YORK STATUTES AND THUS VIOLATE THE NEW YORK STATE CONSTITUTION

A. The Court's Authority To Promulgate Rules Under the Constitution

The New York State Constitution (the "Constitution") delineates the authority to

promulgate rules and regulations concerning court procedures:

The legislature shall have the same power to alter and regulate the jurisdiction and proceedings in law and in equity that it has' heretofore exercised. The legislature may, on such terms as it shall provide and subject to subsequent modification, delegate, in whole or in part, to a court, including the appellate division of the supreme court, or to the chief administrator of the courts, any ~wer possessed by the legislature to regulate practice and procedure in the courts. The chief administrator of the courts shall exercise any such power delegated to him or her with the advice and consent of the administrative board of the courts. Nothing herein contained shall prevent the adoption of regulations by individual courts consistent with the general practice and procedure as provided by statute or general rules.

N.Y. CON ST. art. VI, § 30 (emphasis added). The Court of Appeals has held that ''the language

of the Constitution leaves little room for doubt that the authority to regulate practice and

procedure in the courts lies principally with the Legislature." Cohn v. Borchard Affiliations, 25

N.Y.2d 237,247 & 249,303 N.Y.S. 633, 694-696 (1969) (noting that paucity of cases "in which,

a procedural statute has been found to be an unconstitutional infringement upon judicial '

prerogatives"). Nor, as the italicized words above show, does that language leave room for

doubt that, absent a specific delegation of authority, court rules must be consis~ent with existing

statutes.

2 Section 85 of the Judiciary Law authorizes the Appellate Division to promulgate rules of practice: "The appellate division of each department ... from time to time may provide rules as it may deem necessary generally to promote the efficient tranSaction of business and the orderly administration of justice therein." N.Y. JUD. LAW § 85 (2009).

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Accordingly, the Court of Appeals has held that court rules inconsistent with statutes are

unconstitutional, particularly where such rules hav~ substantive effect. For example, in People v.

Ramos, 85 N.Y.2d 678, 681, 628 N.Y.S.2d 27, 29 (1995), the issue was whether the Appellate

Division acted outside its rule-making authority by promulgating a rule requiring personal

service of an appellate brief; in each of the three cases before the Court, the govenunent's

appeals had been dismissed for failure to personally serve the briefs pursuant to this rule. 85

N.Y.2d at 681-683,628 N.Y.S.2d at 29-30. Noting that the Constitution pennits Oldy court rules

"consistent with the general practice and procedure as provided by statute or general rules," the

Court struck down the Appellate Division rule, holding that "a court may not significantly affect

the legal relationship between litigating parties through the exercise of its rule-making

authority.': 85 N.Y.2d at 687,628 N.Y.S.2d at 33 (citations omitted). See also Gair v. Peck, 6

N.Y.2d 97, 104, 188 N.Y.S.2d 491, 495-96 (1959) (if an Appellate Division rule "establishes

substantive law applicable to but one segment of the State [i.e., one group of lawyers handling a

certain kind of case] ... it would be a fatal defect. .. "); Corletta v. Oliveri, 169 Misc.2d 1, 7, 641

N.Y.S.2d 498,498 (Sup. Ct. Monroe Co. 1996) (holding that a court rule prohibiting an

otherwise lawful agreement impaired an attorney's substantive right to contract in violation of

the New York State Constitution); Dorst v. Pataki, 167 Misc.2d 329, 334, 633 N.Y.S.2d 730,

730 (Sup. Ct. Albany Co. 1995) (finding that an executive order containing "substantive content"

and creating a different policy from that contained in the applicable legislation violated

separation -of powers).

CoUrt rules in conflict with statutes are problematic for two piincipal reasons. See Ga;r,

6 N.Y.2d at 122, 188 N.Y.S.2d at 511 (Burke, J. dissenting). First, by "usurping power not

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granted to it by the Legislature, the court has enacted legislation contrary to the method

prescribed by the State Constitution." Id citing Chase Watch Corp. v. Heins, 284 N.Y. 129, 134,

29 N .~.2d 646 (1940). Second, such a rule potentially "changes the substantive law ~f the State

for one particular group of lawyers practicing in one particular area of the State." Id. Judge

Burke noted that "[ s ]uch discrimination between citizens of the State with regard to their access

to our courts is a violation of the due process and equal protection clauses of the State and

Federal Constitutions." 6 N.Y.2d at 123, 188 N.Y.S.2d at 511.

B. The Expense Rules Impermissibly Conflict With Section 488

The Expense Rules conflict with Section 488 which, as noted earlier, explicitly pennits

lawyers both to advance expenses where their repayment is contingent on the outcome and to

receive reimbursement in full of expenses paid in contingency cases.

Prior to 2006, New York law did not penn it an attorney to pay litigation expenses on

behalf of his client. Subdivision 2 of Section 488 prohibited an attorney from:

By himself, or by or in the name of another person, either before or after action brought, promise or give, or procure to be promised or given, a valuable consideration to any person, as an inducement to placing, or in consideration of having placed, in his hands, or in the hands of another person, a demand of any kind, for the purpose of bringing an action thereon, or of representing the claimant in the pW'Suit of any civil remedy for the recovery thereof. But this subdivision does not apply to an agreement between attorneys and counselors, or either, to diyide between themselves the compensation to be received.

Although the New York Code of Professional Responsibility pennitted an attorney to advance

litigation expenses, the client remained liable for repayment unless he was indigent and the

representation was on a pro bono basis. See N.Y.·Code of Professional Responsibility, DR 5-

103. Therefore, apart from the limited exception, a client would remain liable for repayment of

all expenses, regardless of the outcome of the matter.

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Indeed, pre~2006 case law illustrates the presumption that the client shall bear

responsibility for expenses and disbursements in contingency matters unless otherwise provided

by agreement. See, e.g., Hampton v. Rosenheim, 92 Misc. 207,209, 155 N.Y.S. 361, 361 (1st

Dep't 1915) ("In the absence of agreement as to necessary disbursements in conducting the case

it is presumed that they will be ultimately borne by the client.") citing Spence v. Bode, 57 Misc.

611,612-13, 108 N.Y.S. 593,594 (App. Tenn 1908) (fees agreed upon "for legal services" do

not include reimbursement for expenses and disbursements). In Manzo v. Dullea, the Second

Circuit rejected the client's argument that expenses should have been deducted from the

attorney's contingency fee recovery. 96 F.2d 135, 137 (2d Cir. 1938). The court held that where

a retainer agreement is silent as to whether expenses should be deducted, the attorney has a right

to recovery of such expenses in addition to the contingency fee percentage: "the attorney's right

to [expense reimbursement] follows as a matter of law from his making the advances for the

benefit of the litigation he was employed to conduct." Id at 138. The court further noted that

the alternative (i.e., deducting expenses based on the amount recovered) would possibly violate

the rules against champerty and maintenance. Id

In 2006, the Legislature amended Section 2 of judiciary Law § 488 in 2006 by creating

two additional exceptions:

... c. a lawyer advancing court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; or

d. a lawyer,. in an action in which an attorney's fee is payable in whole or in part as a percentage of the recovery in the action, paying on the lawyer's own account court costs and expenses of litigation. In such case, the fee paid to the attorney from the proceeds of the action may include an amount equal to such costs and expenses incurred. (Emphasis added)

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These exceptions now expressly allow a lawyer both to pay and to advance expenses on behalf of

his client in certain circumstances.3 Subsection (c) expressly pennits an attorney to advance

expenses to his client, and, as the italicized language shows, permits the attorney to fully recover

his expenses if the litigation outcome pe~ts. Subsection (d) addresses contingency fee

arrangements, noting in the bold language that the fee paid to the attorney may include all costs

and expenses advanced by the attorney. Notably, both exceptions retain the premise that the

attorney will be reimbursed for expenses, unless the outcome is unfavorable.4

The Expense Rules are inconsistent with the amended Section 488(2). The Legislature

made clear its intention that attorneys should be able to advance - and to recover in full -

litigation expenses: ''the fee paid to the attorney from the proceeds of the action may include an

amount equal to such costs ~d expenses incurred." N.Y. JUD. LAW § 488(2)(d). Yet the effect

of the Expense Rules, which require the litigation expenses to be deducted from the total

recovery before the attorney's fee percentage is calculated, is that the attorney ultimately pays

for a portion of the litigation expenses out of her fee.

3 New York's shift toward pennitting attorneys to advance litigation expenses is hardly an extreme position. Other jurisdictions allow attorneys to finance not only litigation expenses, but also medical and living expenses and other financial assistance to their clients. See, e.g., Rules of Prof. Conduct, Rule 1.8, AL ST RPC Rule 1.8 (Ala.); State Bar Articles of Incorporation, Art. 16, Rules of PI of. Conduct, Rule 1.8, LSA-R.S. foil. 37:222 (La.); Rules of Prof. Conduct, Rule 1.8, MS R RPC Rule 1.8 (Miss.).

4 DR 5-103 of the New York Code of Professional Responsibility (the "Code") was amended to confonn to amended Section 488(2). The Code was replaced by the Rules of Professional Conduct, effective Aprill; 2009, but Rule 1.8(e) reflects the Code's amended language, as well as the amended language in Section 488(2). Indeed, subdivisions (1) and (3) of Rule 1.8(e) are identical to Section 488(2)(c) and (d), respectively. N.Y. COMPo CODES R. & REGS. tit. 22, § 1200.0 (2009).

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The calculation required by the Expense Rules is inconsistent with Sections 488( c) and

(d). S Subsection (c) pennits advancement of expenses where the repayment is contingent upon

the outcome. Full repayment will never occur in contingency matters under the Expense Rules

because where expenses are deducted first, the attorney is never fully reimbursed for the

advanced expenses. Similarly, Subsection (d) permits payment of expenses in contingency

matters and also pennits an attorney to recover as part of his fees "an amount equal to such costs

and expenses incurred." The Expense Rules foreclose the possibility of recovering an amount

equal to expenses incurred. Therefore, these Rules are inconsistent with Section 488( c) and (d),

and thus violate the New York State Constitution.

C. The Expense Rules Impermissibly Conflict With Section 474

The Expense Rules unequivocally prescribe a precise method of calculating contingency

fees, without regard to the parties' fee agreement, and thus conflict with Section 474, which

S The State may contend that, rather than being inconsistent with Section 488, the Expense Rules merely clarify' how expenses are to be calculated. In Levenson v. Lippman, the Court of Appeals held that a rule promulgated by the Chief Administrative Judge was not inconsistent with the relevant compensation-setting statute, but merely filled in a "gap" in the administrative process by providing a mechanism for review of excess compensation awards. 4 N.Y.3d 280,291, 794 N.Y.S.2d 276, 281 (2005). The State may argue that because the Legislature did not set forth a mechanism for calculating expenses in personal injury contingency cases, the Appellate Division was entitled to do so.

This argument is wrong for two reasons. First, the Legislature did specify that the contingency fee in medical, dental and podiatric cases malpractice had to be calculated in a manner identical to the Expense Rules [N.Y. Jud. Law § 474-a], so under the maxim expressio unius est exclusio alterius, the Legislature's silence with respect to personal injury and wrongful death cases demonstrates its intent to not apply that fonnula to those cases. Second, and perhaps more importantly, unlike the rule at issue in Levenson, the Expense Rules are not merely administrative rules, but rather reflect a substantive detennination inconsistent with that already made by the Legislature.

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provides that the "the c?mpensation of an attorney or counsellor for his services is governed by

agreement, express or implied, which is not restrained by law." N.Y. JUD. LAW § 474 (2009).

As noted in Corletta v. Oliveri, New York common law and Section 474 of the Judiciary Law

establish the contract rights of an attorney and client and to the extent that a court rule impinges

upon this right, it is an unconstitutional transgression upon "the providence of the Legislature ... "

169 Misc.2d at 6,641 N.Y.S.2d at 498 (holding that a court rule requiring written retainer

agreements unconstitutionally violated substantive right to create implied agreements for

compensation under Section 474). By dictating how expenses are to be calculated, the Expense

Rules undennine agreements between attorneys and clients that provide otherwise, and thus

contravene the legislative intent set forth in Section 474.

) Of course, notwithstanding Section 474, New York courts are permitted to promulgate

rules that regulate the manner in which fee agreements are executed, see N.Y. COMPo CODES R. &

REGS. tit. 22, § 1200.0, R. 1.5(b) (2009) (requiring contingency agreements to be in writing), or

that prohibit inherently improper fee agreements, see id., R. 1.5(a) (prohibiting "excessive" fees).

As the next section makes clear, however, the courts' authority in this area does not extend to

barring agreements that are permitted by legislative enactments - and indeed by other court

rules as well.

D. The Expense Rules Impermissibly Create Substantive Law

Furthermore, the Expense Rules create an impermissible substantive rule of law with

respect to attomey-client agreements. The Court of Appeals has held that "the Appellate

Divisions cannot make substantive law by rules ... " Gair, 6 N.Y.2d at 104, 188 N.Y.S.2d at

496. At issue in Gair was Rule 4, an Appellate Division rule establishing a fee schedule for \ I

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compensation for legal services. The Court of Appeals analYzed whether the rule conflicted with

the (identical) predecessor to Section 474. It concluded that Rule 4 merely established fees that

were prima facie reasonable, leaving fees in excess subject to court supervision or discipline that

might otherwise be required under Canon 13, the excessive fee provision of the old Canons of

Professional Conduct. 6 N.Y.2d at 108-09, 188 N.Y.S.2d at 498-99. Because Rule 4's effect

had only presumptive effect in light of the court's inherent power to supervise compensation, it

did not create a change in the parties' substantive relationship. 6 N.Y.2d at 114, 188 N.Y.S.2d at

504. The court held that "it lay within the competence of the First Department .... to adopt rule 4

as a procedural aid in rendering effectual its disciplinary power over attorneys in the case of

unlawful contingent fees." Id. The Court of Appeals explained, " ... what is of the utmost

importance, these [fee] schedules are merely presumptive of what constitutes an exorbitant

contingent fee in a particular case" - a fee in excess of the amount still might be permissible with

court approval. 6 N.Y.2d at 113, 188 N.Y.S.2d at 503 (emphasis added).

Unlike the procedural rule at issue in Gair, the Expense Rules create substantive law by

establishing a bright-line rule that any attorney-client agreement under which expenses and

disbursements are deducted after computing contingency fees is impermissible, regardless of

whether the client is sophisticated or the terms are fair and reasonable. Such a significant

encroachment upon the statutory rights to contract between attorney and client and to recover

expenses in full involves a careful policy determination that must be made by the Legislature.

This is particularly so because, unlike the excessive fees that the Appellate Division

wanted to guard against in Gair, there is nothing inherently unethical about gross recovery under

contingency fee arrangements. Indeed, the New York State Bar Association Ethics Committee

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concluded that in contingency fee cases outside the ambit of the Appellate Division rules, "a

lawyer may compute the attorney's fee prior to deducting litigation expenses, provided the fee is

otherwise legal and reasonable in light of all the circumstances, and the attorney has provided a

prompt written statement to the client stating how the fee is to be calculated, including whether

expenses are to be deducted before or after the fee is calculated." New York State Bar Ass'n

. Committee on Professional Ethics, Opinion No. 669, June 14, 1994. Perhaps even more

importantly, N.Y. Rule 1. 5 (c) permits calculating a fee based on gross recovery as long as this is

stated in the retainer agreement and is not otherwise prohib~ted. 6 All of this is consistent ~th

Bar opinions and court decisions throughout the country, which make clear that basing a

contingency calculation on gross recovery can be fair and ethica1.7

6 The New York Rules of Professional Conduct state that a contingency fee agreement must state "whether such expenses are to be deducted before or, if not prohibited by statute or court rule, after the contingent fee is calculated .... " N.Y. COMPo CODES R. & REas. tit. 22, § 1200.0, R. 1.5(c) (2009). The majority of other states simply provide that the agreement must state whether expense are to be deducted before or after the contingent fee is calculated, without reference to any statutes or court rules to the·contrary. See, e.g., State Bar Articles of Incorporation, Art. 16, Rules of Prof. Conduct, Rule 1.5, LSA-R.S. foil. 37:222 (La.); Rules of Prof. Conduct, Rule 1.5, MS R RPC Rule 1.5 (Miss.); Sup. Ct. Rules, Rule 8, RPC 1.5, 1N R S CT Rule 8, RPC 1.5; Rules of Prof. Conduct 1.5 (Tenn.), AI{ Rules of Prof. Conduct, Rule 1.5 (Alaska); Rules of Prof. Conduct 1.5, CT R RPC Rule 1.5 (Conn.); Rules of Prof. Conduct 1.5, DE R RPC Rule 1'.5 (Del.); Rules of Prof. Conduct 1.5, DC R RPC Rule 1.5 (D.~.).

7 Apart from the Expense Rules and Judiciary Law § 474-a, there is nothing unlawful about deducting expenses from the net recovery in New York and in other jurisdictions, which have approved, either implicitly or explicitly, attomey-client agreements in which the contingency fee is calculated based upon the gross recovery. See Hibdon v. Sedalia Anesthesia Consultants, Inc., No. 01-CV-213735, 2003 WL 24141306 (Mo. eire Aug. 22,2003) (approving a contingency fee arrangement in a wrongful death case providing for a percentage of the gross recovery plus expenses); Ramirez v. Sturdevant, 26 Cal. Rptr. 2d 554,558 (Ct. App. 1994) ("Although it appears that other attorneys ... routinely calculate a contingency fee after deducting costs form any gross settlement, we cannot say that to do [so] otherwise shocks the conscience."); Cappa v. F & KRock & Sand, inc., 249·Cal. Rptr. 718 (Ct. App. 1988) (implicitly upholding an agreement providing for attorneys' fee based on gross recovery by prioritizing lien

12

Finally, it bears noting that the Court of Appeals rendered its decision in Gair before the

Legislature had enacted laws concerning the appropriate amount of contingency fees and the

calculation thereof. The court rules at issue in Gair were thus necessary to provide guidance in

this legislative vacuum. Since the Gair decision, however, the Legislature has enacted Section

474-a, which outlined a contingency fee schedule as well ~ the method of calculation for such

fees in medical, dental and podiatric malpractice cases. The Legislature also amended Section

488, allowing the advancement and recovery in full of litigation expenses in contingent fee

arrangements where recovery was contingent upon the outcome of the suit. The Expense Rules

governing the calculation of fees in contingency cases, even if they could be construed as

procedural, are inconsistent with these legislative pronoWlcements, and therefore

unconstitutional.

for fees and disbursements); In re Cooper, 344 S.E.2d 27 (N.C. Ct. App. 1986) (holding that contingency fee arrangements in equitable distribution proceedings were not void against public policy, implicitly countenancing the agreement at issue which provided for a percentage fee of the gross recovery plus expenses); Kramer v. Fallert, 628 S.W.2d 671 (Mo. Ct. App. 1981) (awarding contingency fee based on percentage of gross recovery before deducting expenses in a suit for, inter alia, fraudulent misrepresentation and replevin).

13

Memo Exhibit 1

May 2$, 2009

Memoranduin: in Support of Clarifying Amendment to JUdiciary Law §488

TIlls memo provides insight into the recent substantial modifications to subdivision 2 of Judiciary Law §488, I which pennit lawyers to assume the responsibility for the payment of litigation expenses and courtcosts.{"litigation costs~') inc~d in connection with the prosecution 'Ofa client's claim, and the pre-existirig law and rules governing matters litigated on a contingent basis .

. ThiS 'relationship is sigrutlcant because New, York's traditional, posture of imposing limits on , contingent fee' percentages and requiring that the C9ntingent fee be calculated after deducting litigation costs has significantly diff~rent implications Wlder a regimen in which lawyers are specifically pennitted to "own" litigation costs than it did under a regimen in which clients were req~ to remain liable for Ulese costs. '

',TItis memorandwn first expl,ainS the current law and rules governing contingent fees. SeOOnd~ it addresses the niles that prevailed with regard to payment of litigation costs before §488

:was amend~ and third, the changes effected by the 2006 modifications to §488. Finally, the memo aCldresses the inconsistency between the court rul,es governing contingent fe,es and the changes eifeete<:f by the recent modificatio~ to §488 and sets forth the method to resolve the inconsistency to eff~~te the legislature's intent. '

I. .. ' Current Law and Rules

Under §474 cifthe Judiciary Law, lawyers and their clients are free to agree to f~ arr8ngeme~ts, -and these agreements ei~er e?Cpress o~ implied, will goyem the payment of f~, " if not restrained 'by iaw~,,2, In other than'~edical malpractice c8ses, liniitatio~ on contingent fees and

" •• ." I ••

I Effective April i, 2009~ the Rules of Professional C~nduct (the ClRulesp'or "RPCn) replacedtbe New York Code

of Professional. Responsibility (the "Code"). The. Code had been amended by the courtS ,to confonn with the amendments to Judiciary Law §48~ and the RPC mirrors tJte amended l~guageIQfthe:Code: RPC 1.8 ~nt Clients: Speciflc Conflict of Interest Rules' '".',

'(e) While representing a client in'colUlection with contemplated'or pending litigation, ~ lawyer shall not advance .or guarantee financial assistance to 'the client, except that: ' ' , , (I) A lawyer may advanCe ,court costs and expenses oflirigation, the repayment of which may be ,~ntingent on.the outcome oCthe matter; , ,

. (2) A·lawy~r representing an indigent or pro bono client may pay coUrt costs .. and expe:nses 'of litigation on . behalf of a client; and ' , ' . t,' . (3) A lawyer in an:actio~ in which an ~~omey's fee is .payable in 'whQ~ or ~,part as a, pe~ntage o(the

recovery in the action, may-pay on the lawyer's own account court ~sts and expenses of litigation. In, such case~ die' fee paid to the attorney from th~ proceeds of tile action,may iiiciude an amoimt equal to

, such ~~ and, ex~e~es in~ed. . ' ' " ; . ,."., ' lTheapplicable provision of,the Rules, RPC l.S(c), pennits lawyers and,clients to enter into fee agreements includiqg whether litigation costs are to be deducted before or after the contingent fee is calculated "if not prohibited . ,

the requfretrtellt that contingent fees be qalculated after deduction ofli~gati~n costs arefound in the rules of the Appellate Division of the Supreme Court for·the four judiqial departments, riot in statute. The ~aJor C~urt rules governing continge~~ f~es ~e found in' 22 N.Y.C:llR. §603.7(e) (First Department); 22 N. Y.C.R.R. §691.20 (e) (Second Departme~t); 22 N. Y"C.R.R. .§803.13 (b). (Third Department); and 22 N. Y.C.R.R. § 1022.31 (b) (Fourth D~partment). Each sets the same schedules for maximum contingent fees in various types of matters' and each provides that the percentage "shall. be 'compllted on the nei sum recovered after dedu~ting. from ~e amount recovered expenses and disbursements ... " (Emphasis added). '

II. Pre .. §488 Rules Regarding Tteatlnent of Litigation Cos~ ':'"

Until the. recent modifications to §488, the Code and then the RPC;' New York was one of a tiny 'minority of American jurisdictions' that retained the requirement that clients remain liable for litigation expenses.) 'The New York LawYer's Code of Professional :R~sponsibillty pemiitted lawyers to advm,.ce litiga:tion costs but, except where the lawyer represented an.indigent client on a. pro bono basis, reqUired that the client remain l~able for the repayment of those c9sts and expenses, regardless of the outcome of the litigation. Accordingly, under the previous regimen, a lawyer did not, and indeed could not, assume the ownership pf these expenses, which remained the responsibility of the client. Theoretically, 'at least, this regimen assumed that cli'en~ would repay any advances bY'lawyers for'litigation costs.

JUst. ~ New· York did not follow Ute vast majority of jurisdictions that permitted repayment of advances: for· litigation cQsts to be "contingent on the out~QJlle of the m~tter", New 'York's nde:requiring that.litigatio~.costs be deducte~t before ~e contingent fee is calculated does not reflect national practice. .

III . ." i~O~ Mgdificati~ns to ~~dici¥r' Law §488

.. The 2006 modifications to' subdivision 2 of §488 of the Judiciary Law sought to , mod"e~ze the way in which lawyerS may handle the payment of l~~gati~n costs .on behalf of a client. ·This s~tutOry change and the' subsequent change in ~e 'appIicabl~ disciplinary rule mark a signific8;Ilt departure ~om the way in which client expe~es have:histot:i~ly been ip:-eated in ~ew York. Under ~s. new regimen, .lawyer and ~Jient are free to dec~de wh~ will '~C1WIl" these ~xpenses. . Ii '.

. . ~ ... . . . Thes~ modifications reflected .discontent wi~ the negative p'~bH~, policy impl~cations of

. the prevlous' rule. Firs.t, the modificatio~ brought ~e law int~ confprm}D' ~tll: the ~despr~ p~ctice of.~awyers ~ho.resisted ~aking any butproforma efforts:l6 reqo~p Iitigatiop. costs from

by law. or court rule." It goeS on to require a lawyer who has been e~loyed in a contingent fee matter· provides to "promptly" pro~de the' client "with a writing statmg the method by wh~ch the fe~ is lo ~e determined, including the pe~tage or pen:entagcs'tbat shall accrue to the lawyer in the event of settle me tit, trlal.~.r appeal; lif:igation and other eXpenses to be deducted from the recovery; and ·whether such expenses..are to.be· deducted before or, if not . rrohibited by statute or court rule, a.tWr the contingent f~ is calcul~. :. " ".: . .

. . Before §488 was aIIlended, the foUr sta:tes that tetained some version pf the' old nIle we~. New York, Oregon, virgini8..and Washiilgton. 'The Oregon rule makes the client liable only "to the extent of the client's ability to pay." Or.. RPC 1.8 (e) (2004) The W~h~n rule cOntains ,an exception for class actions where repayment "may be contingent on the outcome of the matter." Wask, RPC 1.8 (e)(2) (2003). '.

'.

~ .. : i: -. 2 ':.

. ' .. : ..

a client in an unsucces~ful matter., S.uing one's client to recoup litigatioQ costs places a hiwYer'in an uncomfortable adversarial posture towards a client ·who has already suffered fr9m·.the injury ~derlying the'litigation, and to whom the lawyer rightfully feels a: duty :0 f loyalty . '

• o. • :,..,j, •

Second, if clients were responsible for litigation costs' win or lose, lawyers would be constrained· to incur discovery, investigative and other litigation expens0s, only in the amount. the client can afford, whether or not that amount is' sufficient to effectively prosecute the client's claim. . ". ' . .

.! .. -

Thus, Judiciary'Law §488 pennfts iaWycrs to ~'own" the responsibility for litlgationeosts and shifts the risk to the lawyer and away from the .. client is seen as·a· wa;y'not only to promote the lawyer's duty of loyalty to clients, but as importantly is a way to insure that a lawyer's ability t<? effectively prosecute. a claim on behalf of-a client. . . I': ' :;

Judiciary Law §488 consists of three provisions which perinit a lawyer to:

1. Pay the costs and expenses of litigation when representing an "indigent Qr pro bono client; .

2. . Advance costs. and expenses, the repayment of which may be contingent on the outcome of.the matter; . .. . ..

3 .. Use his ot her own account to pay litigation costs and eX\penses when the!attomey's fee is based: on a percentage of recovery. ',,'

Moreover, the finatsentence of the ~ee new provisions ofsubtlivi,~(;)li-2 provid~~:

"In such case,.,!he fee paid to th~ attorney from the pro~ oc.the action may include an amount equal to such 'costs and expenses' incurred." ',: '

A plaitl ~ing '<?f this final sentence indiqa~es that where a,lawr~r ~d ~lien~ agree that . the lawy~r Will pay li~gatioll: costs ,and there is ~ su<X?CSsful ou~~~ of.~e matter, tl.te lawyer may recover these costs,~ part of the laWyer's' fee. ~ other words,.,the lawyer may obtain as his or her fee the' percentag-e of th~ recovery permitted by the court ruies ot'statute, plus the Iitigati.on costs incurred in obtaiO.ing the· reCovery fQr the ~lient.

.... . .. . . , :- . ~. IV. Clanfying Judiciary Law §488 'to Insure that the Legislative iPurQose of the '2006

'Modifications' Is Not Undennined· " ' '.;r .... ':t

The 2006 modifications to §488, providing that ~'the fee .paid to 'the attorney from, the proceeds of'the action may ·includ~ an amoUnt .equal to the,costs arid;exIlenSes incurred" are inconsistent With·~e ~rt t:Ules reql;liring that litigation. costs be qe,dticted',be(ore,cal~uJating the 'lawyer'S conti,ngentJee:.(~ee atta~hl:nent q, 7, 8, and~; see ~(so,Z2 .. ~.Y~c.~·R.~ ,§·6(}~.J(e) <r~t Department>.; ,22 ~. y.Ci~R. §691.20 (e) (S~nd Dep~~n~); 22 N. Y~·G:R.~. §803~ 13 (b) (Thlrd Dep~ent); an~ ~2 N. y.C.R.R.. § 1 022.31 (b) ~o~ De~~~nt). ,h), the <:~ent of an . inconsiste~ey or co¢1ict betwee~ a statute an<l a court:rUle, i~ is '~l~ '~t:~~ statute: controls. As fonner'Chief Judge' Kaye wrote; "[u]n1ess a statute in some w:ays,col]~venes the $te or·, federal cOnstitution, ·we are obliged to follow it .... and of course"we do. state Courts 'a~ the Dawn

. . . . . .:.' ",: .

• ,'II: ,. 3

of a New Century: Com~on Law Courts Reading Statutes and ConstitutiQTzs, 70 N. Y .. U. L. Rev. 1, 19-20 (1~95).· .' ... ,t. :;': .:,

.. .

I~ is a .Qasic tenet .of ~ve I~w that administrative age~cies'~ 'only ~e rules in · accordarice with authoritY-granted by·the l.egisl8ture, ~d truit the rules·m~feorifonn·to Sfatutor:flaw.

'.'The Cornerstone of adttnnistrative law is derived from the· principld th~~the Legishi~e may declare its win, and after fixing a primary .standard, ·endow adm.inisti-ati~ agencies ·,'iith . the:; . power to fill in the intet~tices in th~ I~gislative· product by prescribi~g ~es:and regul~tions consistent with the enabling· legislation." Ma,tter o/Nicholas v. Kalin, 41"N.Y.2d 2~ 31, 416 .. N.Y.S.2d·S65(1979).· rhe sam~ principles apply 'to the CourtS in. the p~~~ulgation of-their own

· rules.' Gair·v.' Peck, '6 ~~Y~2d:97, 188· N·:Y.S~2d 491(1959), 'remittitUr a$.0; 6 N~Y.2(1'983; :~" . (1959), 191N.Y.S.2d 95,1, cert den and'app dismd, 361 US 374; 80·S·Ct·401~·4 L Ed 2d 380 (1960). ' ., : . ;'t:

The application of this principle to court rules has also been acknowledged in the context of the amendment to New York's Constitution, effective January I, 1978, which specifically

· authorizes the 'Chief Judge to administer ~e court,system and to promulgate rules to .facilitate c9urt·administration. The' amen4ment granted the courts the power to, promulgate rules that are consistent,with statute. Levenson v. Lippman 772 ·N.Y.S.2d 286 (1 st Dept 2004). The amendm.ent does not affect the legislature'S ability to- regulate attorneys' fees and.other matters relating to the judiciaisystem,.and the.co~~ obligation to comply,with(.statutory la~~ ·.Kind/on v. County oj Rel1Sse/aer, 158 App Div 2d"11,8, 558 N.Y.S.2d 286 (3<:lDept .1990) .

. The.,Court of-J\ppeals has explicitly held th.at the at:tthority·tQ regulate pr~tic'e ~d . procedure in the CoUrts. lies. pnncipally with ~e,Legis·lature. Cohri ~/·,Borfchard Afldipiions,. 25 ' N.Y.2d 237, 30lN.Y.S.2d 633(1969).: Parti'cularly relevant to the:que~tion at hand:fis a lower. court decision that declared a court rUle· req\.liring. written retainer'agreem.ents in ~mati"hponial- ' cases· t~' be unconstitutional. The coUrt also held that t4e rule illeg811 y .~ . .j.t~ven~(LJt.diciary , Law §474, which specifiCally rec~izes'implied contracts. Corletill v: .@Iiveri, ·169:,Misc. 2d,I, 641 N. Y.S.2d' 498 (199~). .... . ; '(' :} '.

. .'~: ' :r" '. . Therefore, it is necessary to amend the rules {)f the respective Afmellate DivisiOns or'

claritY llndamend §488. Clearly,.it is undesirable as.a matter of public. policy for the·governing law to be uncertain, 'and notwithstanding the 2006 legislatiye change, la~e~ .have been loath to a~t in a way that is inconsistent with the coUrt lilIes. ". '! . ~~." . '. ' ~ .

.... . 8. . , '. .... To eliminate this: uncertaiitty and· to insure ~t the legisla~e" s p'~se. ~ ~nacting ·the , 2006 modifications to ·,subdivision 2 'of §488 of the' ~~(li~iary Law is: r~~ ~m4Ustraiive . clarification PI: legislative .action is' calied, for. The' key features are"~ f<?UQws,: .' ".J " .

. .

I. .Amend th~.~·;~.~es. of tiie FirSt, Se~o'~d, Tbird~ ~nd Fo~~t~J~~part~e~~ (iee ~2 . . ·N. Y.C~R .. R~ "§603~ 7(e) (First Departmerit); 22:N.y.C.R.R. ~).·.20·(e) (Second

Department); 2'2 N. Y.C.R.~ §'803·.13 (b) (Third Departn\ent);:and 22 N.V.C.R .. R . . : ·§ot022.~1.~).(FQurth Department) see q/so .~bnients..6, 1~B:an:d:9); Qr·~ . .

• .'". • :.o • • • .... .' -• .o. ..~: •• :.:.",; ~ e' •

.. .. 2. AiD~Qtf.Ju'aiciary.laW ·§lt88'pa~graph (2)(d) clarifying,:~Ii~:meth·od·~r;::.· .. : • • eo • '. •• • • ."._ .0 ~.; ' •• s. .'.

cQmputatlO.n~' ' " , '. . w,:' .' ..... ~:' ." .' .. . .." • . :'.f i'~f' ~}:.. .~,

1"', \,.:. Ii

\"

4

PUBLIC COMMENTS TO THE

AMENDED RETAINER RULES(Available at:

http://www.courts.state.ny.us/rules/comments/PDF/received/ContingentFeePC-Received.pdf)

COMMENTS OF THE NEW YORK STATE BAR ASSOCIA nON CO~TTEEONSTANDARDSOFATTORNEYCONDUCT

on PROPOSED AMENDMENT OF THE RULES OF THE APPELLATE DMSION

RELATING TO CONTINGENT FEE COMPUTATION IN PERSONAL INJURY AND WRONGFUL DEATH ACTIONS

In response to the Memorandum of the Unified Court System's Counsel dated March 18,2013, the-Committee on Standards of Attorney Conduct (COSAC) of the New York State Bar Association (NYSBA) hereby presents its comments on the proposal to amend the Appellate Division Rules that require, in a contingency fee case, that the expenses incurred in prosecuting the suit be deducted before calculation of the attorney's percentage recovery rather than after. These comments are those ot COSAC alone. They have not been reviewed or approved by the NYSBA House of Delegates.

COSAC does not take a position on whether the proposed change in the rules should or should not be adopted. COSAC believes that that is a policy choice that would require broader input from within the NYSBA. Our comments here are directed toward the way in which the question is posed. In particular, we believe the question is a straight-up policy choice and not one that has been persuasively shown to be commanded by (1) the 2006 amendment to judiciary Law § 488, (2) the long-standing rule set forth in Judiciary Law § 474, or (3) the statutory promulgation in Judiciary Law § 474-a of a net-calculation rule for certain malpractice actions and not for other contingency-fee actions. We also briefly address certain ethical arguments put forward by the proponents of the change.

Background

The Appellate Divisions each have identical rules setting forth the maximum permissible percentages (absent a court order) for contingency fee agreements in personal injury and wrongful death actions. 22 NYCRR §§ 603.7(e)(3), 691.20(e)(3), 806. 1 3 (c), 1022.31(c). Those rules also require that the percentage be applied to the net recovery, after deduction of the expenses incurred in prosecuting the successful suit. The Court of Appeals has upheld the Appellate Divisions' power to promulgate presumptively maximum contingency fees as a permissible exercise of the courts' inherent power to supervise attorney compensation and prevent excessive fees. Gair v. Peck, 6 N.Y.2d 97 (1959).1 The proposal is to alter these rules so as to leave the current maximum percentages in place but to permit lawyers to provide in their

Among the arguments made by proponents of a rule change is that, "[u]nlike the procedural rule at issue in Gair, the [Appellate Division's net-ca1culation rules] create substantive law by establishing a bright-line rule that any attorney-client agreement under which expenses and disbursements are deducted after computing contingency fees is impermissible .... " Exh. A to March 18, 2013 Request for Comments at II (emphasis in original). In fact, however, the rule at issue in Gair was the First Department's predecessor to the present Appellate Division rules and contained the same net­calculation provision. 6 N.Y.2d at 101 D.·.

retention a~eements with clients that the contingent fee will be calculated on the gross recovery, before paymg the fees and expenses from the client's share of the recovery.

The gross-calculation method that the proponents seek results in a higher attorney's fee than the net-calculation method. To illustrate the operation of the two options, we use a case that has resulted in a judgment of $300,000 and'in which the contingency fee is stated to be one-third, the maximum under the rules for recoveries of that size. Assume that there were expenses of $30,000. The result under the current and proposed rules ~ou1d be:

Current "Net-Calculation Rule" Proposed "Gross-Calculation Rule"

Judgment $300,000 Judgment $300,000

Expenses 30,000 Attorney's fee (1/3) 100,000

Net $270,000 Net $200,000

Attorney's fee (1/3) 90,000 Expenses 30,000

Client share $180,000 Client share $170,000

Arguments Advanced for Cbanging Net-Calculation Rule

N.Y. Judiciary Law § 488. The proponents of the change argue that the change is required by the Legislature's adoption in 2006 of amendments to N.Y. Judiciary Law § 488. Prior to 2006, that law provided that an attorney could not pay litigation expenses on a client's behalf. In Disciplinary Rule 5-103 the courts had allowed lawyers to advance expenses in contingent fee cases as long as the client remained ultimately liable for repayment, regardless of whether the matter was successful or not. 2 In 2006, the Legislature amended Section 488 to pennit lawyers to advance costs and expenses, the repayment of which may be contingent on the outcome of the matter, and in contingency fee cases, to pay fees and expenses for the lawyer's

2 This limitation did not apply if client was indigent and the representation was on a pro bono basis. Specifically, DR 5-1 03 (B) provided:

While representing a client in connection with contemplated or pending litigation, a lawyer shall not advance or guarantee financial assistance to the client, except that:

1. A lawyer may advance or guarantee the expenses of litigation, including court costs, expenses of investigation, expenses of medical examination, and costs of obtaining and presenting evidence, provided the client remains ultimately liable for such expenses.

2. Unless prohibited by law or rule of court, a lawyer representing an indigent client on a pro bono basis may pay court costs and reasonable expenses of litigation on behalf of the client.

-2-

own account, to be repaid out of the recovery. The new exceptions to the prohibition on paying litigation expenses on a client's behalfread as follows:

c. a lawyer advancing court costs and expenses of litigation, the repayment of which may be contingent on the outcome of the matter; or

d. a lawyer, in an action in which an attorney's fee is payable in whole or in part as a percentage of the recovery in the action, payin~ on the lawyer's oWn account court costs and expenses of litigation. In such case, the fee paid to the attorney from the proceeds of the action may include an amount equal to such costs and expenses incurred.3

The proponents of the change argue that the Appellate Division's net-calculation rule is inconsistent with the "plain language" of the last sentence of Section 488(2)(d). We do not agree. The plain language of the last sentence says nothing about whether the contingent fee is calculated on a recovery that is the amount of the judgment or the amount of the judgment less expenses. Rather, the last sentence simply denominates as a ''fee'' any amount of costs and expenses that the lawyer has paid. The rationale for such drafting might have been to reinforce the tax rationale for subsection (d) (that is, that the repayment of costs and expenses is contingent and taxable as income when received) or to ensure that that there was a statutory basis for the total fee, including costs and expenses, exceeding the percentages set forth in the court rules (and identical statutory fee limits on malpractice actions, Judiciary Law § 474-a(3». Simon's, supra,. at 415-16.

If the alternative reading of the last sentence of Section 488(2)( d) advanced by the proponents of the change is accepted, then the change to the Appellate Divisions' net-calculation rules would have to apply as well to the identical net-calculation language in Judiciary Law

3 Section 488(2)( c) and (d) differ slightly: subsection (c) permits a lawyer to "advance" the fees and expenses; subsection (d) pennits a lawyer to "paYD on the lawyer's own account." The difference between "advance" and "paYD on the lawyer's own account" has tax significance: the lawyer paying on his or her own account can deduct the expenses in the year incurred; the lawyer advancing costs and expenses can only deduct them by establishing, at the end of the matter, that the client is excused from repaying the loan. Roy Simon, Simon IS New York Rules of Professional Conduct Annotated 41 5 (2013) ("Simon's"). Supporters of the bill cited this rationale in explaining the provision. Memo from Joseph P. Awad, President, New York State Trial Lawyers Ass'n to the Governor (July 12,2006), reprinted in New York Bill Jacket, 2006 Assembly Bill 11763 (avail. on Westlaw) (the bill "will also have a beneficial effect on the ability of small practitioners to cover the costs of litigation by allowing for the deduction of expenses in the year they are incurred"); Memo from Carol L. Ziegler, Adj. Prof. of Law, Columbia Law School (June 12,2006), reprinted in same (subsection (d) "gives lawyers the flexibility to structure contingent fee agreements that may afford lawyers more favorable tax treatment of those expenses").

-3-

§ 474-a, the statute governing malpractice actions.4 Such an implied repeal is unlikely. The legislative history of the 2006 amendment contains no hint of a legislative intent to repeal any language in Section 474-a and makes no reference to the method of calculating contingency fees. Rather, the justification for the bill was simply to allow lawyers to advance costs to clients without having the client ultimately liable for the costs:

This bill provides the ability to attorneys to advance costs to clients who are not in a financial position to themselves afford some [of] the necessities of litigation. Further, in the same manner as a contingent arrangement, such fees need not be repaid by the client if the matter proves unsuccessful.

New York Assembly Memorandum in Support of Legislation, Bill Number Al 1763A, reprinted in New York Bill Jacket, 2006 Assembly Bill 11763.

We note as well that the change to Section 488 did not work a major change in practice. As the May 25, 2009 Memorandum in Support of Clarifying Amendment to Judiciary Law § 488 (circulated in the Unified Court System's request for comments) notes (p. 2), prior to 2006, lawyers would routinely advance costs and expenses and, if the action was unsuccessful, make no more than "pro forma efforts to recoup litigation costs from a client."s The change to Section 488 formally approved this practice, allowing lawyers forthrightly to set forth in their retainer agreements that they would not seek to recover costs and expenses advanced by the lawyer if there was no recovery by the client There is no reason to think that, in making this relatively minor adjustment, the Legislature intended to overturn the 50-year-old Appellate Division rules on fee calculation, rules that are also incorporated into the similar statutory limits in Section 474-a on contingency fees in malpractice actions.

The textual argument that proponents of changing the rules put forward is logically flawed. The argument starts from the proposition that the last sentence of Section 488(2)( d) envisions that the lawyer may recover the entire amount of the costs and expenses that he or.she has advanced. That is'true. But the argument then posits that if the costs and expenses are deducted from the amount of the judgment before the percentage is applied, the lawyer is in fact paying some portion of the costs and expenses. That assumes, however, that a percentage of the entire judgment (e.g., 113) rightfully belongs to the lawyer. That is the logical fallacy: the argument assumes that the thing to be proved is true in order to prove it. The question to be answered is whether a percentage of the entire judgment is the lawyer's fee. If it is not - and

4

s

Section 474-a(3) requires that the percentages set forth in that section (applicable to malpractice actions) "shall be computed on the net sum recovered after deducting from the amount recovered expenses and disbursements for expert testimony and investigative or other services properly chargeable to the enforcement of the claim or prosecution of the action."

This was also mentioned by supporters of the bill. E.g., Memo of Carol L. Ziegler, supra ("as a practical matter, many lawyers make no or only perfunctory efforts to recoup expenses in most instances where the litigation is unsuccessful',).

under the Appellate Division rules, it is not - then the textual argument advanced by the proponents of the change does not work.

In short, we see nothing in the amendments to Section 488 that requires the Appellate Divisions to rewrite their existing rules on calculation of contingency fees. The rule requiring deduction of expenses prior to application of the permitted percentages is part and parcel of the rule prescribing the percentages. Both components of the rules are a pennissible exercise of the courts' power to regulate attorney compensation. Logically, if the net-calculation is to be changed, the coUrts should consider whether the pennissible percentages are still the correct percentages, because changing the method of calculation will be in effect to raise the pennissible percentages.

N.Y. Judiciary Law § 474. The proponents of the rule change also argue that the net-calculation sentence in the Appellate Divisions' rules is inconsistent with N.Y. Judiciary Law § 474, which provides that ''the compensation of an attorney or counsellor for his services is governed by agreement, express or implied, which is not restrained by law.,,6 This argument depends on the view that Section 488( d) now requires that a lawyer bepennitted to recover a fee that is a percentage of the full judgment, not the judgment less expenses. If that is not so, as we conclude above, then the Appellate Division net-calculation sentence is just part of the courts' regulation of excessive fees, which the proponents concede is permitted.

N.Y. Judiciary Law § 474-a. We also are not persuaded by the proponents' argument that the Appellate Divisions' net-calculation rule is inconsistent with the fact that the Legislature chose to impose such a rule in medical, dental and podiatric malpractice cases and did not extend the limitation to personal injury and wrongful death claims. Judiciary Law §474-a(3). As the Court of Appeals has explained, the limitations in Judiciary Law § 474-a were aimed at reducing the percentage fees available in malpractice actions "as part of a comprehensive State legislative initiative to reduce the spiraling medical malpractice premium rates fueled by enormous plaintiffs' verdicts and the high costs of litigation." Yalango v. Popp, 84 N.Y.2d 601,606 (1994).· Originally enacted in 1976 to reduce the previously permitted 50% contingency fee, the statute was amended in 1985 to "eliminateD the one-third recovery as an option and relegated medical malpractice attorneys to the percentages contained in the fee schedule." Id at 607. The change thus was focused on reducing the percentage of awards that went to fees because of the effect high fees had on medical malpractice insurance premiums. This is a rational response to a perceived evil in a particular industry segment. There is no more basis to conclude from the existence of that statute that all other contingency-fee lawyers are entitled to a gross-ca1culation method than there would be to conclude that all other contingency­fee lawyers should be allowed to charge the original 50% contingency fee.

6 The tenn ''which is not restrained by law" should be ~ in modem English, "that is not restrained by law" - that is, that the statute permits agreements on fees that are not restrained by law. See Gair, 6 N.Y.2d at 106 (so reading the statute).

-5-

Ethieal Points. The proponents also note that the proposed change would be pennissible as an ethical matter.7 It is true that there is no current New York disciplinary rule that requires any particular method of calculating contingency fees. Rule 1.5(a) prohibits lawyers from charging an "excessive" fee. As long as the overall fee is not excessive, the current rules would not be violated by application of the percentage before or after deduction of expenses. At the same time, the Appellate Divisions, in the exercise of their inherent power to supervise the attorneys who appear before them, are free to determine that a particular method of calculation results in an excessive fee within the meaning of the rules promulgated by the Appellate Divisions themselves.

Conelusion

There may be policy reasons to increase compensation for contingency .. fee lawyers who have advanced costs and expenses in the prosecution of successful personal injury and wrongful death cases. We have not analyzed the policy questions. But the question should be addressed as a policy matter rather than on the ground that the change is required to comply with recent legislative action.

May 16,2013

7

/ Joseph E. Neuhaus Chair

Committee on Standards of Attorney Conduct of the New York State Bar Association

The proponents of the change also state that other States do not have New York's net­calculation rule. We have not surveyed other State law to verify the accuracy of this claim.

-6-

ADcontingfeerules - Please register my strong support!!

From: Lenore Kramer <lenore@)cramerdunleavy .com> To: "ADcontingfeerules@nycourts.gov" <ADcontingfeerules@nycourts.gov> Date: 3/20/2013 10:40 AM Subject: Please register my strong support!!

Thank youl

Lenore Kramer, Esq. Past President New York State Trial lawyers Association Women's Bar Association of the State of New York

Kramer & Dunleavy llP 350 Broadway New York, New York 10013 Ik@kramerdunleavy.com

212-226-6662 1-877- WOMANLAW

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ADcontingfeerules - PI Contingency Fees

From: Jason Kaufer <jkaufer@jmkauferlaw.com> To: <ADcontingfeerules@nycourts.gov> -Date: 3/19/2013 7:55 PM Subject: PI Contingency Fees

I support a change of PI contingency fees to being based upon the gross settlement amount as opposed to the net after expenses are deducted. Jason M. Kaufer 923 Saw Mill River Road Suite 146 Ardsley, New York 10502 917-690-9159

ADcontingfeerules - Contingent Fee rule cbange

From: <sweeney lawfirm@optonline.net> To: <ADcontingfeerules@nycourts.gov> Date: 3119/20134:44 PM Subject: Contingent Fee rule change

Dear Mr. McConnell, I fully support this rule change for the reasons expressed in the memo. Terry Sweeney

Law Offices of Terence J. Sweeney, Esq. 44 Fairmount Avenue 225 Broadway Suite 1 Suite 2500 Chatham, New Jersey 07928 N. Y., N.Y. 10007 (973) 665-0400 (212) 727-0721 Facsimile (973) 665-0401 www.TSweeneyLawfirm.com

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ADcontingfeerules - Proposed Rule Change

From: STEPHEN FRANKEL <tortesql@yahoo.com> To: <ADcontingfeerules@nycourts.gov> Date: 3/19/2013 3 :46 PM Subject: Proposed Rule Change'

I am strongly in favor of revising this rule. Change is long overdue.

Sincerely,

Stephen H. Frankel, Esq. Law Office of Stephen H. Frankel 368 Willis Avenue Mineola, New York 11501 T(516)742-0400 F(516)742-0499 Email: tortesql@yahoo.com

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ADcontingfeerules - Comment on proposed rule

From: Joshua Stein <jsteinI202@gmail.com> To: <ADcontingfeerules@nycourts.gov> Date: 3/19/2013 3 :27 PM Subject: Comment on proposed rule

I am in favor of the changing of this rule. As it is it makes the attorney financially responsible for 1/3 of the expenses. I don't believe this to be the intent of the Court when they made the rule. The attorney should be able to front the expenses, but ultimately they should be the client's responsibility as they are in every other facet of the attorney/client relationship. Thank you,

Joshua N. Stein Greenberg & Stein, P.C. 360 Lexington Avenue -Suite 1501 New York, NY 10017

(212)681-2535 (516) 320-8044 - Fax

Page 1 of 1

ADcontingfeerules - Changing the computation of contingent fees

From: Paul Hanly <phanly@hanlyconroy.com> To: II ADcontingfeerules@nycourts.gov" <ADcontingfeerules@nycourts.gov> Date: 3l19/2013 12:57 PM Subject: Changing the computation of contingent fees

Our finn is in favor of the proposed change, which would bring NY in line with most, if not all, other states' rules. It seems quite unfair, and frankly inconsistent with the principle that costs and expenses are the responsibility of the party, not counsel, to have a rule whereby counsel is paying 113 of the client's expenses.

Paul J. Hanly, Jr.

Hanly Conroy Bierstein Sheridan

Fisher & Hayes LLP

112 Madison Avenue

New York, NY 10016-7416

212.784.6400 (Main)

phanly@hanlyconroy .com

www.hanlyconroy.com

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ADcontingfeerules - NY State Courts Requests for Public Comment on Proposed Amendments

From: Mitchell Breit <mbreit@hanlyconroy.com> To: "ADcontingfeerules@nycourts.gov" <ADcontingfeerules@nycourts.gov> Date: 3/19/2013 12:53 PM Subject: NY State Courts Requests for Public Comment on Proposed Amendments

I am in favor of the proposed amendment of Appellate Division Rules relating to contingent fee computation in personal injury and wrongful death actions.

Mitchell M. Breit Hanly Conroy Bierstein Sheridan Fisher & Hayes LLP . 112 Madison Avenue New York, New York 10016-7416 Main (212) 784-6400

Fax (212) 213-5949 mbreit@hanlyconroy.com

Page 1 of 1

ADcontingfeerules - Comments on Rule Cbange

From: Thomas Sheridan <tsheridan@hanlyconroy.com> To: "ADcontingfeerules@nycourts.gov" <ADcontingfeerules@nycourts.gov> Date: 3119/2013 11:42 AM Subject: Comments on Rule Change

I am in favor of the proposed amendment of Appellate Division Rules relating to contingent fee computation in personal injury and wrongful death actions.

Thomas I. Sheridan, III Hanly Conroy Bierstein Sheridan Fisher & Hayes LLP 112 Madion Avaue New Yd.<, NY 10016 (212) 784-6404 (212) 213-5949 (fax) tsheridan@hanlyconroy.com www.hanlyconroy.com

This message contains information from a law firm which may be confidential or privileged. The information is for the use of the entity or individual named above. If you are not the intended recipient, be aware that any disclosure, copying, distribution or use of the contents of this message is prohibited. If you have received this electronic transmission in error please notify us immediately.

HOFSTRA LAW REVIEW

CONFERENCE ON LEGAL ETHICS:“WHAT NEEDS FIXING?”:

CHEATING CLIENTS WITH THE

PERCENTAGE-OF-THE-GROSS

CONTINGENT FEE SCAM(Available at: 30 Hofstra L. Rev. 767)

CONFERENCE ON LEGAL ETHICS: ″WHAT NEEDS FIXING?″:CHEATING

CLIENTS WITH THE PERCENTAGE-OF-THE-GROSS CONTINGENT FEE

SCAM

Spring, 2002

Reporter: 30 Hofstra L. Rev. 767

Length: 5793 words

Author: W. William Hodes*

* President, The William Hodes Professional Corporation; Professor Emeritus of Law, Indiana University; B.A.,

Harvard College (with honors, 1966); J.D., Rutgers Law School (with highest honors, 1969). This Essay is an extension

of remarks I made on the afternoon of September 11, 2001 at the Hofstra University School of Law Symposium

Legal Ethics: What Needs Fixing? That the organizers of the Symposium decided to press ahead, even in the face

of the terrorist attack that took place that morning in nearby Manhattan, is a small tribute - one of thousands we have

seen in the intervening months - to the indomitable American spirit. I would like to thank the staff of the Hofstra

Law Review, and especially Nancy Lucas, for assistance in putting the finishing touches on this Essay.

LexisNexis Summary

… I was pleased and honored to participate in the third of the magnificent series of national legal ethics symposia

hosted every two or three years by the Hofstra University School of Law.…Acting pursuant to a written, and apparently

otherwise valid, contingent fee agreement, the lawyer had awarded himself a one-third contingent fee of $ 20,000

off the top, which still left $ 40,000 for the client. … Suppose that the lawyer had accepted the case with the same

one-third contingent fee agreement, and with the same clear risk of achieving a zero recovery, thus losing the time he

invested. … However, much later - namely, when I was preparing this Essay for oral presentation at the Hofstra

Symposium - I discovered that the old 1908 Canons of Ethics, which had been replaced by the Model Code in 1969,

did have something to say on the subject, but obliquely. … Along the way, I hope to show as well that the practical

(and deleterious) consequences of adopting this method of calculating the fee do not depend upon whether the

lawyer advances the expense money, whether the client pays each expense item as it becomes due, or whether the

service provider is content to extend credit and receive payment for the expense in question at the end of the case. …

Text

[*767]

I. Introduction: A Baseline Example of a Scam in Action

I was pleased and honored to participate in the third of the magnificent series of national legal ethics symposia

hosted every two or three years by the Hofstra University School of Law. The Symposium theme this year posed

the question ″What Needs Fixing?,″ which I understood to have as its ever-so-slightly sardonic subtext, ″What still

needs fixing, even after publication of the Restatement of the Law Governing Lawyers, 1 and even after completion of

1 Restatement (Third) of the Law Governing Lawyers (2000). The final draft of this Restatement was approved by the

members of the American Law Institute (″ALI″) at its May 1998 annual meeting, held in Washington, D.C. That action had been

preceded by some thirteen years of drafting and debate, punctuated by annual votes on a series of tentative drafts. See id. at

xxii. According to ALI practice, the reporters for a Restatement have discretion to make stylistic and technical alterations even

after final approval; in the case of this work, this process lasted another two years. See Stephen Gillers & Roy D. Simon, Regulation

of Lawyers: Statutes and Standards 465 (2001).

the work of the Ethics 2000 Commission?″2 I first became aware that one little piece of the regulation of attorney’s

fees was broken one day in the fall of 1979, [*768] after Civil Procedure class during my first semester as a law

professor at Indiana University. I have been tinkering away ever since, 3 but it still needs fixing.

A first-year student approached me and wanted to know whether she had any recourse in the following situation.

My student’s boyfriend had been involved in a moderately serious automobile accident, and, after a seemingly

interminable delay, had just ″won″4 a jury verdict of $ 60,000.

Acting pursuant to a written, and apparently otherwise valid, contingent fee agreement, 5 the lawyer had awarded

himself a one-third contingent fee of $ 20,000 off the top, which still left $ 40,000 for the client. Unfortunately, it had

been necessary to obtain two expert medical reports and to take several short depositions of lay witnesses, for a

total expenses bill of $ 45,000. This meant that the boyfriend owed the lawyer $ 5000, and the lawyer was demanding

payment! A few more ″wins″ like this, and we are all undone. Except, of course, for the contingent fee lawyers.

[*769] I had never heard of such a calculation method before, and I had practiced law for some nine years before

becoming a law teacher the year before. True, because most of my practice had been in government service and with

a public interest law firm, I had not been personally involved in negotiating or setting attorney fees, but I understood

- and assumed that everyone in the legal profession also understood - that the plaintiff had not ″won″ $ 60,000 at

all. In reality, he had only won $ 15,000, once the legitimate costs of obtaining the gross amount of $ 60,000 were

taken into account.

Of course, even a small win of $ 15,000 is better than losing, and certainly the lawyer would deserve compensation

at the full 33 1/3% contract rate for investing his time and intellectual capital, while risking the full amount of

that investment. 6 Thus, continuing to assume a gross recovery of $ 60,000, but a true win of only $ 15,000, the

expenses of the litigation would still all be paid to the providers, the lawyer would still receive a fee of $ 5000, and

2 See generally Ctr. for Prof’l Responsibility, ABA, Report of the Commission on Evaluation of the Rules of Professional

Conduct (2000). Commonly referred to as the ″Ethics 2000 Commission″ because of its charge to make recommendations respecting

possible amendments to the American Bar Association’s (″ABA″) Model Rules of Professional Conduct by the year 2000, the

Commission had begun its work in 1997.

3 See 1 Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of Lawyering, 8.13, at 8-30 illus. 8-2 (3d ed. 2001). This

illustration, which is loosely based on the same 1979 incident described immediately below in the text, has been included in every

edition of the book, which was first published in 1985.

When the Ethics 2000 Commission began its work of suggesting revisions to the Model Rules of Professional Conduct, see

supra note 2, I became a member of its Advisory Council. In what might be called a ″targeted mailing,″ I wrote to the Commission

proposing an amendment to Rule 1.5, see infra note 5, along the lines suggested in this Essay. Later, in what might be called an

″in-person solicitation,″ I repeated this proposal at a public hearing held by the Commission in New Orleans. The Commission was

unmoved by my advocacy, however.

4 I put the word ″won″ in quotes, because there is more to the story and more to the math (which has been simplified to

protect the squeamish) - which is the whole point of this Essay.

5 Model Rule 1.5(c) reads, in pertinent part, as follows:

A contingent fee agreement shall be in writing and shall state the method by which the fee is to be determined, including the

percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses

to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated.

Model Rules of Prof’l Conduct R. 1.5(c) (2001) [hereinafter Model Rules] (emphasis added).

In 1979, of course, the Model Rules had not yet been promulgated by the ABA, much less adopted by any jurisdiction. The fee

contract in question appeared to be in accord with DR 2-106 of the Model Code of Professional Conduct, however, which was in

force in virtually all jurisdictions in the United States at the time. See Gillers & Simon, supra note 1, at 527. DR 2-106 did not

require that contingent fee agreements be in writing, and did not advert to the matter of expenses of the representation and whether

the calculation should be made on the net or the gross amount recovered. See Model Code of Prof’l Responsibility DR 2-106

(1986) [hereinafter Model Code].

6 Under Model Rule 1.5(a), all fees must be ″reasonable,″ see Model Rules, supra note 5, R. 1.5(a), quite apart from the

specific regulation of contingent fees set forth in Rule 1.5(c), see Model Rules, supra note 5, R. 1.5(c). Most authorities agree

that a fee of one-third, while large, is ordinarily not ″unreasonable″ in the sense of Rule 1.5(a), because it takes into account the

30 Hofstra L. Rev. 767, *769

Page 2 of 11

the client would be left with a net plus of $ 10,000. The difference between taking a fee of $ 5,000 and the $

20,000 fee that the boyfriend’s lawyer actually took, every penny of which came out of the client’s hide, 7 is what I

refer to as the ″percentage-of-the-gross contingent fee scam″ that forms the title of this Essay.

[*770]

II. Calculating the Reasonableness of a Fee for Legal Services - Amount, Methodology, and Rationality

When I first heard of the percentage-of-the-gross contingent fee scam that first semester back in 1979, I was

teaching the course in Professional Responsibility for the first time as well, and my Civil Procedure student may

have been hoping to tap into my budding knowledge in the former field. What we today know as Rule 1.5(a) of the

Model Rules of Professional Conduct (″Model Rules″), which prohibits lawyers from charging ″unreasonable″

fees, 8 contingent or otherwise, was barely getting to the drawing board stage in 1979, but I was well familiar with

the Disciplinary Rules (″DRs″) of the Model Code of Professional Conduct (″Model Code″), which contained a similar

prohibition in less elegant and more circular language. 9 According to DR 2-106(A), a lawyer may not charge or

collect a ″clearly excessive fee,″ 10 a term defined in DR 2-106(B). 11 A fee was said by that paragraph to be ″clearly

excessive″ when, ″after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm

conviction that the fee is in excess of a reasonable fee.″ 12

DR 2-106(B) then provided a long list of factors suggesting how reasonableness might be measured by that

hypothetical ″lawyer of ordinary prudence,″ including factor (B)(8), ″whether the fee is fixed or contingent.″ 13

Unfortunately, no guidance was provided as to whether a contingent fee of a certain size ought generally to be

considered more reasonable or less so than a fixed or hourly fee of the same size. Moreover, neither the DRs nor the

Ethical Considerations (″ECs″) associated with Canon 2 of the Model Code made reference to the method of

calculation, or how expenses should figure into the equation at all. 14

risk that the lawyer - and only the lawyer - bears of losing the professional time and effort he invested. See, e.g., Simler v.

Conner, 282 F.2d 382, 384 n.30, 385 (10th Cir. 1960), rev’d on other grounds, 372 U.S. 221 (1963);Large v. Hayes, 534 So. 2d

1101, 1106 (Ala. 1988) (discussing 50% contingency as reasonable); Spinello v. Spinello, 334 N.Y.S.2d 70, 78 (Sup. Ct. 1972); see

also Lester Brickman, Contingent Fees Without Contingencies: Hamlet Without the Prince of Denmark?, 37 UCLA L. Rev. 29,

30 (1989) (″According to conventional wisdom virtually all contingent fee percentages exceeding fifty percent are illegal and

excessive, but most lower percentages are valid.″). Although the general rule is as just stated, some courts have intervened where a

nominally ″reasonable″ contingency fee rate generated a fee that in hindsight seemed ″unreasonable″ when compared to prevailing

hourly fee rates. See 1 Hazard & Hodes, supra note 3, 8.6, at 8-15.

7 Looking at the two methods of calculation from the client’s point of view, the difference is the same $ 15,000: the client

″receives″ either $ 10,000 or a negative $ 5000. As will be seen below, see infra note 32 and accompanying text, the difference

is always the amount of the expenses multiplied by the contingent fee percentage. In other words, a lawyer employing the gross

recovery calculation is effectively charging a ″markup″ on the expenses equal to the contingent fee percentage.

8 See Model Rules, supra note 5, R. 1.5(a).

9 See Model Code, supra note 5, DR 2-106.

10 Id. DR 2-106(A).

11 See id. DR 2-106(B).

12 Id.

13 Id. DR 2-106(B)(8).

14 See id. Canon 2. As is well known, the Model Code had a tripartite structure: broad general ″axiomatic″ principles (″Canons″),

aspirational and explanatory provisions (″Ethical Considerations″ (″ECs″)), and black letter rules (″Disciplinary Rules″ (″DRs″)).

See Geoffrey C. Hazard, Jr., Legal Ethics: Legal Rules and Professional Aspirations, 30 Clev. St. L. Rev. 571, 572 (1981). In

theory, the DRs alone were legally binding minimum standards of conduct, enforceable in disciplinary proceedings, while the Canons

and ECs served as organizing principles and interpretive guidelines, respectively. See id. In practice, however, it proved virtually

impossible to maintain this separation. See id. at 572-73. For a critique of this structure by the chief draftsman of the Model

Rules, which replaced the Model Code, see id. at 574, which argues that, while aspirational standards are desirable, they cannot

coexist with binding legal rules in the same document.

30 Hofstra L. Rev. 767, *769

Page 3 of 11

[*771] In any event, while there has been considerable controversy over the charging of contingent fees in

situations presenting little risk of nonrecovery, 15 and while courts have often capped the permissible percentage

figure that may be used (usually by rule of court), 16 and sometimes have looked askance at the sheer size of the resulting

fee, 17 there was little to suggest that the one-third contingent fee charged to my student’s boyfriend was excessive

or unreasonable in and of itself.

But the method of calculation - using the gross recovery rather than the net recovery as a base - was another matter.

From the moment I heard my student’s sad tale, it occurred to me that the concept of ″reasonableness″ of a fee

must include an element of rationality or appropriateness, even if the total amount is not unreasonably high by

conventional measures. What was shocking about the fee in question, in short, was not that $ 20,000 was per se too

high.

That proposition can be demonstrated by varying the facts only slightly. Suppose that the lawyer had accepted the

case with the same one-third contingent fee agreement, and with the same clear risk of achieving a zero recovery, thus

losing the time he invested. But suppose that, instead of litigating the case and incurring significant expenses, the

lawyer was able to convince the defendant to settle for the same $ 60,000 in a matter of a few weeks. Under those

circumstances, the lawyer would indeed be entitled to his full $ 20,000 fee, despite the possible objection that he had

actually performed less work to obtain it.

That objection would carry no weight with me, with most courts, or even most academic critics because a genuine

contingency existed, the [*772] percentage figure of one-third is commonly used and within court-imposed guidelines

in virtually all states, and the client had control over the decision whether to accept the proffered settlement or to

push on to trial in the hope of obtaining more. 18

In the actual case, the lawyer received the same $ 20,000 for doing more work, but in my view his fee was

unreasonable nonetheless. This follows because the result he achieved was significantly worse, and in contingent fee

arrangements - unlike hourly fee arrangements - lawyers are rewarded for results, not effort. 19 The result achieved

in the actual case was not ″worse″ as an abstract proposition, of course, because the defendant would write the same

$ 60,000 check in either instance. But looked at in the real world and from the client’s point of view, the result

was worse precisely because the lawyer obtained the same dollar figure while spending more of the client’s resources

during the representation. In other words, to return to basic terminology, the lawyer obtained the same gross

recovery, but a lower net recovery.

To allow the lawyer to receive the same fee as if he had achieved the same result without the expenditure of client

resources is to reward inefficiency and to break apart the community of interests that the contingent fee is supposed to

15 See Brickman, supra note 6, at 30-32, 84. In 1994, several academics, judges and public officials, arrayed across a broad

political spectrum, invited the ABA Standing Committee on Ethics and Professional Responsibility to issue an opinion on the

reasonableness of contingent fees in situations involving little risk of nonrecovery, including situations in which an opposing party

had quickly offered a substantial settlement, so that there was no risk of nonrecovery at least as to that amount. See ABA

Comm. on Ethics and Prof’l Responsibility, Formal Op. 94-389 (1994), reprinted in ABA Comm. on Ethics and Prof’l Responsibility,

Formal and Informal Ethics Opinions 1983-1998, at 272, 273 (2000) [hereinafter ABA Ethics Opinions]. The Committee’s

response was severely criticized in Lester Brickman, ABA Regulation of Contingency Fees: Money Talks, Ethics Walks, 65 Fordham

L. Rev. 247, 247-49 (1996), and Michael Horowitz, Making Ethics Real, Making Ethics Work: A Proposal for Contingency Fee

Reform, 44 Emory L.J. 173, 175 n.4 (1995).

16 See Brickman, supra note 6, at 113. For an excellent discussion of this development, see Richard M. Birnholz, Comment,

The Validity and Propriety of Contingent Fee Controls, 37 UCLA L. Rev. 949, 958, 962, 973 (1990) (discussing issues such as

interference with right to contract and access to the courts as implications of both the First Amendment and the Due Process Clause).

17 See 1 Hazard & Hodes, supra note 3, 8.6, at 8-15.

18 Although the resulting hourly rate would be high, it would not be so high as to cause many courts to second-guess reasonableness

after the fact. See supra note 6 and accompanying text. Moreover, given that there was genuine risk, and given that the total

recovery and the resulting fee were all well within the range contemplated at the outset, probably even Professor Brickman and

the other academic critics of contingent fees would not object either. See supra note 15 and accompanying text.

19 See, e.g., Model Rules, supra note 5, R. 1.5(a)(4).

30 Hofstra L. Rev. 767, *771

Page 4 of 11

promote. Thus, percentage-of-the-gross contingent fees are unreasonable because they are irrational and because

they promote bad policy, not because they are necessarily too large. Just as the law protects clients - somewhat

paternalistically, it must be said 20 - against fees that are excessively large, it should flatly prohibit the kind of

mathematical scam that was played out against my student’s boyfriend, and thousands of clients after him. 21

[*773]

III. Measuring Results by the Lawyer’s ″Value Added″

The above discussion - to say nothing of my whole argument - brings into focus the fact that, from the client’s

point of view, there is no clear divide between ″fees″ that will go into the lawyer’s bank account and ″expenses″

that go into the bank accounts of various third parties, such as court reporters, expert witnesses, or copy services such

as Kinko’s. 22 Instead, in the real world inhabited by real clients, what matters is how much the intervention or

participation of the lawyer has improved the lot of the client at the end of the day. In short, leaving aside emotional

wear and tear and other noneconomic risks and rewards of litigation, clients sensibly care only about the net

results obtained by their lawyers, and consequently measure their satisfaction with the lawyers’ performance on that

scale.

As indicated earlier, when I was asked in 1979 to assess the situation of a client subjected to a percentage-of-the-gross

contingent fee, immediately available materials had little to say on the subject. 23 The Model Code, which was in

force essentially everywhere at that time, did not discuss or distinguish between fees and costs. 24 There did not appear

to be much case law either, perhaps because, by the late-1970s, not enough lawyers had yet had the brass to cheat

their clients in this fashion. And the Model Rules, which would explicitly approve percentage-of-the-gross contingent

fees, 25 were several years away from final approval by the ABA House of Delegates, let alone the Indiana

Supreme Court.

However, much later - namely, when I was preparing this Essay for oral presentation at the Hofstra Symposium - I

discovered that the old 1908 Canons of Ethics, 26 which had been replaced by the Model Code in 1969, did have

something to say on the subject, but obliquely. Canon 12 listed some of the factors that ought to be considered in

setting any fee - a list quite similar to the list now appearing in Model Rule 1.5. 27 Item 4 on the old list was ″the amount

involved in the controversy and the [*774] benefits resulting to the client from the services.″ 28 For the reasons

given earlier, this can only refer to the net benefits the lawyer’s services have brought to the client.

20 See Roy Ryden Anderson & Walter W. Steele, Jr., Ethics and the Law of Contract Juxtaposed: A Jaundiced View of

Professional Responsibility Considerations in the Attorney-Client Relationship, 4 Geo. J. Legal Ethics 791, 814-15 (1991) (rejecting

the whole concept of unreasonable fees as a sanctimonious and unexplained exception to the normal discipline of the market).

21 In 1987, a commission of the ABA, chaired by the late Robert McKay, proposed exactly that to the House of Delegates. See

Report of the Action Commission to Improve the Tort Liability System, 112 A.B.A. Ann. Rep. 190, 191-92 (1987). The proposal

was voted down after unusually self-serving and disingenuous attacks on it were made on the floor of the House. See Proceedings

of the 1987 Midyear Meeting of the House of Delegates, 112 A.B.A. Ann. Rep. 34, 39-40 (1987).

22 See Lawyers Who Advertise Contingent Fees Must Explain Who is Responsible for Costs, 17 Laws. Man. on Prof. Conduct

(ABA/BNA) 484, 484-85 (2001) (citing Ohio State Bar Ass’n Legal Ethics and Prof’l Conduct Comm., Informal Op. 01-03

(2001), which held that a legal advertisement stating ″no attorney’s fee in personal injury cases unless we get money for you″ is

misleading because most nonlawyers are not aware of the distinction between fees and costs).

23 See supra note 5 and accompanying text.

24 See supra note 14 and accompanying text.

25 See supra notes 5-6 and accompanying text.

26 See Canons of Prof’l Ethics (rev. ed. 1949) (1908) [hereinafter Canons].

27 Compare id. Canon 12, with Model Rules, supra note 5, R. 1.5(a).

28 Canons, supra note 26, Canon 12 (emphasis added).

30 Hofstra L. Rev. 767, *772

Page 5 of 11

In calculating the net value that the lawyer’s labors bring to the client, it is helpful to imagine that a contingent fee

lawyer is keeping a ledger sheet for each client in each case. 29 During the course of the litigation, contingent fee lawyers

appropriately authorize or incur debits on the client’s ledger for necessary and reasonable costs and expenses. The

cost of these expense items may be carried on the books of the provider, paid by the client, or advanced by the lawyer

on the client’s behalf, which is the same as a loan to the client. 30

By the time the case is concluded, the lawyer hopes to have created a much larger credit, in the form of a judgment

or settlement, which will extinguish the debits and leave the client with a net positive result. When the smoke

clears, the client can enjoy only this net positive sum, and that sum is the proper measure of the value of the lawyer’s

service to the client. This is what the 1908 Canons presumably meant by ″benefits resulting to the client from the

services,″ 31 which today we commonly [*775] refer to as the ″value added″ by the lawyer. In my original example

of the law student and her boyfriend, it would again be $ 15,000, not $ 60,000. 32

In any event, assuming I am right that lawyers of my generation and earlier - those who graduated from law school

during and after the mid-1960s, when there was a huge upsurge in the law school population - universally charged

29 In fact, most lawyers (or their bookkeepers) do keep ledger sheets of this kind, either in traditional ledger books or on one

of the several software programs that have been developed especially for this purpose.

30 At common law, laws against ″maintenance″ prohibited either a lawyer or a third party from advancing living or other

expenses to a litigant to enable continuation of the case. See, e.g., 2 Hazard & Hodes, supra note 3, 54.4, at 54-6. In addition to

traditional worries about ″stirring up litigation″ that would not otherwise be undertaken, a lawyer making this kind of loan to her own

client in the very litigation that the lawyer is handling creates conflicts of interest that are causes for additional concern. See id.

Specific regulation of this form of conflict of interest has followed an uneven path of partial and shifting compromises, however.

DR 5-103(B) of the Model Code continued the ban on advancement of living expenses, but permitted lawyers to advance

out-of-pocket expenses of the litigation, ″provided the client remains ultimately liable for such expenses.″ Model Code, supra

note 5, DR 5-103(B) (emphasis added). If no such advances were permitted, it was feared that impecunious plaintiffs would not

be able to withstand the financial pressures of even the most ordinary delay, thus giving defendants too much leverage in settlement

negotiations. See Robert H. Aronson & Donald T. Weckstein, Professional Responsibility in a Nutshell 276-77 (2d ed. 1991).

On the other hand, if lawyers could advance litigation costs without limit, and without the client having to bear the downside risk,

the traditional ills of maintenance might reappear. In practice, however, contingent fee lawyers who actually lost rarely insisted

upon being repaid their investment: Although the client must remain ″ultimately liable,″ that did not mean that the lawyer was

required to enforce that liability. See id. at 277.

Model Rule 1.8(e) is more liberal still. While advancement of living expenses during litigation is still prohibited, expenses of

litigation may be advanced even if repayment is explicitly stated to be contingent on the outcome of the matter. See Model Rules,

supra note 5, R. 1.8(e)(1). Moreover, in the case of an indigent client, the lawyer may make an outright gift of court costs and

expenses. See id. R. 1.8(e)(2).

31 Canons, supra note 26, Canon 12.

32 It is important to remember, however, that in calculating the net benefit to the client or the ″value added″ by the lawyer, the

client is entitled to a credit against the gross recovery only for costs and expenses that were themselves made necessary by the

intervention of the lawyer. Most particularly, if the client had preexisting expenses (such as unpaid medical bills) before the lawyer

came on the scene, those would not be deducted before calculating the lawyer’s contingent fee, even in the percentage-of-the-net

scheme that I advocate.

In the example of the boyfriend’s automobile accident, assume that, instead of $ 45,000 in litigation costs, there were no such

costs but rather $ 45,000 of uninsured medical bills. In that situation, when the lawyer secured a $ 60,000 settlement or judgment

for the client, the client would indeed suddenly be ″better off″ by the full $ 60,000, and the lawyer would be entitled to his full

fee of $ 20,000. The client would have gained $ 40,000 from the case that the lawyer handled, although all of it and more will no

doubt eventually wind up in the hands of the medical providers. But that is not the lawyer’s ″fault″; rather, the lawyer’s efforts

produced the money that the client was able to use to eliminate most of his existing debt - an obvious gain to the client.

Compare, however, Levine v. Bayne, Snell & Krause, Ltd., 40 S.W.3d 92 (Tex. 2001), in which a law firm was permitted to

calculate its contingent fee only on the net ″amount received″ in a litigated matter after deducting a setoff of a preexisting debt.

See id. at 94-95. This is a highly dubious result, as the dissenting justices pointed out, because not only was the client’s preexisting

debt eliminated, but so also was a mortgage securing that debt. See id. at 102 (Hecht & Abbott, JJ., dissenting). Thus, in

exchange for paying the debt, the client received the subject property free of the mortgage. See id. at 103 (Hecht & Abbott, JJ.,

dissenting). This effectively meant that the ″value added″ by the law firm was the entire original amount, because the set off amount

was in turn off set by the value of the extinguished mortgage. See id. at 102 (Hecht & Abbott, JJ., dissenting).

30 Hofstra L. Rev. 767, *774

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only on this basis, and thus calculated contingent fees only on the net amount recovered, it must have been during

the late-1970s that contingent fee lawyers decided to give themselves a raise without telling anybody. Moreover, they

must have had a good lobby, too. The Discussion Draft of the Model Rules, published in January 1980 (a full

three years before final promulgation of the Model Rules) already included the version of Rule 1.5(c) that is in

force in most jurisdictions today, 33 endorsing percentage-of-the-gross fees and requiring only that the scam be

announced in the fee agreement, not that clients be given a choice in the matter, or even that they be told why they

should care. 34

[*776]

IV. The Practical Effect of Percentage-of-the-Gross Contingent Fees - Illicit Markup or Usurious Loan?

In the mathematically sanitized real-life example described at the outset of this Essay that first alerted me to the

percentage-of-the-gross contingent fee problem, the difference between the gross and the net methods of calculation

of the fee came to $ 15,000. The lawyer’s fee was either $ 20,000 or $ 5000, and the client either gained $

10,000 or owed $ 5000.

In this section, I pose and examine three linked sets of hypothetical (and distinctly contrived) figures, with an eye to

demonstrating the direct mathematical relationship between the expenses incurred and the extra fee that the lawyer

will earn using the gross recovery calculation (as opposed to the net recovery calculation). Along the way, I hope to

show as well that the practical (and deleterious) consequences of adopting this method of calculating the fee do

not depend upon whether the lawyer advances the expense money, whether the client pays each expense item as it

becomes due, or whether the service provider is content to extend credit and receive payment for the expense in question

at the end of the case.

Let us continue to assume a genuinely contested and therefore inevitably risky case - but one that is not even close

to being frivolous. The contingent fee contract again calls for one-third of the recovery to be paid to the lawyer. In each

example there is only a single expense item, each a legitimate expenditure that a competent lawyer might reasonably

choose to incur or not to incur to advance the case, and each is exactly $ 3000. In the three hypotheticals, only

the expense item and the manner of its payment differ, as described below. Finally, a settlement is ultimately agreed

to in each case, calling for the plaintiff to receive the gross sum of $ 30,000. 35

In the first example, the plaintiff’s lawyer decides to send each of a long series of negotiation proposals by Federal

Express, in order to impress the other side with her seriousness of purpose. The lawyer has [*777] no interest in Federal

Express, secret or otherwise, the company charges its normal rates, and the lawyer pays the $ 3000 in charges as

they are billed. This is a most common method of handling ongoing expenses, and it is understood that the client is

ultimately responsible for these charges that have been incurred on his behalf and will reimburse the lawyer for

them. 36

33 Compare Model Rules of Prof’l Conduct R. 1.6(d) (Discussion Draft 1980), with Model Rules, supra note 5, R. 1.5(c). For

a discussion of selected state variations of Rule 1.5, see Gillers & Simon, supra note 1, at 49-57.

34 See Model Rules, supra note 5, R. 1.5(c).

35 It is certainly a contrivance to assume that there will always be a recovery, let alone that the recovery will always be

exactly $ 30,000. Accordingly, I pose three parallel hypotheticals in which the expenses are as stated in the main hypotheticals,

but there is no settlement, no recovery at trial, and also - to keep the math simple and uniform - no additional expense. In all of these

cases, the expense bill will have to be paid or carried by someone, and the question will be whether the lawyer or the client

will bear the dead loss of $ 3000. This feature of real-life litigation is of great practical concern, but because the lawyer can either

choose to accept this risk of loss or insist at the outset that only the client bear this risk, it should not affect analysis of the

legitimacy of charging extra on account of costs.

36 It should be remembered, however, that, under Model Rule 1.8(e), the client may not actually have to repay these costs, if

there is no recovery. See Model Rules, supra note 5, R. 1.8(e); see also supra note 30 and accompanying text. Indeed, even under

the provisions of the Model Code, although the client had to remain ″ultimately liable″ for expenses advanced by the lawyer, in

practice many lawyers would not insist upon enforcing that liability. See Model Code, supra note 5, DR 5-103(B); see also supra

note 30 and accompanying text. Accordingly, lawyers advancing costs are often putting those costs at risk, in addition to

risking the cost of their intellectual capital, which is always a factor where the contingency is a genuine one, as assumed in all

30 Hofstra L. Rev. 767, *775

Page 7 of 11

Second, the lawyer recommends hiring an expert in the field to evaluate the case, for which the expert charges a

flat fee of $ 3000. The plaintiff client, who is meticulous in keeping track of expenses in all of his business and other

affairs, pays this sum by personal check the day [*778] after the expert issues her report. 37 Third, the lawyer

arranges for a series of long negotiation sessions to be held in her office to try to hammer out a deal; a local luncheonette

sends in tuna fish sandwiches 38 costing a total of $ 3000. The lawyer has no interest, hidden or otherwise, in the

luncheonette, and the total sandwich bill is a reasonable one. In this third example, the third-party provider simply adds

the total to the law firm’s running account instead of receiving payment for each order. When the case is finally

settled, the $ 3000 bill is still outstanding, but it is paid shortly thereafter.

In all three of these variations, no matter who actually pays the $ 3000 expense bill, and on what schedule, the

service provider is always satisfied out of the proceeds of the settlement, leaving $ 27,000 out of the $ 30,000 gross

of the hypotheticals under discussion. This additional risk factor is sometimes advanced as a justification for charging

percentage-of-the-gross contingent fees, but it will not bear the weight.

First, the contingency factor has already been built into the fee aspects of the arrangement so that the typical contingent-fee

lawyer will earn enough in successful cases to balance out losses of both time and un-recouped expenses in losing causes. Certainly,

the extra risk is insufficient to justify marking up the expenses in successful cases a full 33% or more, which is the effect of

percentage-of-the-gross contingent fees, as demonstrated below in the text. Second, although the contingency factor is a legitimate

one, its significance is often overplayed, even with respect to fees. Lawyers are not in the habit of accepting marginal cases,

even where advances for costs will be small, because the risk of losing the time invested, which is always present, already serves

as a strong negative check. Third, and perhaps most important, there are alternative ways for lawyers to shift the risk of loss of

cost outlays back to the client, which is where it ultimately ought to reside in any event, as previously noted. A lawyer already wary

of accepting a particular contingent fee case may, for example, be persuaded that the extra risk of losing out-of-pocket costs is

enough to tip the balance toward simply declining the case. (The client may then be able to find another lawyer, who has more faith

in the merits of the case, or enough ready cash to be able to risk losing some of it in exchange for the chance at a fee.) Or a

lawyer may accept the case on the stated condition that she will not agree to advance the costs of the case; in that event, the client

might be able to borrow the money from friends or family, possibly without interest, or the lawyer might help the client obtain

a loan from a financial institution at market or premium rates - in which case the interest charged to the client will still be far less

than 33.33%! Still another possibility is that the lawyer will agree to advance costs on the client’s account, but insist - and so

state in advance - upon recouping them whether or not there is a recovery.

It is true that, even after these alternative sources of funding the costs of litigation are exhausted, some clients still will not be

able to afford to risk failure to recover even enough to recoup those costs. The hard reality in such cases is that the client, who has

already been offered an advance of legal services at no risk, will simply not be able to bring the claim. But if the claim, even

though not frivolous, is sufficiently dicey not to be able to attract any funding on any of the above bases, it is probably a good

thing overall that it languish on the vine.

37 As described below in the text, in the net recovery method of calculation that I advocate, the client must be reimbursed out

of the settlement proceeds before the lawyer’s one-third share is levied. Some have objected that this means that the lawyer is

″paying″ one-third of the client’s expenses, or that the lawyer is ″sharing″ in them to the extent of one-third. This is mathematically

accurate, but only in comparison to what the lawyer would earn if one-third of the gross were the assumed baseline, and the

lawyer was suffering a ″reduction″ in compensation.

That is the wrong baseline to use, however, as I have argued throughout this Essay. Moreover, the instant example is the best

one to demonstrate the fallacy of the suggested line of argument because it shows that the lawyer is proposing to take an unjustified

additional fee in the amount of one-third of the expenses, not a reduction. To see why this is so, consider that if the client is

not given credit for the $ 3000 paid out of his own pocket, the lawyer will receive a full third of the gross settlement of $ 30,000,

which is the same sum the lawyer would receive if there were no expenses at all! Thus, the lawyer would receive an enhanced

fee in exchange for no extra risk of loss of the expense money, and merely for the privilege of watching while the client spent money

that the lawyer urged him to spend. Meanwhile, the client, who properly pays the $ 3000 in expenses in all variations, pays the

lawyer an additional $ 1000 for no apparent reason.

38 See ABA Comm. on Ethics and Prof’l Responsibility, Formal Op. 93-379 (1993) [hereinafter Formal Op. 93-379] (finding it

unethical for lawyers to create extra ″profit centers″ by passing on to clients more than the dollar-for-dollar cost of disbursements

related to the representation), reprinted in ABA Ethics Opinions, supra note 15, at 216, 223. ″The lawyer’s stock in trade is the sale

of legal services, not photocopy paper, tuna fish sandwiches, computer time or messenger services.″ Id. at 224. See also Lawrence

J. Fox, Just Deserts, in Legal Tender: A Lawyer’s Guide to Handling Professional Dilemmas 227 (1995), for a short story

written by a member of the Committee when Formal Opinion 93-379 was issued. In this story, a newly hired lawyer in a law

firm that is evidently the real Hell is shown a series of lawyers doomed to suffer punishments fitting the ″crimes″ of their earlier

billing practices, each of which had been condemned in the opinion. See id. at 230-36. One of the unfortunates is observed

complaining loudly in the cafeteria that he was being charged extra for his silverware and a straw. See id. at 233.

30 Hofstra L. Rev. 767, *777

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settlement for the lawyer and the client. The lawyer will earn a fee of either $ 10,000 or $ 9000, depending on

which method of calculation is used, and the client will then walk away with $ 17,000 or $ 18,000, as the case may

be. In each of these hypotheticals, therefore, just as in the real-life original example, the difference (here $ 1000)

is precisely one-third of the expense bill (here $ 3000).

[*779] If one compares these three situations with a fourth, in which there are no expenses, it is apparent that

using the gross recovery calculation is exactly the same as if the lawyer had charged a markup on the expenses bill

of exactly 33 1/3%, which is the contingent fee percentage. 39 Furthermore, the client who receives a disbursement

check of $ 17,000 will not have a clue that, but for this markup, the check would have been larger by $ 1000. Clients

who do not know they have paid $ 1000 extra to the lawyer merely because the lawyer thought it wise to spend $

3000 of the client’s money 40 will, of course, never complain - which is exactly the way the lawyers like it, and why

they never explain the significance of the calculation method, or even that there is more than one way of doing the

calculation. 41

V. Tinker, Tailor, Lawyer, Cheat: Cost-Plus Billing and the Fiduciary Relationship

In many service industries, a standard method of charging fees is cost-plus billing. 42 The professional providing

services to the customer or client purchases the necessary materials (sometimes including the labor of subcontractors),

and then adds a fixed percentage markup to cover overhead, administration, and profit. 43 Tinkers and tailors may

use this billing method, and when a waiter serves a large party in a grand restaurant, the gratuity is often calculated

in advance based on a set percentage. 44

The same principle is at work in all commission sales transactions, although we do not normally think of the

transaction as involving a series of component parts, each one separately priced and marked up. 45 [*780] Thus, if

you buy twice as much stock, the cost of the broker’s service doubles (leaving aside quantity discounts), and the same

is true of automobile and real estate sales. But perhaps the most telling example, where there is both a final

product and a series of interim cost-plus transactions, is that of a contract for building a home. 46

Suppose that my contractor is putting the finishing touches on my new home, working on a 10% cost-plus markup.

At the last minute, just as the plumbing fixtures are about to go in, my contractor calls and recommends that I switch

from brass faucets to solid gold, but only in the master bathroom. The additional cost of the faucets is $ 1000,

which means that I will pay $ 1100 extra for going in style. Already worried about overspending my intended budget,

I argue that, although the gold faucets are indeed impressive and worth every extra penny, it is unreasonable for

39 A markup on expenses was one of several billing practices found to be unethical in Formal Opinion 93-379. See Formal

Op. 93-379, supra note 38, at 216-17, 223. Moreover, in the examples considered in the opinion, the markups did not even approach

the typical contingent fee rates of 25%, 33%, or even higher. See id. at 218.

40 It is important to recall that, in all of the examples given in this Essay, I am assuming that the lawyer’s judgment was

sound and was not infected by self-interest. The problem is not that the lawyer spent the client’s money or advanced money that

the client would later repay; it is that the lawyer charged an exorbitant ″service fee″ of one-third for doing so.

41 See Formal Op. 93-379, supra note 38, at 217 (noting that ″the bases on which … charges are to be assessed often are not

disclosed in advance or are disguised in cryptic invoices so that the client does not fully understand exactly what costs are being

charged to him″).

42 See Kohler’s Dictionary for Accountants 138 (W.W. Cooper ed., 6th ed. 1983).

43 See id.

44 See id. Accordingly, if you order wine that is twice as expensive, that portion of the service fee will double, even though

the pouring motion is the same and the cork is just as easy to extract.

45 See id.

46 See 2 Accountants’ Handbook 24.6, at 35 (D.R. Carmichael et al. eds., 8th ed. 1996).

30 Hofstra L. Rev. 767, *778

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me to pay an extra $ 100 for the installation. After all, the contractor can pick them up from the same supplier, and

it will take not even a minute more of her time to install them. 47

The contractor, however, is unlikely to be moved by this line of reasoning. She will point out that our deal was

cost-plus, and that I had the choice of whether or not to purchase a pricier set of faucets at the last minute. I will

derive more pleasure from the more expensive end product, it is true, but only I can decide whether the additional

enjoyment is worth every dollar of the extra cost, and the extra cost is $ 1100, not $ 1000. She will also say that the

end result of her labors - with the gold faucets included - is going to be a slightly more valuable home that will

have a slightly higher resale value. She is thus guaranteeing me a superior result and demands payment according to

our agreement.

There are several reasons, it should be obvious, why a lawyer cannot be permitted to use the same argument to

justify cost-plus pricing with respect to specific cost items, even if they will probably contribute to a superior final

result. First, perhaps, is the very word ″probably″ in the preceding sentence. Although all of the lawyer examples

considered so far have assumed that the lawyer recommended the expenditures in question in good faith, meaning

that the client can properly be debited for those amounts, there is no one-to-one relationship, or even a direct [*781]

causal relationship, between the expenditure and a superior result. In other words, if a home owner purchases gold

faucets, the ″net″ result will be a more elegant home, whereas if a litigant purchases mediation services or tuna fish

sandwiches necessary to sustain a day-long negotiation, there is no guarantee that these will not be dead losses.

Second, and more important, is simply the point made in ABA Formal Opinion 93-379: Lawyers are not in the business

of selling anything other than legal services, especially on a commission basis. 48 Indeed, if they do provide these

″extras,″ they are ethically required to provide them at cost, not cost-plus. 49 By contrast, customers of homebuilders

are perfectly aware that the builder is not only selling the service of assembling a home from all of the component

parts, but is also in the business of selling each component part on commission. The third difference, which follows from

the second, is that, because of these different expectations, consumers of a builder’s services (but not a lawyer’s)

can protect themselves against overselling. In other words, the homeowner can judge the builder’s recommendations

with the appropriate level of skepticism; conversely, the client will not even be aware of the lawyer’s self-interest

under the percentage-of-the-gross calculation method.

It is no doubt true that most contractors have a genuine pride in craftsmanship and will usually recommend more

expensive items in good faith because they will be beneficial to the consumer, just as I have assumed throughout this

Essay that the lawyers in the examples have recommended only cost items that they believe in good faith will

advance the client’s cause. The fact remains, however, that contractors have a direct financial stake in including

more, rather than less, expensive items in each room in the house, and the owner will be well advised to keep that

fact in mind when approving change orders. Under the gross-amount calculation method, lawyers also have a direct

financial stake in spending more, rather than less, on a client’s matter, but clients who are unaware of this fact are

correspondingly disabled from taking it into account.

Finally, the most important and the simplest difference between homebuilders and lawyers is that the latter, almost

uniquely among service providers, are fiduciary agents of their clients at the same time. 50 Thus, if a contractor sells

an extra gold faucet or two to a vainglorious [*782] homeowner, or if an automobile salesman sweet-talks a

shortsighted customer into purchasing more car than the budget will realistically allow, there is social harm, to be

sure, but there is no disloyalty or betrayal, because these service providers deal at arm’s length with everyone and do

not (seriously) profess otherwise. But if a lawyer acts against the interests of a client, especially without disclosing

a conflict of interest, that is a betrayal of the defining element of the entire client-lawyer relationship, which is supposed

47 This is a real story, just like the story about contingent fees set out at the beginning of this Essay. But, again, the facts and

figures have been modified to make the point easier to follow. There are no gold faucets in my home, and I have suppressed any

memory of what the contractor’s actual markup was.

48 See Formal Op. 93-379, supra note 38, at 224.

49 See id. at 216-17, 223.

50 See id. at 220 (″The attorney-client relationship is not necessarily one of equals … it is built on trust, and … the client is

encouraged to be dependent on the lawyer … .″).

30 Hofstra L. Rev. 767, *780

Page 10 of 11

to be trust. After all, lawyers profess loudly - and have written it into their professional rules of conduct - that they

deal at arm’s length with everyone except clients, with whom they deal as fiduciaries. 51

Thus, at bottom, the percentage-of-the-gross contingent fee should be deemed per se unreasonable for an ironic

reason indeed. It is literally ″unlawyerlike″ to cheat clients by marking up costs of the litigation without telling them,

despite the fact that so many lawyers do it.

Copyright (c) 2002 Hofstra Law Review

Hofstra Law Review

51 See, e.g., Model Rules, supra note 5, R. 1.8(a) (business transactions with clients); R. 1.8(c) (gifts from clients); R. 1.8(d)

(exploitation of media rights to client’s story); R. 1.8(f) (third-party payment of client’s attorney fees); R. 1.8(j) (acquisition of

proprietary interest in client’s claim).

30 Hofstra L. Rev. 767, *782

Page 11 of 11

IMPORTANT NOTICE TO ACADEMY MEMBERS

The retainer agreement provisions set forth below are provided to Academy Members for general information purposes only. They do not constitute legal advice to the Academy Members or other readers and the Academy and the authors of these provisions do not intend to give legal advice, or otherwise create any type of attorney-client relationship between the Academy, the readers and authors of these provisions. Every lawyer must carefully evaluate his or her own legal practice and relationships with his or her clients in order to determine what provisions should be included in his or her retainer agreements.

Should this matter be concluded on the basis of a “structured settlement” (that is, with payments to be made over a period of time), the Firm’s entire fee plus all costs and expenses shall be deducted from the initial cash payment.

The Client hereby authorizes the Firm to endorse for the

Client and deposit into the Firm’s escrow account any checks which may come into the Firm’s hands and which are payable to the Client as a result of the above claim.

If the Client’s claim is settled or otherwise resolved by the

Client without the direct participation and involvement of the Firm, then the Client shall remain responsible for the payment of the Firm’s legal fees pursuant to the terms of this retainer agreement. In such circumstances, the Firm shall also have, in the alternative, the option of seeking compensation based upon the quantum meruit value of the Firm’s contribution to the advancement of the Client’s claim, to be determined by the court. In such circumstances, the court would determine the fair value of the Firm’s contribution. Such compensation shall constitute a lien upon any recovery in the claim, and the Client agrees to advise other retained counsel of the existence of such lien.

In the event that the Client, after execution of this retainer

agreement, decides to retain other counsel to prosecute this

claim, the Firm shall be entitled to compensation based upon the quantum meruit value of the Firm’s contribution to the advancement of the Client’s claim, to be determined by the court. Such compensation shall constitute a lien upon any recovery in the claim, and the Client agrees to advise other retained counsel of the existence of such lien.

The Client has been recommended/referred to the Firm

by, and he/she will assume joint responsibility. The Client agrees to a division of the legal fee between the Firm and the referring lawyer who shall be paid out of the Firm’s attorney’s fees and shall not effect the Client’s share. The referring attorney shall receive ___________ of the Firm’s attorney fees. The Client consents to the Firm’s selection of trial counsel.

It is further understood that the Firm may associate with

other counsel of the Firm’s choosing, for assisting in the prosecution of this claim, and that other counsel may render services herein, including investigation, review of records, preparation of legal documents, pre-trial depositions and trial.

The Firm undertakes to represent the Client, “subject to

investigation” and will not commence suit and/or initiate a claim until after the Firm has had an opportunity to obtain and review the relevant records, including but not limited to medical/hospital records.

Because of the uncertainty of legal proceeding, the

interpretation and changes in the law and many unknown factors, the Firm cannot and does not predict nor guarantee the amount of time it may take, or that any result can, will or is likely to be obtained. No representation has been made to the Client as to what amount, if any, he/she may be entitled to recover in this case.

It is further understood and agreed by the Client that this

retainer agreement neither includes nor will this Firm represent the Client for: no fault, Federal and/or State

disability benefits, arbitration/litigation of no fault benefits, Worker’s Compensation benefits, litigation involving liens or rights of subrogation, appeals of any kind, supplemental proceeding to collect on or enforce any judgment or award, unless a separate agreement in writing is entered into between the Client and the Firm. All liens of any kind shall be payable solely out of the Client’s share of the recovery and there shall be no deduction for said items in computing the attorney’s fee.

It is further understood and agreed by the Client that this

retainer agreement does not include, nor will this Firm represent the Client in, trust and estate work and/or Surrogate Court work. For example, matters which are not included in this retainer agreement, and for which the Client would have to retain separate counsel, would include: a) any work that would have to be performed if the appointment of an Executor/Administrator or Guardian is required and/or if trust or guardianship proceedings must be initiated and/or Surrogate Court proceedings are required, in order to proceed with the underlying claim and/or lawsuit; and b) any work that would have to be performed in connection with proceedings which might need to be initiated in any court to withdraw funds deposited pursuant to an Infant Compromise Order or similar order or court directive. If such work is required, the Client understands and agrees that the Client would have to retain separate counsel to perform such work.

It is further agreed that any oral changes or modifications

of the above contract are null and void unless subscribed to in writing and executed by this Firm.

The Client acknowledges that he/she has received a copy

of this Retainer Agreement, has read this Retainer Agreement, has discussed and/or had the opportunity to discuss same and/or seek independent legal counsel and understands and agrees to be bound by the terms and conditions contained herein.