Jan L. Jacobowitz: Hi, and welcome to Quimbee. And today we're going to talk about attorneys' fees, the legal rules of the road. Here's your course description. New client and wondering how to handle the fee arrangement, retainer, contingency arrangement, what's a lawyer to do to ensure reasonable collectable fees? Driving business is a necessary part of the practice of law, and the legal ethics rules of the road are an essential part of the roadmap. This course will explore the fundamental categories of fees, reasonableness, methods of fee collection, trust account issues, and more.
Here's your learning objectives. Analyze the standards for determining reasonable fees, explore the different types of fees, identify various billing issues when outsourcing work, understand the permissible methods for sharing attorneys' fees, and recognition of fundamental trust account issues. Sounds like a lot, but I think it will become much clearer as we go along. So, let's go through some of the basics first. And I'm going to refer to some of the notes or outline that you've been provided so we're sort of moving along together.
If you... What we're considering here is in most states and in the modal rules, rule 1.5. And rule 1.5 tells us that legal fees must be reasonable. And so, of course, we love that standard in the law reasonableness, but standing alone it's hard to understand the application sometimes. So let's break it down a little bit. What is the difference between reasonable and unreasonable? And let's say first that reasonable attorneys' fees it's great if you have them in writing if you're challenged on the concept, but in many states a retainer or an engagement agreement is not required to be in writing unless it's a contingency fee agreement or it's a very limited scope of representation agreement, or perhaps it's a non-refundable fee arrangement, if your state allows it.
So, if your state allows it, it's always important to know, make sure you know what's required in your state if your retainer agreement is required to be in writing regardless. And even if it's not, best practice, definitely put it in writing. And if you don't do it in the moment that you talk to a client and agree to do something, your relationship with that client is likely begun, do it after the fact, discuss it with the client, put it in writing, have the client review it. So that's point one.
But what are the factors to determine that it's reasonable? And so, what the courts have looked to and the ethics bodies have looked to are certain factors. They'll look at what is the time, labor, and novelty of the case? Is it a simple speeding ticket and your law firm processes hundreds of those a day? Or at the other extreme, is it a novel issue of law for which there's no exact precedent?
The next one is the likelihood that the lawyer will be precluded from other employment while pursuing the case along with special time demands. So, especially if you're a small firm or maybe even medium size, is this case so large that taking it on is really going to preclude you or the firm from taking on other matters? What are the customary fees? So, I'm sitting today in Miami. What may be customary here may not be customary even in the State of Florida in a town further north of here that's maybe a small town where they've set different fees. Certainly in different states and in different parts of different states know what lawyers generally charge for a certain matter.
So, if it's after the fact and it's a debate on whether your fees were reasonable, a court may look at not only the size of the case, but what were the results you obtained? This doesn't mean you can't charge reasonable fees and wage a fair fight and lose a case, you're still entitled to your fees in most situations, unless again it's a contingency case, but it's just another factor, which is a good segue into, the court looks to whether it's a fixed fee or it's a contingent fee. So those are all factors for you to consider because the courts and the ethics committees and the state bars will consider them.
Okay. So let's move on to the flip side of factors and definition for reasonable fees would be, how do you define an excessive fee? And so let me read to you the technical definition of an excessive fee is if a lawyer of ordinary prudence would deem the fees to be overreaching or unconscionable, or the fee was obtained because of fraud or misrepresentation or through non-compliant advertising or solicitation. So that something where not only do you have to check your jurisdiction on the general fee rule, but you have to make sure that your advertising is in line with the requirements of your jurisdiction. And I can tell you that many of the jurisdictions have very different advertising roles.
So, the factors that come into play here when the court's considering or an ethics disciplinary board is considering is the relationship and your course of conduct with your client. In other words, is there a past course of conduct? Does the client know you? Have you been charging them for years? Is this a new client? Was there notice to the client? And then they also look at the reasonableness of your costs. So not just your fees, but what are you charging for whether it's copying or mailing, or you're outsourcing part of the project to an outside vendor, maybe for document review, if you're a litigator, or for research, et cetera.
And generally, all fees must be communicated to the client. But again, in some states, only those fees that are contingent need to be in writing. And again, another reminder, best practice, put it all in writing. And also another just sort of footnote to all this is how are you going to accept those fees? In some states you can use a credit card, you can use a third party payment platform, and even cryptocurrency. And those are more advanced, or at least nuanced topics. So, calling your attention to them.
I think the District of Columbia has the most recent cryptocurrency opinion. Florida is just coming out with one on third party payers. In other words, can you accept payment through Venmo or PayPal, where the money may be sitting somewhere else? And you'll generally find that confidentiality is a rule there. And in something like cryptocurrency, it might be analogous to taking stock, it has to be reasonable at the time, but again, not fully exploring those here, just highlighting them because they're different and current and fun from an ethics' standpoint.
So, let's look at the different kinds of fees you usually hear about. So, people use the term retainer sort of generically, but what it really means technically is it's a fee that says, "I'll be available for you. So you pay me $2,000 a month, and whether you need me or not, I'm here, I get the money, and I will respond to your phone calls." It's not a fee for past or future services, it's sort of an availability fee, if that makes sense.
A flat fee, which have become more common in recent years, is I'll quote you a fee right now. And whatever it takes, you're only going to pay, let's call it $10,000. It's a low fee in many cases, but for the sake of discussion. So $10,000. And obviously, the advantage to the client and the lawyer is they both understand what the case is going to cost. The disadvantage to the lawyer may be that the time spent wasn't properly estimated or things happened. And so, really the work the lawyer does may end up being 15 or $20,000 worth of work, but he's contracted or she's contracted for 10.
And same with the client. Maybe the lawyer, because of their reputation is able to settle a case really quickly. And the deal is 10 no matter what, and they didn't need to bill the amount of time. Now, having said that, a flat fee still has to ultimately be reasonable. So, we will discuss that more later, but you can't take $10,000 usually and just spend five minutes, although sometimes you actually can. So stay tuned.
An advance fee is when a lawyer takes the fee, which is very common, in advance. And that's where a lot of people call this a retainer fee generically, but it's really an advance fee. Give me $10,000, I'll start working on your case. I'm going to put it in my trust account and I will bill against the $10,000. In other words, I'll send you an invoice, but I'll be taking money and moving it from the trust account into my operating account as I earn the money. Okay? So, a little different than a real retainer, different than a flat fee.
And very often flat fees are earned upon receipt. So, the lawyer can put them in their operating account, but again, with the disclaimer that if the scenario unfolds such that maybe it becomes unreasonable, then there's going to have to be a truing up with the client. And that's true also with the refundable or non-refundable fee, excuse me, which there are many states that don't recognize it. Florida happens to recognize it. Some states recognize it with different terminology, which means you give me $10,000, you don't get your money back no matter what. But again, in the scenario where it should have taken many hours and takes five minutes, the fee may become unreasonable depending on the facts of the case.
And then the last one that we're going to discusses is the contingent fee. And the contingent fee is a fee that the lawyer says, "Unless I win, I don't get paid." That's the simplest way to explain it. So, it's a contingent upon something occurring that brings success in the case. And obviously, the advantage for the client is they don't have to pay anything up front. The advantage and disadvantage both for the lawyer is they're working on their own time and at their own expense, but if they win the case, the win may ultimately be larger as a percentage than maybe what they would have billed on an hourly basis.
So, the contingent fee has to be in writing. In some states, there's a lot of documentation that goes with it, a Statement of Client's Rights. The client typically still has to pay costs and expenses, for example, filing fees or a deposition cost. And it has to be abundantly clear to the client that they are still on the hook for costs. Sometimes this creates a problem in the end, even if there's success, the client sees a big deduction for costs and expenses from their ultimate judgment, and the client can be very upset if they didn't know that that was coming. So, that's your contingency fee. Put them all in writing, but certainly that one, there's a requirement pretty much everywhere that it be in writing.
So, another area in exploring just fundamental rules of the road is can you share the fees? So, there's two topics that are the main topics of consideration here. Can you share the fees with other lawyers? Can you have a co-counsel? What about if somebody refers the case to you, but doesn't really stay actively involved?
So, most of the modal rules and in most states you can share a fee with another lawyer if it's in proportion to the work you're each doing on the case, or the fee can be split after the client has full disclosure and agrees and that lawyer agrees to stay available to the client and responsible on the file. So in other words, if there's an unfortunate malpractice situation that arises that second lawyer remains responsible, that lawyer is available to discuss the status of the case with the client. And in both these situations, of course the fees have to be reasonable.
Then the second area that's a hot topic in some of the states now is can you share the fees with non-lawyers? And that brings in also the dovetailing of the rule 1.5 with rule 5.4, which is the professional independence of a lawyer. And in every state at the moment, you cannot share fees with the non-lawyers. So you can't go into business with them, you can't pay them a referral fee. And what's the policy? The policy is the professional independence of a lawyer shouldn't be impacted by pressures from non-lawyers to handle a case a certain way based on the outcome. So in other words, settle the case, get the money in now, even if the client doesn't want to settle or there's a good chance to win at trial.
Now, let me back-pedal a little and say that the District of Columbia is the only state that for many years has allowed non-lawyers to be members of law firms. So, that is an exception. Now, these non-lawyers have to participate in the firm, not as lawyers and not in the legal strategy, but in other words, they can't be silent investors, they have to play a business role in the firm.
The other big exception right now is Arizona, they have deleted 5.4 and they have also deleted the part of their advertising rule 7.2, which doesn't let you pay anyone for recommending you for a case. And so, they're in a grand experiment out there with the deletion of these rules, where they are allowing lawyers and non-lawyers to collaborate. Again, this is a whole nother topic for a whole nother CLE, but also Utah has a regulatory sandbox in play right now where they are experimenting with lawyers in a safe harbor collaborating with non-lawyers.
Now, again, this would take us way off track, but I just want to say there's requirements to register in Arizona, there's requirements to register in Utah. There are other states like Florida and North Carolina and the State of Washington that are all starting to take a look at this and consider whether they should modify or delete these rules to allow greater collaboration, to reflect what's going on in our digital world to try to increase access to legal services, et cetera. But rule of thumb, most places is no, you cannot share fees with non-lawyers.
Okay. So, let's talk about another aspect which is receiving the fees. So when you receive the fees, another rule comes into play, which is rule 1.15, which deals with holding the property or funds of a client. And that rule provides that you cannot commingle your funds with the clients' funds. And if it happens to be property, it could be stock certificates, property deeds, it could be a diamond ring, they must be secured separately from the lawyer's personal property.
This is extraordinarily important because in some states, the commingling of a lawyer's funds with the client's funds, or otherwise mishandling a client's funds is presumptively a violation that calls for disbarment. In other words, in some states you have the burden to show why you shouldn't be disbarred, as opposed to the other way around. In all states, it's a very serious offense because it's considered conversion or theft when you use a client's funds. So no, you can't borrow money from the trust account, because you're a little short on paying a bill, knowing you have a check coming in Monday or Tuesday and it's Thursday and you'll put it right back. No good. Not acceptable.
You have to keep, and all the states have their own rules, but record-keeping is extremely important. You usually have to keep these records for six years, even if it's a piece of litigation where there's otherwise not a rule that you have to keep the clients' files for that long. The trust account rules call for six years in many states, you have to check your own state.
You have to have receipt and notification to the client. And then you have to pay attention, because not only do you have to promptly return the funds to the client when it's the right time and the case comes to an end, the representation is no longer going on, et cetera. But if there's a dispute, and we'll talk about this more later, if there's a dispute, it could be between you and the client, or it could be a third party perhaps has a medical lean on part of the judgment and the client doesn't want you to pay it. You have to hold these funds in trust. You can't decide to be the arbiter of that. You can do an interpleader into the court, which sometimes is necessary, but you must keep the funds separate from your own, again, give them back when it's time, account for everything. And when there is a dispute between you and the client, or a third party and the client, maintain them in trust until that dispute is properly resolved.
Okay. So let's try to apply some of these concepts to hypothetical and... Okay, so let's try and apply some of these concepts to a hypothetical or several. So this first one is a bit long, but it lays out the facts for our entire discussion and the other shorter hypothetical. So, bear with me. Hopefully, you have a copy of this and you can follow along. I'm going to read this so I get it right.
Okay. So, here we go. It's called Cash & Shout Meets Crystal Gems Jewelry. Aimee Cash, a well known plaintiff's lawyer in town... I'm sorry. She is a well known plaintiff's lawyer in town. Although her firm Cash & Shout PC is small, she has celebrated clients in a variety of high-profile personal injury cases and often represents celebrities in contract negotiations.
Crystal Sparkle is the president of Crystal Gems Jewelry, the nation's largest jewelry retail outlet, and no slouch when it comes to publicity, especially during the holidays. Crystal is angry and embarrassed, because she was unable to manufacture, sell, or appear in her popular jewelry during the 2020 holiday season. And why was this? This was because of the failure of Crystal's largest gem supplier, Gems R Us. They failed to timely ship Crystal's order. To add insult to injury, Crystal also believes that she has a trademark infringement claim against Gems, because Gems recently opened several jewelry stores named Crystal Gems.
Okay, so we have Aimee the lawyer, we have Crystal the president, and we have Gems R Us or Gems in the way. Crystal's in-house lawyer, Ivan Holme, attempts to negotiate a resolution with Gems, but is unsuccessful. One of Crystal's neighbors, Nicky Opportune, suggests that Crystal contact Aimee. Nicky explains that although Nicky's not a lawyer, she has been doing yoga regularly with Aimee for years, and Aimee is as sharp as they come.
Okay. So, just to keep this going, Ivan, the in-house counsel failed at negotiating a settlement. So, Crystal's now getting a recommendation to contact Aimee, and the recommendation comes from her friend, Nicky, who's known Aimee for years. Nicky is a non-lawyer, just a friend, a yoga friend. Crystal is unaware that Aimee had years before promised each member of her yoga group, including Nicky, 5% of any fee from any matter referred to Aimee. Okay. So, she's promised a non-lawyer a referral fee. And Aimee is aware that she has a problem because she hasn't handled a commercial litigation case in over 20 years. That was since her days as an associate at a big firm. Additionally, she's never handled a trademark case. And Cash & Shout doesn't even have any trademark litigators.
Well, Aimee wants to avoid revealing her inexperience, maybe understandable because she's working from a place of fear, fearing she'll lose the business, and she wants the business. So, she decides to "quietly" retain Sammy Polo, a solo practitioner specializing in trademark litigation. So she reaches out to get help. Aimee agrees to pay Sammy by the hour, and Sammy agrees that she will bill Aimee at the rate of $150 per hour.
Now, what Aimee plans to do is pay Sammy, and then charge Crystal for Sammy's time at $300 per hour, which will appear as a single entry on the Cash & Shout's monthly bills. And it will show as a disbursement for outside consultant. Aimee uses her standard contingent retainer agreement for personal injury cases, which says, "I will receive 50% of the net recovery plus disbursements for court fees, transcription services, consultants, expert witnesses, and other out-of-pocket costs." So this is the cost plus fees. Net recovery is defined, and it's defined as the gross amount received as a result of a settlement or the collection of a judgment after a win or an arbitration award, less any unpaid disbursements.
Crystal goes ahead and executes the retainer agreement on behalf of Crystal Gems Jewelry. So, Aimee has it in writing, and Crystal has an in-house counsel and she's president of a corporation. So we could see her as more in the category of sophisticated client for later conversation. Aimee, of course, doesn't mention Sammy's role to Crystal or to Ivan, the in-house counsel. And as the matter progresses, Ivan, the in-house counsel, approves all the bills, and all of them contain this outside consultant disbursement and other costs. And Ivan never asked for any explanation, because the trademark issues are important to the case. The disbursement or the paying of the bill often exceeds $5,000 per month.
Okay. So let's go back through the hypothetical and ask some questions and talk about the answers in terms of flushing out the issues. So, first question, maybe one of the easier ones, is the arrangement with Nicky proper?
Now, remember Nicky's one of the yoga group, who's not a lawyer. So, as we discussed a little bit earlier, you can't pay a non-lawyer a referral fee. That may be being explored in this setting in Arizona, but for the most part you can't pay a non-lawyer a referral fee. That's a no, no. Now, what if we tweak it and say, well, Nicky's a lawyer? So then, again, check your state. Because in California, they do have what they call bare referral fees, where she could pay Nicky if Nicky was a lawyer, whereas in Florida, the default is to the rules we discussed. So, if Nicky's not going to have any part of the case, she needs to remain responsible for malpractice and malfeasance issues, and the client needs to know and consent.
Okay. So, issue one, not too complicated. What about the arrangement with Sammy? She doesn't tell Sammy. And generally, that has to be disclosed to the client. For example, in New York, perhaps it would work if you disclosed it and had consent. In Florida, we have an outsourcing opinion that says, "If you outsource work short of again some other arrangement with the client, you have to bill it through at what it cost you." In other words, she'd have to bill it at 150 not 300. It's possible if she spent some time supervising or reviewing that work, Aimee could bill for that time, but she couldn't bump Sammy up 100% with no disclosure to Crystal and Ivan, the in-house lawyer, approving the bills.
By the way, he hasn't been asking, that's not necessarily atypical, but really... I was in-house counsel at one point, got to scrutinize those bills and make sure, because it's better to catch something, especially maybe it's a misunderstanding or it's not, but catch something early on in the billing and not just keep consenting and paying, and then a year later say, "Wait a minute, I really didn't understand. I didn't mean to pay." Especially if you're a corporate client where the courts and the ethics bodies are going to look to you as hopefully having more sophistication than a client who has no legal education who perhaps has retained a lawyer after a car accident or for a divorce, et cetera.
Okay. What if Aimee used an associate in her firm who was paid $150 per hour, but billed at $300 per hour to do the same job? Would that be proper? And yes, it's generally proper. Generally, it goes to reasonable fees and what the market will bear what you're going to bill out for an associate as opposed to what you actually pay the associate. So while this can be viewed as a terrible disadvantage, perhaps for a smaller firm who can't afford to employ a lot of associates and here and there outsource some work, that is how sort of the business model of law is set up and understood in the context, especially of the ethics rules right now.
Is Aimee's fee arrangement with Crystal Gems excessive? And can we determine this from the face of the agreement or in some other way? So there we go back to the variables we discussed and consider the unconscionability based on time, labor, preclusion from other work, what a lawyer of ordinary prudence would think. And here I just want to distinguish, in the case law there's two types of unconscionability when it comes to fees.
Procedural unconscionability, which is the client didn't even understand from the outset, you didn't explain it well or you didn't realize they didn't understand, or a lawyer didn't explain it at all.
Substantive unconscionability generally refers to, it's outrageous in the marketplace regardless of the client's understanding. And that substantive unconscionability sort of aligns to those factors we went over in terms of time, labor, novelty, experience of the lawyer, results, et cetera, et cetera. So, that's the old, "it depends," but that's the way to analyze it.
So, next question. Assume Aimee settles the matter for $600,000 after writing a demand letter and one meeting with opposing counsel. And she's accrued what would've been $10,000 in time. Does her fee then become excessive? And this is where time and labor make this a problem, she didn't spend much time, unless perhaps there's client consent. So, you also want to look at the procedural unconscionability versus the substantive. So look at the timing of the agreement and what the client understood, but I can say that generally there's an understanding that contingency fee cases are high-risk/high-gain for lawyers and clients. So, if everyone understood and it's a contingency fee case and there's consent, then the court may just say, "Good for you." So, you made a big fee with very little time.
What about if Aimee gets $600,000 in damages plus another $150,000 attorney fee award in the case, she's by contract or statute entitled to another $150,000. So, it depends again where you are. So, in California, I can tell you that generally if it's not provided for, it's not addressed in the agreement, then California, the fee goes to the attorney unless... okay, here's the big unless, it makes the fee unconscionable by all those standards we went over.
On the other hand, in New York, it's very similar, but if there's no agreement, then the lawyer keeps the larger of either the contingent fee or the attorney fee award. So, you have to do the research and in your jurisdiction as to what the potential for a fee award may be before you even address it or before you finish the contract or the engagement agreement, so you can address it.
All right. So, moving along to if the fee is deemed excessive, is Aimee entitled to any fees? And if so, on what basis? So, it depends how far off this roadmap Aimee or any lawyer has traveled. If the fees are deemed to be illegal, excessive, and unconscionable, the fees can be forfeited unless the client somehow ratified or agreed to those fees. And there are cases where there's been a crazy amount of fee for something, but the courts have found that it was ratified by the client. And of course, remember if you advertise in a way that's in violation of the rules and you obtain the client that way, particularly in Florida, you can lose your fees.
So, let's assume that Aimee negotiates and enters into an oral settlement agreement with Gems R Us on behalf of Crystal Gems. And during the drafting of the final agreement, Crystal fires Aimee. What would she be trying to accomplish? And will her plan succeed? So, she can fire Aimee. Pretty much a client can fire a lawyer whenever they want. And a lawyer has many ways to terminate the relationship depending of course if you're on the eve of trial and some other nuance, but this is where we default to quantum meruit.
So, if she fires Aimee, and Aimee's done this great job of settling the case, Aimee can pursue her fees from Crystal on the basis of all the work she accomplished. Again, assuming there's no contract that governs the situation, which typically there's not with quantum meruit and getting fired for no reason, but there could be.
Okay. So let's move to hypothetical two called Cash & Shout Settle on an Hourly Basis. And I promised you that first hypothetical was the longest and would sort of tee us up for the other one. So we're going to imagine the same fact pattern with Aimee and Crystal and Ivan, the in-house counsel, and Gems R Us. But we're going to have a different fee arrangement for this one. So, let me share it with you.
In this scenario, Aimee takes the Crystal Gems case on an hourly basis. She tells Crystal and Ivan that she has no trademark experience, she's coming clean here, but she's a highly experienced lawyer who has often worked in areas of the law with which she is not familiar and obtained excellent results. And let's assume that this is true, because it is true for many lawyers, we'll assume it's true for Aimee. And that Crystal and Ivan had interviewed trademark lawyers, but none had the so-called fire in the belly they were looking for. So, they're going to knowingly take a chance on Aimee. Sorry for the paper in the way.
So, Aimee asks for a $100,000 advance retainer, and her retainer agreement says, "It's non-refundable." Aimee charges $750 per hour, the same as trademark litigators at a big firm, and of course she quickly accrues $250,000 in time having associates research basic trademark and commercial law issues. So, she is learning the law, which she should do to become competent, but it's costing a lot of money here. Over the course of six months, Aimee and her firm rack up a total of $400,000 with, again, no objection from Crystal or Ivan. And Ivan's overseeing and paying these bills again.
Now, the case eventually settles during mediation. And after the motion to dismiss stage, it settles for $600,000. Assume that if asked to testify, other trademark and commercial litigators will opine, but because of their familiarity with trademark and commercial law issues, they could have accomplished the same result for $150,000. They've never seen a case where $400,000 in time had been spent in the motion to dismiss stage. So, Aimee's run up quite a bill, learning the law after telling them she didn't know the law.
So, here's our first question. May Aimee require a $100,000 non-refundable fee? So, in Florida, I mentioned before, you can contract for a non-refundable fee, but you cannot contract against the excessive fee prohibition. So, assuming it ends up being a reasonable fee, it's okay. In New York, I'm just giving you a few states, for example, you can't call a fee non-refundable and you can't make it non-refundable. The client must be able to fire the lawyer and get the unearned part of their fee returned. But if you completed the work, you may be able to call it a flat fee, and it may be analyzed more like a contingency. So, it could go either way. That sounds a little like who's on first, but just to point out New York's a bit different.
And in California, I can tell you terminology is important. You can't deem a fee earned upon receipt, which I mentioned to you earlier, or non-refundable unless it's a true retainer, meaning that attorney availability cannot be billed again. So, if you take it as a retainer to be available, it's a different analysis. California has a flat fee to cover specific services, and it's earned upon completion of the services. So the problem occurs if you're terminated in the middle of the representation, the client might get a refund, but that can be addressed in the engagement agreement. So, I hope that made sense.
The major overarching takeaway is make sure what you can do in your state, both terminology, what it can be called, and whether you can take something that's not otherwise excessive and keep it regardless of what happens next. Okay. That's the big question.
Okay. Question two. Is Crystal likely to prevail on a claim that Aimee's fee was excessive? On what basis, if she would be? And may such a claim be asserted in court or only in the disciplinary process? So, we're not sure here there would be a basis for excessiveness, but running up $250,000 to learn an area of law is an issue for both the courts and the disciplinary authorities. They won't be happy about it. But they might not necessarily do anything about it if there's client knowledge and consent. So, it depends upon your jurisdiction and whether restitution is part of the disciplinary process, and remedies, whether it would be worth it to pursue a disciplinary action. Generally, you would be probably better off in court. It would turn out to be more maybe like a quantum meruit analysis on the flip side of what the client should be entitled to have back.
Okay. Assume Aimee settles the matter for $600,000 after writing a demand letter and one meeting with opposing counsel accruing a total of $10,000 in time. So that's... So, let's go past that one, we discussed that earlier, and talk about what if Crystal just refuses to pay, what causes of action may Aimee assert to obtain recovery? And in California, there has to be a notice to pursue fee arbitration. And if not, then it's a breach of contract action. So if you don't have a notice from the client.
And if your contract... This is an interesting, important piece of trivia, in California if you don't have your contract duly signed by both parties and a duplicate returned to the client, then the attorney is limited to quantum meruit, because they consider the contract void. So... And then you get into whether you have in California, New York, Florida, these are the... I've been picking three of the four corners of the country, and California sort of gets almost two corners, because it's so large. But there's another cause of action called an account stated, which allows recovery based on the contract. If billing was sent and there was no objection from the client as to the bills within a reasonable amount of time, you don't need any further proof.
So, there's some amazing examples of this, especially in New York, that we won't go into, but it's just sort of a note to file for you that it may be another option. There's a whole nother discussion about whether lawyers should ever sue their clients for fees, because quite often the counterclaim comes in for malpractice. And so, there's an analysis, including a cost benefit analysis, that should always go on before a lawyer sues a client. Again, bigger topic for another time.
So, let's look at hypothetical three. Cash & Shout Get Lucky on an Hourly Basis. In this hypothetical, we can assume the same hourly basic facts, except without a settlement at the motion to dismiss phase. So Crystal and Ivan appalled at the mounting legal fees, contact Aimee to express their outrage. They say that they will not pay another penny beyond the 400,000.
Aimee replies, "I'm telling you, this is a good case, and I have a lot of faith in it. I'm not guaranteeing anything, but I think you can do a lot better than $600,000 settlement here. So I'm willing to switch to a contingency arrangement. You pay me $200,000 in return for writing off the other 200," because remember, they owe her four. "I'll get 40% contingency of any settlement. At settlement, I will give you credit for the fees you have paid me and will subtract $200,000 from my contingency fee." So, it sounds pretty good, and Crystal and Ivan agree. And three months later, Aimee gets really lucky. She's done very little additional work.
And what comes as a complete surprise to Aimee and Crystal, Gems R Us produces an email in which its president admits to one of its subordinate that the shipment was defective, and says, "Now we're in double trouble. Not only have we harmed Crystal Gem's holiday season, but we've harmed Crystal's reputation, which certainly won't help our effort to launch our own stores." So, this is a smoking gun that every litigator dreams of, and Aimee, and it is a hypothetical, but Aimee gets the smoking gun.
So she quickly extracts a $2 million settlement, which results in a total fee to her of 800,000, almost double what she would've received if the hourly agreement had remained in place. So, I don't know, Crystal and Ivan may be shaking their head at this point, but no one could see that smoking gun coming.
So, what legal rules apply to the change in the fee agreement mid-stream? And was this proper, what occurred here? And what kind of client matters can you do this in? So, this is not an uncommon issue, because legal fees get really high and attorneys and clients to negotiate. And what's happened here is really the courts will look and say, "This kind of case deserves some special scrutiny." And they look at the fair and reasonable approach and proper communication. And some even look at one of the conflict rules when you take an interest in a client's business or settle.
So, the ethics' opinions are less focused on that requirement, but it's still kind of a good practice, which is, do you have a sophisticated client? Did you perhaps encourage them to have another independent counsel review it? Have they consented? Do you have the consent in writing? And if all of that comes to pass and you weigh in the concepts from the contingency fee it might be okay, it can be excessive, and it could have been made at the outset of the agreement, or in hindsight, in any of these cases. So, they got really lucky here. And it's hard to know for sure what the end result of this is going to be. But lesson learned on all sides, in terms of put it in writing and be very clear and up front about what this means to change fees in mid-stream.
Okay. So, last hypothetical of the day, Crystal Gems Employees an Expert. So using the same hourly fee fact pattern. Remember, I promised we wouldn't read another long one. We have the case settling for $600,000. And during the case, Crystal hired an economist to serve as an expert. Not uncommon. Aimee knows the terms of the deal, and assisted in the drafting of the engagement agreement for the expert. When the case settles, the economist expert is owed $50,000. The settlement funds come into Aimee's attorney's trust account, and Aimee informs Ivan that Aimee intends to pay the 50,000 to the economist and then divide the balance between his firm... between Aimee's firm, I'm sorry, and Crystal Gems.
Ivan objects. He's the in-house counsel, remember. "That economist was useless. We don't want to pay him." Aimee says, "This was a straight hourly arrangement, and his report was key to the settlement. Ivan, you know that!" Ivan responds, "Well, Crystal won't let it happen. And you are our lawyer and you have to follow our instructions." So, this is something we talked about earlier. We've got the settlements come in, and we have the client not wanting to have the lawyer, Aimee, pay a third party.
And at this point you really need to hold the funds in trust or maybe interplead them into the court, and make sure that the dispute is settled, because you can't just follow your client's instructions when somebody has an interest in the funds and you're holding them. So, the settlement needs to go to the trust account, the notification needs to go to the client and to the expert with an accounting, and then it should normally be distributed. But when there's a dispute, the lawyer, in this case, maybe he doesn't even have a contractual duty because he didn't hire the expert, the fact pattern tells us Crystal did, but he still will have a fiduciary duty.
And you can file an interpleader in the court and put the funds in the court, noting there's a dispute, because otherwise you can face civil penalties and a disciplinary case. And New York and Florida pretty much do the same thing. Put it in the court and let the court settle the dispute so that you are not the arbitrator between Crystal and her economist, and you're not then allegedly misusing client funds by paying the economist or being otherwise involved in not having the economist get what is due to him.
Okay. So, those are a bunch of the issues run through the hypotheticals with Crystal and Aimee and Ivan. And I hope that was helpful. I always remind folks that when you read the rule, some of them look pretty easy, they're black and white, to just fundamentally understand, but the application of them is where the nuances develop. And so, it's always worthwhile to learn a bit more, look up the rules in your state, call your own ethics hotline if you have a question, or otherwise familiarize yourself, because we all want to get paid, but we need to do it in the right way so that we can keep the money and not be spending our time and energy in litigation, or otherwise responding to complaints about our fees, whether it's from a client or the bar.
Okay. So, that's all for attorneys' fees today. I hope you picked up some pointers. It's always nice to speak to you through the Quimbee lens. And take care and stay safe. Bye-bye.