WAUKESHA COUNTY

BAR ASSOCIATION

Thursday, November 12, 2015

LEGAL ETHICS 2015:

Lost in the Fog

Dean Dietrich, Esq.
Ruder Ware
500 1st Street
Suite 8000
Wausau, WI 54401
/ Timothy Pierce, Esq.
Ethics Counsel
State Bar of Wisconsin
5302 Eastpark Blvd.
Madison, WI 53718
/ Keith Sellen, Esq.
Office of Lawyer Regulation
110 E. Main Street
Suite 315
Madison, WI 53703-3383

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{W1177476.DOC/1}1 - Dietrich

Engagement Letters

And

Fee Agreements:

Communicating with your Client

About your Representation

FEE AGREEMENTS AND THE RULES

Timothy J. Pierce

Ethics Counsel

State Bar of Wisconsin

5302 Eastpark Blvd.

Madison, WI 53707-7158

(608) 250-6168

(800) 444-9404, ext. 6168

Fax: (608) 257-5502

This outline discusses, in Part I, what Wisconsin’s Rules of Professional Conduct for Attorneys (the “Rules”) require with respect to lawyers fee agreements. In Part II, this outline discusses some clauses that appear from time to time in the fee agreements, but which may pose hazards for lawyers. Because the focus of the outline is on fee agreements themselves, rather than a lawyer’s handling of fees, the requirements of Wisconsin’s trust account Rule (SCR 20:1.15), such as the alternative protection for advanced fees, are not discussed herein.

I.WHAT’S REQUIRED IN FEE AGREEMENTS BY SCR 20:1.5

A.For any matter in which it is reasonably foreseeable that the total cost of the representation to the client will exceed $1,000, certain information must be transmitted to the client in writing, which is to say there must be a written fee agreement: The new Rule does not use the term “fee agreement,” but SCR20:1.5(b)(1) does require that certain information with respect to fees and expenses be transmitted to the client in writing. This writing must include:

1.The scope of the representation. This should be a clear description of the services and matter for which the lawyer has been retained. The Rule does not require a set degree of specificity, but simply “legal representation” would likely be suspect, whereas “legal representation through trial in connection with the pending OWI 3rd Offense criminal charges in Grant County” should suffice.

2.The basis or rate of the lawyer’s fee. Again, the Rule sets no specific standard, but the clear intent of the Rule is that this information be sufficient to enable the client to understand how the fee will be calculated and should be transmitted in a clear and readily understood manner.

3.The expenses for which the client will be responsible. If the client will be charged for copying costs, experts, travel time, medical records, etc., that information must be included in the agreement. If known at the time, the amount charged for such expenses should also be in the agreement.

Beyond these three requirements, SCR 20:1.5(b)(1) does not mandate that anything further be in the fee agreement.

B.There is no requirement in the Rule that the “writing” or agreement, be signed by the client (except contingent fee agreements): While SCR 20:1.5 clearly requires written fee agreements in most cases now, it does not require the client’s signature, except for contingent fee agreements, which always must be signed by the client.

C.“Writing” is broadly defined: SCR 20:1.5 requires that information about fees be communicated to the client in writing. SCR 20:1.0(q) defines “writing” as “a tangible or electronic record of a communication or representation, including handwriting, typewriting, printing Photostatting, photography, audio or video recording and e-mail.” Thus the “writing” required by SCR 20:1.5(b)(1) could take many forms, including e-mail. It can also be argued that a voice-mail would fit the definition, although that, for reasons of retention and documentation, is a risky proposition.

D.The “writing” must be communicated to the client before or within a reasonable time of commencing the representation: SCR 20:1.5(b)(1) does not mandate that the fee agreement be transmitted to the client before commencing work on the matter, although that is clearly the preferred option. Thus, in situations where time is of the essence, the lawyer may start work and provide the client with the written fee agreement within a reasonable time. Obviously, what is a reasonable time is dependent upon specific circumstances, but the fee agreement should be sent to the client as soon as reasonably possible.

E.For any matter in which it is reasonably foreseeable that the total cost of the representation to the client will be $1,000 or less, the information about fees and expenses may be communicated to the client orally or in writing: While SCR20:1.5(b)(1) does not require that information about fees to be communicated in writing if the total cost is likely to be less than $1,000, it still requires that the information discussed in paragraph 1 be communicated to the client orally. Thus, a lawyer who intends to charge $300 for a simple traffic matter and not use a written fee agreement would still be required to orally inform the client of the scope of representation, the basis or rate of the fee, and any expenses for which the client will be responsible.

F.When a lawyer is representing a regularly represented a client and charging fees on the same basis or rate as in the past, the written or oral communication requirements do not apply: SCR 20:1.5(b)(1) requires that specified information about fees and expenses be communicated to clients except when the lawyer is charging a regularly represented client on the same basis or rate as in the past. Neither the Rule nor the Comment defines a “regularly represented client” but it is worth noting that the Rule uses the term “regularly” rather than “continuously.” Thus the Rule does not require written fee agreements for a regularly represented client even on completely new matters. Whether two, four, six or some other number of matters per year constitutes “regularly represented” remains to be seen, but it seems reasonable to assume that if a client routinely comes to a specific lawyer for firm for whatever matters might arise, and matters actually do arise on a more than sporadic basis, that client is “regularly represented.”

G.Any change in the basis or rate of the lawyer’s fee must be communicated to the client in writing: This requirement of SCR 20:1.5(b)(1) applies to all representations, regardless of whether the Rule requires a written fee agreement in the matter. Thus, if there is no written fee agreement because the lawyer is representing a regularly represented client, but the lawyer wishes to implement an annual increase in hourly rates, that information must be communicated to the client in writing. The first paragraph of the Wisconsin Committee Comment states:

In instances when a lawyer has regularly represented a client, any changes in the basis or rate of the fee or expenses may be communicated in writing to the client by a proper reference on the periodic billing statement provided to the client within a reasonable time after the basis or rate of the fee or expenses has been changed. The communication to the client through the billing statement should clearly indicate that a change in the basis or rate of the fee or expenses has occurred along with an indication of the new basis or rate of the fee or expenses. A lawyer should advise the client at the time of commencement of representation of the likelihood of a periodic change in the basis or rate of the fee or expenses that will be charged to the client.

Therefore, an increase in hourly rates does not necessarily require a separate written notification to the client, but a clear and prominent statement on a bill sent to the client would be required.

H.The purpose and effect of any retainer or advance fee must be communicated to the client in writing if the total cost of the representation is more than $1,000: SCR 20:1.5(b)(2) requires this, but interestingly, does not use the “reasonably foreseeable” language found in SCR 20:1.5(b)(1). As a practical matter, the client should always be informed of the purpose of any retainer or advance fee payments whether or not there is a written fee agreement because this is part is the lawyer’s duty to communicate the basis or rate of the lawyer’s fee. When a written fee agreement is required or used voluntarily, then this information should be part of the agreement. The communication should clearly explain the actual purpose of any advance fees or retainers paid to the lawyer. For example, lawyers often request a “retainer” which actually serves as an advance on hourly fees, as opposed to true retainer, which is not payment for legal services, but simply to secure a lawyer’s availability. If a payment operates as an advance on hourly fees, it should be explained to the client as such. See Wisconsin Committee Comment, paragraph two.

I.All contingent fee agreements must be in writing and signed by the client: SCR20:1.5(c) continues the current Rule’s requirement that all contingent fee agreements be in writing and signed by the client. The contingent fee agreement must also state how the fee is to be calculated, whether the fee is net or gross of any expenses and whether the client bears responsibility for any costs or expenses. SCR 20:1.5(c) also continues the requirement that the client be provided with a settlement statement showing the remittance to the client and the method of its determination.

II.THINGS NOT REQUIRED OR PROHIBITED BY SCR 20:1.5, BUT WORTH CONSIDERING

A.There should be no language in a lawyer’s fee agreement asserting any sort of “lien” or “interest” in the file for unpaid fees: There is no attorney’s lien on a client file in Wisconsin. A few other jurisdictions recognize such a lien, but even where it is recognized, it tends to be quite limited and is becoming disfavored. The file is the property of the client and the client is entitled to the file upon request, regardless of whether the client owes the lawyer money or not (See Wisconsin Ethics Opinion E-00-03). Further, as noted in Wisconsin Ethics Opinion E-95-5, “the existence of an attorney’s lien on a client file has never been recognized in Wisconsin,” and in OLR Public Reprimand 2005-9, a lawyer was disciplined not only for failing to provide the file to the client upon request (SCR 20:1.16), but also for asserting a frivolous claim (SCR 20:3.1) by claiming a lien on the file for unpaid fees. It should also be noted that if the lawyer wishes to retain a copy of the file, those copying costs must be born by the lawyer and not passed on to the client (Op. E-00-03), unless, in certain circumstances, the lawyer is providing a second set of previously provided materials. Any statement or clause in a fee agreement asserting a lien on a client’s file is simply false.

B.If a lawyer intends to charge interest on unpaid balances, that information should be part of the fee agreement or clearly communicated to the client at the beginning of the representation: The Rules do not prohibit a lawyer from charging reasonable rate of interest on outstanding balances. But the lawyer must notify the client of that intent as part of the duty to communicate the basis or rate of the lawyer’s fee. A lawyer who simply imposes interest charges absent client notification and consent runs the risk of having been found to have violated that duty and/or charged an unreasonable fee. See Wisconsin Ethics Opinion E-09-03.

C.A lawyer should be cautious of clauses unilaterally imposing responsibility for collection costs on clients: Statements in fee agreements that the client will be responsible for any collection costs are not explicitly prohibited by the Rules. Further, there is no Wisconsin ethics opinion or case (of which the author is aware) forbidding, or even addressing this subject. However, there is case law from other jurisdictions that finds such clauses unenforceable and possibly unethical. See Lustig v. Horn, 315 Ill.App.3d 319, 732 N.E.2d 613 (IL 2000); Ween v. Dow, 35 A.D.3d 58 (NY App. Div. 2006); Gruber & Colabella v. Erickson, 345 N.J. Super. 248, 784 A.2d 758 (2001). Courts fault these clauses for their unfairness, lack of mutuality and their chilling effect on a client’s perhaps legitimate dispute with a lawyer over fees. Particular troublesome is a provision that allows

These cases do not stand for the proposition that a lawyer would be forbidden from seeking legitimate fees and costs in a collection action, but they do forbid the use of clauses which unilaterally impose such costs on the client in advance. Thus, while lawyers may seek legitimately available fees and costs when appropriate, clauses which seek to unilaterally and prospectively impose such costs on clients should be avoided.

D.Consider placing the firm’s file retention policy in the fee agreement: It is generally recommended that former clients be given reasonable notice before old files are destroyed , and a convenient way to do this is to place the firm’s file retention policy in fee agreements (and closing letters). This puts the client on early notice as to when they can expect the firm to dispose of old files. For further discussion see Wisconsin Formal Ethics Opinion E-98-1, Retaining Client Files, N. Petro, 79 Wis. Law 25 (April 2006).

E.A lawyer should avoid clauses that deem late payment consent for withdrawal: Lawyers, unlike clients, do not have unfettered discretion to terminate the lawyer-client relationship. SCR 20:1.16(b) lays out various permissive grounds for withdrawal, and SCR 20:1.16(b)(5) allows a lawyer to withdraw if the client fails to substantially fulfill an obligation to the lawyer (i.e., payment of fees as previously agreed) and the client has been given reasonable warning that the lawyer will withdraw because of the unfulfilled obligation. It is extremely unlikely that such a clause in a fee agreement will constitute reasonable warning. Further, if a matter is in litigation, the lawyer almost always must seek the tribunal’s permission to withdraw, and the client is entitled to state whether or not they consent at that time. See Michigan Informal Ethics Opinion RI-20 (1989) and Suffolk County (N.Y.) Ethics Opinion 88-2.

That being said, there is nothing improper with a clause in a fee agreement notifying the client that continued delinquency in fees may result in withdrawal after the client has been given reasonable opportunity to come current.

F.If the firm is organized as a limited liability entity, consider having a summary of the applicable law in the firm’s fee agreement: If the firm is organized as an LLC, LLP, SC, or any form of limited liability organization, SCR 20:5.7(e)(2) requires that clients and potential clients be provided a “plain-English summary of the features of the limited liability law under which it is organized and of the applicable provisions of this chapter.” A clause in the firm’s fee agreement is a convenient way to fulfill this requirement.

G.Clauses requiring the arbitration of fee disputes, or even malpractice claims, are permissible provided the clause is fair and the client gives informed consent: The majority of jurisdictions, as well as the ABA in Formal Ethics Opinion 02-425, that have examined this topic find such a clause permissible under the Rules, but do require that the client provide informed consent. Informed consent is defined by SCR 20:1.0(f) as follows;

Informed consent” denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.

One of the most important elements of informed consent, as explained in Comment [6] to SCR 20:1.0, is an explanation of the possible disadvantages to the client of a proposed course of conduct. For example, ABA Formal Opinion02-425 notes;

...the lawyer should make clear that arbitration typically results in the client’s waiver of significant rights, such as the waiver of the right to a jury trial, the possible waiver of broad discovery, and the loss of the right to appeal. The lawyer might also explain that the case will be decided by an individual arbitrator and inform the client of any obligation that the lawyer or client may have to pay the fees and costs of arbitration.

Such clauses must also be fair. In Wisconsin Auto Title Loans v. Jones, 290 Wis.2d 514, 714 N.W.2d 155 (2006) the Wisconsin Supreme Court held a clause in a consumer loan contract requiring arbitration of disputes to be unconscionable, in part because the clause required the consumer to submit disputes to arbitration but left the lendor free to choose other avenues to pursue relief. While this case does not deal with a lawyer’s fee agreement, it is worth noting.

A lawyer considering the use of such a clause must also be careful not to include any language which can be construed as prospectively limiting the lawyer’s liability to the client (See section8 below). ABA Formal Opinion 02-425 further states:

The Committee agrees that mandatory arbitration provisions are proper unless the retainer agreement insulates the lawyer from liability or limits the liability to which she otherwise would be exposed under common or statutory law. For example, if the law of the jurisdiction precludes an award of punitive damages in arbitration but permits punitive damages in malpractice lawsuits. the provision would violate Rule 1.8(h) unless the client is independently represented in making the agreement. The mere fact that a client is required to submit disputes to arbitration rather than litigation does not violate Rule 1.8(h), even though the procedures implicated by various mandatory arbitration provisions can markedly differ from typical litigation procedures. The Committee believes, however, that clients must receive sufficient information about these differences and their effect on the clients’ rights to permit affected clients to make an informed decision about whether to accept an agreement that includes such a provision.

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Other, unusual requirements in mandatory arbitration provisions also might be deemed to have the effect of limiting a lawyer’s liability when they are one-sided. The validity of such requirements, for example, requiring that arbitration be conducted in a specific location distant from the client’s abode, permitting the lawyer to choose the arbitrator, or unequally allocating the cost of the arbitration, thus might be called into question under Rule 1.8(h).