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Ethical Considerations When Fees Outpace Recovery

August 16, 2017
Jonathan Holtz
Posted in: Professional Liability

When legal fees outpace the recovery to the client, it can give rise to serious implications of New Jersey’s Rules of Professional Conduct (RPCs).  New Jersey’s Disciplinary Review Board (DRB) has found multiple RPC violations in such situations, including RPCs 1.4 (Communication); 1.5 (Fees); and 8.4 (Misconduct).  These situations almost always stem from insufficient communication, including lack of: oral or written fee agreement; discussion regarding expected recovery; regular invoicing; and explanation of how settlement proceeds will be allocated.  These situations clearly cross into ethical violations when attorneys, on notice of a dispute over funds, nonetheless withdraw the funds to satisfy their legal fees. Violations can result in a range of consequences, from admonition to disbarment; as well as disgorgement of all fees, imposition of disciplinary hearing costs, and supplemental continuing education requirements.  As illustrated by multiple DRB decisions, sufficient communication is key to avoiding these disputes.

This situation can almost certainly be avoided with sufficient communication.  Specifically, attorneys should always prepare written fee agreements, even when not required.  Frank discussions with the client at the outset of the engagement as to potential recovery and expected fees can help set reasonable expectations.  Regular invoices can keep the client informed of the billing progress and supporting time records can justify fees in later disputes.  While there is no express prohibition on encouraging a skittish client to continue litigation, attorneys should recognize they may be giving the impression they will reduce or waive their fees in the event of limited recovery.  Should the client disagree, the attorney must heed the client’s express direction to dismiss the litigation regardless of the impact on recovery.  All settlement offers should include a discussion of how the settlement funds will be allocated prior to acceptance.  Perhaps most important of all, attorneys, on notice of a dispute over funds should never withdraw any disputed funds. The DRB routinely finds withdrawal of disputed funds to be more egregious conduct than the excessive fee.  Should fee issues develop, attorneys should remember they may seek to withdraw due to “unreasonable financial burden.”  Pursuing fees in excess of the recovery may not only subject the attorney to ethical issues, but further, many Fee Arbitration and DRB decisions result in full disgorgement of all fees.  Accordingly, as a practical matter, reducing fees to a reasonable portion of the actual recovery may permit collecting something as opposed to nothing.

Reprinted (in part) with permission from the July 3 issue of the New Jersey Law Journal. © [2017] ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.