Editor's Note:
State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule.
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Do the California Rules of Professional Conduct prohibit a member from contracting with the client that the right to recover attorney's fees pursuant to civil rights statutes belongs to the attorney and may not be waived by the client?
Such agreements are not prohibited in actions brought under 42 United States Code section 1988, so long as the member complies with rules 3-300 and 3-310.
Rules 3-300, 3-310, 3-510, 3-700 and 4-200 of the California Rules of Professional Conduct.
Under 42 United States Code section 1988, a court may award a reasonable attorney's fee to the prevailing party in civil rights suits. The United States Supreme Court held in Evans v. Jeff D. (1986) 475 U.S. 717, 730-731 [89 L.Ed.2d 747, 106 S.Ct. 1531] that the attorney's fee award belongs to the client, not the attorney, and that the plaintiff may waive, settle, or negotiate the right to fees. Evans holds that the trial court may approve a settlement pursuant to which the plaintiff receives substantially all the non-pecuniary relief sought in exchange for waiver of the right to recover attorney's fees. This waiver often leaves the plaintiff's attorney without compensation.
We have been asked to provide an opinion as to whether or not a member of the State Bar of California, at the outset of the attorney-client relationship, may ethically contract with a client that the rights to apply for and receive an award of attorney's fees are irrevocably assigned, transferred, and conveyed to the attorney, and that the client shall not attempt to waive the right to apply for and receive such fees.
This committee believes that, so long as the member fully complies with rule 3-300 of the California Rules of Professional Conduct (hereafter rule(s)), there is no ethical prohibition against such an agreement. This opinion only addresses the propriety of such agreements in the context of actions brought under 42 United States Code section 1988.
Rule 3-300 provides that:
A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements is satisfied:
(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and
(B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and
(C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition.
The discussion section following rule 3-300 states that the rule does not apply to retention agreements, unless the agreement confers an ". . . ownership, possessory, security, or other pecuniary interest adverse to the client."
The effect of the client's assignment to the attorney of the right to an attorney's fee award gives the attorney an interest in the award to which he or she would not otherwise be entitled. In Evans v. Jeff D., supra, 475 U.S. 717, 722, the defense offered to settle the case by giving the plaintiff full relief in exchange for a waiver of the statutory entitlement to attorneys fees.1 In that event, it is in the best interest of the client to accept the settlement, while it is in the interest of the attorney who has obtained the client's waiver of the right to attorney's fees to reject the offer. In our opinion, the real possibility of an Evans settlement offer creates an actual conflict between attorney and client because it allows the lawyer to pursue a course of action that may not be in the client's best interests. The attorney's exclusive possession of the right to collect attorney's fees, and therefore to control settlement, constitutes a "possessory interest" adverse to the client such that the member must comply with rule 3-300.
Contracting with the client for the right to statutory attorney's fees is different from a contingency fee agreement, which the Legislature has decreed to be exempt from conflict of interest rules because of public policy. (See Bus. & Prof. Code, § 6147; Cal. State Bar Formal Opn. No. 1987-94.) The Legislature has declared no such public policy protecting contracts for the right to collect attorney's fees. In the absence of such a declaration, we must conclude that the conflict of interest rules do apply to the provision in question. Moreover, retainer agreements which give the attorney the right to control settlement are against the public policy of the State of California. (Hall v. Orloff (1920) 49 Cal.App. 745, 749.)
Courts have held other arrangements by which attorneys secure the right to collect fees, to be subject to rule 3-300's predecessor, rule 5-101. (See Hawk v. State Bar (1988) 45 Cal.3d 589, 601 [247 Cal.Rptr. 599, 754 P.2d 1096] [taking promissory note secured by deed of trust in real property owned by client]; Ritter v. State Bar (1985) 40 Cal.3d 595, 602 [221 Cal.Rptr. 134, 709 P.2d 1303] [client's loan to attorney in lieu of attorney's fees].)
Rule 3-300 does not prohibit attorneys from obtaining pecuniary interests adverse to their clients so long as the transaction is fair and reasonable and the client consents after having been appropriately informed. Other contractual provisions by which attorneys attempt to secure their right to compensation have been held not to violate the Rules. In California State Bar Formal Opinion Number 1981-62, this committee concluded that an attorney may obtain a lien, promissory note, or other security device to protect the ability to collect fees, so long as the attorney complies with former rule 5-101 (the predecessor to rule 3-300). Another committee has opined that an attorney may obtain a security interest in client assets to secure payment of attorney's fees. (L.A. Cty. Bar Formal Opn. No. 398.)
In determining whether or not a transaction is "fair and reasonable" to the client, the courts have examined whether the terms of the transaction would have been fair had the client entered into the transaction with a third party who was not his attorney. (See, e.g., Hawk v. State Bar, supra, 45 Cal.3d at p. 601 [discipline against attorney upheld where attorney had obtained notes secured by deed of trust on client's property and then caused the properties to be foreclosed upon. Although the terms of the transactions were "fair and reasonable", the clients did not understand their legal significance]; Gold v. Greenwald (1961) 247 Cal.App.2d 296, 304 [55 Cal.Rptr. 660] [even though the client's financial exposure in a real estate joint venture was greater than her attorney's, the court ruled the agreement was fair but refused to enforce it because the client had not been fully informed of her responsibilities and liabilities]; Hawkins v. Faries (1942) 49 Cal.App.2d 186, 192 [client sold oil drilling permits to attorneys; attorneys sold the permits to a third party at a large profit. When client sued to recover this "secret profit," the court ruled in favor of the attorneys as the client had received a "fair and adequate price" for the permits].) The attorney bears the burden of proving that the terms of the transaction are fair, and that the client was fully informed. (See Ames v. State Bar (1973) 8 Cal.3d 910, 916 [106 Cal.Rptr. 489, 506 P.2d 625].)
Assignment by the client of the statutory right to attorney's fees appears fair. Such an assignment is consistent with the purposes of the attorney's fees award in civil rights cases. Congress intended that the entitlement to fees would enable indigent plaintiffs to obtain competent counsel. (See Venegas v. Mitchell (1990) 495 U.S. 82 [109 L.Ed.2d 74, 83, 110 S.Ct. 1679].) Permitting defendants to settle such actions in exchange for the plaintiff's waiver of the right to attorney's fees may eliminate access to the courts in civil rights cases by reducing the number of lawyers willing to take on such cases. (See L.A. Cty. Bar Formal Opn. No. 445.) Allowing lawyers to contract with their clients for an assignment of the right to fees should enhance the public's access to competent counsel.
Our conclusion that such agreements may be fair and reasonable is also supported by the United States Supreme Court's opinion in Venegas v. Mitchell, supra, 495 U.S. 82, which held that an attorney's contingency fee contract was enforceable even though it gave the attorney greater fees than the district court had awarded pursuant to 42 United States Code section 1988. The Court notes that since a civil rights plaintiff may agree to waive the right to fees in favor of the defendant, refusing to enforce a contingency agreement would place plaintiffs ". . . in the peculiar position of being freer to negotiate with their adversaries than with their own attorneys." Id. at p. 88. Additionally, the Court recognized that ". . . depriving plaintiffs of the option of promising to pay more than the statutory fee if that is necessary to secure counsel of their choice would not further 42 United States Code section 1988's general purpose of enabling such plaintiffs in civil rights cases to secure competent counsel." Id. at p. 89. Therefore, the concept of an assignment of the right to recover attorney's fees does not appear to us to be unfair.2
To establish compliance with rule 3-300, the member must also satisfy the disclosure requirement of the rule. (Rule 3-300(A).) Disclosure should include a discussion that the lawyer may attempt to override the client's desire to settle the case by accepting the injunctive relief requested, if the settlement offer depends upon a waiver of some or all of the attorney's fees, and that the lawyer's right to do so may not be enforceable. The client must be informed that the defendant may offer the full injunctive relief requested in exchange for a waiver of attorney's fees and that, in this event, the attorney's interest and the client's interest in settling the case would differ, with the possible result that the attorney must withdraw.3
Furthermore, because there is a conflict of interest between attorney and client regarding settlement, the attorney must promptly and fully inform the client of all settlement offers. (See Cal. State Bar Formal Opn. No. 1989-114.) In the event of a settlement offer contingent upon waiver of attorney's fees, the attorney must not only advise the client of all terms of the offer, but should also remind the client that the attorney "owns" the right to attorney's fees, and advise the client that he or she has the right to consult with independent counsel regarding the settlement offer. We believe that rule 3-310(A) and (B)(4) imposes this requirement of additional disclosure, as the attorney has acquired an interest in the subject matter of the representation. In the event of a disagreement between client and attorney as to whether or not a settlement offer should be accepted, the attorney may be forced to withdraw from representation. (See rule 3-700(B)(2) [mandatory withdrawal when member knows or should know that continued employment will result in violation of the rules] and rule 3-700(C)(1)(f) [permissive withdrawal where client breaches agreement as to fees].)
Although such agreements do not appear to be unethical if the attorney makes the appropriate disclosures and obtains client consent, there is no guarantee that such agreements are enforceable. A member may not agree to settlement without the client's consent. (See Sampson v. State Bar (1974) 12 Cal.3d 70, 82 [115 Cal.Rptr. 43, 524 P.2d 139]; Bodisco v. State Bar (1962) 58 Cal.2d 495, 497-498 [24 Cal.Rptr. 835] [concluding settlement without client's consent warrants discipline]; Bambic v. State Bar (1985) 40 Cal.3d 314, 323 [219 Cal.Rptr. 489, 707 P.2d 862] [willful settlement without client's consent is a dishonest act warranting severe discipline]; Alvarado Community Hospital v. Superior Court (1985) 173 Cal.App.3d 476, 480 [219 Cal.Rptr. 52] [attorney has no authority to bind client to settlement without client's consent].) Since an attorney may not dictate a settlement decision against the client's will, it appears that the attorney also does not have the right to veto a settlement that the client wishes to accept. The client always has the right to determine whether or not to accept a settlement offer. (Rule 3-510; Bus. & Prof. Code, § 6103.5.) In Darby v. City of Torrance (C.D. Cal. 1992) 810 F.Supp. 271, the District Court held that a lawyer could not enforce a fee provision in a 42 U.S.C. § 1983 case by becoming a party in the underlying case, or by filing for injunctive relief in that case to prohibit settlement without protecting the lawyer's fees.4 Thus, in the event of a disagreement between attorney and client regarding settlement, the appropriate procedure would require the attorney to withdraw from representation and then seek to enforce the retainer agreement. Whether the attorney has legal standing to oppose the settlement and whether or not a court would enforce the agreement between attorney and client, are legal questions beyond the scope of this opinion. We make note of these issues because they obviously influence an attorney's decision to enter into such a retainer agreement.
For the reasons discussed above, and despite concerns regarding enforceability, agreements assigning the right to attorney's fees are neither illegal nor unconscionable, and therefore do not violate rule 4-200. The court sets the amount of attorney's fees awarded pursuant to 42 United States Code section 1988; the agreement in question does not affect the amount of fees to be awarded.
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of the State Bar of California. It is advisory only. It is not binding on the courts, the State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.
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