Can class counsel agree to pay the class representative extra out of court-awarded fees if the representative's recovery is less than full damages?

Plain-English summary

The committee reviewed a proposed retention-agreement clause for a class representative. Because a class representative may recover less by pursuing a class action and must devote substantial time and resources, the clause provided that if the representative's net recovery (including any incentive fee) is less than his court-determined allowable damages, the lawyers would pay him half the difference out of their fees. The provision would be disclosed to the court at the fee-approval stage.

The opinion concludes the clause may give rise to a Rule 1.7 conflict. While reducing or rebating a fee is not per se impermissible, here the lawyer's personal interest in fulfilling fiduciary duties to the absent class collides with the arrangement. Class counsel owes a fiduciary duty to the whole class (citing Creative Montessori and Rodriguez), and a worked example shows the clause would pay the representative meaningfully more than absent class members beyond the court-approved incentive award, with the gap widening as the fee percentage rises. That creates a significant risk under Rule 1.7(a)(2) that the representation is materially limited by the lawyer's own interest. The opinion further concludes this conflict could not be waived, because the only client who could consent, the class representative, has an incentive to consent even though the arrangement disadvantages the absent class members to whom both lawyer and representative owe fiduciary duties.

On fee-sharing, the opinion concludes the specific proposed clause does not violate Rule 5.4(a), because the payment from the lawyer's fee goes to the lawyer's own client, and lawyers may generally discount or rebate fees to their own clients (citing D.C. Op. 351, Maine Op. 198, N.Y. State Op. 819, and Virginia Op. 1783). It cautions, however, that a similar arrangement could in other circumstances cross the line into improper fee-sharing with a nonlawyer (collecting Newberg and a Texas opinion), and leaves those circumstances beyond the opinion's scope.

In practice

Under this opinion, class counsel considering such a clause faces a substantial risk of an unwaivable Rule 1.7 conflict, because the arrangement sets the lawyer's fiduciary duty to absent class members against the representative's interest, and only the representative (who benefits) could consent. The opinion holds the specific clause presented does not violate Rule 5.4(a), since the payment is a rebate to the lawyer's own client, but it holds that a similar agreement could violate the fee-sharing bar in other circumstances it does not define. The committee frames the analysis around the lawyer's fiduciary obligations to the class as a whole.

Common questions

Q: Can I promise a class representative extra money out of my court-awarded fees?

A: It is risky. The opinion concludes such a clause creates a substantial risk of a Rule 1.7 conflict between the representative and absent class members that cannot be waived.

Q: Why can't the conflict just be waived?

A: The opinion concludes only the class representative could consent, and he has an incentive to consent because he benefits, even though the arrangement disadvantages the absent class members to whom the lawyer owes fiduciary duties.

Q: Does paying the representative from my fee violate the fee-sharing rule?

A: Not in this specific case. The opinion concludes Rule 5.4(a) is not violated because the rebate goes to the lawyer's own client, but it warns a similar arrangement could violate the rule in other circumstances.

Background and rules framework

The opinion interprets Illinois Rule of Professional Conduct 1.7 (concurrent conflicts, including the 1.7(a)(2) material-limitation test and consentability) and Rule 5.4(a) (sharing legal fees with a nonlawyer), against class counsel's fiduciary duty to the class. These correspond to Model Rules 1.7 and 5.4.

Citations and references

Rules:

• Illinois RPC 1.7(a)(2), (b) (MR 1.7): material-limitation conflicts and consentability
• Illinois RPC 5.4(a) (MR 5.4): sharing legal fees with a nonlawyer

Cases:

• Creative Montessori v. Ashford Gear, 662 F.3d 913 (7th Cir. 2011), fiduciary obligations of class counsel
• Rodriguez v. West Publishing Corp., 563 F.3d 948 (9th Cir. 2009), duty to absent class members
• O'Hara v. Ahlgren, Blumenfeld & Kempster, 127 Ill. 2d 333 (1989), public policy against lawyer-nonlawyer fee-sharing

Other opinions cited:

• D.C. Op. 351 (2009); Maine Op. 198 (2009); N.Y. State Op. 819 (2007); Virginia Op. 1783 (2003); Texas Op. 526 (1998): fee discounts and fee-sharing

See also

• ISBA Ethics Op. 15-04: Sharing Court-Awarded Fees With a Nonprofit Referral Source
• ISBA Ethics Op. 12-11: Fee Sharing Between a Discharged Lawyer and Successor Lawyer
• ABA Formal Op. 474: Referral Fees and Conflicts of Interest

Source

• Landing page: https://www.isba.org/ethics/opinions/1901