Can a California lawyer agree to pay or indemnify a client for the litigation costs the client may be ordered to pay if the client loses the case?

Plain-English summary

An attorney wanted to represent clients in civil litigation who were unable or unwilling to pay costs if they did not prevail, and wanted to indemnify those clients against any costs the court might award if the clients were not the prevailing party. In some cases the request for indemnity arose at the inception of the representation and in others during the litigation. The question was whether a lawyer or firm may indemnify a client for costs associated with litigation if the client loses and the prevailing party files a memorandum of costs.

The committee read the unambiguous language of former California Rule 4-210(A)(3) to permit an attorney to agree to pay a client's reasonable litigation costs, with repayment contingent on the outcome. It anchored that reading in Ripley v. Pappadopolous (1994) 23 Cal.App.4th 1616, 1626 fn. 17, and in State Bar Formal Opinion 1976-38 (Rule 4-210 does not prohibit advancing expenses for which the client is responsible, even where the client likely cannot pay), recited by analogy in State Bar Formal Opinion 1994-138, and in the committee's own Formal Opinion 495 (an attorney may advance the reasonable expenses of an action even if the expenses might not be repaid).

The committee reasoned that an indemnification for costs the client may be ordered to pay is not materially different from advancing costs whose repayment is contingent on the outcome. To the extent indemnification is not treated as a form of advancing costs, the committee concluded it is permitted, at inception or during the litigation, under the general exception in Rule 4-210(A) for "otherwise protecting or promoting the client's interests." Because the indemnified expenses are the costs the trial court awards under Code of Civil Procedure sections 1033 and 1034, the amount the court determines is presumptively reasonable and therefore permissible under the rule.

The committee then addressed whether the indemnity agreement creates an adverse interest implicating former Rule 3-310(B), which requires written disclosure where a member has certain relationships or interests adverse to the client. It concluded the agreement does not create a legal, business, financial, professional, or personal relationship in violation of Rule 3-310(B)(1) or (3), nor does it create such a relationship in the subject matter under Rule 3-310(B)(4). The interests of the attorney and the client remained the same as with any other cost expense, because both want to prevail; the prospect of increasing costs as a case proceeds to trial in the face of a Code of Civil Procedure section 998 offer is present in every contingency case. The committee concluded that the indemnity does not present a different ethical result and is simply a contractual expansion of the scope of reasonable expenses of litigation within the ambit of Rule 4-210(A)(3).

Currency note

This opinion was issued in 2006 and interprets the former California Rules of Professional Conduct, specifically Rule 4-210(A) (paying or guaranteeing a client's expenses) and Rule 3-310(B) (disclosure of adverse interests). California adopted a new, renumbered set of Rules of Professional Conduct effective November 1, 2018. Verify the current rules before relying on the rule citations here.

In practice

The opinion holds that, under the former California rules as they stood in 2006, an attorney could agree to advance a client's reasonable litigation expenses and waive repayment if the matter produced no recovery, and could agree to indemnify the client for costs the court might award to a prevailing opponent under Code of Civil Procedure sections 1033 and 1034. Per the opinion, that indemnity could be agreed either at the inception of the representation or during the litigation, and the committee concluded it did not create an adverse interest beyond the written-disclosure requirement of former Rule 3-310(B), because attorney and client share the interest in prevailing.

Common questions

Q: Can a California lawyer agree to indemnify a client for the other side's costs if the client loses?

A: Per the opinion, yes. The committee concluded that indemnifying a client for court-ordered costs is not materially different from advancing costs with repayment contingent on the outcome, and is permitted under former Rule 4-210(A).

Q: Does it matter whether the indemnity is agreed at the start of the case or later?

A: Per the opinion, no. The committee concluded the agreement is permissible either at the inception of the representation or during the course of the litigation.

Q: Does indemnifying the client's costs create a conflict of interest?

A: Per the opinion, no adverse interest is created under former Rule 3-310(B). The committee reasoned that the attorney and client share the interest in prevailing, the same as with any other cost expense.

Q: What costs does the indemnity cover?

A: Per the opinion, the reasonable expenses of litigation. Because those costs are set by the trial court under Code of Civil Procedure sections 1033 and 1034, the amount the court determines is presumptively reasonable.

Background and rules framework

The opinion interprets former California Rule of Professional Conduct 4-210(A), which barred a member from agreeing to pay a client's personal or business expenses except, under subparagraph (3), advancing the costs of prosecuting or defending a claim with repayment contingent on the outcome. That provision corresponds generally to Model Rule 1.8(e) on advancing litigation costs. It also interprets former Rule 3-310(B), the disclosure rule for adverse interests, which corresponds generally to Model Rule 1.7. The cost framework comes from Code of Civil Procedure sections 998 (offers to compromise), 1033, and 1034 (the court's determination of recoverable costs).

Citations and references

Rules of Professional Conduct (former California):

• California Rule 4-210(A) (paying or guaranteeing a client's expenses) (Model Rule 1.8(e))
• California Rule 3-310(B) (disclosure of adverse interests) (Model Rule 1.7)

Statutes:

• California Code of Civil Procedure sections 998, 1033, and 1034

Cases:

• Ripley v. Pappadopolous, 23 Cal.App.4th 1616 (Cal. Ct. App. 1994), advancing costs with repayment contingent on outcome

Other opinions cited:

• California State Bar Formal Opinion 1976-38: advancing expenses the client is responsible for
• California State Bar Formal Opinion 1994-138: recites 1976-38 by analogy
• LACBA Formal Opinion 495: advancing reasonable expenses that might not be repaid

See also

• CA COPRAC Ethics Op. 2020-204: Third-Party Litigation Funding
• LACBA Ethics Op. 445: Fee-Waiver Settlements in Civil Rights Cases
• LACBA Ethics Op. 275: Contingent Fees (Opinion 263 Withdrawn)

Source

• Landing page: https://lacba.org/?pg=ethics-opinions
• Original PDF: https://lacba.org/docDownload/2010586