May a California lawyer take a contingency fee agreement giving the lawyer the first proceeds of suit, shifting to the client the risk that the defendant's finances will limit recovery?
LACBA Ethics Opinion 526: Contingency Fee Agreements Giving Lawyer First Proceeds
Short answer: Under former California Rules 3-300 and 4-200, a lawyer may enter a binding contingency fee agreement that pays the lawyer some or all of the first proceeds of suit, shifting to the client the risk that the defendant's financial condition will limit recovery. The agreement must comply with Bus. & Prof. Code section 6147 and rests on the client's informed consent based on the lawyer's full and fair disclosure of pertinent facts.
Disclaimer: This is an advisory ethics opinion. Advisory opinions are not binding; they interpret the Los Angeles County Bar Association's view of California's rules of professional conduct and are persuasive authority. This summary is for research purposes only and is not legal advice. Verify current rules before acting on any specific guidance.
About this page: The plain-English summary and Q&A below were written by Ezel based on the official opinion. We do not reproduce the opinion text on this page; follow the linked source for the official text, which controls.
Plain-English summary
The opinion considers a hypothetical contract dispute where XYZ, Inc. asks Lawyer to take its breach-of-contract claim on contingency. XYZ has limited cash and the potential defendant may be unable to satisfy a full judgment. Lawyer insists on a fee agreement giving Lawyer the first proceeds of any settlement or judgment up to the full agreed contingent fee. The writing complies with Bus. & Prof. Code section 6147 and explains that XYZ's recovery may be reduced or eliminated by Lawyer's superior rights.
The committee concludes the agreement is permissible. The general rule (Tarver v. State Bar (1984) 37 Cal.3d 122) is that a contingent-fee lawyer collects only when there is a recovery, and the lawyer ordinarily shares the client's risk. But that default can be varied by an unambiguous writing that complies with section 6147 and former Rule 4-200's reasonableness requirement, and where the client provides informed consent under former Rule 3-300's business-transaction disclosure standard.
The committee identifies the specific disclosures: the client must understand that the lawyer's "first proceeds" priority can leave the client with little or no net recovery, that the arrangement differs from a standard contingency, and that the client may obtain independent counsel before signing. The opinion treats the agreement as a "business transaction" with the client implicating Rule 3-300 because the lawyer is acquiring a pecuniary interest adverse to the client.
The committee also addresses unconscionability under former Rule 4-200 and section 6148 by reference to Brobeck, Phleger & Harrison v. Telex Corp. (9th Cir. 1979) and the Cotchett, Pitre line of cases. It concludes the agreement at issue is not unconscionable where the client is a sophisticated business and the writing is clear.
In practice
The opinion holds that, under California's rules as they stood in 2015, a first-proceeds contingency fee agreement is enforceable when the writing complies with Bus. & Prof. Code section 6147, the client gives informed consent meeting former Rule 3-300's disclosure standard, and the overall fee is not unconscionable under former Rule 4-200.
This opinion predates California's November 1, 2018 rule revisions and is framed under former Rules 3-300 and 4-200. Current California Rule 1.5 (fees) and Rule 1.8.1 (business transactions with clients) carry forward the equivalent concepts.
Common questions
Q: Can a contingency agreement put the lawyer ahead of the client in the recovery?
A: Per the opinion, yes, where the writing is unambiguous and complies with Bus. & Prof. Code section 6147, the client gives informed consent under former Rule 3-300, and the overall fee is not unconscionable under former Rule 4-200.
Q: What disclosures does the lawyer have to make under former Rule 3-300?
A: The opinion treats the first-proceeds clause as a business transaction with the client. The client must understand the priority arrangement, the practical consequence that the client may recover little or nothing despite the lawyer recovering the full fee, that the terms differ from a standard contingency, and that the client may seek independent counsel before signing.
Q: Does the client have to be a sophisticated business?
A: The opinion's hypothetical involves a sophisticated business client (XYZ, Inc.) with experienced management. The committee notes the disclosure burden may be heavier with a less sophisticated client and that unconscionability is a fact-specific inquiry under former Rule 4-200.
Q: What if the lawyer believes the defendant cannot pay the full claim?
A: Per the opinion, the lawyer's expectation that the defendant may not pay in full is part of what makes the first-proceeds arrangement an "informed" risk reallocation. The lawyer must disclose what the lawyer knows so the client's consent reflects the actual likelihood of limited recovery.
Background and rules framework
The opinion interprets former California Rule 3-300 (business or financial transactions with a client, requiring fair terms and informed written consent), former Rule 4-200 (fees, including unconscionability), and Bus. & Prof. Code section 6147 (written contingent-fee agreement requirements). It uses Tarver v. State Bar as the baseline for contingency-fee allocation and Brobeck, Phleger as the unconscionability anchor.
Citations and references
Rules of Professional Conduct:
- Former California Rule 3-300 (business or financial transactions with a client)
- Former California Rule 4-200 (fees, including unconscionability)
Statutes:
- Bus. & Prof. Code section 6147 (contingent-fee agreements; written form)
- Civ. Code section 1670.5 (unconscionability)
- 42 U.S.C. section 1983
Cases:
- Brobeck, Phleger & Harrison v. Telex Corp., 602 F.2d 866 (9th Cir. 1979), sophisticated-client unconscionability
- Tarver v. State Bar, 37 Cal.3d 122 (Cal. 1984), default contingency-fee allocation
- Cetenko v. United California Bank, 30 Cal.3d 528 (Cal. 1982)
- Herrscher v. State Bar, 4 Cal.2d 399 (Cal. 1934), fee-discipline standards
- Goldstone v. State Bar, 214 Cal. 490 (Cal. 1931)
- Cotchett, Pitre & McCarthy v. Universal Paragon Corp., 187 Cal.App.4th 1405 (2010)
- Ramirez v. Sturdevant, 21 Cal.App.4th 904 (1994)
- Alderman v. Hamilton, 205 Cal.App.3d 1033 (1988)
- Sayble v. Feinman, 76 Cal.App.3d 509 (1978)
- Setzer v. Robinson, 57 Cal.2d 213 (Cal. 1962)
- Yerkovich v. MCA, Inc., 11 F. Supp.2d 1167 (C.D. Cal. 1997)
- In re Stochel, 792 N.E.2d 874 (Ind. 2003)
- State Bar Court matters: Phillips (2011), Goddard (2011), Wells (2005), Van Sickle (2005), Yagman (1997)
Other opinions cited:
- California State Bar Formal Opinion 1994-135
- LACBA Formal Opinion 496 (1998): liens on recovery in unrelated case
- LACBA Formal Opinion 518 (2006): ethical considerations in outsourcing legal services
- Restatement (Third) of the Law Governing Lawyers section 35(2)
See also
- No sibling opinions yet indexed.
Source
- Landing page: https://lacba.org/?pg=ethics-opinions
- Original PDF: https://lacba.org/docDownload/2010575