Can an Ohio lawyer use a fee agreement that lets the lawyer choose, at settlement, whichever is larger between the hourly fee and a contingent percentage?

Plain-English summary

The Board addresses a proposed fee agreement under which the client pays the lawyer an hourly rate during the matter, but at settlement or collection of judgment the lawyer may elect to keep the hourly fee or instead take a total fee equal to a percentage of the recovery, whichever produces the larger fee.

The opinion concludes the arrangement is improper. It starts from the premise that contingent fees are normally higher than hourly fees because the lawyer bears the risk of no recovery, an arrangement the opinion describes as a "shared risk of non-recovery" between client and lawyer, quoting Cincinnati Bar Ass'n v. Schultz. Under the proposed agreement, the lawyer takes on no such risk: the lawyer can pick the larger of two fees at the end without ever risking nonpayment, which the Board calls "largely illusory."

The opinion grounds the conclusion in two rules. First, Prof.Cond.R. 1.5(a) requires every fee to be reasonable, and the Board notes that deciding which fee to impose based on the amount at the conclusion of the matter is not among the rule's reasonableness factors; it cites Cuyahoga Cnty. Bar Ass'n v. Levey and Columbus Bar Ass'n v. Klos, where lawyers were disciplined for contingent-fee contracts that let them charge hourly upon discharge or an unsuccessful contingency. Second, under Prof.Cond.R. 1.2(a) the client controls the decision whether and when to settle, and the Board explains the proposed structure could interfere with that authority because a client may feel pressure to settle early to avoid mounting hourly fees. The opinion notes other jurisdictions have reached a similar conclusion, citing Texas Ethics Opinion 518 (1996). This opinion withdraws Adv. Op. 1995-07.

In practice

Under this opinion, an Ohio lawyer may not offer a fee agreement that lets the lawyer choose, at the conclusion of the matter, the larger of an accrued hourly fee or a contingent percentage. The Board treats the structure as improper because the lawyer collects the higher fee without bearing the risk that justifies a contingent fee, and because it can both interfere with the client's settlement authority under Prof.Cond.R. 1.2(a) and produce an unreasonable fee under Prof.Cond.R. 1.5(a).

The opinion's holding is specific to the "whichever is larger" election structure. It does not disturb a lawyer's ability to enter an ordinary contingent-fee agreement under Prof.Cond.R. 1.5(c) or to charge a reasonable hourly fee.

Common questions

Q: Can an Ohio lawyer write a fee agreement that picks the larger of hourly or contingent at the end of the case?

A: No. The opinion concludes such an agreement is improper because it lets the lawyer collect the higher of two fees without incurring any real risk of no recovery.

Q: Why does the Board call the arrangement "illusory"?

A: Per the opinion, a contingent fee is justified by the lawyer's shared risk of non-recovery; an election to take the larger of two fees removes that risk while still capturing the contingent premium, so the contingency is in name only.

Q: Which rules does the opinion rely on?

A: The opinion relies on Prof.Cond.R. 1.5(a) (reasonable fee) and Prof.Cond.R. 1.2(a) (the client's authority to decide whether and when to settle).

Q: How could the arrangement affect a client's decision to settle?

A: The opinion explains a client may feel pressure to settle early to avoid mounting hourly fees, regardless of the settlement amount offered, which can interfere with the client's settlement authority under Prof.Cond.R. 1.2(a).

Background and rules framework

The opinion interprets Ohio Prof.Cond.R. 1.5 (Model Rule 1.5): subsection 1.5(c) permits contingent-fee agreements, and subsection 1.5(a) requires that every fee be reasonable and lists eight nonexclusive reasonableness factors. It also interprets Prof.Cond.R. 1.2(a) (Model Rule 1.2(a)), under which a lawyer must abide by the client's decision whether to settle a matter.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.5 / Ohio Prof.Cond.R. 1.5(a) (reasonable fee), 1.5(c) (contingent fees)
• Model Rule 1.2(a) / Ohio Prof.Cond.R. 1.2(a) (client's authority over settlement)

Cases:

• Cincinnati Bar Ass'n v. Schultz, 71 Ohio St.3d 383, 1994-Ohio-46, contingent fees imply a shared risk of non-recovery
• Cuyahoga Cnty. Bar Ass'n v. Levey, 88 Ohio St.3d 146, 2000-Ohio-283, hourly charge on discharge violated the reasonable-fee requirement
• Columbus Bar Ass'n v. Klos, 81 Ohio St.3d 486, 1998-Ohio-610, contingent fee flawed where it allowed hourly compensation on withdrawal or discharge before settlement

Other opinions cited:

• N.Y. Eth. Op. 697 (1997): contingent fees compensate for risk of no recovery
• Tex. Comm. Prof. Ethics Op. 518 (1996): other-jurisdiction conclusion that the structure is improper

See also

• Ohio BPC Op. 1995-07: Hourly or Contingent, Whichever Is Larger (withdrawn)
• ABA Formal Op. 464: Fee Division With Lawyers Who Share With Nonlawyers

Source

• Landing page: https://ohioadvop.org/advisory-opinion-index/
• Original PDF: https://www.ohioadvop.org/wp-content/uploads/2024/04/Adv.-Op.-2024-03-Final.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

OPINION 2024-03
Issued April 5, 2024
Withdraws Adv. Op. 1995-07

Propriety of Fee Agreement Permitting Conversion from an Hourly Rate to a Contingent Fee

SYLLABUS: It is improper for a lawyer to enter into a fee agreement where the client agrees to pay an hourly rate until settlement or collection of judgment at which time the lawyer may choose between charging the hourly fee or receiving a total fee equal to a percentage of the settlement or judgment depending upon whichever results in the larger fee to the lawyer.

APPLICABLE RULES: Prof.Cond.R. 1.2, 1.5.

QUESTION PRESENTED:

May a lawyer enter into a fee agreement where the client pays an hourly rate until settlement or collection of judgment at which time the lawyer chooses between keeping the hourly fee or receiving a total fee equal to a percentage of the settlement or recovery depending upon whichever results in the larger fee to the lawyer?

ANALYSIS:

Contingent Fee Agreements

Lawyers are permitted to enter into contingent-fee agreements with clients. Prof.Cond.R. 1.5(c). Contingent fee arrangements enable clients to pursue actions when they do not have the financial resources to pay a lawyer during impending and pending litigation. Contingent fees are normally greater than the hourly fees that would be charged for the same representation because the lawyer bears the risk of no recovery, and the higher fee is compensation for incurring that risk. N.Y. Eth. Op. 697 (1997). In essence, contingent fee agreements imply a "shared risk of non-recovery" between the client and the lawyer. Cincinnati Bar Ass'n v. Schultz, 71 Ohio St. 3d 383, 384, 1994-Ohio-46.

Reasonableness of Fee

Any fee charged by a lawyer must be reasonable. Prof.Cond.R. 1.5(a). Prof.Cond.R. 1.5, cmt. [5]. Prof.Cond.R. 1.5(a) lists eight nonexclusive factors to be considered in the determination of whether a fee is reasonable. Prof.Cond.R. 1.5, cmt.[1]. A decision of which fee will be imposed based on the amount of the fee at the conclusion of the representation is not a factor considered to determine reasonableness under the rule. Moreover, the fact that a client agrees to a particular fee arrangement does not relieve the lawyer from the reasonable fee requirement of Prof.Cond.R. 1.5(a).

The Supreme Court has reviewed contingent fee contracts that give a lawyer the right to charge an hourly fee when (a) the representation concludes prematurely or (b) upon the unsuccessful occurrence of the contingency and held that the lawyers consequently violated the reasonable fee requirement of what is now Prof.Cond.R. 1.5(a). Cuyahoga Cnty. Bar Ass'n v. Levey, 88 Ohio St. 3d 146, 148, 2000-Ohio-283 (disciplining attorney whose "contingent-fee agreement with [clients] provided for an hourly charge if he was discharged whether or not, a successful completion [of case] occurred"); Columbus Bar Ass'n v. Klos, 81 Ohio St. 3d 486, 489, 1998-Ohio-610 ("The contingent fee portion of the contract * * * was also flawed" because it "provided that should the attorneys be discharged or withdraw prior to settlement, they would be compensated" at the hourly rate.)

Interference With Client's Decision to Settle

The proposed fee agreement gives the lawyer the unilateral ability to choose the higher of the hourly rate or contingent fee when the matter is successfully resolved. This type of fee agreement likely interferes with the client's authority to choose when and whether to settle a matter and increases the likelihood in some circumstances for the charging or collection of an unreasonable or excessive fee. See Prof.Cond.R. 1.2(a) (a lawyer shall abide by the client's decision whether to settle a matter.) Under the proposed fee arrangement, interference with the client's decision to settle the matter may arise if a client perceives that it is better to settle the matter early in order to avoid mounting hourly fees, irrespective of the amount that may be offered in settlement.

Improper Fee Agreement

With regard to the question presented, the Board concludes it is improper for a lawyer to enter into a fee agreement where the client agrees to pay an hourly rate until settlement or recovery, at which the lawyer can unilaterally decide whether to charge an hourly rate or a contingent fee. Other jurisdictions have reached a similar conclusion. See e.g. Tex. Comm. Prof. Ethic 518 (1996). Such an agreement is largely illusory since the lawyer can elect to charge the larger of two fees without incurring any risk of no recovery. The traditional risks that a lawyer accepts by entering into a contingency fee agreement with a client cannot be eliminated by permitting the lawyer by agreement to collect the fee with the highest value at the conclusion of the matter.