Can a lawyer recommend and participate in a deal where the client pays a nonlawyer investigator a contingent fee out of the recovery, in addition to the lawyer's own contingent fee?

Plain-English summary

A lawyer hired on a contingent fee to prosecute a complex personal-injury claim told the client an investigator was needed and that hourly investigation would be costly. The lawyer recommended the client hire the investigator on a contingent fee, explained the implications, and the written fee agreement with the lawyer expressly permitted it. The investigator's contract paid a percentage of the recovery plus costs, but reverted to an hourly fee if the investigator became a fact witness. The investigator was not the lawyer's employee, and the lawyer received no part of the investigator's fee. The Committee addressed only the Disciplinary Rules, expressing no view on the arrangement's permissibility under any other Texas law.

The Committee worked through three rules. On Rule 3.04(b) (no compensation to a witness contingent on testimony or outcome), it concluded there was no violation here because the contingent arrangement would not apply if the investigator became a witness; it noted the lawyer must also take steps to ensure the investigator makes no contingent payment to a witness. On Rule 5.04(a) (no sharing of legal fees with a nonlawyer), the Committee concluded a client-investigator contingent fee does not involve the lawyer in fee-sharing if it is a reasonable means of compensating the investigator for services that are not the practice of law, even though the lawyer's work affects the size of the investigator's fee.

The Committee found the more serious question to be the effect on the lawyer's own fee under Rule 1.04(a), which bars an unconscionable fee. While Rule 1.04(d) permits contingent fees and the Committee has no authority to pass on any particular fee's permissibility, it observed that pairing the lawyer's contingent fee with the investigator's could leave the client a significantly smaller share. If, for that type of case, the lawyer would ordinarily advance investigation costs with repayment contingent on the outcome (permitted by Rule 1.08(d)(1)), and the lawyer instead routed those costs into a separate investigator contingency without reducing the lawyer's own percentage, the lawyer's fee arrangement might violate Rule 1.04(a). The Committee concluded the lawyer may participate subject to four conditions.

Currency note

This opinion was issued in 1994, under the Texas Disciplinary Rules of Professional Conduct that took effect January 1, 1990. Texas did not adopt the ABA's Ethics 2000 revisions; its rules have been amended only piecemeal since, including the March 1, 2005 amendment to the fee rule, Rule 1.04, and the comprehensive 2021 revisions adopted by Texas Supreme Court order. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a client pay an investigator a contingent fee out of the recovery?

A: The Committee concluded a lawyer may participate in such an arrangement if the investigator's contingency is reasonable compensation for non-legal services, voids if the investigator becomes a witness, and does not push the combined fees into unconscionable territory.

Q: Is the investigator's contingent fee an improper sharing of legal fees with a nonlawyer?

A: The Committee concluded it is not, under Rule 5.04(a), if it is a reasonable means of compensating the investigator for services that are not the practice of law, even though the lawyer's work affects how large the investigator's fee becomes.

Q: What happens if the investigator ends up as a witness?

A: The Committee concluded the contingent fee must not apply when the investigator becomes a witness (here it reverted to hourly), so Rule 3.04(b)'s ban on paying a witness contingent on testimony or outcome is not violated; the lawyer must also ensure the investigator pays no witness a contingent amount.

Q: Can stacking two contingent fees make the lawyer's fee unconscionable?

A: The Committee concluded it can. Under Rule 1.04(a), if the lawyer's percentage is not reduced to account for the investigator's contingency, the lawyer's fee viewed together with the investigator's may exceed the maximum permissible.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.04 (fees; ABA Model Rule 1.5), including 1.04(a) (no unconscionable fee) and 1.04(d) (contingent-fee contracts permitted), Rule 3.04(b) (no compensation to a witness contingent on testimony or outcome; Model Rule 3.4), Rule 5.04(a) (no sharing of legal fees with a nonlawyer; Model Rule 5.4), and Rule 1.08(d)(1) (advancing litigation expenses with contingent repayment). It distinguishes Opinion 458, which found a violation where a medical-legal consulting firm under contingency also provided expert testimony.

Citations and references

Rules of Professional Conduct:

• MR 1.5 (fees), MR 3.4 (fairness to opposing party and counsel), MR 5.4 (professional independence of a lawyer)
• Texas Disciplinary Rules 1.04 (incl. 1.04(a), (d)), 3.04(b), 5.04(a), 1.08(d)(1)

Other opinions cited:

• Tex. Ethics Op. 458 (Oct. 1988): a lawyer would violate the prior Code (DR 7-109(C)) by participating in a contingent-fee arrangement with a medical-legal consulting firm that also supplied expert testimony

See also

• TX Ethics Op. 518: "Greater of" Hourly or Contingent Fee and Unconscionability
• TX Ethics Op. 549: Contingent Fee on Gross Recovery With Subrogation
• TX Ethics Op. 558: Paying a Lender a Percentage of a Contingency Fee as Fee Sharing
• TX Ethics Op. 553: Expert Witness Employer's Contingent-Fee Interest

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-510/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_510.pdf

Original opinion text

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

QUESTION PRESENTED

May a Texas attorney provide legal services to a client under a contingent-fee arrangement in a litigation matter when the client also enters into a contingent-fee arrangement with a non-attorney investigator to perform investigation services in connection with the matter?

STATEMENT OF FACTS

A Texas attorney is employed by a client to prosecute a complex personal injury claim. The attorney and the client enter into a written agreement providing that the client will pay to the attorney in certain circumstances specified percentages of the amount recovered plus reimbursement of court costs and expenses and payment of indebtedness incurred on behalf of the client. At the time of employment, the attorney informs the client that an investigator will need to be hired because of the complexity of the case and that hiring an investigator on an hourly basis will be very costly. The attorney recommends that the client hire an investigator on a contingent fee basis and fully explains to the client the implications of such an arrangement. A contingent fee arrangement with an investigator is expressly permitted by the attorney's written agreement with the client. The client thereafter enters into a written agreement under which the investigator will perform all investigative work for a fee equal to a percentage of the client's recovery on the matter plus the investigator's costs and expenses. There is an additional provision in the contract that states that, if the investigator has to become a fact witness in the matter for any reason in the client's suit, then the contingent fee contract between them is void and the contract reverts to an hourly fee contract. All investigative information obtained by the investigator is to be turned over to the client's attorney. The investigator is not an employee of the lawyer and the lawyer will not receive any part of the fees paid to the investigator under the contract.

DISCUSSION

This opinion addresses solely the Texas Disciplinary Rules of Professional Conduct (the "Disciplinary Rules") as applied to an attorney who might be involved in the proposed arrangement. The Committee expresses no opinion on the legal effect (including the permissibility) of the proposed arrangement under any rule of Texas law other than the Disciplinary Rules.

Fee arrangements between a lawyer's clients and non-lawyers are not themselves subject to the Disciplinary Rules. However, the Disciplinary Rules may prohibit a lawyer from involvement in certain arrangements for the payment of fees to non-lawyers.

In Opinion 458 (Texas Bar Journal October 1988 at 924), this Committee considered the permissibility, under the Texas Code of Professional Responsibility as then in effect, of a lawyer's participating in or recommending that a client enter into a contingency fee agreement with a medical-legal consulting firm. Since in that case the medical-legal consulting firm would provide various services including the provision of expert testimony, Opinion 458 concluded that a lawyer would violate the provision of the Texas Code of Professional Responsibility (DR 7-109(C)) then in effect that prohibited a lawyer from participating in the payment of contingent compensation to a witness. The opinion also noted that the arrangement with the medical-legal consulting firm raised problems under the Texas Code of Professional Responsibility in several other areas including fee splitting and excessive legal fees.

With respect to contingent fees payable to witnesses, Rule 3.04(b) of the Disciplinary Rules as currently in effect is substantially the same as the provision cited in Opinion 458. Rule 3.04(b) (all references to Rules are to provisions of the current Disciplinary Rules) provides that a lawyer may not "pay, offer to pay, or acquiesce in the offer or payment of compensation to a witness or other entity contingent upon the content of the testimony of the witness or the outcome of the case." However, unlike the arrangement considered in Opinion 458, there should be no violation of Rule 3.04(b) in this case since the contingent-fee arrangement will not apply if the investigator becomes a witness in the proceeding. It should be noted however that Rule 3.04(b) also requires the lawyer to take appropriate steps to ensure that the investigator receiving a contingent fee payment does not make any payment to a witness that is contingent on the outcome of the case.

Rule 5.04(a) provides, with exceptions not here applicable, that "[a] lawyer or law firm shall not share or promise to share legal fees with a non-lawyer . . . ." The Committee is of the opinion that a contingent fee arrangement between a client and a non-lawyer investigator would not involve a lawyer in sharing legal fees with a non-lawyer if the arrangement is a reasonable means of compensating the investigator for the investigator's services and such services are not services that constitute the practice of law. Such a fee arrangement for the investigator should not be viewed as an impermissible sharing of legal fees even though the lawyer's services are directly involved in the outcome that determines the amount of the investigator's fee.

A more serious question is presented with respect to the impact of the investigator's contingent fee arrangement on the lawyer's own contingent fee contract with the client. Rule 1.04(d) specifically permits an attorney to enter into a written contract for a contingent fee arrangement for most types of legal services. However, any fee arrangement, whether or not contingent, must comply with Rule 1.04(a): "A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee. A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable." With respect to the application of this Rule, this Committee has no authority to pass on the permissibility under Rule 1.04(a) of any particular contingent fee arrangement.

Unless a lawyer's contingent fee percentage is reduced, a lawyer's contingent fee contract when coupled with an investigator's contingent fee arrangement may result in a significantly smaller percentage of a recovery going to the client than if there were no contingent fee arrangement with the investigator. Depending on the circumstances, the lawyer's fee when viewed in conjunction with the investigator's contingent fee may be in excess of the maximum fee permissible under Rule 1.04(a). For instance, an excessive fee under Rule 1.04(a) could result if, for the particular type of case, the normal contingent fee arrangement for legal services would involve the lawyer's advancing the costs of investigation services under an agreement that repayment to the lawyer would be contingent on the outcome of the case (as permitted by Rule 1.08(d)(1)). If for such a case a lawyer assisted the client to enter into a contingent fee contract for investigative services while making no reduction in the lawyer's contingent fee percentage from the percentage generally used by other lawyers who advance investigation costs, the lawyer's fee arrangement might be in violation of Rule 1.04(a).

CONCLUSION

Under the Disciplinary Rules, a lawyer may participate in an arrangement under which the lawyer's client enters into a contingent fee contract with a non-lawyer for investigative services provided (1) the lawyer explains to the client the full implications of the arrangement and the lawyer's agreement with the client contemplates such an arrangement, (2) the contingent-fee arrangement with the non-lawyer does not apply if the non-lawyer becomes a witness in the case and the lawyer ensures that no contingent payment is made by the investigator to any witness, (3) the compensation for investigative services is reasonable compensation for investigative services and is not a disguised means of sharing a legal fee with a non-lawyer, and (4) in the circumstances, the lawyer's contingent fee arrangement, viewed in conjunction with the fee arrangement for investigative services, is not in excess of the maximum permitted under Rule 1.04(a).

Tex. Comm. On Professional Ethics, Op. 510 (1994)