In a workers' comp third-party case, can my contingent fee be based on the gross recovery even though part of it must be repaid to the comp carrier?

Plain-English summary

The opinion uses a worked example. An injured worker received $50,000 in workers' compensation benefits, then hired a lawyer on a one-third contingent fee to sue a negligent third party, and the suit settled for $100,000. The lawyer proposed to take one-third of the gross $100,000 ($33,333), repay the $50,000 carrier reimbursement, and leave the worker $16,667.

The Committee applies Rule 1.04(a), under which a lawyer may not charge or collect an unconscionable fee, defined as one a competent lawyer could not reasonably believe is reasonable. It then explains the governing law: Texas Labor Code section 417.001 subrogates the carrier to the worker's rights against the third party, and section 417.002 requires the carrier to be reimbursed out of the recovery. Under settled Texas law (Fort Worth Lloyds v. Haygood and cases following it), the carrier is entitled to the first money out of any third-party recovery until reimbursed in full, and until then neither the worker nor his representative has any right to those funds.

Because the worker and his lawyer have no right to the funds owed the carrier, the Committee concludes that a fee calculated to include those funds is unconscionable and violates Rule 1.04(a). It illustrates a permissible allocation: subtract the $50,000 carrier reimbursement first, then apply the one-third fee to the worker's $50,000 net recovery ($16,667 fee), leaving the worker $33,333. The Committee also notes that Labor Code section 417.003 addresses attorney's fees on funds recovered for a carrier whose interest is not actively represented by an attorney.

In practice

Under this opinion, and under the Texas rules as they stood at the time, a lawyer in a workers' compensation third-party action may not base a contingent fee on the gross recovery where part of it must be repaid to the carrier. The opinion holds that the carrier's statutory first-money right means the client has no right to those funds, so a fee that counts them is unconscionable under Rule 1.04(a); the fee should be computed on the recovery net of the carrier's reimbursement.

Common questions

Q: Can my contingent fee be a percentage of the total settlement in a workers' comp third-party case?

A: Per Opinion 549, no, where part of the settlement must be repaid to the comp carrier. The Committee concludes a fee on the gross recovery is unconscionable under Rule 1.04(a) because the client has no right to the carrier's portion.

Q: What is the correct base for the fee?

A: The Committee illustrates subtracting the carrier's reimbursement first and applying the contingent percentage to the client's net recovery. In its example, the one-third fee applies to the worker's $50,000 net, not the $100,000 gross.

Q: Why does the carrier get paid first?

A: The Committee relies on Texas Labor Code sections 417.001 and 417.002 and on Fort Worth Lloyds v. Haygood, holding the carrier is subrogated and entitled to the first money out of any third-party recovery until reimbursed, so until then neither the worker nor his lawyer has any right to those funds.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.04(a) (no illegal or unconscionable fee, corresponding to ABA Model Rule 1.5(a)). The fee analysis depends on Texas Labor Code sections 417.001 (carrier subrogation), 417.002 (reimbursement out of the recovery), and 417.003 (attorney's fees on a carrier's unrepresented recovery), as applied in Fort Worth Lloyds v. Haygood. The analysis turns on the fact that the client has no right to the funds owed the carrier, so including them in the fee base makes the fee unconscionable.

Citations and references

Rules of Professional Conduct:

• MR 1.5 (fees; unconscionable fees)
• Texas Disciplinary Rule 1.04(a)

Statutes:

• Texas Labor Code section 417.001 (carrier subrogated to the employee's third-party rights)
• Texas Labor Code section 417.002 (carrier reimbursed out of the net third-party recovery)
• Texas Labor Code section 417.003 (attorney's fees on a recovery for an unrepresented carrier)

Cases:

• Fort Worth Lloyds v. Haygood, 246 S.W.2d 865 (Tex. 1952), carrier's first-money right to a third-party recovery until reimbursed

See also

• TX Ethics Op. 545: Delinquent-Tax Collection Contingent Fee and the Statutory Penalty
• TX Ethics Op. 558: Paying a Lender a Percentage of the Contingency Fee
• TX Ethics Op. 679: Renegotiating a Flat Fee After Litigation Is Underway

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-549/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_549.pdf

Original opinion text

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

QUESTION PRESENTED

May a lawyer representing a workers’ compensation claimant in a third-party action collect a contingent fee from the client based on the gross recovery, part of which is required to be paid to the workers’ compensation carrier?

STATEMENT OF FACTS

The question presented is illustrated by the following example. Walter Worker is injured in the course and scope of his employment by ABC Corporation and receives $50,000.00 in workers’ compensation benefits. Worker employs Lawyer A to file suit against a negligent third-party and agrees to pay Lawyer A one-third of the amount recovered from such third-party. Walter Worker’s suit against the third party is settled for $100,000.
Lawyer A proposes to disburse funds from the settlement to Worker as follows:
Total settlement with third-party defendant $100,000 Less Lawyer A’s fee, one-third of the gross settlement $ 33,333 Less Reimbursement to workers’ compensation carrier $ 50,000 Disbursement to Walter Worker $ 16,667.

DISCUSSION

Rule 1.04(a) of the Texas Disciplinary Rules of Professional Conduct provides:
“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.”
Section 417.001 of the Texas Labor Code provides that the insurance carrier is subrogated to the rights of an injured employee against a third-party and Section 417.002 provides that the workers’ compensation carrier shall be reimbursed, for benefits that have been paid for a compensable injury, our of the net amount recovered in a third-party action. Under settled Texas law, a workers’ compensation carrier is entitled to the first money out of any third-party recovery until the carrier is reimbursed for benefits paid, regardless of whether the recovery is in an action initiated by the worker or in an action initiated by the workers’ compensation carrier. The first money recovered in any third-party action belongs to the workers’ compensation carrier, and until the carrier is repaid in full neither the employee nor his representative has any right to any of the third-party funds (subject to the provisions of Section 417.003 of the Texas Labor Code noted below). Fort Worth Lloyds v. Haygood, 246 S.W.2d 865 (Tex. 1952) and numerous cases following it.

Walter Worker and his representatives, including Lawyer A, have not right to the funds due the compensation carrier. A fee that includes in its calculation funds to which Walter Worker has no rights is unconscionable and violates Rule 1.04(a) of the Texas Disciplinary Rules of Professional Conduct. A competent lawyer could not form a reasonable belief that the fee charged under the proposed division is reasonable.
The following allocation would not result in an unconscionable fee:
Total settlement with third-party defendant $100,000 Less Reimbursement to insurance carrier $ 50,000 Recovery for Walter Worker $ 50,000 Less contingent fee $ 16,667 Disbursement to Walter Worker $ 33,333.

It should be noted that Section 417.003 of the Texas Labor Code provides that the funds recovered on behalf of a workers’ compensation carrier whose interest is not actively represented by an attorney in third-party action are subject to payment of an attorney’s fee and this section sets out how the amount of such fee is to be determined.

Under the Texas Disciplinary Rules of Professional Conduct, a lawyer representing a workers’ compensation claimant in the third-party action pursuant to a contingent fee arrangement may not collect a fee from the client/claimant based on the gross recovery, part of which is required to be paid to the workers’ compensation carrier.

CONCLUSION

Under the Texas Disciplinary Rules of Professional Conduct, a lawyer representing a workers’ compensation claimant in the third-party action pursuant to a contingent fee arrangement may not collect a fee from the client/claimant based on the gross recovery, part of which is required to be paid to the workers’ compensation carrier.

Tex. Comm. On Professional Ethics, Op. 549 (2003)