In a personal-injury case where the client must reimburse a health insurer's subrogation claim, can a lawyer base the contingent fee on the gross recovery, or does Opinion 549's workers'-comp rule require basing it on the net?

Plain-English summary

The opinion asks whether Opinion 549 (August 2003) applies outside workers' compensation. Opinion 549 held that a lawyer representing a workers'-compensation claimant in a third-party action under a contingent fee may not collect a fee based on the gross recovery when part of that recovery must be paid to the comp carrier. The present question is whether the same rule governs other situations where a client's recovery is reduced by a subrogation claim, for example an individual health policy with subrogation and reimbursement provisions that appear to require repayment without reduction for attorney fees.

The Committee explains the basis of Opinion 549: under Texas Labor Code section 417.002(a) and settled case law (Fort Worth Lloyds v. Haygood), the comp carrier is entitled to the "first money" out of any third-party recovery until reimbursed, so until then neither the worker nor his representative has any right to those funds. On that footing, basing a contingent fee on the gross would violate Rule 1.04(a). The opinion stresses Opinion 549 was narrow: it addressed only fee collection (not pre-collection engagement terms), did not bar collecting fees from both client and carrier, and rested on the comp-specific "first money" statute.

The Committee then holds the analysis does not extend beyond workers' compensation. Rule 1.04(a) prohibits an unconscionable fee, defined as one a competent lawyer could not reasonably believe is reasonable, and Rule 1.04(b) lists non-exhaustive reasonableness factors. Because subrogation claims vary widely, with rights turning on the facts, contracts, statutes, and whether the insurer is represented, and because resolving liens and subrogation often demands substantial lawyer effort, the Committee concludes the "bright line" of Opinion 549 does not apply outside workers' compensation. In other subrogation contexts, the reasonableness of a contingent fee is determined by all relevant Rule 1.04 factors.

In practice

Under this opinion, and under the Texas rule as it stood at the time of the opinion, the Opinion 549 prohibition on basing a contingent fee on gross recovery applies only to workers' compensation third-party actions, where a statute gives the carrier the "first money." The opinion holds that in other matters where the client's recovery may be subject to a subrogation claim, whether a contingent fee (including one calculated on the gross) is reasonable is judged under Rule 1.04 by all relevant factors, including those in Rule 1.04(b), rather than by a bright-line rule.

Common questions

Q: Does the workers'-comp rule against a gross-recovery contingent fee apply to my health-insurance subrogation case?

A: No. Per Opinion 660, the bright-line rule of Opinion 549 is limited to workers' compensation; outside that context, reasonableness is judged under Rule 1.04's factors.

Q: Why is workers' compensation treated differently?

A: The opinion explains that Texas Labor Code section 417.002(a) and Fort Worth Lloyds v. Haygood give the comp carrier the "first money" out of any third-party recovery, so the claimant has no right to those funds until the carrier is repaid; that statutory footing does not exist for subrogation generally.

Q: How is the contingent fee judged in other subrogation cases?

A: The opinion holds the fee is judged under Rule 1.04(a)'s unconscionability standard and the non-exhaustive factors in Rule 1.04(b), considering all material facts of the engagement.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.04(a) (prohibition on illegal or unconscionable fees) and Rule 1.04(b) (factors bearing on a fee's reasonableness), which correspond to ABA Model Rule 1.5. The analysis distinguishes the statutory "first money" rule of the workers'-compensation context (Texas Labor Code sections 417.002 and 417.003; Fort Worth Lloyds v. Haygood) from subrogation generally.

Citations and references

Rules of Professional Conduct:

• MR 1.5 (fees)
• Texas Disciplinary Rules 1.04(a), 1.04(b)

Statutes:

• Tex. Labor Code section 417.002(a) (reimbursement of the carrier from a third-party recovery)
• Tex. Labor Code section 417.003 (attorney's fees from the carrier)

Cases:

• Fort Worth Lloyds v. Haygood, 246 S.W.2d 865 (Tex. 1952)

Other opinions cited:

• Texas Professional Ethics Committee Opinion 549 (August 2003): contingent fee on gross recovery in a workers'-compensation third-party action

See also

• ABA Formal Op. 487: Fee Division With a Client's Prior Counsel in a Contingent-Fee Matter
• California Op. 2006-170: Charging Lien in a Contingency-Fee Agreement
• TX Ethics Op. 658: Marking Up Expenses and Billing for a Firm-Owned Vendor

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-660/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_660.pdf

Original opinion text

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

QUESTION PRESENTED

Does Professional Ethics Opinion 549 (August 2003), which addressed the calculation of a lawyer's contingent fee in a workers' compensation case, apply outside the context of workers' compensation?

STATEMENT OF FACTS

In Opinion 549, this Committee concluded that "a lawyer representing a workers' compensation claimant in [a] 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." The question considered now is whether this conclusion applies to situations outside the workers' compensation context in which a client's recovery may be reduced by a subrogation claim.

For example, consider the case of an injured client who is insured under an individual health insurance policy. The policy in question contains subrogation and right-of-reimbursement provisions that appear to require the client to pay the insurer out of any recovery from the tortfeasor, without any reduction for attorney fees or expenses. In representing such a client under a contingent-fee agreement, may a lawyer collect a fee from the client based on the entire amount of recovery from the tortfeasor? Or must the lawyer deduct from the fee calculation the amount that the client, under the insurance policy, is obligated to reimburse the insurer?

DISCUSSION

In Opinion 549, this Committee addressed whether a lawyer who represents a worker's compensation claimant in a third-party action may collect a contingent fee from the client based upon the client's "gross recovery" rather than the client's net recovery after reimbursing the client's insurance carrier. Opinion 549 noted that section 417.002(a) of the Texas Labor Code provides that the "net amount recovered by a claimant in a third-party action shall be used to reimburse the insurance carrier for benefits, including medical benefits, that have been paid for the compensable injury." The Committee relied on Texas law holding that the carrier was legally entitled to the "first money" out of any third-party recovery:

"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 . . . ."

Opinion 549 (citing Fort Worth Lloyds v. Haygood, 246 S.W.2d 865 (Tex. 1952)). Because of this law, Opinion 549 concluded that it would violate Rule 1.04(a) of the Texas Disciplinary Rules of Professional Conduct for a lawyer representing a workers' compensation claimant in a third-party action under a contingent fee agreement to collect a fee from the client/claimant based on the gross recovery, part of which is required to be paid the workers' compensation carrier.

Opinion 549 was limited to the collection of fees from a workers' compensation claimant. The opinion noted that section 417.003 of the Texas Labor Code defines how and to what extent the attorney for the claimant may recover attorneys' fees and expenses from the carrier with regard to funds recovered from the third party and paid to the carrier. Nothing in Opinion 549 suggested that the attorney may not collect fees from both the client and the carrier or that the aggregate amount of fees so collected could not equal the amount of a contingent fee on the gross amount of recovery. Further, the opinion addressed only the collection of fees, which in a contingent fee arrangement generally occurs after a subrogation claim is known and the amount of recovery has been paid. Opinion 549 did not address pre-collection engagement arrangements, which generally must be evaluated based on the circumstances and the knowledge of the parties at the time of execution.

The question presented here is whether the analysis in Opinion 549 applies to subrogation situations outside the narrow context of collecting a contingent fee for representing a worker's compensation claimant in a third-party claim. The Committee concludes that it does not.

The usual determination of whether a fee is unconscionable requires consideration of all material facts regarding the engagement. Rule 1.04(a) provides that "[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." There are many factors that may be considered in determining the reasonableness of a fee, including the eight factors specifically identified in Rule 1.04(b), which are not exhaustive. "The fees of a lawyer will vary according to many factors, including the time required, the lawyer's experience, ability and reputation, the nature of the employment, the responsibility involved, and the results obtained." Comment 4 to Rule 1.04.

There are many varieties of subrogation claims, and not all subrogation situations are the same. The rights of the involved parties may vary based on the circumstances, the terms of the applicable contracts, statutes, or law, and whether the insurer is represented in the third-party action. Indeed, in a given situation there may be multiple parties asserting separate subrogation claims governed by different laws. A lawyer representing an injured client against a third-party tortfeasor must often devote substantial attention to resolving, by negotiation or otherwise, applicable subrogation claims. See, e.g., Clayton Starnes and Scott Freeman, The Do's and Don'ts of Medicare and Medicaid Lien Resolution and Settlement Practices, 51 HOUSTON LAWYER 10 (Sep./Oct. 2013) ("The purpose of this article is to help attorneys navigate the tangled web of complex lien resolution and benefit preservation."); and Randal Kauffman, The War of the Cockatrice, 60 TEX. BAR J. 310 (Apr. 1997) ("After successfully fighting [discovery and evidentiary] battles and obtaining a reasonable settlement, or verdict, the [personal injury] attorney may also have to battle the cockatrice known as SUBROGATION.").

Given the variables above, the Committee concludes that the "bright line" rule of Opinion 549 does not apply beyond the context of workers' compensation. In other representations in which the client's recovery may be subject to a subrogation claim, whether the amount of a contingent fee is reasonable within the meaning of Rule 1.04 requires consideration of all relevant factors.

CONCLUSION

This Committee's conclusion in Opinion 549 is limited to the workers' compensation context. Under the Texas Disciplinary Rules of Professional Conduct, in other situations in which a client's recovery may be subject to a subrogation claim, determining whether a contingent-fee calculation is reasonable requires consideration of all relevant factors, including those identified in Rule 1.04(b).

Tex. Comm. On Professional Ethics, Op. 660 (2016)