Understanding the Legal Fee Agreement: Consumers' Rights in the Legal Marketplace

By Richard Alexander

Finding the "right lawyer" to represent you is a challenging process describe in the companion to this article, How to Hire the "Right Lawyer": Consumers' Rights in the Legal Marketplace. Once you have found the"right lawyer," you will want a written fee agreement explaining what you want the lawyer to do, what the lawyer has promised to do for you, and what it is going to cost.

Unless you sign a written fee agreement at the outset, the probability of having an amicable conclusion to your case and to your relationship with your lawyer is very close to zero. If someone wants to do business on a handshake, expect the other hand will be in your pocket.

Only a fool hires a lawyer without a written fee agreement. Good lawyers know this and always explain your obligations and theirs in a document you can read and understand. Only after you understand the agreement will you be asked to sign and along with your lawyer confirm your understanding. So, always ask for a copy of the attorney's fee agreement at your first meeting. As with all documents, make sure that you understand it fully before you sign it. No reputable attorney will pressure you to accept a fee agreement on the spot. If he/she does, find another lawyer.

And, do not fail to understand that every attorney's fee agreement is different. There is no such thing as a "standard agreement." You will be signing a document that binds you and the lawyer. Make sure you understand every word, what it says, and what it does not say. Before you sign any contract, make sure you understand the following general advice which is intended to provide you with a general background of what you can expect when you hire a lawyer.

The important operative words in this case are "you" and "hire." The lawyer is a professional, but you are the boss and the fee agreement is the contract of employment explaining the duties of both sides. Remember, you are hiring the lawyer and the lawyer is deciding both what kind of work you need performed and what kind of boss you will be.

Hourly Fees

First, determine if your legal work is best accomplished by a fixed fee, hourly rate, or contingency fee. If the work is to be on an hourly basis ask for the attorney's hourly rate, and the rates of any other attorneys at the firm who are expected to participate. Ask for a copy of the firm's fee schedule. Check the fee agreement to confirm fees for the firm's support staff. Is time billed in minimums of one-quarter of an hour or in tenths? Be cautious about paying for the work of law clerks or new lawyers who are being trained at your expense.

Legal research may sometimes be called for, but you should not have to pay an attorney, or a new associate, to learn the basics about the law concerning a common legal issue. Ask whether there are any specific areas of the law that should be researched in your case and how long that would take. If the attorney explains they will "have to look into," "give the matter some thought," or "check the case law on a question" that is a red flag: watch out for being billed for research that another professional with more experience may not need to do. Obviously there is no hard and fast rule here, but nobody wants to pay for waiting time in a cab while the driver is trying to figure out how to read a map.

In addition to controlling time devoted to research, if you expect litigation, insist that you not be charged for your attorney to make a motion for summary judgment without your permission. A motion for summary judgment asks the court to dismiss a lawsuit on the assertion that the opposition's case is unsupported by any facts. Only in the rarest of cases are these motions successful, because no matter how strongly you believe that the case brought against you is without merit, there is always some question of fact that must be determined by a jury.

A lawyer's hourly rate will give you only part of the total financial picture. Many cases require sizable expenditures in order to obtain the best recoveries. Always ask what kinds of expenses the attorney considers essential to prepare your case and maximize your recovery, as well as what costs could be minimized. Get an estimate of what those costs will be and two budgets: 1) a rock bottom minimum and 2) the most probable. Determine exactly what will be chargeable to you as costs.

Cases costs routinely include all out of pocket expenses paid for the purpose of carrying forward the client's case. Common expenses include charges for filing fees, process servers, facsimile charges, couriers, express mail, federal express, UPS; copying of medical, employment, court and other records; deposition reporters' fees and transcripts, experts' and consultants' fees, telephone toll charges, in-office copying, postage, attorneys' travel by car, parking, overnight hotel and meals, focus groups, trial exhibits, computer research, mediation fees, jury fees, pro- judges, and investigators, among others. It is always expected that your attorney will do everything to minimize case expenditures, but do not minimize case costs at the expense of not hiring important experts or failing to take the deposition of a critical witness.

It may be possible to arrange a flat fee for certain services, such as a will or a divorce. Many large corporations are negotiating with law firms to undertake, for example, all the company's defective product litigation on a fixed fee basis. Fixed fees are becoming more and more popular with sophisticated purchasers of legal services. It is worthwhile asking about a fixed fee in your case. You might be able to arrange a sliding scale of attorney's fees, with separate rates for different tasks ranging from correspondence to court appearances. Some lawyers work on a sliding scale of fees that depends on when a case is resolved, such as prior to filing, at pre-trial, at the settlement conference, after trial begins, or after an appeal.

If the attorney bills by the hour, she or he will request a retainer to secure payment. A retainer functions like a deposit. Clients are expected to keep a certain minimum level of funds in the attorneys trust account and to replenish as charges are made. The days of the non-refundable fee to assure the lawyer will always be available for a particular client's cases, or avoid working for the client's competitors, are gone. Do not agree to pay a totally non-refundable retained unless your last name is Rockefeller, Carnegie or Perot. Always require that you approve a bill before funds are withdrawn from a trust account. Give no one a free hand with your money.

Contingency Fees

Contingency fees, or percentage fees, are paid at the conclusion of a case, and only if there is a recovery. Lawyers who work on a contingency expect to be paid well for expending time and effort, paying for their office overhead during the pendency of their cases, and either advancing or paying the case costs normally paid by a client that have been explained above. The client has the benefit of securing the services of the "right lawyer" and in the event the case is without, or with less, merit than expected at the outset, the burden is carried by the lawyer and not by the client.

The contingency fee is the average person's only way to hire a lawyer and for that reason major corporations and insurance companies have worked hard to limit contingency fees in order to limit the ability of the public to assert its legal rights.

Under a contingency fee contract, the attorney's fee is a percentage of the recovery, generally between 33% and 40%, but there is nothing sacred about these numbers, although many people are so familiar with these percentages that they are accepted as gospel. In more complicated and difficult cases, the percentages will be higher. For any punitive damages awarded, this percentage may be as high as 50%. This type of fee agreement is used commonly, though not exclusively, by those who have suffered personal injury, property loss or serious damage to their business and by families who have suffered the death of a family member.

Establish and consider a sliding scale of percentages of compensation and tie the increased percentage to financial decisions that will impact you and your lawyer. For example:

  • 25% to negotiate a final resolution before the defendant answers the complaint;
  • 33% after service of the complaint but before retention of experts, and
  • 40% after experts have been given work assignments or upon disclosure of experts for pre-trial depositions.

Normally an attorney will try to settle a case before serving a complaint and then having to deal with the defendants' lawyer in a litigation setting. Once the complaint is filed and served, a defendant has an interest in minimizing both the cost of settlement and the cost of defense. This is an excellent time for both sides to consider settlement. Once litigation is underway and witnesses deposed [interviewed under oath by an attorney at a deposition before a court reporter] the factual picture should be clearer. In anticipation of trial both sides will have to have experts, provide them with factual information and pay for them to render opinions, conduct studies or the like. This is another excellent time to pursue settlement. Clearly the attorney's workload increases then and at the time when trial experts are disclosed and deposed. This is another logical point for both sides to "talk turkey." In all cases, you want to encourage your lawyer to invest the time needed to obtain the best result.

There are many types of contingency fee agreements available and there is no such thing as a standard contract. Many clients focus on the percentages to be charged without considering carefully how it is applied to the recovery and how the fees are calculated. Contingency fee agreements fall into three major categories which reflect the basic methods followed to calculate the attorney's fee.

How Fees Are Calculated

Under a gross fee contract, the agreed percentage is applied to the gross amount of the recovery, and the case costs incurred in prosecuting the case, if advanced by the lawyer, are repaid to the attorney our of the client's portion of the recovery. Under this type of agreement, there is no incentive for the lawyer to be economical in spending because the client bears the full brunt of such expenditures and the fees are unaffected.

Under a net fee agreement, the lawyer is reimbursed for case costs from the gross recovery. If the client has paid the costs of litigation then it is common to reimburse the client before calculating fees. The agreed percentage is applied to the net recovery or the final, total net sum recovered from the defendants after deducting any disbursements or case costs incurred in connection with prosecution or settlement of the claim. This approach provides some incentive for the lawyer to contain costs and spend effectively, since her or his fee grows smaller as the costs grow larger. If the agreed attorney's fee is one third, then every time the lawyer spends one hundred dollars in case costs he or she knows that the attorney's fee is reduced by $33.

Does The Attorney Advance Or Pay Case Costs?

As a result of a 1995 appellate decision, some lawyers are offering a single charge contingency contract under which the attorneys agree to pay all costs associated with the case. If the case is successful, out of any recovery the attorney receives as total compensation for all services an agreed upon percentage of the gross recovery. Because the payment of preparation and trial costs are the sole responsibility of attorneys, the client always receives a known percentage of the recovery and can readily calculate his/her share. This approach places the full burden of the costs of the case on the attorney who is spending his or her own money to prepare for trial.

Just as in selecting a percentage fee that provides incentives, both a net fee and single charge fee agreement contain hidden incentives. These are important to understand to make sure your lawyer has the incentive to maximize a recovery for you at the earliest possible moment.

When an attorney "advances" case costs the IRS treats these expenditures as non-interest loans from personal capital. A lawyer who advances case costs uses after tax dollars. For example, for a lawyer to advance $10,000 to pay an expert's bill requires gross income of $60,000. The lawyer's office overhead expenses in operating a law firm can range from 60% to 80% of gross income. Assuming an overhead of 66% for salaries, rent, insurance, phones, etc., on an income of $60,000 the lawyer has net earnings of $20,000. Subtract federal and state income taxes [38% federal 11% California] and the attorney has net after tax income of $10,200 to loan or advance to the client. The attorney's cash flow after paying the expert's bill is $200.

Single charge fee agreements are growing in popularity because lawyers who agree to "pay" the cost of a contingency fee case are now entitled to deduct the cost as a business expense. If $10,000 is needed to pay an expert's bill, it is paid from the attorney's net pre-tax income, reducing $20,000 to $10,000 with resulting taxes of $4,900 and leaving a net income of $5,100.

In many states a single charge agreement is not available. In those states bar rules prohibit a lawyer from paying a client's business expenses or personal expenses and include in that definition the costs of litigation. States which allow single charge contracts draw a distinction between litigation expenses and business or personal expenses that a client would incur whether or not there was a lawsuit and which are the personal client's responsibility. In virtually all cases, a client is personally responsible for his or her medical bills or the payment of medical liens imposed by private insurance agreements, state health care insurance programs, Medicare, medical benefits paid by a worker's compensation carrier, county hospitals, self-insured employers, or liens by private physicians rendering direct care.

Who Pays the Costs If You Lose?

The best aspect of a contingency fee agreement is that in the event there is no recovery, the attorneys are not paid for their time, make sure this term is set forth in any contingency fee agreement your sign, but be careful about who is responsible for paying case costs in the event of a loss. In many states case costs are always the client's responsibility and even in states such as California, in which an attorney can agree to pay litigation costs without recourse to the client in the event of a loss, in a losing case the client could still be obligated to pay defense costs. Make sure the fee agreement you sign explains how any potential defense costs are going to be paid in the event your case turns sour.

Defense costs usually are limited to specified categories of costs which include filing fees, court reporter fees and the like, as opposed to the full range of actual costs incurred by litigants in most cases. Exposure for defense case costs can occur if there is a dismissal of your case before trial or a defense verdict after trial.

Some attorneys agree to pay defense costs if their advice to their clients turns out to be incorrect and others let the client make the call whether or not to reject a defense settlement offer and to take a case to trial. In the latter case, if the client chooses to try a case against the advice of attorneys, and it is won by the defendants, in that case the client agrees to pay the defendants' court costs.

A losing client could be responsible to pay defense costs, defense expert fees, and defense attorneys fees. The rules vary from state to state, but many states require that if a settlement offer made in writing prior to trial, is rejected, and the client does not do as well at trial, then the client must pay a penalty, which can range from paying the defendants' court costs, defendant's expert fees or defense attorneys fees. Find out what the rule is in your state and how it could be applied in your case. Include in your fee agreement an understanding how a defense verdict and defense case costs will be handled.

Common Terms in Contingency Fee Agreements

Occasionally a fee agreement will ask for a power of attorney. Be careful not to agree that your lawyer has complete authority to settle your case. Demand that no settlement will be made without your authority and never approve settlement authority without obtain an understanding of the implications of a given settlement proposal and how your net recovery will be calculated.

A power of attorney to the lawyer to negotiate a final settlement check can be given, but it should only be effective only after a settlement has been approved by you, a release has been executed by you forever ending your case or a final judgment is issued in your favor of the client. Once that occurs it is appropriate to give your lawyer a power of attorney to execute settlement drafts or checks to be deposited into his/her trust account to facilitate the prompt clearing of the settlement drafts or checks.

Although no attorney can guarantee what the outcome of a given case will be, that does no prevent the lawyer from promising to use his/her best efforts on your behalf. A contract which merely agrees to represent you means the lawyer will provide the level of service common to your community. The "right lawyer" is never unwilling to make this commitment to his/her clients and to put it in writing.

Some health care providers, HMOs, or insurers will demand client sign a lien or reimbursement agreement which may grant the lienor rights greater than those allowed by law. Never sign legal documents giving anyone a lien unless your attorneys have approved the lien beforehand. Ask your potential lawyer if he/she charges separately to negotiate a reduction of medical liens for your benefit. Many lawyers provide this service at no extra charge.

In case you were injured while "on the job" and will be or have been receiving workers' compensation benefits, the compensation insurance carrier will assert a lien against your recovery. The resolution of workers' compensation liens also results in granting the carrier a credit against further benefits and can end benefits depending upon the amount of the recovery in a third party case. These rules vary greatly from state to state. Include in the fee agreement an explanation of how the workers' compensation insurance lien will be repaid and how this will affect the calculation of the lawyers' fees and your share.

In the event of a judgment lien imposed by a court of law against your case, attorneys fees are always based upon the full recovery and the benefit conferred by the full recovery before deducting the amount of any judgment that has been taken against you. If as a result of this new litigation you attorneys are ordered to pay outstanding bills from your portion of the recovery, understand that the final cash you may receive will be less than what you may have realized had you not had outstanding bills and that the attorney's fees will be calculated based on the gross recovery including the benefit of any reduced debt. In such cases, the compensation paid to your attorneys may exceed what you receive in cash, but it should be the stated percentage of the recovery and your portion may consist of cash and paid judgment liens that have been imposed upon your case.

Many times cases are settled by having a separate insurance company issue an annuity contract to make regular monthly or annual payments in the future. Should the payment of a settlement or judgment be carried out by periodic payments or on an annuity basis [often referred to as a structured settlement], your fee agreement should cover this possibility. In most cases, attorneys' fees are computed and collected as a percentage of the cost of an annuity and are paid from any initial cash payment made as part of the settlement.

Today, fewer attorneys are recommending structured settlements and will only participate in such a financial investment as part of a settlement if you specifically make such a request. Structured settlements or annuities are sold by insurance companies such as Baldwin, First Executive, First Capital and Bankers' Mutual Life, all of which are bankrupt or have been under the control of the insurance commissioner and have not paid their agreed obligations. Only in the rarest of cases does a structured recovery make good sense.

Attorneys will often ask for written authority to associate as co-counsel other attorneys or firms necessary to successfully prosecute your claims. Many lawyers will agree that any such association will result in no additional expense to the client. But make sure you are not being charged an inflated percentage so that your lawyer can "refer" you to someone else who will do all the work in exchange for a "referral fee." Demand that you must know and approve beforehand what agreements are being made concerning your case. You want to know who is being paid and how much to make sure you are receiving the representation you deserve.

It is not unusual for attorneys to explain to clients in fee agreements that the lawyer may withdraw at any time if the client refuses to cooperate, does not follow attorneys' advice, or in the event the prosecution of this case is not economically feasible. If such terms are provided to you make sure that they are qualified to protect you from undue prejudice to your case and make sure that you will be given reasonable notice so you can hire other counsel. Require also in your contract that you can change attorneys at any time and that any sums due to your lawyer will not be paid until and unless there is a recovery.

To avoid any doubts about who controls your case and to assure joint decision-making have your lawyer agree in writing to schedule regular office or telephone working sessions every 30 days, or as often as you agree, to meet with you to assure good attorney-client communication, joint case management and to participate in important decisions being made with regard to your claim. Remember, this is your case.

In the event of an emergency you will need to be able to contact your lawyer and speak with him/her, not merely leave a message on a message recording machine. Your expectation on this issue needs to be communciated from the outset. An emergency exists whenever you determine that you need immediate advice. Findout at the beginning who you will be able to contact and what service you can expect. Once a promise is made to you about emergency services, put it in writing.


Like anything else, "the devil is in the details." This article has not been intended to provide an exhaustive list of the terms and conditions that will fit all lawyers, all clients, and all cases, but it is a starting point to expand your understanding of what you can and should expect before you are asked to sign. If an explanation given to you "sounds different" from what you have read in a fee agreement, ask for the agreement to be amended and initialed before your sign.

Lastly, before you sign any fee agreement, take time to consider whether you would be comfortable in working with this person as your lawyer. Ask yourself whether or not she or he gave you clear and direct information. Will they be available in an emergency? Consider if the attorney spoke knowledgeably and with a minimum of legal terms. Think about whether this lawyer understood and shared your goals. As a client will you be a co-participant or will the lawyer be making all the decisions? Did the attorney give you his/her home phone number if you have an emergency?

The importance of creating a comfortable working relationship with your lawyer cannot be underestimated. The road to obtaining the legal services you are seeking may be long, and it will take a considerable amount of teamwork to get there. If you make the commitment to find an experienced lawyer with whom you can work jointly under a clearly understandable written fee agreement you will be well on your way to the best possible result.

December, 1995

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