A Model Retainer Agreement for Legal
Services Programs: Mandatory
Attorney Fee Provisions

by Stephen Yelenosky and Charles Silver*

I. Introduction

Federal law requires programs supported by the Legal Services Corporation. (LSC) to "execute a written retainer agreement, in a form approved by the Corporation, with each client." [Fn 1] The retainer agreement must "clearly identify the relationship between the client and the [program], the matter in which representation is sought, the nature of the legal services to be provided, and the rights and responsibilities of the client." [Fn 2] After reviewing a number of retainer agreements already in use, LSC promulgated a model retainer agreement in June 1993. It had decided that a model agreement would best satisfy the demand for information about possible revisions and reforms. [Fn 3]

LSC's model retainer agreement has many useful features. Unfortunately, parts of the model are deficient, especially the provisions relating to attorney fees. Although attorney fees are important sources of revenue for legal services programs, especially now that low interest rates have reduced the size of IOLTA funds, it is difficult to design a retainer agreement that both facilitates the collection of attorney fees in appropriate cases and comports with the special legal constraints legal services programs must respect. This article describes and defends a new model retainer agreement ("new model agreement") that better meets these goals.

The new model agreement draws on LSC's model, on retainer agreements currently used by some legal services programs, and on a model developed by Jeff Scott Olson for private civil rights lawyers. [Fn 4] It is a complete agreement that deals with other matters as well as fees. [Fn 5] However, this article focuses on the fee provisions for three reasons. First, a widespread need for better fee provisions exists. Second, as the reader will see, a discussion of the fee provisions is sufficiently involved to stand on its own. Third, the fee provisions are likely to be the most controversial parts of the new model agreement.

Two basic differences exist between the model proposed here and other retainer agreements, including the model propounded by LSC. First, the new model agreement prescribes a formula, the content of which is established by agreement at the outset of a representation, for fixing attorney fees in settled cases that include statutory attorney fee claims. Second, the fee provisions proposed are mandatory. A client must assent to them when retaining a legal services program. A defense of these aspects of the new model agreement will follow in a later section.

The principles discussed here and the formulas provided can serve as guides when advising client about fees, even if a reader decides not to use the new model agreement. Every legal services lawyer who represents a client in a case in which a fee may be deducted from a settlement payment must think systematically about the issues addressed in this article. By clarifying the issues and providing a method for handling them, the article may enable legal services attorneys to serve their clients and their programs better and to comply with applicable federal laws and professional responsibility rules.

II. Deficiencies in Existing Retainer Agreements

Like many retainer agreements now used by programs, LSC's model fails to fix the amount a legal services program can charge as a fee when a case is settled. LSC's model states only that "if [a client's] opponent is ordered to pay attorneys' fees ... [the program] may keep those fees." [Fn 6] The value of this provision is limited. Most cases settle, and, in settlement, the payment of fees is rarely "ordered" or even approved by a judge. Instead, an opposing party voluntarily pays an amount - often a lump sum - that extinguishes its liability, including its liability for attorney fees. A legal services program must then determine whether it can keep any part of the settlement fund as fees and, if so, how much.

In the absence of governing contractual provisions, two methods for allocating settlement payments between fees and compensation have evolved. The first is to accept an allocation proposed by the opposing party. The second is to accept an allocation desired by the client. Both approaches have serious flaws.

In general, there is no reason to allocate funds as an opposing party desires. An opposing party has no right to control the division of a settlement fund between a program and a client. Only a program and its client are affected by the formula applied, and only a program and a client have relevant legal rights. A client has the right to recover compensation and attorney fees, and a program has the right (in appropriate circumstances) to charge for services it supplies. Division of a settlement fund between compensation and fees is therefore a matter for a legal services program and a client to decide.

Moreover, an opposing party's preferred allocation may yield an unconscionable fee, a fee that unlawfully diminishes a client's compensatory recovery, or a fee that pays a legal services program less than LSC policy permits and encourages it to keep. [Fn 7] The fact that an opposing party proposed a formula has no bearing on a formula's acceptability. This must be separately determined.

The method of deferring to clients is also defective. A client may prefer an allocation that yields an unconscionably large fee or a fee that diminishes the client's compensatory recovery. A client may also choose a division that provides too small a fee, thereby denying a program a lawful opportunity to expand its ability to provide free legal assistance. Relying on clients is also problematic because lawyers cannot readily advise clients what to do even though, on matters relating to settlement, clients often want lawyers' guidance. A lawyer's judgment may be compromised when every dollar earmarked for a client is one less dollar in fees, and an attorney who advises a client to pay more rather than less in fees may thereby breach fiduciary and professional duties to keep exclusively the client's interests in mind. [Fn 8]

Finally, unresolved fee issues may discourage a client from bargaining for the highest possible settlement because a client may find it easier to wheedle additional dollars out of the client's attorney than to extract them from the client's opponent. For example, suppose defendant has offered a settlement of $5,000 and that $1,000 of that amount is for fees. If client wants to take home at least $4,500, the client has only two options: (1) convince defendant to raise the offer, or (2) convince the lawyer to reduce the fee. When fee issues are unresolved, the lawyer may be in a weaker bargaining position than the defendant, and the client may rationally take the path of least resistance.

All things considered, to delay resolving issues relating to fees until the latter phases of a representation is bad practice, and to expect clients (alone) to resolve these issues in any event is inappropriate. The best approach is to settle fee issues, including the allocation formula, in an appropriate way at the beginning of a lawyer-client relationship. The new model agreement does this by establishing a formula that governs the allocation of any settlement payment between compensation and fees.

The use of a formula to allocate settlement amounts isnot unique. Some legal services programs already build formulas into their retainer agreements. However, their agreements are deficient in other respects. Some contain formulas that yield odd results; some contain provisions of questionable ethical propriety; and some needlessly and unwisely give clients the option of excising the fee provisions before signing.

For example, one retainer agreement used by a program provides that, when a lump-sum payment is received, court costs will be deducted and the remaining sum will be divided in one of two ways. If the payment net of costs is less than or equal to the largest amount of damages that the client could have won at trial, then the program will retain 30 percent of the net amount as a fee and the client will receive 70 percent. If the payment net of costs exceeds the largest amount that the client could have won at trial, the client will keep an amount equal to the largest possible trial recovery and the program will retain the rest.

This formula is defective in at least two respects. First, the formula can yield bizarre results. Suppose a client who stands to recover at most $10,000 at trial is offered $10,000 (net of costs) in settlement. If the client accepts the offer, the first formula applies, and the sum is divided $7,000 to $3,000 between compensation and fees. However, if the client were to hold out for $10,001 (again net), the second formula applies. The client keeps $10,000 and the program receives $1, the difference between the settlement payment and the highest possible recovery at trial. The client's incentives are obvious: by demanding an additional dollar the client can gain $3,000. The program's incentives are equally apparent: by encouraging the client to settle for less, the program can greatly increase its fee.

Second, both the formulas and the choice of thresholds - the highest possible trial recovery - seem arbitrary. The first formula must often mismeasure the contribution a client's right to a fee award makes to the size of a settlement because the size of the contribution depends on variables that a flat percentage fee does not address. [Fn 9] The second formula must often yield inadequate fees for the same reason. Finally, the threshold seems arbitrary because the contribution that the right to a fee award makes to the size of a settlement does not obviously revert from 30 percent to zero at that point. At least, the reasons for thinking that such a reversion occurs must be explained.

The retainer agreement containing the formula just discussed also gives clients the option of refusing to sign the fee provisions. The option is largely a sham. [Fn 10] The average legal aid recipient lacks the information needed to exercise the option intelligently. Most clients are unfamiliar with nonrecourse debts (the kind of debts retainer agreements create) and will have difficulty understanding them. Most clients must wonder whether excising the provisions will affect a lawyer's willingness to spend time on their case, and most will be suspicious of assurances to the contrary. Because legal aid recipients are almost uniformly unable to obtain assistance from other sources, any pressure, including uncertainty about the consequences of exercising the option, will usually dissuade them from deleting fee provisions from a retainer agreement.

In some respects, legal services retainer agreements are like contracts of adhesion. They contain provisions the meaning or importance of which clients often misunderstand, and they offer terms that, as a practical matter, clients are not free to negotiate or turn down. But these facts do not weigh against the use of retainer agreements. They merely argue for agreements that are reasonable and fair. In other words, the insight that retainer agreements have adhesive aspects forces one to focus on the real issue - the propriety of the terms the agreements contain.

III. The Model Attorney Fee Provisions

As noted above, it is difficult to design a retainer agreement that both facilitates recovery of attorney fees in appropriate cases and meets the peculiar legal demands legal aid programs confront. This section describes and explains the basic structure of the fee provisions found in the new model agreement, which provides for payment of attorney fees only when a client is entitled to recover a fee award from an opposing party.

A. Acquiring the Right to Apply for, Collect,and Keep a Fee Award

A fundamental fact observed in numerous Supreme Court opinions is that fee award statutes entitle prevailing
parties, not prevailing lawyers, to recover fee awards. [Fn 11] The statutes place no rights in lawyers' hands - lawyers have only the rights that their clients convey. The most basic function of a retainer agreement is therefore to authorize a lawyer to apply for, collect, and keep a client's fee award. The new model agreement, shown at the end of this article, accomplishes that in section IV.A.2, which expressly transfers the client's right to recover a fee award (if the client has such a right) to the legal aid program.

Section IV.A.2 also indicates that a client agrees to pay the legal aid program a reasonable hourly rate for all time reasonably invested in a matter. However, the provision clearly states that a client bears no personal liability on the debt that the agreement creates. The program renounces the right to require the client to pay for services from personal funds, including damages recovered by judgment or settlement on the client's claims for compensatory or other merit-based relief. [Fn 12]

Instead, the program agrees to look solely to any fee recovered by judgment or settlement to satisfy the debt.

The new model agreement creates a nonrecourse debt.[Fn 13] It obligates the client to pay a market rate for services received and limits a program's recourse against the client by freeing the client from having to satisfy the obligation with personal funds. Instead, the agreement stipulates that the only source from which the obligation is to be paid is the client's fee recovery, and it transfers to the program the right to apply for, collect, and keep that recovery to facilitate payment of the debt.

There is nothing magical or mysterious about nonrecourse debts. Such a nonrecourse agreement can be used when funds are loaned for the purchase of property. The borrower agrees to repay the loan on a particular schedule, thereby incurring a repayment obligation, and the lender agrees that, in the event of default, the borrower bears no personal liability on the note. The property purchased is the lender's security. In a rising real estate market, a lender may be content with this arrangement, despite being denied access to a borrower's assets, because the lender may expect the value of the property to cover fully the balance outstanding on the loan.

When thinking about the new model agreement, it is important to remember that the existence of a debt is distinct from the size of a debt and from the sources that a creditor can tap for satisfaction of a debt. The new model agreement creates a debt - the obligation of the client to pay for program services. It establishes that the size of the debt is the market value of the time reasonably expended in the course of supplying those services. [Fn  14] It also provides that the client bears no personal liability on the debt. The only source a legal services program can look to in satisfaction of the debt is the fee award the client recovers by judgment or settlement. If the client recovers a sufficiently large award, the debt will be fully paid. Otherwise, a program will collect less than the full amount of the debt. In either event, the client bears no personal liability. That is consistent with federal law, discussed below, barring legal services programs from charging fees.

By agreeing to represent a client on the terms contained in the new model agreement, a legal aid program assumes the risk of loss on the debt. However, to assume this risk may be reasonable for several reasons. It may make economic sense when a client has a strong case that is likely to yield a full fee recovery. Because the expected cost of representing such a client, net of the fee recovered, is low, a decision to enter into a nonrecourse arrangement is a wise use of resources. It enables a legal aid program to serve a needy client with a highly meritorious claim while preserving the program's ability to serve other clients by replenishing the program's coffers from the fee awarded at the conclusion of the case. When a client has a claim of lesser strength, a nonrecourse agreement is a means of using funds in a manner consistent with a program's mission. It enables a legal aid program to serve a needy client while freeing the client from personal liability for the value of the services supplied.

B. Treatment of Monies Received in Judgment or Settlement

When a client's claims for relief and fees are resolved by judgment at trial, a judge or jury divides the total recovery between the client and the legal services program. The client keeps the compensatory relief and the program keeps the sum awarded as fees. [Fn 15] The same is true when a client's claim for relief is decided at trial and the client's claim for fees is subsequently settled. Again, the client retains the compensatory relief and the program receives the sum that defendant agrees to pay as fees.[Fn 16] The need arises to allocate a settlement payment between compensation and fees when both claims for compensation and for fees are settled. There is then no judge, jury, or other disinterested third party to make the division. Program and client must handle the matter themselves.

One way to resolve the matter is to give both the client and the program the power to reject any settlement offer either party dislikes. This arrangement, which has been incorporated into some retainer agreements, permits a client to reject any offer that provides too little compensation and a program to reject any offer that includes insufficient fees. Whatever its merits, the shared-veto approach is clearly objectionable on professional responsibility grounds. Model Rule of Professional Conduct 1.2(a) states that "a lawyer shall abide by a client's decision whether to accept an offer of settlement of a matter," and Comment 5 on the rule states that a retainer agreement may not ask a client "to surrender ... the right to settle litigation that the lawyer might wish to continue." A legal services lawyer practicing in a Model Rules jurisdiction can neither acquire nor exercise a settlement veto.

The new model agreement takes a different approach. Although it requires a client to consult with a legal services program before accepting a settlement offer, [Fn 17] it does not assign a program the power to reject the settlement. A client retains sole authority to settle all claims, including claims for fees. [Fn 18] The subparts of section IV.B of the new model agreement determine how any settlement payment received will be divided between compensation and fees. The formula treats all settlement payments as lump sums and applies even when a client formally waives the right to recover a fee award when settling a claim. [Fn 19]

The provisions in Section IV seek to ensure that all sums retained by legal aid programs as fees can reasonably be said to derive from clients' fee recoveries. This assurance is needed because legal services programs cannot charge fees when doing so diminishes a client's compensatory recovery. As several opinion letters issued by LSC's General Counsel's Office recognize, legal services programs can retain monies as fees only when fees are awarded in addition to compensatory relief, so that, despite the retention, the client is made whole. [Fn 20] For example, a 1978 opinion letter states:

If the fee is to be deducted from an award to the client, the legal services program must relinquish its portion to the client. This is consistent with the general principle prohibiting a legal services program from accepting a fee from a client. If the award of attorneys' fees is made in addition to the client's recovery, e.g., under a statutory provision, the legal services program should accept its share of the fee. Such awards increase the resources available to service other eligible clients. [FN 21] Other opinion letters express the same view: legal aid programs may not charge fees that are deducted from clients' compensatory recoveries but may do so when fees are awarded in addition to other relief. [Fn 22]

The permissibility of charging fees thus hinges on a determination that monies retained by a legal services program derive from a client's right to a fee award, not from a client's compensatory recovery. The purpose of section IV is to make that determination to the satisfaction of the client and the program. By providing a formula that breaks all settlement payments into amounts received as compensation and amounts received as fees, section IV expressly identifies a client's right to a fee award as the source of all funds retained by a legal services program as fees.

Section IV rests on the assumption that the existence of the right to a fee award increases the amount a client receives in settlement of a dispute. The assumption makes sense on both legal and economic grounds. As a legal matter, the Supreme Court has established that only plaintiffs who hire lawyers can recover fee awards. Plaintiffs who argue pro se are entitled to compensatory relief only. [Fn 23] By hiring a lawyer, a plaintiff becomes eligible for an additional remedy - a fee award. As an economic matter, the prevailing model posits that the amount a defendant will offer in settlement is a function of, among other things, the amount a court will order the defendant to pay the plaintiff after a trial. [Fn 24] Because plaintiff's right to a fee award increases defendant's expected loss at trial, it increases the amount a defendant will find it economically rational to pay in settlement of a claim.

The size of a settlement payment is thus attributable partly to a client's entitlement to compensatory relief and partly to a client's entitlement to a fee award. The difficulty is in determining the portion of the payment received in a particular case that is attributable to the latter entitlement. Section IV tackles this problem in a straightforward way by establishing a formula according to which an allocation is to be made. [Fn 25]

The formula works as follows. When a settlement payment is received, expenses are deducted from the total, leaving a net settlement amount. [Fn 26] The reasonable fee is then determined by multiplying the number of hours reasonably expended by the reasonable hourly rate set in the agreement. [Fn 27] The reasonable fee is then subtracted from the net settlement amount, and the residual is compared to the client's anticipated or undiscounted compensatory recovery at trial - the estimated amount, including all monetary relief that the client would have won if the client had taken the case to trial and won. [Fn 28]

If the residual equals or exceeds the undiscounted compensatory recovery, the program keeps the reasonable fee and the client keeps the remainder. In most cases, the net settlement amount will not be large enough to cover both the reasonable fee and the anticipated compensatory recovery. When a shortage exists, the fee is determined as follows. First, the net settlement amount is multiplied by a fraction, the numerator of which is the reasonable fee. The denominator is the reasonable fee plus the client's undiscounted recovery at trial, as determined by the lawyer. The product of the multiplication is the fee.

Consider two examples, both of which make the following assumptions: (1) the program incurred $1,000 in expenses; (2) the lawyer reasonably expended 50 hours; (3) the lawyer's reasonable hourly rate is $125; (4) the client would have won $10,000 if the client had taken the case to trial and won; and (5) the likelihood that the client would have won had the case gone to trial is 50 percent. [Fn 29]

Example 1. Assume that the defendant pays $20,000 to settle the matter. When expenses of $1,000 are subtracted, the net settlement payment is $19,000. The reasonable fee is $6,250 (50 hours x $125/hour). The net settlement payment minus the reasonable fee is $12,750. This amount exceeds the client's anticipated compensatory recovery ($10,000), so the reasonable fee is the fee actually charged.

Example 2. Defendant pays only $15,000 in settlement. The net settlement payment is therefore $14,000. When the reasonable fee ($6,250) is subtracted from the latter amount, the residual ($7,750) is less than the undiscounted compensatory recovery ($10,000). The fee is therefore determined by multiplying the net settlement payment ($14,000) by the following fraction: $6,250/($6,250 + $10,000), which equals roughly 0.38. The product, $5,320, is the fee actually charged, which means that the client retains $8,680 as compensation.

Two constraints limit the application of the formula. First, a legal services program may never collect a fee that exceeds the reasonable fee, which, as stated, is the product of the time reasonably invested and a lawyer's reasonable hourly rate. [Fn 30] This ensures that a program will never charge an excessive or unconscionable fee. Second, a program must remit all or part of the fee determined by the formula when a decision to collect the entire fee will leave a client with less than the client's anticipated compensatory recovery discounted by the probability of winning at trial (the "discounted recovery").[Fn 31] For example, if a client's discounted compensatory recovery at trial is $5,000 and application of the fee formula will leave a client with only $4,000, the program will remit $1,000 (or the entire fee, whichever is less). This ensures that a client's compensatory recovery remains intact whenever a legal services program collects a fee. The second constraint will be discussed further below.

It may help to examine some other common examples. Consider a case in which a program expends a large number of hours on behalf of a client who is likely to recover little in the way of compensation. If the anticipated recovery is $1,000, the number of attorney hours is 100, the reasonable hourly rate is $150, and the probability of winning is 50 percent, the reasonable fee is $15,000. If the net settlement payment is $16,000 or more, that amount can be charged because the client will nonetheless be paid in full. If the net settlement payment is less than $16,000, charging the full amount will leave the client with less than $1,000, so the formula must be applied. The fraction is $15,000/($15,000 + $1000), which equals 0.9375. Multiplying the net settlement amount by the fraction yields the fee to be charged. The size of the fraction ensures that when attorney time and effort account for the bulk of a case's settlement value, the formula ensures that the fee recovery will dominate the compensatory recovery throughout most of the settlement range. However, if the net settlement payment is below $8,000, the program will have to remit part or all of the fee. The client must retain at least $500, the discounted compensatory recovery, and the program may retain only amounts in excess of that figure as fees.

Another common situation combines a high value claim with a small investment of attorney time. Assume an investment of 10 hours, an hourly rate of $150, an expected compensatory recovery of $10,000, and a probability of winning is 50 percent. If the net settlement amount is $11,500 or more, the reasonable fee of $1,500 can be collected. If the settlement is below $11,500, the formula applies and the fee fraction is $1,500/($1,500 + $10,000), which equals 0.13. The fee equals the net settlement amount times the fraction. The size of the fraction ensures that when a client's right to compensation contributes more to a settlement than the right to a fee award, the client retains the bulk of the fund. [Fn 32]

The new model agreement also avoids the prospect that an unconscionable fee will be charged when an unexpectedly large settlement payment is received. This may occur when a defendant sets an erroneously high price on a case or a legal services attorney mistakenly sets the value of a case too low. For example, suppose a net settlement payment of $50,000 is received in a case in which, in the opinion of the program attorney, the client will win only $1 0,000 if the client were to win at trial and the probability of winning is only 50 percent. If the attorney has put in 10 hours at a reasonable rate of $150, the agreement will entitle the client to retain all but $1,500 of the net amount. The client will enjoy the windfall; the program will not, but it will recover a fully compensatory fee.

By limiting a program to a reasonable fee, the new model agreement also enables a client to reap the benefit of yet-to-be-expended attorney hours. When settlement negotiations commence before trial, the defendant knows that the plaintiff's lawyer will expend additional hours if the case is tried. This knowledge encourages defendant to pay more in settlement than the number of already expended attorney hours justifies. Under the new model agreement a legal services program does not benefit from any increase in the settlement's size once the threshold of a reasonable fee is crossed. It can recover at most the reasonable market value of the hours actually invested.

A final scenario worth thinking about is one in which a case settles for an amount with less than probability that the plaintiff will win times the amount the defendant expects to have to pay the plaintiff ((P)(J)). This may occur because a defendant has limited assets, in which event it may be economically rational for the client to accept less than the discounted compensatory recovery in the resolution of a claim, or because the client decides to accept a small settlement even though the defendant can afford to pay more. In both situations, federal regulations bar programs from collecting fees because fee recoveries are permitted only when clients' compensatory recoveries remain intact. Unless a client retains at least (P)(J), the amount of compensation the client could reasonably expect to win at trial, no fee may be charged.

It is important to distinguish limited-fund situations from other situations in which a client may be inclined to settle for an amount that, in a lawyer's opinion, is less than the client's discounted compensatory recovery. In limited-fund situations, the desire to recover as much compensation as possible weighs against continued litigation that will force defendant to expend additional resources, thereby depleting its already inadequate resources. A lawyer's role may therefore be to encourage a client to accept a settlement that, from the client's perspective, may seem small and that will yield no fee because the client would have received at least as much at trial even had the client not been eligible for a fee award. In other situations, a lawyer giving unbiased advice may have to discourage a client from settling. When a client is tempted to accept a bad bargain, a lawyer may want to use incentives to encourage the client not to settle. [Fn 33] If a client persists, a program is unlikely to collect a fee because the client would have recovered at least as much at trial even if the client had not been entitled to a fee award.

C. Settlement Incentives and Renegotiation

The fee provisions in the new model agreement create acceptable settlement incentives, though imperfect ones. Because all fee arrangements are imperfect to some extent, imperfection is not, by itself, objectionable. The most one can reasonably hope for is an arrangement that aligns the interests of lawyers and clients reasonably well. The fee formula in the new model agreement passes this test. Under the formula, a legal services program never stands to gain more from a smaller settlement than a larger one because an increase in the size of a settlement can never decrease the size of the fee a program retains. [Fn 34] Likewise, an increase in the settlement payment can never reduce the amount of money a client keeps.

A client may sometimes be indifferent between a smaller and a larger settlement, however, because of the condition established by section IV.B.4. That condition establishes a weak entitlement in a client to an amount equal to a client's discounted recovery at trial. When application of the fee formula allows a client to retain less than the discounted recovery, Section IV.B.4 requires a program to remit enough of the fee to bring a client up to that level. In certain situations, this implies rational indifference between settlements of unequal sizes because a client will receive the same amount of money - the discounted recovery - in either event. [Fn 35] The incentive created by section IV.B.4 is not ideal, but it is tolerable. Ideally, one wants to encourage a client always to prefer more money. However, when client indifference is a problem, the loser is the legal services program, not the client, because any dollars lost are ones the program would have retained.

A related concern is the possibility that the program's desire to recover more in fees may lead it to pressure an indifferent client to reject a settlement offer. The danger will be greatest when the size of a settlement offer is less than or equal to a client's discounted recovery. In this case, a program may not recover a fee under section VI.B.4 and will have an economic incentive to encourage a client to hold out because the program will recover a high percentage of every dollar above the threshold amount.

One way to deal with client indifference and program pressure is simply to rely on legal services attorneys to fulfill their professional obligations. Generally, legal services attorneys are not in the business for the money. They are salaried employees who have chosen to spend their time helping the poor. Given their motivations and the fact that they, as individuals, do not stand to benefit financially from higher settlements, it is reasonable to expect them to pursue their clients' interests and to resist program pressure to recover fees.

A second way to handle these problems is to renegotiate the fee arrangement when section IV.B.4 applies. [Fn 36] The difficulty with this provision is that, in certain circumstances, it gives a client no interest in maximizingthe recovery and may thereby permit defendants to retain funds that a program and a client could otherwise extract in settlement or at trial. That problem can be mitigated by creating an appropriate interest. For example, if a client is indifferent between a standing offer of $6,000 and a possible offer of up to $7,000 because the client will retain $5,000 in either event, a program can offer to split any increase in the offer above $6,000 with the client on a 50-50 basis. [Fn 37] It can promise the client $5,000 if the $6,000 offer is accepted and $5,500 if the client holds out and a $7,000 offer is received. This arrangement will be mutually advantageous because both parties will share part of every additional dollar received. [Fn 38]

Renegotiation in these circumstances comports with a lawyer's fiduciary obligations and relevant professional responsibility rules. A lawyer who honestly believes that a defendant is likely to increase its offer if pressed does nothing wrong by informing a client of that fact. Nor is a lawyer guilty of wrongdoing for altering the terms of a
fee agreement in a manner that improves a client's incentives by decreasing the portion of every marginal dollar recovered that is retained by the lawyer as fees. [Fn 39] The suggested renegotiation accomplishes this. It entitles a client to keep more money than the original formula would have allowed the client to retain. Although renegotiations that increase fees are presumptively unreasonable, a lawyer who replaces an existing formula with one that more heavily favors a client should not be held to violate the lawyer's fiducial obligations.

D. Fee Waivers

Consistent with the Supreme Court's decision in Evans v. Jeff D., [FN 40] the new model agreement allows clients to waive the right to a fee award when settling a case. Although one motive for writing a new model agreement is to counter Jeff D., a retainer agreement cannot, as a general rule, bar a client from waiving the right to recover fees for several reasons. [Fn 41] First, a retainer agreement cannot prevent a defendant from conditioning a settlement offer on an agreement to waive fees because the defendant is not a party to such an agreement. Second, under Model Rule 1.2(a), it may be impermissible to use a retainer agreement to require a client to reject all settlement offers that lack a substantial monetary component, for reasons already explained. [Fn 42] Third, Model Rules 1.7(b), 1.8(f), and 5.4(c) require a legal services lawyer who receives a settlement offer conditioned on a fee waiver agreement to give a client unbiased professional advice designed to further the client's interests, not the program's interest in collecting a fee.

Despite these obstacles, the approach in this article substantially remedies the Jeff D. problem when the client is entitled to a large damage award. To see this, one must understand that, under the new model agreement, the fee formula applies whenever a client receives money in settlement of a claim, even when a settlement agreement between a client and a defendant formally waives the client's right to a fee award. The new model agreement treats all settlement payments as lump sums to be divided as the agreement requires. This makes sense from both economic and legal perspectives because a defendant's insistence on describing the entirety of a settlement payment as a compensatory recovery is entirely artificial and need not determine how a client and a program allocate a settlement payment. Whether a defendant pays $100,000 in compensation and $0 in fees, $50,000 each for comsensation and fees, or $0 in compensation and $100,000 in fees, the defendant is out $100,000, and the economic explanation for the defendant's willingness to pay that amount is that the defendant expects to lose at least that much at trial.

As a legal matter, the question is whether a client must allow a legal services program to retain part of a settlement payment as a fee even though the client, when settling, signed a fee waiver agreement. The answer is yes. A fee waiver agreement extinguishes a client's right to recover a fee on top of other agreed relief from a settling defendant. It does not bear on, much less extinguish, any obligations a client incurs by entering into a retainer agreement with a legal services program. Only an agreement between a client and a program can extinguish such obligations. A client cannot renounce obligations by means of an agreement to which a legal services program is not a party. However, when a lawsuit such as an injunctive class action is unlikely to produce substantial monetary relief, the new model agreement protects a program's legitimate interest in recovering a fee less well. The only way fully to counter Jeff D. in this context is by legislation overriding the decision. [Fn 43] However, if a client has some right to monetary compensation, a lawyer can at least in one instance legitimately encourage a client to reject an offer that provides nothing in the way of a fee. In most contexts, the fee formula proposed entitles a client to keep part of every dollar recovered. A lawyer can therefore properly point out, both prior to the settlement negotiations and when a fee waiver demand is received, that a client stands to gain from a money settlement and that the more money offered, the larger the gain. [Fn 44] A lawyer can also offer a dispassionate assessment of the likelihood that defendant will come forward with a monetary offer after an in-kind offer is declined. By creating joint stakes in any money recovered, the fee formula gives both program and client an interest in securing substantial monetary relief.

E. Assigning Values to Variables: Method, Timing, Disclosure, and Review

The new model agreement requires counsel to think seriously about clients' compensatory and fee claims. Only by forming opinions about the contribution each claim makes to the monetary value of a client's case can a lawyer fill in the variables in an appropriate way. Thinking seriously means making informed and defensible estimates of the amount a client would recover at trial if the client were to win and the probability that the client would win at trial. These are burdensome tasks that require lawyers to learn the facts and the law and to make judgments involving professional expertise.

The burdens are not unique to the proposed retainer agreement, however. All lawyers shoulder them when they advise clients about settlements. How can a lawyer tell a client whether to settle for a particular amount without thinking about the client's anticipated compensatory recovery and the probability of winning at trial? [Fn 45] Moreover, legal services attorneys already make calculations like those built into the model whenever they collect fees in settled cases. In every such case, the decision to collect a fee reflects ajudgment that part of the settlement fund is attributable to a client's right to a fee award and can be retained without reducing a client's compensation. The difference is only that the new model agreement explicitly defines the variables and the relationships between them. This is preferable to an unstructured, intuitive approach because there is greater assurance that judgments concerning fees will be made in defensible ways.

The time at which a lawyer should assign values to the variables is not entirely clear. It may often be wise to assign values to a client's undiscounted recovery and probability of winning before settlement negotiations are initiated. This avoids conflict of interests that may arise when the likely size of the settlement is known and that may cast doubt on a lawyer's objectivity. By the same token, lawyers' opinions of their clients' expected recoveries often change over time.

Information revealed by discovery, legal research, interlocutory rulings, and settlement negotiations may cause a a lawyer's estimate to fall or rise. Values filled in early may have to be adjusted, and adjustments that result in higher fees may seem suspect and may require client consent. [Fn 46] Finally, the greater accuracy of late estimates weighs in favor of their use for three reasons: accurate estimates (1) yield appropriate fees; (2) enable clients to figure more precisely how much of a settlement payment they will be allowed keep; and (3) enable lawyers to advise clients better on the relative desirability of settling and going to trial.

The matter of timing is related to the requirement of disclosure and client consent. Model Rule 1.5(b) states that "the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation." Comment 1 on the rule explains that an understanding as to the fee should be promptly established. It is not necessary to recite all the factors that underlie the basis of the fee, but only those that are directly involved in its computation. It is sufficient, for example, to state that the basic rate is an hourly charge or a fixed amount or an estimated amount, or to identify the factors that may be taken into account in finally fixing the fee. When developments occur during the representation that render an earlier estimate substantially inaccurate, a revised estimate should be provided to the client. [Fn 47]

Legal services lawyers can satisfy both Model Rule 1.5(b) and Comment 1 by initially informing clients that fees are based on hourly rates and hours worked. These variables determine the size of the nonrecourse debt created by the new model agreement. A lawyer should also explain that clients bear no personal liability for fees and that fees are withheld from settlement payments only when that can be done without reducing the amount of compensation a client receives. The discussion of the latter point need not be complicated. It should suffice to say that a formula based on hourly rates, hours worked, and the anticipated compensatory recovery will be used to identify the fees portion of a settlement and that at most the fee based on a lawyer's hourly rate will be withheld.

Insofar as the rules of professional responsibility are concerned, there appears to be no need for a lawyer to determine either the size of the anticipated recovery or the probability of winning at the outset of a representation or to secure a client's consent to either estimate. However, the lawyer may personally think that a client should be more fully informed on matters relating to fees than the rules require and may disclose the expected recovery in the course of advising a client with respect to settlement, or document the extent of compliance with federal regulations governing the collection of fees. These are valid concerns, but they leave room for considerable variation in the time at which values are assigned to the variables and the extent to which the values assigned are disclosed.

The following course of conduct is recommended. Lawyers should make the disclosures required by Model Rule 1.5(b) at the outset of a representation. They should give an initial, nonbinding estimate of a client's expected recovery when they first feel comfortable doing so, and they should clearly indicate that an estimate made early on may have to be revised in light of new information. Then, before making a settlement demand on behalf of a client or when receiving a settlement offer from the opposing side, the lawyer must make a serious attempt to estimate the client's expected recovery at trial. The effort is, in any event, required to advise the client properly with respect to settlement. The figure must be disclosed to the client, the client must be told that the estimate may affect the amount of money that the client may keep, and the lawyer must explain how the estimate affects the amount of money that the client and the program may retain. Finally, the estimate, the basis for it, and the fact of disclosure should be memorialized in the file.

IV. Internal Revenue Service Regulations

As 501(c)(3) charitable corporations, legal services programs are bound by Internal Revenue Service (IRS) regulations governing fees. Revenue Procedure 92-59 is the IRS's most recent statement on fee practices. It contains guidelines for use in determining when "a public interest law firm may accept fees for its services." [Fn 48] The guidelines, which form a test of the "charitable character" of a public interest law firm, are "not inflexible." [Fn 49] A program is entitled to show that a deviation from a guideline does not detract from the charitable nature of its operations. [Fn 50]

Revenue Procedure 92-59 contains three guidelines that directly regulate the content of retainer agreements. Two of the three require little discussion. The first states that "a public interest law firm may accept reimbursement from clients or from opposing parties for direct out-of-pocket expenses incurred in the litigation," including "filing fees, travel expenses, and expert witness fees." [Fn 51] This passage permits the inclusion of section III.C. 1 and .2 in the new model agreement. The second states that "the organization will not seek or accept attorney fees in any circumstances that would result in a conflict with state statutes or professional canons of ethics." [Fn 52] As explained above, the fee provisions in the new model agreement satisfy the Model Rules.

The third guideline appears to be more problematic. It states that "the organization may accept attorney fees in public interest cases [Fn 53] if such fees are paid by opposing parties and are awarded by a court or administrative agency or approved by such a body in a settlement agreement." [Fn 54] The formula and conditions built into the new model agreement satisfy the "paid by opposing parties" requirement. They ensure that every sum collected can reasonably be labeled as a payment made by an opposing party to cover its expected liability for a client's fees. But nothing in the model satisfies the "approval" requirement when fees are collected in settled cases. Taken literally, the approval requirement bars programs from retaining fees in all but a tiny minority of settled cases, for in very few cases are settlement terms approved by an agency or a court.

The reality is that the vast majority of cases settle without court or agency involvement and that programs nationwide routinely collect fees in settled cases. This practice is consistent with LSC regulations, which do not condition recovery of fees on court or agency approval. [Fn 55] A Project Advisory Group memorandum also deemed "acceptable" a contractual provision that allowed a program to collect a fee without judicial approval. [Fn 56]

This practice is also consistent with the interpretation of the language in Revenue Procedure 92-59 offered by the IRS. According to an IRS representative, the language does not create a requirement. [Fn 57] Its purpose is to establish that it is proper for a program to recover fees ordered by an agency or a court, not to establish that it is improper for a program to collect a fee when a case settles without an order. In other words, the language is enabling, not preclusive - it does not limit a program's ability to recover fees in settlement because it does not generate a negative implication. Although this interpretation of Revenue Procedure 92-59 may seem strained, [Fn 58] it appears to be the interpretation followed in practice. The language has been in force since at least the early 1970s, [Fn 59] and LSC Counsel, Ken Boehm, reports that he and other senior staffers are unaware of any IRS proceeding brought against a program for accepting fees in settlement without court approval or any IRS action against a program regarding attorney fees. [Fn 60]

Perhaps the best argument for the interpretation offered by the IRS is that a literal reading of the language in Revenue Procedure 92-59 complicates the settlement process for no good reason. LSC regulations already bar programs from accepting fees that diminish clients' compensation, and federal law requires programs to secure LSC approval of retainer forms. The added burden of judicial approval is therefore difficult tojustify. Approval usually is a formality in any event because judges rarely are inclined to disturb the terms of settlements to which the parties have agreed. [Fn 61] It even seems unlikely that a judge will bother to read a proposed settlement agreement, much less take the time needed to evaluate its terms. Judges are often pressed for time, and they lack the information needed to make the necessary assessments. How can a judge, who may be largely or entirely ignorant of the facts and law relating to a case, determine the plaintiff's anticipated recovery at trial, estimate the plaintiff's chances of winning at trial, or perform the other operations needed to assess the propriety of settlement terms? And why would a judge be concerned about these matters in any event? Unless a judge understands both the relevant LSC requirements and their operation, the judge will not be concerned. At best, one can expect a judge to assure only that the fee charged does not exceed a reasonable amount, as determined by the hours expended and the hourly rate. The new model agreement assures that as a matter of contract. Absent a reason for thinking that programs will frequently charge excessive fees, it hardly seems worthwhile to involve judges routinely in the process.

Two other guidelines in Revenue Procedure 92-59 are worth mentioning even though they do not, strictly speaking, apply to retainer agreements. Section 4.3 states: "The likelihood or probability of a fee ... may not be a
consideration in he organization's selection of cases. The selection of cases should be made in accordance with the procedures set forth in section 3 [entitled 'General Guidelines'] of this revenue procedure."

Section 4.5 provides: "The total amount of all attorneys' fees ... must not exceed 50 percent of the total cost of operation of the organization's legal functions.... An organization may submit a ruling request where an exception to the above 50 percent limitation appears warranted."

The guideline established by section 4.3 appears responsible for the erroneous decision of several programs to allow clients to excise fee provisions before signing retainer agreements. The guideline requires only that a program follow the procedures set out in section 3 and not consider the prospect of recovering a fee when accepting cases. As long as a program employs criteria permitted by section 3, it satisfies Revenue Procedure 92-59, even if it denies clients the option of waiving the fee provisions. That is so because the fact that a program's retainer agreement contains mandatory fee provisions does not mean that the prospect of recovering a fee is a consideration affecting a program's selection of cases. The use of mandatory fee provisions establishes only that a program deems it appropriate to conduct all fee-generating representation on certain terms. It does not show that a program offered to represent a given client because that client's case had the potential to generate a fee or that a program rejected another client because that client's case lacked that potential.[Fn 62]

One can argue that a program will violate section 4.3 by conditioning an offer to represent a client on the client's acceptance of the fee provisions since the decision to represent the client will then seem to anticipate recovering a fee. This objection misreads section 4.3 because it fails to distinguish the criteria a program uses when selecting cases from the terms on which a program offers to serve clients whom it agrees to represent. Section 3.8 of Revenue Procedure 92-59 states that an organization may accept fees "in accordance with the procedures set forth in [Section 4] . . .," and [Section 4.1] permit, an organization lo accept fees paid when cases settle, as previously stated. Section 4.3 must therefore be read in conjunction with section 4. 1, not in opposition to it. The natural way to read the two provisions together is by saying that they permit organizations to recover fees in cases that they decide to handle, but do not permit organizations to decide to handle cases because of the likelihood of recovering fees. Since mandatory fee provisions are simply a means of recovering fees in cases chosen for other reasons, their use is consistent with Revenue Procedure 92-59.

Admittedly, the inclusion of mandatory fee provisions may raise a suspicion that the desire to collect a fee influenced the decision to take a case. The fee provisions do benefit the program. However, suspicion is not fact, as the guidelines implicitly recognize. The second guideline allows programs to recover fees equal to 50 percent of operating expenses, and even more in exceptional cases, without endangering their tax status. This suggests that a program can collect sizable fees without even presumptively violating the first guideline and that any presumption that may arise when the 50-percent level is exceeded can be defeated by showing that a program did not actually use the prospect of recovering a fee as a criterion for choosing among requests for representation. Given that fee recoveries have historically accounted for far less than 50 percent of legal services programs' operating budgets, the risk that mandatory fee provisions will cause a program to violate the guidelines seems small. [Fn 63]

V. Conclusion

This article explains and defends a model retainer agreement containing mandatory fee provisions. It is important for legal services programs to recover attorney fees when they can do so without running afoul of applicable laws and in a manner that respects the professional obligations legal aid lawyers face. It is also important to be open and honest about the considerations that may reasonably affect the decision to recover a fee of a particular size in a particular case. A shortcoming of existing practice is the failure of lawyers to deal with these considerations explicitly and systematically, in a manner that protects the legitimate interests and rights of both their programs and their clients. By reading this article, legal services lawyers will be better equipped to handle matters relating to fees even if they decide to use only part of the new model agreement or to decline to use it entirely.
 
 
Explanation of Fee Formula

To explain the reasons for choosing the fee formula, a digression into the economics of settlement is required. The standard economic model of the decision to settle indicates that a defendant will pay a certain amount (S) to settle a case because the defendant expects to lose that much or more at trial. The model also explains that a defendant's expected trial loss is the sum of the defendant's expected litigation costs (L) and the amount the defendant expects to have to pay the plaintiff. The latter amount reflects the likely size of the judgment (J), discounted by the probability that the plaintiff will win (P), together with the likely size of the fee award (F) ' also discounted by the probability that the plaintiff will win P.  The following equation describes the economic logic that accounts for a defendant's willingness to pay to settle a claim:

S < L + (P)(J) + (P)(F).

To be clear, L + (P)(J) + (P)(F) is the most a defendant will pay. A defendant will find it even more advantageous to pay less than that amount because a smaller payment saves the defendant even more money.

When thinking about an allocation formula, one can ignore the contribution of (L) because there is no need to do otherwise. LSC regulations and policies impose only two requirements: (1) a fee can be collected only when a client receives at least (P)(J);[Fn 1] and (2) the fee should as closely as possible reflect (P)(F). The first condition protects a client's compensatory recovery, the part of a settlement payment attributable to a client's expected recovery on the merits, against depletion. The second condition satisfies the aim of enabling legal services programs to provide additional legal assistance.

The portion of a settlement payment attributable to (L) is thus afund that can be divided between compensation and fees. For example, $27,500 is the most an economically rational defendant will pay to settle a case in which (L) equals $10,000, (P)(J) equals $7,500 and (P)(F) equals $10,000. If the defendant pays $7,560 or less, the first constraint requires that the client retain the entire amount. If the defendant pays between $7,500 and $17,500, the client retains at least $7,500, because of the first constraint, and the program can keep any amount between $7,500 and $17,500. [Fn 2] If the defendant pays more than $17,500, the client retains the first $7,500, the program keeps the next $10,000, and the remaining $10,000 can be shared in any manner that allows the program to retain no more than a reasonable fee defined as the product of the hours invested and a reasonable hourly rate.

When (L) is removed, the equation reads

S < (P)(J) + (P)(F).

The fee award (F) is a product of the number of attorney hours reasonably invested in a plaintiff's case (H) and an attorney's reasonable hourly rate (R). This is the amount the law entitles plaintiff to recover as fees at trial. [Fn 3] By substitution, one can rewrite the simplified equation as

S < (P)(J) + (P)(R)(H)

This formula yields two convenient fractions for dividing a fee award:

       (P)(R)(H)   
(P)((J) + (R)(H))

and

      (P)(J)          
(P)((J) + (R)(H))

The first fraction represents the portion of a settlement payment attributable to a client's right-to-a-fee award. The second represents the portion attributable to client's expected compensatory recovery. Because (P) appears in the numerator and the denominator of both fractions, they can be further reduced to

   RH  
J + RH

and
    J     
J + RH

The formula in the new model agreement employs the first fraction as the basis for the fee recovery.



Notes
  1. Few settlements below (P)(J) are anticipated.
  2. This assumes that the program expended attorney hours sufficient to justify a fee of up to $10,000. Otherwise, the program may retain no more than the product of the hours reasonably expended and a reasonable hourly rate.
  3. See sources cited in footnote 13.

MODEL RETAINER AGREEMENT
 

I. AUTHORIZATION


______________________________(client) and the [Program] agree to the terms and conditions contained in this retainer agreement. Client retains [Program] to provide the following legal services:

________________________________________________________________________________

_________________________________________________________________________.

II. [PROGRAM'S] DUTIES

A. Services

1. [Program] will undertake to provide legal services only on the matter indicated above. [Program's] obligations under this agreement terminate at the completion of the services indicated above or at the time of a termination of its representation, as provided in section VI below.

2. This agreement does not cover appeals from administrative hearing decisions or court judgments unless specified as a service to be provided in section I above. Legal services for appeals or any other matters not expressly indicated above are new matters. Client may apply for legal assistance for new matters, but [Program] is not obligated to provide such additional services under this retainer agreement.

3. The person handling client's case may or may not be an attorney. In all cases, however, the handling of client's case will be supervised by an attorney.

4. [Program] may review client's case with attorneys from [Support Center] and may also review client's case with attorneys from national support centers which cocounsel in poverty law cases. By signing this agreement, client consents to such consultation and cocounseling as may be needed in client's case.

B. Communication

1. As required by the Disciplinary Rules of Professional Conduct, the [Program] case handler will communicate with client to the extent reasonably necessary to permit client to make informed decisions regarding the representation and to alert the client to important developments. The [Program] case handler will keep client reasonably informed about the status of client's case and will promptly comply with client's reasonable requests for information.

2. All documents provided to [Program] by client or prepared on client's behalf will be returned to client on request, but [Program] may make and keep copies of all documents.

3. All communications between the [Program] attorney and client will be kept confidential, consiste with the Disciplinary Rules of Professional Conduct.

C. Client Trust Account

1. All money transactions involved in client's case will be processed through the [Program] Client Trust Account. At the close of client's case, all money remaining in client's trust account will be refunde or paid to client. All money remaining in client's trust account will be mailed to client by certified mail, restricted delivery, return receipt requested, at client's last known address.

2. State law requires [Program] to place client's trust money in an interest-bearing account and to pay any interest that accrues to a fund which is distributed to nonprofit organizations providing legal services.

III. THE CLIENT'S DUTIES

A. Cooperation

Client will cooperate fully with the case handler in the preparation and handling of client's case. Cooperation includes:

B. Communication

1. Client will respond to phone calls and correspondence from the [Program] case handler on a timely basis. Client will timely inform the case handler of all changes of client's address and telephone number and of where client can be reached during normal business hours. Client will also notify the case handler ofany change in income.

2. Client has retained [Program] to be client's representative and to act as an intermediary with opposing parties and their attorneys. Effective representation requires that client communicate with opposing parties and their attorneys only through [Program]. If an opposing party or attorney contacts client in person, by phone, or by letter, therefore, client will not talk with them but will immediately notify the [Program] case handler. In divorce cases, some communication between client and her spouse may be appropriate even though they are on opposite sides of a divorce and or custody dispute. Family law clients should discuss with the case handler the appropriateness of communications with a spouse.

C. Payments

1. Client is responsible for and is required to pay court costs. Court costs include but are not limited to filing fees, deposition costs, subpoenas, witness fees, court-ordered social studies, psychologicals, attorney ad litem fees, blood-test expenses, and costs for copies of documents charged by other agencies or organizations such as hospitals, doctors, state agencies, or schools. [Program] may request client to reimburse [Program] for any expenses [Program] may have paid or may be required to pay.

2.  If [Program] advances client any court costs, such costs are to be deducted from any settlement or court judgment received by client. If [Program] advances client any court costs and client does not recover anything by settlement or court judgment, [Program] will waive client's responsibility for all costs advanced other than filing fees.

3. [Program] will determine whether to prepare and file the lawsuit with a request that the court waive
the filing fee. If the court declines to waive the fee, client will be responsible for the filing fee.

4. [Program] does not accept personal checks. All money transactions must be by cash or money order. [Program] will always provide client with a receipt for all money transactions.

IV. ATTORNEY FEES

A. Attorney Fees Claim

1. [Program] does not charge any client attorney fees. In some types of cases, however, the law provides that a client may make a claim against the opposing party - the person or business sued - for the client's attorney fees. The purpose of those laws is to enable people who cannot pay their own attorney to be represented by an attorney. It is a claim for additional money that a client has only if he is represented by an attorney. Client's case is one in which the law provides an attorney's fee claim against the opposing party.

2. By signing this agreement, client agrees that _________ [insert dollar figure] per hour is a reasonable hourly rate for the time an attorney expends on client's behalf. Client also agrees that the reasonable fee for this matter is the reasonable hourly rate times the number of hours reasonably expended on client's behalf. Client agrees to pay [Program] the reasonable fee. [Program] agrees that client is not personally liable for the debt this agreement creates. Client is not required to pay any money to [Program] from client's personal funds or property, or from any funds client obtains as compensatory relief in this matter. In satisfaction of the debt, [Program] may accept only monies received as attorney fees from an opposing party. By signing this agreement, client assigns client's claim for attorney fees to [Program]. Client also authorizes [Program] to apply for a fee award on client's behalf, and to accept and keep any fee awarded by a court or paid by an opposing party in settlement of a client's fee claim.

B. Formula for Determining Fees in Settlement

1. Very often, a lawsuit is settled without ever going to trial in a court. If there is a settlement and the client's case is a type of case that has an attorney fees claim, part of the settlement money paid will result from the attorney fees claim which client has assigned to [Program].

2. Since, in most settlements, the court will not be involved, the court will not decide how much of the settlement should go to attorney fees. Sometimes the opposing party whom client has sued will try to divide the settlement money between the amount that goes to client and the amount that goes to [Program]. The opposing party may want to divide the settlement in a certain way for its own reasons. Neither client nor [Program] is required to agree to the division the opposing party wants to make.

3. Nothing in this section or in this agreement affects the right of client to decide whether to make or accept an offer of settlement. This section does, however, require the client to divide any settlement accepted in the manner described below.

4. By signing this agreement, client and [Program] agree that any settlement offered or paid by the opposing party or parties, no matter how the opposing party or parties divide the money or make out the checks, will be treated as one lump-sum payment. The lump sum will be divided between client and [Program] as follows:

WHERE

        R equals the reasonable hourly rate for attorney fees stated in paragraph IV.A.2 above,
 
        H equals the number of hours the attorney has reasonably worked on the case at the time of settlement,

        J equals the anticipated compensatory recovery at trial, which is the amount of compensation client would probably receive if client were to win at trial, as determined by [Program], and

        S equals the net settlement amount, which is equal to the total settlement offer minus court cost

a. [Program] will receive a fee equal to R x H, unless S - (R x H) is less than J, in which event, the formula in 4(b) applies.

b. [Program] will receive an amount equal to R x H x S/((R x H) + J), unless [Program] determine
that a fee of this size, when subtracted from S, would leave client with less than the anticipated compen tory recovery (J) discounted by the probability of success at trial, as determined by [Program]. In that event, [Program] will allow client to retain an amount equal to the anticipated compensatory recovery d counted by the probability of success at trial and will keep any remaining monies as fees.

V. SETTLEMENT OF THE CASE

The attorney may take all necessary and appropriate actions consistent with the Disciplinary Rules of Professional Conduct in providing legal services to client, including, but not limited to, entering into settlement negotiations. Any settlement, however, must be approved by client. Client authorizes [Program] to receive, on behalf of client, checks or other forms of payment made in satisfaction of client's claims, whether by settlement or judgment.

VI. TERMINATION OF REPRESENTATION

A. [Program]'s Right to Withdraw

[Program] may close client's case, withdraw from the case, or dismiss the case, as may be appropriate un der the circumstances and as may be consistent with the Disciplinary Rules of Professional Conduct, if:

1. [Program] has completed the services it has agreed to provide or [Program] has reasonably determined that further representation would not benefit client;

2. Client violates any of the duties in Section III (the previous section);

3. [Program] is not able to contact client despite reasonable efforts;

4. Client indicates an intention to give false testimony or is found to have misrepresented or concealed facts concerning the case;

5. Client directs the [Program] case handler to file any paper, or insists on advancing any claim or defense, which the [Program] attorney responsible for the case, directly or by supervision of a paralegal, reasonably believes will subject the attorney to sanctions;

6. Client refuses to obey a court order which the case handler has advised client to obey;

7. The financial circumstances upon which client was accepted as a client by [Program] change significantly;

8. [Program] experiences a sharp decrease or termination of funding ([Program] funding is uncertain).

B. Client's Right to Discharge [Program]

Client may request that [Program] stop all further legal assistance to client and to withdraw from the case. If client so requests, [Program] will comply with client's request in a manner consistent with the Disciplinary Rules of Professional Conduct.

VII. COMPLAINTS

If client has a complaint regarding the manner or quality of services being provided by a [Program] staff member, client may ask the [Program] receptionist for a complaint form and complain to the [Program]'s Executive Director. If client is not satisfied with the disposition of the complaint by the Executive Director, client may complain to the [Program]'s Board of Directors' Client Grievance Committee.

[Program]: CLIENT:

___________________                            ________________________
(Case handler's signature)                           (Client's signature)
 

__________                                              ____________
DATE                                                        DATE
 



Notes

* Stephen Yelenosky is a former staff attorney with the Legal Aid Society of Central Texas and at present legal director of Advocacy, Inc., in Austin. Charles Silver is a professor at the University of Texas School of Law in Austin. The authors "are grateful" to Pieter Schenkkan and Gregory Sisk, who provided extensive comments on a draft of this article, and Michael Churgin, Sam Issacharoff, and Fred Fuchs, who gave helpful suggestions, "for the time and energy they devoted to the task."

  1. 45 C.F.R. § 1611.8(a).
  2. Id.
  3. Memorandum of Leslie Q. Russell (June II, 1993).
  4. Jeff Scott Olson, A New Model Retainer Agreement for Civil Rights Cases: Nailing Things Down on Settled Ground, in CIVIL RIGHTS LITIGATION AND ATTORNEY FEES ANNUAL HANDBOOK 391-415 (Steven Saltzman & Barbara M. Wolvovitz eds., 19910.
  5. The new model agreement is printed its entirety at the end of this article.
  6. New model agreement, § 11.

  7. E.g., an opposing party might want 100 percent of a settlement payment to be treated as fees. A legal services program cannot automatically accede to that desire. A 100 percent fee might violate MODEL RULE OF PROFESSIONAL CONDUCT Rule 1.5(a) (1983), if not justified by the time and labor required or other considerations, and it might violate LSC policy by diminishing a client's compensation. A program could also justifiably reject an opposing party's preference to allow a client to keep 100 percent of a settlement payment. LSC encourages programs to collect fees when they legally can to expand their ability to serve needy people. A program can therefore reasonably decide to collect a fee even when a defendant prefers that no fee be paid
  8.  See CHARLES W. WOLFRAM, MODERN LEGAL ETHICS § 9.2 (1986) (observing judicial hostility toward lawyers who, subsequent to the creation of an attorney-client relationship, act in ways that "have the effect of benefiting the lawyer, such as by raising the amount of the lawyer's compensation").
  9. These variables are discussed at length in III.B, infra.
  10. We also believe that it is unnecessary to offer the option. See the discussion of IRS regulations infra.
  11. Venegas v. Mitchell, 495 U.S. 82, 86-87 (1990); Blanchard v. Bergeron, 489 U.S. 87, 94 (1989); Evans v. Jeff D., 475 U.S. 717, 730 (1986) (Clearinghouse No. 37,341).
  12. The category of merit-based relief includes all remedies other than fee awards. For the sake of simplicity, we will use the terms "relief," "compensatory relief," recovery," and "compensatory recovery" to cover all remedies other than fee awards.
  13. This discussion of nonrecourse debts is drawn from a longer discussion in Charles Silver, Unloading the Lodestar: Toward a New Fee Award Procedure, 70 TEX. L. REV. 865, 881-86 (1992).
  14. Under existing cases, defendants can be made to pay reasonable hourly rates for all time reasonably expended when prevailing plaintiffs are represented by legal services programs. See Blum v. Stenson, 465 U.S. 886 (1984) (Clearinghouse No. 27,808); Phillips v. General Servs. Admin., 924 F.2d 1577, 1582-83 (Fed. Cir. 1991); HERBERT B. NEWBERG, ATTORNEY FEE AWARDS § 3.07 (Supp. 1993). By fixing the debt at that level, the new model agreement shows that a program expects, and is entitled, to receive the maximum the law allows. It also establishes that a court can fully cover a prevailing party's legal obligation to pay fees only by ordering a defendant to pay the maximum. Because the amount a prevailing party owes as fees, up to the limit of a reasonable fee, should determine the sum a losing defendant is required to pay, the agreement creates a context in which a judge should award the largest amount the law allows. See Silver, supra note 13, at 886-99 (discussing caps on fee awards).
  15. See new model agreement § IV.A.2.
  16. Id.
  17. Id. at § III.A.
  18. Id. at § IV. B.3. in this respect, the new model agreement is similar to an ordinary contingent fee agreement that promises a lawyer a percentage of a damage award. Both agreements entitle clients to accept or reject settlement offers, with obvious consequences for the fees lawyers receive. The difference between the agreements is that a contingent fee contract transfers an interest in a client's compensatory award and the new model agreement transfers an interest in a client's fee recovery. In both cases, the fact that a client retains settlement authority is wholly consistent with the transfer of an economic interest to a lawyer. The economic component of or beneficial interest in a right is distinct from the power to waive or compromise the right and is susceptible to separate assignment.
  19. Id. at § IV.B.4. The option of waiving the right to recover attorney fees was recognized in Jeff D., 475 U.S. 717. Fee waiver problems are discussed in III.D, infra.
  20. See, e.g., letters dated October 1, 1980 ("Part 1609.5(a) of the Corporation's Regulations has ... been interpreted as permitting recipients to accept attorneys' fees awarded or approved by a court or administrative body only when the fees will not reduce the amount of damages or other relief awarded to the client."); and September 9, 1977 ("Reading [45 C.F.R. §§ 1609.5 and 1609.6] together ... suggests a distinction ... between 'damages' owing to the client, from which only costs may be accepted, and fees awarded in addition to those damages.").
  21. Opinion Letter of LSC's Assistant General Counsel, Toby Sherwood (July 31, 1978).
  22. Compare letters dated March 18, 1987; December 9, 1985 (45 C.F.R. § 1609.5(a) permits legal services programs to accept attorneys' fees "only where the attorneys' fees do not reduce the monetary award received by the client"); and March 26, 1981 (encouraging programs to seek fees under fee award statutes), with letters dated December 9, 1985; April 9, 1987 (denying option of charging fees in Social Security Act cases in which fees come from clients' compensatory recoveries).
  23. Kay v. Ehler, 499 U.S. 432 (1991). For a criticism of the decision in Kay, see Charles Silver, Incoherence and Irrationalitv in the Law of Attorneys' Fees, 12 REV. OF LITIG. 301, 333-40 (1993).

  24. For a formal discussion of the economic model, see Steven Shavell, Suit, Settlement and Trial: A Theoretical Analysis under Alternative Methods for the Allocation of Costs, 11 J. LEGAL STUD. 55 (1982). For nontechnical discussions, see RICHARD A. POSNER, ECONOMIC ANALYSIS OFLAW § 21.4 (2d ed. 1977); ROBERT COOTER AND THOMAS ULEN, LAW AND ECONOMICS 484-87 (1988).
  25. See the appendix in sidebar for a detailed explanation of how we derived the fee formula.
  26. New model agreement, § 111. 1-2; § IV. B.4.
  27. Id. § IV.A.2.
  28. This figure is "undiscounted" because it does not reflect the likelihood that the client will actually win at trial. The "discounted" compensatory recovery is the undiscounted recovery times the probability that the client will win at trial. Thus, a client who is likely recover $5,000 in compensatory damages, $3,000 in punitive damages, and $2 in nominal damages if he or she wins at trial has an anticipated or undiscounted compensatory recovery (J) of $8,002. If the client's likelihood of winning (P) is 50 percent, the client's discounted recovery (P)(J) is $4,001. As we explain below, the lawyer forms the estimates of damages.
  29. The time and the manner in which an attorney computes figures for anticipated recovery and the probability of success are discussed in § III.E, infra.
  30. New model agreement, § IV.A.2.
  31. Id. § IV.B.4.
  32. Moreover, if the settlement is below $5,747, application of the formula leaves the client with less than $5,000, the discounted compensatory recovery, and the program must remit all or part of the fee.
  33. Possible incentive arrangements are discussed in the following section.
  34. In this respect, the formula in the new model agreement is superior to the formula discussed in § I, supra.
  35. E.g., suppose a client's expected compensatory recovery at trial is $5,000, the highest possible recovery is $10,000, the hours worked are 100, and the hourly rate is $150. The fee fraction is then $15,000/$25,000 or 3/5. Next suppose the defendant offers $6,000 in settlement but the client's lawyer believes that the defendant would raise the offer to $6,500 if pressed. If the standing offer is accepted, straight application of the fee formula entitles the client to retain $2,400. Because this amount is less than $5,000, IV.B.4(b) applies and the program, assuming appropriate exercise of discretion (see below), must remit $2,600 of the fee. If the client holds out for $6,500, the fee formula entitles the client to keep $2,600, and the program must remit an additional $2,400 to bring the client up to the $5,000 level.
  36. This recommendation does not apply in limited-fund cases.
  37. The 50-50 split is merely a suggestion.
  38. Section IV.B.4 of the new model agreement also complicates work incentives, but not in an unacceptable way, because a program may recover no fee when a case settles for an amount less than or equal to a client's expected recovery. In such a case and in other circumstances, a program has no economic incentive to invest lawyer time in a case in which it cannot cover its costs. However, this is not the case with legal services programs, which mainly handle cases that do not generate fee awards; they have no expectation of receiving fees.
  39. In the example discussed above, the client was indifferent between a $6,000 settlement and a $7,000 settlement because the client would keep $5,000, the discounted recovery, in either event. The fee formula thus entitled the lawyer to keep 100 percent of every dollar between $6,000 and $7,000. A renegotiated formula enables the client to keep part of this money, thereby bestowing an additional benefit on the client.

  40.  

     
     
     

    It is true that the size of the fee in dollars will be higher under the renegotiated formula than under the original formula if client holds out and the case settles for a higher amount or yields a damage award greater than the original offer. Thus, a $6,000 settlement will yield $1,000 in fees, and a $7,000 settlement will yield $1,500 if a 50-50 split were employed. However, for present purposes, this is not a relevant comparison. The relevant comparison is between the fee of $2,000 that client would have paid under the original formula if the case had settled at $7,000 and the fee of $1,500 the renegotiated formula required client to pay. Because the renegotiated fee is lower than the fee required under the original agreement at the actual settlement level, no violation occurs.
     

  41. Jeff D., 475 U.S. 717.
  42. But cf. Steven M. Goldstein, Settlement Offers Contingent upon Waiver of Attorney Fees: A Continuing Dilemma after Evans v. Jeff D., 20 CLEARINGHOUSE REV. 692 (Oct. 1986) (proposing model provisions that would (1) bifurcate settlement negotiations into stages addressing, respectively, the merits and fees and (2) require judicial review of settlements that provide inadequate fees).
  43. The acceptability of retainer provisions that bar clients from accepting fee waiver offers is disputed. Although we take the view that such provisions are impermissible, Comment f on § 206 of THE RESTATEMENT OF THE LAW GOVERNING LAWYERS (Tentative Draft No. 4, 1991), argues that "an agreement between client and lawyer that the client will consent to no settlement proposal failing to provide for a reasonable award of legal fees should be regarded as a legitimate method by which the lawyer secures the right to receive the benefit of a fee award." We do not mean to contend that the RESTATEMENT is wrong. However, given the newness of the RESTATEMENT, the paucity of authority supporting the position it takes, and the weight of countervailing authority, we do not feel comfortable encouraging lawyers to take the aggressive position advocated in the RESTATEMENT at this time.
  44. The office of Congressman Craig Washington (D-Tex.) has begun an effort to reform existing fee award statutes that may yield the legislation required to override Jeff D.
  45. A lawyer must explain a program's fee-related interests as well.
  46. A probability estimate need not be too precise; a gross estimate will do. E.g., does the case have a 25-percent, a 50-percent, or a 75-percent chance of success at trial?
  47. WOLFRAM, supra note 8, § 9.2 (1986).
  48. COMMENT TO MODEL RULES OF PROFESSIONAL CONDUCT.
  49. Rev. Proc. 92-59 § 1, 1992-29 I.R.B. 11
  50. Id.
  51. Id.
  52. Id. § 3.10.
  53. Id. § 4.6.
  54. See id. § 3.1 for a definition of public interest cases.
  55. Id. § 4.1.
  56. 45 C.F.R. § 1609.5 ("A recipient may seek and accept a fee awarded or approved by a court or administrative body, or included in a settlement").
  57. Memorandum from Linda E. Perle and Alan W. Houseman to Project Advisory Group (PAG) Member Programs/Litigation Directors 42-43 (Jan. 1989).
  58. Telephone conversation between Charles Silver and Charles Barrett, Senior Conferee Reviewer, Internal Revenue Service (Aug. 24, 1993).
  59. The plausibility of the interpretation is strengthened by Rev. Proc. 92-59 allowing public interest law firms to collect fees directly from clients withoutjudicial supervision. See § 4.02. Rev. Proc. 9-59 requires no judicial oversight even when the risk is great that a client will be harmed by a decision to collect a fee.
  60. See Rev. Proc. 75-13, 1975-1 C.B. 662 ("the organization may accept attorneys' fees in public interest cases if such fees are paid by opposing parties and are awarded by a court or administrative agency or approved by such a body in a settlement agreement").
  61. Telephone conversation between Stephen Yelenosky and Ken Boehm, Assistant to the President and Counsel to the LSC Board of Directors (Nov. 24, 1993).
  62. This does not apply to class actions in which judges are obligated to consider the merits of proposed settlements. FED. R. Civ. P. 23(e).
  63. It is worth observing here that retainer agreements contain many mandatory provisions. E.g., clients may not waive the provisions that obligate them to cooperate with counsel, that authorize counsel to negotiate on their behalf, that limit the scope of a representation to an identified matter, or that hold a client liable for costs advanced. The mandatory nature of these provisions sheds little light on a program's criteria for accepting cases. It implies only that a program, having decided to offer a client representation for whatever reason, believes that the representation can best be conducted on the terms an agreement contains.
  64. In the recent past, the highest percentage of attorney fees in relation to total funding in any program was 27 percent, and most programs obtained less than 10 percent of their total funding from fees. LEGAL SERVICES CORPORATION, 1988-1989 FACT BOOK (1990) (review of statistics contained in apps. A, D & H).