CI-1089

July 8, 1985

SYLLABUS

Use of a mixed fee structure involving both contingent fee and hourly fee components is not per se unethical. In personal injury or wrongful death cases, however, the total fee recoverable under such mixed fee structure may not exceed one-third of any net recovery realized. In other cases, the fee must not be "clearly excessive," and the percentage used in the contingent fee portion of the structure, as well as the hourly rate, should appropriately reflect the nature of the agreement.

References: MCPR DR 2-106(A), DR 2-106(B), DR 5-103; MCR 8.121(A) and (E); CI-962, CI-1089.

Editor's Note: This opinion has been superseded by RI-6.

TEXT

A lawyer is considering entering into a contingent fee agreement with personal injury clients providing for a lawyer fee which is equal to the greater of (1) one-third of the net recovery, or (2) $30 per hour.

The fee of $30 per hour is not contingent on the outcome of the case, but would constitute a minimum fee even if no recovery was realized. If the case was successful, the $30 per hour fee would be charged if the fee computed on the basis of that rate was greater than the fee computed on the basis of one-third of the net recovery. As such, the one-third contingency fee would only be used in the event that a recovery was realized, and in a sum sufficient to render one-third of that net recovery greater than the total of your fees based on the rate of $30 per hour.

MCPR DR 2-106(A) states:

"A lawyer may not enter into an agreement for, nor charge or collect a fee which is "clearly excessive."

This, of course, is not a standard which automatically produces firm answers applicable to all cases. MCPR DR 2-106(B) attempts to delineate the factors to be considered in determining on a case-by-case basis, whether or not a particular fee is "clearly excessive," and looks to the nature of the case involved, the customary fee charged locally for similar work, the relationship between the particular lawyer and client, and other factors.

Although long accepted in the United States, contingent fee agreements have been recognized as an exception to the general rule that a lawyer may not acquire a proprietary interest in a client's cause. See MCPR DR 5-103. This is so because use of the contingent fee agreement allows persons to obtain the services of a lawyer in situations where it might otherwise be financially impossible; a major goal of MCPR Canon 2.

The Michigan Supreme Court has, from time to time, adopted special rules governing the use of contingent fee agreements in actions for personal injury or wrongful death. The most recent embodiment of these rules is found in MCR 8.121(A), which provides that the receipt, retention or sharing of a fee in excess of one-third of the net recovery "shall be deemed to be the charging of a 'clearly excessive fee' in violation of Canon 2, DR 2-106(A) of the Code of Professional Responsibility and Canons." While widely used in practice, the contingent fee agreement is not the only method by which a lawyer handling a personal injury claim may be compensated. In fact, MCR 8.121(E) requires a lawyer to advise a client of other means of compensation, such as reasonable hourly or per diem rates.

It is thus clear that, assuming the fee was not otherwise "clearly excessive," a lawyer would be free to charge clients with personal injury claims either (1) one-third of the net recovery under a contingent fee agreement, or (2) $30 per hour regardless of the outcome. The question raised by this inquiry is, in the final analysis, whether a lawyer may tentatively arrange to do both, with the final choice between the two fee structures deferred until and dependent upon the outcome of the case.

There do not appear to be any existing formal or informal opinions from either the American Bar Association or this Committee on this precise question. Some guidance is available in CI-962, where the lawyer proposed entering into a contingent fee agreement providing that the client pay the lawyer $1,000 in advance. If there were no recovery, the lawyer would keep the $1,000 as a fee. If there was a recovery, then the $1,000 would be applied toward the fee.

The Committee first indicated that it would be unethical for the lawyer to retain any portion of the $1,000 that had not been earned. Realizing, however, that the $1,000 might be considered to have been earned on the basis of a hourly rate or otherwise, the opinion went on to examine the propriety of the arrangement which, in effect similar to this inquiry, provided for the payment of a fixed fee in addition to or part of a contingent fee agreement. After noting that the arrangement ran contrary to the purposes justifying the use of true contingent fee agreements, the Committee suggested it not be utilized. At the same time, however, the Committee concluded that the arrangement could not be considered unethical. See also, ABA Op 1317.

As a result of this analysis, it would appear that there is nothing per se unethical about the use of a mixed fee structure in general, so long as the client is clearly informed and provided the fees were otherwise not "clearly excessive." Accordingly, further inquiry would be necessary on a case-by-case basis, with the ultimate result dependent largely on the type of case involved.

As noted above, the ethics rules have been supplemented by MCR 8.121 where contingent fee agreements are used in personal injury or wrongful death cases. This court rule has a limiting effect on the use of a mixed fee arrangement, so that it would be unethical for a lawyer to collect a fee on the basis of the hourly rate component of the structure where that fee would exceed one-third of the net recovery. Whenever the fee structure in a personal injury or wrongful death case includes a contingent fee component, the maximum recoverable fee cannot exceed one-third of any net recovery actually realized.

In cases other than personal injury or wrongful death where MCR 8.121(A) is not applicable, the general rule of MCPR DR 2-106 applies, and the use of a mixed fee structure must satisfy the requirement that the fee not be "clearly excessive." In making that determination, the percentage used in the contingent fee portion of the structure should appropriately reflect the insurance against loss of fees resulting from the hourly fee portion of the structure. See ABA i1317. Likewise, the hourly rate component should take into account any potential for additional compensation based on the contingent fee component, depending on the precise nature of the structure used and the interplay between the various fee components.