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End-of-life notice: American Legal Ethics Library

As of March 1, 2013, the Legal Information Institute is no longer maintaining the information in the American Legal Ethics Library. It is no longer possible for us to maintain it at a level of completeness and accuracy given its staffing needs. It is very possible that we will revive it at a future time. At this point, it is in need of a complete technological renovation and reworking of the "correspondent firm" model which successfully sustained it for many years.

Many people have contributed time and effort to the project over the years, and we would like to thank them. In particular, Roger Cramton and Peter Martin not only conceived ALEL but gave much of their own labor to it. We are also grateful to Brad Wendel for his editorial contributions, to Brian Toohey and all at Jones Day for their efforts, and to all of our correspondents and contributors. Thank you.

We regret any inconvenience.

Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


Arizona Legal Ethics

1.5   Rule 1.5 Fees

1.5:100   Comparative Analysis of Arizona Rule

1.5:101      Model Rule Comparison

The 2003 amendments added to AZ-ER 1.5(b) a "writing" requirement with regard to almost every fee agreement between a lawyer and client, but it does not require that the writing be signed by the client. The intent was to eliminate, to the extent possible, misunderstandings about fee arrangements. Contingent fee agreements and fee-splitting agreements, on the other hand, must now be actually signed by the client. The imposition of a "writing" requirement with respect to fee agreements follows the recommendation of the ABA Ethics 2000 Commission, but this recommendation was not adopted as part of MR 1.5 by the ABA House of Delegates.

A new subparagraph (d)(3) was added which imposes additional requirements with regard to so-called "earned upon receipt" or "nonrefundable" fees. Lawyers who seek to enter into such arrangements must provide the client with a written notice that (1) the lawyer may be discharged at any time, and (2) a portion of the fee may be refundable, depending upon the value of the services provided by the lawyer. Paragraph 7 of the Comment elaborates upon this provision, and explains that it does not apply to "true retainers."

Paragraph (e) was revised, and deviates from MR 1.5(e), by eliminating the option to avoid client consent to fee-splitting arrangements by dividing the fee among lawyers in proportion to the services performed. Under the amended Rule, any lawyer sharing a fee must assume joint responsibility for the matter, and the client must agree, in writing, to the participation of all the lawyers involved. New language was added to paragraphs 8 and 9 of the Comment to explain the restrictions on fee-splitting agreements and referral fees.

Paragraph 6 of the Comment was revised to clarify the propriety of contingent fee arrangements for post-dissolution collection matters. Previously, contingent fee agreements were not permitted in any domestic relations matter. The new language in the Comment clarifies that such fee agreements may be permitted when the engagement is simply to collect an amount of money previously awarded and in arrears.

There are, as a consequence of the 2003 amendments, significant differences between AZ-ER 1.5 and MR 1.5. In fact, paragraph (c) of AZ-ER is the only provision that remains identical to the corresponding paragraph in MR 1.5.

In listing the factors to be considered in determining whether a lawyer's fee is reasonable, AZ-ER 1.5(a)(8) refers to "the degree of risk assumed by the lawyer." MR1.5(a)(8) uses the language "whether the fee is fixed or contingent."

AZ-ER 1.5(b) now requires that the basis or rate of a lawyer's fee and expenses for which the client will be responsible, and any changes thereto, be communicated to the client in writing. MR 1.5(b) requires that these matters be communicated to the client, but only says that the communication should be "preferably in writing." This differences in the two Rules is also reflected in differences in paragraph of the Comments to them.

AZ-ER 1.5(d) has a subpart (3) which specifically addresses, and restricts, the circumstances under which a lawyer may charge a fee denominated as "earned upon receipt" or "nonrefundable" or the like, and a paragraph 7 of the Comment to the Rule which explains this new provision. MR 1.5(d) has no comparable provision, or the referenced Comment paragraph.

MR 1.5(e) permits the division of fees between lawyers not in the same firm if the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the matter and the client's agreement to the arrangement is confirmed in writing. AZ-ER 1.5(e) permits such fee-splitting arrangements only where each participating lawyer assumes joint responsibility for the matter, and there is a writing signed by the client agreeing to the participation of all the lawyers involved. This difference in the two Rules is reflected in corresponding differences between paragraph 8 of the Comment to AZ-ER 1.5 and paragraph 7 of the Comment to MR 1.5.

Paragraph 5 of the Comment to AZ-ER 1.5 includes a sentence, not contained in paragraph 5 of MR 1.5, requiring a lawyer to discuss alternative fee arrangements when there is doubt whether a contingent fee is in the client's best interests. Finally, paragraph 10 of the Comment to AZ-ER 1.5 differs from the corresponding paragraph 9 of the Comment to MR 1.5 because Arizona has adopted a procedure for the arbitration of fee disputes.

1.5:102      Model Code Comparison

Former DR 2-106(A) of the Code of Professional Conduct provided that: "A lawyer shall not enter into an agreement for, charge, or collect an illegal or excessive fee." Under DR 2-106(B), "[a] fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee." The factors which that Rule directed be considered in determining the reasonableness of a fee included: (1) the time and labor required, the novelty and difficulty of the questions involved and the skills required to perform the services properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and, (8) whether the fee is fixed or contingent." By implication, the Rule included the factor of the client's ability to pay, signifying that a client of ample means could properly be charged more for a particular service, and a person of limited means less, all other factors being equal.

There was no counterpart in the Disciplinary Rules of the Code of Professional Responsibility to AZ-ER 1.5(b). EC 2-19 stated that: "It is usually beneficial to reduce to writing the understanding of the parties regarding the fee, particularly when it is contingent. Similarly, the Disciplinary Rules of the Code had no counterpart to AZ-ER 1.5(c). EC 2-20 did provide that "[c]ontingent fee arrangements in civil cases have long been commonly accepted in the United States," but that "a lawyer generally should decline to accept employment on a contingent fee basis by one who is able to pay a reasonable fixed fee . . ."

With regard to AZ-ER 1.5(d), DR 2-106(C) prohibited "a contingent fee in a criminal case." EC 2-20 provided that "contingent fee arrangements in domestic relation cases are rarely justified."

With regard to AZ-ER 1.5(e), former DR 2-107(A) permitted division of fees only if: "(1) The client consents to employment of the other lawyer after a full disclosure that a division of fees will be made; (2) The division is in proportion to the services performed and responsibility assumed by each; and, (3) The total fee does not exceed clearly reasonable compensation . . ." AZ-ER 1.5(e), on the other hand permits a division of fees without regard to the services performed by each lawyer if they assume joint responsibility for the representation."

1.5:200   A Lawyer's Claim to Compensation

1.5:210      Client-Lawyer Fee Agreements

AZ-ER 1.5(b) provides that: "The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee or expenses shall also be communicated in writing." The Comment to this aspect of the Rule makes clear, however, that the need for communication between lawyer and client concerning the fees and/or costs to be charged is not limited to situations where the lawyer undertakes representation of a new client, is not necessarily satisfied by a one-time exchange at the inception of the relationship, and should contain more information than simply a fee schedule:

When the lawyer has regularly represented a client, they ordinarily will have evolved an understanding concerning the basis or rate of the fee. When the scope of the representation changes, in a material way, the lawyer should notify the client about the changes in writing. In a new client-lawyer relationship, however, a written understanding as to fees and expenses must be promptly established. Generally, furnishing the client with a simple memorandum or copy of the lawyer's customary fee arrangements will suffice, provided that the writing states the general nature of the legal services to be provided, the basis, rate or total amount of the fee and whether and to what extent the client will be responsible for any costs, expenses or disbursements in the course of the representation. A written statement concerning the terms of the engagement reduces the possibility of misunderstanding.

Comment, AZ-ER 1.5, ‡ 2.

The Rule's new requirement for a written fee agreement in most engagements, while differing from the provisions of MR 1.5, does not represent a significant departure from what had previously been required. The Comment to the former Rule had a clearly stated preference for written fee agreements as prudent: "A written statement concerning the fee reduces the possibility of misunderstanding. Furnishing the client with a simple memorandum or a copy of the lawyer's customary fee schedule is sufficient if the basis or rate of the fee is set forth." In fact, there were instances where the failure to include such information in a written fee agreement would result in the billing for them constituting charging an excessive fee.

For example, Matter of Ireland, 146 Ariz. 340, 706 P.2d 352 (1985), which arose under the former Code of Professional responsibility, involved several charges arising from Ireland's handling of a marital dissolution matter. Among the charges made against Ireland was that he had charged his client in the matter unreasonable or excessive fees by separately charging her for the services of secretaries and other non-lawyer personnel when the client had not agreed to the charging of such fees in the fee agreement. The Court agreed:

The fee agreement in the present case provided for a flat hourly billing rate without mention of billing for the services of secretaries. In the absence of an agreement to be charged separately for secretarial services, we find the fee charged in this case to violate DR 2-106(A).

Id., 146 Ariz. at 344, 706 P.2d at 356. In that same Opinion, the Court declined to address the issue whether it was ethically permissible to bill separately for the time of paralegals and messengers, without an express client agreement to such charges, because the issue was not presented, but cautioned: "Suffice it to say that it would be the better practice to have client agreement before such charges are billed." Id., 146 Ariz. at 344, 706 P.2d at 356, fn.4.

This preference for written understandings between lawyers and clients concerning the lawyer's fees was also reflected in former Rule AZ-ER 7.1 governing communications to prospective clients concerning a lawyer's services. That Rule, effectively abrogated in 2003 for other reasons, imposed the following requirements for every advertisement or written communication or solicitation that contains information about the lawyer's fees:

(1) advertisements and written communications which indicate that the charging of a fee is contingent on outcome or that the fee will be a percentage of the recovery must also disclose (A) that the client will be liable for expenses regardless of the outcome, and (B) whether the percentage will be applied before or after expenses are deducted from the recovery;

(2) where the advertisement or written communication states a range of fees or hourly rates for services, the client must be informed in writing at the commencement of any attorney-client relationship that the total fee within the range that will be charged, or the total hours to be devoted, will vary depending upon the particular matter to be handled, and that the client is entitled without obligation to an estimate of the fee within the range that is likely to be charged;

(3) an advertisement or written communication may state fixed fees for specific routine legal services, the description of which would not be misunderstood or deceptive, but the client must be informed in writing at the commencement of any attorney-client relationship that the quoted fee is available only to clients whose matters fall within the services described and that the client is entitled without obligation to a specific estimate of the fee that is likely to be charged; and

(4) a lawyer who advertises a specific fee, range of fees or hourly rate for a particular service must honor the fee advertised for a period of at least ninety (90) days, unless the advertisement or written communication specifies a shorter period. In the case of such advertisements in the "Yellow Pages" of telephone directories, or other media not published more frequently than annually, the advertised fee or range of fees shall be honored for not less than one (1) year following publication of the advertisement.

Under both the former Code of Professional Responsibility, and the current Rules of Professional Conduct, the Committee on the Rules of Professional Conduct has concluded that a lawyer may not charge interest on delinquent client accounts without a prior written agreement with the client permitting that. Arizona Ethics Opinions Nos. 86-09, 81-14. Similarly, the Committee has held that a lawyer may bill a surcharge, calculated as a percentage of fees, in lieu of billing for actual expenses and costs incurred, but only if the percentage surcharge employed approximates the actual costs incurred, the overall fees and costs charged are reasonable, and the client has agreed to this arrangement in writing.

In Arizona Ethics Opinion No. 2001-11, the Committee considered an inquiry from a firm that assisted clients in qualifying for and processing claims involving Medicaid and Arizona Long Term Care System benefits, and proposed to contract with an outside agency to work with and assist the firm's clients in preparing and processing benefit applications. The Committee ruled that this arrangement would be permissible only under certain conditions. The first was that the firm could only pass on to the client the costs paid directly to the agency for the services provided, plus a surcharge that was related to reasonable firm expenses such as overhead, but only if the arrangement was communicated and agreed to by the client.

Contracts for the payment of attorneys' fees are generally enforced in accordance with their terms. Heritage Heights Home Owners Ass'n v. Esser, 115 Ariz. 330, 565 P.2d 207 (App. 1977). A fee agreement, however, is not an ordinary commercial contract and is subject to the lawyer's provisional responsibility not to take advantage of a client and not to charge an unreasonable fee. See In re Swartz, 141 Ariz. 266, 273, 686 P.2d 1236, 1243 (1984). For example, in Matter of Struthers, 179 Ariz. 216, 877 P.2d 789 (1994), the Court approved the disbarment of Struthers for a variety of ethical violations, including violations of AZ-ER 1.5(a). These charges stemmed largely from Struthers' use of contingency fee contracts in engagements to collect overdue child support payments which permitted him to retain all of the back payments he collected as his fee until 25% of the total arrearages had been paid in full. A separate provision of the agreements, which the Court also found to violate AZ-ER 1.5(a), purported to entitle Struthers to retain any court-awarded fees in addition to his contingency fee. The Court found that this would result in double recovery of fees, and would mislead the court to whom an application for the award of fees was made. Although Struthers claimed that he never invoked the provision in question, the court found that it was facially unreasonable and improper and a violation of AZ-ER 1.5(a). It is a fair inference that the Court would have found such a provision unenforceable as well.

1.5:220      A Lawyer's Fee in Absence of Agreement

The issue of a lawyer's right to, and basis for, a fee in the absence of an agreement concerning fees with the client was squarely addressed in Schwartz v. Schwerin, 85 Ariz. 242, 336 P.2d 144 (1959), where the Court held that: "Where, as here, the amount of compensation claimed is not fixed by an agreement between the parties, the attorney must declare for relief on a quantum meruit, which means the reasonable value of services responded." Id., 85 Ariz. at 245, 336 P.2d at 146. The Court then elaborated on the factors that are to be considered in determining "the reasonable value of an attorney's services":

From a study of the authorities it would appear such factors may be classified under four general headings (1) the qualities of the advocate: his ability, his training, education, experience, professional standing and skill; (2) the character of the work to be done: its difficulty, its intricacy, its importance, time and skill required, the responsibility imposed and the prominence and character of the parties where they affect the importance of the litigation; (2) [sic] the work actually performed by the lawyer: the skill, time and attention given to the work; (4) the result: whether the attorney was successful and what benefits were derived . . . Furthermore, good judgment would dictate that each of these factors be given consideration by the trier of fact and that no one element should predominate or be given undue weight.

Id., 85 Ariz. at 245-46; 336 P.2d at 146 (citations omitted). Schwartz v. Schwerin was decided while the Code of Professional Responsibility was still in effect in Arizona. It would seem logical to assume that a court today in such an action would take into account not only the factors listed in the Schwartz decision, but the factors listed in AZ-ER 1.5(a) as well. There may be a question, however, whether a quantum meruit recovery will be permitted at all, if the lawyer has failed to comply with AZ-ER 1.5(a)'s written fee agreement requirements.

1.5:230      Fees on Termination [see 1.16:600]

Although there are no Arizona authorities which specifically address the point, it seems to be assumed that a lawyer is entitled to receive those fees which have been earned up to the date the relationship is terminated. This is an easy standard to apply where the fee arrangements with the client were on an hourly rate basis. Issues arise, however, where the engagement was being carried out on either a fixed fee or contingency fee basis.

In the case of contingent fee engagements, a client who enters into a contingency fee agreement with an attorney may settle, compromise or release the client's claims on any terms the client finds acceptable, without the attorney's consent, and even against the attorney's advice. Richfield Oil Corporation v. LaPrade, 56 Ariz. 100, 105 P.2d 1115 (1940). Moreover,:

Our law does not bind a person to one attorney merely because he has entered into a contingent fee relationship. If the client in the exercise of this power discharges the attorney under a contingent fee contract before his lien arises, that attorney generally has a remedy only against the client for the value of his services.

State Farm Mutual Insurance Company v. St. Joseph's Hospital, 107 Ariz. 498, 502, 489 P.2d 837, 841 (1971) (citing Walker v. Wright, 28 Ariz. 235, 236 P. 710 (1925)). In Arizona Ethics Opinion No. 84-12, the Committee deemed the question of whether an attorney who accepts a case on a contingent fee basis may charge the client an hourly fee if the attorney is discharged prior to settlement to be an issue of law and declined to decide it. The decision in Schwartz v. Schwerin, 85 Ariz. 242, 336 P.2d 144 (1959), however, would seem to suggest that, in that circumstance and absent an agreement addressing the situation, the attorney must seek relief on a quantum meruit basis, which means the reasonable value of the services rendered before being discharged. In that case, the Supreme Court indicated that the reasonable value of an attorney's services, absent an agreement between the attorney and the client, would be determined by considering four factors: (1) the qualities of the attorney/advocate; (2) the character of the work to be performed; (3) the work actually performed; and, (4) the results obtained. If, on the other hand, the contingency fee agreement contains a provision specifying that the attorney will be compensated at a specified hourly rate in the event the agreement is terminated prematurely, such a provision may be enforceable. See Crews v. Collins, 140 Ariz. 80, 680 P.2d 216 (App. 1984).

In the case of a fixed fee engagement, if the client terminates the relationship before the engagement is completed, at least some portion of the fee will be unearned. As the Comment to AZ-ER 1.5 points out: "A lawyer may require advance payment of a fee, but is obliged to return any unearned portion." Comment, AZ-ER 1.5, ‡ 4. Indeed, one of the specific requirements imposed by AZ-ER 1.16(d) upon termination of a representation, is that the lawyer refund "any advance payment of fee that has not been earned." In Arizona Ethics Opinion No. 89-10, the Committee determined that where the client had paid an advance retainer or fixed fee by use of a credit card, the attorney could, upon termination of the relationship, accomplish return of the unearned portion of the fee through processing a credit to the client's credit card account.

In a number of cases in which lawyers have been found to have violated AZ-ER 1.5(a) by accepting advance retainers and not completing the engagement, the Disciplinary Commission has routinely ordered restitution to the wronged clients of the unearned fees. See Matter of Brady, 186 Ariz. 370, 923 P.2d 836 (1996); Matter of Woltman, 181 Ariz. 525, 892 P.2d 861 (1995); Matter of Secrist, 181 Ariz. 526, 892 P.2d 862 (1995); Matter of Engan, 180 Ariz. 13, 881 P.2d 345 (1994); Matter of Secrist, 180 Ariz. 50, 881 P.2d 1155 (1994); Matter of Woltman, 178 Ariz. 548, 875 P.2d 781 (1994); Matter of Peartree, 178 Ariz. 114, 871 P.2d 235 (1994); Matter of Wurtz, 177 Ariz. 586, 870 P.2d 404 (1994); Matter of Elowitz, 177 Ariz. 240, 866 P.2d 1326 (1994).

In Arizona Ethics Opinion No. 93-03, the Committee ruled that where an attorney, at the conclusion or termination of an engagement, had returned to the client all original documents and any other documents in the file that belonged to the client, it was not improper for the attorney to charge the client for the expense of making additional copies of the file. That Opinion, however, may have been superseded by the Committee's subsequent issuance of Arizona Ethics Opinion No. 98-07, which is discussed extensively in Section 1.8:1140, infra. In that Opinion, the Committee determined that if, after termination of the relationship, the client requested return of the entire file, the lawyer may deliver it or provide a full copy. In the latter event, or if the lawyer delivers to the client the original file and elects to retain a copy, the client should not be charged any copying costs. The client may be charged for any additional copying costs incurred in responding to client requests after the original or one full copy of the file has been given to the client.

1.5:240      Fee Collection Procedures

An attorney whose client has failed to pay the attorney's fees due may obviously resort to litigation to collect them. Such a suit may be brought in contract, where there is a written fee agreement, or on a quantum meruit theory if there is no such agreement, provided such a type of recovery remains available in light of the amendments to AZ-ER 1.5. See Schwartz v. Schwerin, 85 Ariz. 242, 336 P.2d 144 (1959). If there is a dispute as to the appropriateness or amount of the fee, that can be resolved by agreement, in a collection action, or in a fee arbitration at the conclusion of which the attorney, if successful, can enforce any arbitration award. See discussion in Section 1.5:250, infra.

Other obligations imposed by the Rules of Professional Conduct may operate to restrict or preclude the attorney's ability to utilize collection procedures that would be available in a normal commercial context. For example, an attorney may not properly charge interest on delinquent fee accounts without a prior written agreement with the client which permits that. Arizona Ethics Opinion Nos. 86-09, 81-14.

Thus, in Arizona Ethics Opinion No. 2000-07, the Committee on the Rules of Professional Conduct ("the Committee") ruled that: (1) it is ethically permissible for lawyers and law firms to charge interest, at a reasonable rate, on delinquent client bills, provided the charge is disclosed in a written fee agreement to which the client has agreed, (2) it is ethically permissible for lawyers and law firms to use collection agencies to collect delinquent client accounts, provided that the prospective use of such a collection agency is disclosed and agreed to by the client in a written fee agreement, and (3) it is ethically permissible for lawyers and law firms to pass on to the client the actual cost of using a collection agency, provided the cost is reasonable, the manner in which the charge will be computed is disclosed and agreed to by the client in a written fee agreement, and the charge is independently fair and reasonable to the client. The Committee also held, however, that it is not proper to add to the principal balance the client owes an additional charge to cover the costs of collection, and then refer that increased amount out to the collection agency.

In Arizona Formal Ethics Opinion No. 94-11, the Committee ruled that an attorney must have the prior consent of a client before disclosing client confidences to a credit reporting agency or a collection agency that uses a credit reporting agency. In Arizona Formal Ethics Opinion No. 89-10, the Committee held that an attorney who has accepted a credit card for payment of legal fees may not disclose confidential communications between the attorney and the client to the lender. Finally, in Arizona Formal Ethics Opinion No. 98-05, the Committee held that a law firm may not sell its accounts receivable to a factor because: (1) it will require the disclosure of confidential information beyond that authorized by Arizona ER 1.6(d), and (2) it would involve the sharing of legal fees with a non-lawyer. A lawyer or law firm may not sell accounts receivable to a factor if the factor is authorized to resell the accounts to anyone, or if the agreement would permit the factor to receive correspondence from the law firm's clients that may contain confidential information.

An attorney may, with the agreement of the client, accept a lien on property as security for the payment of fees. Thus, in Skarecky & Horenstein, P.A. v. 3605 North 36th Street Co., 170 Ariz. 424, 825 P.2d 949 (App. 1991), a law firm had accepted, as security for payment of its fees, the assignment of its clients' beneficial interest in a deed of trust. The Court of Appeals agreed with the firm's contention, on an appeal from a Superior Court's determination that the assignment was void and unenforceable, that it did not operate to give the firm an improper proprietary interest in a cause of action, but was rather a legally and ethically permissible lien acquired as security for the payment of the firm's fees. Similarly, in Arizona Ethics Opinion No. 86-12, the Committee ruled that a lawyer representing a client in a marital dissolution proceeding may secure the payment of the lawyer's fees and costs by taking a lien on community funds after the preliminary injunction contemplated by A.R.S. § 25-315 is issued.

There are also some ethical restrictions on an attorney's ability to retain the client's entire file as a form of "security" for the payment of fees. The two principal categories of lawyer liens that have been recognized in Arizona are "charging liens" and "retaining liens." National Sales & Service Co., Inc. v. Superior Court of Maricopa County, 136 Ariz. 544, 667 P.2d 738 (1983). "Charging liens" attach to the funds or other property created or obtained by the attorney's efforts. Id. The Supreme Court has held that a "charging lien" arises only when it appears that the parties agreed to look to the fund itself for the payment of the attorney's fees. Linder v. Lewis, Roca, Scoville & Beauchamp, 85 Ariz. 118, 333 P.2d 286 (1958).

"Retaining liens", on the other hand, attach to the files, books and records that come into an attorney's possession, or are generated by the attorney, during the course of an engagement. The issue of the propriety of an attorney asserting a "retaining lien" as security for the payment of fees was first addressed in Arizona Ethics Opinion No. 81-32. The Committee essentially avoided the issue, ruling that if an attorney had a retaining lien "as a matter of law," the attorney could assert the lien, as security for the payment of fees, on client property in the attorney's possession.

The issue of whether Arizona would recognize the existence and propriety of a "retaining lien" "as a matter of law" was first (and finally) addressed in National Sales & Service Co., Inc. v. Superior Court of Maricopa County, 136 Ariz. 544, 667 P.2d 738 (1983). The Court initially pointed out that no Arizona appellate court had previously addressed the issue of whether such liens were valid, but noted that such liens were contemplated by DR 5-103(A)(1) of the Code of Professional Responsibility, which was then in effect in Arizona. The Court also noted that, in the absence of prior decisional or legislative authority to the contrary, Arizona courts were usually inclined to follow the principles of the Restatement of the Law, and that both § 62 of the Restatement of Security and § 464(b) of the Restatement (Second) of Agency recognized retaining liens in favor of an attorney as security for the payment of fees and recovery of advances. Accordingly, the Court determined:

We therefore hold that an attorney has a retaining lien as security for the general balance due him for professional services and disbursements upon the papers and other chattels of his client which come into his possession in his professional capacity.

Id., 136 Ariz. at 546, 667 P.2d at 740.

After encouraging attorneys and clients to negotiate and resolve fee disputes without resorting to the assertion of liens and/or litigation, the Court noted that there would clearly be circumstances where it would be inconsistent with the lawyer's duties to the client to assert a lien right with respect to portions of the client's file. Laboring without a detailed record that would permit it to give definitive guidance on this issue, the Court could only announce general guidelines as to when the assertion of a lien would be proper. Thus, it pointed out that it would be proper for the lien to attach to the lawyer's, and the lawyer's staff's, research notes and internal memoranda concerning the engagement. Such work product was, in the Court's view, the lawyer's property and remained the lawyer's property at least until the lawyer was paid. The Court then observed:

On the other hand, we believe it is improper for the lien to attach to a document given by the client to the lawyer for a purpose inconsistent with the fixing of a lien upon it. If, for example, a client brings an original document or instrument to a lawyer for delivery to another, then the client's purpose is inconsistent with the fixing of a lien upon the document or instrument ... Likewise, if a client brings some book, document or other chattel to his lawyer for use as an exhibit at an impending trial, the client's purpose is inconsistent with the fixing of a lien upon the document. In either of the above cases the lawyer's duty to seek his client's lawful objectives and to avoid prejudice or damage to his client are inconsistent with his assertion of a retaining lien.

Id., 136 Ariz. at 546, 667 P.2d 740 (citations omitted). Briefly summarized, the rule which emanates from the National Sales decision is that an attorney has, and may assert, a "retaining lien" with respect to work product generated by the lawyer or the lawyer's staff during the course of an engagement. With respect to other papers received and retained by the lawyer during the course of an engagement as part of the client's "file," the attorney may assert a "charging lien" as security for the payment of fees, but not if to do so would be inconsistent with the lawyer's obligations to accomplish the client's objectives or if the assertion of a lien with respect to all or any portion of the file would damage or prejudice the client's interests.

The Court in National Sales based its decision upon two separate grounds: (1) the fact that former DR 5-103(A)(1) of the Rules of Professional Responsibility (which is no longer in effect in Arizona) seemed to contemplate "retaining liens," and (2) the fact that sections of two separate Restatements, which Arizona courts are inclined to follow in the absence of contrary Arizona authority, but neither of which specifically addressed the obligations of lawyers, also seemed to recognize them.

In that regard, it is interesting to note that § 43 of the American Law Institute's Restatement of the Law Governing Lawyers takes a somewhat different approach to the issue of retaining liens. Section 43(1) does permit a lawyer to retain documents prepared by the lawyer or at the lawyer's expense as security for the payment of fees if retaining such materials would not unreasonably harm the client's or former client's interests, which is consistent with National Sales. That Section also provides, however, that a lawyer may not retain possession of, or assert a lien with respect to, a client's property, unless a statute or rule authorizes that, or the client has agreed to such an arrangement. This seems more restrictive than the rule announced in National Sales, but the issue has not been considered by the Supreme Court since the promulgation of the Restatement.

1.5:250      Fee Arbitration

A lawyer and client may always agree to arbitrate any disputes concerning the lawyer's fees, either at the inception of the relationship or after a dispute concerning fees has already arisen. There is no ethical prohibition on including an arbitration clause with respect to fee disputes in the initial retainer agreement. The public policy of Arizona favors the consensual arbitration of disputes as an alternative to court proceedings, and Arizona has adopted the Uniform Arbitration Act, A.R.S. §§ 12-1501 through 12-1518, which sanctions and governs agreements to arbitrate. Meineke v. Twin City Fire Ins. Co., 181 Ariz. 576, 892 P.2d 1365 (App. 1994); City of Cottonwood v. James L. Fann Contracting, Inc., 179 Ariz. 185, 877 P.2d 284 (App. 1994). When agreements to arbitrate are freely and fairly entered into, they will be enforced. Broemmer v. Abortion Services of Phoenix, 173 Ariz. 148, 840 P.2d 1013 (1992). The enforceability of such agreements, however, is determined by general contract principles, and they may be found unenforceable if unconscionable. Id. Arbitration agreements and clauses are construed broadly and any doubts concerning whether a matter is subject to arbitration are resolved in favor of arbitrability. Foy v. Thorp, 186 Ariz. 151, 920 P.2d 31 (App. 1996).

As the Comment to AZ-ER 1.5 notes: "The State Bar of Arizona has established an arbitration procedure for the resolution of disputes." Comment, AZ-ER 1.5, ‡ 10. A lawyer may inform a client in the fee agreement that fee arbitration is available through the State Bar and obtain the client's consent to binding arbitration through the Bar's Arbitration Program should a dispute over fees arise. Such consent may also be sought and secured after a fee dispute has already arisen.

The State Bar's fee arbitration program is administered by a Fee Arbitration Committee which has issued Regulations, approved by the Bar's Board of Governors, which specify the Committee's jurisdiction and the procedures that will be followed with respect to disputes that are submitted to it for resolution. The Regulations stress that the program is entirely voluntary and available to all parties who agree to be bound by the eventual arbitration award. The members of the Committee are appointed by the President of the State Bar.

The Regulations specify that the Committee's jurisdiction extends to the following categories of fee disputes, but only when all parties agree to be bound by the result:

1. Disputes between and among attorneys practicing in Arizona when the dispute arose;

2. Between attorneys practicing in Arizona when the dispute arose and their clients;

3. Between attorneys practicing in Arizona when the dispute arose and a third party who has paid or agreed to pay the attorney's fees, but only if the client joins as a co-petitioner or co-respondent, as the case may be: and

4. Between clients and the law firm to which the fee in dispute may be owed or has been paid.

The Committee does not have, or at least will not exercise, jurisdiction over a dispute: (1) if any party declines to be bound by the eventual determination; (2) if there has already been a determination made as to the validity of the fee in dispute; (3) if an action on the fee dispute is already pending in another forum; (4) if the dispute is in the nature of a compulsory counterclaim that could have been raised in another proceeding; (5) if the petition to arbitrate is filed more than three (3) years after the attorney-client relationship has been terminated or the final billing has been received by the client, whichever is longer, unless all parties stipulate to waive that limitation; and, (6) if the amount in controversy is less than $500.00. In addition, any member of the Committee or of Committee staff may decline jurisdiction in a particular case where the interests of justice would thereby be served or where fee arbitration is not likely to lead to the resolution of the dispute.

Fee arbitration proceedings are initiated by filing a signed Petition for Arbitration and Agreement to Arbitrate with the State Bar. Forms of such Petitions and Agreements are available from the State Bar. Upon the receipt of those two forms completed and signed by the Petitioner, the State Bar forwards to the Respondent a copy, with a request that the Respondent sign and return a copy of the Agreement and a response to the Petition. Failure to return the Agreement within twenty (20) days of the transmittal letter from the Bar is construed as a declination to arbitrate the dispute. If the Bar receives from the Respondent a signed copy of the Agreement and a response to the Petition, a copy is forwarded to the Petitioner, and the complete file is forwarded to a member of the Fee Arbitration Committee for the appointment of an Arbitrator. By Regulation, the parties' signatures on the Agreement to Arbitrate constitute:

1. An avowal that the parties have attempted to resolve the dispute and are unable to do so, or have a reasonable belief that such an effort would be futile.

2. An agreement to hold harmless from suit the State Bar and its employees, the members of the Committee, the Arbitrator(s), and all others who participate in good faith in the arbitration proceedings.

3. An acknowledgment that the award of the Arbitrator(s) is final and binding upon the parties and that the award may be enforced by any court of competent jurisdiction.

4. An agreement to keep the State Bar advised of any subsequent change of address and an agreement that the failure to do so shall be deemed a waiver of notice of the arbitration hearing.

5. An agreement that the dispute will be heard and determined by the Fee Arbitration Committee in accordance with the Rules of Arbitration of Fee Disputes.

6. An acknowledgment and agreement to make available to the Arbitrator(s) all relevant records pertaining to the dispute, including but not limited to the signed fee or retainer agreement, retention letter, and all billings.

7. An avowal that no civil litigation regarding the fee dispute has been filed or, if such a suit was filed, it has been dismissed or stayed.

In a proceeding in which the amount in controversy is more than $10,000, either party may request in the Agreement to Arbitrate that the matter be heard by a panel of three Arbitrators. If such a request is made, the Committee member to whom the file was forwarded is to appoint three (3) persons to constitute the arbitration panel, two (2) of whom shall be members of the State Bar of Arizona, with the third being a layperson. In a proceeding where the amount in controversy is $10,000 or less, the Committee member appoints a single Arbitrator who is to be a member of the State Bar of Arizona. Arbitrators are to be chosen geographically, according to the venue where the hearing will be conducted. The parties are to be advised of the name(s) of the Arbitrator(s) selected, and any party may within ten (10) days following the date of that notice, file an objection to any Arbitrator selected. Upon receipt of such an objection, a new Arbitrator is to be selected to replace any Arbitrator objected to, with that selection to be binding upon any party who previously objected.

Unless the parties otherwise agree, or the Arbitrator(s) determine that there is a more convenient forum, the arbitration hearing is to be conducted in the county in Arizona where the services were performed, or the county in Arizona where the parties contracted for the services. The hearing is to be held promptly, but in no event later than ninety (90) days after receipt of the fully executed Agreement to Arbitrate. The Arbitrator(s) shall set a date, time and location for the hearing and notify the parties by personal service or by first class mail not less than fifteen (15) days prior to the date selected. Testimony at the hearing is taken under oath, and any party may make arrangements to have the hearing recorded, at that party's own expense, by a court reporter or by electronic tape recording, provided notice of that is given to the opposing party and to the Arbitrator(s) at least three (3) days prior to the scheduled hearing. If a party who has received notice of the hearing fails to appear without good cause, the Arbitrator(s) may proceed with the hearing and determine the controversy upon the evidence produced. The parties may also stipulate to waive the hearing and to have the Arbitrator(s) determine the controversy solely on the basis of the materials in the file.

If the matter is heard by a single Arbitrator, then the award must be rendered within twenty (20) days after the close of the hearing. If the matter is heard by a panel of three (3) Arbitrators, the award must be rendered by majority vote within forty (40) days after the close of the hearing. The Regulations specify, however, that these time limits are not jurisdictional. The award must be in writing and be signed by al least one Arbitrator. The award may include an award of interest, where appropriate under Arizona law, but may not include attorney's fees or costs incurred in the arbitration. The parties have thirty (30) days from the date upon which a copy of the award is mailed to them to comply with the award. If the parties fail to comply within that time period, the award may be judicially confirmed pursuant to the procedures specified in Arizona's Uniform Arbitration Act, A.R.S. § 12-1501, et seq.

The preference for the use of these arbitration procedures to resolve fee disputes was underscored by the decision in In re Connelly, 203 Ariz. 413, 55 P.3d 756 (2002). There, Connelly and a client had entered into a fee agreement for Connelly to handle a criminal matter for a "nonrefundable fixed fee," and the engagement agreement provided that any dispute as to fees or costs was to be submitted to fee arbitration under the auspices of the State Bar. Notwithstanding, at the conclusion of the matter, the client filed a complaint with the State Bar that Connelly had charged an excessive fee, and the Bar commenced disciplinary proceedings. The Court held that, where the lawyer and client had entered into a binding fee arbitration agreement, and no charges of other misconduct were involved, the State Bar should await the conclusion of the fee arbitration proceedings before initiating formal disciplinary proceedings. Id.

1.5:260      Forfeiture of Lawyer's Compensation

There are no Arizona authorities identifying circumstances under which a lawyer will be deemed to have forfeited any right to compensation for services that the lawyer has rendered. As the Comment to AZ-ER 1.5 points out, however: "A lawyer may require advance payment of a fee, but is obliged to return any unearned portion." Comment, AZ-ER 1.5, ‡ 4. Indeed, one of the specific requirements imposed by AZ-ER 1.16(d) upon termination of a representation, is that the lawyer refund "any advance payment of fee that has not been earned." In a number of cases in which lawyers have been found to have violated AZ-ER 1.5(a) by accepting advance retainers and not completing the engagement, the Disciplinary Commission has routinely ordered restitution to the wronged clients of the unearned fees. See Matter of Brady, 186 Ariz. 370, 923 P.2d 836 (1996); Matter of Woltman, 181 Ariz. 525, 892 P.2d 861 (1995); Matter of Secrist, 181 Ariz. 526, 892 P.2d 862 (1995); Matter of Engan, 180 Ariz. 13, 881 P.2d 345 (1994); Matter of Secrist, 180 Ariz. 50, 881 P.2d 1155 (1994); Matter of Woltman, 178 Ariz. 548, 875 P.2d 781 (1994); Matter of Peartree, 178 Ariz. 114, 871 P.2d 235 (1994); Matter of Wurtz, 177 Ariz. 586, 870 P.2d 404 (1994); Matter of Elowitz, 177 Ariz. 240, 866 P.2d 1326 (1994).

1.5:270      Remedies and Burden of Persuasion in Fee Disputes

There are no Arizona authorities which address this specific issue.

1.5:300   Attorney-Fee Awards (Fee Shifting)

1.5:310      Paying for Litigation: The American Rule

As stated by the Court in London v. Green Acres Trust, 159 Ariz. 136, 145, 765 P.2d 538, 547 (App. 1988):

The general rule regarding attorneys' fees, sometimes referred to as the "American Rule," is that, absent a statute or contract, the prevailing litigant is ordinarily not entitled to collect attorney's fees from the losers.

See also Kromko v. Superior Court In and For County of Maricopa, 168 Ariz. 51, 811 P.2d 12 (1991); Marcus v. Fox, 150 Ariz. 333, 723 P.2d 682 (1986); Schwab Sales, Inc. v. GN Construction Co., Inc., 196 Ariz. 33, 992 P.2d 1128 (App. 1998); Lewin v. Miller Wagner & Co., Ltd., 151 Ariz. 29, 725 P.2d 736 (App. 1986).

Both the Arizona Supreme Court and the Arizona Court of Appeals, however, have had occasion to observe that the prior prevalence of the so-called "American Rule" in Arizona has been significantly eroded. Thus, in its Supplemental Opinion in Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 710 P.2d 1025 (1985), the Supreme Court observed:

Statutes and common law practices that require the losing party to pay the successful party's attorney's fees are contrary to traditional American jurisprudence. Under the so-called American rule, counsel fees are not regarded as "costs" and each party to litigation generally bears its own attorney's fees regardless of who prevails . . . Over the years, especially in this century, courts and legislatures have fashioned exceptions to this rule. These exceptions are commonly intended 1) to encourage private enforcement of public laws by victims, 2) to discourage non-meritorious litigation, 3) to encourage a just claim or a just defense, or 4) to promote settlements of disagreements out of court.

Id., 147 Ariz. at 391, 710 P.2d at 1046. The Court had previously observed, in its Opinion in New Pueblo Constructors, Inc. v. State, 144 Ariz. 95, 111, 696 P.2d 185, 201 (1985), that: "The Arizona Legislature has enacted more than sixty statutes authorizing recovery of attorney's fees. . . . "

The Court of Appeals noted the same phenomenon in its decision in Arnold v. Arizona Department of Health Services, 160 Ariz. 593, 775 P.2d 521 (1989), in which it applied the "private attorney general" doctrine, discussed in Section 1.5:320, infra:

Whether to adopt the private attorney general doctrine involves a policy choice between encouraging public interest litigation and preserving the "American Rule" of each party bearing its own attorney's fees absent a statute or contract directing otherwise. The "American Rule", although longstanding, has been eroded by statute and judicial decision on both the state and federal level. In Arizona, we have at least 73 statutes providing for fee-shifting . . . There are a number of judicial exceptions to the "American Rule" such as the Common Fund Doctrine . . . Given the eroded status of the "American Rule" and the benefit to Arizona citizens from public interest litigation, we adopt and apply the private attorney general doctrine here.

Id., 160 Ariz. at 609, 775 P.2d at 537 (citations omitted).

1.5:320      Common-Law Fee Shifting

Arizona has recognized, to one degree or another, five separate common law or equitable doctrines that, where the conditions for invoking them are satisfied, permit the court to award the prevailing party its attorneys' fees even though no statute, rule or contract calls for that: (1) the "common fund" doctrine; (2) the "substantial benefit" doctrine; (3) the "private attorney general" doctrine; (4) the "tort of another" doctrine; and, (5) the "bad faith" exception. Unfortunately, there is dictum in the decisions in both Arnold v. Arizona Department of Health Services, 160 Ariz. 593, 603, 775 P.2d 521, 531 (1989) and Kadish v. Arizona State Land Department, 155 Ariz. 484, 497-98, 747 P.2d 1183, 1196-97 (1987), which erroneously suggests that the "substantial benefit" doctrine and the "private attorney general" doctrine are one and the same, when they are not. See Myerson & Norris, Arizona Attorneys' Fees Manual - Third Edition (State Bar of Arizona 1998) p. 6-6.

The Arizona Supreme Court first recognized and applied the "common fund" doctrine in Zeckendorf v. Steinfeld, 15 Ariz. 335, 138 P. 1044 (1914), aff'd 239 U.S. 26, 36 S.Ct. 14, 60 L.Ed. 125 (1915). This was a shareholders' derivative action in which the Court determined that "right and justice" required that the benefitted company reimburse the plaintiff for the legal costs incurred in securing a recovery for the company which benefitted the company and all its shareholders. Id., 15 Ariz. at 342, 138 P. at 1047. In Hartman v. Oatman Mining & Milling Co., 22 Ariz. 476, 198 P. 717 (1921), the Court again permitted reimbursement of the plaintiff's fees, even though the litigation had neither brought a fund into the court nor added to the assets of the corporation. The Court found a substantial benefit to the stockholders in the enhanced value of the remaining shares, and reasoned that the award served to spread the costs proportionately among those shares. Subsequent development suggests that the result in Hartman was justifiable, not by application of the "common fund" doctrine, but rather the "substantial benefit" doctrine.

In State v. Boykin, 112 Ariz. 109, 538 P.2d 383 (1975), the Arizona Supreme Court, in declining to apply the "common fund" doctrine, indicated that it agreed with the rationale for the doctrine articulated in the decision of the United States Supreme Court in Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970), which held that an award of attorney's fees to a plaintiff might be appropriate where the plaintiff had successfully prosecuted litigation that (1) conferred a substantial benefit, (2) upon members of an ascertainable class, and (3) the court's jurisdiction made possible an award which would spread the costs proportionately among the beneficiaries. In Kerr v. Killian, 197 Ariz. 213, 3 P.3d 1133 (App. 2000), the Court indicated that the purpose of the "common fund" doctrine is to compensate counsel for producing benefits for those who have undertaken no risk or cost, and to prevent the unjust enrichment of those who receive the benefits of counsel's efforts.

In Kadish v. Arizona State Land Department, 155 Ariz. 484, 747 P.2d 1183 (1987), aff'd 490 U.S. 605 (1989), the Court discussed the fact that the plaintiffs were seeking an award of their attorneys' fees under the "substantial benefit" doctrine, but did so in a fashion that confused it with the "common fund" doctrine. In any event, a majority of the Justices could not concur in any resolution of the question, so attorneys' fees were not awarded until the litigation was remanded.

In Kerr v. Killian, 197 Ariz. 213, 3 P.3d 1133 (App. 2000), the Court of Appeals held that a court may award attorneys' fees, under the "common fund" doctrine, to counsel for the prevailing side whose efforts in litigation create or preserve a common fund from which others who have undertaken no risk or cost will nevertheless benefit. The Court pointed out that the purpose of the doctrine is to compensate counsel for producing such benefits and to preclude the unjust enrichment of those who receive the benefits of the fund created and/or preserved. The "common fund doctrine" is a general rule of equity that a person or persons who employ attorneys for the preservation of a common fund may be entitled to have their attorneys' fees paid out of that fund. Hobson v. Mid-Century Insurance Company, 199 Ariz. 525, 19 P.3d 1241 (App. 2001). It may not be invoked, however, to reduce the amount of a workers' compensation carrier's statutory lien on the proceeds of a recovery from a third party by a portion of the fees incurred in securing that recovery. Id.

The "common fund" doctrine is based on an equitable principle of allocating counsel's fees among the benefited class members, not shifting them to the losing party. Burke v. Arizona State Retirement System, 205 Ariz. 116, 67 P.3d 712 (App. 2003). Such an award is from the common fund created, and not assessed against the opposing party. Id. The doctrine thus is a mechanism for fee-spreading rather than fee-shifting. Id. A common application of the doctrine is the award of attorneys' fees in a derivative suit from a common fund that the plaintiff has created for the benefit of a discernible group. Steer v. Eggleston, 202 Ariz. 523, 47 P.3d 1161 (App. 2002).

The "private attorney general" doctrine was first adopted and applied in Arnold v. Arizona Department of Health Services, 160 Ariz. 593, 775 P.2d 521 (1989), in which private parties had successfully prosecuted a class action on behalf of approximately 4,500 chronically mentally ill indigents who claimed that state and county governmental agencies had breached a statutory duty to provide them, and others similarly situated, with adequate mental health care. The trial court had awarded plaintiffs their attorneys' fees against the State based on A.R.S. § 12-348, and then held that the county defendants should be responsible for one-third of the fees awarded on the basis of the "private attorney general" doctrine. The Supreme Court affirmed, noting that some of its prior decisions had discussed the doctrine (which the Court erroneously characterized as being the same as the "substantial benefits" doctrine) and recognized its existence, but had never actually applied it. Recognizing that the decision whether or not to apply the doctrine involved weighing the interests in encouraging public interest litigation against the interest in preserving the "American Rule" concerning attorneys' fee awards, the Court noted that there had already been significant erosion of the "American Rule," and that its vitality was outweighed in that case by the societal interest in public service litigation:

The private attorney general doctrine is an equitable rule which permits courts in their discretion to award attorney's fees to a party who has vindicated a right that:

(1) benefits a large number of people;

(2) requires private enforcement; and

(3) is of societal importance.

******

Although Arizona has long recognized the private attorney general doctrine, we have not applied it before. We do so now.

Id., 160 Ariz. at 609, 775 P.2d at 537.

In Arizona Center for Law in the Public Interest v. Hassell, 172 Ariz. 356, 837 P.2d 158 (App. 1991), the Court of Appeals approved an award of fees, on the basis of the "private attorney general" doctrine, to a public interest law firm that had successfully challenged the constitutionality of certain legislation that permitted the disposal of public trust lands in the beds of certain watercourses in the state. Subsequently, in Kadish v. Arizona State Land Department, 177 Ariz. 322, 868 P.2d 335 (App. 1993), the Court held that the plaintiffs and the Arizona Center for Law in the Public Interest should receive, under the "private attorney general" doctrine, an award of their attorneys' fees incurred in their long and ultimately successful challenge to the constitutionality of Arizona's fixed mining royalty statutory provisions. The Court held that the litigation satisfied all the criteria that were required for application of the doctrine, which the Court described as follows: (1) the resolution of the litigation benefitted a large number of people in the state, including taxpayers and public school students, (2) the vindication of the right asserted was of societal importance, and (3) vindication of the right asserted required a legal challenge to a statute adopted by the state legislature and thus could only have been privately enforced. Interestingly, the Court rejected the argument that an award of fees against the State based on the "private attorney general" doctrine was pre-empted by A.R.S. § 12-348 and that the State Land Department should not be liable for the fee award because its status in the litigation was that of a "nominal party."

The "tort of another" doctrine was first recognized by the Supreme Court in United States Fidelity & Guaranty Co. v. Frohmiller, 71 Ariz. 377, 227 P.2d 1007 (1951), where the Court explained:

It is generally held that where the wrongful act of the defendant has involved the plaintiff in litigation with others or placed him in such relation with others as makes it necessary to incur expenses to protect his interest, such costs and expenses, including attorneys' fees, should be treated as the legal consequences of the original wrongful act and may be recovered as damages.

Id., 71 Ariz. at 380, 227 P.2d at 1009. The doctrine was subsequently applied in Collins v. First Financial Services, Inc., 168 Ariz. 484, 815 P.2d 411 (App. 1991), where the Court indicated that, in order to recover attorneys' fees under this exception, the plaintiff must show that: (1) the plaintiff became involved in a legal dispute because of the defendant's tortious conduct; (2) the dispute was with a third party; (3) the plaintiff incurred attorneys' fees in connection with that dispute; (4) the expenditure of attorneys' fees was a foreseeable or necessary result of the defendant's tortious conduct; and, (5) the claimed fees are reasonable. Id., 168 Ariz. at 486-87, 815 P.2d at 413-14.

Finally, in London v. Green Acres Trust, 159 Ariz. 136, 765 P.2d 538 (App. 1988), a successful class action brought against sellers of funeral services and related items for violations of endowment care statutes, securities statutes and the Arizona Consumer Fraud Act, the Court noted that there were several bases upon which the plaintiffs might be awarded their attorneys' fees incurred in the litigation. Initially, the Court pointed out: There is indeed an equitable exception to the American Rule which permits recovery of fees and expenses in this case: the bad faith exception." Id., 159 Ariz. at 146, 765 P.2d at 548. The Court noted that there were very few Arizona cases which discussed that exception, but attributed that to the fact that it had been partially codified in A.R.S. § 12-341.01(C), which permits the award of attorneys' fees where the action or defense is groundless or not made in good faith. The Court noted, however, that there was at least one Arizona case - Taylor v. Southern Pac. Transp. Co., 130 Ariz. 516, 637 P.2d 726 (1981) - which had recognized and applied it.

1.5:330      Statutory Fee Shifting

As both the Arizona Supreme Court and the Arizona Court of Appeals have had occasion to observe, the Arizona Legislature has enacted a number of statutes that permit or require an award of attorneys' fees to the prevailing party in specified categories of cases. This Section will discuss only those statutory provisions which are most frequently invoked as the basis for an award of fees.

Perhaps the most frequently invoked fee-shifting statute is A.R.S. § 12-341.01(A), which provides that: "In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney's fees." Subpart (B) of the statute specifies that:

The award of reasonable attorney's fees awarded pursuant to subsection A should be made to mitigate the burden of the expense of litigation to establish a just claim or a just defense. It need not equal or relate to the attorney's fees actually paid or contracted, but such award may not exceed the amount paid or agreed to be paid.

In light of this statutory language, the Arizona courts have consistently held that a fee award under the statute may not exceed, and conversely need not equal, the amount of fees which the litigant actually incurred. Associated Indemnity Corp. v. Warner, 143 Ariz. 567, 694 P.2d 1181 (1985); Sparks v. Republic National Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied 459 U.S. 1070 (1982); Jerman v. O'Leary, 145 Ariz. 397, 701 P.2d 1205 (App. 1985). Subpart (D) specifies that any award of fees under this statutory provision is to be made by the Court and not by a jury. Assuming that the standards of the statute are met, there is nothing that precludes an award of fees against the State under it. New Pueblo Constructors, Inc. v. State, 144 Ariz. 95, 696 P.2d 185 (1985).

Attorneys' fees may be awarded under this statute in contract cases in federal court where the court's jurisdiction is based upon diversity of citizenship, Apollo Group, Inc. v. Avnet, Inc., 58 F.3d 477 (9th Cir. 1995); Matison v. Transamerica Title Ins. Co., 845 F.2d 867 (9th Cir. 1988); Marvin Johnson, P.C. v. Shoen, 888 F.Supp. 1009) (D.Ariz. 1995); but not where federal jurisdiction is based on the presence of a federal question. See Home Savings Bank, F.S.B. v. Gillam, 952 F.2d 1152 (9th Cir. 1991). Attorneys' may not be recoverable under the stature where the parties have provided that the contract will be governed by the law of another state. See Swanson v. Image Bank, Inc., 202 Ariz. 226, 43 P.3d 174 (App. 2002); Aries v. Palmer Johnson, Inc., 153 Ariz. 250, 735 P.2d 1373 (App. 1987).

One issue which has been a relatively frequent focus of litigation under this statute is the circumstances under which a claim will be deemed to be one "arising out of a contract, express or implied." In ASH, Inc. v. Mesa Unified School District No. 4, 138 Ariz. 190, 673 P.2d 934 (App. 1983), the Court suggested that an action could be deemed to be one "arising out" of a contract if the action was one in which a contract was "a factor causing the dispute." This view of the statute was criticized subsequently as representing an overly broad interpretation of the phrase, and as being inconsistent with the decision in Sparks v. Republic National Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127, cert. denied 459 U.S. 1070 (1982). Marcus v. Fox, 150 Ariz. 333, 723 P.2d 682 (1986). The Court in Marcus also rejected the argument, which found some support in earlier decisions, that an award of fees under A.R.S. § 12-341.01(A) would only be proper in cases in which a contract is actually breached. The Court concluded that the appropriate test was whether the cause of action in question could not have existed but for the existence of a contract. See also Burke v. Arizona Retirement System, 205 Ariz. 116, 67 P.3d 712 (App. 2003); Hanley v. Pearson, 204 Ariz. 147, 61 P.3d 29 (App. 2003); Schwab Sales, Inc. v. GN Construction Co., Inc., 196 Ariz. 33, 992 P.2d 1128 (App. 1998). A successful party on a contract claim may recover not only attorneys' fees expended on the contract claim, but also fees expended litigating an "interwoven" tort claim. Robert E. Mann Construction Company v. Liebert Construction, 204 Ariz. 129, 60 P.3d 708 (App. 2003); Ramsey Air Meds, L.L.C. v. Cutter Aviation, Inc., 198 Ariz. 10, 6 P.3d 315 (App. 2000). The tort claim will be considered "interwoven," however, only if the tort could not exist but for the breach or avoidance of a contract. Id.

On the other hand, the Arizona courts have rejected the notion, particularly in cases involving professionals, that claims of negligent performance of a contract are ones arising out of contract. In Lewin v. Miller Wagner & Co., Ltd., 151 Ariz. 29, 725 P.2d 736 (App. 1986), an accounting malpractice action, the trial court had awarded the successful plaintiffs their attorneys' fees on the grounds that the action arose out of the contract between the plaintiffs and the defendant for the performance of accounting services. The Court of Appeals agreed that there clearly had been a contract between the parties for the performance of accounting services, and that the law does impose upon the accountant who is a party to such a contract a duty to perform the services in accordance with a standard of reasonable care or suffer liability for failure to do so, but concluded that was not a sufficient basis to award fees under the statute:

We therefore conclude that while a contractual relationship may give rise to a duty to perform in accordance with a certain standard of care, this legally imposed duty exists separate and apart from the contract giving rise to the duty. The failure to comply with this standard of care results in a breach of the legal duty imposed and is not an action "arising out of contract" under A.R.S. § 12-341.01(A).

Id., 151 Ariz. at 36, 725 P.2d at 743. The very same result was reached, based upon essentially same reasoning, where a legal malpractice action was claimed to be one "arising out" of the contract to perform legal services so that the prevailing party could claim fees under A.R.S. § 12-341.01(A). Barmat v. John & Jane Doe Partners A-D, 155 Ariz. 519, 747 P.2d 1218 (1987).

An award of fees under the statute is discretionary rather than mandatory. The leading case concerning the factors the trial court should take into account in exercising its discretion whether or not to award fees remains Associated Indemnity Corp. v. Warner, 143 Ariz. 567, 694 P.2d 1181 (1985), where the Court indicated that the following factors should be taken into account:

1. Whether litigation could have been avoided or settled and whether the successful party's efforts were completely superfluous in achieving the result;

2. Whether assessing fees against the unsuccessful party would cause an extreme hardship;

3. Whether the successful party prevailed with respect to all of the relief sought;

4. Whether the legal question presented was novel and whether such claim or defense had previously been adjudicated in Arizona; and

5. Whether a fee award would discourage other parties with tenable claims or defenses from litigating or defending legitimate contract issues.

Id., 143 Ariz. at 570, 694 P.2d at 1184. See also Wagenseller v. Scottsdale Memorial Hospital, 147 Ariz. 370, 710 P.2d 1025 (1985).

The attorneys' fees awarded must be reasonable. Under A.R.S. § 12-341.01(B), as earlier noted, the fees awarded may not exceed the amount actually paid by the claimant. The fact that the fees requested exceed the amount in dispute, however, does not mean that they are unreasonable. Wagner v. Casteel, 136 Ariz. 29, 663 P.2d 1020 (App. 1983). The most definitive articulation of the standards for determining the reasonableness of requested attorneys' fee awards, and the support that the claimant must provide for any such request, remains the decision in Schweiger v. China Doll Restaurant, Inc., 138 Ariz. 183, 673 P.2d 927 (App. 1983). The Court initially noted that the erosion of the dominance of the American Rule had placed new and, at times, difficult burdens on the judiciary:

Like most courts, this court is faced with an ever-burgeoning growth of fee applications in a myriad of cases. Increasingly, the court's time is taken up with determining reasonable fees in cases ranging from contract disputes to litigation which arises under numerous statutes containing attorneys' fees provisions. The slow but steady shift from the historic American rule, which provides that in the ordinary case each party should bear its own fees, to the English rule, which provides that the prevailing party is ordinarily to recover fees, is changing the nature of litigation and the judicial function in many instances.

Id., 138 Ariz. at 186, 673 P.2d at 930. The Court then held that the starting point for determining reasonableness was the actual billing rate charged by the lawyer or lawyers involved in the matter. The Court then indicated that applications for the award of attorneys' fees should be supported by an affidavit of counsel indicating the type of services provided, the date the service was provided, the identity of the attorney providing the service (if more than one attorney was involved), and the time spent in providing the service. The Court also pointed out that any fee application must be in sufficient detail to permit the Court to evaluate the reasonableness of the time spent on individual tasks and on the entire matter, and cautioned practitioners to prepare summaries from contemporaneous time records indicating the work performed. See also Note, Statutory Attorney's Fees in Arizona: An Analysis of A.R.S. Section 12-341.01, 24 Ariz.L.Rev. 659 (1982).

Attorneys' fees on appeal are recoverable under this statute only if they are requested in the manner prescribed in Rule 21(c) of the Arizona Rules of Civil Appellate Procedure, which requires that a request for them be made in the briefs on appeal. Robert E. Mann Construction Company v. Liebert Construction, 204 Ariz. 129, 60 P.3d 708 (App. 2003). If a party fails to request an award of fees in that manner, that party cannot then ask the trial court on remand to award fees incurred on appeal, and it also precludes that party from seeking an award of fees incurred in the trial court after remand. Id.

A.R.S. § 12-341.01(C) is a separate subsection of that same statute which authorizes awards of attorney's fees in actions found to be groundless or to have been brought in bad faith. Specifically, it provides:

Reasonable attorney's fees shall be awarded by the court in any contested action upon clear and convincing evidence that the claim or defense constitutes harassment, is groundless and not made in good faith. In making such award, the court may consider such evidence as it deems appropriate and shall receive this evidence during trial on the merits of the cause, or separately, regarding the amount of such fees as it deems in the best interest of the litigating parties.

In White v. Kauffman, 133 Ariz. 388, 652 P.2d 127 (1982), the Court articulated the following as the perceived purpose of this statute:

We need not determine the precise purpose for which the legislature enacted the subject statute. Assuming, without deciding, that § 12-341.01(C) is purely punitive in purpose, we nevertheless recognize that it is entirely within the power of the legislature to provide for additive punishments or deterrences in such cases.

Id., 133 Ariz. at 390-91, 652 P.2d at 130-31. Subsequently, the Court of Appeals stated unequivocally that an award of fees under this statute is "punitive in nature." Wean Water, Inc. v. Sta-Rite Industries, Inc., 141 Ariz. 315, 318, 686 P.2d 1285, 1288 (App. 1984). Accordingly, a fee award under this statute need not be designed to compensate the party wronged by the conduct the statute proscribes, or measured with that goal in mind. The statute applies to "any contested action," regardless of the nature of the claims or defenses asserted. White v. Kauffman, 133 Ariz. 388, 652 P.2d 127 (1982); Nationwide Resources Corp. v. Ngai, 129 Ariz. 226, 630 P.2d 49 (App. 1981). The state may be subject to an award of fees under this statute, and may recover fees under it as well. New Pueblo Constructors, Inc. v. State, 144 Ariz. 95, 696 P.2d 185 (1985). The statute may be applied on appeal, as well as in actions brought in Superior Court. Boone v. Grier, 142 Ariz. 178, 688 P.2d 1070 (App. 1984).

The terminology employed in the statute ("shall be awarded") means that, once a court has found that the statutory criteria have been met, an award of reasonable attorneys' fees is mandatory. Associated Indemnity Corp. v. Warner, 143 Ariz. 567, 568, 694 P.2d 1181, 1182, fn.1 (1985); White v. Kaufman, 133 Ariz. 388, 652 P.2d 127 (1982). The statute applies only when it is shown, by clear and convincing evidence, that a claim or defense: (1) constitutes harassment, (2) is groundless, and (3) is not made in good faith. All three elements must be established to support a fee award. State v. Richey, 160 Ariz. 564, 774 P.2d 1354 (1989); McKesson Chemical Co. v. Van Waters & Rogers, 153 Ariz. 557, 739 P.2d 211 (App. 1987). In Gilbert v. Board of Medical Examiners, 155 Ariz. 169, 745 P.2d 617 (App. 1987), the Court held that the appropriate standard for measuring "good faith" was a subjective one, i.e., whether the particular attorney or party in the action knew that the action was not being brought in good faith, not whether a "reasonable" attorney would have known that the claim was frivolous or improper, but acknowledged that such subjective bad faith would ordinarily have to be proven by reference to objective factors.

A separate statute which authorizes the award of attorneys' fees, in addition to other penalties, for the bringing of meritless claims is A.R.S. § 12-349. That statute provides that, in any civil action commenced in a court of record, the court shall assess reasonable attorney's fees and, at the court's discretion, double damages of not to exceed five thousand dollars ($5,000) against any attorney or party, including the state or any political subdivision, who is found to have done any of the following:

1. Brings or defends a claim without substantial justification;

2. Brings or defends a claim solely or primarily for delay or harassment.

3. Unreasonably expands or delays the proceeding.

4. Engages in abuse of discovery.

"Without substantial justification" is defined in the statute to mean that the claim or defense constitutes harassment, is groundless and is not made in good faith. A.R.S. § 12-349(F). Subpart (C) of the statute also provides that attorney's fees may not be assessed if, after filing an action, a voluntary dismissal is filed for any claim or defense within a reasonable time after the attorney or party filing the dismissal knew or reasonably should have known that the claim or defense was without substantial justification.

A.R.S. § 12-350 provides that, in awarding attorney's fees under A.R.S. § 12-349, the Court must set forth the specific reasons for the award, and may take into account the following factors in determining whether such an award is warranted:

1. The extent of any effort made to determine the validity of a claim before the claim was asserted;

2. The extent of any effort made after the commencement of an action to reduce the number of claims or defenses being asserted or to dismiss claims or defenses found not to be valid;

3. The availability of facts to assist a party in determining the validity of a claim or defense;

4. The relative financial positions of the parties involved;

5. Whether the action was prosecuted, in whole or in part, in bad faith;

6. Whether issues of fact determinative of the validity of a party's claim or defense were reasonably in conflict;

7. The extent to which the party prevailed with respect to the amount and number of claims in controversy; and

8. The amount and conditions of any offer of judgment or settlement as related to the amount and conditions of the ultimate relief granted by the court.

It has been held that the same issues and concerns are involved, where a party requests sanctions under A.R.S. § 12-349, as where the request is based upon Rule 11, Ariz.R.Civ.P. Harris v. Reserve Life Insurance Company, 158 Ariz. 380, 762 P.2d 1334 (App. 1988).

A.R.S. § 12-348 authorizes awards of attorneys' fees and expenses in favor of a private party who has prevailed in certain types of actions commenced by or against certain governmental entities. The purpose of the statute has been found to be to encourage individuals aggrieved by governmental action to assert their rights. Estate of Walton, 164 Ariz. 498, 794 P.2d 131 (1990); New Pueblo Constructors, Inc. v. State, 144 Ariz. 95, 696 P.2d 185 (1985). "Fees and other expenses" is defined by the statute, and specifically A.R.S. § 12-348 (I)(1), to include the reasonable expenses of expert witnesses, the reasonable cost of any study found by the court to be necessary for the preparation of the prevailing private party's case, and reasonable and necessary attorney fees. A.R.S. § 12-348(E)(1) specifies that an award of expert expenses may not be at a rate which exceeds the highest rate of compensation for experts paid by the state, or a city, town or county. In addition, A.R.S. § 12-348(H)(3) specifies that an award is not to include the fees and expenses incurred in making an application for an award under the statute. The fact that, because of some of the exceptions discussed below, a party does not qualify for an award of fees and expenses under A.R.S. § 12-348, does not preclude an award based upon other statutes, or based upon one of the equitable theories discussed in Section 1.5:320, supra. Kadish v. Arizona State Land Department, 177 Ariz. 322, 868 P.2d 335 (App. 1993).

The statute draws an initial distinction between cases where such fee awards are nominally mandatory, and those where they are expressly discretionary. Thus, A.R.S. § 12-348(A) provides that a court "shall award fees and other expenses to any party other than this state or a city, town or county" which prevails on the merits in the following types of actions:

1. A civil action brought against the party by the state or a city, town or county;

2. A court proceeding brought to secure judicial review of any state agency decision;

3. A proceeding brought under A.R.S. § 41-1034;

4. A special action proceeding brought by the private party to challenge an action by the state against the party; and

5. An appeal by the state from a decision by the personnel board under title 41, chapter 4, article 6 of the Arizona Revised Statutes.

Under A.R.S. § 12-348(E)(2), any award of attorneys made under subsection (A) of the statute may not exceed the amount which the prevailing party has paid or agreed to pay, or a maximum amount of seventy-five dollars, unless the court specifically finds that an increase in the cost of living, or some special factor, such as a limited availability of qualified attorneys to handle the type of case involved justifies a higher fee, Moreover, any award under subsection (A) made against a city, town or county (but not the state) is subject to a maximum limit of $10,000. See Bromley Group. Ltd. v. Arizona Department of Revenue, 170 Ariz. 532, 826 P.2d 1158 (App. 1991).

A.R.S. § 12-348(B) makes an award of fees and other expenses discretionary "to any party, other than this state or a city, town or county" who prevails on the merits "in an action brought by the party against the state or a city, town or county challenging the assessment or collection of taxes." A discretionary award under subsection (B) may not, under A.R.S. § 12-348(E)(3), exceed the amount the prevailing party has paid or agreed to pay, or a maximum amount of one hundred dollars an hour. Moreover, under A.R.S. § 12-348(E)(5), awards under this section against the state, or a city, town or county may not exceed $20,000.

Notwithstanding the facially mandatory nature of awards under subsection (A) of the statute, A.R.S. § 12-348(C) provides that a court may, in its discretion, deny an award of fees and expenses, if it finds that:

1. The prevailing party unduly and unreasonably protracted the final resolution of the matter; or

2. The reason that the party prevailed is attributable to an intervening change in the law; or

3. The prevailing party refused an offer of settlement that was at least as favorable to the party as the relief ultimately granted.

Obviously, a finding of any of the foregoing would also justify a denial of a discretionary fee award under subsection (B).

Finally, A.R.S. § 12-348(H) provides that the statute will not apply to the following types and categories of proceedings:

1. An action arising from proceedings in which the role of the state, city, town or county was to determine the eligibility or entitlement of an individual to a monetary benefit or its equivalent, to adjudicate a dispute or issue between private parties, or to fix a rate;

2. Proceedings brought by the state, or by a city, town or county, pursuant to title 13 or title 28 of the Arizona Revised Statutes;

3. Proceedings involving eminent domain, foreclosure, collection of judgment debts;

4. Proceedings in which the state, city, town or county is a nominal party;

5. Proceedings brought by a city, town or county to collect taxes, or pursuant to traffic ordinances; and

6. Proceedings brought by a city, town or county on ordinances which contain a criminal penalty or fine for violations of them.

A.R.S. § 12-348 was intended to be a "very broad" exception to the American Rule, which normally bars attorneys' fee awards to prevailing parties in civil litigation. Estate of Walton, 164 Ariz. 498, 794 P.2d 131 (1990); New Pueblo Constructors, Inc. v. State, 144 Ariz. 195, 696 P.2d 185 (1985). It is, however, a very complicated statute which has been frequently amended and/or restructured since its initial adoption, making the task of applying earlier precedents to the current statutory provisions a difficult one. A good discussion and explanation of the statute and analysis of judicial decisions construing and applying it can be found in Chapter 4 of Meyerson & Norris, Arizona Attorneys' Fees Manual - Third Edition (State Bar of Arizona 1998).

There are a variety of provisions in the Arizona Rules of Civil Procedure which authorize the imposition of sanctions, which may include awards of attorneys' fees, for the filing and/or pursuit of non-meritorious claims or positions, for failure to comply with discovery and/or disclosure obligations, and for failure to participate in certain pretrial proceedings in good faith. See Rules 11, 16(d), 16(f) and 37, Arizona Rules of Civil Procedure. These provisions are discussed thoroughly in Section 3.1:300 of this Narrative.

Arizona has also adopted a system of mandatory court-annexed arbitration of certain disputes. Under A.R.S. § 12-133(A), the Superior Court in each county is required to, by Local Rule: "1. Establish jurisdictional limits of not to exceed fifty thousand dollars for submission of disputes to arbitration,", and "2. Require arbitration in all cases which are filed in superior court in which the court finds or the parties agree that the amount in controversy does not exceed the jurisdictional limit." Such arbitrations are conducted in accordance with the Uniform Rules of Procedure for Arbitration, which were originally adopted in 1971, but then amended significantly in both 1987 and 1991. Included in the 1991 amendments were provisions intended to provide disincentives to file appeals to the Superior Court, where review is de novo, from arbitration awards. The Uniform Rules of Procedure for Arbitration were abrogated as a separate set of rules, and their provisions incorporated, with certain amendments, into Rules 72 through 76 of the Arizona Rules of Civil Procedure, effective December 1, 2000. Under new Rule 76(f), Ariz.R.Civ.P., if the result achieved on appeal is not at least 25% more favorable to the appellant than the monetary relief secured in the arbitration (i.e., 25% less than an award in arbitration against the appellant, or 25% more than an arbitration award in favor of the appellant), then the appellant is to be responsible to pay the arbitrator's compensation, the appellee's taxable costs, the reasonable expert witness fees, if any, incurred by the appellee in connection with the appeal, and the reasonable attorneys' fees incurred by the appellee for services necessitated by the appeal.

1.5:340      Financing Litigation [see 1.8:600]

As a general rule, a lawyer is prohibited from giving financial assistance to a client if litigation is pending or contemplated, subject to two exceptions: (1) a lawyer may advance court costs and expenses of litigation the repayment of which may be contingent on the outcome of the matter, and (2) a lawyer may pay court costs and expenses of litigation on behalf of a client who is indigent. AZ-ER 1.8(e). AZ-ER 1.8(e)(1) previously differed from the corresponding provision in the Model Rules of Professional Conduct in that it retained the requirement, carried forward from former DR 5-103(B) of the Code of Professional Conduct, that the non-indigent client must remain ultimately responsible for any costs and expenses which the lawyer advances. Confirming this general rule, the Committee indicated, in Arizona Ethics Opinion No. 87-07, that an attorney representing an indigent client in either a civil or criminal matter may pay the costs and expenses of litigation on behalf of the client, but must ask the client to pay as much of the costs and expenses of the litigation as possible. Similarly, the Committee ruled, in Arizona Ethics Opinion No. 87-18, that an attorney could not run advertisements containing the statement "no recovery, no fee" or its equivalent, unless it was also disclosed that client, unless indigent, was responsible for the payment of court costs and litigation expenses. The 2003 amendments to AZ-ER 1.8(e) eliminated the requirement remain ultimately liable for advanced costs and expenses, and the Rule is now the same as MR 1.8(e).

As earlier noted, a lawyer is generally prohibited from giving financial assistance to a client if litigation is pending or contemplated, subject to two exceptions: (1) a lawyer may advance court costs and expenses of litigation with repayment permitted to be contingent on the outcome of the matter, and (2) a lawyer may pay court costs and expenses of litigation on behalf of a client who is indigent. AZ-ER 1.8(e). "Costs" are those charges a party may recover in litigation. They include filing fees, fees for service of process, and other costs that are taxed and included in a judgment. "Expenses" are nontaxable items such as the costs of investigation, expenses of required medical examinations, and costs of obtaining and presenting evidence. "Court costs" and "expenses of litigation" do not include general living expenses which the client may incur during the course of the representation. Thus, in Arizona Ethics Opinion No. 95-01, the Committee concluded that a lawyer could not properly advance rental car or car repair costs, or pay an insurance deductible to or for a client, in connection with pending or contemplated litigation, because these were ordinary living expenses and not "court costs and expenses of litigation" the advancement of which was permitted by AZ-ER 1.8(e). On the other hand, in Arizona Ethics Opinion No. 81-03, the Committee concluded that, if a client had authorized the attorney to pay all unpaid medical bills from the proceeds of the settlement of the client's claim, and the attorney discovers, subsequent to the disbursement of all of the settlement finds, an unpaid medical bill which the client is unlikely to pay, the attorney may pay the bill.

In Arizona Ethics Opinion No. 03-05, the Committee concluded that an attorney for a plaintiff or claimant could not ethically enter into any settlement agreement that would require the attorney to indemnify the settling parties from any lien claims against the settlement proceeds. The principal basis for this conclusion was that AZ-ER 1.8 precludes attorneys from providing financial assistance to a client by paying or advancing medical expenses, and would similarly preclude the attorney from guaranteeing, or accepting ultimate liability for, the payment of such expenses. The Committee went on to note that, while AZ-ER 1.2 generally requires an attorney to abide by a client's decision whether to accept an offer of settlement, a settlement that would require the attorney to hold settling parties harmless violates AZ-ER 1.8, and the attorney cannot agree to such a condition. If the client insists that the attorney do so, then the attorney would be required to withdraw.

Essentially the same restrictions pertained under the former Code of Professional Responsibility. Thus, in In re Bowen, 144 Ariz. 92, 695 P.2d 1130 (1985), a lawyer was censured for advancing a client $25,000 in order to prevent forfeiture of the client's trailer park. In In re Carroll, 124 Ariz. 80, 602 P.2d 461 (1979), the Court approved the suspension of the respondent lawyer for, among other things, advancing to clients ordinary living expenses. Finally, in Matter of Stewart, 121 Ariz. 243, 589 P.2d 886 (1979), the Court approved the one-year suspension of a lawyer for, among other things, advancing living expenses to a disabled client. The Court articulated the following dangers that can flow from such arrangements, even when the advance is in the form of a loan:

... because if an attorney acquires an interest in the outcome of a suit in addition to his fees, it can lead to the attorney placing his own recovery ahead of his client. For example, he might urge a settlement which would be to his best interest but not to the best interest of the client ... Moreover, the practice of making loans to clients, if publicized, would constitute an improper inducement for clients to employ an attorney.

Id., 121 Ariz. at 245, 589 P.2d at 888 (citations omitted).

A lawyer is prohibited from loaning or advancing money to a client, except in the situations permitted by AZ-ER 1.8(e), which do not include loans or advances to cover ordinary living expenses. Thus, in Arizona Ethics Opinion No. 75-17, the Committee ruled that a lawyer may not make a personal loan to a client for living expenses to be repaid out of the proceeds of a judgment, even when the matter is on appeal, and the trial court had awarded a sizable judgment in the client's favor. The Committee subsequently confirmed, in Arizona Ethics Opinion No. 76-26, that a lawyer may not advance money to a client for living expenses during the pendency of litigation. Similarly, a lawyer may not guarantee a third party's loan to a client. Arizona Ethics Opinion No. 91-19. An attorney may, however, assist a client in locating a third party "personal injury loan service" which will make a loan to the client, provided the attorney has no interest in the lender's business, does not guarantee repayment of the loan, and maintains client confidentiality. Arizona Ethics Opinion No. 91-22.

Although Arizona cases and Ethics Opinions have consistently concluded that loans to clients, other than advancements for costs and expenses of litigation, are prohibited by AZ-ER 1.8(e), the Committee on the Rules of Professional Conduct ("the Committee"), and its predecessors, have determined that in certain situations, a lawyer may make a gift to a client. In Arizona Ethics Opinion No. 89-03, the Committee concluded that it was ethically proper for a lawyer to make a gift to a client of money for the payment of utility and food bills, unrelated to the litigation being handled for the client. The Committee stressed that such gifts must result from a charitable motive and be made with no expectation of repayment. The Committee extended the rationale of this Opinion to non-indigent clients in Arizona Ethics Opinion No. 91-14, when it concluded that an attorney could make a cash gift to an impecunious client whose child was in dire need of emergency medical treatment, as long as the gift, or any discussion of the gift, was made after the client had retained the lawyer, the gift resulted from a "truly charitable motive" with no expectation of repayment, and the transfer of money was not accompanied by any "business, proprietary or pecuniary overtures."

The Committee's Ethics Opinions are advisory in nature and are not binding on the Discipline Department of the State Bar of Arizona. Although the State Bar normally encourages attorneys to rely on the Opinions issued by the Committee, the Discipline Department has previously indicated that it does not agree with Opinions Nos. 89-03 and 91-14. Undaunted, the Committee subsequently ruled, in Arizona Ethics Opinion No. 95-09, that an attorney could make a gift to a client of all or a portion of the attorney's fees in a matter, where the attorney's motive was charitable, unless a medical provider had specifically agreed to accept a reduced amount on the condition that the client not receive any money.

In Arizona Ethics Opinion No. 94-14, the Committee ruled that an attorney may make an offer to donate 10% of the attorney's fee to a charity of a client's choosing as long as: (1) the total fee charged is reasonable; (2) the attorney's independent professional judgment is not affected; (3) charities are not paid for referrals of clients to the attorney; and, (4) the advertisement of the offer complies with the requirements of AZ-ER 7.1.

In Arizona Ethics Opinion No. 93-05, the Committee held that it was proper to employ a non-testifying trial consultant under arrangements which called for the payment to the consultant of a bonus fee, if the case resulted in a judgment or settlement satisfying certain conditions. In Arizona Ethics Opinion No. 97-07, the Committee ruled that a lawyer may properly pay a fact witness reasonable compensation for time spent by the witness in preparing to testify, as long as the compensation is not based upon the outcome of the litigation, and the client remains ultimately responsible for such costs. The Committee added that the reasonableness of the compensation paid the witness would have to be determined on a case-by-case basis.

1.5:400   Reasonableness of a Fee Agreement

  • Primary Arizona References: AZ-ER 1.5(a) and accompanying Comment
  • Background References: ABA Model Rule 1.5(a), Other Jurisdictions
  • Commentary: ABA/BNA § 41:301, ALI-LGL § 46, Wolfram § 9.3.1; Shely, Contingent Fees and "Non-refundable Retainers (State Bar of Arizona (State Bar of Arizona 1998); State Bar of Arizona Manual on Professionalism (1992) 34-35

1.5:410      Excessive Fees

The overarching requirement of AZ-ER 1.5(a) is that: "A lawyer shall not make an agreement for, charge or collect an unreasonable fee or an unreasonable amount for expenses." This requirement applies whether the fee is a fixed fee, a contingency fee or a fee based upon an hourly rate. Matter of Swartz, 141 Ariz. 266, 686 P.2d 1236 (1984); ABC Supply, Inc. v. Edwards, 191 Ariz. 48, 952 P.2d 286 (App. 1997). Cases in which a lawyer's fee has been found to be "excessive" roughly divide into three separate categories: (1) cases where the lawyer's fee, whether or not embodied in a written fee agreement, exceeds what can be considered "reasonable" by application of the criteria set forth in AZ-ER 1.5(a); (2) cases where a lawyer charges a client more than the client has agreed to pay, or has included in billings to clients elements or charges for which the client has not agreed to be responsible; and, (3) cases in which the lawyer has accepted a lump sum advance retainer or fixed fee advance payment for an engagement, and has not performed or completed the task for which the lawyer was engaged.

With respect to the first category of cases, AZ-ER 1.5(a) sets out the following factors that are to be considered in gauging the reasonableness of a lawyer's fee:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill required to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the service; and

(8) whether the fee is fixed or contingent.

In Matter of Feeley, 180 Ariz. 41, 881 P.2d 1146 (1994), the Disciplinary Commission ordered the disbarment of a lawyer who had already been disbarred for separate offenses, and the Supreme Court declined review. In this particular proceeding, Feeley was charged with a number of ethical violations, including charging excessive fees in violation of AZ-ER 1.5(a). That particular charge arose from a bankruptcy matter in which Feeley had collected almost $30,000 in fees from his clients, without securing bankruptcy court approval, and then applied to that court for an award of fees, avowing that he had not been paid anything.

In Matter of Struthers, 179 Ariz. 216, 877 P.2d 789 (1994), the Court approved the disbarment of Struthers for a variety of ethical violations, including violations of AZ-ER 1.5(a). These charges stemmed largely from Struthers' use of contingency fee contracts in engagements to collect overdue child support payments which permitted him to retain all of the back payments he collected as his fee until 25% of the total arrearages had been paid in full. A separate provision of the agreements, which the Court also found to violate AZ-ER 1.5(a), purported to entitle Struthers to retain any court-awarded fees in addition to his contingency fee. The Court found that this would result in double recovery of fees, and would mislead the court to whom an application for the award of fees was made. Although Struthers claimed that he never invoked the provision in question, the court found that it was facially unreasonable and improper and a violation of AZ-ER 1.5(a).

Finally, Matter of Laws-Coats, 172 Ariz. 514, 838 P.2d 1275 (1992) involved a published Order of the Disciplinary Commission, which was not appealed and which the Supreme Court did not review sua sponte, suspending Ms. Laws-Coats from the practice of law for one year, and directing that she thereafter serve a two year probationary period. The charges against her arose out of her mishandling of a matter for a client who had purchased special mobile radio antennas for two-way radios and who claimed that the seller had falsely represented that it would secure the required Federal Communications Commission license for them. The Commission specifically found that, in addition to other violations committed during the course of this matter, Ms. Laws-Coats had violated AZ-ER 1.5(a) by charging her clients approximately $700,000, which the Commission found to be an unreasonable and excessive fee in light of the amount of money involved in the suit and the results obtained.

The second category of cases involves situations where the lawyer has billed in excess of the fee the client has agreed to pay or has billed for items not encompassed in the fee agreement. In many instances, problems in this area can be cured by using a written fee agreement and charging only what that agreement calls for. That was one of the impetuses for the 2003 amendments to AZ-ER 1.5(b), which now generally requires that "the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same rate or basis." This imposition of a general requirement for written fee agreements did not represent a sharp departure from past practice. In fact, even before the amendment to the Rule, there were instances where the failure to include charges in a written fee agreement would result in the billing for them constituting charging an excessive fee

For example, Matter of Ireland, 146 Ariz. 340, 706 P.2d 352 (1985), which arose under the former Code of Professional Responsibility, involved several charges arising from Ireland's handling of a marital dissolution matter. Among the charges made against Ireland was that he had charged his client in the matter unreasonable or excessive fees by separately charging her for the services of secretaries and other non-lawyer personnel when the client has not agreed to the charging of such fees in the fee agreement. The Court agreed:

The fee agreement in the present case provided for a flat hourly billing rate without mention of billing for the services of secretaries. In the absence of an agreement to be charged separately for secretarial services, we find the fee charged in this case to violate DR 2-106(A).

Id., 146 Ariz. at 344, 706 P.2d at 356. In that same Opinion, the Court declined to address the issue whether it was ethically permissible to bill separately for the time of paralegals and messengers, without an express client agreement to such charges, because the issue was not presented, but cautioned: "Suffice it to say that it would be the better practice to have client agreement before such charges are billed." Id., 146 Ariz. at 344, 706 P.2d at 356, fn.4.

Under both the former Code of Professional Responsibility, and the current Rules of Professional Conduct, the Committee on the Rules of Professional Conduct has concluded that a lawyer may not charge interest on delinquent client accounts without a prior written agreement with the client permitting that. Arizona Ethics Opinions Nos. 86-09, 81-14. Similarly, the Committee has held that a lawyer may bill a surcharge, calculated as a percentage of fees, in lieu of billing for actual expenses and costs incurred, but only if the percentage surcharge employed approximates the actual costs incurred, the overall fees and costs charged are reasonable, and the client has agreed to this arrangement in writing. Arizona Ethics Opinion No. 94-10.

With respect to the final category of "excessive fee" cases, there are a number of cases in which the Disciplinary Commission has found that lawyers have violated AZ-ER 1.5(a) by accepting advance retainers and not completing the engagement. In such cases, the Disciplinary Commission has routinely ordered restitution to the wronged clients of the unearned fees. See Matter of Brady, 186 Ariz. 370, 923 P.2d 836 (1996); Matter of Woltman, 181 Ariz. 525, 892 P.2d 861 (1995); Matter of Secrist, 181 Ariz. 526, 892 P.2d 862 (1995); Matter of Engan, 180 Ariz. 13, 881 P.2d 345 (1994); Matter of Secrist, 180 Ariz. 50, 881 P.2d 1155 (1994); Matter of Woltman, 178 Ariz. 548, 875 P.2d 781 (1994); Matter of Peartree, 178 Ariz. 114, 871 P.2d 235 (1994); Matter of Wurtz, 177 Ariz. 586, 870 P.2d 404 (1994); Matter of Elowitz, 177 Ariz. 240, 866 P.2d 1326 (1994).

In Arizona Ethics Opinion No. 95-05, the Committee ruled that an attorney in a personal injury case who has already received the full fee agreed upon may accept the client's portion of the settlement proceeds, as a gift from the client, if (1) the attorney fully complies with the requirements of AZ-ER 1.8(a) regarding business transactions with clients, (2) the attorney does not attempt to prepare a legal instrument to perfect the gift, and (3) the client is competent to make an informed decision concerning the matter.

Finally, in Arizona Ethics Opinion No. 94-09, the Committee advised the inquiring lawyer that there might be an obligation to report, under AZ-ER 8.3, the fact that another lawyer had charged what the inquiring lawyer considered to be an excessive fee in a probate matter, if the inquiring lawyer believed that the charging of the excessive fee raised a substantial question as to the other lawyer's honesty, trustworthiness, or fitness to practice law.

1.5:420      "Retainer Fees:" Advance Payment, Engagement Fee, or Lump-Sum Fee

AZ-ER 1.5(a)(8) previously contemplated that a lawyer may set a fixed fee for an engagement. The 2003 amendment eliminated, however, as one of the factors to be considered in determining the reasonable ness of a fee, "whether the fee is fixed or contingent," substituting in its place "the degree of risk assumed by the lawyer." The Rule and the accompanying Comment are now silent on the subject of fixed fees.

In Arizona Ethics Opinion No. 86-06, the Committee held that may charge a fee that is termed to be "earned upon receipt," but only if the fee met the "reasonableness" requirement of AZ-ER 1.5(a). In Arizona, it is probably a misnomer to characterize any fee as "earned upon receipt," because of several factors. Initially, the doctrine of In re Swartz, 141 Ariz. 266, 686 P.2d 1236 (1984), which requires that the reasonableness of a fee be examined both prospectively and retroactively, applies to all fee arrangements, not just contingent fees. As the Court itself noted: "Either a fixed or contingent fee, proper when contracted for, may later turn out to be excessive." Id., 141 Ariz. at 273, 686 P.2d at 1243. The Court expressly indicated that, regardless of the nature of the fee arrangement agreed upon at the inception of the engagement, if a fee which seemed reasonable at that point becomes excessive, under the criteria of AZ-ER 1.5(a), due to unforeseen circumstances, such as an unanticipated and sudden settlement, the lawyer must reduce the fee to a level which is reasonable under the circumstances. Id.

In addition, as the Comment to AZ-ER 1.5 points out: "A lawyer may require advance payment of a fee, but is obliged to return any unearned portion." Comment, AZ-ER 1.5, ‡ 4. Indeed, one of the specific requirements imposed by AZ-ER 1.16(d) upon termination of a representation, is that the lawyer refund "any advance payment of fee that has not been earned." Finally, in a number of cases in which lawyers have been found to have violated AZ-ER 1.5(a) by accepting advance retainers and not completing the engagement, the Disciplinary Commission has routinely ordered restitution to the wronged clients of the unearned fees. See Matter of Brady, 186 Ariz. 370, 923 P.2d 836 (1996); Matter of Woltman, 181 Ariz. 525, 892 P.2d 861 (1995); Matter of Secrist, 181 Ariz. 526, 892 P.2d 862 (1995); Matter of Engan, 180 Ariz. 13, 881 P.2d 345 (1994); Matter of Secrist, 180 Ariz. 50, 881 P.2d 1155 (1994); Matter of Woltman, 178 Ariz. 548, 875 P.2d 781 (1994); Matter of Peartree, 178 Ariz. 114, 871 P.2d 235 (1994); Matter of Wurtz, 177 Ariz. 586, 870 P.2d 404 (1994); Matter of Elowitz, 177 Ariz. 240, 866 P.2d 1326 (1994).

Consistently, in In re Connelly, 203 Ariz. 413, 55 P.3d 756 (2002), the Court held that a nonrefundable flat fee for specific services could be proper. It noted that these types of fees reflect a negotiated element of risk sharing between attorney and client, and can be larger than the fee that would be generated by hourly rates without being excessive. Id. In addition, in Arizona, such fees are subject to retrospective review for reasonableness. Id.

The propriety of such fees now must also take into account new AZ-ER 1.5(d)(3), which provides that a lawyer may not enter into an arrangement for, charge or collect "a fee denominated as Çearned upon receipt,' Çnonrefundable' or in similar terms unless the client is simultaneously advised in writing that the client may nevertheless discharge the lawyer at any time and in that event may be entitled to a refund of all or part of the fee based upon the value of the representation pursuant to paragraph (a)." The Comment to this aspect of the Rule explains the scope and reasons for this provision, and the fact that it is not intended to apply to "true retainers":

Advance fee payments are of at least four types. The "true" or "classic" retainer is a fee paid in advance merely to insure the lawyer's availability to represent the client and to preclude the lawyer from taking adverse representation. What is often called a retainer but is in fact merely an advance fee deposit involves a security deposit to insure the payment of fees when they are subsequently earned, either on a flat fee or hourly fee basis. A flat fee is a fee of a set amount for performance of agreed work, which may or may not be paid in advance but is not deemed earned until the work is performed. A nonrefundable fee or an earned upon receipt fee is a flat fee paid in advance that is deemed earned upon payment regardless of the amount of future work performed. The agreement as to when a fee is earned affects whether it must be placed in the attorney's trust account, see ER 1.15, and may have significance under other laws such as tax and bankruptcy. But the reasonableness requirement and application of the factors in paragraph (a) may mean that a client is entitled to a refund of an advance fee payment even though it has been denominated "nonrefundable," earned upon receipt" or in similar terms that imply the client would never become entitled to a refund. So that a client is not misled by the use of such terms, paragraph (d)93) requires certain minimum disclosures that must be included in the written fee agreement. This does not mean that the client will always be entitled to a refund upon early termination of the representation (e.g., factor (a)(2) might justify the entire fee), nor does it determine how any refund should be calculated (e.g., hours worked times a reasonable hourly rate, quantum meruit, percentage of the work completed, etc.), but merely requires that the client be advised of the possibility of the entitlement to a refund based upon application of the factors set forth in paragraph (a). In order to be able to demonstrate the reasonableness of the fee in the event of early termination of the representation, it would be advisable for lawyers to maintain contemporaneous time records for all representations undertaken on any flat fee basis.

Comment, Az-ER 1.5, ‡ 7.

1.5:430      Nonrefundable Fees

See discussion in Section 1.5:420, supra. Prior to the adoption of new AZ-ER 1.5(d)(3), so-called "non-refundable retainers," which upon analysis are frequently simply "earned upon receipt" fees given a different name, have recently come under scrutiny by both the Supreme Court and the disciplinary authorities of the State Bar of Arizona. Matter of Hirschfeld, 192 Ariz. 40, 960 P.2d 640 (1998) involved an appeal from a unanimous recommendation of the Disciplinary Commission that the respondent attorney be disbarred for a number of ethical violations, including the use of what he referred to as "non-refundable retainer" agreements. According to the Court, Hirschfeld's practice was to obtain a significant retainer at the beginning of an engagement pursuant to a fee agreement that stated that the retainer was earned upon receipt and non-refundable, and then rely on this agreement to keep the full retainer paid, no matter how long the engagement lasted or how much work he actually performed. The Hearing Committee which considered the charges, the Disciplinary Commission, and the Supreme Court all found this practice to violate the requirement of AZ-ER 1.5 that a lawyer's fee be reasonable. The Court was careful to point out, however, that is was not adopting a rule that non-refundable retainers were per se unethical:

We do not hold that non-refundable retainers are per se violations of Ethical Rule 1.5. A retainer, in its classic sense, is a fee paid to secure a lawyer's availability, and it may be appropriate in certain circumstances. Similarly a flat fee charged for specific legal services can be proper. Regardless of how the fee is characterized, however, each situation must be carefully examined on its own facts for reasonableness. Under Swartz, lawyers are obligated to review the services they have rendered to determine whether the fees ultimately collected are reasonable. 141 Ariz. at 273, 686 P.2d at 1243.

Id., 192 Ariz. at 43-44, 960 P.2d at 643-644.

Former Ethics Counsel for the State Bar of Arizona, however, also viewed with favor the somewhat more restrictive treatment given so-called "non-refundable retainers" in the decision in In re Cooperman, 83 N.Y.2d 465, 633 N.E.2d 1069, 611 N.Y.S.2d 465 (Ct.App. 1994). Cooperman involved a situation almost identical to that presented in Hirschfeld - an attorney entering into special so-called "non-refundable retainer" agreements with clients, and then refusing to refund any portion of the retainer paid, regardless of the length of the resulting engagement or the amount of work performed. The New York Court of Appeals found such agreements to be against public policy, and subject to discipline under the former Code of Professional Responsibility, because they compromised the client's absolute right to terminate the unique attorney-client relationship:

Our holding today makes the conduct of trading in special nonrefundable retainer fee agreements subject to appropriate professional discipline. Moreover, we intend no effect or disturbance with respect to other types of appropriate and ethical fee arrangements . . . Minimum fee arrangements and general retainers that provide for fees, not laden with the nonrefundability impediment irrespective of any services, will continue to be valid and not subject in and of themselves to professional discipline.

83 N.Y.2d at 476, 633 N.E.2d at 1074, 611 N.Y.S.2d at 470. State Bar Ethics Counsel has also said the following concerning arrangements of this nature:

A "general" retainer is a payment by a client in exchange for a lawyer's promise to be available to perform legal services or a defined period of time. Courts have concluded that such a general retainer is a payment for a promise of availability and not advance payment for services and, as such, is earned upon receipt. Such a retainer should be clearly explained in the retainer agreement.

Fees that have been earned do not go into the firm trust account; they go into the general business account. If the money is placed in the trust account, a court must presume that the amount is not a general retainer but in fact is an advance payment on fees to be earned.

Shely, Contingent Fees and "Non-refundable" Retainers (State Bar of Arizona 1998) p. 2.

The propriety of such fees now must also take into account new AZ-ER 1.5(d)(3), which provides that a lawyer may not enter into an arrangement for, charge or collect "a fee denominated as Çearned upon receipt,' Çnonrefundable' or in similar terms unless the client is simultaneously advised in writing that the client may nevertheless discharge the lawyer at any time and in that event may be entitled to a refund of all or part of the fee based upon the value of the representation pursuant to paragraph (a)." The Comment to this aspect of the Rule explains the scope and reasons for this provision, and the fact that it is not intended to apply to "true retainers":

Advance fee payments are of at least four types. The "true" or "classic" retainer is a fee paid in advance merely to insure the lawyer's availability to represent the client and to preclude the lawyer from taking adverse representation. What is often called a retainer but is in fact merely an advance fee deposit involves a security deposit to insure the payment of fees when they are subsequently earned, either on a flat fee or hourly fee basis. A flat fee is a fee of a set amount for performance of agreed work, which may or may not be paid in advance but is not deemed earned until the work is performed. A nonrefundable fee or an earned upon receipt fee is a flat fee paid in advance that is deemed earned upon payment regardless of the amount of future work performed. The agreement as to when a fee is earned affects whether it must be placed in the attorney's trust account, see ER 1.15, and may have significance under other laws such as tax and bankruptcy. But the reasonableness requirement and application of the factors in paragraph (a) may mean that a client is entitled to a refund of an advance fee payment even though it has been denominated "nonrefundable," earned upon receipt" or in similar terms that imply the client would never become entitled to a refund. So that a client is not misled by the use of such terms, paragraph (d)93) requires certain minimum disclosures that must be included in the written fee agreement. This does not mean that the client will always be entitled to a refund upon early termination of the representation (e.g., factor (a)(2) might justify the entire fee), nor does it determine how any refund should be calculated (e.g., hours worked times a reasonable hourly rate, quantum meruit, percentage of the work completed, etc.), but merely requires that the client be advised of the possibility of the entitlement to a refund based upon application of the factors set forth in paragraph (a). In order to be able to demonstrate the reasonableness of the fee in the event of early termination of the representation, it would be advisable for lawyers to maintain contemporaneous time records for all representations undertaken on any flat fee basis.

Comment, AZ-ER 1.5, ‡ 7. See also In re Connelly, 203 Ariz. 413, 55 P.3d 756 (2002).

1.5:500   Communication Regarding Fees

Experience seems to indicate that no aspect of the financial relationship between lawyer and client has generated as much controversy, conflict and misunderstanding as the failure of a lawyer and client to reach a prompt agreement as to the fees and costs to be incurred in the handling of the client's matter. Amended AZ-ER 1.5(b) provides that: " . . . the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate." The Comment to this aspect of the Rule makes clear, however, that the need for communication between lawyer and client concerning the fees and/or costs to be charged is not limited to situations where the lawyer undertakes representation of a new client, and is not necessarily satisfied by a one-time exchange at the inception of the relationship:

When the lawyer has regularly represented a client, they ordinarily will have evolved an understanding concerning the basis or rate of the fee and the expenses for which the client will be responsible. When the scope of the representation changes, in a material way, the lawyer should notify the client about the changes in writing. In a new client-lawyer relationship, however, a written understanding as to fees and expenses should be promptly established. Generally, furnishing the client with a simple memorandum or a copy of the lawyer's customary fee arrangements will suffice, provided that the writing states the general nature of the legal services to be provided, the basis, rate or total amount of the fee and whether and to what extent the client will be responsible for any costs, expenses or disbursements in the course of the representation. A written statement concerning the terms of the engagement reduces the possibility of misunderstanding.

Comment, AZ-ER 1.5, ‡ 2.

As the final sentence of this paragraph suggests, the requirement that the basis upon which the lawyer's fee and other charges will be computed be communicated to the client in writing can be viewed as a particularized application of the requirement of AZ-ER 1.4(b) that requires a lawyer to explain matters to a client to the extent reasonably necessary to permit the client to make informed decisions concerning the representation. This was, at least in part, the impetus for the adoption of the requirement that fee arrangements with clients be in writing. This did not, on analysis, represent a dramatic departure from past practices. The prior Rule had always stated a "preference" that fee agreements be in writing. In addition, there were instances where the failure to include charges in a written fee agreement would result in the billing for them constituting charging an excessive fee.

For example, Matter of Ireland, 146 Ariz. 340, 706 P.2d 352 (1985), which arose under the former Code of Professional Responsibility, involved several charges arising from Ireland's handling of a marital dissolution matter. Among the charges made against Ireland was that he had charged his client in the matter unreasonable or excessive fees by separately charging her for the services of secretaries and other non-lawyer personnel when the client has not agreed to the charging of such fees in the fee agreement. The Court agreed:

The fee agreement in the present case provided for a flat hourly billing rate without mention of billing for the services of secretaries. In the absence of an agreement to be charged separately for secretarial services, we find the fee charged in this case to violate DR 2-106(A).

Id., 146 Ariz. at 344, 706 P.2d at 356. In that same Opinion, the Court declined to address the issue whether it was ethically permissible to bill separately for the time of paralegals and messengers, without an express client agreement to such charges, because the issue was not presented, but cautioned: "Suffice it to say that it would be the better practice to have client agreement before such charges are billed." Id., 146 Ariz. at 344, 706 P.2d at 356, fn.4.

Under both the former Code of Professional Responsibility, and the current Rules of Professional Conduct, the Committee on the Rules of Professional Conduct has concluded that a lawyer may not charge interest on delinquent client accounts without a prior written agreement with the client permitting that. Arizona Ethics Opinions Nos. 86-09, 81-14. Similarly, the Committee has held that a lawyer may bill a surcharge, calculated as a percentage of fees, in lieu of billing for actual expenses and costs incurred, but only if the percentage surcharge employed approximates the actual costs incurred, the overall fees and costs charged are reasonable, and the client has agreed to this arrangement in writing.

In Arizona Ethics Opinion No. 2001-11, the Committee on the Rules of Professional Conduct held that a firm that retained the services of an agency to assist its clients in preparing and processing applications for government assistance programs could only pass on to the clients the costs paid directly to the agency for the services provided, and a surcharge related to firm overhead expenses, but only if the arrangement had been communicated and agreed to by the clients involved. Similarly, in Arizona Ethics Opinion No. 2001-07, the Committee concluded that a lawyer who secured a line of credit in order to advance court costs and litigation expenses could pass on to the client only the actual interest charges incurred by the lawyer, and only if the arrangement had been explained and agreed to by the client.

1.5:600   Contingent Fees

One specific exception to the general prohibition of AZ-ER 1.8(i) upon a lawyer acquiring a proprietary interest in the cause of action or subject matter of litigation which the lawyer is conducting for a client is that a lawyer may "contract with a client for a reasonable contingent fee in a civil case." The Rule which generally governs the subject of lawyers' fees is AZ-ER 1.5. The overriding requirement of AZ-ER 1.5(a), replicated in AZ-ER 1.8(i)(2), is that a lawyer's fee, whether fixed or contingent or calculated on some other basis, must be "reasonable." AZ-ER 1.5(a) sets out the following factors that are to be considered in gauging the reasonableness of a lawyer's fee:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill required to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the service; and

(8) whether the fee is fixed or contingent.

AZ-ER 1.5 also contains certain provisions that are specifically applicable to contingent fee agreements. AZ-ER 1.5(c) requires that a contingent fee agreement be in writing, and signed by the client. In addition, under AZ-ER 1.5(c), the contingent fee agreement "shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated." Finally, AZ-ER 1.5(c) requires the lawyer, upon the conclusion of a contingent fee matter, to furnish the client with a written statement showing the outcome of the matter and, if there has been a recovery, showing the remittance to the client and the manner in which it was calculated. See Arizona Ethics Opinion No. 94-02.

The Arizona authorities have given cautious recognition to, and somewhat begrudging acceptance of, contingency fees in civil matters, viewing them as almost a necessary evil. The leading case in Arizona concerning the enforceability and ethical propriety of contingency fees in civil case remains the decision of the Arizona Supreme Court in Matter of Swartz, 141 Ariz. 266, 686 P.2d 1236 (1984). That case arose under DR 2-106 of the former Code of Professional Responsibility, and concerned an agreement by respondent Swartz to represent an accident victim for one-third of all sums recovered on the client's behalf, either from the workmen's compensation carrier for the client's employer or from third-party claims. The client did receive a recovery from the industrial carrier, which was the State Compensation Fund, and Swartz did institute claims on the client's behalf against the driver of the vehicle in which the client had been a passenger when the accident that produced the client's injuries took place.

It appeared undisputed that the driver was intoxicated at the time of the incident in question, and the two liability carriers for the driver very shortly offered their policy limits of $100,000 and $50,000 respectively to settle the claim. In fact, the Court estimated that Swartz could not have spent more than twenty or thirty hours in handling and settling the claims. The problem was that the State Compensation Fund had a statutory lien, in the amount of approximately $100,000, on any recovery the client secured from third parties. Discharge of that lien, and payment to respondent of the one-third contingency fee virtually exhausted the recovery on behalf of the client. As the Court observed: "From a practical standpoint, the net result of the settlement was that the Fund got $100,000, respondent received the $50,000 fee, and Sarge [the client] received nothing." Id., 141 Ariz. at 270, 686 P.2d at 1240.

In its discussion of the ethical propriety of this arrangement, in light of the results achieved, the Court initially noted that the contingent fee had originally been considered unethical and illegal as a form of champerty, but had gradually been accepted and approved in virtually all American jurisdictions, albeit that the acceptance was "grudging," and the contingent fee was approved because it was considered a "necessary evil." Id., 141 Ariz. at 272, 686 P.2d at 1242. (citations omitted). See also Richfield Oil Corporation v. LaPrade, 56 Ariz. 100, 105 P.2d 1115 (1940). The initially perceived dangers of such arrangements were that lawyers with a pecuniary interest in the outcome of a case would have an incentive to twist or manufacture favorable evidence, or would overreach in the prosecution of claims because of their own pecuniary interest, and that such arrangements might increase the filing of vexatious and frivolous actions. After noting these initial concerns, the Court concluded:

Whatever the dangers, it is now generally accepted that the contingent fee is proper and has substantial social utility because such arrangements are "often the only method by which a person of ordinary means may prosecute a just claim to judgment." . . . Properly used, therefore, we believe the contingent fee is a necessary method of insuring the availability of legal services.

Id., 141 Ariz. at 272, 686 P.2d at 1242 (citations omitted).

Notwithstanding their potential social utility, however, contingent fees are still subject to the proscription that a lawyer's fee be reasonable and are subject to scrutiny and regulation by the disciplinary authorities and, ultimately, the Arizona Supreme Court. The Court then pointed out that it was erroneous to conclude that "recognition of the propriety of the initial fee arrangement gives the lawyer carte blanche to charge the agreed percentage regardless of the circumstances which eventually develop." Id., 141 Ariz. at 273, 686 P.2d at 1243, and announced the following rule concerning contingency fee arrangements:

We hold, therefore, that if at the conclusion of a lawyer's services it appears that a fee, which seemed reasonable when agreed upon, has become excessive, the attorney may not stand upon the contract; he must reduce the fee. What is reasonable and within permissible limits will be determined by the circumstances, including the factors listed in DR 2-106.

Id., 141 Ariz. at 273, 686 P. 2d at 1243. Among the factors to be considered in assessing, whether prospectively or retroactively, the reasonableness of a contingency fee, the Court cited the following: "1) the degree of uncertainty or contingency with respect to liability, amount of damages which may be recovered, or the funds available from which to collect any judgment; 2) the difficulty of the case and the skill required to handle it; 3) the time expended in pursuing it; and, 4) the results obtained. Id. Applying those factors to the case before it, the Court concluded that Swartz had charged an excessive fee, and ordered that he be suspended from the practice of law for a period of six months.

That the standards enunciated in Swartz survived the adoption of the Arizona Rules of Professional Conduct in full force, and would be applied in determining whether a contingency fee arrangement satisfied the standards of AZ-ER 1.5(a), was confirmed by the Arizona Court of Appeals in Matter of Conservatorship of Fallers, 181 Ariz. 227, 889 P.2d 20 (App. 1994). That case involved a contingency fee arrangement between a deceased father's former wife and a lawyer, which granted the lawyer a one-third interest, as the lawyer's fee, in the proceeds of a wrongful death action to be brought on behalf of the father's four minor children. The Court held that, under Swartz, a court should analyze the propriety of a contingency fee, both prospectively and retroactively, using the eight factors listed in AZ-ER 1.8(a), and that a contingent fee could be found excessive where liability in the matter is clear, there are no novel or difficult legal or factual issues presented, the client may receive little of the recovery if the contingency fee is honored, and the lawyer did not have to devote much time to the matter.

Swartz and its progeny dictate that the reasonableness of a contingent fee is to be assessed both prospectively, at the inception of the attorney-client relationship, and retroactively, at the conclusion of the engagement and in light of the results achieved and/or the efforts required of the lawyer. Thus, in Matter of Zang, 158 Ariz. 251, 762 P.2d 538 (1988), the Court approved the disbarment of the respondent Zang for, among other things, entering into contingency fee agreements that called for a 50% contingency fee. In an earlier proceeding involving the same respondent, Matter of Zang, 154 Ariz. 134, 741 P.2d 267 (1987), the Court found that Zang had charged an excessive fee by taking a one-third contingent fee out of a property damage settlement for a client which Zang and his firm had done nothing to secure, and for taking a one-third contingency fee from a medical payments check that had been sent in error to the client by the client's insurer, and which Zang and his firm also had done nothing to secure. See also Matter of Mercer, 126 Ariz. 274, 614 P.2d 816 (1980), where the Court approved the suspension of Mercer for a period of two months for, among other things, charging a client an excessive fee by taking a contingent fee share of an award to the client by the Employment Securities Division, which Mercer had not obtained for the client, and which was in excess of what the Industrial Commission hearing officer had determined was an appropriate fee. See also In re Barth, 46 Ariz. 281, 50 P.2d 564 (1935), where the Court held that it was improper for an attorney, who had a fee agreement calling for the attorney to receive 25% of any sums recovered, to treat a promissory note received as part of a settlement as cash, and collect 25% of that from the cash proceeds received.

Contingent fee arrangements have been subjected to particularly close scrutiny in domestic relations matters. AZ-ER 1.5(d)(1) itself prohibits "any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof." In Arizona Ethics Opinion No. 77-18, the Committee ruled that Arizona's change from a "fault" divorce to a "no-fault" dissolution concept did not operate to dilute the prohibition against charging a contingent fee with regard to either the disposition of marital property or future spousal maintenance.

In Arizona Ethics Opinion No. 82-09, the Committee approved a contingent fee arrangement where the services to be performed involved an attempt to set aside a prior divorce decree and settlement agreement on the grounds of fraud and duress, and the inquiring attorney had a different fee arrangement for negotiating or litigating a new property settlement agreement. In Arizona Ethics Opinion No. 86-12, the Committee held that it was proper for an attorney representing a client in a marital dissolution proceeding to take a lien on community funds to secure the payment of the attorney's fees and costs, after the issuance of the preliminary injunction contemplated by A.R.S. § 25-315.

In Arizona Ethics Opinion No. 87-06, the Committee reaffirmed, after the adoption of the Arizona Rules of Professional Conduct, the continuing vitality of the prohibition upon charging a client a contingent fee computed on the value of any property the client was to receive as a result of the division of marital property in the divorce proceeding. In Arizona Ethics Opinion No. 89-02, however, the Committee approved a contingent fee arrangement in a post-dissolution action to claim a share of an allegedly undisclosed community asset which had not been considered by the court at the time of the dissolution proceeding.

In Arizona Ethics Opinion No. 93-04, the Committee ruled that AZ-ER 1.5(d)(1) was inapplicable to a contingency fee agreement between a lawyer and client for the collection or enforcement of child support or spousal maintenance after entry of the decree of dissolution, but cautioned that the length of time the contingency fee would be applied to future payments be specified, and that the agreement be in all respects fair and reasonable. In issuing this Opinion, the Committee formally withdrew its prior Arizona Ethics Opinion No. 91-20. The Supreme Court deemed this development to be of sufficient importance to warrant adding a published 1993 addition to the Comment accompanying AZ-ER 1.5, which provided as follows:

On March 27, 1993, the Committee on Rules of Professional Conduct of the State Bar of Arizona withdrew its Opinion No. 91-20 and directed that a new Opinion, 93-04, be issued clarifying the Committee's view of the application of ER 1.5(d) to contingency fee arrangements in child support or spousal maintenance collection matters. Opinion No. 91-20 had held that, while an attorney may ethically charge a contingent fee when retained solely to collect past-due child support or spousal maintenance amounts, to the extent that the contingent fee is charged against and collected from current or future child support or spousal maintenance payments, it is ethically improper. Opinion No. 93-04 stated that: (1) An attorney may ethically charge a contingent fee for the collection of arrearages in child support or spousal maintenance payments after the entry of the decree in a marital dissolution proceeding. (2) Where a contingent fee arrangement is entered into for the enforcement of a current child support or spousal maintenance order, the length of time that the contingency fee will apply to future payments must be spelled out in the agreement, and the agreement must be fair and equitable to the client. (3) Where a current order for support and/or maintenance is in existence and a contingent fee arrangement is entered into for the collection of an arrearage in such payments, the legal rules applicable to allocation of monies paid upon a debt must be applied in determining whether and to what extent monies collected are to be credited to current support and/or maintenance or to the arrearage.

Subsequently, the Supreme Court issued its decision in Matter of Struthers, 179 Ariz. 216, 877 P.2d 789 (1994), which was a disciplinary proceeding against an attorney who specialized in collecting overdue child support payments from divorced parents, generally on a 25% contingency fee basis. Many of the respondent's fee agreements, moreover, purported to allow him to keep one hundred percent of all payments he collected until 25% of the total arrearages had been paid in full. The Court identified two problems with the fee agreements being used by respondent.

The first was a provision that respondent was entitled to retain any court-awarded fees in addition to the contingency fee. The Court found that this would result in a double recovery of fees, and would mislead the court to which an application for the award of fees was made. Although respondent claimed that he never invoked the provision, the Court found that it was facially unreasonable and improper and a violation of AZ-ER 1.5(a).

The second improper aspect was that the agreements could be interpreted as allowing Struthers to keep all funds collected on a client's behalf until his pre-set fee was paid in full. The Court noted that a provision of this nature was inherently suspect in child support cases, and improper unless both parties fully understood and freely agreed to the arrangement. The Court also criticized the agreements as ambiguous, and summed up its holding as follows:

Insofar as they allowed double payment of fees, the fees were unreasonable and thus in violation of ER 1.5(a). Insofar as they purported to allow Struthers to retain all monies until his fee was paid in full, the agreements did not state the method by which the fees would be calculated with sufficient clarity to satisfy ER 1.5(c).

179 Ariz. at 223, 877 P.2d at 796.

The Court went on to observe that, given the financial situation of many of Struthers' clients, a provision allowing him to keep for himself all of the initial monies collected when, in many of the cases, it was to be expected that there would be no further recoveries for some time, if ever, was so clearly unfair to the clients as to be overreaching as a matter of law. For these, and other, transgressions, Struthers was disbarred.

Slightly different considerations may come into play where the attorney's contingency fee is not applied to a monetary recovery obtained, but to the value of property or assets that may or may not be the subject of the engagement. In Arizona Ethics Opinion No. 80-05, the Committee held that an attorney representing a client in a land dispute may accept a portion of the land as a contingent fee. In Arizona Ethics Opinion No. 94-15, the Committee ruled that an attorney may take a contingent fee in the form of a partial patent registration assignment for handling the prosecution of a patent application at the U.S. Patent and Trademark Office, but pointed out that the fee must be reasonable under AZ-ER 1.5(a), and the attorney was also required to comply with the requirements of AZ-ER 1.8(a) applicable to entering into a business transaction with a client.

In Matter of Cain, 174 Ariz. 592, 852 P.2d 407 (1993), Cain had been retained to represent clients in a quiet title proceeding to clear certain trust property of a long-term lease with an option to purchase. Cain's written retainer agreement called for a non-refundable retainer of $5,000, and a contingency fee equal to 10% of the gross value of the entire nine-acre property involved. The Court found the agreement improper because it did not specify the nature of the contingency, because it failed to state the time at which the property would be valued for purposes of calculating the contingency, and because it did not clarify whether costs and expenses would be deducted from the recovery before or after the 10% of gross value calculation was to be made. For this and other ethical violations, Cain was suspended from the practice of law for a period of two years.

Contingency fee arrangements have also not been given favorable treatment in cases involving fee applications where a governing statute, such as A.R.S. § 12-341.01, permits the shifting of fees incurred by the prevailing party. In Betancourt v. Arizona Property & Casualty Insurance Fund, 150 Ariz. 296, 823 P.2d 1304 (App. 1991), the Court held that, where an application for an award of attorneys' fees is made under A.R.S. § 12-341.01, the applicant must still submit an affidavit establishing the reasonableness of the award of fees sought, which satisfies the standards of Schweiger v. China Doll Restaurant, Inc., 138 Ariz. 183, 673 P.2d 927 (App. 1983), even though a contingency fee agreement is involved. In Chavarria v. State Farm Mutual Automobile Insurance Company, 165 Ariz. 334, 798 P.2d 1343 (App. 1990), the Court held that, while A.R.S. § 12-341.01(A) gives the trial court discretion to award attorneys' fees in a contested action arising out of a contract, A.R.S. § 12-341.01(B) provides that "such award may not exceed the amount paid or agreed to be paid." Accordingly, in the Court's view, where the applicant was engaged under a contingency fee arrangement, the award cannot exceed the amount payable under that contingency agreement, even if the reasonable value of the services is much higher.

A client who enters into a contingency fee agreement with an attorney may settle, compromise or release the client's claims on any terms the client finds acceptable, without the attorney's consent, and even against the attorney's advice. Richfield Oil Corporation v. LaPrade, 56 Ariz. 100, 105 P.2d 1115 (1940). Moreover,:

Our law does not bind a person to one attorney merely because he has entered into a contingent fee relationship. If the client in the exercise of this power discharges the attorney under a contingent fee contract before his lien arises, that attorney generally has a remedy only against the client for the value of his services.

State Farm Mutual Insurance Company v. St. Joseph's Hospital, 107 Ariz. 498, 502, 489 P.2d 837, 841 (1971) (citing Walker v. Wright, 28 Ariz. 235, 236 P. 710 (1925)). In Arizona Ethics Opinion No. 84-12, the Committee deemed the question of whether an attorney who accepts a case on a contingent fee basis may charge the client an hourly fee if the attorney is discharged prior to settlement to be an issue of law and declined to decide it. The decision in Schwartz v. Schwerin, 85 Ariz. 242, 336 P.2d 144 (1959), however, would seem to suggest that, in that circumstance and absent an agreement addressing the situation, the attorney must seek relief on a quantum meruit basis, which means the reasonable value of the services rendered before being discharged. In that case, the Supreme Court indicated that the reasonable value of an attorney's services, absent an agreement between the attorney and the client, would be determined by considering four factors: (1) the qualities of the attorney/advocate; (2) the character of the work to be performed; (3) the work actually performed; and, (4) the results obtained. If, on the other hand, the contingency fee agreement contains a provision specifying that the attorney will be compensated at a specified hourly rate in the event the agreement is terminated prematurely, such a provision may be enforceable. See Crews v. Collins, 140 Ariz. 80, 680 P.2d 216 (App. 1984).

1.5:610      Special Requirements Concerning Contingent Fees

AZ-ER 1.5 contains certain provisions specifically applicable to contingent fee arrangements. AZ-ER 1.5(c) requires that a contingent fee agreement be in writing, and that it be actually signed by the client. In addition, under AZ-ER 1.5(c), the contingent fee agreement "shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingent fee is calculated." Finally, AZ-ER 1.5(c) requires the lawyer, upon the conclusion of a contingent fee matter, to furnish the client with a written statement showing the outcome of the matter and, if there has been a recovery, showing the remittance to the client and the manner in which it was calculated.

AZ-ER 1.5(d) specifies two situations where a contingent fee will never be permissible. The Rule prohibits lawyers from entering into agreements for, or collecting:

(1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or

(2) a contingent fee for representing a defendant in a criminal case.

See further discussion of these provisions in Sections 1.5:710 and 1.5:720, infra.

1.5:620      Quantum Meruit in Contingent Fee Cases

A client who enters into a contingency fee agreement with an attorney may settle, compromise or release the client's claims on any terms the client finds acceptable, without the attorney's consent, and even against the attorney's advice. Richfield Oil Corporation v. LaPrade, 56 Ariz. 100, 105 P.2d 1115 (1940). Moreover,:

Our law does not bind a person to one attorney merely because he has entered into a contingent fee relationship. If the client in the exercise of this power discharges the attorney under a contingent fee contract before his lien arises, that attorney generally has a remedy only against the client for the value of his services.

State Farm Mutual Insurance Company v. St. Joseph's Hospital, 107 Ariz. 498, 502, 489 P.2d 837, 841 (1971) (citing Walker v. Wright, 28 Ariz. 235, 236 P. 710 (1925)). In Arizona Ethics Opinion No. 84-12, the Committee deemed the question of whether an attorney who accepts a case on a contingent fee basis may charge the client an hourly fee if the attorney is discharged prior to settlement to be an issue of law and declined to decide it. The decision in Schwartz v. Schwerin, 85 Ariz. 242, 336 P.2d 144 (1959), however, would seem to suggest that, in that circumstance and absent an agreement addressing the situation, the attorney must seek relief on a quantum meruit basis, which means the reasonable value of the services rendered before being discharged. In that case, the Supreme Court indicated that the reasonable value of an attorney's services, absent an agreement between the attorney and the client, would be determined by considering four factors: (1) the qualities of the attorney/advocate; (2) the character of the work to be performed; (3) the work actually performed; and, (4) the results obtained. If, on the other hand, the contingency fee agreement contains a provision specifying that the attorney will be compensated at a specified hourly rate in the event the agreement is terminated prematurely, such a provision may be enforceable. See Crews v. Collins, 140 Ariz. 80, 680 P.2d 216 (App. 1984).

1.5:700   Unlawful Fees

1.5:710      Contingent Fees in Criminal Cases

As earlier noted, one of the two situations in which AZ-ER 1.5(d) specifies that a contingent fee will never be permissible is "a contingent fee for representing a defendant in a criminal case." AZ-ER 1.5(d)(2).

1.5:720      Contingent Fees in Domestic Relations Matters

Contingent fee arrangements have been subjected to particularly close scrutiny in domestic relations matters. AZ-ER 1.5(d)(1) itself prohibits "any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof." In Arizona Ethics Opinion No. 77-18, the Committee ruled that Arizona's change from a "fault" divorce to a "no-fault" dissolution concept did not operate to dilute the prohibition against charging a contingent fee with regard to either the disposition of marital property or future spousal maintenance.

In Arizona Ethics Opinion No. 82-09, the Committee approved a contingent fee arrangement where the services to be performed involved an attempt to set aside a prior divorce decree and settlement agreement on the grounds of fraud and duress, and the inquiring attorney had a different fee arrangement for negotiating or litigating a new property settlement agreement. In Arizona Ethics Opinion No. 86-12, the Committee held that it was proper for an attorney representing a client in a marital dissolution proceeding to take a lien on community funds to secure the payment of the attorney's fees and costs, after the issuance of the preliminary injunction contemplated by A.R.S. § 25-315.

In Arizona Ethics Opinion No. 87-06, the Committee reaffirmed, after the adoption of the Arizona Rules of Professional Conduct, the continuing vitality of the prohibition upon charging a client a contingent fee computed on the value of any property the client was to receive as a result of the division of marital property in the divorce proceeding. In Arizona Ethics Opinion No. 89-02, however, the Committee approved a contingent fee arrangement in a post-dissolution action to claim a share of an allegedly undisclosed community asset which had not been considered by the court at the time of the dissolution proceeding.

In Arizona Ethics Opinion No. 93-04, the Committee ruled that AZ-ER 1.5(d)(1) was inapplicable to a contingency fee agreement between a lawyer and client for the collection or enforcement of child support or spousal maintenance after entry of the decree of dissolution, but cautioned that the length of time the contingency fee would be applied to future payments be specified, and that the agreement be in all respects fair and reasonable. In issuing this Opinion, the Committee formally withdrew its prior Arizona Ethics Opinion No. 91-20. The Supreme Court deemed this development to be of sufficient importance to warrant adding a published 1993 addition to the Comment accompanying AZ-ER 1.5, which provided as follows:

On March 27, 1993, the Committee on Rules of Professional Conduct of the State Bar of Arizona withdrew its Opinion No. 91-20 and directed that a new Opinion, 93-04, be issued clarifying the Committee's view of the application of ER 1.5(d) to contingency fee arrangements in child support or spousal maintenance collection matters. Opinion No. 91-20 had held that, while an attorney may ethically charge a contingent fee when retained solely to collect past-due child support or spousal maintenance amounts, to the extent that the contingent fee is charged against and collected from current or future child support or spousal maintenance payments, it is ethically improper. Opinion No. 93-04 stated that: (1) An attorney may ethically charge a contingent fee for the collection of arrearages in child support or spousal maintenance payments after the entry of the decree in a marital dissolution proceeding. (2) Where a contingent fee arrangement is entered into for the enforcement of a current child support or spousal maintenance order, the length of time that the contingency fee will apply to future payments must be spelled out in the agreement, and the agreement must be fair and equitable to the client. (3) Where a current order for support and/or maintenance is in existence and a contingent fee arrangement is entered into for the collection of an arrearage in such payments, the legal rules applicable to allocation of monies paid upon a debt must be applied in determining whether and to what extent monies collected are to be credited to current support and/or maintenance or to the arrearage.

This addition to the Comment to the prior Rule was not carried forward when the Rule and accompanying Comment were amended in 2003. The amended Comment merely states that the general prohibition on contingent fees in domestic relations matters "does not preclude a contingent fee for legal representation in connection with the recovery of post-judgment balances due under support, alimony or other financial orders because such contracts do not implicate the same policy concerns." Comment, AZ-ER 1.5, ‡ 6.

Subsequently, the Supreme Court issued its decision in Matter of Struthers, 179 Ariz. 216, 877 P.2d 789 (1994), which was a disciplinary proceeding against an attorney who specialized in collecting overdue child support payments from divorced parents, generally on a 25% contingency fee basis. Many of the respondent's fee agreements, moreover, purported to allow him to keep one hundred percent of all payments he collected until 25% of the total arrearages had been paid in full. The Court identified two problems with the fee agreements being used by respondent.

The first was a provision that respondent was entitled to retain any court-awarded fees in addition to the contingency fee. The Court found that this would result in a double recovery of fees, and would mislead the court to which an application for the award of fees was made. Although respondent claimed that he never invoked the provision, the Court found that it was facially unreasonable and improper and a violation of AZ-ER 1.5(a).

The second improper aspect was that the agreements could be interpreted as allowing Struthers to keep all funds collected on a client's behalf until his pre-set fee was paid in full. The Court noted that a provision of this nature was inherently suspect in child support cases, and improper unless both parties fully understood and freely agreed to the arrangement. The Court also criticized the agreements as ambiguous, and summed up its holding as follows:

Insofar as they allowed double payment of fees, the fees were unreasonable and thus in violation of ER 1.5(a). Insofar as they purported to allow Struthers to retain all monies until his fee was paid in full, the agreements did not state the method by which the fees would be calculated with sufficient clarity to satisfy ER 1.5(c).

179 Ariz. at 223, 877 P.2d at 796.

The Court went on to observe that, given the financial situation of many of Struthers' clients, a provision allowing him to keep for himself all of the initial monies collected when, in many of the cases, it was to be expected that there would be no further recoveries for some time, if ever, was so clearly unfair to the clients as to be overreaching as a matter of law. For these, and other, transgressions, Struthers was disbarred.

1.5:730      Other Illegal Fees in Arizona

There no Arizona authorities which determine circumstances in which a lawyer charging a fee will be "illegal," as distinguished from "unethical." An excessive or unreasonable fee is "unethical." [ See discussion in Section 1.5:400 and its subparts, supra.]

1.5:800   Fee Splitting (Referral Fees)

AZ-ER 1.5(e) as amended in 2003, provides that a division of a fee between lawyers who are not in the same firm may be made only if the following conditions are satisfied:

(1) each lawyer assumes joint responsibility for the representation;

(2) the client is agrees, in a writing signed by the client, to the participation of all the lawyers involved; and

(3) the total fee is reasonable.

As the Comment to this aspect of the Rule explains:

A division of fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm. A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist. Paragraph (e) permits the lawyers to divide a fee by agreement between the participating lawyers if all assume responsibility for the representation and the client agrees, in a writing signed by the client, to the arrangement.

Comment, AZ-ER 1.5, ‡ 8. That paragraph of the Comment also stresses that: "Except as permitted by this Rule, referral fees are prohibited by ER 7.2(b)." Id.

This is a more restrictive regime for the propriety of fee-splitting arrangements than pertains under MR 1.5. That Rule permits fee-splitting arrangements between lawyers not in the same firm if "the division is in proportion to the services performed by each lawyer," without lawyers sharing in the fee assuming joint responsibility for the matter. Arizona removed this provision from its Rule with the 2003 amendments. This is also one of the instances (contingent fee agreements being the other) where an agreement concerning fees must not only be in writing, but must also actually be signed by the client.

The decision in Peterson v. Anderson, 155 Ariz. 108, 745 P.2d 166 (App. 1987), suggests that fee-splitting agreements will only be enforceable if all the lawyers participating in them are licensed to practice in Arizona or have been admitted pro hac vice in the matter for which fees are being shared. In that case, Mr. Peterson, who was an attorney licensed to practice in Illinois but living in Arizona, referred a personal injury plaintiff who had contacted him concerning representation to Mr. Anderson, who was admitted to practice in Arizona. Anderson entered into his standard one-third contingency fee agreement with the client, but also entered into an agreement with Peterson that, in exchange for Peterson's agreeing to assist in preparing the matter for trial, Anderson would give Peterson one-third of whatever fee he received in the matter. Peterson volunteered to seek to become admitted pro hac vice in the case, and Anderson advised him that was unnecessary. The client was advised of this arrangement and expressed no objection. Anderson subsequently reneged on the arrangement.

Peterson filed suit to enforce the agreement, and also submitted a complaint concerning Anderson's conduct to the State Bar of Arizona. The latter proceeding resulted in the issuance of an informal reprimand of Anderson for sharing legal fees with a non-lawyer in violation of DR 3-102 of the Code of Professional Responsibility, which was in effect in Arizona at the time the arrangement was put in place. In the litigation, the trial court entered summary judgment in favor of Anderson on the grounds that the agreement to share fees with Peterson, who was not a licensed Arizona attorney, was against public policy and unenforceable. The Court of Appeals affirmed, reasoning:

We conclude that the fee-splitting arrangement between Peterson and Anderson is unenforceable because it is against public policy . . . The acts to be performed under the fee arrangement for attorneys' fees required Peterson to "participate in the pretrial work-up," or, in other words, to practice law. This was clearly in violation of the Code of Professional Responsibility and A.R.S. §§ 32-261, 32-262 (in effect at the time) and therefore against public policy.

Id., 155 Ariz. at 113, 745 P.2d at 166.

On a somewhat related subject, the Committee recently ruled, in Arizona Ethics Opinion No. 98-09, that a lawyer cannot ethically enter into an arrangement pursuant to which the lawyer was to receive a referral fee for referring clients of the lawyer to an investment adviser. In an earlier opinion, the Committee had held that, while it was permissible for a lawyer who was also an accountant to engage in both professions simultaneously, the businesses had to be kept separate and clients that were referred to the lawyer's accounting business had to be advised of the lawyer's interest in it. Arizona Ethics Opinion No. 97-08. Consistently with these Opinions, the Committee has also held that it is impermissible, under AZ-ER 1.7(b), for a lawyer to refer clients to a chiropractic clinic in which the lawyer has an ownership interest, and for a lawyer to accept referral fees from medical providers for referring clients to them. Arizona Ethics Opinions Nos. 96-05, 95-10. On the other hand, in an Opinion applying the provisions of the former Code of Professional Responsibility, Arizona Ethics Opinion No. 84-16, the Committee ruled that it was ethically permissible for an attorney to recommend that the attorney's client invest in particular securities, even if the attorney would receive a sales commission for handling the investment transaction, so long as all of the compensation arrangements were fully disclosed.

In Arizona Ethics Opinion No. 2000-08, the Committee on the Rules of Professional Conduct held that it was proper for a firm to list on its letterhead, as "Of Counsel," two lawyers who were not admitted in Arizona and whose practice would be limited to consultation in federal Social Security matters, provided that the letterhead also disclosed that the two lawyers were not admitted in Arizona and that their practice would be so limited. The Committee also held that it would be permissible for the firm to share fees with the two lawyers involved, provided that the fee-splitting requirements of AZ-ER 1.5(e) were satisfied.