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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.

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Some portions of the collection may already be severely out of date, so please be cautious in your use of this material.


Texas Legal Ethics

1.5   Rule 1.5 Fees

1.5:100   Comparative Analysis of Texas Rule

Primary Texas References: TX Rule 1.04
Background References: ABA Model Rule 1.5, Other Jurisdictions
Commentary:

1.5:101      Model Rule Comparison

Note that as of November 1998, Texas lawyers were considering a referendum that proposes changes of certain Texas Rules, including Texas Rule 1.04, "Fees." This narrative addresses Texas Rule 1.04 as it existed as of November 11, 1998, and does not address the referendum pending as of that date.

Model Rule 1.5, "Fees," finds its analogue in Texas Rule 1.04, also named "Fees." Paragraph (b) of Model Rule 1.5 is essentially similar to paragraph (c) of Texas Rule 1.04. Likewise, paragraph (c) of Model Rule 1.5 is substantially the same as paragraph (d) of Texas Rule 1.04. Similarly, both rules agree that a lawyer shall not enter into an agreement for, charge, or collect a contingent fee for representing a defendant in a criminal case. See Texas Rules Rule 1.04(e); Model Rules Rule 1.5(d)(2). Unlike Model Rule 1.5, Texas Rule 1.04 does not prohibit contingent fees in domestic relations matters. (Comment 9 to Texas Rule 1.04 notes, however, that contingent fee arrangements in domestic relations matters "are rarely justified.") Texas Rule 1.04 also differs from Model Rule 1.5 in permitting a division or agreement for division of a fee between lawyers who are not in the same firm when "made with a forwarding lawyer" so long as other provisions of Texas Rule 1.04 are satisfied. Texas Rules Rule 1.04(f)(1)(ii).

One final significant difference between Model Rule 1.5 and Texas Rule 1.04 will be noted. Model Rule 1.5 would appear to contemplate professional discipline for a lawyer if a lawyer charges a fee that is not "reasonable." See Model Rules Rule 1.5(a). Texas Rule 1.04, by contrast, would limit professional discipline, regarding the amount of a fee, to situations in which the fee charged is "unconscionable." Texas Rules Rule 1.04(a). "A fee is unconscionable" under the Texas Rules "if a competent lawyer could not form a reasonable belief that the fee is reasonable." Id. Official Comment 1 to Texas Rule 1.04 helps illuminate the distinction between the Texas unconscionability standard and the Model Rule reasonableness standard:

A lawyer in good conscience should not charge or collect more than a reasonable fee, although he may charge less or no fee at all. The determination of the reasonableness of a fee, or of the range of reasonableness, can be a difficult question, and a standard of "reasonableness" is too vague and uncertain to be an appropriate standard in a disciplinary action. For this reason, paragraph (a) adopts, for disciplinary purposes only, a clearer standard: The lawyer is subject to discipline for an illegal fee or an unconscionable fee. Paragraph (a) defines an unconscionable fee in terms of the reasonableness of the fee but in a way to eliminate factual disputes as to the fee's reasonableness. The Rule's "unconscionable" standard, however, does not preclude use of "reasonableness" standard of paragraph (b) in other settings.

Texas Rules Rule 1.04 cmt. 1. The factors used to determine the reasonableness of the fee under Texas Rule 1.04 and Model Rule 1.5 are not identical, but are generally similar. For a more thorough discussion of the similarities and differences between Model Rule 1.5 and Texas Rule 1.04, see Robert P. Schuwerk & John F. Sutton, Jr., A Guide to the Texas Disciplinary Rules of Professional Conduct, 27A Hou. L. Rev. 1, 6-73 (1990) .

1.5:102      Model Code Comparison

Certain provisions of Texas Rule 1.04 find analogues in the Model Code. Like Texas Rule 1.04, DR 2-106(C) prohibited contingent fees in criminal cases. EC 2-20 stated that contingent fee arrangements "in domestic relations cases are rarely justified." As to a standard for imposing discipline for the amount of a fee, DR 2-106(A) stated that a lawyer could not properly "enter into an agreement for, charge, or collect an illegal or clearly excessive fee." Model Code DR 2-106(A) (emphasis added). Under the Model Code, a fee was to be deemed clearly excessive when, after a review of the facts, "a lawyer of ordinary prudence would be left with a definite and firm conviction is that the fee is in excess of a reasonable fee." DR 2-106(B) sets forth factors for determining the reasonableness of a fee; these are generally similar to the factors set forth in paragraph (b) of Texas Rule 1.04. Fee division was addressed in the Model Code in DR 2-107(A). Like the Model Rules, the Model Code on this subject did not address fee division with forwarding lawyers, a topic explicitly addressed in Texas Rule 1.04.

1.5:200   A Lawyer's Claim to Compensation

Primary Texas References: TX Rule 1.04
Background References: ABA Model Rule 1.5, Other Jurisdictions
Commentary: ABA/BNA § 41:101, ALI-LGL §§ 50-54, Wolfram §§ 9.1-9.6

For a general discussion of this subject, see sections 1.5:101 and 1.5:400 through 1.5:730.

1.5:210      Client-Lawyer Fee Agreements

For a general discussion of this subject, see sections 1.5:101 and 1.5:400 through 1.5:730.

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

[The discussion of this topic has not yet been written.]

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

Paragraph (d) of Texas Rule 1.15 provides in part that upon termination of the representation, the lawyer should return "any advance payments of fee that has not been earned." Texas Rules Rule 1.15(d). For an interesting case considering fee issues relating to whether a lawyer has been discharged with or without cause (and some related issues), see Augustson v. Linea Aêrea Nacional-Chile S.A., 76 F.3d 658 (5th Cir. 1996).

1.5:240      Fee Collection Procedures

[The discussion of this topic has not yet been written.]

1.5:250      Fee Arbitration

Comment 12 to Texas Rule 1.04 encourages lawyers to consider arbitration or mediation procedures. Texas Rules Rule 1.04 cmt. 12.

1.5:260      Forfeiture of Lawyer's Compensation

For discussion touching on this subject, see section 1.5:230.

1.5:270      Remedies and Burden of Persuasion in Fee Disputes

[The discussion of this topic has not yet been written.]

1.5:300   Attorney-Fee Awards (Fee Shifting)

Primary Texas References: TX Rule 1.04
Background References: ABA Model Rule 1.5, Other Jurisdictions
Commentary: ABA/BNA § 41:301, Wolfram § 16.6

[The discussion of this topic has not yet been written.]

1.5:310      Paying for Litigation: The American Rule

[The discussion of this topic has not yet been written.]

1.5:320      Common-Law Fee Shifting

[The discussion of this topic has not yet been written.]

1.5:330      Statutory Fee Shifting

[The discussion of this topic has not yet been written.]

1.5:340      Financing Litigation [see 1.8:600]

The Texas Deceptive Trade Practices Act ("DTPA") provides that a party prevailing under the act can recover its attorney fees in appropriate circumstances. In Arthur Andersen & Co. v. Perry Equipment Corp., 945 S.W.2d 812 (Tex. 1997), the prevailing plaintiff sought to recover its fees from the defendant based upon the plaintiff's contingent fee contract with its counsel. The Texas Supreme Court held that the award of attorney fees under the DTPA had to be a dollar amount, rather than a percentage of the judgment. The Texas Supreme Court observed that the contingent fee contract could be admissible in evidence, but further concluded that, ultimately, determination of recoverable reasonable and necessary attorneys' fees under the DTPA should include reference to the factors set forth in Texas Rule 1.04.

1.5:400   Reasonableness of a Fee Agreement

Primary Texas References: TX Rule 1.04(b)
Background References: ABA Model Rule 1.5(a), Other Jurisdictions
Commentary: ABA/BNA § 41:301, ALI-LGL § 46, Wolfram § 9.3.1

Rule 1.04(b) provides a nonexhaustive list of subjective, "relevant factors" for "determining the reasonableness of a fee":

(1)   the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite 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 services; and
(8)   whether the fee is fixed or contingent on results obtained or uncertainty of collection before the legal services have been rendered.

Texas Rules Rule 1.04(b).

The "reasonable fee" determination requires consideration of the interests of both client and lawyer, including the sophistication of the client and the circumstances surrounding the negotiation of the contingent fee agreement. Id. cmt. 4, cmt. 8. Typically, the reasonableness of any fee is evaluated in light of the circumstances at the time the parties entered into a fee arrangement. Rule 1.04 cmt. 7.

1.5:410      Excessive Fees

Texas Rule 1.04 forbids lawyers from, among other things, charging an illegal or unconscionable fee. "A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable." Texas Rules Rule 1.04(a). See 1.5:400 for factors to consider in determining reasonableness. In Cushnie v. State Bar, 845 S.W.2d 358 (Tex. App.— Houston [1st Dist.] 1992, writ denied), the court deemed unreasonable a $2,500 per hour fee in a breach of contract case. See also Kershner v. State Bar, 879 S.W.2d 343 (Tex. App.—Houston [14th Dist.] 1994, writ denied) (deeming clearly excessive a $2,500 fee for three to five hours work in light of facts of case).

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

The Texas Rules themselves do not appear to explicitly direct these subjects. For a general discussion of fees, see section 1.5:100 and following sections.

1.5:430      Nonrefundable Fees

The text of Texas Rule 1.04, "Fees," appears to be silent on nonrefundable fees; similarly, the text of Texas Rule 1.08, "Conflict of Interest: Prohibited Transactions," does not appear to expressly address this matter.

1.5:500   Communication Regarding Fees

Primary Texas References: TX Rule 1.04(c)
Background References: ABA Model Rule 1.5(b), Other Jurisdictions
Commentary: ABA/BNA § 41:101, ALI-LGL § 50, Wolfram § 9.2.1

Texas Rule 1.04(c) generally requires that, "when a lawyer has not regularly represented a client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation." Texas Rules Rule 1.04(c). Texas Rule 1.04(f) further requires, among other things, that client consent be obtained regarding fee divisions between lawyers who are not in the same firm. Texas Rules Rule 1.04(f). For a discussion of contingent fee agreements, including the requirement under Texas Rule 1.04(d) that such agreements be in writing, see 1.5:600.

1.5:600   Contingent Fees

Primary Texas References: TX Rule 1.04(d)
Background References: ABA Model Rule 1.5(c), Other Jurisdictions
Commentary: ABA/BNA § 41:901, ALI-LGL §§ 46, 47, Wolfram § 9.4

For a discussion of contingent fees in Texas, see sections 1.5:610 and 1.5:700.

1.5:610      Special Requirements Concerning Contingent Fees

Promulgated by the Texas Supreme Court in 1989 and effective January 1, 1990, the Texas Disciplinary Rules of Professional Conduct govern contingent fee agreements in Texas. Rule 1.04(d) expressly authorizes Texas attorneys to enter into contingent fee arrangements. Texas Rules Rule 1.04(d). Rule 1.04(d) requires contingent fee agreements to be in writing. Additionally, section 82.065(a) of the Texas Government Code requires that a contingent fee contract be in writing and signed by the attorney and client. Tex. Gov't Code Ann. § 82.065(a) (West Supp. 1994). However, in at least one case, this section has been "construed to operate in a manner similar to the statute of frauds," i.e., "an agreement is enforceable if it is in writing and signed by the party to be charged." Enochs v. Brown, 872 S.W.2d 312, 318 (Tex. App.—Austin 1994, no writ).

Rule 1.04(d) also requires disclosure of the following information in all contingent fee agreements:

(1)   The method by which the fee is to be determined;
(2)   The litigation and other expenses to be deducted before or after the contingent fee is calculated; and
(3)   If the contingent fee percentage or percentages differ in the event of settlement, trial or appeal, then all percentage must be disclosed.

Texas Rules Rule 1.04(d).

A contingency fee agreement may be based upon the client's "entire recovery," including punitive damages. See Crum & Forster, Inc. v. Monsanto Co., 887 S.W.2d 103, 152 (Tex. App.—Texarkana 1994) vacated by agr., 1995 WL 273592 (Mar. 9, 1995).

At the conclusion of a contingent fee matter, the lawyer must evidence the termination of the agreement in writing to the client. In that context, the lawyer must describe "the outcome of the matter." Further, if the lawyer obtains a recovery, he must explain the remittance to the client and justify the method of its determination. Rule 1.04(d).

1.5:700   Unlawful Fees

Primary Texas References: TX Rule 1.04(e)
Background References: ABA Model Rule 1.5(d), Other Jurisdictions
Commentary: ABA/BNA §§ 41:901, ALI-LGL § 48, Wolfram §§ 9.3.2; 9.4

Texas Rule 1.04, "Fees," prohibits Texas lawyers from charging unconscionable fees. This is discussed in section 1.5:610. Contingent fee agreements between attorneys and criminal defendants are prohibited by Texas Rule 1.04(e).

1.5:710      Contingent Fees in Criminal Cases

Contingent fee arrangements between attorneys and defendants in criminal cases are prohibited in Texas. Texas Rules Rule 1.04(e).

1.5:720      Contingent Fees in Domestic Relations Matters

Official Comment 9 to Texas Rule 1.04 states that "[c]ontingent and percentage fees in family law matters may tend to promote divorce and may be inconsistent with a lawyer's obligation to encourage reconciliation. Such fee arrangements also may tend to create a conflict of interest between lawyer and client regarding appraisal of assets obtained for client." Texas Rules Rule 1.04 cmt. 9. According to comment 9, "[b]ecause of the human relationships involved and the unique character of the proceedings, contingent fee arrangements in domestic relations cases are rarely justified." Texas Rules Rule 1.04 cmt. 9.

1.5:730      Other Illegal Fees in Texas

Unconscionable fees, contingent fees in criminal cases, and unwritten contingent fee agreements violate Texas Rule 1.04, "Fees," as do agreements to divide fees between lawyers not in the same firm (unless the requirements of paragraph (f) of Texas Rule 1.04 are satisfied).

1.5:800   Fee Splitting (Referral Fees)

Primary Texas References: TX Rule 1.04(f)
Background References: ABA Model Rule 1.5(e), Other Jurisdictions
Commentary: ABA/BNA § 41:701, ALI-LGL § 59, Wolfram § 9.24

An important purpose behind fee splitting is clear from the comments to the Texas Rules: "A division of fees 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." Texas Rules Rule 1.04 cmt. 10.

Rule 1.04(f) governs referral fee agreements. In Texas, lawyers who are not in the same law firm may not enter into an agreement for a division of a fee unless:

(1)   the division is:

(i) in proportion to the professional services performed by each lawyer;

(ii) made with a forwarding lawyer; or

(iii) made, by written agreement with the client, with a lawyer who assumes joint responsibility for the representation;

(2)   the client is advised of, and does not object to, the participation of all the lawyers involved, and

(3)   the aggregate fee does not constitute an "illegal" or "unconscionable" fee.

Texas Rules Rule 1.04(f). Thus, Rule 1.04(f) permits lawyers to divide a fee in proportion to the professional services performed by each or in any other mutually agreeable proportion. Rule 1.04 cmt. 11. Paragraph (f) of the rule does not require disclosure to the client of the share that each lawyer is to receive. Rule 1.04(f) cmt. 11.

"[I]f a lawyer acts as a forwarding attorney, the client need only be advised of and not object to the participation of all the lawyers involved in the fee agreement." Bond v. Crill, 906 S.W.2d 103, 106 (Tex. App.—Dallas 1995, no writ) (citing Polland & Cook v. Lehmann, 832 S.W.2d 729, 736 (Tex. App.—Houston [1st Dist.] 1992, writ denied)). In certain circumstances, a lawyer is not required to advise a client of a fee referral agreement. Comment 10 to the Texas Rules provides in relevant part:

Because the association of additional counsel normally will result in a further disclosure of client confidences and have a financial impact on a client, advance disclosure of the existence of that proposed association and client consent generally are required. Where those consequences will not arise, however, disclosure is not mandated by this Rule.

Rule 1.04 cmt. 10. "Thus, an exception to the mandatory disclosure requirement can arise when there is no disclosure of client confidences to the forwarding attorney and no financial impact on the client." Bond, 906 S.W.2d at 106 (citing Matlock v. Kittleman, 865 S.W.2d 543, 545 (Tex. App.—Corpus Christi 1993, no writ)). Any party asserting a violation of Rule 1.04(f) has the burden of negating this exception. 906 S.W.2d at 106.

An attorney is not required to actually work on a case in order to be entitled to a referral fee in Texas. Vance v. Davidson, 903 S.W.2d 863, 867 n.3 (Tex. App.—Houston [14th Dist.] 1995, orig. proceeding).

The Rules do not prohibit payment to a former partner or associate pursuant to a separation or retirement agreement. Texas Rules Rule 1.04(g).

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