(Note: This is an edited version of an article written by Michael Malatino that appears in the Winter 2023 edition of the NJSBA’s Labor and Employment Law Quarterly. Section members can read the full article and edition here.)
With the decision in Balducci v. Cige, and the Sept. 12, 2022, New Jersey Supreme Court request for public comment on retainer agreements that foreclose settlement when terms waive the lawyer’s fees or costs, the law concerning retainer agreements has been a focal point of recent Court activity. Counsel can violate ethical duties simply by charging what a client might agree to pay. Because of this and the wide latitude employment litigation attorneys have in their crafting of fee arrangements, counsel must ensure that their fiduciary obligations to their clients are always respected.
Must attorney fee arrangements be in writing?
New Jersey Rule of Professional Conduct 1.5(b) requires that a lawyer who has not regularly represented a client communicate the basis or rate of fee in writing to the client before or within a reasonable time after commencing the representation. While it is likely still best practice to memorialize all fee arrangements, if the attorney regularly represents the client, there is latitude within the Rules of Professional Conduct for fee arrangements not being reduced to a writing.
However, regardless of whether the attorney has regularly represented the client, if the representation is based in whole or in part based on a contingency, New Jersey Rule of Professional Conduct 1.5 requires the fee arrangement be in writing.
What is a reasonable contingency fee?
Are attorneys free to enter into any contingency fee arrangement that both the lawyer and the client agree upon? The answer is a clear no. New Jersey Rules of Professional Conduct 1.5(a) limits attorneys to only a “reasonable fee.” While New Jersey Court Rule 1:21-7 expressly exempts employment litigation from the contingency fee caps expressed therein, attorneys still must charge only a “reasonable fee.”
So, the question is then, what is a “reasonable fee?” As with many legal questions, the determination of a “reasonable fee” will be dependent on the facts and circumstances of each case and will consider elements such as the uncertainty of recovery. Nonetheless, courts have provided some guidance as to a fee’s reasonableness. Courts have rejected a contingency fee of 50% of the net sum recovered in several instances. Additionally, a court may scrutinize contingency fees involving the representation of a minor more strictly because New Jersey Court Rule 1:21-7 limits contingency fees for many non-employment related actions to only 25%.
Can an attorney charge a non-refundable retainer?
The short answer is, maybe. In Opinion 644 of the Advisory Committee on Professional Ethics, the committee found that a non-refundable retainer is not per se unethical. Rather, the committee found that retainer payments are subject to the overriding precept that any fee arrangements must be reasonable and fair to the client.
Best practice remains to avoid charging a “non-refundable” retainer and to the extent such an arrangement is necessary to protect against risk, be prepared to justify the unique circumstances allowing counsel to deviate from the standard billable hour model and allow counsel to charge fees despite lacking the billable hours justifying them
Are merger clauses effective in protecting against a client disputing the terms of a retainer agreement?
hat lawyers typically call merger clauses, integration clauses or entirety clauses – whereby the parties agree that the written agreement is the complete and sole agreement regarding the subject between the parties – are now ubiquitous in contracts. Will a merger clause prevent lawyer communications to a client that are contrary to the terms of the written retainer agreement from being introduced as evidence in a fee dispute? No.
The court in Balducci v. Cige found that an attorney cannot give oral assurances to a client that are in conflict with the terms of the retainer agreement and expect to find refuge in the parol evidence rule. Prior communications between an attorney and their client that are inconsistent with the terms of a written retainer will likely be considered by the court in a fee dispute because the lawyer has a fiduciary relationship to the client and must act within those ethical constraints.
Is the inclusion of an hourly fee in addition to a contingent fee unethical?
There are many different mechanisms that attorneys use in their attempt to balance potential risk against potential reward. Some attorneys include a clause in their retainer agreements that they are entitled to the greater of their hourly rate or the contingency fee applied to gross recovery including the attorney fee award. The court in Balducci v. Cige held that contingency fee arrangements that have an hourly component are not unreasonable; however, the court cautioned that because the hourly fee may exceed recovery, attorneys who choose to use an hourly component must clearly explain the hourly component to clients because the hourly fee could meet or even exceed the recovery.