If a lawyer waives part of a contingent fee for the client after settlement, must the lawyer tell the client's PIP carrier, whose reimbursement was reduced by a pro rata share of that fee?

Plain-English summary

The inquiring attorney posed three hypotheticals about a lawyer's obligations under a contingent fee agreement in a personal injury settlement. The committee answered only the first, noting that the other two were really legal questions about how to apply the fee agreement, not ethics questions; it also noted that, although the inquirer requested a "formal" opinion, the committee could issue only an "informal" opinion in this setting.

The first hypothetical drew on Mahler v. Szucs, 135 Wn.2d 398 (1998), under which a plaintiff's contingent fee lawyer must, on settlement and in certain circumstances, reimburse the client's PIP insurer, less the insurer's pro rata share of attorneys' fees and costs. That pro rata share is computed using the total attorneys' fees charged the client. After disbursement, the client asked the lawyer to waive $600 of the fee, which would drop the lawyer's share below the agreed one-third, even though the lawyer had already retained the PIP carrier's share calculated on the full one-third.

The committee found no ethical problem in the lawyer-client relationship: the proceeds were properly disbursed, and there is nothing unethical about taking less than the agreed fee, since RPC 1.5(a) requires only that the fee be reasonable and RPC 1.5(c) permits the contingent fee. The ethical issue, it held, lay between the lawyer and the PIP carrier. Because Mahler found no attorney-client relationship between the lawyer and the carrier, there was no violation of RPC 1.7 or RPC 1.5. But RPC 4.1 bars a lawyer from knowingly making a false statement of material fact to a third person, and the amount of fees charged the client is a material factor in the sum retained from the carrier's reimbursement. The committee concluded that, to comply with RPC 4.1, the lawyer must disclose the fee waiver and, if requested, extend the same waiver percentage to the PIP carrier, and that RPC 8.4(c) (dishonesty, deceit, or misrepresentation) also applies. For Hypotheticals 2 and 3, the committee declined to interpret Mahler, referring the inquirer to RPC 1.5(a) and 1.5(c)(2) and the duty to determine the actual cost of the settlement.

In practice

Under this opinion, and under the rules as they stood in 2006, the committee separated two relationships. The opinion holds that reducing the lawyer's own contingent fee below the agreed percentage is permissible as to the client, because RPC 1.5(a) requires only reasonableness. The constraint runs to the third-party PIP carrier: because the fee figure feeds the formula for what the lawyer keeps out of the carrier's reimbursement, the opinion treats the actual (reduced) fee as a material fact, so under RPC 4.1 the lawyer must disclose the waiver and, if asked, apply the same waiver percentage to the carrier, with RPC 8.4(c) reinforcing the duty. The committee expressly declined to resolve Hypotheticals 2 and 3, treating them as legal questions about applying Mahler v. Szucs rather than ethics questions.

Common questions

Q: Can a contingent fee lawyer agree to take less than the agreed percentage from the client?

A: Yes. The committee found nothing unethical in it, because RPC 1.5(a) requires only that the fee be reasonable and RPC 1.5(c) permits the contingent fee.

Q: If the lawyer waives part of the fee, does the PIP carrier have to be told?

A: Yes, per the committee. Because the fee amount is a material factor in calculating what the lawyer retains from the carrier's reimbursement, RPC 4.1 requires disclosing the waiver and, if requested, extending the same waiver percentage to the carrier.

Q: Is there a conflict of interest with the PIP carrier?

A: The committee said no. Citing Mahler v. Szucs, it found no attorney-client relationship between the lawyer and the carrier, so RPC 1.7 and the RPC 1.5 fee provisions were not implicated; the duty arises under RPC 4.1 and RPC 8.4(c).

Q: Did the committee answer how to calculate the fee in the other two hypotheticals?

A: No. It treated Hypotheticals 2 and 3 as legal questions about applying Mahler, declined to interpret the case, and referred the inquirer to RPC 1.5(a) and 1.5(c)(2).

Background and rules framework

The opinion interprets several Washington rules as they stood in 2006: RPC 1.5 (fees), including RPC 1.5(a) (reasonableness) and RPC 1.5(c) (contingent fees); RPC 4.1 (truthfulness in statements to others, the counterpart to Model Rule 4.1), which bars knowingly making a false statement of material fact to a third person; and RPC 8.4(c) (the counterpart to Model Rule 8.4(c)), addressing conduct involving dishonesty, deceit, or misrepresentation. The factual backdrop is Mahler v. Szucs, 135 Wn.2d 398 (1998), which governs a plaintiff lawyer's obligation to reimburse a client's PIP insurer net of a pro rata share of fees and costs.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.5 / Washington RPC 1.5, 1.5(a), 1.5(c) (fees; reasonableness; contingent fees)
• Model Rule 4.1 / Washington RPC 4.1 (false statement of material fact to a third person)
• Model Rule 8.4 / Washington RPC 8.4(c) (dishonesty, deceit, or misrepresentation)

Cases:

• Mahler v. Szucs, 135 Wn.2d 398, 957 P.2d 632 (Wash. 1998), PIP-reimbursement and pro rata fee-sharing obligation

See also

• ABA Formal Op. 06-439: Truthfulness in Negotiation and Mediation
• WA Ethics Op. 1103: Contingent Fee Plus Staff Costs

Source

• Landing page: https://ao.wsba.org/print.aspx?ID=1556

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Advisory Opinion: 2115
Year Issued: 2006
RPC(s): RPCs 1.5, 4.1, & 8.4(c)
Subject: Lawyer’s obligations under a contingent fee agreement re: PIP reimbursement.

Facts

The inquiring attorney presents three hypotheticals all directly or indirectly addressed to the lawyer’s obligations under a contingent fee agreement. Only the first hypothetical presents an “ethical” question properly posed to this committee. The other two hypotheticals present questions of how the contingent fee agreement should be applied to varying circumstances, which are more properly considered legal questions. Therefore, we answer only the first hypothetical. It should be noted that the inquiring attorney requests a “formal” ethics opinion. This committee can issue only an “informal” opinion in this setting.

By way of background, under Mahler v. Szucs, 135 Wn.2d 398, 957 P.2d 632 (1998), an attorney representing a plaintiff under a contingent fee agreement is obligated, upon settlement of a personal injury claim, to, among other things and under certain circumstances, reimburse his/her client’s PIP insurer for amounts recovered from the defendant that have already been paid on behalf of the client under PIP. That reimbursement obligation is for the full amount of PIP payment, less the insurer’s pro rata share of attorneys fees and costs. The pro rata share is calculated according to a formula that has as one of its elements, the total attorneys fees charged the client – (Attorneys fees + costs) x (PIP amount / Total Settlement) .

The key question under Hypothetical #1 is whether the attorney operating under the contingent fee agreement may ultimately charge his client less than the specified 1/3 percentage, while at the same time charging the client’s PIP carrier an amount calculated on the assumption that the full 1/3 share was charged. In this hypothetical, following disbursement of the proceeds of the settlement, the client requested the attorney to waive $600 of the fees earned. By this time the lawyer had already retained the PIP insurer’s share of the fees and costs, calculated using 1/3 contingent fee amount as the “attorneys fees” element of the equation. The effect of granting the client’s request would be to reduce the lawyer’s contingent fee share to less than 1/3. The question is whether the attorney may waive the $600 without disclosing such to the PIP carrier and/or extending the same fee waiver to the PIP carrier.

Under Hypothetical #2, the client asserts an underinsured motorist claim against his own UIM carrier. Prior to settlement, the client received PIP benefits from the same insurer providing the UIM coverage. The total settlement is $40,000, with $10,000 of that coming under the PIP coverage. Under this scenario, even when the PIP carrier and the UIM carrier are the same, the PIP carrier is entitled to less than full reimbursement of the expenses paid. That reimbursement is subject to the pro-rata share of attorneys fees and costs. Upon execution of the settlement, the UIM carrier issues a check for $33,833.33 (representing the full $40,000, less $6,166.67 it retains as the PIP carrier’s reimbursement.) The question posed is whether the lawyer may calculate his/her 1/3 contingent share based upon the gross settlement of $40,000 or the disbursement settlement of $33,83.33.

Hypothetical #3 presents the same type of “legal” question as posed in hypothetical #2. A case settles with a tortfeasor for $25,000 (tortfeasor’s carrier’s liability limit). The client also receives $10,000 in PIP benefits. Since the client is not made whole by the collective recovery, the PIP provider waives its right to any reimbursement from the $25,000 settlement. The question is whether the attorneys fees: (a) may be based on the total settlement of $35,000; (b) must be based on the $25,000 received on behalf of the tortfeasor; or (c) may be based upon the $25,000, plus the PIP reimbursement that the attorney saved the client.

Discussion

Hypothetical #1:

The ethical question presented in this hypothetical is not one between the attorney and the client (the party the attorney has been representing to the point of settlement). The attorney properly disbursed the proceeds of the settlement to his client pursuant to the terms of the Contingent Fee Agreement. On behalf of the client, the lawyer also properly disbursed the “reimbursement to the PIP carrier pursuant to Mahler v. Szucs. There is also nothing unethical about agreeing to take less in attorneys fees than he/or she is entitled to receive under the fee agreement. RPC 1.5(a) provides only that a “lawyer’s fee shall be reasonable,” and there is nothing to suggest that taking $600 less that the $8,333.33 to which the attorney was entitled makes the fee “unreasonable.” Furthermore, RPC 1.5(c) allows for contingent fees in the type of representation addressed in the hypothetical, and by all indications, the contingent fee was properly based upon the actual cost of the settlement, as required by RPC 1.5(c)(2)(ii).

The ethical issue focuses rather on the relationship between the attorney and the PIP carrier. The Mahler court specifically found no attorney/client relationship between the attorney and the carrier. Mahler v. Szucs, 135 Wn.2d at 427. Therefore, there is no technical violation of the conflict of interest rules of RPC 1.7 or the fee provisions of RPC 1.5. However, RPC 4.1 provides that “[i]n the course of representing a client, a lawyer shall not knowingly: (a) Make a false statement of material fact or law to a third person.” In calculating the sum being retained from the PIP carrier out of its reimbursement, a material factor is the amount of fees being charged the client. While the reduction in fees below the “contingent fee” occurred after the proper disbursement of the settlement monies, the fact remains that the actual fee charged the client ended up being less than the fee used in calculating the amount retained from the carrier’s reimbursement amount. Therefore, to comply with RPC 4.1, it would appear that the inquiring attorney must disclose the fee waiver and, if requested, extend the same fee waiver “percentage” to the PIP carrier. Another provision applicable to this action is RPC 8.4(c), dealing with conduct involving dishonesty, deceit or misrepresentation.

Hypotheticals #2 and #3:

In contrast with first hypothetical, Hypotheticals #2 and #3 ask the committee to interpret Mahler v. Szucs. This is neither the role nor function of this committee. Therefore, it is our recommendation that we refer the inquiring attorney to RPC 1.5(a) and RPC 1.5(c)(2), and impose upon the attorney the responsibility to determine “the actual cost of the settlement.”