‘Value-added’ fees: Attorneys respond

DETROIT — As the Michigan Supreme Court contemplates two ethics rule proposals that address “value added” fees in domestic-relations cases — one that will permit them and one that will not — attorneys have been quick to say what they think of the suggested changes.

A value-added fee reflects the overall value of legal services and not the number of hours spent on a case. The final fee is usually agreed upon by the lawyer and the client at the end of the matter.

Family-law attorneys often use value-added fees, also known as value-based, results-oriented or bonus billing, saying it is more reasonable and the client has more control. The Attorney Grievance Commission, however, opposes value-added fees in domestic-relations matters. The AGC says it is really a contingency fee, which is not permitted in divorce cases.

Grievance Administrator Alan M. Gershel told MiLW that value-added fees do not belong in the family-law arena. “If the lawyer has done what he agreed to do,” he said, “why is there a need for this enhanced fee?”

Value-added fees are not good public policy, said Lake Orion lawyer Kenneth M. Mogill, who chairs the State Bar Standing Committee on Professional Ethics. “Personally, I think the balancing of interests of the family law bar and the public, and taking into account other ethics considerations, cannot be squared with a proposal to allow value-added fees,” said Mogill, of Mogill Posner & Cohen.

But according to Franklin private practitioner Harriett B. Rotter, the AGC has not been flooded with “masses of grievances” about value-added fees in divorce cases. “I would be willing to bet that that the majority of fee disputes in divorce cases emanate from lawyers spending excessive amounts of time on matters in comparison to the results achieved,” she said. “If so, then what is the problem with continuing to look at the results achieved in relation to the reasonableness of the fee?”

There is no harm as long as the value-added fee is not illegal or clearly excessive, Rotter said. “The AGC has not articulated any reason to intrude on the right to contract. Most clients are not in need of government protection.”

Most lawyers are indeed used to telling a client the value of services at the beginning of a case, acknowledged Birmingham attorney Mark A. Bank. “Doesn’t it make more sense for the lawyer and client, with the benefit of reflecting upon what the lawyer accomplished for the client, to assess the actual value of the services performed at the conclusion of the case?” asked Bank, who is with The Law Firm of John F. Schaefer.

 The two proposals

The AGC, the SBM Standing Committee on Professional Ethics and the SBM Family Law Section all submitted proposals to amend Michigan Rule of Professional Conduct 1.5 to address value-added fees in domestic-relations matters.

The Supreme Court, on March 25, published the finalized proposals for comment (MiLW No. 06-88289, 3 pages).

The suggestion from the AGC and the SBM ethics committee would prohibit value-added fees in domestic-relations cases. The Family Law Section’s proposal would allow the fees, with the understanding that the fees must be reasonable and agreed upon by the client.

The proposal that would disallow value-added fees says:

“(d) A lawyer shall not enter into an arrangement for, charge, or collect:

“(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, the lawyer’s success, results obtained, value added, or any factor to be applied that leaves the client unable to discern the basis or rate of the fee or the method by which the fee is to be determined, or

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

The following instruction would also be added in the comment section at the end of MRPC 1.5:

“Prohibited Contingent Fees

“Paragraph (d) prohibits a lawyer from charging a fee in a domestic relations matter when payment is contingent upon the securing of a divorce, or upon the amount of alimony or support or property settlement to be obtained. The amount of alimony, support or property awarded to a client shall not be used by a lawyer as a basis for enhancing the fee. This provision does not preclude a contract for a contingent fee for legal representation in connection with the recovery of postjudgment balances due under support, alimony or other financial orders because such contracts do not implicate the same policy concerns.”

Meanwhile, the proposal that would amend MRPC 1.5 to allow value-added fees says:

“(d) A lawyer shall not enter into an arrangement for, charge, or collect a contingent fee in a domestic relations matter or in a criminal matter. An attorney and client may consent in writing to an ‘enhanced fee’ in a case, which may take into consideration the results obtained for a client, provided that such a fee is ‘reasonable’ considering all the factors set forth in MRPC 1.5(a) and is agreed to by attorney and client.”

 ‘Vulnerability’ issues

Gershel said the AGC is concerned because, at the end of the case, the client is being asked to pay additional money. “We are now converting a fiduciary relationship into a contractual relationship, and I think that’s problematic.”

Also, clients in domestic-relations cases are often dealing with difficult events in their lives and may be vulnerable, Gershel noted. “And I think the terms in the proposal from the Family Law Section raises more questions than answers,” he said. “It’s vague and unclear, and it’s problematic because it puts a lot of pressure on a client to pay this additional fee.”

Mogill agreed that domestic-relations clients can be vulnerable. “In a lot of these cases, the nature and complexity of the issues certainly warrants a healthy fee, and it should be clear and well-articulated up front,” he said. “If it’s at the back end, the client may be even more vulnerable.”

The real question, according to Mogill, is not whether value-based billing involves a contingency fee, but how the current MRPC 1.5 is unfair to family-law practitioners and how the proposal to allow value-added fees will benefit the public.

“Tied in with this is, when you talk about a value-added fee, what are you getting as a client that you haven’t already paid for in the hourly rate?” he asked. “Is there something inconsistent about lawyers coming to their clients at the end and saying, ‘We got you a fantastic result and I’m entitled to an enhanced fee’?”

The value-added fee concept also goes against other ethics rules, Mogill noted. “It’s incompatible with the obligation to inform the client, early on, of the basis of the fee,” he said. “It is also incompatible with the fairly well-settled principle that if a lawyer changes the fee arrangement after entering into it, there must be a significant change in circumstances to justify it.”

Value-added proponents

The traditional ban on contingent fees in divorce cases was based on the premise that financial issues could not be separated from whether a marriage would be dissolved, the grounds for dissolution and who would be deemed the innocent party, said Birmingham private practitioner John F. Schaefer.

“In contrast, results-oriented fees are not directly related by percentage or formula to the amount recovered,” he said. “Rather, they focus on the content of the result and the extent to which the result met the client’s objectives.”

Southfield lawyer Donald D. Campbell, of Collins Einhorn Farrell PC, noted that current MRPC 1.5 has been in place for many years. He said there is no reason to “target” family-law attorneys by changing it.

“If anything,” Campbell said, “I’d rather the court reinforce the current rule with an amendment to the comment as follows: ‘The prohibition of a contingent fee in domestic relations matters does not prohibit what is commonly referred to as an ‘enhanced’ or ‘value-added’ fee where such fee is agreed to by the client and is not clearly excessive based upon the application of the factors set forth at paragraphs (a)(1)-(7) of this rule.’”

Value-added fees are already allowed in other practice areas, said Bloomfield Hills private practitioner Edward D. Gold. “Since the current rules require that a fee be reasonable, there is no reason to adopt a new rule limiting the right of an attorney and client to discuss and agree upon the fee to be paid by the client based in part upon the result achieved by the attorney.”

According to Gerald P. Cavellier, of Hertz Schram in Bloomfield Hills, the AGC “has no business interfering with the contractual relations of parties and their lawyers, other than to insure that the fee is not unreasonable.”

A lawyer who has developed an expertise in a particular area of the law is entitled to sufficient compensation, not only for that expertise, but for the results he delivers, Cavellier explained. “This is true, and should continue to be true, for family lawyers in the same way that it is for commercial lawyers, patent lawyers, bankruptcy lawyers, etc.,” he said. “As written, MRPC 1.5(a) respects this dynamic of the attorney-client relationship.”

Birmingham private practitioner B. Andrew Rifkin pointed out that in 2009 the AGC suggested a similar revision to MRPC 1.5. The SBM Family Law Section, the Michigan Chapter of the American Academy of Matrimonial Lawyers and numerous family-law attorneys and professors opposed the change, he said.

“In response, the Supreme Court did not act on the AGC’s agenda then,” he said. “And nothing has changed in the intervening six years that would require a change now.”

This article is by Traci R. Gentilozzi of Michigan Lawyers Weekly, a sister publication of Maryland Family Law Update.

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