Formal Opinion 191
(1994)
A Contingent Fee May Not be Based Upon the Larger of the Recovery Obtained at Trial/Arbitration or the Amount Offered in Settlement

Issue

May a lawyer properly include a provision in a contingent fee contract which states that if the client rejects a settlement offer that the lawyer deems "reasonable in light of all the circumstances," then the contingent fee will be based upon the larger of the recovery obtained at trial/arbitration or the amount offered in settlement?

Answer

No. The provision infringes on Rule 1.2(a) of the Rules of Professional Conduct that requires a lawyer to abide by a client's decision whether to accept or reject a settlement offer.

Discussion

Contingent fee contracts are specifically approved by the Rules of Professional Conduct. See, RPC 1 .5(c), 1.8(e)(2), 1.8(i)(2).  However, the RPCs also impose certain restrictions upon such agreements. For example, a lawyer may not charge a contingent fee for representation relating to either marital dissolution or criminal defense. See, RPC 1.5(d).  A contingent fee agreement must always be in writing, See, RPC 1.5(c), and, as with all fee arrangements, the contingent fee must be reasonable. See, RPC 1.5(a), 1.8(e)(20, 1.8(i)(2).

In addition to those Rules which apply to contingent fee agreements by their express terms, any such agreement also must not contravene any other requirement of the RPCs. One such requirement is contained in RPC 1.2(a).  That rule provides in relevant part (emphasis added):

A lawyer shall abide by a client's decision whether to settle a matter.

The proscription is phrased in mandatory terms. Although not defined by the RPCs, "abide" is generally understood to mean "to await submissively; accept without question or objection ... to submit to."  See, Webster's Third International Dictionary (1986). Thus, RPC 1.2(a) requires a lawyer to "accept without question" a client's decision to accept or reject a settlement offer. Moreover, as a legal matter, courts also affirm a client's unfettered right to accept or reject a settlement offer. See, Bernard v. Moretti, 518 N.E.2d 599, 601 (Ohio App. 1987) (a client does not breach a contingent fee agreement by refusing to accept a settlement offer even if the refusal was foolish; it is solely within the client's discretion to accept or reject a settlement offer); Goldman v. Home Mutual Ins. Co., 126 N.W.2d 1, 5 (Wis. 1964) ("Claim belongs to the client and not the attorney; the client has the right to compromise or even abandon his claim if he sees fit to do so"); Giles v. Russell, 567 P.2d 845, 850 (Kan. 1977) (". . .neither a valid contingent fee contract nor an attorney's lien can interfere with a client's right to settle"); but see, Hagans, Brown & Gibbs v. First National Bank of Anchorage, 783 P.2d 1164, 1167 (Alaska 1989) ("Should the client fail to exercise control over the litigation in a manner consistent with the reasonable expectations of the parties, the client may become liable to his attorney").

The proposed provision is antithetical to a lawyer's duty to "abide by" a client's decision regarding settlement.  Rather than accept a client's settlement decision without question, the provision—and thus the lawyer by extension—restricts the client's freedom to reject a settlement offer.  In very real terms, the provision functions to economically coerce the client into accepting an offer that the client might otherwise perceive to be inadequate.  The theoretical possibility of a non-coercive use does not justify permitting this provision. Regardless of any coercive effect the provision may have, the client who does exercise his or her rightful prerogative to reject a settlement offer is directly penalized.  The provision shifts all downside risk of the litigation—otherwise shared by the lawyer and client alike—to the client alone.  Nonetheless, the lawyer remains entitled to share in all upside risk.  "It is not necessary that the contract actually caused the feared evil in a given case; its tendency to have that result in [sic] sufficient."  Wunschel Law Firm, P.C. v. Clabaugh, 291 N.W.2d 331, 335 (Iowa 1980).  For the foregoing reasons, it is the opinion of the Rules of Professional Conduct Committee that a contingent fee contract may not include a provision that bases the contingent fee upon the larger of the recovery obtained at trial/arbitration or the amount offered in settlement in the event that the client rejects a settlement offer that the lawyer deemed reasonable.  Such a provision is unduly coercive to a client's choice with respect to settlement or trial of the client's matter.

[Amended 2009]