Fletcher v. Davis - Rule 3-300 of the Rules of Professional Conduct of the State Bar of California
The California Supreme Court has held "an attorney who secures payment of hourly fees by acquiring a charging lien against a client's future judgment or recovery has acquired an interest that is adverse to the client, and so must comply with the requirements of rule 3-300 of the Rules of Professional Conduct." (Fletcher v. Davis (2004) 33 Cal.4th 61.)
Rule 3-300 of the Rules of Professional Conduct requires attorneys who acquire interests adverse to their clients to do so on "fair and reasonable" terms and, in writing, disclose those terms and advise the clients they may seek independent counsel.
Rule 3-300 provides:
"A member shall not enter into a business transaction with a client; or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client, unless each of the following requirements has been satisfied:
(A) The transaction or acquisition and its terms are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which should reasonably have been understood by the client; and (B) The client is advised in writing that the client may seek the advice of an independent lawyer of the client's choice and is given a reasonable opportunity to seek that advice; and (C) The client thereafter consents in writing to the terms of the transaction or the terms of the acquisition."
But the Fletcher court expressly declined to "decide whether rule 3-300 applies to a contingency-fee arrangement coupled with a lien on the client's prospective recovery in the same proceeding." (Fletcher, supra, 33 Cal.4th at p. 70, fn. 3.)
It noted a formal professional responsibility opinion from the Los Angeles County Bar Association that "suggested that rule 3-300 did not apply to a contingency fee coupled with a lien against the client's prospective recovery 'in the same matter in which legal services are being provided.' " (Fletcher, at p. 70, fn. 3.)
The California State Bar has since concluded that "the inclusion of a charging lien in the initial contingency fee agreement does not create an 'adverse interest' to the client within the meaning of rule 3-300 ... ." (State Bar Standing Com. on Prof. Responsibility & Conduct, Formal Opn. No. 2006-170, p. 7 (Formal Opinion No. 2006-170).)
It noted, "A charging lien is an equitable corollary to, and thus inherent in, a contingency fee contract because, unlike the situation in hourly fee agreements:
(a) the attorney and client have agreed that the attorney's fee will be limited to a percentage of, and derived only from, a successful recovery created by the attorney's work;
(b) the attorney and client share the risk of a recovery;
(c) any fee the attorney earns or receives is delayed until the client obtains a recovery, usually at the very end of the representation;
(d) the recovery often represents the only source of funds from which the attorney can ever be paid. For these reasons, charging liens are not only inherent in contingency fee contracts, they are almost universally found and almost universally uncontroversial in such contracts." (Id. at p. 5.)
Requiring attorneys to advise their clients to seek independent counsel would be futile because "the independent lawyer would likely confirm that charging liens are universally included in contingent fee contracts, that their inclusion in such contracts has consistently been upheld by the courts, and that the client would be hard pressed to find a competent lawyer to take a case on a contingency fee basis without a charging lien." (Formal Opn. No. 2006-170, at p. 6.)