Michigan Supreme Court gets an earful on value-added fee proposals

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DETROIT, MI — Dozens of attorneys have written the Michigan Supreme Court, telling the justices why lawyers should — and should not — be allowed to charge value-added fees in divorce cases.

Most of the comments submitted to the high court support the fees, which have been a controversial subject during the past few years.

Also called “enhanced” or “results-oriented” fees, value-based fees reflect the overall value of legal services and not the number of hours a lawyer spends on a case. The final fee is agreed upon when the matter is closed. Many divorce attorneys say they use the arrangement because the fee is more reasonable and the client has more control.

Earlier this year, the Supreme Court published two amendments to Michigan Rule of Professional Conduct 1.5 dealing with value-added fees. One proposal would allow the fees, while the other would outright prohibit them. The high court accepted written comments on the amendments through July 1.

The Attorney Grievance Commission and the State Bar Standing Committee on Professional Ethics do not favor value-added fees and drafted the proposal that would prohibit them. They assert, among other things, that value-based billing violates ethics rules because it is really a contingency fee, which is not permitted in domestic-relations cases.

The Family Law Section, on the other hand, supports value-added fees and drafted the proposal allowing them. According to the section, results-oriented fees are not contingent and should be permitted as long as they are reasonable and agreed-upon by the client.

Now that the written comment period has ended, the amendments will be discussed at the high court’s Sept. 16 public administrative hearing, according to John Nevin, Supreme Court communications director.

Clients are not ‘fools’

In comments submitted to the Supreme Court, lawyers who support enhanced fees noted that six years ago the AGC suggested the fees be prohibited, but no action was taken.

“[N]othing has changed to warrant a new rule now, other than perhaps the need to adopt Alternative B [allowing value-added fees]… so that this nearly-annual wringing of hands and gnashing of teeth over this issue can finally come to an end,” wrote Bloomfield Hills attorney Susan E. Cohen, president of the Michigan Chapter of the American Academy of Matrimonial Lawyers.

Kalamazoo lawyer John W. Allen, former chair of both the SBM ethics committee and the Special Committee on Grievance, told the Supreme Court that “every discussion about fees should start with the express or implied contract between the lawyer and the client.

“It should not be assumed that the AGC knows more than the client about the client’s desires,” Allen said. “It also should not be assumed that all clients are fools. Those two assumptions are implicit in the AGC’s proposed prohibition. And they are both wrong.”

Many attorneys emphasized that other practice areas have used results-oriented fees with no resistance from the AGC, and that lawyers and clients should be able to freely negotiate.

“The ability of clients to contract regarding family law matters is routinely affirmed by appellate courts,” wrote Novi lawyer James J. Harrington III, a former chair of the Family Law Section. “Clients signing written ‘amount involved and the results obtained’ agreements have the full protection of the Michigan Rules of Professional Conduct insuring that any fee must be ‘reasonable.’”

Other practitioners pointed out that divorce clients are demanding alternatives to the typical billable hour.

“The call for a paternalistic ban on results-obtained fees (only in domestic-relations cases), fails to consider whirlwind changes in the marketplace for legal services,” Farmington Hills lawyer Mathew Kobliska wrote. “Much of it seems to be based on the notion that ‘we’ve never done it this way.’ The market demands that we explore ways to give prospective clients an array of options to meet their needs and expectations.”

Portage attorney Scott G. Bassett said, “In an hourly fee contract, the client has little say in how an attorney’s time is expended, nor how much time is expended. In a results-oriented fee agreement, the client is in complete control.”

Meanwhile, numerous other domestic-relations attorneys joined together and signed a single letter to the Supreme Court. Among other things, they asserted that value-based billing is not a contingency fee at all.

“Contingent fees guarantee a lawyer a fee based on a randomly selected percentage of the recovery, whereas results-obtained fees are essentially based on quantum meruit that focus on the content of the result and the extent to which the result met the client’s objectives,” they said.

A ‘measure of success’

The AGC, in opposing value-based billing, told the Supreme Court it is a contingent fee because it is “conditioned on some measure of the client’s success.”

Moreover, prohibiting value-added fees in divorce cases is consistent with “longstanding public policy disfavoring fee agreements between attorneys and their clients that are entered into during a representation,” the AGC said.

An enhanced fee is not an “arms-length” transaction because the lawyer and client are already in a fiduciary relationship, the AGC explained to the high court. “What consideration can there be for an enhanced fee in a divorce case?”

A client is always entitled to competent representation under MRPC 1.1, the AGC pointed out. “A lawyer’s discharge of existing obligations in conformity with the Rules of Professional Conduct can hardly be deemed adequate consideration in support of an enhanced fee.”

In his comments to the Supreme Court, Lake Orion lawyer Kenneth M. Mogill, who currently chairs the SBM ethics committee, said those who support value-based fees have an “inaccurate understanding” of the ethics rules.

If enhanced fees are permitted, Mogill said, “family lawyers would be able to reap the benefits of a contingency without assuming the risks that in no small part justify its use.”

Allowing value-added fees in divorce matters would in turn authorize them in criminal cases, “where such fees have historically been prohibited for reasons that remain very persuasive,” Mogill said.

West Bloomfield attorney Lawrence S. Katz said the concern is not just that clients do not know the actual fee in a value-added arrangement. He also asserted that the hours spent on the case will be higher as the lawyer “works the file” and tries to “maximize the result.”

“[T]here is no way spouses seeking lawyers in an emotional time in their lives would generally be positioned to independently negotiate and reach an agreement as to what is ‘reasonable’ on this subject,’” Katz wrote.

And according to Bingham Farms lawyer Sheldon G. Larky, “If attorneys believe they should receive more for their services, then those lawyers should charge a higher hourly fee rather than take ‘a piece of the action.’”

If you would like to comment on this story, email Traci R. Gentilozzi at [email protected].

The fee proposals

The Michigan Supreme Court recently sought feedback on two proposals to amend Michigan Rule of Professional Conduct 1.5 regarding value-added fees in domestic-relations cases (MiLW No. 06-88288, 3 pages).

Here is an overview of those amendments.

Alternative A: Fee prohibited

The Attorney Grievance Commission and the State Bar Standing Committee on Professional Ethics offered a proposal disallowing value-based billing. It 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 MRPC 1.5 comment section:

“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.”

Alternative B: Fee permitted

The Family Law Section presented a proposal permitting value-added fees. It 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.”