By Robert K. Sall, who practices with Sall Spencer Callas & Krueger ALC in Laguna Beach, and serves on LACBA's Professional Responsibility and Ethics Committee and is a Certified Specialist in Legal Malpractice by the Board of Legal Specialization of the State Bar of California. The opinions expressed are his own.

Articles are provided regularly by LACBA’s longstanding Professional Responsibility and Ethics Committee.

Since 2020, the State Bar of California’s Standing Committee on Professional Responsibility and Conduct (“COPRAC”) has been struggling with drafting an ethics opinion on the propriety of conversion clauses. The current draft of that opinion, Proposed Formal Opinion Interim No. 20-0005 (the “Draft Opinion”) entitled “Conversion Clauses in Contingent Fee Agreements” is available for review in the Public Comment section of the State Bar’s website. The Draft Opinion defines a conversion clause as “a term in any contingent fee agreement, in either a litigation or transactional matter, that provides that, upon termination of the relationship or refusal to settle on terms recommended by an attorney before the happening of the contingent event, the attorney’s fee may convert to an hourly rate or some other calculation other than the original contingent fee.”

The Draft Opinion was recently subjected to a second round of public comments, and no doubt will have drawn many. It has neither been approved by COPRAC or the State Bar.  The Draft Opinion concludes that conversion clauses in contingent fee agreements are always ethically prohibited because their use improperly interferes with important client rights, including the right to discharge the attorney or the right to decide when to settle a matter. This begs the question, is there ever a scenario in which it would be permissible to include a contractual conversion clause and thereby deviate from ethical rules or existing case law governing attorney compensation?

In contingency representation, a lawyer’s compensation may be affected by developments that arise during litigation. The Plaintiff client may lose a series of skirmishes in litigation and lose confidence in the case or the will to go forward. Personal issues in the client’s life may lead to the desire to abandon a case or settle it for less than it might otherwise be worth. Any number of things may lead a client to accept a less than optimal settlement or even to dismiss and walk away. Naturally, this is one of the risks undertaken in contingency litigation – the client is in control of the decision to settle. Rule 1.2 (a) of the California Rules of Professional Conduct (“RPC”) provides that “A lawyer shall abide by a client’s decision whether to settle a matter.”

Similarly, clients have the absolute right to terminate the lawyer’s representation at any time, and may discharge their current counsel and retain another to handle the representation. In such situations, the discharged lawyer becomes entitled only to quantum meruit, not to the contingency percentage compensation to which the lawyer originally agreed. Fracasse v. Brent, 6 Cal. 3d 784, 790-792 (1972). The lawyer also must await the outcome to receive this fee. Id.  The lawyer on a contingent fee basis receives nothing unless the client obtains a recovery. Likewise, compensation is delayed as the lawyer must often wait a long time for the contingency to occur. Cazares v. Saenz, 208 Cal. App. 3d 279, 288 (1989). These so-called “contingency risks” are among the many factors that permit a contingent fee lawyer to receive a greater compensation than he or she would have received had they been paid on an hourly basis.

Lawyers naturally want to protect their fees. They are sometimes motivated to include a conversion clause in the fee agreement because of the fear of spending countless hours diligently working on a case only to have the client terminate the relationship or decide to abandon it or settle on terms that are less than the lawyer believes the case is worth. The lawyer is ethically required to abide by the client’s decision even if it results in less compensation than would otherwise be received if the matter were prosecuted to its ultimate potential. Where the client chooses to abandon a claim, the lawyer receives no fee despite having performed hundreds of hours or more of legal services. Understandably, the lawyer wants to protect against suffering such a loss and to guarantee receipt of some level of reasonable compensation for the contingency risk that was undertaken.

Some lawyers include a conversion clause that is triggered by the client’s termination of the lawyer. In that situation, the lawyer may be seeking a contractual arrangement that would in effect evade the Fracasse rule and provide for compensation other than quantum meruit. Termination of the relationship by the client often results in a dispute with the successor counsel over how the reasonable fee to the discharged lawyer will be determined. To avoid that, the lawyer might include a dubious provision that says something as simple as “if you terminate my services, then at such time as the case is ultimately resolved, I will be entitled to a reasonable fee that will only be calculated upon my standard hourly rates multiplied by the number of hours I have worked on the case.” This is provided as an example only. There are many permutations of conversion clauses that attempt to minimize the lawyer’s risk. This discussion should not be viewed as an endorsement of such provisions.

The useful starting point of the quantum meruit determination may be the number of hours performed multiplied by a reasonable hourly rate, but that is not the end of the analysis.  Mardirossian v. Ersoff, 153 Cal. App. 4th 257, 272-273 (2007) provides that numerous other factors will be taken into consideration, including "[t]he nature of the litigation, its difficulty, the amount involved, the skill required in its handling, the skill employed, the attention given, the success or failure of the attorney's efforts, the attorney's skill and learning, including his [or her] age and experience in the particular type of work demanded." Id., at 272.

The glaring question is whether it is ethically proper at the outset of representation to negotiate a contract that deviates from the recognized methods of determining quantum meruit for the discharged lawyer, dissuades the client from discharging an attorney or converts the economics to something other than a reasonable fee? Some lawyers say that freedom of contract should control. Others say that entering a contract that deviates from these authorities would be unconscionable.

Rule 1.16 (a) of the RPC mandates that a lawyer shall withdraw from representation if the client discharges the lawyer. A conversion clause may run afoul of a lawyer’s ethical obligations if it impairs the client’s absolute right under Fracasse and rule 1.16 to discharge the current counsel and engage another. A provision so onerous that it discourages the client from exercising the right to change counsel is likely to be unenforceable. Likewise, a provision that imposes such large economic burden on the client that it would likely dissuade a second lawyer from taking over the representation is predictably improper for the same reason – it interferes with the client’s right to change counsel.

Similarly, a clause impinging upon the client’s absolute right to control the decision to settle a case is likely to be held invalid, as well as constituting overreaching by the attorney. Rule 1.2 (“A lawyer shall abide by a client’s decision whether to settle a matter.”), Hall v. Orloff, 49 Cal. App. 745, 749-750 (1920); Matter of Guzman (Review Dept., 2014) 5 Cal. State Bar Ct. Rptr. 308, 314-315.

Suffice it to say, these clauses are highly controversial and have great potential to be held unenforceable as well as providing grounds for disciplinary action. We don’t know whether Draft Opinion will ever be adopted, but as always, let’s be careful out there.