Newsletter – August 2020 

In a recent California Court of Appeal decision, the Court found a fee sharing agreement to be unenforceable because the agreement was formed by an attorney who did not have professional liability insurance and did not disclose that fact to his clients, in violation of the Rules of Professional Conduct. Hance v. Super Store Industries, No. F075852 (Ct. App. January 23, 2020). The Court stated, however, that the attorney still could seek a reasonable fee for the value of services rendered.

Facts of the Case

This case involves representation and fee division agreements related to a potential class action lawsuit. In January 2012, lawyer William Margolin referred client John Hance, who was a potential class representative, to lawyer Steven Waisbren. Waisbren then brought in two more lawyers (Miller and Fong) with more class action experience than he had to work on the case with him. Hance and a second class representative signed representation agreements providing that attorneys’ fees would be divided among Waisbren and the other two attorneys according to their own agreement. Hance’s agreement also granted Margolin a referral fee.

In mid-2012, Waisbren and the other two attorneys negotiated a fee division agreement that gave Waisbren a 30 percent referral fee and provided that Miller would pay Margolin’s 15 percent referral fee. Then in 2014, Miller then added a third class representative, but he did not tell the new client about Waisbren, inform Waisbren about the new client, or mention Waisbren and Margolin in the representation agreement.

The parties to the class action reached a settlement in 2016. Miller and Fong requested an award of attorneys’ fees and a division of the fees among the class’s lawyers. Since Miller and Waisbren had a dispute between themselves about the amount of fees owed to Waisbren, Waisbren filed his own motion for attorneys’ fees. In response, Miller opposed Waisbren’s motion and argued that the fee sharing agreement was unenforceable. The trial court awarded 30 percent of the fees to Waisbren and 15 percent to Margolin, convinced that Waisbren and Miller had agreed to this in their 2012 negotiations. Miller appealed.

Was the 2012 Fee Division Agreement Enforceable?     

The Court of Appeal reversed on the issue of the validity of Waisbren’s fee sharing agreement. During the appeal process, the parties argued extensively about whether there was compliance with State Bar Rules of Professional Conduct, former rule 2-200, such that the fee sharing agreement was unenforceable. Former rule 2-200 (current rule 1.5.1) concerns divisions of fees and disclosure of these financial arrangements to clients.  Fee sharing amongst lawyers is prohibited unless the lawyers enter into a written agreement to divide the fee, the client consents in writing to the fee sharing arrangement after full disclosure of the material terms, including the terms of the division and the total fee charged by all lawyers will not increase solely because of the fee sharing agreement.

In the Hance case, the lawyers did not agree whether a final fee division agreement was reached, whether the failure to tell the third class representative about the fee division was out of compliance with former rule 2-200, or whether Waisbren breached the fee sharing agreement. The Court of Appeal, however, determined that it did not need to consider these issues because Waisbren had violated a different Rule of Professional Conduct.

Former rule 3-410 (current rule 1.4.2) states in part that a California lawyer who does not have professional liability insurance (malpractice insurance) must inform his or her clients in writing of this fact at the time the clients engage the attorney, if it is foreseeable that the representation will last more than four hours. Although this rule does not describe the consequences of failure to inform clients, the Court of Appeal’s opinion goes over the consequences of other ethical violations in a series of similar cases. In these cases, courts determined that a violation of the Rules of Professional Conduct could render the contract at issue; i.e., the fee sharing agreement, unenforceable.

Here, it was undisputed that Waisbren did not inform the clients that he had no professional liability insurance. The Court of Appeal’s opinion states that to award Waisbren the fees described in the fee division agreement would be to effectively condone his rule violation. Further, condoning a rule violation would be contrary to public policy. As a result, the Court found that the fee sharing agreement was unenforceable to the extent it provides for Waisbren to receive a percentage of the settlement. Although the Court of Appeal said that Waisbren still could seek fees in quantum meruit, which would require him to prove the reasonable value of services provided, it left the issues of whether he should receive fees and how much to the trial court on remand.

The Takeaway

Fee sharing agreements amongst lawyers must comply with Rule 1.5.1 to be enforceable.  Too often, lawyers take short cuts in jumping into cases without disclosing all relevant aspects of the fee sharing agreement to clients. This Court of Appeal opinion emphasizes the consequences for violations of the State Bar Rules of Professional Conduct in failing to disclose the lack of professional liability insurance. Under Hance, a violation of the State Bar ethical rules made this fee sharing agreement unenforceable.