Opinion #17. Negotiation of Attorney's Fees in Class Actions

Issued by the Professional Ethics Commission

Date Issued: January 15, 1981

The principal question before the Committee is whether, in a class action in which plaintiffs’ counsel is statutorily entitled to be compensated by defendant, it is unethical for plaintiffs’ counsel to negotiate the amount of those fees with defendant prior to settlement of the underlying action. Ancillary inquiries involve the propriety of disclosure to defendants of the number of hours and hourly rate expended by plaintiffs’ counsel prior to settlement on the merits and the right of plaintiffs’ counsel to prevent his client from agreeing to settle without protecting plaintiffs’ counsel with respect to recovery of fees from defendant.

The questions posed raise the specter of a classic conflict of interest between an attorney and his client: the competing interest of the client and the attorney in the division of a settlement fund which a defendant is prepared to pay to resolve litigation. Surprisingly, no ethics opinion has been found which deals with such matter.[1] A number of recent cases, however, have discussed the question in the context of approval or disapproval of proposed settlements in class actions, and we feel that, whether viewed as statements of substantive law or ethical principles, these cases are persuasive and dictate the result of our deliberations.

Unlike other attorney self‑interest situations, the inquiry poses a circumstance which cannot be resolved by the attorney resigning from the case. Plaintiffs in class actions must, of necessity, be represented by counsel, and any attorney representing plaintiffs under these circumstances falls victim of the same statutorily created conflict. The conflict presented is very real; the attorney involved is always left open to the accusation that consideration of the amount of his fee may have influenced his recommendation as to the settlement of the underlying case.

“The present arrangement leaves the unfortunate impression that defendants are buying themselves out of the lawsuit by direct compensation to plaintiffs’ counsel.” Jamison v. Butcher and Sherred, 68 F.R.D. 479, 484 (1975)

Several recent cases have condemned a practice of negotiating plaintiffs’ counsel fees prior to settlement of the underlying case. Leading among these is Prandini v. National Tea Co., 557 F.2d 1015 (3rd Cir. 1977). The Prandini court establishes a far preferable procedure of deferring any consideration of counsel fees until after the approval of the class action settlement. See also, Norman v. McKee, 90 F.Supp. 29, 36 (N.D.Cal. 1968), aff’d, 431 F.2d 769 (9th Cir. 1970); Munoz v. Arizona State University, 80 F.R.D. 670 (1978); Jamison v. Butcher & Sherred, supra at 484 (“. . . (I)t is inappropriate for a proposed settlement to provide for direct payment of attorney’s fees to counsel for the class representatives . . . . Rather, the issue of attorney’s fees is more properly reserved for judicial consideration after settlement of the gross amount to be paid to the class.”) See also, 1 Moore on Federal Practice (Manual for Complex Litigation), Rule 1.46; 3B Moore’s Federal Practice, paragraph 23.07(1). C.f. City of Philadelphia v. Charles Pfizer & Co., 345 F.Supp. 454, 470‑71 (S.D.N.Y. 1972), where the court upheld a class action settlement providing for a plaintiff’s attorney to be paid “reasonable counsel fees” to be later determined by the court.

In view of these authorities, we must conclude that the “inherent conflict of interest” (Manual for Complex Litigation, Rule 1.46 supra) presented by this inquiry requires a plaintiff’s attorney to abstain from any fee discussions with a defendant until after the underlying case has been at least tentatively resolved. Once the plaintiff’s claims have been settled as between the parties and plaintiff’s counsel has committed himself to the settlement value of the underlying claim, it becomes appropriate to discuss fee considerations. Plaintiff’s counsel might disclose to defendant information concerning hours expended, billing rates, and other matters commonly considered in establishing a reasonable fee. Of course, the fee itself must be either fixed or approved by the court, and whether this were done in the context of a gross settlement figure recommended by the parties with a fee to be determined by the court, or in the context of an approval of a fee proposal made by the parties, seems to us to make little difference. The important factor is that the amount of the underlying claim be resolved prior to consideration of the fee for counsel. It should also be noted that it would be equally unethical for a defendant to seek resolution of plaintiff’s counsel fees prior to agreement on the underlying claim.

In no event may plaintiffs’ counsel prevent his clients from settling a case, even though such a settlement may ignore the plaintiffs’ right to recover statutory counsel fees from the defendant. We would perceive no ethical impropriety, however, in the attorney informing his clients that they might be directly liable to him for counsel fees‑such as under quantum meruit‑if they were to waive their right to receive counsel fees from the defendant.


Footnote

[1] Perhaps it is not so surprising, since none of the provisions of the Code of Responsibility address themselves directly to the issue. Rules 3.4(f) and 3.7(c) and (i), dealing with the interest of a lawyer in or antagonistic to his client’s interest, are not strictly applicable because counsel in a class action never really has an “interest” in the client’s cause of action. Rule 3.6(g), relating to settlement of similar claims on behalf of different clients, does not really address itself to a class action. Of course, the principal duty of the lawyer, as set forth in Rule 3.6(a) is that he “employ reasonable care and skill and apply his best judgment in the performance of his services”; the concern raised by the issue posed is that the resolution of the attorney’s fee may distract the attorney from using his best judgment in settling the class action.


Enduring Ethics Opinion