Court of Appeals for the 7th Circuit on the validity of a contingency fee agreement

Last month (on Nov. 5), the U.S. Circuit Court of Appeals for the 7th Circuit issued a short, but interesting opinion on whether a certain contingency fee agreement was reasonable.  The case is called Goesel v. Boley International Ltd., Westlaw cite: 2015 WL 6774211.

The facts of the case were as follows:  A five year-old boy was injured when playing with a toy and his parents retained a law firm to sue on Cole’s behalf.  The agreement between the parents and the firm provided that the firm's fees would be one-third of any gross settlement or judgment, and that the clients would be responsible for litigation expenses.  In the event of no recovery, the clients would not be responsible for either expenses or fees.   After four years of litigation, the case was settled for $687,500. Under the retainer agreement, the firm’s one-third of the gross settlement amount was $229,166.67 and the litigation expenses totaled $172,949.19.  This meant the clients would recover about $288,000 or 42% of the total amount of the settlement.  Because the injured party a minor at the time of the litigation, the federal court’s local rules required court approval before the settlement could be finalized. At a hearing on the settlement, the district judge launched sua sponte into his objections to a contingent-fee arrangement.  Holding that the amount of recovery clients received was inadequate, the judge modified the fee structure, deducting expenses prior to calculating the one-third fee.  The law firm appealed.

On appeal, the court held that the fee agreement was reasonable because it did not exceed the prevailing market rate, nor did it defeat the public policy of protecting the interests of minors in litigation. In fact, the court noted that the duty to protect minors is consistent with the policy of promoting access to the courts through reasonable contingent fee arrangements.  The court, therefore, reversed the district court’s decision and ordered the original fee arrangement be reinstated.

This was the correct decision.  First, it should be noted that the court focused its analysis on the reasonableness of the agreement and not on the fee (or more specifically on the amount recovered by the firm).  This is an important distinction.  What defines a contingency agreement is the fact that there is a level of uncertainty as to the result of the case, and because of that it is possible that the case could end up generating less value than expected.  Also, the fact that the client is responsible for the expenses of the case in addition to the fee earned is not only the prevailing practice, it is also reasonable.  Remember that during the litigation, the firm is advancing these costs.  If the firm was forced to recover both fees and expenses out of the amount obtained by using the percentange agreed upon to determine fees, there would come a time when the firm could be losing money on the case, which will result in firms not taking certain cases and, therefore, less access to justice for clients.  This approach was unsuccessfully attempted as a form of tort reform in Florida.

There is however, one aspect of the agreement that should also be examined.  The rules require that a firm proposing a contingency fee agreement explain its consequences and alternatives.  This is so precisely to make make that attorneys explain the possibility that the firm may end up recovering a higher amount than the client in the end, as happened in this case.  The client must give valid, informed consent, which means the client must freely agree to the fee arrangement with an understanding of this possibility.  Presumably this happened in this case, after all it was not the client who objected to the agreement but the trial judge on his own.