Concept
Permitted Exceptions
Acquiring an interest in litigation
Permitted Exceptions
Rule 1.8(i) bars a lawyer from acquiring a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, “except that the lawyer may” do two things. The lawyer may acquire a lien authorized by law to secure the lawyer’s fee or expenses, and the lawyer may contract with a client for a reasonable contingent fee in a civil case.1 Those are the only exceptions the rule names, and client consent is not among them. A stake in the claim or in the disputed property is therefore forbidden unless it fits one of the two.
Both exceptions concern the lawyer’s pay, which is why the rule yields at these two points. A lawyer who works on a matter is entitled to be paid, and a bar on every financial tie to the outcome would have barred ordinary fee collection and contingent representation along with the ties it was meant to stop. A lien secures the fee or expenses, and a contingent fee makes the amount of the fee depend on the result. Either one leaves the lawyer with some interest in how the matter ends.
The rules concede that cost openly. They generally forbid a lawyer to obtain a financial interest in a client’s matter, both to discourage unnecessary litigation and to reduce the distracting influence of a personal stake on professional judgment.2 An older Code of Professional Responsibility, quoted in Wunschel Law Firm, P.C. v. Clabaugh, gave the same reason: a proprietary interest may impair the lawyer’s free judgment for the client. It then made two allowances. It called the assertion of legally permissible liens proper even where the lawyer thereby acquires an interest in the outcome, and it permitted a reasonable contingent fee in civil cases because that fee may be the only means by which a layperson can obtain the lawyer of choice.3 The exceptions thus accept a limited interest in the outcome and receive two benefits in return: security for the lawyer’s pay and access to counsel for clients who cannot pay by the hour.
The purpose marks the boundary. The exceptions protect the right to be paid, so they reach arrangements that pay the lawyer and stop short of arrangements that make the lawyer an owner. A lien secures a fee or expenses, and a contingent fee measures compensation; neither moves any part of the claim or the disputed property to the lawyer. A lawyer paid a reasonable one-third of a civil damages recovery has made a bargain the rule allows. A lawyer who takes an assignment of one-third of the claim itself has acquired the interest the rule forbids. At the end of a winning case the dollar amounts may look alike, but the first is a fee and the second is ownership. Each exception also has conditions of its own. The lien comes first, and its governing condition is that the law itself must authorize it.
Liens Authorized by Law
The first exception lets a lawyer “acquire a lien authorized by law to secure the lawyer’s fee or expenses.”4 A lien is a claim against property that secures payment, and what it secures here is the lawyer’s fee or expenses. The charging lien in the sum the client recovers is the familiar example.5 Because such a lien attaches to the recovery, it gives the lawyer a stake in the result, which is the kind of stake the basic prohibition otherwise condemns. The older Code accepted that consequence. It found nothing improper in a lawyer’s protecting the right to a fee by asserting legally permissible liens, even though the lawyer may thereby acquire an interest in the outcome of the litigation.6
Two phrases carry the exception. “To secure the lawyer’s fee or expenses” says what the lien is for: it makes sure the lawyer is paid, and it does not make the lawyer an owner of the claim. “Authorized by law” says where the lien must come from, and that source lies outside the engagement letter. The lawyer may assert the security the law provides but may not enlarge it by drafting. The older Code drew the same limit when it spoke of liens that are “legally permissible.”
The clean case is a lien the law itself creates.
The problem case is a clause that reaches past what the law provides.
Both liens secure an unpaid fee against the client’s recovery, and the debt is the same kind in each. They differ in source: the first comes from the law, and the second claims reach beyond it. An exam stem may dress the second kind of clause in protective language, such as a citation to a statute or the client’s initials beside the paragraph, so the analysis should look past the wording to the source.
The third step does the work, because the first two only gather facts. A lawyer who asserts only the lien the law provides stays inside the exception, and a lawyer who uses the agreement to reach past it steps outside.
Reasonable Contingent Fees
The second exception allows a lawyer to “contract with a client for a reasonable contingent fee in a civil case.”8 The sentence sets three limits: the fee must be contingent on the outcome, it must be reasonable, and the matter must be a civil case. A fee that meets all three still gives the lawyer a financial interest in how the case ends, so the exception exists only because the rules weighed that interest against something they valued more.
That something is access to a lawyer. A client with a sound claim and no money to pay by the hour cannot hire counsel on ordinary terms, while a lawyer paid only on success will take the case because the fee compensates the risk of working for nothing. Contingent fees, ordinarily a percentage of the recovery, are recognized as an appropriate and ethical means of compensation because they widen access for people who could not otherwise afford counsel and encourage lawyers to take cases with a substantial risk of loss.9 The older Code reaches the same judgment with a caution. Because the lawyer is better placed than the client to evaluate a cause of action, the lawyer should enter a contingent fee arrangement only where it will benefit the client.10
The first limit, that the fee be contingent, reaches beyond the personal injury case that usually comes to mind. Rule 1.5(c) provides that “[a] fee may be contingent on the outcome of the matter for which the service is rendered.” A defendant may therefore agree to a reverse contingency fee based on the money the client saves in resolving the dispute, and a fee in a transactional matter may depend on reaching a particular objective or price, if the amount can be ascertained without speculation.11
Under any of these arrangements the lawyer remains a creditor. The lawyer’s right is to be paid a sum computed by formula from the recovery, and the client keeps title to the whole claim. The line between that right and ownership has an old pedigree. Traditional doctrine reconciled contingent fees with champerty by saying that a bargain is not champertous if the fee is not a share of the money or other thing recovered but is merely measured by a percentage of its value. The same source observes that the distinction wears thin once one remembers the lawyer’s charging lien on the sum recovered.12 Rule 1.8(i) now handles the matter by naming the reasonable contingent fee as an exception, and the rule’s own wording keeps the ownership line in place, because an interest in the claim or the disputed property is the forbidden thing.
The common error is to treat “contingent” as a password. A fee can depend entirely on winning and still be a forbidden stake if what the lawyer receives is a share of the claim itself.
The second limit requires the fee to be reasonable. If the risk of loss was never substantial, or the ultimate recovery proves astronomically high, a contingent fee may be inappropriate or may call for a smaller percentage. The Restatement’s comment says the fee may be unreasonable if there was a high likelihood of substantial recovery by trial or settlement, so that the lawyer bore little risk of nonpayment, or if the client’s recovery was likely to be so large that the fee would clearly exceed the sum appropriate to pay for services performed and risks assumed.13 A contingent fee compensates the lawyer for the risk of receiving nothing, so it loses its justification when that risk is slight.
The test looks to the time of signing. An evaluator should avoid the hindsight that makes the litigation look simple and the chances of success look good, and should judge the fee on the facts known to lawyer and client when the agreement was signed. A contingent fee also stands on its own terms. It is not measured against what hourly billing would have produced, and its size against the work performed does not settle its reasonableness, because the degree of risk the lawyer assumed at the outset is ordinarily the crucial factor.14
The third limit confines the exception to civil cases, and other fee rules narrow it further. The disciplinary rule quoted in Wunschel forbids a lawyer to enter into an arrangement for, charge, or collect a contingent fee for representing a defendant in a criminal case or either party in an action involving domestic relations.15 One state’s fee rule likewise bars a contingent fee in a domestic relations matter when payment depends on securing a divorce or on the amount of alimony, support, or property settlement. The same provision allows a contingent contract for recovering post-judgment balances due under support, alimony, or other financial orders, because those contracts do not implicate the same policy concerns.16 A domestic relations matter is still a civil proceeding, so the bar comes from these separate fee rules and not from the civil-case limit in Rule 1.8(i). The post-judgment carve-out belongs to the rule that contains it, so apply the governing jurisdiction’s fee rule to it.
Dahl v. Dahl shows the limits working together. The Utah Supreme Court faced a lawyer’s fee arrangement in a domestic matter, and it did not decide whether the arrangement was a prohibited contingency fee agreement in a domestic matter. It invalidated the arrangement on an alternate ground: under a Utah statute and Rules 1.8 and 1.5, the lawyer had acquired a prohibited interest in the subject matter of his representation, and his claimed fees were unreasonable. The court then referred the lawyer to the Office of Professional Conduct.17 A fee arrangement can thus fail on the interest prohibition, on reasonableness, or on a bar specific to the kind of matter, and a court may rest its decision on the narrowest ground that is enough.