Argued December 1,=20 2005
We = deny=20 Walton=92s motion for rehearing and grant Hoover Slovacek=92s motion for = rehearing.=20 We withdraw our opinion of June 30, 2006 and substitute the following in = its=20 place.
In = this case,=20 we must determine whether an attorney hired on a contingent-fee basis = may=20 include in the fee agreement a provision stating that, in the event the = attorney=20 is discharged before completing the representation, the client must = immediately=20 pay a fee equal to the present value of the attorney=92s interest in the = client=92s=20 claim. We conclude that this termination fee provision is contrary to = public=20 policy and unenforceable. We affirm the court of appeals=92 judgment in = part,=20 reverse in part, and remand to the court of appeals for further = proceedings.
I
Background
In = June 1995,=20 John B. Walton, Jr. hired attorney Steve Parrott of Hoover Slovacek LLP = (Hoover)=20 to recover unpaid royalties from several oil and gas companies operating = on his=20 32,500 acre ranch in Winkler County. The engagement letter granted = Hoover a 30%=20 contingent fee for all claims on which collection was achieved through = one=20 trial. Most significantly, the letter included the following = provision:
You may=20 terminate the Firm=92s legal representation at any time . . . . Upon = termination=20 by You, You agree to immediately pay the Firm the then present value of = the=20 Contingent Fee described [herein], plus all Costs then owed to the Firm, = plus=20 subsequent legal fees [incurred to transfer the representation to = another firm=20 and withdraw from litigation].
Shortly after=20
signing the contract, Walton and Parrott agreed to hire Kevin Jackson as =
local=20
counsel and reduced Hoover=92s contingent fee to 28.66%. Parrott =
negotiated=20
settlements exceeding $200,000 with Texaco and El Paso Natural Gas, and =
Walton=20
paid Hoover its contingent fee. Parrott then turned to Walton=92s claims =
against=20
Bass Enterprises Production Company (Bass), and hired accountant Everett =
Holseth=20
to perform an audit and compile evidence establishing the claims=92 =
value.
In = January=20 1997, Parrott made an initial settlement demand of $58.5 million. = Bass=92s=20 attorney testified that Parrott was unable to support this number with = any legal=20 theories, expert reports, or calculations, and that the demand was so = =93enormous=94=20 he basically =93quit listening.=94 The following month, however, Bass = offered $6=20 million not only to settle Walton=92s claims, but also to purchase the = surface=20 estates of eight sections of the Winkler County ranch, acquire numerous=20 easements, and secure Walton=92s royalty interests under the leases. = Walton=20 refused to sell, but authorized Parrott to accept $6 million to settle = only=20 Walton=92s claims for unpaid royalties. Walton also wrote Parrott and = expressed=20 discontent that Parrott did not consult him before making the $58.5 = million=20 demand. According to Walton, Parrott responded by pressuring him to sell = part of=20 the ranch and his royalties for $6 million. In March 1997, Walton = discharged=20 Parrott, complaining that Parrott was doing little to prosecute his = claims=20 against Bass and had damaged his credibility by making an unauthorized = and=20 =93absurd=94 $58.5 million demand.
Walton then=20 retained Andrews & Kurth LLP, which, in November 1998, settled = Walton=92s=20 claims against Bass for $900,000. By that time, Hoover had sent Walton a = bill=20 for $1.7 million (28.66% of $6 million), contending that Bass=92s $6 = million=20 offer, and Walton=92s subsequent authorization to settle for that = amount,=20 established the present value of Walton=92s claims at the time of = discharge.=20 Walton paid Andrews & Kurth approximately $283,000 in hourly fees = and costs,=20 but refused to pay Hoover.
When Hoover=20 sought to intervene in the settlement proceedings between Walton and = Bass, the=20 trial court severed Hoover=92s claim, and the parties tried the case = before a=20 jury. Richard Bianchi, a former state district judge in Harris County, = testified=20 as Hoover=92s expert witness. Bianchi opined that a 28.66% contingent = fee was, =93if=20 anything, lower than normal, but certainly reasonable under these=20 circumstances,=94 and that =93it would only be unconscionable to ignore = the=20 agreement of the parties.=94 He also testified that charging more than = Walton=20 ultimately recovered from Bass =93doesn=92t change the deal they made. = That=92s just a=20 bad business deal.=94 In contrast, Walton=92s local counsel, Kevin = Jackson,=20 testified that he had never heard of attorneys charging a percentage = based on=20 the present value of a claim at the time of discharge rather than the = client=92s=20 actual recovery, and that the $1.7 million fee was unconscionable.
The =
jury=20
failed to find that Walton discharged Hoover for good cause or that =
Hoover=92s fee=20
was unconscionable. The trial court entered judgment on the verdict, =
which=20
awarded Hoover $900,000.
II
Discussion
When=20 interpreting and enforcing attorney-client fee agreements, it is =93not = enough to=20 simply say that a contract is a contract. There are ethical = considerations=20 overlaying the contractual relationship.=94 Lopez v. Mu=F1oz, Hockema = & Reed,=20 L.L.P., 22 S.W.3d 857, 868 (Tex. 2000) (Gonzales, J., concurring and = dissenting).
In Texas,=20 we hold attorneys to the highest standards of ethical conduct in their = dealings=20 with their clients. The duty is highest when the attorney contracts with = his or=20 her client or otherwise takes a position adverse to his or her = client=92s=20 interests. As Justice Cardozo observed, =93[a fiduciary] is held to = something=20 stricter than the morals of the marketplace. Not honesty alone, but the=20 punctilio of an honor the most sensitive, is then the standard of = behavior.=94=20 Accordingly, a lawyer must conduct his or her business with inveterate = honesty=20 and loyalty, always keeping the client=92s best interest in mind.
Id.=20 at 866-67 (alteration in original) (citations omitted). The attorney=92s = special=20 responsibility to maintain the highest standards of conduct and fair = dealing=20 establishes a professional benchmark that informs much of our analysis = in this=20 case.
Although=20
contingent fee contracts are increasingly used by businesses and other=20
sophisticated parties, their primary purpose is to allow plaintiffs who =
cannot=20
afford an attorney to obtain legal services by compensating the attorney =
from=20
the proceeds of any recovery. Arthur Andersen & Co. v. Perry =
Equip.=20
Corp., 945 S.W.2d 812, 818 (Tex. 1997). The contingent fee offers =
=93the=20
potential of a greater fee than might be earned under an hourly billing =
method=94=20
in order to compensate the attorney for the risk that he or she will =
receive =93no=20
fee whatsoever if the case is lost.=94 Id. In exchange, the =
client is=20
largely protected from incurring a net financial loss in connection with =
the=20
representation.
In =
Texas, if=20
an attorney hired on a contingent-fee basis is discharged without cause =
before=20
the representation is completed, the attorney may seek compensation in =
quantum=20
meruit or in a suit to enforce the contract by collecting the fee from =
any=20
damages the client subsequently recovers. Mandell & Wright v. =
Thomas,=20
441 S.W.2d 841, 847 (Tex. 1969) (citing Myers v. Crockett, 14 =
Tex. 257=20
(1855)). Both remedies are subject to the prohibition against charging =
or=20
collecting an unconscionable fee. Tex.=20
Disciplinary R. Prof=92l Conduct 1.04(a), reprinted in =
Hoover=92s=20 termination fee provision purported to contract around the = Mandell=20 remedies in three ways. First, it made no distinction between discharges = occurring with or without cause. Second, it assessed the attorney=92s = fee as a=20 percentage of the present value of the client=92s claim at the time of = discharge,=20 discarding the quantum meruit and contingent fee measurements. Finally, = it=20 required Walton to pay Hoover the percentage fee immediately at the time = of=20 discharge.
In = allowing=20 the discharged lawyer to collect the contingent fee from any damages the = client=20 recovers, Mandell complies with the principle that a = contingent-fee=20 lawyer =93is entitled to receive the specified fee only when and to the = extent the=20 client receives payment.=94 Restatement=20 (Third) of the Law Governing Lawyers =A7 35(2) (2000). Hoover=92s = termination=20 fee, however, sought immediate payment of the firm=92s contingent = interest without=20 regard for when and whether Walton eventually prevailed. Public policy = strongly=20 favors a client=92s freedom to employ a lawyer of his choosing and, = except in some=20 instances where counsel is appointed, to discharge the lawyer during the = representation for any reason or no reason at all. See Martin v. = Camp,=20 114 N.E. 46, 48 (N.Y. 1916) (describing this policy as a =93firmly = established=20 rule which springs from the personal and confidential nature=94 of the=20 attorney-client relationship); see also Whiteside v. Griffis & = Griffis,=20 P.C., 902 S.W.2d 739, 746 (Tex. App.=97Austin 1995, writ denied) = (noting that=20 the policy supporting a client=92s freedom to select his attorney = precludes the=20 application of commercial standards to agreements that restrict the = practice of=20 law); Tex. Disciplinary R. = Prof=92l=20 Conduct 1.15 cmt. 4 (=93A client has the power to discharge a = lawyer at any=20 time, with or without cause . . . .=94). Nonetheless, we recognize the = valid=20 competing interests of an attorney who, like any other professional, = expects=20 timely compensation for work performed and results obtained. Thus, = attorneys are=20 entitled to protection from clients who would abuse the contingent fee=20 arrangement and avoid duties owed under contract. Striving to respect = both=20 interests, Mandell provides remedies to the contingent-fee lawyer = who is=20 fired without cause. Hoover=92s termination fee provision, however, in = requiring=20 immediate payment of the firm=92s contingent interest, exceeded = Mandell and=20 forced the client to liquidate 28.66% of his claim as a penalty for = discharging=20 the lawyer. Because this feature imposes an undue burden on the = client=92s ability=20 to change counsel, Hoover=92s termination fee provision violates public = policy and=20 is unconscionable as a matter of law.
Notwithstanding=20
its immediate-payment requirement, several additional considerations =
lead us to=20
conclude that Hoover=92s termination fee provision is unenforceable. In =
Levine=20
v. Bayne, Snell & Krause, Ltd., we refused to construe a =
contingent fee=20
contract as entitling the attorney to compensation exceeding the =
client=92s actual=20
recovery. 40 S.W.3d 92, 95 (Tex. 2001). In that case, the clients =
purchased a=20
home containing foundation defects, and stopped making mortgage payments =
when=20
the defects were discovered. Id. at 93. They agreed to pay their =
lawyer=20
one-third of =93any amount received by settlement or recovery.=94 =
Id. A jury=20
awarded the clients $243,644 in damages, but offset the award against =
the=20
balance due on their mortgage, resulting in a net recovery of $81,793.=20
Id. The lawyer sued to collect $155,866, a fee equaling one-third =
of the=20
gross recovery plus pre- and post-judgment interest and expenses. =
Id. In=20
refusing to interpret =93any amount received=94 as permitting collection =
of a=20
contingent fee exceeding the client=92s net recovery, we emphasized that =
the=20
lawyer is entitled to receive the contingent fee =93=91only when and =
to the=20
extent the client receives payment.=92=94 Id. at 94 (quoting =
The = Disciplinary Rules provide that a contingent fee is permitted only = where, quite=20 sensibly, the fee is =93contingent on the outcome of the matter for = which the=20 service is rendered.=94 Tex. = Disciplinary=20 R. Prof=92l Conduct 1.04(d). Hoover=92s termination fee, if not = impliedly=20 prohibited by Rule 1.04(d), is directly forbidden by Rule 1.08(h), which = states=20 that =93[a] lawyer shall not acquire a proprietary interest in the cause = of action=20 or subject matter of litigation the lawyer is conducting for the client, = except=20 that the lawyer may . . . contract in a civil case with a client for a=20 contingent fee that is permissible under Rule 1.04.=94 Id. = 1.08(h)(2).=20 Thus, even if Hoover=92s termination fee provision is viewed as = transforming a=20 traditional contingent fee into a fixed fee, it nonetheless = impermissibly grants=20 the lawyer a proprietary interest in the client=92s claim by entitling = him to a=20 percentage of the claim=92s value without regard to the ultimate results = obtained.
Examining the=20 risk-sharing attributes of the parties=92 contract reveals that = Hoover=92s=20 termination fee provision weighs too heavily in favor of the attorney at = the=20 client=92s expense. Specifically, it shifted to Walton the risks that = accompany=20 both hourly fee and contingent fee agreements while withholding their=20 corresponding benefits. In obligating Walton to pay a 28.66% contingent = fee for=20 any recovery obtained by Parrott, the fee caused Walton to bear the risk = that=20 Parrott would easily settle his claims without earning the fee. But = Walton also=20 bore the risk inherent in an hourly fee agreement because, if he = discharged=20 Hoover, he was obligated to pay a 28.66% fee regardless of whether he = eventually=20 prevailed. This =93heads lawyer wins, tails client loses=94 provision = altered=20 Mandell almost entirely to the client=92s detriment. Indeed, the = only=20 scenario in which Hoover=92s termination fee provision would benefit = Walton is if=20 he expected the value of his claim to significantly increase after = discharging=20 Hoover. In that case, Walton could limit Hoover=92s fee to 28.66% of a = relatively=20 low value, and avoid paying 28.66% of a much larger recovery eventually = obtained=20 with new counsel. Thus, it is conceivable that a client viewing the = events in=20 hindsight could find that the arrangement worked out to his benefit. At = the time=20 of contracting, however, the client has no reason to desire such a = provision=20 because the winning scenario is not only unlikely, but also entirely = arbitrary=20 in relation to its timing and occurrence. Moreover, to the extent the = client=20 believes the value of his claim will increase as a result of employing = new=20 counsel, a rational client would forego the representation altogether = rather=20 than agree to the provision. In sum, the benefits of Hoover=92s = termination fee=20 provision are enjoyed almost exclusively by the attorney.
Hoover=92s=20 termination fee provision is also antagonistic to many policies = supporting the=20 use of contingent fees in civil cases. Most troubling is its creation of = an=20 incentive for the lawyer to be discharged soon after he or she can = establish the=20 present value of the client=92s claim with sufficient certainty. Whereas = the=20 contingent fee encourages efficiency and diligent efforts to obtain the = best=20 results possible, Hoover=92s termination fee provision encourages the = lawyer to=20 escape the contingency as soon as practicable, and take on other cases, = thereby=20 avoiding the demands and consequences of trials and appeals. Moreover, = the=20 provision encourages litigation of a subset of claims that would not be = pursued=20 under traditional contingent fee agreements.
Finally,=20
Hoover=92s termination fee provision creates problems relating to =
valuation and=20
administration, but not in the manner articulated by the court of =
appeals. The=20
court of appeals viewed the parties=92 contract as empowering Parrott =
alone to=20
determine the value of Walton=92s claims at the time of discharge, =
concluding that=20
=93[a]n agreement that leaves the damages to be paid upon termination by =
one party=20
wholly within the unfettered discretion of the other party is so =
one-sided as to=20
be substantively unconscionable.=94 149 S.W.3d at 846 (citations =
omitted). We=20
disagree, because nothing in their fee agreement indicates that Parrott =
retained=20
such discretion. On the contrary, the contract is silent with respect to =
valuation. Nevertheless, its silence in that respect exposes an =
additional=20
defect=97the contract fails to explain how the present value of the =
claims will be=20
measured. It does not describe how the nature and severity of the =
client=92s=20
injuries will be characterized, nor does it state whether any other =
factors,=20
such as venue, availability and quality of witnesses, the defendant=92s =
wealth and=20
the strength of its counsel, and the reprehensibility of the =
defendant=92s conduct=20
will apply to the calculation. Lawyers have a duty, at the outset of the =
representation, to =93inform a client of the basis or rate of the fee=94 =
and =93the=20
contract=92s implications for the client.=94 Levine, 40 S.W.3d at =
96 (citing=20
Restatement (Third) of the Law =
Governing=20
Lawyers =A7=A7 38(1), 18). We have stated that =93to impose the =
obligation of=20
clarifying attorney-client contracts upon the attorney =91is entirely =
reasonable,=20
both because of [the attorney=92s] greater knowledge and experience with =
respect=20
to fee arrangements and because of the trust [the] client has placed in =
[the=20
attorney].=92=94 Levine, 40 S.W.3d at 95 (quoting Cardenas v. =
Ramsey=20
County, 322 N.W.2d 191, 194 (Minn. 1982)) (alterations in original). =
For=20
these reasons, the =93failure of the lawyer to give at the outset a =
clear and=20
accurate explanation of how a fee was to be calculated=94 weighs in =
favor of a=20
conclusion that the fee may be unconscionable.
Our =
conclusion that Hoover=92s termination fee provision is unconscionable =
does not=20
render the parties=92 entire fee agreement unenforceable. See =
The =
court of=20
appeals rendered a take-nothing judgment against Hoover, holding the =
entire fee=20
agreement unenforceable and denying a recovery in quantum meruit because =
Hoover=20
failed to present evidence of the reasonable value of its services. 149 =
S.W.3d=20
at 847. We agree that Hoover no longer has a claim for quantum meruit, =
but we=20
disagree with the take-nothing judgment. In the trial court, Hoover =
sought to=20
enforce the contract=92s termination fee provision. Our holding, =
however, severs=20
the termination fee provision, leaving a contingent fee contract subject =
to=20
Mandell. The jury (1) found that Walton did not comply with the =
contract=20
and (2) failed to find that Walton had good cause to discharge Hoover. =
Under=20
Mandell, therefore, Hoover was entitled to its contingent fee: =
28.66% of=20
$900,000, or $257,940. In the trial court, and again in his appellate =
brief,=20
Walton argued that Hoover was entitled to only this amount, and Hoover =
requested=20
this relief in the alternative in its brief to this Court.
In = the court=20 of appeals, however, Walton challenged the factual and legal sufficiency = of the=20 evidence supporting the jury=92s finding on the good-cause issue. = Because the=20 court of appeals reversed and rendered judgment, it did not reach = Walton=92s=20 sufficiency points. Accordingly, we remand the case to that court for=20 consideration of those issues.
III
Conclusion
Hoover=92s=20 termination fee provision penalized Walton for changing counsel, granted = Hoover=20 an impermissible proprietary interest in Walton=92s claims, shifted the = risks of=20 the representation almost entirely to Walton=92s detriment, and = subverted several=20 policies underlying the use of contingent fees. We hold that this = provision is=20 unconscionable as a matter of law, and therefore, unenforceable. We = affirm that=20 part of the court of appeals=92 judgment reversing the trial court=92s = judgment, but=20 reverse its take-nothing judgment, and remand this case to the court of = appeals=20 for further proceedings. Tex. = R. App.=20 P. 60.2(a), (d).
____________________________________
Wallace B.=20 Jefferson
Chief=20 Justice
OPINION = DELIVERED:=20 November 3, 2006