IN THE SUPREME COURT OF TEXAS

IN THE SUPREME COURT OF TEXAS

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No. 04-1004

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Hoover Slovacek=20 LLP,

formerly Hoover, = Bax &=20 Slovacek, L.L.P., Petitioner,

John B. Walton, = Jr.,=20 Respondent

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On Petition for Review from = the

Court of Appeals for the Eighth = District of=20 Texas

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Argued December 1,=20 2005

Justice Hecht, joined by = Justice Medina and Justice Willett, = dissenting.

I = withdraw my=20 dissenting opinion dated June 30, 2006 and substitute this one in its = stead.

No = rational=20 plaintiff changes lawyers midway through a case in order to recover = less, and=20 John B. Walton, Jr. was not irrational. So when he retained what is now = the law=20 firm of Hoover Slovacek LLP to collect royalties for oil and gas = produced on his=20 32,500-acre ranch for a contingent fee of 28.66% of any recovery, he = must have=20 reasoned that if he had to discharge the firm it would be to maximize = recovery,=20 in which event the firm should not receive a percentage of the final = recovery=20 and thereby benefit from services rendered by the new lawyers but should = be paid=20 only what the fee was worth at the time of discharge. Without an = agreement on=20 the subject, if Hoover Slovacek were discharged for good cause, it might = have=20 the right to be paid the value of its services rendered,[1] but if it were discharged = without good=20 cause, it would be entitled to its full contingent fee from the final=20 recovery.[2] Walton and Hoover Slovacek = agreed=20 instead that if he terminated the representation, with or without cause, = he=20 would =93immediately pay the Firm the then present value of the = Contingent Fee=94.=20 Hoover Slovacek would not receive a percentage of the final recovery if=20 discharged without cause, and Walton would pay the value of the fee, = which could=20 take into account more than the time spent and thus might be more or = less than=20 the value of the services rendered by the firm based on an hourly = rate.

What appears=20 to have been a good-faith effort by lawyer and client to reach a fair=20 arrangement for handling the difficult possibility of estrangement was,=20 according to the Court, unconscionable, meaning that =93a = competent lawyer=20 could not form a reasonable belief that the fee is reasonable.=94[3] This, of course, does not = reflect very=20 well on Hoover Slovacek or its distinguished counsel in this case, who = have=20 advocated the reasonableness of the fee, and the Court=92s condemnation = of what=20 might appear to be a rather innocuous fee agreement may also come as a = surprise=20 to a large number of other lawyers who have up until now considered = themselves=20 competent. Worse still, the Court says, the agreement violated public = policy,=20 which means, not that it was bad, but that it =93contravene[d] some = positive=20 statute or some well‑established rule of law=94.[4] The Court does not actually = identify a=20 statute or rule of law that has been contravened, and truthfully, none = has been.=20 In fact, the agreement has done no devilry at all. To be sure, Walton = and Hoover=20 Slovacek have fought hard over how much is owed, the firm claiming at = least $1.7=20 million (28.66% of $6 million, which Walton once may have thought his = claims=20 were worth), maybe more, while the client admits to owing no more than = $257,940=20 (28.66% of the $900,000 his claims actually settled for), and maybe = nothing at=20 all. But fighting over an agreement does not make the agreement = unconscionable=20 and against public policy, or the number of valid agreements would be = much=20 smaller.

What does=20 make an agreement unconscionable and against public policy, according to = the=20 Court, is not its terms, which seem fair enough in this case, or any = consequence=20 to the parties, as yet unrealized here, but what might happen if = the=20 agreement were made between other parties or in other circumstances. If = a court=20 can imagine circumstances in which an agreement could be = unconscionable =97=20 and here, the Court has tried to list every conceivable way that could = happen,=20 and then some =97 it is unconscionable. Here are the seven = reasons the=20 Court gives for holding this termination fee agreement unconscionable = and=20 against public policy:

$ &n= bsp; =20 The agreement does not distinguish between discharges with and = without=20 cause. True, but surely a lawyer and client can agree to a = termination fee=20 that avoids wrangling over whether discharge was with or without cause, = given=20 the intrinsic uncertainties in that issue. Walton and Hoover Slovacek = settled on=20 a termination fee that Walton, at least, surely thought would be less = than a=20 percentage of the ultimate recovery, and the firm, perhaps, thought = might be=20 more than the value of services rendered at an hourly fee. Mere = compromise is=20 not unconscionable, but if it were, no matter here. Walton undertook to = prove=20 that he discharged Hoover Slovacek with cause but failed to convince the = jury,=20 so even if the agreement had drawn the distinction, he could not take = advantage=20 of it. At this point, the distinction is irrelevant.

$ &n= bsp; =20 If the contingent fee were worth more at the time of discharge than = at the=20 end of the case, it would be a bad deal for the client. So it would, = but a=20 fee agreement is not unconscionable and against public policy merely = because it=20 could be a bad deal for the client. As noted at the outset, a = rational=20 plaintiff does not change lawyers to recover less, and if that is what = Walton=20 did, he has himself to blame. The Court criticizes this agreement = because it=20 would benefit the client only when the claim is improved by changing = lawyers,=20 but since the client is in control, benefit to the client should always = be=20 intended and, absent misjudgment, achieved. Moreover, there is no = evidence in=20 this case that Hoover Slovacek=92s contingent fee was ever worth = more than=20 it would have been at the end of the case. If the fee was worth as much = at=20 discharge as it would have been at the end, the agreement gave the firm = only=20 what Texas law would if there had been no termination clause, since it = has not=20 been established that discharge was for cause. Walton could have = made a=20 bad deal, but there is no evidence he did.

$ &n= bsp; =20 Ascertaining the value of a contingent fee mid-case is hard. = There is=20 some tension between this argument and the previous one, which assumes = that a=20 contingent fee can be valued before the end of the case to the = client=92s=20 detriment. Actually, the value of a contingent fee mid-case may well be=20 impossible to prove with sufficient certainty for recovery, even in a = case like=20 this one involving only economic damages. Walton=92s lawyer first = demanded $58.5=20 million to settle, the defendants countered with $6 million and = conditions,=20 Walton demanded $6 million without conditions, the defendants offered = $300,000,=20 and the case finally settled for $900,000, due largely to new and = unforeseen=20 developments. Walton discharged Hoover Slovacek 22 months into a = 42-month-long=20 case. What was Hoover Slovacek=92s contingent fee worth at discharge? = That=20 question has been fully tried but has still not been answered =97 there = is no=20 evidence what a willing buyer would have paid a willing seller for a = claim like=20 Walton=92s the day he discharged Hoover Slovacek =97 and it may not be = answerable.=20 Even if the audit of royalty payments Walton commissioned had been = completed,=20 uncertainties remained in determining whether he had been underpaid. But = the=20 Court seems not to notice that Hoover Slovacek bears the burden of = proving the=20 value of its fee, and any difficulty in carrying that burden does not = prejudice=20 Walton, it benefits him.

$ &n= bsp; =20 A lawyer who knows that the value of a claim is declining has an = incentive to=20 misbehave, provoke discharge, collect more than he would in the end, and = turn to=20 more lucrative business. This argument rejects what the previous one = asserts, that the value of a contingent fee is hard to predict. But more = importantly, the Court appears to assume a jurisdiction in which lawyers = do not=20 owe clients a fiduciary duty, the intentional breach of which is a tort = remedied=20 by actual and exemplary damages. A lawyer as wicked as the Court=92s = imagination=20 may be more deterred by the threat of punitive damages than the threat = of a=20 voided contract. In any event, no evidence in this case hints at = anything even=20 approaching this pollo poco nightmare.

$ &n= bsp; =20 The agreement required Walton to pay up at discharge. But if = there had=20 been no agreement, Walton would undisputedly have been required to pay = Hoover=20 Slovacek at discharge the value of its services rendered. The = impoverished=20 client the Court hypothesizes =97 certainly not Walton =97 who could = afford=20 representation only on a contingent fee, would be required to pay for = the value=20 of the discharged lawyer=92s services at termination. To agree to what = the law=20 would otherwise provide can hardly be unconscionable. Even so, it = would in=20 fact have been no burden on Walton. He could have paid Hoover = Slovacek, just=20 as he paid his new lawyers $283,000 at an hourly rate. And in any event, = in over=20 nine years, Walton has not yet paid Hoover Slovacek one cent for = prosecuting his=20 claims against the Bass defendants.

$ &n= bsp; =20 The agreement violated professional rule 1.08(h) by allowing Hoover = Slovacek=20 to acquire an interest in Walton=92s claim other than by a contingent = fee=20 authorized by rule 1.04. Here the circularity is dizzying. To = restate the=20 argument: if the agreement was unconscionable in violation of rule 1.04 = of the=20 Texas Disciplinary Rules of Professional Conduct, it gave Hoover = Slovacek an=20 interest in Walton=92s claim prohibited by rule 1.08(h), which excepts = only=20 interests created by an agreement valid under rule 1.04, which this = agreement=20 was not, if indeed it wasn=92t. If the termination fee was not = unconscionable,=20 rule 1.08(h) is inapplicable, and if the termination fee was = unconscionable,=20 rule 1.08(h) is inconsequential. Either way, rule 1.08(h) is = irrelevant.

$ &n= bsp; =20 A client should not reasonably expect a contingent fee to equal or = exceed the=20 recovery. Certainly not, but even if that could ever occur = with a=20 termination fee like the one in this case, and it is not at all clear = that it=20 ever could, it has not happened in this case. Walton settled for=20 $900,000, and there is no evidence that he owes Hoover Slovacek more = than 28.66%=20 of that amount. The Court notes that its concerns do not extend to = hourly fee=20 agreements, but it is not clear why only contingent fees are subject to = abuse.[5]

In = sum, the=20 Court =93believe[s] Hoover=92s termination fee provision is unreasonably = susceptible=20 to overreaching, exploiting the attorney=92s superior information, and = damaging=20 the trust that is vital to the attorney-client relationship.=94[6] Although I think the = Court=92s arguments=20 are strained at best, even if they had more substance, a fee agreement = should=20 not be voided as unconscionable and against public policy based merely = on what=20 could happen but was not intended and has not in fact occurred. = It=20 could have happened that Hoover Slovacek provoked its own = discharge for=20 nefarious reasons, or that Walton discharged Hoover Slovacek for cause, = or that=20 when he did, the termination fee exceeded the contingent fee, or that he = was=20 somehow prejudiced by the difficulty in evaluating the termination fee, = or that=20 he had to pay before any recovery was realized, or that the fee exceeded = his=20 recovery. Any of these things could have happened, but none = did.=20 Walton and Hoover Slovacek anticipated exactly what occurred and tried = to make=20 suitable provision for it. Whether their agreement was unconscionable, = and=20 therefore abhorrent to public policy and void, should be determined by = their=20 initial expectations and the actual consequences, not on hyperbolic=20 hypothesizing in hindsight. As the comment to rule 1.04 states:

[F]ee arrangements normally are made at the outset = of=20 representation, a time when many uncertainties and contingencies exist, = while=20 claims of unconscionability are made in hindsight when the contingencies = have=20 been resolved. . . . Except in very unusual situations, therefore, the=20 circumstances at the time a fee arrangement is made should control in=20 determining a question of unconscionability.[7]

Agreements are=20 unconscionable when they are not or cannot be proper, not when it is = merely=20 possible for them to be improper.

Again, it=20 matters not whether the parties have behaved admirably throughout. = Walton does=20 seem to have had an inflated view of the value of his claims (about = 900%),=20 though perhaps no more than many clients, and he may not have had good = cause to=20 discharge Hoover Slovacek =97 at least he could not convince a jury he = did. And=20 Hoover Slovacek may have been overly aggressive, at first in pursuing = the=20 defendants (demanding $58.5 million to settle a $900,000 claim) and then = in=20 pursuing Walton (demanding millions for a legal fee worth $257,940). But = Hoover=20 Slovacek=92s lawyers are not here on disciplinary charges, and Walton is = not=20 applying for Client of the Year. An agreement is not unconscionable = because a=20 party acts unconscionably =97 and there is certainly no evidence that = Walton or=20 Hoover Slovacek did.

If = the Court=20 is serious about today=92s analysis, many more fee agreements and other = contracts=20 will be unconscionable. The Court says that =93[h]ourly fee agreements=20 . . . do not implicate the [same] concerns=94 it has about the = agreement=20 in this case,[8] but they do. Fees based on = hourly=20 rates seemingly reasonable at the outset could end up being = excessive in=20 easily imaginable circumstances, but that mere potential does not = invalidate an=20 agreement.

But = the Court=20 may not be serious. It may be that today=92s decision will be limited to = this one=20 particular fee agreement in this one isolated situation, portending = nothing for=20 fee agreements in general.[9] If so, then the rules = governing fee=20 agreements will merely have a minor exception, and only the Court=92s = authority to=20 articulate general rules will suffer. Of course, the careful lawyer on a = contingent fee can simply charge what the law allows for termination of=20 representation without good cause: the full fee. The client will be = penalized=20 for changing lawyers and will pay for services not rendered, but it will = not be=20 unconscionable.

We = have taken=20 as given that the only fee a Texas lawyer is prohibited from charging is = one=20 that is illegal or unconscionable because that is what rule 1.04(a) of = the Texas=20 Disciplinary Rules of Professional Conduct provides.[10] In most states, lawyers = cannot charge=20 unreasonable fees;[11] not so in Texas. In Texas, = a lawyer=20 is prohibited only from charging a fee that a competent lawyer could not = reasonably believe to be reasonable.[12] Of course, Texas law does = not=20 award lawyers unreasonable fees, so one could argue that = notwithstanding=20 rule 1.04(a), a lawyer suing to collect a fee must prove that it is = reasonable,=20 not merely that it is not unconscionable. In matters other than lawyer=20 discipline, the Disciplinary Rules of Professional Conduct have been = held to=20 =93provide guidelines and suggest the relevant considerations=94 without = supplying=20 the rule of decision,[13] and one could argue that = the role of=20 rule 1.04(a) in enforcing fee agreements is similarly limited.[14] But none of the parties = here=20 does.

The = Court=20 remands the case to the court of appeals to review the sufficiency of = the=20 evidence regarding the jury=92s failure to find that Walton discharged = Hoover=20 Slovacek for good cause. In the end, Hoover Slovacek may recover as much = or more=20 without the termination fee provision. This is certainly an odd way of = applying=20 unconscionability. I would enforce the termination fee agreement. = Accordingly, I=20 respectfully dissent.

&n= bsp; &nb= sp; &nbs= p; = ; = &= nbsp; &n= bsp; =20

Nathan L. Hecht

Justice

Opinion=20 delivered: November 3, 2006

^[1] Compare Royden v. Ardoin, 331 = S.W.2d 208,=20 209 (Tex. 1960) (holding that an attorney suspended from practice before = completion of representation was not entitled to recover on the contract = or for=20 quantum meruit, but stating: =93If an attorney, without just cause, = abandons his=20 client before the proceeding for which he was retained has been = conducted to its=20 termination, or if such attorney commits a material breach of his = contract of=20 employment, he thereby forfeits all right to compensation.=94 (internal = quotation=20 marks omitted)), and Kelly v. Murphy, 630 S.W.2d 759, = 761‑762=20 (Tex. App.=97Houston [1st Dist.] 1982, writ ref=92d n.r.e.) (holding = that an=20 attorney who dismissed his client=92s lawsuit without authorization was = not=20 entitled to recover for quantum meruit), with Rocha v. = Ahmad, 676=20 S.W.2d 149, 156 (Tex. App.=97San Antonio 1984, writ dism=92d) (holding = that attorney=20 discharged for good cause was nevertheless entitled to recover for = quantum=20 meruit, and stating: =93If the former client pleads and proves good = cause for=20 discharge, . . . then the attorney is not entitled to recover = under=20 the contract of employment. In such a case, the attorney may attempt to = recover=20 a fee for services rendered up to the time of discharge under quantum=20 meruit.=94).

^[2] Mandell & Wright v. Thomas 441 = S.W.2d 841,=20 847 (Tex. 1969) (=93In Texas, when the client, without good cause, = discharges an=20 attorney before he has completed his work, the attorney may recover on = the=20 contract for the amount of his compensation.=94 (citing Myers v. = Crockett,=20 14 Tex. 257 (1855); White v. Burch, 19 S.W.2d 404 (Tex. Civ. = App.=97Fort=20 Worth 1929, writ ref=92d); White v. Burch, 33 S.W.2d 512 (Tex. = Civ.=20 App.=97Fort Worth 1930, writ ref=92d); Cottle County v. McClintock = &=20 Robertson, 150 S.W.2d 134 (Tex. Civ. App.=97Amarillo 1941, writ = dism=92d=20 judgment cor.))). One might well think that the most the client would = owe in=20 such circumstances would be the contractual fee prorated for the = services the=20 lawyer actually performed. See Restatement (Third) of the Law = Governing=20 Lawyers =A7 40 cmt. c (2000) (=93Allowing a discharged or = withdrawing=20 lawyer to recover compensation under a fee contract with the client is = sometimes=20 more appropriate . . . where the client discharges a = contingent-fee=20 lawyer without cause just before the contingency occurs, perhaps in = order to=20 avoid paying the contractual percentage fee. . . . [T]he = contractual=20 fee is prorated for the services actually performed . . . .=94). But = that is not=20 Texas law, and the parties in this case have not suggested it should=20 be.

^[3] Tex.=20 Disciplinary R. Prof=92l Conduct 1.04(a) (=93A fee is = unconscionable if a=20 competent lawyer could not form a reasonable belief that the fee is=20 reasonable.=94).

^[4] Lawrence v. CDB Servs., Inc., 44 = S.W.3d 544, 553=20 (Tex. 2001) (=93=91Public policy, some courts have said, is a term of = vague and=20 uncertain meaning, which it pertains to the law‑making power to = define, and=20 courts are apt to encroach upon the domain of that branch of the = government if=20 they characterize a transaction as invalid because it is contrary to = public=20 policy, unless the transaction contravenes some positive statute or some = well‑established rule of law.=92=93); Town of Flower Mound v. = Stafford Estates=20 Ltd. Partnership, 135 S.W.3d 620, 628 (Tex. 2004); Texas Commerce = Bank,=20 N.A. v. Grizzle, 96 S.W.3d 240, 250 (Tex. 2002);.Churchill Forge, = Inc. v.=20 Brown, 61 S.W.3d 368, 373 (Tex. 2001).

^[5] See Restatement (Third) of the Law = Governing=20 Lawyers =A7 34 cmt. c (2000) (=93Accordingly, the = reasonableness of a=20 fee due under an hourly rate contract, for example, depends on whether = the=20 number of hours the lawyer worked was reasonable in light of the matter = and=20 client. It is also relevant whether the lawyer provided poor service, = such as=20 might make unreasonable a fee that would be appropriate for better = services, or=20 services that were better or more successful than normally would have = been=20 expected . . . .=94).

^[6] Ante at ___.

^[7] Tex.=20 Disciplinary R. Prof=92l Conduct 1.04 cmt. 7; see also = Restatement (Third) of the Law = Governing=20 Lawyers =A7 34 cmt. c (=93Although reasonableness is usually = assessed as=20 of the time the contract was entered into, later events might be = relevant.=20 . . . [E]vents not known or contemplated when the contract was = made=20 can render the contract unreasonably favorable to the lawyer or, = occasionally,=20 to the client. . . . To determine what events client and = lawyer=20 contemplated, their contract must be construed in light of its goals and = circumstances and in light of the possibilities discussed with the = client=20 . . . .=94).

^[8] Ante at ___.

^[9] See County of Cameron v. Brown, = 80 S.W.3d=20 549, 565-566 (Tex. 2002) (Hecht, J., dissenting) (=93It may be, however = =97 one=20 cannot always tell for sure =97 that the Court does not really mean what = it says.=20 . . . [I]t may be that this case is just another =91restricted = railroad=20 ticket, good for this day and train only.=92=93 (citing Smith v. = Allwright,=20 321 U.S. 649, 669 (1944) (Roberts, J., dissenting))).

^[10] Tex.=20 Disciplinary R. Prof=92l Conduct 1.04(a) (=93A lawyer shall not = enter into an=20 arrangement for, charge, or collect an illegal fee or unconscionable=20 fee.=94).

^[11] Alaska R.=20 Prof=92l Conduct Rule 1.5(a); Ariz.=20 R. Prof=92l Conduct ER 1.5(a); Ariz. R. Prof=92l Conduct, ER = 1.5(a);=20 Ark. R. Prof=92l = Conduct, Rule=20 1.5(a), (e)(3); Colo. R. = Prof=92l=20 Conduct Rule 1.5(a), (f); Colo.=20 R. Civ. P. Ch. 23.3 (contingent fees), Rules 3, 7; Conn. R. Prof=92l Conduct, = Rule 1.5(a);=20 Del. R. Prof=92l Conduct = , Rule=20 1.5(a); D.C. R. Prof=92l = Conduct=20 Rule 1.5(a); Ga. R. Prof=92l=20 Conduct Rule 4-102, Rule 1.5(a); Haw. R. Prof=92l Conduct Rule = 1.5(a);=20 Idaho R. Prof=92l = Conduct Rule=20 1.5(a); Ill. R. Prof=92l = Conduct=20 Rule 1.5(a); Ind. R. Prof=92l=20 Conduct Rule 1.5(a); Kan. R.=20 Prof=92l Conduct Rule 1.5(a), (e) (court review); Ky. R. Prof=92l Conduct SCR=20 3.130(1.5(a)); La. R. Prof=92l = Conduct Rule 1.5(a), (f)(5) (unearned fee/expense = deposit/retainer=20 provision); Md. R. Prof=92l = Conduct=20 Rule 1.5(a); Minn. R. Prof=92l = Conduct Rule 1.5(a); Miss. R.=20 Prof=92l Conduct Rule 1.5(a); Mo.=20 R. Prof=92l Conduct Rule 4-1.5(a); Mont. R. Prof=92l Conduct = Rule 1.5(a);=20 Nev. R. Prof=92l = Conduct Rule=20 155.1; N.J. Rules Prof=92l = Conduct=20 RPC 1.5(a); N.M. R. Prof=92l=20 Conduct RULE 16‑105(A); N.D. R.=20 Prof=92l Conduct Rule 1.5(a); Okla.=20 R. Prof=92l Conduct Rule 1.5(a); R.I. R. Prof=92l Conduct Rule = 1.5(a);=20 S.C. R. Prof=92l = Conduct Rule=20 1.5(a); S.D. R. Prof=92l = Conduct=20 Rule 1.5(a); Tenn. R. Prof=92l = Conduct Rule 1.5(a); Vt. R.=20 Prof=92l Conduct Rule 1.5(a); Va.=20 R. Prof=92l Conduct Rule 1.5(a); Wash. R. Prof=92l Conduct = Rule 1.5(a);=20 W. Va. R. Prof=92l = Conduct Rule=20 1.5(a); Wis. R. Prof=92l = Conduct=20 SCR 20:1.5(a); and Wyo. R. = Prof=92l=20 Conduct Rule 1.5(a). See also ABA Model Rules of Professional = Conduct=20 Rule 1.5(a) (no =93unreasonable=94 fees or expenses) (1983); ABA Ethics 2000 Revised Model Rules = of=20 Professional Conduct Rule 1.5(a), (e)(3) (2003); and Restatement of the Law Governing=20 Lawyers =A7=A7 34-35 (contingent fees, incorporating=20 =A734)(2000).

^[12] See supra note 2.

^[13] In re Users System Services, Inc., 22 = S.W.3d=20 331, 334 (Tex. 1999); In re EPIC Holdings, Inc., 985 S.W.2d 41, = 48 (Tex.=20 1998); National Medical Enterprises, Inc. v. Godbey, 924 S.W.2d = 123, 132=20 (Tex. 1996); Henderson v. Floyd, 891 S.W.2d 252, 254 (Tex. 1995) = (per=20 curiam); Spears v. Fourth Court of Appeals, 797 S.W.2d 654, 656 = (Tex.=20 1990); Ayres v. Canales, 790 S.W.2d 554, 556 n.2 (Tex.=20 1990).

^[14] Cf. Johnson v. Brewer & = Pritchard,=20 P.C., 73 S.W.3d 193, 205 (Tex. 2002) (referring to Rule 1.04 to = determine a=20 permissible referral fee); Bocquet v. Herring, 972 S.W.2d 19, 21 = (Tex.=20 1998) (referring to Rule 1.04 for factors indicating reasonableness of = attorney=20 fee); Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d = 812,=20 818 (Tex. 1997) (same).