HOOVER SLOVACEK LLP, Formerly Hoover, Bax & Slovacek, LLP, Petitioner, v. John B. WALTON, Jr., Respondent.
No. 04-1004.
Supreme Court of Texas.
Argued Dec. 1, 2005. Delivered Nov. 3, 2006.
206 S.W.3d 557
John M. Phalen Jr., Daniel J. Sheehan Jr., Michael L. Atchley, Daniel Sheehan & Associates, L.L.P., Dallas, for Respondent.
Chief Justice JEFFERSON delivered the opinion of the Court, in which Justice O NEILL, Justice WAINWRIGHT, Justice BRISTER, Justice GREEN, and Justice JOHNSON joined.
We deny Walton s motion for rehearing and grant Hoover Slovacek s motion for rehearing. We withdraw our opinion of June 30, 2006 and substitute the following in its place.
In this case, we must determine whether an attorney hired on a contingent-fee basis may include in the fee agreement a provision stating that, in the event the attorney is discharged before completing the representation, the client must immediately pay a fee equal to the present value of the attorney s interest in the client s claim. We conclude that this termination fee provision is contrary to public policy and unenforceable. We affirm the court of appeals judgment in part, reverse in part, and remand to the court of appeals for further proceedings.
I
Background
In June 1995, John B. Walton, Jr. hired attorney Steve Parrott of Hoover Slovacek LLP (Hoover) to recover unpaid royalties from several oil and gas companies operating on his 32,500 acre ranch in Winkler County. The engagement letter granted Hoover a 30% contingent fee for all claims on which collection was achieved through one trial. Most significantly, the letter included the following provision:
You may terminate the Firm s legal representation at any time.... Upon termination by You, You agree to immediately pay the Firm the then present value of the Contingent Fee described [herein], plus all Costs then owed to the Firm, plus subsequent legal fees [incurred to transfer the representation to another firm and withdraw from litigation].
Shortly after signing the contract, Walton and Parrott agreed to hire Kevin Jackson as local counsel and reduced Hoover s contingent fee to 28.66%. Parrott negotiated settlements exceeding $200,000 with Texaco and El Paso Natural Gas, and Walton paid Hoover its contingent fee. Parrott then turned to Walton s claims against Bass Enterprises Production Company (Bass), and hired accountant Everett Holseth to perform an audit and compile evidence establishing the claims value.1 Meanwhile, Walton authorized Parrott to settle his claims against Bass for $8.5 million.
In January 1997, Parrott made an initial settlement demand of $58.5 million. Bass s attorney testified that Parrott was unable to support this number with any legal theories, expert reports, or calculations, and that the demand was so enormous he basically quit listening. The following month, however, Bass offered $6 million not only to settle Walton s claims, but also to purchase the surface estates of eight sections of the Winkler County ranch, acquire numerous easements, and secure Walton s royalty interests under the leases. Walton refused to sell, but authorized Parrott to accept $6 million to settle only Walton s claims for unpaid royalties. Walton also wrote Parrott and ex-
Walton then retained Andrews & Kurth LLP, which, in November 1998, settled Walton s claims against Bass for $900,000. By that time, Hoover had sent Walton a bill for $1.7 million (28.66% of $6 million), contending that Bass s $6 million offer, and Walton s subsequent authorization to settle for that amount, established the present value of Walton s claims at the time of discharge. Walton paid Andrews & Kurth approximately $283,000 in hourly fees and costs, but refused to pay Hoover.
When Hoover sought to intervene in the settlement proceedings between Walton and Bass, the trial court severed Hoover s claim, and the parties tried the case before a jury. Richard Bianchi, a former state district judge in Harris County, testified as Hoover s expert witness. Bianchi opined that a 28.66% contingent fee was, if anything, lower than normal, but certainly reasonable under these circumstances, and that it would only be unconscionable to ignore the agreement of the parties. He also testified that charging more than Walton ultimately recovered from Bass doesn t change the deal they made. That s just a bad business deal.
In contrast, Walton s local counsel, Kevin Jackson, testified that he had never heard of attorneys charging a percentage based on the present value of a claim at the time of discharge rather than the client s actual recovery, and that the $1.7 million fee was unconscionable.
The jury failed to find that Walton discharged Hoover for good cause or that Hoover s fee was unconscionable. The trial court entered judgment on the verdict, which awarded Hoover $900,000.2 The court of appeals reversed and rendered a take-nothing judgment for Walton, concluding that Hoover s fee agreement was unconscionable as a matter of law. 149 S.W.3d 834, 847. We granted Hoover s petition for review. 49 Tex. Sup.Ct. J. 15 (Oct. 17, 2005). Because our reasoning differs from the court of appeals in some respects, we affirm its judgment in part, reverse in part, and remand this case to the court of appeals.
II
Discussion
When interpreting and enforcing attorney-client fee agreements, it is not enough to simply say that a contract is a contract. There are ethical considerations overlaying the contractual relationship. Lopez v. Muñoz, Hockema & Reed, L.L.P., 22 S.W.3d 857, 868 (Tex.2000) (Gonzales, J., concurring and dissenting).
In Texas, we hold attorneys to the highest standards of ethical conduct in their dealings with their clients. The duty is highest when the attorney contracts
Id. at 866-67 (alteration in original) (citations omitted). The attorney s special responsibility to maintain the highest standards of conduct and fair dealing establishes a professional benchmark that informs much of our analysis in this case.
Although contingent fee contracts are increasingly used by businesses and other sophisticated parties, their primary purpose is to allow plaintiffs who cannot afford an attorney to obtain legal services by compensating the attorney from the proceeds of any recovery. Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 818 (Tex.1997). The contingent fee offers the potential of a greater fee than might be earned under an hourly billing method in order to compensate the attorney for the risk that he or she will receive no fee whatsoever if the case is lost. Id. In exchange, the client is largely protected from incurring a net financial loss in connection with the representation.3 This risk-sharing feature creates an incentive for lawyers to work diligently and obtain the best results possible.4 A closely related benefit is the contingent fee s tendency to reduce frivolous litigation by discouraging attorneys from presenting claims that have negative value or otherwise lack merit.5
In Texas, if an attorney hired on a contingent-fee basis is discharged without cause before the representation is completed, the attorney may seek compensation in quantum meruit or in a suit to enforce the contract by collecting the fee from any damages the client subsequently recovers. Mandell & Wright v. Thomas, 441 S.W.2d 841, 847 (Tex.1969) (citing Myers v. Crockett, 14 Tex. 257 (1855)). Both remedies are subject to the prohibition against charging or collecting an unconscionable fee.
Hoover s termination fee provision purported to contract around the Mandell remedies in three ways. First, it made no distinction between discharges occurring with or without cause. Second, it assessed the attorney s fee as a percentage of the present value of the client s claim at the time of discharge, discarding the quantum meruit and contingent fee measurements. Finally, it required Walton to pay Hoover the percentage fee immediately at the time of discharge.
In allowing the discharged lawyer to collect the contingent fee from any damages the client recovers, Mandell complies with the principle that a contingent-fee lawyer is entitled to receive the specified fee only when and to the extent the client receives payment. RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 35(2) (2000). Hoover s termination fee, however, sought immediate payment of the firm s contingent interest without regard for when and whether Walton eventually prevailed. Public policy strongly favors a client s freedom to employ a lawyer of his choosing and, except in some instances where counsel is appointed, to discharge the lawyer during the representation for any reason or no reason at all. See Martin v. Camp, 219 N.Y. 170, 114 N.E. 46, 48 (1916) (describing this policy as a firmly established rule which springs from the personal and confidential nature of the attorney-client relationship); see also Whiteside v. Griffis & Griffis, P.C., 902 S.W.2d 739, 746 (Tex.App.-Austin 1995, writ denied) (noting that the policy supporting a client s freedom to select his attorney precludes the application of commercial standards to agreements that restrict the practice of law);
Notwithstanding its immediate-payment requirement, several additional considerations lead us to conclude that Hoover s termination fee provision is unenforceable. In Levine v. Bayne, Snell & Krause, Ltd., 40 S.W.3d 92, 95 (Tex.2001), we refused to construe a contingent fee contract as entitling the attorney to compensation exceeding the client s actual recovery. Id. at 93. In that case, the clients purchased a home containing foundation defects, and stopped making mortgage payments when the defects were discovered. Id. They agreed to pay their lawyer one-third of any amount received by settlement or recovery. Id. A jury awarded the clients $243,644 in damages, but offset the award against the balance due on their mortgage, resulting in a net recovery of $81,793. Id. The lawyer sued to collect $155,866, a fee equaling one-third of the gross recovery plus pre- and post-judgment interest and expenses. Id. In refusing to interpret any amount received as permitting collection of a contingent fee exceeding the client s net recovery, we emphasized that the lawyer is entitled to receive the contingent fee only when and to the extent the client receives payment. Id. at 94 (quoting RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 35). A reasonable client does not expect that a lawyer engaged on a contingent-fee basis will charge a fee equaling or, as in this case, exceeding 100% of the recovery.8 In Levine, we noted that [l]awyers almost always possess the more sophisticated understanding of fee arrangements. It is therefore appropriate to place the balance of the burden of fair dealing and the allotment of risk in the hands of the lawyer in regard to fee arrangements with clients. Id. at 95 (quoting In re Myers, 663 N.E.2d 771, 774-75 (Ind.1996)). We believe Hoover s termination fee provision is unreasonably susceptible to overreaching, exploiting the attorney s superior information, and damaging the trust that is vital to the attorney-client relationship.
The Disciplinary Rules provide that a contingent fee is permitted only where, quite sensibly, the fee is contingent on the outcome of the matter for which the service is rendered.
Examining the risk-sharing attributes of the parties contract reveals that Hoover s termination fee provision weighs too heavily in favor of the attorney at the client s expense. Specifically, it shifted to Walton the risks that accompany both hourly fee and contingent fee agreements while withholding their corresponding benefits. In obligating Walton to pay a 28.66% contingent fee for any recovery obtained by Parrott, the fee caused Walton to bear the risk that Parrott would easily settle his claims without earning the fee. But Walton also bore the risk inherent in an hourly fee agreement because, if he discharged Hoover, he was obligated to pay a 28.66% fee regardless of whether he eventually prevailed. This heads lawyer wins, tails client loses provision altered Mandell almost entirely to the client s detriment. Indeed, the only scenario in which Hoover s termination fee provision would benefit Walton is if he expected the value of his claim to significantly increase after discharging Hoover. In that case, Walton could limit Hoover s fee to 28.66% of a relatively low value, and avoid paying 28.66% of a much larger recovery eventually obtained with new counsel. Thus, it is conceivable that a client viewing the events in hindsight could find that the arrangement worked out to his benefit. At the time of contracting, however, the client has no reason to desire such a provision because the winning scenario is not only unlikely, but also entirely arbitrary in relation to its timing and occurrence. Moreover, to the extent the client believes the value of his claim will increase as a result of employing new counsel, a rational client would forego the representation altogether rather than agree to the provision. In sum, the benefits of Hoover s termination fee provision are enjoyed almost exclusively by the attorney.
Hoover s termination fee provision is also antagonistic to many policies supporting the use of contingent fees in civil cases. Most troubling is its creation of an incentive for the lawyer to be discharged soon after he or she can establish the present value of the client s claim with sufficient certainty. Whereas the contingent fee encourages efficiency and diligent efforts to obtain the best results possible, Hoover s termination fee provision encourages the lawyer to escape the contingency as soon as practicable, and take on other cases, thereby avoiding the demands and consequences of trials and appeals. Moreover, the provision encourages litigation of a subset of claims that would not be pursued under traditional contingent fee agreements.
Finally, Hoover s termination fee provision creates problems relating to valuation and administration, but not in the manner articulated by the court of appeals. The court of appeals viewed the parties contract as empowering Parrott alone to determine the value of Walton s claims at the time of discharge, concluding that [a]n agreement that leaves the damages to be paid upon termination by one party wholly
Our conclusion that Hoover s termination fee provision is unconscionable does not render the parties entire fee agreement unenforceable. See RESTATEMENT (SECOND) OF CONTRACTS § 208 (1981) ( If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result. ); Williams v. Williams, 569 S.W.2d 867, 871 (Tex.1978) (explaining that an illegal provision generally may be severed if it does not constitute the essential purpose of the agreement); In re Kasschau, 11 S.W.3d 305, 313 (Tex.App.-Houston [14th Dist.] 1999, no pet.) (concluding that an unenforceable provision may be severed if the parties would have entered into the contract without it). Walton paid Hoover its contingent fee for settlements that Parrott negotiated with Texaco and El Paso Natural Gas, and Walton does not contend that this portion of the agreement is unconscionable. On the contrary, in his brief to the court of appeals, Walton argued in the alternative that Hoover was limited to recovering 28.66% of the $900,000 settlement reached in the Bass litigation and requested rendition of judgment in that amount. Severing the termination fee provision, the remainder of the fee agreement is enforceable. Thus, if Hoover were discharged without cause, it would be entitled to either its contingent fee or compensation in quantum meruit. Mandell, 441 S.W.2d at 847.
The court of appeals rendered a take-nothing judgment against Hoover, holding the entire fee agreement unenforceable and denying a recovery in quantum meruit because Hoover failed to present evidence
In the court of appeals, however, Walton challenged the factual and legal sufficiency of the evidence supporting the jury s finding on the good-cause issue. Because the court of appeals reversed and rendered judgment, it did not reach Walton s sufficiency points. Accordingly, we remand the case to that court for consideration of those issues.
III
Conclusion
Hoover s termination fee provision penalized Walton for changing counsel, granted Hoover an impermissible proprietary interest in Walton s claims, shifted the risks of the representation almost entirely to Walton s detriment, and subverted several policies underlying the use of contingent fees. We hold that this provision is unconscionable as a matter of law, and therefore, unenforceable. We affirm that part of the court of appeals judgment reversing the trial court s judgment, but reverse its take-nothing judgment, and remand this case to the court of appeals for further proceedings.
Justice HECHT filed a dissenting opinion, in which Justice MEDINA and Justice WILLETT joined.
Justice HECHT, joined by Justice MEDINA and Justice WILLETT, dissenting.
I withdraw my dissenting opinion dated June 30, 2006 and substitute this one in its stead.
No rational plaintiff changes lawyers midway through a case in order to recover less, and John B. Walton, Jr. was not irrational. So when he retained what is now the law firm of Hoover Slovacek LLP to collect royalties for oil and gas produced on his 32,500-acre ranch for a contingent fee of 28.66% of any recovery, he must have reasoned that if he had to discharge the firm it would be to maximize recovery, in which event the firm should not receive a percentage of the final recovery and thereby benefit from services rendered by the new lawyers but should be paid only what the fee was worth at the time of discharge. Without an agreement on the subject, if Hoover Slovacek were discharged for good cause, it might have the right to be paid the value of its services
What appears to have been a good-faith effort by lawyer and client to reach a fair
What does make an agreement unconscionable and against public policy, according to the Court, is not its terms, which seem fair enough in this case, or any consequence to the parties, as yet unrealized here, but what might happen if the agreement were made between other parties or in other circumstances. If a court can imagine circumstances in which an agreement could be unconscionable and here, the Court has tried to list every conceivable way that could happen, and then some it is unconscionable. Here are the seven reasons the Court gives for holding this termination fee agreement unconscionable and against public policy:
- The agreement does not distinguish between discharges with and without cause. True, but surely a lawyer and client can agree to a termination fee that avoids wrangling over whether discharge was with or without cause, given the intrinsic uncertainties in that issue. Walton and Hoover Slovacek settled on a termination fee that Walton, at least, surely thought would be less than a percentage of the ultimate recovery, and the firm, perhaps, thought might be more than the value of services rendered at an hourly fee. Mere compromise is not unconscionable, but if it were, no matter here. Walton undertook to prove that he discharged Hoover Slovacek with cause but failed to convince the jury, so even if the agreement had drawn the distinction, he could not take advantage of it. At this point, the distinction is irrelevant.
- If the contingent fee were worth more at the time of discharge than at the end of the case, it would be a bad deal for the client. So it would, but a fee agreement is not unconscionable and against public policy merely because it could be a bad deal for the client. As noted at the outset, a rational plaintiff does not change lawyers to recover less, and if that is what Walton did, he has himself to blame. The Court criticizes this agreement because it would benefit the client only when the claim is improved by changing lawyers, but since the client is in control, benefit to the client should always be intended and, absent misjudgment, achieved. Moreover, there is no evidence in this case that Hoover Slovacek s contingent fee was ever worth more than it would have been at the end of the case. If the fee was worth as much at discharge as it would have been at the end, the agreement gave the firm only what Texas law would if there had been no termination clause, since it has not been established that discharge was for cause.
Walton could have made a bad deal, but there is no evidence he did. - Ascertaining the value of a contingent fee mid-case is hard. There is some tension between this argument and the previous one, which assumes that a contingent fee can be valued before the end of the case to the client s detriment. Actually, the value of a contingent fee mid-case may well be impossible to prove with sufficient certainty for recovery, even in a case like this one involving only economic damages. Walton s lawyer first demanded $58.5 million to settle, the defendants countered with $6 million and conditions, Walton demanded $6 million without conditions, the defendants offered $900,000, and the case finally settled for $900,000, due largely to new and unforeseen developments. Walton discharged Hoover Slovacek 22 months into a 42-month-long case. What was Hoover Slovacek s contingent fee worth at discharge? That question has been fully tried but has still not been answered there is no evidence what a willing buyer would have paid a willing seller for a claim like Walton s the day he discharged Hoover Slovacek and it may not be answerable. Even if the audit of royalty payments Walton commissioned had been completed, uncertainties remained in determining whether he had been underpaid. But the Court seems not to notice that Hoover Slovacek bears the burden of proving the value of its fee, and any difficulty in carrying that burden does not prejudice Walton, it benefits him.
- A lawyer who knows that the value of a claim is declining has an incentive to misbehave, provoke discharge, collect more than he would in the end, and turn to 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 owe clients a fiduciary duty, the intentional breach of which is a tort remedied by actual and exemplary damages. A lawyer as wicked as the Court s imagination may be more deterred by the threat of punitive damages than the threat of a voided contract. In any event, no evidence in this case hints at anything even approaching this pollo poco nightmare. - The agreement required Walton to pay up at discharge. But if there had been no agreement, Walton would undisputedly have been required to pay Hoover Slovacek at discharge the value of its services rendered. The impoverished client the Court hypothesizes certainly not Walton who could afford representation only on a contingent fee, would be required to pay for the value of the discharged lawyer s services at termination. To agree to what the law would otherwise provide can hardly be unconscionable. Even so, it would in fact have been no burden on Walton. He could have paid Hoover Slovacek, just as he paid his new lawyers $283,000 at an hourly rate. And in any event, in over nine years, Walton has not yet paid Hoover Slovacek one cent for prosecuting his claims against the Bass defendants.
- The agreement violated professional rule 1.08(h) by allowing Hoover Slovacek to acquire an interest in Walton s claim other than by a contingent fee authorized by rule 1.04. Here the circularity is dizzying. To restate the argument: if the agreement was unconscionable in violation of rule 1.04 of the Texas Disciplinary Rules of Professional Conduct, it gave Hoover Slovacek an interest in Walton s claim prohibited by rule 1.08(h), which excepts only interests created by an agreement valid under rule 1.04, which this agreement was not, if indeed it wasn t. If the termination fee was not unconscionable, rule 1.08(h) is
inapplicable, and if the termination fee was unconscionable, rule 1.08(h) is inconsequential. Either way, rule 1.08(h) is irrelevant. - A client should not reasonably expect a contingent fee to equal or exceed the recovery. Certainly not, but even if that could ever occur with a termination fee like the one in this case, and it is not at all clear that it ever could, it has not happened in this case. Walton settled for $900,000, and there is no evidence that he owes Hoover Slovacek more than 28.66% of that amount. The Court notes that its concerns do not extend to hourly fee agreements, but it is not clear why only contingent fees are subject to abuse.5
In sum, the Court believe[s] Hoover s termination fee provision is unreasonably susceptible to overreaching, exploiting the attorney s superior information, and damaging the trust that is vital to the attorney-client relationship. 6 Although I think the Court s arguments are strained at best, even if they had more substance, a fee agreement should not be voided as unconscionable and against public policy based merely on what could happen but was not intended and has not in fact occurred. It could have happened that Hoover Slovacek provoked its own discharge for nefarious reasons, or that Walton discharged Hoover Slovacek for cause, or that
[F]ee arrangements normally are made at the outset of representation, a time when many uncertainties and contingencies exist, while claims of unconscionability are made in hindsight when the contingencies have been resolved.... Except in very unusual situations, therefore, the circumstances at the time a fee arrangement is made should control in determining a question of unconscionability.7
Agreements are unconscionable when they are not or cannot be proper, not when it is merely possible for them to be improper.
Again, it matters not whether the parties have behaved admirably throughout.
If the Court is serious about today s analysis, many more fee agreements and other contracts will be unconscionable. The Court says that [h]ourly fee agreements... do not implicate the [same] concerns it has about the agreement in this case,8 but they do. Fees based on hourly rates seemingly reasonable at the outset could end up being excessive in
But the Court may not be serious. It may be that today s decision will be limited to this one particular fee agreement in this one isolated situation, portending nothing for fee agreements in general.9 If so, then the rules governing fee agreements will merely have a minor exception, and only the Court s authority to articulate general rules will suffer. Of course, the careful lawyer on a contingent fee can simply charge what the law allows for termination of representation without good cause: the full fee. The client will be penalized for changing lawyers and will pay for services not rendered, but it will not be unconscionable.
We have taken as given that the only fee a Texas lawyer is prohibited from charging is one that is illegal or unconscionable because that is what rule 1.04(a) of the Texas Disciplinary Rules of Professional Conduct provides.10 In most states, lawyers cannot charge unreasonable fees;11
The Court remands the case to the court of appeals to review the sufficiency of the evidence regarding the jury s failure to find that Walton discharged Hoover Slovacek for good cause. In the end, Hoover Slovacek may recover as much or more without the termination fee provision. This is certainly an odd way of applying unconscionability. I would enforce the termination fee agreement. Accordingly, I respectfully dissent.
NATHAN L. HECHT
JUSTICE