THE STATE BAR OF CALIFORNIA
STANDING COMMITTEE ON
PROFESSIONAL RESPONSIBILITY AND CONDUCT
FORMAL OPINION NO. 1984-79
Regarding the Committee's discussion of contingent fee arrangements with expert medical consultants in medical tort injury claims cases, attorneys are advised to review the case Ojeda v. Sharp Cabrillo Hospital (1991) 8 Cal.App.4th 1.
What are the ethical considerations for members of the State Bar who are considering permitting their clients to enter into contractual arrangements with firms which offer the service, on a contingent fee basis, of providing expert medical consultation and of locating and providing expert testimony?
There are several serious potential obstacles that may preclude an attorney from participating in such arrangements. Members of the State Bar have a professional responsibility to see that contingent fees are not paid for the testimony of witnesses, that the member is not aiding the unauthorized practice of law, and that legal fees are not shared with a lay person. In addition, members must exercise control over and responsibility for the conduct of their cases, must maintain an absolute duty of loyalty to their clients, and must avoid illegal running and capping. Within the foregoing constraints, a member of the State Bar may continue his or her professional activities on behalf of a client who has entered into such a contract.
Rules 3-101(A), 3-102(A), 3-103 and 7-107(C) of the Rules of Professional Conduct of the State Bar of California.
Business and Professions Code section 6152.
The Committee has received a hypothetical inquiry about a company which would offer to attorneys and their clients, on a contingent fee basis, the service of providing expert medical consultation and of locating and providing expert testimony. While aspects of this type of arrangement have previously been considered in American Bar Association Informal Opinions Nos. 1375 (August 10, 1976) and 1445 (February 1, 1980), because the American Bar Association model rules and opinions are not binding in California (See Opinion 1983-71 of the Committee on Professional Responsibility and Conduct) the Committee wishes to review, for the benefit of members of the State Bar, a number of the ethical issues which must be considered by members participating or acquiescing in such arrangements.
The facts as stated in ABA Informal Opinion No. 1375 and the hypothetical facts submitted to the Committee are substantially similar: Lawyer and client enter into a contingent fee agreement under which the lawyer is to prosecute a personal injury tort claim (in No. 1375 the matter was a malpractice claim against a doctor). On the lawyer's advice, client also enters into a written agreement with a "medical-legal consulting service" (herein referred to as the "Consulting Service") under which the Consulting Service is to provide technical medical research, investigation, evaluation of medical records, expert witness testimony and assistance to the lawyer in prosecution of the lawsuit. The Consulting Service will contract for and pay the fees of expert witnesses. The agreement with the Consulting Service also contains an "assignment" which is acknowledged by the lawyer and by which the lawyer agrees to pay the fees and expenses of the Consulting Service out of any proceeds received on behalf of the client.
In the facts stated in ABA Informal Opinion No. 1375, the client was dissatisfied with the Consulting Service and instructed the lawyer not to pay. That opinion listed three ethical considerations in such arrangements, which will be considered further below:
1. The contingent fee cannot be payable for the testimony of a witness.
2. The lawyer may not share legal fees with a lay person.
3. The lay person or agency may not engage in the unauthorized practice of law, nor may the lawyer aid in the unauthorized practice of law. Additional ethical considerations are the professional responsibility and duty of loyalty which a lawyer owes to his or her client and the prohibition in California on running and capping contained in Business and Profession Code section 6151.
Within the limits of the foregoing ethical considerations, a member of the State Bar may continue his or her professional activities on behalf of a client who has entered into a contingent fee arrangement with a lay agency like the Consulting Service.
Contingent Fees for Expert Witnesses
Rule 7-107(C) of the Rules of Professional Conduct states that a member of the State Bar shall not:
"... (d)irectly or indirectly pay, offer to pay, or acquiesce in the payment of compensation to a witness contingent upon his testimony or the outcome of his case."
The rule does permit the payment of "a reasonable fee for the professional services of an expert witness." The California rule is based on ABA Disciplinary Rule 7-109(C), and is intended as a protection against an undue incentive for false or slanted testimony by witnesses. In the facts stated in ABA Informal Opinion No. 1375, and in the hypothetical facts presented to the Committee, it is assumed that the prohibition of these rules is avoided because the expert witnesses themselves are not paid on a contingent basis.
It should be noted, however, that rule 7-107(C) specifically prohibits acquiescing in the payment of a contingent witness fee. A member of the State Bar may not simply turn a blind eye to the substantial possibility that the arrangement stated may simply be a subterfuge for paying a contingent witness fee. For this reason Informal Opinion No. 1445, which involved similar facts, states that the contract should not contemplate testimony by the employees or agents of the Consulting Service, and testimony by shareholders of the Consulting Service must obviously be barred for the same reason. It must also be recognized that any real business like the Consulting Service is likely to maintain a "stable" of experts upon which it draws for testimony. The arrangements with the experts may be such that the witnesses are provided with a stake in the outcome of the litigation due to their repeated utilization by Consulting Service, and their repeated compensation therefor. Obviously the lawyer must carefully explore these issues against the possibility of surprise disclosure at trial with devastating effect on the client's case. In the event the lawyer discovers that the witnesses' compensation is in essence contingent on either testimony or outcome, this lawyer will violate rule 7-107(C) if he or she should acquiesce in the arrangements by permitting such testimony.
The Committee notes that the rule against contingent fees for expert witnesses has provoked some criticism. The constitutionality of the rule was challenged in Person v. Association of the Bar of New York (2d. Cir. 1977) 554 F.2d 534, by an attorney who alleged that he was unable to obtain vital accounting and economic testimony in an antitrust case. The trial court found that access to the courts by less affluent litigants was impaired and held that the rule was too irrational to survive Fourteenth Amendment analysis. The Second Circuit, while conceding that litigation of complex matters might be aided by eliminating the prohibition, reversed on the basis that there is sufficient danger of the inducement of false expert testimony to support the rule against Fourteenth Amendment attack. In particular, the court noted:
"Expert testimony, by its very nature, concerns areas of knowledge with which the ordinary juror and the court are unfamiliar, and perjured expert testimony is particularly difficult for a juror to detect. Id. at 539."
A number of commentators have criticized the rule on the basis that there are sufficient checks available against perjured testimony to make a blanket prohibition unnecessary. (See Note, Contingent Fees for Expert Witnesses in Civil Litigation, 86 Yale L.J. 1680 (1977); and Note, The Contingent Compensation of Expert Witnesses in Civil Litigation, 52 Ind. L.J. 671 (1977).) The most substantial criticism leveled against the rule is that the fees of expert witnesses are often de facto contingent upon the outcome for the simple reason that the litigant has no money apart from the potential award in the litigation with which to pay such fees and the witnesses testify with full knowledge of such financial circumstances.
The new ABA Model Rules of Professional Conduct somewhat loosen the absolute prohibition of the DR 7-107(C). New Model Rule 3.4(b) now provides that a lawyer shall not "offer an inducement to a witness that is prohibited by law." The comment to the new rule simply notes that the common law rule in most jurisdictions makes it "improper to pay an occurrence witness any fee for testifying and . . . improper to pay an expert witness a contingent fee."
California case authority, in accord with the common law, has strongly condemned such contingent fee arrangements:
"It is the contingency on the one hand and the agreement to furnish a given set of facts essential to a successful litigation on the other, and both of which in their nature are calculated to induce false charges and the production of perjured testimony, to subvert the truth and pervert justice through fraud, trickery, and chicanery at the hands of unscrupulous private detectives or other conscienceless persons, which has impelled the law, with wisdom, to declare such contracts illegal" Von Kesler v. Baker (1933) 131 Cal. App. 654, 657 citing Hare v. McGue (1918) 178 Cal. 740.
It should also be noted that the codes of several expert professions prohibit contingent fee arrangements. (See Note, supra, 86 Yale L.J. 1680 at 1682, fn. 9 (such professions include doctors, accountants and expert document examiners).) In any event, the arrangement with the Consulting Service under consideration does not involve a direct payment of a contingent payment to a witness and therefore falls outside the safeguards discussed in the scholarly debate cited above.
Sharing Legal Fees with a Lay Person
Rule 3-102(A) of the Rules of Professional Conduct prohibits a member of the State Bar from directly or indirectly sharing legal fees except with a person licensed to practice law, with certain exceptions not here relevant.
Whenever a lay person or lay organization plays a part in the attorney-client relationship, lawyers must take care to analyze fee arrangements, both their own and those of the lay organization. Thus, in ABA Informal Opinion 1375 it was held to be unethical for a lawyer to agree to an assignment of the proceeds of litigation to the Consulting Service if, in fact the arrangement is merely a subterfuge for fee-splitting between a lawyer and a lay person. However, if the assignment is made with the understanding of the client and is merely to assure payment to the Consulting Service for its services and expenses, the assignment would not violate the disciplinary rule.
A closely related question was presented in ABA Informal Opinion No. 1445, which addressed the propriety of lawyers' participation in an organization providing litigation support services in the fields of economics and related areas. The opinion noted that the organization could not be retained by a lawyer on a contingent fee basis if any nonlawyer employee of the organization would be paid other than on the basis of a regular salary computed without regard to fees collected. Accordingly, if any person other than a member of the State Bar1 has a proprietary interest in the Consulting Service or will be paid other than a regular salary, it would be improper if the Consulting Service entered into the proposed contingent fee arrangement with the lawyer rather than with the client.
In addition, if the fee payable to the Consulting Service is taken in whole or in part from the lawyer's own fee, the arrangement contemplated would constitute improper fee splitting, particularly in light of the fact that the services are actually rendered to the lawyer. Thus, the contingent fee of the lawyer must be computed without regard to the fee payable to the Consulting Service. In California, this presents a particular problem in medical injury tort cases (the subject of Informal Opinion No. 1375) where, by statute, the lawyer's fee must be computed on the net sum recovered after deducting any disbursements or costs. (See Bus. & Prof. Code, 6146(a).) Thus, a contingent fee arrangement with the Consulting Service would be improper in medical tort injury claims cases, the very type of case where the services sought to be rendered are likely to be most useful
Aiding the Unauthorized Practice of Law
Rule 3-101(A) of the Rules of Professional Conduct prohibits a member of the State Bar from aiding any person, association, or corporation in the unauthorized practice of law. The purpose of this rule is "to protect individual litigants and the public from the mistakes of the untrained and the schemes of the unscrupulous..." (See Annotated Code of Professional Responsibility (American Bar Foundation, 1979) at 132.)
The question of what constitutes the practice of law is generally a question of fact to be determined in the particular circumstances. Thus, ABA Informal Opinion No. 1375 merely assumes, without discussion, that the activities contemplated by the Consulting Service do not constitute the practice of law. This precise issue was analyzed by the Committee on Legal Ethics of the District of Columbia Bar in Opinion No. 55 (1978), which held that the services rendered by the lay organization in finding appropriate medical witnesses, paying them for their consultation and testimony and assuming a portion of the injured party's financial risk of prosecuting the lawsuit, do not constitute the practice of law.
The fact that lawyers themselves frequently perform the function of finding medical witnesses for their client's cases does not make this necessarily a legal service. Many of the various functions performed by lawyers in preparing cases for trial can be performed by others also. As long as the services are not distinctively legal and remain subject to the control of the lawyer who has responsibility for the case, those performing them are not engaged in the unauthorized practice of law. We assume that the lawyer posing this inquiry is free to accept or reject medical witnesses preferred by the lay organization, depending on his evaluation of the contribution they can make to his client's cause.
The Committee agrees with the analysis of the District of Columbia Bar. A member of the State Bar using the services of such an organization will not be aiding the unauthorized practice of law if the member retains control of and responsibility over the case and is free to accept or reject witnesses depending on the member's own evaluation of the witness's contribution to the client's cause.
In addition, a lawyer associated with such an organization must also take care that the services rendered are not distinctly legal and that the organization's activities are conducted in a manner which recognizes the supervision and control of the attorney of record in the matter. Rule 3-103 of the Rules of Professional Conduct prohibits a member of the State Bar from forming a partnership with a person not licensed to practice law if any of the activities of the partnership consist of the practice of law. A lawyer participating in such an organization would also have to maintain separate billing procedures for services which are legal in nature to avoid violation of rule 3-102, discussed above, and rule 3-103. (See also Formal Opinions Nos. 1982-68 and 1982-69 of the Committee on Professional Responsibility and Conduct for a discussion of the responsibilities of members of the State Bar who engage in law-related activities.)
The lawyer owes to his client the primary duties of loyalty and care. The lawyer should retain ultimate professional responsibility2 for evaluating the case or course of action to be followed for the client (see for e.g., ABA Ethical Consideration 5-21 and Disciplinary Rule 5-107) and should exercise on behalf of his or her client "reasonable control over expenses incurred by the lay agency so that neither expenses unauthorized by the lawyer or client nor those of dubious value to the client's cause are expended by the Consulting Service for the client's account." (ABA Informal Opinion No. 1375. See also, rule 7-107(C).)
The acute ethical dilemma presented to the lawyer is amply demonstrated by ABA Informal Opinion No. 1375. The dispute in that opinion arose because the client was dissatisfied with the services of the lay agency and directed the attorney not to pay the disputed fee. However, the lawyer had signed an "assignment" by which he had agreed to pay the fees and expenses of the lay agency out of proceeds from the action received on behalf of the client. Thus, the lawyer could not deliver the disputed funds to his client,3 nor could he contest on behalf of his client the reasonableness of the fee or its value to his client, without breaching his own contractual obligation. The suggestion of the ABA Committee on Ethics and Professional Responsibility for resolving this dilemma was that the lawyer should "file an appropriate action so that the rights of the claimants will be promptly adjudicated." This Committee believes that a member of the State Bar should not abdicate his or her responsibility to act solely on behalf of the client by signing an agreement which effectively prevents the lawyer from representing the best interests of the client.
Running and Capping
Rule 3-102(B) prohibits an attorney from compensating or giving or promising anything of value to a person or entity for the purpose of recommending or securing employment or as a reward for having made a recommendation of employment, and Business and Professions Code section 6152 makes it illegal for any person to act as a "runner or capper" for an attorney. These provisions were recently discussed in the Committee's Formal Opinion No. 1983-75, and that discussion will not be repeated here. However, in considering the issue of why an attorney would recommend to a client the type of arrangement under consideration, particularly in light of the widespread availability of medical expert witnesses, the Committee was concerned that the known willingness of a lawyer to recommend such arrangements to his or her clients would result in the referral of cases to that attorney by the Consulting Service, to whose attention the case might first have been brought. The Committee believes that any understanding, express or implied, that the lawyer will recommend the retention of the Consulting Service, on any fee basis, would violate rule 3-102(B) and section 6152, as well as raising the other ethical considerations discussed above.
The Committee's conclusion is based on the hypothetical facts assumed herein. Although this arrangement is not per se violative of the Rules of Professional Conduct, the arrangement by its nature may place considerable pressure on the participants, particularly, the Consulting Service and the experts it retains, to operate in a fashion which could result in involving the attorney either directly or indirectly in unethical conduct, and could in fact, harm the client's case. Before engaging in such practice, the attorney should thus carefully and prudently consider this opinion.
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of The State Bar of California. It is advisory only. It is not binding upon the courts, The State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.
1. A member of the State Bar may divide a fee for legal services under the circumstances stated in rule 2-108 of the Rules of Professional Conduct, i.e., the client consents in writing, the total fee charged by all is not increased and the payment is not made for recommending employment of the member.
2. The Committee has not attempted to address the issue of the authority of the lawyer vis-a-vis the client to control various aspects of the handling of the case. For a discussion of this issue and a compendium of cases on the subject see, Linsk v. Linsk (1969) 70 Cal.2d 272, 276 [74 Cal.Rptr. 544].
3. The Committee has not considered whether the written agreement with the Consulting Service to provide expert testimony for a percentage of the fee in the medical malpractice action constitutes an assignment of a personal injury action which is prohibited under California law. Causes of action for personal injuries arising out of tort are not assignable nor are those founded upon wrongs of a purely personal nature such as to the reputation or the feelings of one injured. (Goodley v. Wink & Wink, Inc. (1976) 62 Cal.App.3d 898; (legal malpractice action not assignable); Fifield Manor v. Finston, 54 Cal.2d 632, 639 (1960). See also, Civil Code 954.) Although contingency fee contracts involving attorneys are now well accepted in California, the propriety of such arrangements is still debated. (1 Witkin, Cal Proc., Attorneys, 83, at pp. 87-88 (2d Ed., 1970).) While a distinction may be made between an assignment of a cause of action and the assignment of the proceeds thereof as a means of avoiding the prohibition against assignment of personal injury claims, that issue is unresolved in California. (See Annotation, Assignability of Claim for Personal Injuries or Death, 40 ALR2d 500 (1955), 8, 10.) Therefore, it is an open question in California whether, apart from the ethical considerations discussed herein, the arrangement would be legal under California law.