Clients routinely seek to change lawyers at some point during a lawsuit. It is usually not a problem—unless the first lawyer was retained on a contingent-fee basis. Because many clients who retain a lawyer on a contingent fee are unsophisticated consumers of legal services, they often stumble into risks that could have been avoided when they want to change lawyers. And if the second lawyer does not properly advise the client of these risks, the second lawyer may be embracing his or her own malpractice or tortious-interference lawsuit.
The starting point for any analysis of the legal consequences of changing lawyers retained on a contingent fee is the 1969 Texas Supreme Court decision in Mandel & Wright. The fundamental ruling of that case is easy to articulate but sometimes difficult to apply. If a client fires a lawyer previously employed on a contingent fee without good cause, the lawyer is relieved of all obligations to the client. But the client continues to be obligated to pay the lawyer under the contingency contract. If, on the other hand, the client fires the lawyer for good cause, then the client owes the lawyer only a fee under quantum meruit analysis (more on that in the next blog).
Unfortunately, there is little case law analyzing what constitutes good cause. We do know that the presence or absence of good cause will be decided by a jury in a second lawsuit. This puts the client at a serious disadvantage when the client wants to change lawyers. The client will not know the total amount of fees the client must pay from the client’s recovery until long after the first lawsuit is resolved. And even then, the answer will come only after the client has hired another lawyer to defend the second lawsuit with the first lawyer over the issue of good cause. If the jury in the second case decides that the client terminated the first lawyer without sufficient justification, the client will end up owing the full contingent fee to the second lawyer who completed the work on the case and also another full contingent fee to the first lawyer whom the client terminated—leaving the client with only a small percentage of the settlement proceeds.
When a client fires the first lawyer and hires a second lawyer to complete the case, adverse financial consequences may also slop over onto the second lawyer. Imagine, for example, that lawyer Jones knows the client first hired lawyer Smith but is now dissatisfied and wants to hire lawyer Jones. Lawyer Jones very much wants to be hired on this case. But if lawyer Jones fails to advise the client properly about the risks associated with the Mandel & Wright decision, the client may later sue lawyer Jones for malpractice when it turns out the client did not have good cause to fire lawyer Smith. In addition, lawyer Smith may sue lawyer Jones for tortious interference with the contingency contract with the client.
Most states permit the terminated lawyer to recover only on a quantum meruit basis and not a contingent fee basis. Texas is very much in a minority position regarding compensation to be paid to a terminated lawyer retained on a contingent fee. The Mandel & Wright decision is a huge protection for lawyers working on a contingent fee. It protects lawyers, for example, who worked diligently for a client but then get terminated so the client can hire a nephew who just got out of law school. It serves to discourage barratry and client-stealing by other lawyers. But this protection comes at a high price—or at least the risk of a high price—for the clients wanting to change lawyers.
So, what are the client, the first lawyer, and the second lawyer to do? The easy answer is that all three of them should get together and settle these disputes. We have been advising both the terminated lawyers and the second lawyers to resolve these disputes by agreeing to share fees because of our concern that the protections afforded to lawyers under the Mandel & Wright decision will be removed if the right case finds its way to the Texas Supreme Court.
And as self-serving as it sounds for me to say this, the client needs yet another lawyer to advise him on this issue since both the first lawyer and the second lawyer have a conflict of interest as a result of their own financial interests. We have been retained on multiple occasions by clients in these situations, often referred by the second lawyer. Our goal in these situations always is to resolve the dispute early so that the clients can go forward with their counsel of choice, knowing the amount of fees they will ultimately have to pay. If that voluntary resolution is not possible, however, we prepare the second case for trial, hoping to show that the first lawyer was terminated for good cause, but failing that, planning for an appeal to the Texas Supreme Court that may ultimately disadvantage all lawyers who work on a contingent fee in this state.