Thirty or forty years ago, it was common for transactional lawyers to include in their fee contracts a provision that gave them—in addition to their attorney’s fees—a piece of the deal. And a few lawyers became extremely wealthy through their ownership of a piece of the client’s business deals. The practice is less common today but still not unheard of. Lawyers now recognize, however, that these arrangements are fraught with ethical issues that may outweigh any potential benefit.
The first ethical rule implicated by these piece of the deal arrangements is Rule 1.04, which makes it unethical for a lawyer to “enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee.” An unconscionable fee is defined as any arrangement where “a competent lawyer could not form a reasonable belief that the fee is reasonable.” The Rule enumerates several factors to be considered when determining the reasonableness of a fee.
The problem with piece of the deal contracts is that the piece of the deal is usually added on top of the reasonable fee charged by the lawyer for legal services. Put another way, if the lawyer is charging the full hourly rate for legal services, how can a piece of the deal on top of that full rate possibly be “reasonable”? Transactional lawyers who enter into these arrangements may face not only a grievance but also a lawsuit by the client seeking to void the obligation to give the lawyer a piece of the deal because the fee contract is unconscionable, unethical, and without consideration.
The second rule implicated by the piece of the deal arrangements is Rule 1.08, which prohibits a lawyer from entering into a business transaction with a client unless (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client; (2) the client is given a reasonable opportunity to seek independent counsel before agreeing to the transaction; and (3) the client consents in writing. Whether the lawyer acquires the interest on terms that are fair to the client implicates Rule 1.04 and the reasonableness of the fees charged. But equally important is the obligation of a reasonable opportunity to seek independent counsel. The requirement of a “reasonable opportunity” in all probability requires a lawyer seeking a piece of the deal to make a full disclosure so that the client knows what to ask the independent counsel. This rule recognizes the inherent conflict between client and lawyer so that a failure on the part of the lawyer to fully disclose the conflict in terms the client can understand—so that the necessity of independent counsel can be evaluated—not only is unethical, but probably invalidates the transaction.
So, while the rules do not expressly prohibit a piece of the deal fee arrangement, they certainly make it more complicated than most lawyers realized 40 years ago. If you want to enter into such an arrangement, make sure that your fee is reduced sufficiently to justify the additional compensation represented by the piece of the deal. Make sure you fully explain the matter to the client—including the inherent conflict—and advise the client to seek independent counsel before agreeing to the transaction. Put your disclosure of the conflict and your recommendation of independent counsel in writing, so there is no dispute about it later. And then confirm the client’s consent to the matter in writing with the client’s signature.
There is one last consideration you should evaluate before entering into one of these arrangements. Let’s assume you do everything right and acquire a 10% interest in the client’s valuable business venture. What will you do two years from now when your client is in a fight with other minority owners over mismanagement of the enterprise? Can you look out for your own interest and side with the dissident owners? Are you willing to lose the client? Rule 1.06 says a lawyer may not represent a client when it appears that the lawyer’s own interests may limit or be in conflict with the representation of the client. And none of us can see the future to be sure this does not happen.
There you have it. Piece of the deal fee contracts are possible if you want to run the risks. But those risks can be high and the consequences grave. Good luck.