Understanding New York Rules on Contingency Fees

What are Contingency Fees?

Contingency fees are a common way for attorneys to charge for their services, particularly in personal injury cases. Under a contingency fee arrangement, the attorney accepts the case and pays all of the upfront costs necessary to prosecute the lawsuit, with the understanding that when the case is over and if there is a recovery, the client will pay a percentage of the recovery to the attorney. Thus, there is no upfront retainer, and the attorney bears all of the risk that there will not be a recovery and that all costs will not be reimbursed. In some instances, there are also contingency fees for defense work, but those types of arrangements are rare.
For example, if the attorney agrees to a contingency fee of 33.3% on a personal injury case, when the case resolves and if there is a recovery, the attorney receives 33.3% of the amount recovered , and the client receives the rest. It is important to understand and distinguish between the attorney’s fee and the costs. The same example above may be used, but only with a slight change. Instead of 33.3% of the recovery, the attorney may be entitled to 33.3% of the net amount after costs are after paid. Therefore, if the recovery is $100 and costs are $10, then the attorney would get $29.67 (33.3% of $90 net recovery), and the client would get $60.33 (66.7% of the same net recovery).
Contingency fees in New York are governed by 22 NYCRR 1215.1, which sets forth all of the conditions, limitations, and requirements upon attorneys and clients. Any agreement not in compliance with this rule is void and unenforceable, and the attorney may not collect any fee. It is extremely important that both the attorney and client understand how a contingency fee agreement with their attorney will impact their respective purse strings.

The Laws Pertaining to Contingency Fees in New York

In terms of the legal framework governing contingency fees, New York is actually among the more restrictive states. New York has both statutory and case law that govern contingency fees, and those laws must be followed by all attorneys who take a contingency fee in New York. New York law is fairly comprehensive, but there are some very specific sections that should be addressed.
New York Statutes
N.Y. Code Jud. Ct. §474 provides that subject to the exceptions enumerated in the statute, all attorneys who take contingency fees in New York must establish, in advance of taking the contingency, a written agreement that clearly establishes the exact percentage of the recovery that the attorney will receive. That is a significant distinction between New York and many other states, where the exact percentage does not have to be disclosed until after the recovery. The statute provides that a copy of the contingency agreement must be provided to the client and the attorney must provide a copy to the court as soon as practicable after the agreement has been signed.
The N.Y. Code Jud. Ct. also provides that all contingency fee arrangements must also disclose the total expenses reasonably likely to be incurred by the client. It is unclear how detailed the disclosure must be and how "likely" the expenses must be, with no bright line rule.
While the N.Y. Code Jud. Ct. allows attorneys to ask for an increase in the agreed-upon percentage if they have to perform more work than they expected, this kind of increase is not automatically allowed. Instead, the court must agree to any increase in the percentage, as must the client. Again, there is no bright line rule here, except that the client must agree to the increase in percentage.
N.Y. Code Jud. Ct. §474-a provides that attorneys are prohibited from taking more than 33⅓% contingency fee in medical malpractice cases. In medical malpractice cases, the 33⅓% cap goes up to $250,000 and then drops down to 10% for the remaining recovery over $250,000. The statute further provides that New York’s appellate courts can only violate this cap when the result is "injustice." While it would appear that this would be a narrow exception, it is possible that appellate courts will waive the cap in certain circumstances that might not be as clear-cut.
Case Law
In addition to the statutes governing contingency fees in New York, there is also case law that governs the matter. For example, in Benedict & Altman v. Campbell v. Abrahams, 69 N.Y.S.2d 77 (N.Y. App. Div. 1947), the court held that the client must be notified of the court-approved attorney’s fee before the attorney spends any effort on behalf of the client. This case makes it clear that the client has the right to know the fee arrangement that the attorney has negotiated with the court and the attorney must be clear that the client will have to pay the fee and it will be deducted from his or her recovery.

Contingency Fee Restrictions and Limitations

As is often the case with the law, the limitations on contingency fees in New York are somewhat involved. The fee limitations are spread over a number of legal and advisory documents, and under NYSBA and ABA rules that are honored in NY courts.
OCA Guidance Document
New York State Court Clerk’s Association issued a bulletin on 4/18/05 explaining limitations on fees. The bulletin states that as of June 1, 2005, new restrictions would be in effect for legal fees paid through court, with only approved contingency fees allowed. The bulletin also clarifies that in an action (personal injury, medical malpractice and wrongful death), a plaintiff may not enter into an agreement for legal fees with counsel greater than the contingent fee limits established by 22 NYCRR § 603.7. 22 NYCRR § 603.7(f) limits the total fee in a civil action to 33 1/3% of the first $ 100,000, 25% of the next $ 100,000, 20 % of the next $ 200,000, 15% of the next $ 300,000 and 10% of any excess over $700,000. Smaller limits apply in medical malpractice cases. 22 NYCRR § 603.7(e). In malpractice actions, the "governing fee" is 40% up to $ 250,000, 30% of the next $ 250,000 20% of the next $ 500,000 10% of any excess.
NYSBA Guidelines
The New York State Bar Association Committee on Professional Ethics issues opinions that interpret their view of the law governing attorneys and ethics rules. Opinion 1130 interprets the law to mean that attorneys must honor any limitation on fees found in statutes and rules, and that the discipline risk is the same whether the attorney receives the fee through the court or directly from the client. Opinion 1130 also states that the New York rules of professional conduct prohibit a flat fee for medical malpractice cases, which charges the same fee as a percentage of a recovery would have been, but the New York rules do not explicitly prohibit discounts in these situations. It should also be noted that under the U.S. Supreme Court opinion in Blanchard v. Bergeron, 493 U.S. 251, 261 (1992), attorneys may not agree with their clients to pay the full fee to a referring attorney, but instead must negotiate their own fees from the client.
NYC Bar Guidelines
The New York City Bar has a committee on legal fees, which issued standards for containment, Compliance, and Enforcement to be followed in New York City. Standard C. refers to 22 NYCRR §603.7. The standard states that contingent fees charged in medical claims "should be determined within the limits set forth within 22 NYCRR §603.7(b)(1) but should not be based solely on that amount. The guidelines seem to suggest that it would be inappropriate to negotiate a higher fee in a case expected to be difficult, uncertain, or lengthy than in a case more likely to settle expeditiously.

How Contingency Fees Are in Your Interest

Contingency fees can be a very compelling option for clients because they often make legal representation more accessible, particularly in areas such as personal injury where the costs of litigation can be prohibitive. In many personal injury cases the client is unlikely to be able to pay a massive retainer up front and at a flat hourly rate, as well as any expenses incurred during litigation. Contingency fee arrangements allow the attorney to handle the case with no up-front payments from the client and to recover fees and expenses paid from the amount recovered. In many cases, these arrangements make it possible for the client to receive much needed representation when they probably would not otherwise afford it.
In addition to accessibility, contingency fee arrangements often align the incentives of the attorney and client. In a contingency fee arrangement, the attorney has a powerful financial incentive to obtain the highest recovery possible for the client. The attorney must maximize recovery for the client to maximize their fee. In many cases, the client would receive no compensation at all without the attorney filing the lawsuit and taking the risks of litigation because insurance companies and other defendants are generally unwilling to offer full and fair compensation when the injured party is not represented by an attorney.

Ethical Issues for Lawyers

The National Organization of Social Security Claimant’s Representatives ("NOSSCR") offered a lengthy discussion of this issue in their recent publication, The Ethical Implications and Lawyer Bonus Contingency Fees, commenting on the fact that:
… in their zeal to win bonuses, attorneys are ignoring the risk factors that the New York State Bar Association’s Professional Ethics Commission has emphasized in the past. In fact, many lawyers applying for bonus fees fail to disclose the risks and costs associated with their representation, including disclosures that help the judge know if the fee will be reasonable based upon the circumstances under which the disability claimant retained the lawyer, and whether the $28,000 cap is reached for the right reasons.
… when the judge does not receive risk assessment disclosures, the judge cannot weigh the risk factors against the expected bonus as a basis for deciding whether or not to approve the fee petition . In the vast majority of cases, the judge approves the fee petition without a second thought because the fee appears reasonable due to the vast difference in time between the no-appeal and appeal fee (approximately three years).
… Second, NOSSCR is disturbed at how few courts are requiring the risk disclosure statements that the New York State Bar Association’s Professional Ethics Commission has suggested and which the Social Security Administration has indicated it is interested in having included. … Third, many judges are not making adequate inquiries into how the fee is calculated or proposing reductions to bonus fees that are excessive. Typically, the judges offset fees when (1) the workload evidence is weak; (2) the special skills needed are common; (3) the case involved a well-informed claimant; (4) permanency was attained quickly; (5) it was clear that the claimant never will be improved (e.g., lung cancer); (6) the Administrative Law Judge found error in the past denial of the case; or (7) the case was one that was expected to win.

Choosing an Attorney for a Contingency Fee Matter

A common question is how to choose the right lawyer to handle a case on a contingency fee basis. Clients should consider the immediate interests as well as long term interests in hiring an attorney on a contingency fee. An experienced lawyer can usually address these specific situations in a manner which protects the long term financial interest of the clients.
In general clients should consider the following when selecting an attorney for a contingency fee case:

Reputation. Find an attorney who litigates your type of case and has a good reputation within the legal community.
Experience. Select a lawyer who will be the trial attorney on your case. This may eliminate some firms with larger staffs and hiring a smaller firm with a lawyer who will stick with the case. Many larger firms "staff up" cases with a large support group handling each aspect of the case without assigning a lawyer to the case.
Success Rate. With the internet this is relatively easy to determine. Look at the lawyers past successes as reported in verdict reports and decisions. The lawyer’s past successes and experience gives a good idea of what to expect.
Comfort Level. Select an attorney with whom you are comfortable and with whom you can communicate.

Recent Developments and Trends in Contingency Fees

The New York Court of Appeals has, in recent years, made moves to formalize and standardize its treatment of contingency fees. In a series of decisions, the Court has sought to address the renegotiation of contingent-fee agreements after liability has been established but before damages had been determined, as well as the adjustment of attorneys’ fees due to changes in the applicable law during the litigation. These types of adverse effects on defendant’s liability have prompted certain courts to effectively rewrite contractual terms, in violation of prevailing contract law principles.
In a series of decisions, New York courts addressed the impact of pre-trial settlements on contingency fee agreements. In Chiaramonte v. Clark (2013 N.Y. Slip Op. 3764 [1st Dep’t 2013]), the First Department held that lawyers should retain the same percentage fee ("the contingency") after an early settlement agreement, based upon a formula created by the court: (1) 100 percent of first $100,000; (2) 75 percent of the next $400,000; and (3) 50 percent of the next $500,000. This formula was based on a number of factors such as the lawyers efforts prior to settlement. An opposing view was adopted in Zuckerman v. City of New York (2013 N.Y. Slip Op. 26510 [Sup. Ct. Bronx Cty. 2013]) and Montalto v. City of New York (2013 N.Y. Slip Op. 29130 [Sup. Ct. Bronx Cty. 2013]). In Zuckerman, the trial court rejected the Chiaramonte ruling and applied a sliding scale percentage fee that limited the plaintiff’s liability to actual work performed . The Montalto court adopted the Zuckerman reasoning, but stopped short of prohibiting reference to Chiaramonte. Chiaramonte appears to have been the prevailing rule in later decisions. Windy City Holdings II, LLC v. Adams (2014 N.Y.Slip Op 32107 [Sup. Ct. New York Cty. 2014]) and Guariglia v. Hirsch (2013 N.Y. Slip Op. 23912 [Sup. Ct. Kings Cty. 2013]) cite Chiaramonte for the proposition that settlement-based fee calculations should be based on "efforts expended by all members of the litigation team . . . where practicable." The Guariglia court stated that "where a case is factually indistinguishable from Chiaramonte," it would not apply a sliding-scale contingency.
The sliding scale methodology outlined in the Windy City Holdings II decision, adopted in the two prior rulings, seems to provide a much more equitable solution for clients and attorneys. The Chiaramonte decision, while yet to be expressly overruled by the Court of Appeals, in effect adopts a rule that essentially removes an attorney’s right to be compensated when a case settles shortly after being retained, regardless of the services performed. This runs counter to the general contract law principles of New York. See e.g. Demirovic v. Trippe (2013 NY Slip Op 31955 [U] [Sup. Ct. Nassau Cty. 2013]). The Court of Appeals will no doubt soon squarely address these conflicting approaches to contingent fee contracts.