On appeal from Superior Court, Law Division, Hudson County.
Before Judges Petrella, Baime and Villanueva.
The opinion of the court was delivered by
The significant issue on this appeal is whether a renewable one-year agreement for legal services between an attorney and his client is governed by general contract principles or those principles as modified by ethical considerations and standards applicable to the practice of law as a profession. The subject agreement between the parties has elements of a non-refundable retainer agreement as it can only be canceled by notice within a restrictive thirty-day period, i.e., not less than six nor more than seven months before the start of the next one-year period.*fn1
Defendant Radio-Electronics Officers Union, District 3, NMEBA, AFL-CIO (ROU) appeals from a monetary judgment enforcing a notice provision of a one-year renewable contract for legal services in favor of plaintiff Ernest Allen Cohen. Cohen, an attorney admitted to practice law in New York, New Jersey, and Arizona, cross-appeals contending that the Judge inappropriately applied the doctrine of mitigation of damages and miscalculated certain set-off amounts.
We conclude that the subject contract for legal services, which only permitted "proper" termination of counsel within a limited one-month period and is essentially an agreement for a non-refundable retainer fee, violates public policy and our Rules of Professional Conduct (RPC) as it infringed upon the client's inherent right to discharge his attorney at will, foisted an unwanted attorney upon a client who lost faith and confidence in his services, and provided for the payment of a contract fee regardless of whether the attorney actually performed any professional legal services.
ROU, a labor organization, represents radio officers who are responsible for the communications and electronics aboard ocean-going vessels. Together with employer contributions, it funds various affiliated plans and trusts, which are considered separate entities, to provide medical, vacation, and other benefits to its members.
In December 1985, Thomas C. Harper, then secretary-treasurer of ROU, sought legal services from Cohen, who at that time was a partner in the New York firm of Marchi, Jaffe, Cohen, Crystal, Rosner & Katz (Marchi firm). On January 4, 1986, the Marchi firm and ROU (then based in Jersey City, New Jersey) entered into a contract wherein the parties agreed upon $150 per hour as the highest hourly rate for legal services. In 1986 and 1987, the Marchi firm provided ROU about 1,300 or 1,400 hours in legal services.
In March 1987, Cohen decided to relocate to Arizona and leave the Marchi firm for personal reasons. Shortly thereafter he told Harper, then president of ROU, of his plans. According to Harper, Cohen stated that he wanted to take a few clients with him, including ROU, and practically begged him to be general counsel instead of the Marchi firm.
Cohen on the other hand stated that he told Harper of an offer that he had to teach as an adjunct associate professor at the University of Arizona School of Law. Although Cohen foresaw the possibility of teaching on a full-time basis in the future, he did not apply for this position in 1988, nor was he certain about his future plans. Cohen, however, apparently told Harper that he would have to notify the law school in June of any year in which he wanted the University to consider him for a full-time position. Cohen further claims that Harper initiated the offer to keep him as general counsel and, although he had reservations, he believed it could work given his intention to retain of-counsel status at the Marchi firm.
Although both sides presented conflicting testimony with regard to the actual drafting and signing of the April 28, 1987 agreement, we need not recount those differences. Suffice it to say, ROU and Cohen entered into a one-year agreement, effective January 1, 1988, whereby Cohen would act as general counsel for ROU after he relocated to Arizona.*fn2 The parties "negotiated and executed [the agreement] in New Jersey with reference to New Jersey law" and, on this appeal, neither party contests the application of New Jersey law.
According to its terms, the agreement automatically renewed itself each year unless either party provided "written notice of termination on a date in any year not less than six (6) months nor more than seven (7) months after the commencement month. . . ." Put simply, the termination notice had to be given during June of the year preceding the termination date.
The parties agreed that the annual compensation shall be $100,000 for 1,000 hours of service. ROU also agreed that it would seek to have Cohen designated co-counsel for all applicable ROU trusts and plans*fn3 and, further, any compensation received by Cohen from those plans or trusts would entitle ROU to additional hours of service at the rate of one hour per $100 of compensation. The agreement also permitted Cohen to charge $150 per hour for any time in excess of 1,000 hours, excluding the additional time for the plans.
Cohen in addition had to be "available during ROU's regular business hours for consultation by phone within 24 hours of any call from ROU to Cohen." If ROU identified the call as "on an emergency basis," Cohen had to "be available [by phone] during regular business hours within 3 hours." Alternatively, if Cohen was "unavailable due to illness, vacation or other legitimate cause," he had to provide "appropriate substitute coverage for ROU" at his own cost.
In January 1988, Cohen started to submit invoices with regard to his dual representation of the plans and ROU, including "the amount of time [he] spent on matters of interest to the ROU." According to David Tipton, an ROU auditor, Cohen completed 550 hours of service in 1988 and 1,003 hours in 1989 for ROU. Tipton also determined that Cohen should have reimbursed ROU for $8,079 it had already paid the Marchi firm for legal services.
On December 10, 1989, Harper advised Cohen that the trustees for the plans had decided to replace him as co-counsel and, on December 28, Harper notified Cohen of his termination, effective January 1, 1990, as general counsel for ROU. At that point, Cohen had been fully paid (except for three hours) for legal services rendered through December 31, 1989, but ROU refused to pay him an additional $100,000 for 1990.
Cohen thereafter filed a complaint seeking damages for termination of the legal services agreement without proper notice. More specifically, he sought $100,000 for 1990 based on the failure to comply with the notice provision contained in the agreement and $75,000 for reasonably anticipated fees from ROU related trusts and plans.
In its answer, ROU contended that the contract was not enforceable because (1) Cohen did not advise Harper and ROU to seek independent counsel prior to signing the agreement; (2) certain provisions of the agreement violated the law and were unreasonably advantageous to Cohen; (3) the Rules of Professional Conduct barred a suit arising out of an attorney discharge; and (4) even if the Rules of Professional Conduct did not apply, ROU terminated their agreement with Cohen for cause.*fn4 ROU in addition counterclaimed, asserting breach of contract, misrepresentation with regard to billings, and malpractice.
After an eight-day trial, the trial Judge rendered his oral decision on May 4, 1993, which he later supplemented with a May 12 letter. In his decision, the Judge essentially construed the agreement under general contract principles and concluded that ROU had to provide appropriate advance notice to terminate its agreement with Cohen. The Judge did not find the six-month advance notice provision unreasonable or unfair because the University of Arizona made faculty hiring decisions in June each year and ROU had Cohen at its "beck and call" to travel all over the country, sometimes on short notice. Nor did the Judge interpret RPC 1.16 (terminating representation) as precluding Cohen from maintaining a breach of contract action and, further, stated that there were "no New Jersey appellate decisions which render all actions by attorneys for wrongful termination unenforceable."
Although the trial Judge determined that the parties properly entered into a fair and reasonable agreement, he found illegal the clause providing ROU a one hour credit for each $100 received by Cohen from the trusts or plans.*fn5 The Judge stated that Cohen and Harper both "breached their respective duties as co-counsel and trustee to the plans . . . in including that provision in their retainer agreement." Notwithstanding the illegality of this provision, the Judge determined that the other compensation provisions contained within the agreement were severable and enforceable.
After determining the enforceability of the agreement, the Judge rejected ROU's claim that it had discharged Cohen for cause as pretextual and exaggerated. We find no reason to detail the respective claims of either side here or disturb the trial Judge's findings regarding them. Although there is a sufficient basis in the record to support his findings, Rova Farms Resort, Inc. v. Investors Ins. Co. of America, 65 N.J. 474, 484, 323 A.2d 495 (1974), they are irrelevant to our decision.
The trial Judge then awarded Cohen damages in the amount of $50,000 for the period between January and June 1990 based on his determination that Cohen had a duty to mitigate damages. As Cohen knew of his termination in December 1989, the trial Judge reasoned that he had time to secure alternative employment and, indeed, did procure other clients. The Judge also denied Cohen damages for monies he could have earned as co-counsel to the trusts and plans because he did not attribute the trustees' termination of Cohen to ROU. And, finally, the Judge stated that ROU was entitled to a set-off in every other respect. He initially calculated a set-off of $19,579, yielding an award to Cohen of $30,871,*fn6 but later issued a supplemental letter opinion on May 12, 1993 (as a result of additional correspondence from the parties) correcting the set-off amount to $45,565. The Judge therefore entered a judgment in favor of Cohen and against ROU for $4,885.
On appeal, ROU essentially asserts that (1) the trial Judge erred in enforcing the subject agreement because Cohen did not provide any legal services in 1990 nor did he detrimentally rely upon it; (2) the trial Judge wrongfully enforced an agreement containing an illegal provision; (3) even assuming ROU could only terminate Cohen for good cause, it properly did so based upon Cohen's improper legal advice and billing practices; and (4) the trial Judge should not have relied upon certain evidence in characterizing ROU's arguments for good cause as pretextual. On his cross-appeal, Cohen basically complains that the trial Judge improperly imposed the doctrine of mitigation of damages and miscalculated the set-off amounts.
The precise issue for us to decide is whether a one-year legal services agreement, which is automatically renewable each year, absent six months' notice, and contains a fixed yearly sum irrespective of whether the attorney performs legal services, is controlled by general contract principles or is it a special agreement subject to appropriate ethical and disciplinary rules imposed by our Supreme Court.
We start with the well settled principle that transactions between an attorney and a client are subject to close scrutiny by the court and "the burden of establishing fairness and equity of the transaction rests upon the attorney." Matter of Gallop, 85 N.J. 317, 322, 426 A.2d 509 (1981); Matter of Humen, 123 N.J. 289, 300, 586 A.2d 237 (1991); Matter of Harris, 115 N.J. 181, 187, 557 A.2d 657 (1989); Matter of Nichols, 95 N.J. 126, 131, 469 A.2d 494 (1984). It is also well established that an attorney "is required to maintain the highest professional and ethical standards in his dealings with clients[,]" Humen, supra (123 N.J. at 299-300) (citing In re Gavel, 22 N.J. 248, 262, 125 A.2d 696 (1956)), and "should refrain from engaging in a business transaction with a client who has not obtained independent legal advice on the matter." Humen, supra (123 N.J. at 301) (citing In re Barrett, 88 N.J. 450, 453, 443 A.2d 678 (1982)). See Matter of Smyzer, 108 N.J. 47, 55, 527 A.2d 857 (1987). Hence, "a passing suggestion that the client consult a second attorney" will not even "discharge the lawyer's duty when he and his client have differing interests." Smyzer, supra (108 N.J. at 55).
ROU relies on RPC 1.5(a) for the proposition that a lawyer may only charge reasonable fees. It claims that the judgment in favor of Cohen basically grants him an unreasonable fee because he failed to perform any services whatsoever for 1990. RPC 1.5(a) indeed states that "[a] lawyer's fee shall be reasonable." The factors to consider in determining whether a fee is reasonable include: the time and skill required; the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; the time limitations imposed by the client or circumstances; the nature and length of the professional relationship with the client; and the experience, reputation, and ability of the lawyer or lawyers performing the services. RPC 1.5(a)(1)-(8).
We are also aware of Opinion 644 of the Advisory Committee on Professional Ethics (reported at 126 N.J.L.J. 966, October 11, 1990),*fn7 which discussed non-refundable retainers and concluded that they are "not unethical per se but are subject always to the overriding precept that any fee arrangement must be reasonable and fair to the client." Although the Advisory Committee did not adopt the Ad Hoc Committee's recommendation to condition the deposit of a non-refundable retainer upon compliance by the attorney with a specific set of requirements, it stated:
We concur fully with the Committee's view that an initially reasonable nonrefundable retainer arrangement may become unreasonable because of subsequent unforseen circumstances, such as the sudden death of a client resulting in an abatement of the action. Clearly the unused portion of even a nonrefundable retainer should be returned if contravening events should render it unconscionable for the attorney to keep it.
A non-refundable retainer agreement obviously affects the willingness and ability of a client to discharge his attorney at any time. Although there is a dearth of New Jersey case law addressing the enforceability of non-refundable retainer agreements and, for that matter, the precise issue involved here, In re Estate of Poli, 134 N.J. Super. 222, 338 A.2d 888 (Cty. Ct. 1975), offers some guidance. There, the court concluded that an attorney, who does not complete his services, does not have a vested right in the contractual relationship with a client arising out of a contingent fee arrangement because the client may discharge him at any time without cause. Id. at 226. If discharged, the attorney should refund the client any advanced payment of fees that he has yet to earn. Id. at 225-226. See RPC 1.16(d) (upon termination, an attorney shall take steps to the extent reasonably practicable to refund any advance payment of a fee that has not been earned). The Poli court, however, also reasoned that a client cannot deprive a lawyer of his right to compensation for services already rendered. Id. at 226-227 (citations omitted).
We agree with the Poli court that an attorney is not a businessman "'entitled to charge what the traffic will bear[,]'" but rather is entitled to quantum meruit, i.e., "'as much as he reasonably deserved to have for his labor.'" Poli, supra (134 N.J. Super. at 225) (quoting American Trial Lawyers Ass'n v. New Jersey Supreme Court, 126 N.J. Super. 577, 591, 316 A.2d 19 (App. Div.), aff'd, 66 N.J. 258, 330 A.2d 350 (1974), and Black's Law Dictionary (4th ed. 1951)). And, further, "attorneys must never lose sight of the fact that 'the profession is a branch of the administration of Justice and not a mere money-getting trade.'" Kriegsman v. Kriegsman, 150 N.J. Super. 474, 480, 375 A.2d 1253 (App. Div. 1977) (quoting Canons of Professional Ethics, No. 12).
Other jurisdictions have applied similar reasoning with regard to non-refundable retainer agreements. Most recently, in In the Matter of Cooperman, 83 N.Y.2d 465, 473-474, 611 N.Y.S.2d 465, 468-469, 633 N.E.2d 1069 (1994), the New York Court of Appeals stated:
We hold that the use of a special nonrefundable retainer fee agreement clashes with public policy because it inappropriately compromises the right to sever the fiduciary services relationship with the lawyer. Special nonrefundable retainer fee agreements diminish the core of the fiduciary relationship by substantially altering and economically chilling the client's unbridled prerogative to walk away from the lawyer. To answer that the client can technically still terminate misses the reality of the economic coercion that pervades such matters. If special nonrefundable retainers are allowed to flourish, clients would be relegated to hostage status in an unwanted fiduciary relationship--an utter anomaly. Such circumstance would impose a penalty on a client for daring to invoke a hollow right to discharge.
Without question the relationship between lawyer and client is both extremely delicate and personal. "There are few of the business relations of life involving a higher trust and confidence than that of attorney and client . . . [and] few more anxiously guarded by the law, or governed by sterner principles of morality and Justice. . . ." Matter of Education Law Center, Inc., 86 N.J. 124, 133, 429 A.2d 1051 (1981) (quoting In re Loring, 73 N.J. 282, 290, 374 A.2d 466 (1977)). See Karlin v. Weinberg, 77 N.J. 408, 418-419, 390 A.2d 1161 (1978) (in light of the unique relationship between attorney and client, ordinary commercial standards are inapplicable in determining the enforceability of lawyer restrictive covenants); Dwyer v. Jung, 133 N.J. Super. 343, 347, 336 A.2d 498 (Ch. Div.) (attorney-client relationship is consensual, highly fiduciary on the part of counsel, and he may not do anything that restricts the right of the client to repose confidence in any counsel of his choice), aff'd o.b., 137 N.J. Super. 135 (App. Div. 1975).
The Cooperman Court also recognized the special nature of the attorney-client employment situation, when it stated:
This unique fiduciary reliance, stemming from people hiring attorneys to exercise professional judgment on a client's behalf--"giving counsel "--is imbued with ultimate trust and confidence. The attorney's obligations, therefore, transcend those prevailing in the commercial market place. The duty to deal fairly, honestly and with undivided loyalty superimposes onto the attorney-client relationship a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interest, operating competently, safeguarding client property and honoring the clients' interest over the lawyer's. [Cooperman, supra (83 N.Y.2d at 472, 611 N.Y.S.2d at 467) (citations omitted).]
Our current Rules of Professional Conduct, see RPC 1.5 (fees) and RPC 1.16 (terminating representation), are indeed similar to New York's disciplinary rules, which state that an attorney "shall not enter into an agreement for, charge or collect an illegal or excessive fee" (DR 2-106[A]) and, upon withdrawal from employment, "shall refund ...