On appeal from the Superior Court, Appellate Division, whose opinion is reported at 275 N.J. Super. 241 (1994).
The opinion of the court was delivered by Pollock, J. Justices Handler, O'hern, and Garibaldi join in Justice Pollock's opinion. Justice Stein filed a separate Dissenting opinion in which Justice Coleman joined.
The opinion of the court was delivered by: Pollock
(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).
ERNEST ALLEN COHEN V. RADIO-ELECTRONICS OFFICERS UNION, DISTRICT 3, NMEBA
Argued September 12, 1995 -- Decided August 14, 1996
POLLOCK, J., writing for a majority of the Court.
On April 28, 1987 Ernest Allen Cohen entered into an annual retainer agreement (the Agreement) with the Radio-Electronics Officers Union, District 3 (the ROU), to provide up to 1,000 hours of legal work in 1988 for the set fee of $100,000 to be paid in monthly installments of $8,333.33. The Agreement provided that it would automatically renew unless either party gave "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 anniversary date of this agreement."
The Agreement was negotiated in 1987 between Cohen and Thomas C. Harper, the Secretary-Treasurer of ROU, with whom Cohen had dealings for many years as general counsel. Cohen claims to have negotiated this Agreement because of his plan to move to Arizona and remain of counsel with his prior law firm, continue as general counsel to ROU, practice as a solo practitioner, and to teach as an adjunct professor at the University of Arizona College of Law. Cohen characterized Harper as an extremely successful negotiator who bargained hard about specific provisions of the contract. In particular, they negotiated a reduction in Cohen's hourly rate and his full time availability in exchange for the six month notification-of-termination provision.
Cohen's work pursuant to the Agreement began on January 1, 1988. In that year, Cohen performed 550 hours of service for the ROU. The Agreement was renewed effective January 1989 without objection from the ROU and in that year Cohen performed 1,003 hours of service for the ROU. On December 28, 1989, the ROU terminated Cohen, effective three days later, January 1, 1991. As of the date of termination, Cohen had received full compensation for 1988 and 1989, except for three hours' work over the 1,000 hour limit. In addition, Cohen held $8,079 of the ROU's money in an attorney's special account that Harper and Cohen had agreed would be used as credit to the ROU against future additional fees.
After receiving the ROU termination letter, Cohen demanded payment of $100,000, claiming that the Agreement had been automatically renewed for 1990 because the notice of termination was not timely. When the ROU refused payment, Cohen filed suit seeking monetary damages. In its answer to Cohen's complaint, the ROU contended that the Agreement was unenforceable. The ROU also counterclaimed for breach of contract, misrepresentation, and malpractice.
After an eight-day trial, the court found that, given the unique circumstances of this case, the Agreement, including the notice-of-termination provision, was fair, reasonable and, therefore, enforceable. According to the court, the Agreement was the product of negotiations by two capable negotiators, each aware of their objectives and each exercising some leverage and making some concessions in order to achieve those objectives. Ruling that Cohen had a duty to mitigate damages, the court awarded him $50,000 for 1990. It further found that Cohen's failure to place the $8,079 in an escrow account was inappropriate but did not constitute misappropriation of funds. The court, after calculating certain credits, entered judgment against the ROU in the amount of $4,885.
The ROU appealed. A divided panel of the Appellate Division reversed, finding that the agreement between the ROU and Cohen was unenforceable because the lengthy notice-of-termination provision unreasonably burdened the client's right to choose its lawyer. The court remanded the matter to the Law Division for entry of a judgment for the ROU for $8,079 less the additional three hours service that Cohen had provided in 1989. In a Concurring opinion, Judge Baime agreed that the agreement was unenforceable as against public policy. Judge Baime was unwilling, however, to limit an attorney's recovery to the reasonable value of his services, finding that in certain circumstances out-of-pocket losses and other special damages are also recoverable.
Judge Villanueva, Dissenting in part, agreed with the trial court that the Agreement, including the notice provision, was fair and reasonable. According to the Dissent, lawyers and clients should not be precluded from freely entering into fair and reasonable general retainer agreements that are based on mutual consideration. Here, Cohen had reduced his fee to less than half the reasonable value of his services and had restricted severely his other legal activities in exchange for the ROU agreeing to a fixed term of employment for Cohen and a lengthy notice-of-termination provision.
Cohen appeals as of right on the issue of the validity of the Agreement and the amount of damages. The ROU cross-appeals on the issue of setoff.
Consistent with considerations of fairness and reasonableness, clients may limit their right to discharge a lawyer by agreeing to give the lawyer reasonable notice of termination of their relationship. To withstand judicial scrutiny, the limitation should be fair, reasonable, and not unduly burden the client's right to choose its attorney.
1. Agreements between attorneys and clients concerning the client-lawyer relationship generally are enforceable, provided the agreements satisfy both contractual and ethical requirements. An otherwise enforceable agreement between an attorney and a client would be invalid if it violates the RPCs governing that relationship. A retainer agreement may not prevent a client from discharging a lawyer. With the sophisticated client, however, a retainer agreement may provide that the client agrees to compensate the lawyer if the client terminates the relationship, so long as the provision does not chill the client's right of termination. (pp. 17-20)
2. Because it would be counterproductive to preclude clients from bargaining for a reduction in fees in exchange for a reasonable limitation on the right to discharge the lawyers, a retainer agreement setting a reasonable fee may take into account the cost of a lawyer's availability and the opportunities that the lawyer forgoes. Under the circumstances of this case, however, a provision for six months notice of termination excessively burdens the ROU's right to discharge Cohen. (pp. 20-25)
3. When interpreting agreements between lawyers and their clients, courts may consider the circumstances in which the agreement was made, the parties' past practices and agreements, the extent to which they actually negotiated the agreement, and the client's level of sophistication or experience in retaining and compensating lawyers. Here, the ROU and Cohen intended to provide for a reasonable notice-of-termination provision. The ROU agreed to the notice provision in exchange for reduced fees and Cohen's availability on demand. In effect, the ROU agreed to pay Cohen reasonable compensation for the right to terminate their relationship. However, the three-days' notice of termination given to Cohen was both unfair and unreasonable. (pp. 25-26)
4. Under the modern rule, when a client discharges an attorney, the attorney may recover the reasonable value of his or her services, not damages, under the retainer agreement. Because the modern rule strikes the appropriate balance in this case, Cohen is entitled to recover for the reasonable value of the services he provided prior to discharge. The fair value of those services includes both Cohen's annual retainer and the cost of reasonable notice of termination of his representation of the ROU. Cohen should be compensated by the ROU for one month's notice. In ascertaining the value of that notice, the Court looks to the agreed on monthly payment of $8,333.33. Furthermore, the ROU is entitled to a setoff of $8,079. (pp. 26-32)
Judgment of the Appellate Division is MODIFIED and as modified, is AFFIRMED. The matter is REMANDED to the Law Division for entry of a judgment consistent with this opinion.
JUSTICE STEIN, Dissenting in which JUSTICE COLEMAN joins, is of the view that Cohen is entitled to no damages because the unreasonableness of the notice provision renders the contract unenforceable as a matter of law. Justice Stein implies no disapproval of agreements that reasonably take into account the unfair consequences of a client's premature discharge of a lawyer. In many circumstances, provisions for a non-refundable retainer or for compensation to cover expenses or losses necessarily incurred because of a lawyer-client relationship may be fair and reasonable.
JUSTICES HANDLER, O'HERN and GARIBALDI join in JUSTICE POLLOCK's opinion, JUSTICE STEIN filed a separate Dissenting opinion in which JUSTICE COLEMAN joins.
The opinion of the court was delivered by
POLLOCK, J. At issue is the enforceability of a one-year automatically-renewable retainer agreement providing for six months notice to the lawyer before the client could terminate the agreement. The issue arises in the context of a negotiated agreement in which the lawyer and the client's representative, each a skilled negotiator, bargained for the notice of termination in exchange for a reduced fee and the attorney's availability on demand.
On April 28, 1987, plaintiff, Ernest Allen Cohen, entered into an annual retainer agreement (the Agreement) with defendant, the Radio-Electronics Officers Union District 3 (NMEBA AFL-CIO) (the ROU), to provide up to 1,000 hours of legal work in 1988 for the set fee of $100,000, to be paid in monthly installments of $8,333.33. The Agreement would automatically renew unless either party gave "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 anniversary date of this agreement."
The ROU discharged Cohen on December 28, 1989, three days before the renewal date. Cohen claims that the ROU violated the notice-of-termination provision of the Agreement and that it owes him the full $100,000 fee for 1990. The ROU contends that the Agreement unreasonably burdens its right to discharge Cohen at will and that it does not owe him anything.
The Law Division found that the Agreement was reasonable and enforceable. In three separate opinions, a divided Appellate Division panel reversed and remanded, holding that the lengthy notice-of-termination provision unreasonably burdened the client's right to choose its lawyer. 275 N.J. Super. 241, 261-62 (1994). Cohen appeals as of right on the issue of the validity of the contract and the allowed damages. R. 2:2-1(a). The ROU cross-appeals on the issue of setoff. We modify and affirm the judgment of the Appellate Division.
Cohen is an attorney admitted to practice law in Arizona, New York, and New Jersey. He specializes in labor and employment law. From 1964 until December 1987, Cohen was a partner at a New York law firm, Marchi, Jaffe, Cohen, Crystal, Rosner & Katz (the Marchi firm). In December 1987, Cohen became of counsel to the firm.
The ROU is a labor organization of approximately 200 members that represents radio officers responsible for communications on seagoing ocean vessels. It moved from Jersey City, New Jersey, to Panama City Beach, Florida, in 1987.
From 1975 to 1980, the Marchi firm served as general counsel for the ROU. Cohen was the partner in charge of the work. His hourly rate for the ROU was $150.
Underlying the current dispute between Cohen and the ROU is a rift between competing factions in the union, each of which sought to appoint the ROU's counsel. In 1980, the ROU sustained a change in leadership. The new leaders discharged the Marchi firm and retained the law firm of Dickstein, Shapiro & Morin (the Dickstein firm), which represents the ROU in this action.
After his election as secretary-treasurer of the ROU, Thomas C. Harper asked Cohen in December 1985 to return as general counsel. On January 4, 1986, the ROU and the Marchi firm agreed on an hourly rate that would not exceed $150. According to Cohen, however, he and Harper agreed that the rate would increase gradually until it reached Cohen's standard rate of $225 per hour. In June 1986, after Harper became President of the ROU, the Marchi firm continued as general counsel with Cohen as the partner in charge.
In March 1987, Cohen decided to move to Arizona in January 1988. He planned to remain of-counsel with the Marchi firm, to practice as a solo practitioner in Arizona, and to teach as an adjunct professor at the University of Arizona College of Law.
On April 27, 1987, Cohen met with Harper to discuss his plans. At trial, Cohen and Harper gave different accounts of the meeting. According to Cohen, Harper suggested that Cohen after moving to Arizona continue as general counsel. Cohen characterized Harper as "an extremely accomplished and successful negotiator," who bargained hard about specific provisions of the contract. In particular, Harper and Cohen negotiated a reduction in Cohen's hourly rate from $150 to $100 in exchange for six months' notification of termination of the Agreement.
Cohen explained to Harper why he needed a lengthy notice-of-termination provision in the Agreement. As a solo practitioner, he would need time to obtain new clients, if the ROU discharged him. The University of Arizona, moreover, needed to know in June, if Cohen was to become a full-time faculty member the following year. As the trial court found, "teaching or representing the ROU were the two options being considered by Cohen, and they were mutually exclusive." Thus, an independent economic reason underlay Cohen's request for a provision requiring either party to give notice of termination in June. Harper's response, according to Cohen, was "If you want a long notice provision from me, you're going to have to pay for it."
By the end of the meeting, Cohen and Harper agreed on the basics of a contract designating Cohen as General Counsel. At Harper's insistence, Cohen drafted a proposed contract for Harper to present the next day to the ROU's District Executive Committee (DEC), the governing body of the ROU. Finally, Cohen testified that he advised Harper to consult independent counsel on the proposed contract.
Harper's version differed considerably. According to Harper, Cohen "almost begged" to continue as general counsel after his move to Arizona. Cohen presented Harper with several ideas "how it could be made to ROU's advantage to have it work, including the reduced rate." Harper denied that the parties discussed any specific contract provisions and that Cohen advised him to seek independent legal advice. He claimed that Cohen, without any instruction from Harper, drafted the proposed contract and insisted that Harper sign it the following day.
On April 28, 1987, Harper, acting on behalf of the ROU, signed the Agreement naming Cohen as general counsel. Later, in April or May, 1987, the DEC signed the Agreement after Harper made minor handwritten changes.
The Agreement, which was renewable, retained Cohen as the ROU's general counsel for one year, effective January 1, 1988. According to its terms, the Agreement was "negotiated and executed in New Jersey with reference to New Jersey law." The parties agree that New Jersey law governs this dispute.
The Agreement provided for "annual compensation of $100,000 for 1,000 hours of service," to be paid at a monthly rate of $8,333.33. It also provided for a rate of $150 for each hour in excess of 1,000 hours. According to Cohen, he was to ...