It’s been done forever. If I set up your tile business, you’ll retile my bathroom.  I’ll do your estate plan in exchange for the hind quarter of that six-point buck you shot last winter.  I imagine the boys and girls at the big Indy firms don’t do it much—how do you share a bathroom tile job with your partners?—but solo and small firm practitioners have always engaged in some bartering for legal services.  Given the state of the economy, one suspects that barter exchanges are on the rise.  Lawyers need the work, clients need legal help, and there isn’t a whole lot of cash floating around.

What’s It Worth To You?

With any legal representation, the question of value is always present. What’s it worth?  The pricing of legal services largely follows the rules of the marketplace.  Between willing sellers and informed buyers, price tends to reflect the market price for a particular class of services.

But because neither lawyers nor legal services are fungible, there tends to be a high degree of variability in what any given lawyer can demand and what any given client will pay. Some lawyers are more qualified, some practice niches are more competitive, and some clients have greater need.

 

In a cash-for-services transaction, there may be uncertainty about the value of legal services, generally resolved by market forces, but there is little uncertainty about the value the client gives in exchange. A dollar paid for legal services is worth exactly the same as a dollar applied to the purchase of a loaf of bread.

Trumping the Free Market

Rule of Professional Conduct 1.5(a) says: “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee….”   Note that the rule is stated in the negative.  It does not require that a lawyer’s fee be reasonable.  Only that it not be unreasonable.  If there is a grey area between a fee that is clearly reasonable and one that is not (a provocative question itself), Rule 1.5(a) resolves uncertainty about reasonableness in the lawyer’s favor.  Broadly speaking, the rule limits what a lawyer can get away with charging in a purportedly free market.

There is a Massachusetts case that nicely illustrates this point. Matter of Fordham, 668 N.E.2d 816 (Mass. 1996).  Fordham was a “very experienced senior trial attorney with impressive credentials.”  Laurence Clark’s son, Timothy, was arrested for drunk driving.  Laurence shopped the case to three experienced lawyers and got price quotes of $3,000 to $10,000.  Then he went to Fordham, who had never done a drunk-driving case, but believed himself to be competent to handle one.

Fordham lawyered the heck out of the case, and Timothy was acquitted after a bench trial. On roughly a monthly basis, Fordham’s total bill was about $50,000.  In a subsequent lawyer discipline case, it was stipulated that Fordham and his associates worked every hour billed—there was no fraud.  Even so, Fordham was found to have charged an unreasonable fee.  His work was good, some of his theories were creative, but the market for representation in cases of that type, according to experts who testified, simply would not support a $50,000 fee as an objectively reasonable matter.

 What’s It Worth To Me?

The requirement of reasonableness applies to all fees, including barter exchanges. Once bartering enters the mix, a second level of uncertainty is introduced: what is the value of the goods or services offered in exchange for legal representation?  Sometimes the market readily supplies the answer: if a client offers fifty pounds of frozen pork bellies for legal services, both lawyer and client can convert the pork bellies to their cash equivalent by checking in with the Chicago Mercantile Exchange.  But what about that bathroom tile job?  There isn’t a highly organized market for the package of goods and services that make up that offer.  The lawyer could trust the client’s estimate of value or solicit quotes in order to place a value on the client’s offer.  In many instances, the latter alternative might burden the transaction with a cost that cannot be justified by the value of the legal services, but sometimes it would be worth it.

One might ordinarily be inclined to defer to the lawyer’s reasonable valuation of the legal services and the client’s reasonable valuation of the goods or services offered in exchange—especially when those goods or services can be readily, if roughly, valued and when the client is not particularly vulnerable. But at the margins, things get muddy.

Uncertain Value

Take, for instance, a client who offers a painting instead of cash for legal services. The lawyer, inexperienced in such things, has no clue what the painting is worth.  All she knows is it’s not a Picasso or Rembrandt.  The client has no special knowledge about the value of art, either.  The client’s need for legal services apparently outweighs the time and costs associated with (1) obtaining an appraisal of the painting and (2) converting the painting to cash if the value exceeds the cost of legal services.  If there’s rough parity, no one will likely get too excited.  But what if, unbeknownst to either lawyer or client, the painting is by a little known, but highly collectible artist?  By selling the painting, the lawyer may realize, let’s say, a twenty-fold increase in her fee over what she would have charged in a cash transaction.  Absent extraordinary circumstances, a lawyer who charges a client twenty times the going rate will run afoul of Rule 1.5(a)

The painting case is no different than charging an excessive cash fee, except that the lawyer has real or plausible deniability that she charged the client too much. Should this change the outcome?  I contend that it doesn’t.  As the value of goods or services taken in exchange becomes more uncertain, the greater the lawyer’s burden to not take advantage of the client.

Rule 1.5(a) requires that the fee not be unreasonable—an objective standard—but it does not otherwise have a scienter element requiring that the lawyer also intend or know that the fee is unreasonable. Consequently, notwithstanding the fact that the lawyer believed in good faith that the bartered goods or services were of roughly the same value as the legal services, if it turns out not to be so, the lawyer’s fee will be considered to have been unreasonable.

Business Transactions With Clients

We normally indulge (perhaps counterfactually, especially when it comes to unsophisticated clients) in a presumption that bargaining over an initial fee is at arm’s length. There is no general duty on the part of the lawyer to warn the client that there might be inequality of bargaining power over fee negotiations and that the client would be well-advised to seek representation in the very process of hiring a lawyer.  This makes sense.  If a client needs a lawyer to hire a lawyer, perhaps the client would need a lawyer to hire a lawyer to assist in hiring a lawyer, ad infinitum.

But there is an important exception that includes bartering in lieu of cash for fees. Comment [1] to Rule 1.8(a), which deals with transactions between lawyers and clients where their interests are adverse, states: “[The Rule] does not apply to ordinary initial fee arrangements between client and lawyer, which are governed by Rule 1.5, although its requirements must be met when the lawyer accepts an interest in the client’s business or other nonmonetary property as payment of all or part of a fee.”

This comment suggests that cash-paying prospective clients require no warning from the lawyer that they should be careful about deciding how much to pay for legal services. This changes when the very act of entering into an attorney-client relationship incorporates a business transaction wholly unrelated to the delivery of legal services: when the lawyer, in effect, becomes a purchaser of pork bellies, bathroom tiling or venison from a soon-to-be client.  Rule 1.8(a) doesn’t prohibit it, but it does require a warning that the client is largely on his own in deciding whether the transaction is worth it.

Mirandizing Clients

Lawyer-client transactions governed by Rule 1.8(a) are regulated in several ways. First, the terms of the transaction must be “fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client.”  Just like any well-written fee agreement, the writing will define the scope of representation and the basis of or rate for the fee, see Rule 1.5(b), with the added element that it will also describe the goods or services to be given to the lawyer in exchange.  Rule 1.8(a)(1).  Second, the client must be “advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction.”  Rule 1.8(a)(2).  Third, the client must give “informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.”  Rule 1.8(a)(3).

Up to this point, the demands of Rule 1.8(a) are largely procedural. But Rule 1.8(a)(1) also requires that “the transaction and the terms on which the lawyer acquires the interest are fair and reasonable to the client.”  Note the shift from Rule 1.5(a)’s “not unreasonable” to a “fair and reasonable” standard.  Although the intent of the drafters is not clear, does this mean that uncertainty about the fairness of the transaction will now be resolved in the client’s favor?

Returning to a point I made earlier, in many barter exchanges both lawyer and client will have a good enough sense of the value of the goods or services traded for legal representation that a reasonable person would conclude it was a fair exchange. But in cases like the painting, the lawyer who fails to take steps to make sure the exchange is fair is at risk of coming out on the short end of a retrospective scrutiny for fairness.  The lawyer who does not have the painting of uncertain value appraised at the outset rolls the dice that an after-the-fact assessment of the transaction’s fairness will come up snake eyes.  In that event, the lawyer should be obligated to make it right with the client and could even be held accountable in discipline for having guessed, but guessed wrong.

Tax Consequences[1]

Need I remind you? Lawyers are taxpayers.  From time-to-time, lawyers’ failings as taxpayers get them into disciplinary trouble.  See, e.g., Matter of Colman, 691 N.E.2d 1219 (Ind. 1998).  Lawyers operate under a 24-7 obligation to avoid dishonesty, including in tax matters.  Rule 8.4(c).

Treas. Reg. §1.61-2(d)(1) requires lawyers to include as income the fair market value of property or services taken in exchange for providing legal services. If the goods or services received by the lawyer in exchange for legal services are for a business expense (painting the law office, for example), the lawyer’s business expense deduction will equal the income, resulting in no taxable net income.  But if, as is often the case, the goods or services the lawyer receives are for a personal expense (painting the lawyer’s home, for example), the fair market value of the goods or services is taxable income without any corresponding deduction for the fair market value of the legal services given in exchange.  See Rev. Rul. 79-24, 1979-1 CB 60.  The IRS will ordinarily accept the stipulated price of the exchanged property or services rendered as the fair market value, but it is not bound by that if there is evidence to the contrary.

In the case of a barter exchange where the client pays the lawyer in property or services worth in the course of the client’s trade or business, the client must issue a 1099-MISC to the lawyer. If the lawyer exchanges services worth at least $600 in the course of the lawyer’s trade or business, then the lawyer must issue a 1099-MISC to the client. 26 U.S.C. §6041. If the barter is not in the course of the client’s or lawyer’s trade or business, then no 1099’s are required (assuming the parties are not involved in a barter exchange club or organization), but the lawyer must still include the income on her tax return.

Conclusion

The ethics and tax questions tend to merge around the responsibility of the lawyer in each setting to make some determination of fair market value—in the former case, out of fairness to the client; in the latter, out of conscientiousness as a taxpayer. This may seem like much ado about little. And in most cases, where fair market value is readily ascertainable, perhaps it is. But lawyers need to know that bartering for legal services raises ethics questions if it results in an unfair bargain.

[1] Prof. Bill Popkin should be thoroughly disgusted by the amount of tax law this student has forgotten since I took his excellent course in Federal Income Taxation at I.U. Maurer School of Law.  I’d like to express my thanks to Randy Kaltenmark of Barnes & Thornburg, LLP, Chair of the Indiana State Bar Association Taxation Section, for bailing me out with his input on the tax questions.