Advertisement that states "No Recovery, No Fee", or its equivalent is misleading if it does not disclose the clients responsibility to pay costs even when there is no recovery.

FACTS

The inquiry to this committee is from the Disciplinary Commission. Many advertisements by lawyers and law firms in the yellow pages of the telephone directories for the Phoenix and Tucson areas, as well as other areas in the state, provide that, if there is "no recovery, there is no fee."

QUESTION

Is an advertisement which states "no recovery, no fee" misleading if it does not disclose the client's responsibility to pay costs even when there is no recovery? 

ETHICAL RULES INVOLVED

ER 1.8(e).      Conflict of Interest: Prohibited Transactions

ER 7.1.           Communications Concerning a Lawyer's Services

OPINION

The issue presented by this inquiry has been addressed by the United States Supreme Court, as well as by the legal ethics committees of the states of Michigan and Maryland. The United States Supreme Court spoke to this issue in Zauderer v. Office of Disciplinary Counsel of the Supreme Court of Ohio, 471 U.S. 626, 105 S.Ct. 2265, 85 L.Ed.2d 652 (1985). The Supreme Court found constitutional an Ohio state requirement that an attorney advertising his availability on a contingent fee basis disclose that his clients will have to pay costs even if the lawsuit is unsuccessful. The Court stated:

**** Appellant’s advertisement informed the public that 'if there is no recovery, no legal fees are owed by our clients.' The advertisement makes no mention of the distinction between 'legal fees' and 'costs,” and to a layman not aware of the meaning of these terms of art, the advertisement would suggest that employing appellant would be a no-lose proposition in that his representation in a losing cause would come entirely free of charge. The assumption that substantial numbers of potential clients would be so misled is hardly a speculative one: it is a commonplace that members of the public are often unaware of the technical meanings of such terms as 'fees' and 'costs' - terms that, in ordinary usage, might well be virtually interchangeable.” 105 S.Ct. at 2283.

The rationale and holding of Zauderer was followed in Michigan State Bar Committee on Professional Judicial Ethics, Opinion CI-1128 (4/7/86), and in Maryland State Bar Association Committee on Ethics, Opinion 86-22 (4/28/86). Both of these opinions found that advertisements of contingent fee arrangements that contain language similar to “no fee if no recovery" and which do not disclose the client's liability for costs, even in the event there is no recovery, are misleading.

ER 7.1 provides that a lawyer shall not make false or misleading communications about the lawyer's services. A communication is considered misleading if it contains a material misrepresentation or if it omits “a fact necessary to make the statement considered as a whole not materially misleading.” There is a difference between "fees" and "costs'. ER 1.8(e)(1) permits a lawyer to advance court costs and expenses of litigation provided "the client remains ultimately liable for such costs and expenses." An exception to the prohibition against attorneys paying the court costs and litigation expenses of their clients is found in ER 1.8(e)(2) which provides that "a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client." Thus, it would be permissible for Arizona attorneys to advertise that they will pay all court costs and litigation expenses for indigent personal injury clients.

Even though there is a difference between "fees” and “costs", this is not generally known to the public. The nonlawyer is likely to lump these together. Consequently, an advertisement which states "no recovery, no fee” (or its equivalent) is likely to mislead the nonlawyer into believing that, if there is no recovery, the client will not incur any expense. The fact is that, even if there is no recovery, substantial "costs" may be incurred for the retention of experts, investigation, production of records, depositions, etc., for which “costs” the client remains responsible.

It is therefore our opinion that an attorney's advertisement which states "no recovery, no fee", or its equivalent, is misleading if it does not also disclose the client's responsibility to pay costs even when there is no recovery, unless the attorney's  personal injury client is indigent.

 Editor's notes

(1) One member of the Committee, with whom three others concurred, expressed the following concurring and dissenting views (which were adopted in the final draft of the opinion) concerning the initial proposed opinion:

While I agree with the conclusion of the draft opinion, I feel that the opinion is overly broad in one area and accordingly dissent.

The opinion concludes that:

“An advertisement states 'no recovery, no fee' or, its equivalent, is misleading if it does not also disclose the client's responsibility to pay costs even when there is no recovery.”

I agree with this conclusion. However, it does not seem to me to follow, as is stated in the discussion section of the draft opinion, that all advertisements which make reference to a contingent fee without disclosing that “costs” are not contingent are misleading.

There are essentially two types of advertisements in the yellow pages that may be affected by the opinion. There are those which state “no recovery, no fee" or its equivalent, and there are other advertisements which state “contingency fees available” or “percentage fees available” or similar language. I agree that the "no recovery, no fee” ads are misleading, but I do not agree that the other types of advertisements suggesting the availability of percentage fees or contingent fees are necessarily misleading. In the Zauderer case, the United States Supreme Court had before it an Ohio rule that specifically required that an attorney advertising his availability on a contingent fee basis disclose that his clients will have to pay costs even if the lawsuit is unsuccessful. I would agree that the Arizona Supreme Court could adopt a rule that requires such disclaimer language in all advertisements that mention a contingency fee. However, I do not think that our present rule should be interpreted to contain such a requirement.

It first should be noted that in Arizona there has been a relaxation in the prohibition against attorneys paying the court costs and litigation expenses of their clients. ER 1.8(e) (2) provides that “a lawyer representing an indigent client may pay court costs and expenses of litigation on behalf of the client.” Accordingly, it would be permissible for Arizona attorneys to advertise that they will pay all court costs and litigation expenses for indigent personal injury clients.

What makes the advertisements that state “no recovery, no fee” arguably misleading is that they affirmatively imply that all clients will pay nothing if they lose. But, in Arizona, it would be equally misleading to require a disclaimer to the effect that all clients are required to pay costs.

We must remember that the legitimate purpose of lawyer advertising is to provide meaningful information to assist clients in obtaining counsel. This purpose is not necessarily well served by requiring standard disclaimers to appear in all advertisements. The space available for text in an advertisement is limited and the requirement for inclusion of extensive identical disclaimers will lead to the omission of other information that could provide a meaningful basis for informed choices by the potential client. There is no group of clients more in need of meaningful information than indigent persons who are seriously injured in an accident. To impose unnecessary restrictions on lawyers' advertising would run counter to the duty of the profession to make legal services more readily available. The comment to ER 7.2 states:

[T]he public's need to know about legal services can be fulfilled in part through advertising. This need is particularly acute in the case of persons of moderate means who have not made extensive use of legal services. The interest in expanding public information about legal services ought to prevail over considerations of tradition.

In conclusion, I feel that the opinion should be modified to include a reference to ER 1.8(e)(2) and that the last sentence of the DISCUSSION section of the opinion should be deleted. This sentence reads “An advertisement which makes reference to the contingent fee without disclosing that ‘costs' ate not contingent is misleading." I feel that the opinion should be confined to those situations where there is an affirmative representation that there will be “no fee."

(2) Another member expressed dissenting views (which were not concurred in by a majority of the Committee) concerning the initial proposed opinion as follows:

This was an inquiry about the propriety of certain ads in the yellow pages. In these ads lawyers publicize their availability to take cases on a contingent fee basis. [The draftman's] draft opinion construes ER 7.1 to prohibit such ads, if they say something like "no recovery, no fee," unless they also specify that the client will be responsible for costs and expenses. Be argues that prospective clients may not appreciate the difference between “costs” and “fees," and, without the caveat, may be misled into thinking that they will incur no expense whatsoever if there is no recovery in their case. The ads are misleading within the meaning of ER 7.1, [he] finds, since they omit a fact -- client liability for expenses -- that is “necessary to make the statement as a whole not materially misleading.”

Though I think [his] argument has considerable force, I come out differently on the question and want to explain my views in this dissent. Let me begin with three concessions. First, the Zauderer case did indeed hold that it is constitutional to require lawyers to include a “client-is-responsible-for-expenses" clause in any “no recovery, no fee” ad. Our problem is thus one of rule interpretation, not constitutionality. Second, Arizona's ER 1.8(e) does require that non-indigent clients remain ultimately liable for any litigation expenses their lawyers might advance. (By contrast, the ASA's MR 1.8(e) allows a lawyer to agree to make a client's repayment of expenses contingent on the outcome of the case. Third, I concede that a “no recovery, no fee” ad might very well lead some readers to believe, mistakenly, that if they hired the advertising lawyer and their case proved unsuccessful they would never have to pay anything.

Every communication, however, is capable of misleading somebody, somehow. In deciding whether to treat these ads as misleading, we should compare their present risks, which [the draftman] has identified, with the dangers that would be posed by requiring the ads to include a “liability-for-expenses" caveat. One of those dangers is that in the face of such a requirement lawyers might simply withdraw their ads rather than adding the caveat, which might in turn leave more prospective clients unaware of the availability of lawyers who take cases on a contingent fee basis. More to the point are the dangers that will arise if lawyers continue to run the ads, but add the caveat. Some readers may then be discouraged from consulting a lawyer because they infer -- wrongly -- that the expenses they will be responsible for must be very great, since they were important enough to be mentioned in a brief ad. Even worse, some indigents may be led to believe that they would have to pay expenses like anyone else, which is not necessarily the case under ER 1.8(e).

Measured against these dangers, the evil [the draftman] focuses on seems insubstantial to me. If some readers do respond to the ads in question by coming to a law office in the false expectation that they will not have to pay any expenses unless there is a recovery, they will presumably be set straight before any real damage is done. A lawyer must discuss the basis of a fee with every new client, either before or "within a reasonable time after” taking a case. And a contingent fee agreement -- the type contemplated by the ads in question -- must be in writing and must explain how the expenses of the litigation are to be handled. See ER 1.5.

Because the caveat [the draftman] would insist upon might well do more harm than good, we need not conclude that ads without that caveat are misleading under ER 7.1. Nor, in my view, should we reach that conclusion. Especially where speech is involved, the Committee should be very slow to interpret the ER's to prohibit a practice whose dangers are, on balance, so dubious.

(3) A third Committee member dissented in this fashion:

My dissent is in part based upon the fact that under the code of professional responsibility (sic) all contingent fee agreements must be in writing and must set forth specifically the responsibilities of the parties, including the costs for which the client is responsible. Likewise, I disagree with the proposition that the general public is unfamiliar with a distinction between legal fees and legal costs. My experience is quite to the contrary.

Formal opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceeding. This opinion is based on the Ethical Rules in effect on the date the opinion was published. If the rules change, a different conclusion may be appropriate.

© State Bar of Arizona 1987