Ethics and Agent Fees

In this month's issue of the ABA Journal, Kathryn Thompson has a very informative piece about the ethics standard for lawyer fees pursuant to Rule 1.5 of the ABA Model Rules of Professional Conduct, which simply prohibits fees that are "unreasonable" ("Let's Be Reasonable: Client consent to a fee agreement doesn't mean it's ethical"). Agents who are lawyers are obviously bound by the legal ethics rules. However, non-lawyer agents also act in a fiduciary role on behalf of their clients, which subjects them to common law agency principles of "duty of care" and "duty of loyalty". I have always questioned the reasonableness of a commission-based agent fee system by which agents are paid a percentage of the entire value of the player contract negotiated by the agent. In my Willamette Law Review article, I examine how the economics of the player representation business, with increasing player salaries under a commission-based agent fee system, fuels intense competition among agents, which ultimately harms the players, the teams and the leagues in multiple ways.

The typical counter-arguments to my position are two-fold: First, a commission-based fee is the "normal" fee charged in the player-representation business and players are willing and able to pay the fee. Second, the agent does much more work for the player than simply negotiating a player contract, which makes it difficult to charge a flat fee or an hourly rate fee for the agent's services, i.e. agents put a lot of time and expense into "babysitting" their existing clients and recruiting prospective clients. Although Thompson's article is not specifically addressing agent fees, it essentially addresses why each of these two counter-arguments is not compelling. Regarding the first one, Thompson notes:

A meeting of the minds between lawyer and client does not necessarily mean, however, that a fee agreement is reasonable in the eyes of disciplinary tribunals or courts. A case in point is In re Sinnott, 845 A.2d 373 (2004), where the Vermont Supreme Court affirmed a disciplinary panel’s finding that a fee was unreasonable even though it was based on a valid contract knowingly signed by the client. The court said it is unethical for lawyers to charge unreasonable fees “even if they are able to find clients who will pay whatever a lawyer’s contract demands.”

Regarding the second one, Thompson notes:

Courts also have held that it is unreasonable for lawyers to charge their own rates for services provided by nonlawyers or for their own law-related tasks that do not constitute the practice of law, such as sending faxes or delivering documents to opposing counsel. Lawyers should similarly avoid charging clients for services that fall outside the confines of traditional law practice. In Cincinnati Bar Association v. Alsfelder, 816 N.E.2d 218 (2004), the Ohio Supreme Court affirmed the finding of a disciplinary board that it was unreasonable under Ohio’s version of Rule 1.5 for an attorney to charge a client for “friendly advice” unrelated to the cli­ent’s legal needs. Often meeting over lunch or dinner, the client consulted the attorney about personal relationships, finances and restaurants, among other things. Despite the attorney’s assertions to the client that he had only “attorney’s time” to give, the result was “allowing the client to consult him as a friend while charging for his time as a lawyer,” the court concluded.

The NFLPA and the NBPA have been proactive in this regard by capping the commission that an agent may charge the client. The NFLPA agent regulations, for example, provide that the maximum fee chargeable is 3% of the player's compensation, which is reduced to 2% for players who are Restricted Free Agents or tagged with a Franchise or Transition designation, and further reduced to 1.5% and 1% when tagged with a Franshise or Transition designation a second and third time, respectively. Presumably, the idea here is that the agent's fee should be appropriately tied to the time, difficulty and skill of the work involved (which are factors listed under Rule 1.5 to consider). Thus, the agent's fee should be less to the extent the agent is doing less work or when the work involves less skill because there is little or no negotiation involved in determining the player's compensation. This is also the rationale behind the MLBPA's agent regulations (which do not impose an agent fee cap) that prohibits an agent from receiving a fee to the extent of a player's guaranteed "minimum" salary as set forth in the CBA.

Is it "reasonable" for agents to charge fees on a commission basis? Should A-Rod be required to pay any agent a commission on the first (pick an arbitrary number) $15 million in salary he receives each year? My 10 year old could obtain that, and even more than that, on A-Rod's behalf. Fifteen years ago, Don Fehr said: "As an athlete begins to earn 3 or 4 or 5 million dollars a year, is the work involved that much more lengthy than it was before? As a matter of fact, the agent’s skills may improve and his or her bargaining power may be greater which could mean the process entails less work. Do percentages make any sense? Well, maybe not."

Well, in today's dollars, that 3 or 4 or 5 million is now 10 or 11 or 12 million....

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