In Re Connelly

SUPREME COURT OF ARIZONA
En Banc

In the Matter of ) Arizona Supreme Court
) No. SB-02-0055-D
THOMAS M. CONNELLY, )
Attorney No. 12987 ) Disciplinary Commission
) No. 99-2417
)
Respondent. ) O P I N I O N
__________________________________)

_________________________________________________________________

Appeal from Hearing Officer 9Y’s Report and Recommendation
Anne Phillips, Hearing Officer
VACATED

_________________________________________________________________

Decision of the Disciplinary Commission
No. 99-2417
VACATED

_________________________________________________________________

State Bar of Arizona Phoenix
By Yigael M. Cohen, Director of Lawyer Regulation
Attorney for the State Bar of Arizona

Hinshaw & Culbertson Phoenix
By Brian Holohan
Attorney for Thomas M. Connelly

Thomas J. Marlowe Phoenix
Attorney for Thomas M. Connelly
_________________________________________________________________

M c G R E G O R, Vice Chief Justice

¶1 This matter arose after Respondent Connelly’s client

filed a complaint with the State Bar, alleging that Respondent

charged an unreasonably high fee. We granted review to determine

whether, when a client who has contractually agreed to submit fee
disputes to binding arbitration files a complaint alleging his

lawyer charged an unreasonable fee, disciplinary proceedings should

begin before fee arbitration proceedings conclude. We hold that

when a lawyer and client have agreed to binding fee arbitration and

the disciplinary complaint involves no allegations of other

misconduct, the State Bar should await the conclusion of fee

arbitration proceedings before initiating formal disciplinary

proceedings. We also consider the appropriate standard to use in

evaluating whether an attorney’s fee constitutes a reasonable fee.

I.

¶2 Police arrested Gregory Richman in July 1998 and

confiscated three grams of cocaine from his vehicle. After his

release, Richman sought advice from Thomas M. Connelly, an

experienced criminal defense attorney who had represented Richman

in an earlier matter. Connelly told Richman to do nothing until

the county attorney contacted him. In November 1998, Richman

received a summons indicating a grand jury had indicted him for

possession of narcotic drugs, a class four felony. Richman

promptly notified Connelly of the charges against him.

¶3 When Connelly saw the indictment, he noted that although

Richman was indicted for only a single charge of possession, the

indictment set out seventy-four separate counts and named

approximately twenty defendants. Based on the indictment and

Connelly’s knowledge about the attorney who had prepared the

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summons, Connelly told Richman he believed Richman’s case would not

remain a simple possession case but would involve considerable

discovery, a motion to sever and a motion to suppress. Connelly

estimated that absent a successful motion to sever, and should

Richman’s case go to trial, the case could take eight months to two

years to resolve. In addition, Connelly told Richman he might face

either jail or prison time.

¶4 Connelly, Richman and Richman’s mother, an attorney in

Chicago, discussed Connelly’s fee on two occasions. Due to the

difficulty he thought the case presented, Connelly initially stated

his fee would be $75,000. After negotiations, however, he reduced

that figure to $50,000 and discussed various flat fee options with

Richman and his mother. Over the next several days, Richman

considered the available fee options and agreed to a $50,000 “non-

refundable” flat fee that would cover the entire case, excluding

appellate matters. Connelly sent a fee agreement form to Richman

for his signature. After asking Connelly to clarify portions of

the form, Richman signed and returned the $50,000 flat fee

agreement on January 4, 1999. Under the terms of the fee

agreement, Connelly and Richman agreed to resolve any fee dispute

through binding arbitration.

¶5 The state filed no additional charges against Richman,

and Connelly resolved the case without filing any motions or

proceeding to trial. Connelly negotiated the TASC diversion

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program1 for Richman which, upon Richman’s successful completion,

would result in a dismissal of criminal charges. The county

attorney’s office moved to suspend Richman’s prosecution on April

7, 1999, approximately three months after Connelly began

representing Richman.

¶6 In December 1999, after Richman successfully completed

TASC and the court dismissed the charges against him, Richman filed

a bar complaint accusing Connelly of charging an unreasonable fee.

Richman had neither told Connelly of his dissatisfaction with the

fee nor sought fee arbitration.

¶7 The State Bar initiated this disciplinary proceeding

shortly thereafter.2 When Connelly learned of Richman’s complaint,

he conducted a retrospective review of his representation and fee,

which included speaking with three other experienced criminal

lawyers, and concluded that he had charged a reasonable fee. The

State Bar subsequently filed a formal complaint against Connelly.3

¶8 At his disciplinary hearing, Connelly presented an

1
The TASC Drug Diversion Program is “a special supervision
program in which the county attorney of a participating county may
divert or defer, before a guilty plea or a trial, the prosecution
of a person accused of committing a crime.” Ariz. Rev. Stat. § 11-
361 (2001).
2
“A discipline proceeding commences upon receipt by the state
bar of a charge against a respondent.” Ariz. R. Sup. Ct. 53(a).
3
“Formal discipline proceedings shall be instituted by the
state bar filing a complaint. . . with the disciplinary clerk.”
Ariz. R. Sup. Ct. 53(c)1.

4
accounting, prepared subsequent to the filing of the bar complaint,

of the hours he had spent on Richman’s case. According to that

document, Connelly and his associate spent 116.8 hours on Richman’s

case, and based on respective hourly rates of $200 and $350, earned

$38,015.4 Connelly testified that his representation of Richman

included drafting a discovery request, reviewing an eighteen-page

discovery response and looking at other significant evidence,

including wiretap transcripts and police reports that referred to

Richman. Connelly also testified that Richman was a very difficult

and needy client who called and dropped by the office frequently.

¶9 Connelly’s expert witness, Michael Black, stated that he

viewed Connelly’s fee as reasonable, both prospectively and

retrospectively. He testified that he would have charged Richman

between $75,000 and $100,000. The State Bar’s expert witness,

Michael Kimerer, testified that a reasonable fee in this case,

considered retrospectively, would have been in the range of $20,000

to $25,000.

¶10 Analyzing Connelly’s fee pursuant to Ethics Rule (ER)

1.5, Ariz. R. Sup. Ct. 42, the Hearing Officer found that Connelly

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Connelly’s accounting included an estimate of hours spent
working on “[o]ther conferences/meetings/telephone calls with or
from Richman between December 1998 and November 1999.” Hearing
Officer’s Report and Recommendation at 6. Connelly explained the
lack of specificity by stating he took very few notes regarding
meetings and discussions with Richman because Richman would call or
come by to see Connelly when Connelly was working on another
matter. Id.

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did not initially violate ER 1.5 by charging $50,000 because the

case originally appeared labor-intensive and Connelly had

substantial experience in this area. The Hearing Officer also

found, however, that Connelly’s fee constituted an excessive and

unreasonable fee when viewed retrospectively at the conclusion of

representation.

¶11 The Hearing Officer recommended that Connelly be censured

and required to pay Richman restitution in the amount of $11,985,

the difference between $50,000 and $38,015. Connelly appealed, and

the Commission affirmed the Hearing Officer’s recommendation of

censure. In addition, the Commission increased the amount of

restitution to $25,000 because it did not find Connelly’s hourly

reconstruction credible and because Kimerer had testified that

$25,000 constituted a reasonable fee.

¶12 We granted Connelly’s petition for review and exercise

jurisdiction pursuant to Article VI, Section 5.6 of the Arizona

Constitution and Ariz. R. Sup. Ct. 53(e)5.

II.

¶13 Connelly asserts that the State Bar should have referred

Richman’s complaint to the fee arbitration program rather than

initially treat the complaint as a formal disciplinary matter.

Under the facts of this case, we agree.

A.

¶14 Connelly and Richman signed a fee agreement that included

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the following language:

Should there be any disagreement or dispute concerning or
arising out of or relating to our services, fees or
costs, or our relationship with you, and in the event
they are not capable of resolution between the Attorneys
and Client, the Attorneys and Client both agree to final
and binding arbitration under the procedures of the State
Bar of Arizona for resolving such matters.

(Emphasis added.) Despite that agreement, Richman filed a bar

complaint against Connelly rather than submit the dispute to

binding arbitration. At the disciplinary hearing, Connelly

testified that he suggested fee arbitration to bar counsel when

notified of Richman’s complaint and the disciplinary proceeding

against him.5 Although the record is unclear, Bar Counsel’s

remarks indicate that he discussed fee arbitration with Richman but

Richman “felt that he was not going to be successful at [fee

arbitration].” Tr. of Disciplinary Comm’n Hr’g at 18. Bar Counsel

also stated that the decision to go to fee arbitration rested with

Richman, and that “fee arbitration is not within the purview of the

State Bar.” Id.

B.

¶15 Both disciplinary proceedings concerning the

reasonableness of a lawyer’s fee and fee arbitration proceedings

center around ER 1.5, which states that “[a] lawyer’s fee shall be

5
The Hearing Officer asked Connelly why the case did not
go to fee arbitration. Connelly replied that either the State Bar
or Richman, he did not know which, declined arbitration when he
suggested it early in the disciplinary proceedings. Tr. of
Disciplinary Hearing Proceedings at 277-78.

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reasonable” and then goes on to enumerate eight “factors to be

considered in determining the reasonableness of a fee.” Ariz. R.

Sup. Ct. 42, ER 1.5(a) (emphasis added). Although the two

proceedings involve similar issues, they do not serve precisely the

same purpose.

¶16 The purpose of fee arbitration is to provide a forum “for

the resolution of fee disputes.” Ariz. R. Sup. Ct. 42, ER 1.5,

Comment, Disputes over Fees (emphasis added); see also Rules of

Arbitration of Fee Disputes, State Bar of Ariz. Fee Arbitration

Comm. (Rules of Arbitration of Fee Disputes) I.A (“The purpose of

the . . . Fee Arbitration Committee . . . is to provide a forum for

the binding arbitration of fee disputes.”). When a fee dispute

goes to arbitration, “[t]he issue before a sole arbitrator or a fee

arbitration panel . . . as set forth in ER 1.5 . . . is whether the

fees charged were reasonable for the work that was performed.” Id.

at III.A. After considering the reasonableness of the fee charged,

the arbitrator enters a specific award that “is final and binding

upon the parties and . . . such award may be enforced by any court

of competent jurisdiction.” Id. at IV.B.3.

¶17 A formal disciplinary action brought under ER 1.5

considers whether a lawyer’s fee in a specific case falls within

the range of reasonable fees for the services performed. If the

lawyer’s fee is deemed unreasonable under ethical standards, a

formal disciplinary proceeding also determines what sanction to

8
impose. See Ariz. R. Sup. Ct. 47(f)2, 48(d)3, 51(b).

¶18 The potential overlap between these two proceedings is

evident. Several differences between them, however, support the

conclusion that the State Bar should utilize fee arbitration before

considering whether formal disciplinary action should follow.

First, the State Bar’s announced policy encourages lawyers to

submit fee disputes to arbitration. The Comment to ER 1.5 urges

that “[e]ach lawyer should conscientiously consider submitting to

[fee arbitration].” Ariz. R. Sup. Ct. 42, ER 1.5, Comment,

Disputes over Fees. Because the Fee Arbitration Committee “shall

not have jurisdiction over a dispute . . . [i]f an action on the

dispute already is pending in another forum,” Rules of Arbitration

of Fee Disputes II.B.3, initiating disciplinary action precludes

parties from utilizing the preferred method of arbitration. We do

not approve of a procedure through which the State Bar encourages

fee arbitration on the one hand and, on the other, undermines

arbitration agreements by imposing discipline before allowing the

arbitration procedure to work.

¶19 Proceeding first to arbitration is particularly important

when, as occurred here, an attorney and client have explicitly

agreed to binding arbitration in the event of a fee dispute. By

rejecting Connelly’s request that the matter first proceed to fee

arbitration, the State Bar, in effect, allowed Richman to sidestep

9
his contractual obligation to arbitrate the fee dispute.6

¶20 Fee arbitration proceedings provide a better setting for

initially resolving fee disputes for other reasons. The parties

are more likely to obtain a prompt resolution through arbitration.

The pertinent rules direct that an arbitration hearing be set

within ninety days after receipt of an agreement to arbitrate. Id.

at VII.A. In disciplinary matters, in contrast, a hearing date

should be set within 150 days of filing a complaint. Ariz. R. Sup.

Ct. 53(c)6. The burden of proof also differs between fee

arbitration and formal disciplinary proceedings. In arbitration,

the attorney bears the burden of showing, by a preponderance of the

evidence, that she charged a reasonable fee. Rules of Arbitration

of Fee Disputes VI.F. In formal disciplinary proceedings, the

State Bar must establish the allegations of the complaint by clear

and convincing evidence. Ariz. R. Sup. Ct. 54(c),(d). Both

distinctions can benefit a client seeking a prompt resolution of a

fee dispute.

¶21 Finally, because fee arbitration determines whether a

lawyer charged a reasonable fee and, if not, the amount that

represents a reasonable fee, the award provides valuable

information for a formal disciplinary hearing, if one follows. For

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The State Bar points out that it cannot force both
parties to participate in arbitration. By initiating formal
disciplinary proceedings, however, the State Bar, and not the
parties or a court, determined not to enforce the parties’
agreement to arbitrate.

10
all those reasons, we conclude that fee arbitration provides the

appropriate forum for determining what constitutes a reasonable fee

for work performed in a particular case.

C.

¶22 In its brief, the State Bar presents several arguments to

support the proposition that it acted appropriately by initially

treating Richman’s complaint as a formal disciplinary matter.

First, the Bar argues that because fee arbitration is voluntary, it

cannot force the parties to use that procedure. The Bar’s concerns

are misplaced here, however, because Richman and Connelly had

already agreed to binding arbitration.

¶23 The Bar also expresses concern that, if both parties

agree to arbitration, it will lose its opportunity to initiate

formal disciplinary proceedings. The result, the Bar asserts, is

that the Bar can only discipline some attorneys who charge

unreasonable fees but cannot discipline others. Our holding,

however, does not prevent the State Bar from filing a formal

complaint to commence formal disciplinary proceedings once fee

arbitration proceedings have concluded, if such proceedings appear

appropriate.

¶24 The State Bar also urges that requiring enforcement of an

agreement to arbitrate before instituting formal disciplinary

proceedings could delay an investigation into activities that cause

public harm. That danger results, the Bar states, from the fact

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that most complaints involving excessive fees also involve

allegations of other ethical violations. See, e.g., In the Matter

of Hirschfeld, 192 Ariz. 40, 42 §§ 9-11, 960 P.2d 640, 642 (1998).

We agree that the State Bar should retain discretion to treat

complaints involving matters other than a simple fee dispute in a

way that prevents public harm. This action, however, involves no

other allegations of misconduct.

¶25 We conclude that the State Bar should follow its policy

of encouraging lawyers and clients to resolve fee disputes through

arbitration. We hold, therefore, that the State Bar should not

have begun formal disciplinary proceedings against Connelly until

arbitration of the fee dispute had concluded.

III.

¶26 To decide whether a fee charged constitutes a reasonable

fee, for purposes both of arbitration and formal disciplinary

proceedings, we look to ER 1.5. That rule requires that a lawyer’s

fee be reasonable and then lists eight factors “to be considered in

determining the reasonableness of a fee.” Ariz. R. Sup. Ct. 42, ER

1.5(a)(1)-(8); see Hirschfeld, 192 Ariz. at 43 ¶ 15, 960 P.2d at

643. The eight factors are:

(1) the time and labor required, the novelty and
difficulty of the questions involved, and the skill
requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the
acceptance of the particular employment will preclude
other employment by the lawyer;
(3) the fee customarily charged in the locality for

12
 similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the
circumstances;
(6) the nature and length of the professional
relationship with the client;
(7) the experience, reputation and ability of the lawyer
or lawyers performing the services; and
(8) whether the fee is fixed or contingent.

Ariz. R. Sup. Ct. 42, ER 1.5(a). Subsection 8 of ER 1.5(a) makes

clear that the nature of the fee agreed upon by the lawyer and

client plays an important role in considering the reasonableness of

the fee. Because Connelly and Richman agreed to a non-refundable

flat fee, that factor affects the analysis of whether Connelly

charged a reasonable fee.

A.

¶27 A non-refundable flat fee represents one type of fixed

fee agreement. We have held that non-refundable retainers are not

per se violations of Ethical Rule 1.5 and “a flat fee charged for

specific legal services can be proper.” Hirschfeld, 192 Ariz. at

43 ¶ 17, 960 P.2d at 643. We have also explained that

“[r]egardless of how [a] fee is characterized . . . each [fee

agreement] must be carefully examined on its own facts for

reasonableness.” Id. Finally, like other fee arrangements, non-

refundable flat fees are subject to retrospective analysis. See In

the Matter of Swartz, 141 Ariz. 266, 273, 686 P.2d 1236, 1243

(1984) (“We hold . . . that if at the conclusion of a lawyer’s

services it appears that a fee, which seemed reasonable when agreed

13
upon, has become excessive, the attorney may not stand upon the

contract; he must reduce the fee.”).

¶28 The State Bar’s Committee on the Rules of Professional

Conduct (the Committee) has provided useful guidance in

understanding the nature and proper use of flat fees. A non-

refundable fee agreement is one “under which the attorney may be

entitled to the fee regardless of whether he or she actually

performs the services (or some portion of the services) called for

in the agreement.” State Bar of Ariz. Comm. on Prof’l Conduct, Op.

99-02 at 4 n.2. Furthermore, a flat fee, which may or may not be

refundable, “describes an agreement whereby the attorney renders a

specified legal service for an amount that is fixed at the start of

the representation.” Id. at 6. Similarly, the Restatement (Third)

of the Law Governing Lawyers, defines a non-refundable flat fee as

“a lump-sum fee constituting complete payment for the lawyer’s

services.” Restatement § 38 cmt. g (1998).7 According to the

Committee, legal services typically performed in non-refundable

flat fee agreements are “self-contained task[s] that can easily be

described from start to finish, such as . . . handling a litigation

7
A non-refundable fee differs from a non-refundable retainer
or an advance payment. Unlike a non-refundable fee, a non-
refundable retainer “is a fee paid, apart from any other
compensation, to ensure that a lawyer will be available for the
client if required” and “an advance payment [is one] from which
fees will be subtracted.” Restatement § 34 cmt. e (1998). A non-
refundable fee, on the other hand, is a “a lump-sum fee
constituting the entire payment for a lawyer’s services in a
matter.” Id.

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from complaint to judgment.” State Bar of Ariz. Comm. on Prof’l

Conduct, Op. 99-02 at 6.

¶29 A non-refundable flat fee reflects “a negotiated element

of risk sharing between attorney and client” whereby the “attorney

takes the risk that she will do more work than planned, without

additional compensation; and the client, in return, agrees that the

attorney will earn the agreed-upon amount, even if that amount

would exceed the attorney’s usual hourly rate” because “the client

often has limited resources and therefore requires the certainty of

a pre-set fee.” Id. at 7. Because a non-refundable flat fee

reflects a balancing of the risk to both client and lawyer, a flat

fee can be larger than the fee generated by hourly rates without

being excessive. Swartz, 141 Ariz. at 272-73, 686 P.2d at 1242-43;

see also GEOFFREY C. HAZARD, THE LAW OF LAWYERING, Vol. I, § 8.15 at 8-34

(2001) (non-refundable flat fees benefit lawyers “who are confident

of their ability to judge the cost of providing specific legal

services” and clients who “appreciate . . . definite costs for

legal services . . . [that] are . . . capped”).

B.

¶30 When parties have agreed to binding fee arbitration, an

arbitrator should determine the reasonableness of a fee by looking

to the factors set forth in ER 1.5. If the parties adopted a non-

refundable flat fee, the arbitrator should consider the

circumstances under which the attorney and client agreed to the

15
fee, whether the attorney and client negotiated for and recognized

the risks involved with this type of fee, whether the legal

services covered by the fee constituted a self-contained task, and

the specificity with which the attorney described the legal

services to be performed in the fee agreement.

¶31 Although the Hearing Officer in this case considered the

eight factors listed under ER 1.5 and noted that Connelly charged

a non-refundable fixed fee,8 she did not discuss the

8
The Hearing Officer made the following findings based on
the factors in ER 1.5:

(1) In this case, [Connelly] demonstrated that the amount
of time and labor initially appeared to be great and that
Richman’s case could be complicated by additional charges
against the client. Clearly a highly skilled criminal
defense attorney was needed to perform the service
properly;
(2) There was no evidence presented that acceptance of
Richman’s case precluded [Connelly] from accepting other
employment;
(3) Witness Kimerer indicated that the fee customarily
charged in the locality for similar legal services was in
the range of $1,500-$15,000 . . . but that a fee of
$20,000-$25,000 once the case was completed was not
unreasonable;
(4) The amount involved was large, however, the results
obtained in the case were “extraordinary,” according to
Witness Black;
(5) The client was a difficult and needy client, and the
case required swift movement in order to obtain the
result achieved, therefore there were some time
limitations imposed by the client and the circumstances;
(6) There had been a previous relationship with the
client;
(7) Respondent clearly had the requisite skills,
experience, and reputation to handle such a case;
(8) The fee was fixed and non-refundable.

Hr’g Officer 9Y’s Report and Recommendation at 9.

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appropriateness of the non-refundable flat fee in light of the

negotiated risk involved and the type of legal services provided.

That failure constituted error.

IV.

¶32 The question remaining for resolution involves the

appropriate remedy. Because the Hearing Officer did not fully

consider the impact of the flat fee agreement, we must remand for

an additional hearing, either to the fee arbitration program or to

the Hearing Officer. For the reasons discussed above, we have

concluded that the State Bar should not allow lawyers and clients

who have contractually agreed to submit fee disputes to arbitration

to avoid that agreement. We therefore vacate the report of the

Hearing Officer and the decision of the Disciplinary Commission and

remand this matter for arbitration pursuant to the State Bar’s

Rules of Arbitration of Fee Disputes.

______________________________________
Ruth V. McGregor, Vice Chief Justice

CONCURRING:

___________________________________
Charles E. Jones, Chief Justice

____________________________________
Stanley G. Feldman, Justice

____________________________________
Rebecca White Berch, Justice

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