Flat-Fee Arrangements May Carry Sharp Consequences
By Jonathan B. Stepanian, Litigation News Associate Editor – June 20, 2012
Alternative billing and fixed-fee agreements may be increasingly popular, but they may not be as simple as they seem. An Iowa attorney learned this the hard way after he refused to return a $2,500 non-refundable retainer paid by the client before the matter when it turned out the case required substantially less work than either party anticipated.
Flat-Fee Agreement Not as Simple as It Sounds
An Iowa criminal defense attorney entered into a fee agreement under which the client agreed to pay $225 per hour with a $2,500 retainer. The fee agreement stated that $2,500 would also be the minimum fee for the criminal defense representation. The client paid $2,500 and the attorney placed the funds into his trust account.
Prepared to defend the case, the attorney entered his appearance in the criminal proceedings. Shortly after entering his appearance, however, the court dismissed the charges against the defendant at the request of the state. (Federal authorities filed charges on the same matter, so the state dropped its case.)
The attorney did not represent the client in the federal action. Nonetheless, he subsequently withdrew the $2,500 retainer as payment for his services.
The client’s father (who had paid the retainer) requested return of the retainer and an accounting, but the attorney ignored his requests until the State disciplinary board became involved. At that point, it became apparent that the attorney worked a total of 3.7 hours in the case, including one hour responding to the request for an accounting.
The Iowa Supreme Court found that the attorney fee, notwithstanding the minimum fee agreement, was unreasonable. “The bottom line is that it is unethical for a lawyer to enter into a nonrefundable advance-fee contract except in a case involving a general retainer,” according to the court’s opinion. The court held that under Iowa precedent and court rule the minimum fee agreement “was clearly unethical.”
The court also analyzed the minimum fee agreement under Iowa Rule of Professional Conduct 32:1.5(a), which is identical to American Bar Association Model Rule of Professional Conduct 1.5(a). The court determined that “the amount of the fee charged . . . for performing the limited and insignificant services in representing his client was, without question, unreasonable” under the professional rules.
Earning a Reasonable Fee
Iowa Rule of Professional Conduct 32:1.5(a) and ABA Model Rule 1.5(a) require that counsel fees be reasonable. Both rules prohibit charging or collecting an “unreasonable fee” and establish eight factors used to assess the reasonableness of a fee.
Disciplinary boards of several states have distinguished between flat fees and general retainers. For instance, the Michigan Discipline Board has indicated that flat fees paid in advance are not earned until work commensurate with the amount of the fee is completed. The District of Columbia Bar Legal Ethics Committee also reached a similar conclusion.
By contrast, however, the North Carolina Bar Ethics Committee issued opinion 2008-10 expressly permitting minimum fees and noting that such fees are earned upon payment. The Committee stated that the lawyer does not have to refund a minimum fee simply because the value of the total representation did not rise to the amount of the fee. The fee, however, must still be reasonable.
When to Measure Reasonableness of the Fee
When to measure reasonableness of a fee is subject to debate, with different states reaching different results. The American Bar Association has opined that reasonableness under Model Rule 1.5 is determined upon entering the fee agreement. Although states such as North Carolina are in accord in with the ABA opinion, others are not.
“Some states will focus on the term ‘agreed’ in Model Rule 1.5 and look at whether the fee agreed to is reasonable at the outset and will not necessarily look at what happened afterwards” offers Gregory R. Hanthorn, Atlanta, cochair of the ABA Section of Litigation’s Ethics and Professionalism Committee. “Other states will focus on the ‘charging and collecting’ language of Rule 1.5 to assess whether subsequent developments occurred that render collection of the agreed-upon fee unreasonable,” he adds.
Clarifying When the Fee Is Earned
“In looking at any fee that a lawyer claims is earned at the outset—that is, any non-refundable fee—the first step is to figure out whether it can be fairly characterized as a general retainer,” says Hanthorn. “A ‘general retainer’ is fair compensation to the attorney for holding himself or herself available for the representation and turning down other potential engagements” he adds.
The attorney’s minimum fee in the Iowa case, however, was for representation in a specific engagement in a specific criminal case, which is not consistent with the purpose of a general retainer. It is difficult in Iowa and other states to establish that a fee paid in advance is a general retainer in criminal cases because there may be concerns related to “money being parked with an attorney to make it more difficult to get to under forfeiture statutes” says Hanthorn.
In civil cases, flat or minimum fees paid in advance may be acceptable if the fee is in exchange for something done or to be done by the attorney. “A careful attorney would, in the engagement agreement, point out that all or a portion of a nonrefundable fee is deemed earned at the outset by virtue of the lawyer no longer being able to represent competitors of the client on other similar matters” says Hanthorn. He cautions, however, that states have differing views on minimum fee arrangements. “In some states, such as Texas, for a fee to be earned at the outset the full amount of that portion of the fee has to be attributable to representing one client and foregoing others.”
Keywords: flat-fee agreement, alternative billing, fee arrangement
- » ABA Formal Opinion 11-458 (August 4, 2011).
- » ABA Model Rules of Professional Conduct.
- » State of Michigan, Attorney Discipline Board Opinion, Case No. 10-137-MZ (May 16, 2011).
- » D.C. Bar Legal Ethics Committee, Opinion No. 355 (June 2010).
- » North Carolina State Bar, 2008 Formal Ethics Opinion 10 (October 24, 2008).
1. OK! I would imagine that, to be ethical, if you charge a flat fee that is considered reasonable for three hours of work, and yet end up performing nine hours, the ethics board would approve you then telling your client that the flat fee quote was not reasonable, so to assure what you did is ethical, they must pay your tripple what you quoted. It only makes sense, right? Out of curiosity, are there any ethics rules that limit what doctors, dentists, and pyschologists charge. I can't recall any doctor, dentist, or psychologist being told that they have to reduce their fee because it is unreasonable. Perhaps, it is unethical for lawyers to be held to a higher standard than other professions?? No surprise though, when you consider that lawyers having doctorate degrees, are the only profession that is prohibited from referring to themselves as "Doctor." What a "damned if you do, damned if you don't" profession!
2. This is one of those areas where the basic principles of accounting help. That retainer fee was unearned revenue under GAAP, and any proper accounting would have had it on the balance sheet as a Liability until it was earned and measurable thereby becoming revenue. A proper simple quickbooks accounting would have yielded that the liability was repayment obligation net of fees earned for actual fees earned. Ethics in accounting help to avoid these problems on your books do the following when you book retainers:
Dr. Cash (Client Trust A/c) $2,500.00
Cr. Unearned Revenue $2,500.00
Explain to record the client deposit in Case Docket X10851 client prepaid fixed fees of $2.5k for est 11.1 hrs (let’s guess) legal svcs @ 225/hr
Upon render of services at 3.7 hrs book the entry 3.7hrs * 225/hr for 833.00 (rounded) of earned income assuming 3.7hrs was accurate
Dr. Unearned Fees $833.00
Cr. Earned Fees $833.00
Entry yields recognized income of $832.5 and leaves $2,500-833 =1667.00 of Unearned Balance Sheet Income a liability which is payable to client).
Since now proper accounting is in place as a control, client case dismissed and Atty looks at balance sheet sees unearned fee and remits client refund of $1,667.00 when case is dismissed by reading the value of Unearned Revenue on the Balance Sheet. Easy as GAAP to avoid these issues with Prudent Financial Management and Good Faith Best Practices in Business. The Rules should be uniform in application and GAAP is as relevant to Attys as it is to anyone in business. Perhaps it should be mandated in the Rules of Conduct?
On the question of overages and billing, you need to word fixed fee arrangements for fixed up to X number of hours and then if in excess of X +5 hours example indicate a new tiered billing threshold.
As far as crying about earnings go . . . that’s just the point . . . EARNINGS have to be EARNED . . . no freeloading no cut arounds . . . you eat what you earn.
Don’t worry about doctors, dentists, or psychologists as the malpractice is eating the profit in that business model and from the accounting perspective. It’s easy for me to see who got the money on that transaction.
We need business ethics in ALL areas and tort reform is par for the course. It is of course unethical to see people’s misfortunes as an opportunity to get rich quick. The principle should be to educate the profession of medical practitioners for better practice. Of course at the same time, the profession of ethical litigators play an invaluable role in removing bad actors from the medical fields when you get rogue medical professionals and bad actors.
Case in point there is always some up and down side to litigation but if you use the principles of accounting, you will get better results, manage profitability, and avoid ethics sanctions.
Use GAAP accounting on litigation fees and avoid misunderstandings and be clear on the difference between your fees and client retainers. The practice helps you stay focused that an unearned fee is a repayable liability until it is earned through services; use this practice on your books and you will avoid this issue with good housekeeping through Best Practices of GAAP accounting.
At your service and on the road to ensure that the rule of law and ethical standards is applied to ALL with equal uniformity. I enjoyed the article, which was informative, but the comment was provocative to thought encouraging a fair response in defense of those who through their nature tend to be less defended. Doctors spend a large amount of time dedicated to studying not for healing and educators and doctors both need to be appreciated for their roles in our communities when performing their duties in good faith and with due diligence.
Hope this helped the overall viewpoint. The intent was ultimately to add value to the analysis.