by Toby J. Rothschild
Many lawyers charge flat fees, instead of hourly or contingent fees, for their work. This often happens in criminal law, family law, bankruptcy, and other fields. Flat fees can be helpful to both attorneys and clients as they provide predictability in legal fees and a transparent pricing structure. A flat fee is defined in the California Rules of Professional Conduct as “a fixed amount that constitutes complete payment for the performance of described services regardless of the amount of work ultimately involved, and which may be paid in whole or in part in advance of the lawyer providing those services.”1
While the definition seems straightforward, there are a few issues to be aware of in charging flat fees. These include whether fees paid in advance can be deposited in the attorney’s operating account, rather than a client trust account, whether and how much of the fee is earned if the representation terminates before the agreed tasks are completed, and whether and how the fee can be renegotiated during the representation.
In most cases, advance fees must be deposited into a client trust account.2 The rules make an exception for flat fees. Rule 1.15(b) provides that flat fees can be deposited into the lawyer’s operating account if certain conditions are met. The lawyer must disclose to the client in writing that the client has a right to have the funds deposited in a client trust account until the fee is earned, and that the client is entitled to a refund if the agreed-upon work is not completed. If the fee exceeds $1,000, the disclosure must be signed by the client.
Rule 1.16(e)(2) requires that, on termination of the representation, any unearned advance fees must be refunded to the client. Comment 3 to Rule 1.5 reinforces this requirement. It states: “When a lawyer-client relationship terminates, the lawyer must refund the unearned portion of a fee.” Representation may be terminated because the client fires the lawyer for any reason or because the lawyer withdraws or otherwise ceases the representation. What the rules do not specify is how to determine the unearned portion of a flat fee. One option, suggested by Comment 2 to Rule 1.15, is to establish benchmarks or milestones in the engagement agreement that define how much of the fee is earned for each specific task included in the entire case.3 It is important that the benchmarks not frontload the fees, or otherwise determine them in an unconscionable manner. They must accurately reflect the amount of work required to reach each milestone in the case. This protects against charging an unconscionable fee prohibited by Rule 1.5 and prevents discouraging the client from electing to change lawyers, which clients have a right to do at any time with or without cause.4
Other methods of calculating the earned portion of a flat fee may also be considered, but they too have serious issues. Measuring the fee by using an hourly rate for the work completed does not take into account the reasonable value of the services in relation to the flat fee. Another option is to estimate the percentage of the work completed. However, neither the hourly nor the percentage option is fixed, and may result in lingering fee disputes between the lawyer and the client. This abrogates the predictability advantage of a flat fee.
While there are no California cases addressing this issue directly, one California ethics opinion—as well as cases and ethics opinions from other states—draws the conclusion that the benchmark approach is consistent with Rule 1.5 and is permissible.5
Sometimes, during the course of a flat fee representation, it becomes clear that the initial agreement was based on assumptions of the work required or the amount of time the work would take that turn out to be mistaken. Sometimes this is based on incomplete information provided by the client or by changes in the work to be done. This often allows the parties to reconsider the agreement and potentially to change it. There are currently no cases or ethics opinions in California addressing this issue,6 but it is likely that any change would require compliance with Rule 1.8.1, which governs business transactions with a client. Rule 1.8.1 requires that the transaction be fair and reasonable to the client, that the lawyer fully disclose the terms and the lawyer’s role in the transaction to the client in writing, that the client be represented by independent counsel in the transaction or be advised in writing to seek the advice of independent counsel and be given a reasonable time to do so, and that the client provide informed written consent. The revised agreement must meet all the requirements of a fee agreement, including assuring it is not unconscionable under Rule 1.5.
In conclusion, flat fee arrangements have positive benefits for both the client and the attorney if they are properly drafted. The agreement must make clear what tasks are included in the flat fee, and indicate that the fee depends on the entire project being completed. Any termination of the engagement prior to completion must reduce the fee to cover only the portion of the work completed, and if the fee is paid in advance, any unearned fee must be refunded. It is helpful to make clear in the agreement how any refund will be determined. Specifying benchmarks or milestones to define what portion of the fee is earned as that benchmark is met is a clear way to avoid fee disputes in the case of termination. While advance fees normally are required to be placed in a client trust account, flat fees can be placed in an operating account if the requirements of Rule 1.15(b) are met. If the attorney wishes to amend the agreement, it is safest to follow Rule 1.8.1 to ensure that the new agreement is legal and binding.
ENDNOTES
Toby J. Rothschild is of counsel to OneJustice, providing ethics training and consulting to legal aid programs in California, and is a member of the OCBA Ethics and Professionalism Committee. The views expressed in this article are his own. He can be reached at toby@tjrlaw.net.