Watch out for ethics bumps in flat fees

As alternative billing approaches go, flat fees have many fans. Clients like to know exactly what a particular legal service will cost and lawyers like to leverage experience they have gained in providing the same service to others. Sometimes a flat fee even lets a lawyer spend more time on a matter because there’s no concern that the client will feel the lawyer was trying to run up the bill by spending more time on legal research or clever drafting. Flat fees are also important for clients who are at a high risk of future nonpayment. 

The place where lawyers tend to get in trouble ethically with flat fees is when they want the fee to be both flat and nonrefundable. From a definition standpoint, calling a fee “flat� merely says what the amount will be and says nothing about when the client is expected to pay, when the fee will be considered earned, and what portion (if any) the client will get back if the client is unhappy or just decides the lawyer is ugly.

One way to handle the flat fee is to have the client pay the amount up front, put it in the lawyer’s trust account, and state in the representation agreement when the fee will be considered earned, so that the lawyer can take it out of trust and put it in the business account.  This works well for document-intensive projects, such as an estate plan or an incorporation. But even in a criminal matter the agreement could be that 25% of the fee is earned after the arraignment, another 25% after the omnibus, and the rest after trial, with all of the fee earned at any time a plea bargain is reached.

Most lawyers who use flat fees, however, see them also as a way of avoiding having to place funds in a trust account.  Of course, one could avoid trust account issues by having the client pay after the work is done, but getting the money up front is a key part of keeping a law practice afloat.

This is where the ethics problems start.  Traditionally, lawyers in many jurisdictions have only been able to accept a flat fee, payable in advance, and earned upon receipt (i.e. “nonrefundable�) if the fee was considered an availability retainer.  In other words, “I’m willing to take on your manslaughter case, but it could be such a big case that I will have to a) hire additional staff and/or b) turn down other business, so the only way I can agree to do this is if you agree that once you pay me my $50,000 fee, I won’t have to return it if you change your mind a month from now.�  In some jurisdictions, the Rules of Professional Conduct require that the lawyer make special written disclosures to the client about the non-refundable aspect of the fee and that the fee will not be placed in the trust account (if any portion was refundable up front, then it wouldn’t be earned, and it would have to go in the trust account). 

Inevitably, a client comes back a short time after paying the lawyer the fee, after very little work has been done on the case, and says that the client has changed his or her mind so they’d like a refund. The lawyer says, sorry that wasn’t our deal, and the frustrated client complains to the ethics authorities. 

Smart lawyers both follow the technical rules and give the client back some money.  Not-so-smart lawyers . . . well, they spend a lot of time trying to convince the ethics authorities that it was reasonable for the lawyer to charge a 5-figure fee for very little work.  At the end of the day, all fees must be reasonable.

In criminal, bankruptcy, and federal court matters, to name a few, it really can be difficult for a lawyer to withdraw once he or she gets started, and it can be challenging to figure out ahead of time how much work a case will require.  Availability retainers make sense if a lawyer focusses on one of these areas — some cases will be resolved quickly, some will go to trial, and hopefully it will all work out in the end. 

But for practice areas in which lawyers are typically paid hourly, the trend toward lawyers insisting on non-refundable retainers has been troubling to some ethics authorities. Lawyers sometimes take what would just be an ordinary retainer headed for the trust account, call it “nonrefundable� and both deposit it in the business account and refuse to return any money to the client who quits before the work is done. 

This isn’t something that keeps me awake at night.  Lawyers are very heavily regulated — when I remodeled my house, I wrote huge checks to a contractor, and there was no “trust account� in sight.  I think there’s very little risk that a family law attorney who takes a $3,000 retainer up front to start a divorce isn’t going to earn all of that money. But it’s also not fair to the client to set up the retainer in such a way that the lawyer can get paid for not working, especially if there’s no particular cost to the lawyer. Lawyers have to ask themselves if there’s a good reason for making the fee non-refundable, other than to avoid the hassle of using a trust account. 

So keep quoting those flat fees to clients. Just watch out for the ethics bumps.

Watch out for ethics bumps in flat fees is a post from the law firm marketing blog, Lawyerist.com