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Ethical challenges of using flat fees

We argue that attorneys need to better safeguard clients when using flat fee billing. Even in jurisdictions, like Washington, where flat fees become property of the attorney when they are paid, lawyers need to have systems in place to ensure clients can receive partial refunds if needed. The system we propose can be called “trust accounting lite.”

This article first appeared in print as: Flat Fees: A Few Wrinkles, Greg McLawsen and Deborah Niedermeyer, Vol. 68, No. 4 NWLawyer 29 (June 2014).

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A widespread dissatisfaction with tradition billable hour fee arrangements, both among clients and among many members of the bar,[1] has increased the interest in flat fee agreements of the type which have been commonly used by immigration, family law and some criminal law attorneys for many years. Bar associations, including the Washington State Bar Association, have urged attorneys to consider flat fee agreements both as a means of satisfying client demand for value and as a way to address the embarrassing lack of access to crucially important legal services among low and moderate income individuals[2]

The advantages of a flat fee especially to client of modest means, is clear. As the Arizona Supreme Court explained in Matter of Connelly:

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. 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.[3]

Carefully calculated and ethically drafted flat fees arrangements have been touted as “a win-win proposition for both parties; they can help reduce expenses for clients, which in turn enables more clients to pay for legal services.”[4] Similarly, law practice management experts such as Pete Roberts emphasize that not only do flat fee agreements provide access to legal services to people who could not otherwise afford them, if the attorney works efficiently, flat fee agreements may yield a profit higher than the attorney’s regular hourly rate.[5] And, as in Connelly, this potentially sweet deal for the lawyer is generally thought to be reasonable under RPC 1.5(a) (prohibiting “unreasonable fees”) because of the risk that that the matter will be more complex and require more attorney time than anticipated. RPC 1.5(f)(2) sets out explicit guidelines and helpfully provides suggested language to be incorporated into flat fee agreements. If a client signs a written agreement complying with the five requirements listed in RPC 1.5(f)(2) a flat rate fee becomes the property of the lawyer upon receipt. Because the fee is attorney property it cannot be placed into a firm’s client trust account.[6]

The prospect of a refund.

But here’s the rub: even though the fee becomes the property of the lawyer “upon receipt” the client may still be entitled to be refunded a portion of the fee if the entire scope of work is not completed, even if the attorney is not at fault. This holds even if the legal work is not completed due to the client’s failure to cooperate in the representation or the client’s decision to terminate the attorney-client relationship.

WSBA Advisory Opinion 1864 (1999) concerned a request for the refund of a $1500 flat fee given to the attorney to prepare a petition for permanent status in the U.S. for the foreign spouse of a U.S. citizen. The petition was premised on the marriage and required the cooperation of both spouses. However, while the papers were still in preparation, the couple encountered marital problems and the attorney was instructed to terminate work on the matter. A fee refund was requested. Noting that RPC 1.5 requires that an attorney’s fee must be reasonable, the Advisory Opinion states that the refund is a matter of contract law and indicates that it would be reasonable for the attorney to keep only as much of the fee as she could prove in quantum meruit.

“Whether the fee is fixed or contingent” is the eighth of nine “reasonableness” factors listed in RPC 1.5(a). The rule seems to imply that it is “reasonable” for flat fee agreements to result in a larger than usual, potentially much larger than usual, attorney’s fee in flat fee cases. This compensates the attorney for accepting the risk of what one California ethics expert has called “financial disaster if the amount of work necessary turns out to be much greater than anticipated when the amount of the flat fee was agreed to.”[7] The Arizona Connelly decision sensibly interpreted RPC 1.5 in this manner, holding that any reasonableness analysis of a flat fee agreement must consider “the appropriateness of the non-refundable flat fee in light of the negotiated risk involved.”[8] The ABA concurs, having issued a formal opinion stating, “The reasonableness of a lawyer’s fee typically is assessed in light of the circumstances as of the time the original fee agreement was made.”[9]

In contrast to the approach taken by the ABA and Arizona, other states, including Washington, have required the return of almost an entire attorney’s fee despite the reasonableness of the fee agreement at the time it was made. For example in a 2012 case, the Iowa Supreme Court held a minimum fee agreement to be unreasonable in light of the “limited and insignificant services” the representation turned out to require.[10] Finding that the attorney could not “use the contract to justify the minimum fee he charged and collected from his client” the court not only required a full refund, it imposed a thirty day suspension.[11] Washington State attorneys should bear in mind that Washington courts tend more toward the Iowa approach than the ABA’s. The Washington Court of Appeals has held “if at the conclusion of a lawyer’s services it appears that a fee, which seemed reasonable when agreed upon, has become excessive, the attorney may not stand upon the contract; he must reduce the fee.”[12] In Washington, “[c]ontracts for attorney fees are continually reviewed for reasonableness throughout the relationship of the client and attorney.”[13]

Washington courts’ focus on ongoing analysis of fee agreements for reasonableness, in combination with the client’s absolute right to fire her lawyer at any time,[14] may make Washington attorneys especially vulnerable in flat fee representations. WSBA Advisory Opinion1864 is consistent with analyses like that of the Indiana Supreme Court holding that “[a] corollary of the client’s right to discharge a lawyer is that a contract between the client and the lawyer that unduly impairs that right is invalid.”[15] Such analyses essentially take the position that a client’s inviolable right to discharge the lawyer is not much of a right at all if it would be too costly to assert. Like WSBA Advisory Opinion 1864, courts in Indiana, Georgia and Colorado have strongly suggested that regardless of the fee agreement, a client who fires her attorney, at whatever stage of the representation, for whatever reason, is entitled to a refund based in quantum meruit.

Courts are naware that clients can manipulate these precepts in order to deprive attorneys of fair compensation for work done or risk assumed.[16] For example, a 2009 Washington case almost certainly involved a situation where the client “deliberately fired her attorney to maximize her share of the generous verdict.”[17] Washington attorneys can be somewhat heartened by the fact that the court indicated that, in instances of egregiously unconscionable client behavior, more than an hour-based quatum meruit attorney’s fee is permissible, even if the client discharges the attorney.[18]

What’s the liability?

How should an attorney protect herself for the eventuality that a client will come knocking, wanting reimbursement in a partially-completed flat rate matter? In many years of handling trademark applications on a flat fee basis, attorney Mark Jordan of Invicta Law Group has never had a dispute with a client about a partially-earned flat fee. In the event the full representation is not completed, “I sit down with the client and explain what portion of the fee I’ve earned based on the work performed,” Mark explains. Indeed, flat fee matters generally tend to represent relatively smaller fees, and in a majority of scenarios the attorney will likely have the cash on hand to return some or all of a single flat fee.

What happens, though, if all of an attorney’s flat fee clients come knocking? What if the attorney – through no fault of her own – is unable to continue her work due to disability or family crisis? What if she has an entire caseload of partially-completed flat fee cases and can complete none of them?

“Trust accounting lite.”

How does an attorney track her level of financial exposure for collected flat fees that she may need to partially reimburse? Practice management experts, such as Pete Roberts, recommend that lawyers track time on all flat rate matters just as they would with traditional billing. As Roberts points out, this also gives the lawyer important data to assess the value she is investing in flat rate matters, and she may want to adjust fees accordingly.[19] This approach offers a means to ensure that the attorney always has cash on hand to reimburse a client for a partially-earned fee. The attorney deposits each flat fee into his operating account, but allows herself access only to the portion of the fee that she has earned at a given time. Such a system amounts is what we call “trust accounting lite.”

While trust accounting lite is possible with a single bank account, practitioners may find it cleaner to deposit unearned portions of flat fees into a separate operating account. That second operating account becomes like a secondary trust account, treated as off-limits. If the firm will be maintaining large sums of unearned flat fees it may make sense to use a money market account or other interest-bearing account. Unlike monies kept in a trust account, nothing prohibits an attorney from profiting from interest earned on these monies.

But for an attorney, a major appeal of flat fee matters is precisely that she may believe flat fees relieve her of the hassle and administrative expense of time tracking and trust accounting. If an attorney is forced to carefully track what she has actually earned on a flat rate case, the procedure seems to create the same administrative overhead as standard trust accounting.

Note also that time tracking will not necessarily show the amount of fee that an attorney has earned in a flat fee case. Under RPC 1.5(a) time spent on a matter is only one of nine factors used to assess the reasonableness of a fee. In other words, just because an attorney has expended 50% of the time she anticipates to invest in a representation does not mean the client would be entitled to a 50% reimbursement of the fee.

In addition to the catastrophic “all clients come knocking” scenario, trust accounting lite safeguards attorneys who take on large flat rate matters, a single one representing substantial financial exposure to the attorney. Immigration attorneys, for example, routinely charge a flat rate for an entire removal (“deportation”) defense case. The total representation will be can involve hundreds of hours, entail many thousands of dollars in legal fees, and stretch over years. Trust accounting lite ensures any client could be reimbursed a pro rata portion of her fee at any time.

The sky is not falling.

The situation may not be as dire as it initially seems. As most attorneys appreciate, virtually any violation of the technical trust accounting rules may expose an attorney to bar discipline. The same is not true for trust accounting lite with flat fees. Such accounting will be tested only if a client comes to collect an unearned portion of a flat fee. Without minimizing the importance of safeguarding client interest, the accuracy of trust accounting lite is a professional risk calculation for the attorney to make.

One way to streamline trust accounting lite can be with familiar landmarks in cases commonly handled by an attorney. Hence, for example, if the attorney knows that she generally finishes 60% of work in Case Type X in the first month of work, she might adopt a general accounting protocol of releasing all but 40% of the fee to herself after the first month. Or an attorney could create a menu of landmarks in common flat rate cases. If an attorney knows the typical number of hours expended, for example, to produce an initial court or administrate filing, prepare discovery requests, attend an initial hearing and prepare for a settlement conference, she can allocate funds to herself accordingly, out of her operating account, as each of these landmarks is reached. The finer-grained the landmarks the less financial risk is assumed by the attorney.

Milestone agreements.

Especially in large flat fee matters an attorney may want the protection afforded by a client trust account, but recall that flat fee monies may not be deposited into a trust account. Instead of collecting a single lump-sum flat fee, the client may be asked to advance the full amount of the representation up front, from which a series of flat fees will be removed from the trust account as each stage of the representation is undertaken. Comment 12 to RPC 1.5 specifically approves this “milestone” approach. To avoid commingling lawyer-owned monies, it is critical that a milestone agreement clearly designate the event upon which each portion of the fee advance becomes lawyer property.[20] The milestone approach requires careful drafting of the representation agreement.

At least one commentator believes that such agreements are appropriate only for “reasonably sophisticated clients.”[21] While we disagree, we are mindful of the Washington Supreme Court’s advice that all fee agreements, but especially flat fee agreements, should be “written in clear language that the client can understand.”[22] By clearly setting out the fee for each stage of the representation, “milestone” flat fee agreements may actually help better understand exactly what they are paying for.[23]

Can insurance help?

There is no “off-the-shelf” insurance policy that will protect an attorney from the liability of having to reimburse her flat fee clients. An attorney’s malpractice policy will be of no use. John Chandler of Kibble & Prentice explains “the return of legal fees is specifically excluded from the definition of ‘damages’ in most, if not all malpractice policies.” Could an attorney otherwise insure her exposure for collected but unearned flat rate fees? Probably not, explains John Gray of Basin Insurance. “Ultimately the unearned fees are just a business debt of the firm.” A general liability policy would not cover that debt, nor would an umbrella policy, which simply “is in excess” of a liability policy. The only clear option, says Gray, would be for the attorney to increase coverage for disability and life insurance policies, though this would not cover every scenario where an attorney could not continue work.

Conclusion.

Attorneys need not lose sleep over every theoretical ethics quandary under the sun. The WSBA does not appear to possess statistics for how often fee disputes arise from flat fee billing, or if an attorney has ever been faced with the catastrophic “all clients come knocking” scenario. However, demands for flat fee refunds are not merely theoretical. Some attorneys who use flat fee agreements may choose to take the ostrich approach, ignoring their ethical and financial exposure in flat rate matters and hoping the worst never comes to pass. But we recommend Washington lawyers take systematic, pro-active measures to track their progress on all flat rate matters and implement either trust accounting lite or milestone agreements. Flat fees increase the ability of modest income clients to obtain vitally important legal representation. In the interest of accessible legal services, we express our hope that in cases where a quantum meruit refund is appropriate, Washington will give more serious consideration to the amount of financial risk the attorney has assumed.


 

[1] See e.g. Paula Littlewood, Rethinking Legal Education in a Changing Legal Profession Northwest Lawyer Bar Notes (Oct. 2013).

[2] See e.g. Pete Roberts, Alternative Fee Agreements: Are They Right for Your Practice? De Novo, Practice Success 101 (Dec. 2011); see also, Littlewood, supra, note 1.

[3] Matter of Connelly, 55 P3d 756, 762 (Ariz. 2002) (internal quotations omitted).

[4] Scarlett Hunter, Thinking Outside the Billable Hour: Non-Traditional Fee Arrangements for Newer Attorneys, De Novo (Dec. 2011).

[5] Roberts, supra, note 1.

[6] RPC(f)(1)

[7] David Cameron Carr, Attorney Fees: Five Keys to Ethical Compliance, GP Solo (Oct./Nov. 2010), available at http://tinyurl.com/cav5uq5 (last visited Jan. 15, 2014).

[8] Matter of Connelly, 55 P3d at 762.

[9] ABA Formal Opinion 11-458 (2011).

[10] Supreme Court Atty. Disc. Bd. v. Vilmont, 812 N.W.2d 677 (2012).

[11] Id.

[12] Holmes v. Loveless, 122 Wn.App. 470, 478 (Wash.App. Div. 1 2004).

[13] Forbes v. American Building Maintenance Co., 148 Wn.App. 273, 291 (Wash.App. Div. 3 2009); see also Cotton v. Kroneneberg, 111 Wn.App. 258, 272 (Wash.App. Div. 1 2002) (contracts which seemed fair at the outset of the representation must be reevaluated in light of subsequent events).

[14] See RPC 1.16(3).

[15] Matter of O’Farrell, 942 N.E.2d 799, 804 (Ind. 2011); see also AFLAC, Inc. v. Williams, (Ga. 1994); Olsen v. City of Englewood, 867 P.2d 96 (Colo.App. 1993).

[16] See e.g., O’Farrell, 942 N.E.2d at 807; Olsen, 867 P.2d at 98.

[17] Forbes, 148 Wn.App. at 285.

[18] See id., at 301.

[19] Pete Roberts, Finance: Timekeeping by the Numbers, Vol. 38, No. 4 Law Practice, available at http://tinyurl.com/c3ozaxr) (last visited Jan. 13, 2014).

[20] See RPC 1.5, cmt. 16

[21] Gregory R. Hanthorn, Ethical Principals Applicable to Alternative Fee Arrangements and Related Areasat 7 (presented at ABA Section of Litigation 2012 Section Annual Conference).

[22] Matter of Van Camp, 171 Wn.2d 781, 805 (Wash. 2011).

[23] Clients who are unable to read and write in any language present special issues beyond the scope of this article.


 

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Greg McLawsen

I’m proud to be the founder of Sound Immigration. My job is to work behind the scenes to ensure our clients have an outstanding experience at our firm. I’m passionate about reinventing the practice of law to make it work better for those we serve. I work hard to identify the best available technology to make our firm convenient for clients. I look to other industries, like real estate and the restaurant business, to learn about practice that will help serve our clients better.

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