By David Cameron Carr
We all can agree that “money makes the world go round.” For attorneys in the private practice of law, we may say “attorney fees make the world go round.”
Attorneys are in the interesting position of being both officers of the court (that is, quasi-public officials) and entrepreneurs engaged in operating businesses that need to make a profit in order to survive. The tension between these two roles is a lot of what the ethics rules are all about.
Solos and small firm lawyers may be more keenly aware of this tension because they tend to wear all the hats when it comes to running a law practice.
In the essential area of attorney fees, there are five keys to complying with the ethics rules: (1) setting the fee, (2) documenting the fee agreement, (3) securing the fee, (4) communicating the fee, and (5) earning the fee.
Setting the Fee
Young lawyers who are starting out as solos or small firm lawyers often ask “how much can I charge?” The answer to the question turns on myriad business factors: the practice area, the characteristics of the target market, the amount of your overhead, and what your competitors are charging. But the ultimate determination of what you should charge for your services is also limited by ethics rules designed to keep clients from being gouged.
ABA Model Rule of Professional Conduct 1.5(a) states simply, “A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.” How do we know when a fee is unreasonable? ABA Model Rule 1.5 dictates we look at eight factors:
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 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.
A new proposed version of Rule 1.5 in my home state, California, is consistent with peculiar California case law that holds that a lawyer may only be disciplinedfor charging a fee that is unconscionable, that is, one “that shocks the conscience.” California’s version of 1.5 reiterates all the factors in the ABA Model Rule—with the exception of the “customarily charged” local fee—and adds four more:
1. the relative sophistication of the client and the attorney;
2. the amount of the fee in proportion to the value of the services provided;
3. the time and labor required; and
4. the informed consent of the client.
Market considerations alone might tempt you to charge what the traffic will bear. The circumstances of individual clients might also present opportunities for over-reaching (e.g., the desperate client who has tangible assets). Conscientious lawyers, however, will remember the 12 factors outlined above before even considering taking advantage of their clients.
Documenting the Fee Agreement
Lawyers like written agreements. Thus the utility of a written attorney fee agreement seems obvious. A signed writing should remove all doubt about the exact terms of the engagement. A carefully written scope of representation section is in the lawyer’s interest because it will ensure that the lawyer is not on the hook for work that is beyond the scope of the agreement.
Yet lawyers continue to represent clients without well-written fee agreements or without any fee agreement at all, despite the rules and despite their best interests. It is not uncommon for lawyers to use boilerplate agreements borrowed from other lawyers practicing in the same areas of law—the assumption is that, if it worked once for somebody else, it must be good.
ABA Model Rule 1.5(b) requires that the fee agreement be communicated to the client “preferably in writing” but goes on to state in Rule 1.5(c) that a contingent fee agreement must be in writing. California goes further and requires by statute that both contingent fee agreements and most other fee agreements be in writing (Cal. Bus. & Prof. Code §§ 6147 and 6148, respectively). In California, the informed consent of the client is also a factor in determining whether a fee is unconscionable.
Two of the biggest risks inherent in the practice of law are legal malpractice and not getting paid. A well-thought-out and continually reexamined attorney fee agreement is an essential tool for the managing those risks. The fee agreement should be a living document, continually reexamined in light of changes in the law and lessons learned in the lawyer’s practice.
Securing the Fee
Setting the fee and documenting the fee agreement are of little use to the lawyer if the fee is not paid. A number of ethical rules address the common ways attorneys secure their fees.
The best security is taking an advanced fee. This is a sum of money paid at the beginning of the representation that will be paid to the lawyer as the work is done and the fee is earned. ABA Model Rule 1.15 (c) provides that “a lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.” When the representation terminates, unearned fees and costs must be refunded to the client (ABA Model Rule 1.16(d)).
Another possibility is securing the fee with the client’s property, or taking an interest in the client’s business. This may be done provided certain safeguards are put into place. ABA Model Rule 1.8(a) provides that a lawyer may not take an ownership, possessory, security, or other pecuniary interest adverse to a client unless the transaction is fair and disclosed in writing, the client is given written notice of the right to independent counsel, and the client thereafter agrees in writing.
Failure to scrupulously abide by the rules of professional conduct in this area is fertile ground for the discipline system. Violations often result in actual suspension from practice, sometimes even disbarment. Use of any security device or transaction with the client should only be done after a close examination of the rules and your state’s law.
Communicating the Fee
ABA Model Rule 1.4(a)(3) requires a lawyer to “keep the client reasonably informed,” and Model Rule 1.4(b) provides that the lawyer must explain to the extent reasonably necessary to permit the client to make informed decisions. Aside from the general duties to communicate (and the duty to avoid dishonest or fraudulent conduct (ABA Model Rule 8.4(c)), the ABA Model Rules are not specific about the lawyer’s duty to provide timely or accurate billing statements. California imposes a duty by statute, but Bus. & Prof. Code §6148(c) only requires the lawyer to provide a billing statement within ten days if requested by the client . California disciplinary case law also imposes a specific duty to account to their clients for advanced fees, whether or not those fees are to be deposited into trust.
One of the first cases that I handled when I left the State Bar of California and entered private practice was a lawyer-client dispute in which the lawyer had entered into an hourly fee agreement with a client in a civil litigation matter, had litigated the matter through a three-day trial (in which they lost), and then presented his very first billing statement to the client for an amount in excess of $80,000. Needless to say, the client was in shock. The lawyer’s defense was that he had told the client that his claim was weak to begin with and that he should settle the matter, but the client refused “on principal,” and the law did not require him to provide the client with a billing statement.
The lack of specificity regarding the duty to account for how a fee is earned misleads some lawyers about the importance of accounting. Frequent and accurate billing statements that account for what work has been done and what fees have been incurred are an essential part of a lawyer’s ethical duty to communicate with the client. And remember, clients complain to disciplinary agencies about lack of communication from their lawyers more than about anything else.
Earning the Fee
Model Rule 1.16(d) provides that “any advance payment of fee or expense that has not been earned or incurred” must be refunded upon termination of employment.
California’s proposed version, Rule 1.16(e), is almost identical but adds the concept of the “true retainer,” that is, “a fee paid solely for the purpose of ensuring the availability of the lawyer for the matter” that need not be refunded on termination of employment. Few concepts in the ethics of attorney fees have caused as much consternation as the “true retainer.” Many lawyers would love to avoid having to return unearned fees on termination of employment and not always out of bad motives.
Consider the marital dissolution lawyer who, having done the initial intake consultation, incurred the overhead expense of setting up the client’s file, and perhaps turned down other clients in order to be available to do the work for this client, is informed a few days later that the client has reconciled with her spouse and that the lawyer’s services are no longer required. Small firm and solo lawyers also need to have a constant and predictable cash flow in order to operate in an efficient manner. As a result, many lawyers, especially in the marital dissolution area, have attempted to structure their fees as nonrefundable despite the clear intent of Model Rule 1.16 that no fee that has not been earned may be kept after termination.
In California, many lawyers have attempted to clothe nonrefundable fees as true retainers in spite of the fact that their fee agreements clearly show that the advance fee was paid not for availability but for services. In the modern world of superabundant lawyers, the true retainer is largely an anachronism; it dates from a time, almost unimaginable now, when there were too few lawyers to serve the legal needs of the population and it was often necessary to pay a fee to make sure a lawyer was available when needed—and to make sure that the lawyer was not tied up representing an opposing party.
The current trend toward flat fees, “value billing,” and other unconventional fee agreements gives us reason to consider the requirement that fees be earned.
Flat fees provide certainty for clients who want to know what their legal problem will cost them. Flat fees also provide advantages for lawyers, but only if the lawyer can predict with confidence how much work will need to be done on a particular matter. If the work consists of “cookie-cutter” cases, such as unlawful detainer prosecution, or cases that can be done in volume with a high degree of automation and delegation of much of the work to relatively inexpensive non- attorney staff, flat fees can be extremely lucrative. If the cases are not “cookie cutter” in character, a flat fee can be a 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. In these cases, lawyers end up working for a small fraction of their usual hourly rate, sometimes far less than the amount of their overhead expense.
If a lawyer on a flat-fee case is terminated before completion of the work set forth in the scope of the engagement, what part of the fee has been earned and what part needs to be refunded? With hourly billing, the calculation is relatively easy; the number of hours reasonably spent multiplied by the agreed hourly rate equals the earned fee. But how do you calculate that with a flat fee? California’s proposed new rule 1.5(e)(2) attempts to address the problem with this language:
a lawyer may charge a flat fee for specified legal services, which constitutes complete payment for those services and may be paid in whole or in part in advance of the lawyer providing the services. If agreed to in advance in a writing signed by the client, a flat fee is the lawyer’s property on receipt. The written fee agreement shall, in a manner that can easily be understood by the client, include the following: (i) the scope of the services to be provided; (ii) the total amount of the fee and the terms of payment; (iii) that the fee is the lawyer’s property immediately on receipt; (iv) that the fee agreement does not alter the client’s right to terminate the lawyer-client relationship; and (v) that the client may be entitled to a refund of a portion of the fee if the agreed-upon legal services have not been completed.
The intent of this language seems to be to take the problem outside the realm of potential lawyer discipline and place the onus on the client to dispute the lawyer’s entitlement to the entire fee through some mechanism such as mandatory fee arbitration. Beyond this well-intentioned goal, it is not particularly helpful in determining how much of the flat fee should be refunded.
One of the reasons many lawyers like flat-fee arrangements is that they believe these arrangements will relieve them from the onerous chore of timekeeping (contingent-fee lawyers often do not keep time records for the same reasons). Because of the unearned fee problem, however, this belief is illusory. The best practice for lawyers is to keep timekeeping records, even if the fee arrangement is a contingent or flat fee.
Ethical compliance and sound risk management do not end with our relatively brief examination of these five key areas. There is no substitute for a working knowledge of the rules in your jurisdiction. This can be daunting; California’s proposed version of the Model Rules with comments runs to 100 pages. Lack of familiarity, however, can result in a career-ending injury, one that is often self-inflicted.