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5 Tips to Avoid Ethical Pitfalls in Flat Fee Agreements

Flat fees are a welcome alternative to hourly billing.

This arrangement means the attorney charges a fixed fee for the agreed-upon legal service. The client knows exactly what he will pay for the service and usually begins making payments at the outset of representation.

In my immigration practice — although I can offer an hourly rate to clients — I normally quote a flat fee. No client ever asks to be billed by the hour instead. Most prefer to know the exact value/cost of the agreed-upon legal service, rather than be billed for the lawyer’s time (usually in six, ten or fifteen-minute increments).

While flat fees offer several advantages, they also present ethical pitfalls, particularly when the attorney-client relationship ends before all the work is completed.

Flat Fees Are Subject to a Partial Refund if the Work is Not Fully Performed and to a Full Refund if the Work is Not Performed At All

Minnesota Lawyer recently published an article by Patrick Burns, First Assistant Director of the Minnesota Office of Lawyers Professional Responsibility, titled Ethics: Refunds of Unearned Flat Fees (reprinted here).

In the article, Burns states that there have been complaints filed with the Office of Lawyers Professional Responsibility where the lawyer and client entered into a flat fee agreement, but the agreed-upon service was not fully provided. In some instances, the lawyer claimed no refund was due because the total fee had been earned even though the services were not fully provided. The lawyer argued that he spent enough time on the matter such that the flat fee (when analyzed on an hourly fee basis) was fully earned.

Burns points out, “The flat fee agreement fixes a value for specific legal services to be rendered. If those services are not fully rendered, a refund is due to the client no matter how many hours the lawyer has spent on the matter.”

Amendments to Rule 1.5 Marked the End of Non-Refundable Fees

Previously, Minnesota lawyers could charge non-refundable retainer fees. It was quite common for criminal defense or estate planning attorneys to use non-refundable retainer agreements.

Prior language under Rule 1.5 of the Minnesota Rules of Professional Conduct allowed for non-refundable advance payments of availability (retainer) fees. There was no requirement that the non-refundable retainer be held in a trust account. If clients terminated the representation, they normally forfeited the retainer fee and did not get a refund.

But the amended Rule 1.5, which went into effect on July 1, 2011, prohibits non-refundable fees. The current rule states that while advance payments of flat fees and availability (retainer) fees, if agreed upon in writing, are the lawyer’s property, they are subject to refund.

As part of the amendments, the Minnesota Supreme Court deleted from Rule 1.5(b), the following sentence, “All agreements for the advance payment of nonrefundable fees to secure a lawyer’s availability for a specific period of time or a specific service shall be reasonable in amount and clearly communicated in a writing signed by the client.”

The Court added to Rule 1.5 (b) the following:

Except as provided below, fee payments received by a lawyer before legal services have been rendered are presumed to be unearned and shall be held in a trust account pursuant to Rule 1.15.

 (1) 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 written fee agreement signed by the client, a flat fee shall be considered to be the lawyer’s property upon payment of the fee, subject to refund as described in Rule 1.5(b)(3). Such a written fee agreement shall notify the client:

(i) of the nature and scope of the services to be provided;

(ii) of the total amount of the fee and the terms of payment;

(iii) that the fee will not be held in a trust account until earned;

(iv) that the client has the right to terminate the client-lawyer relationship; and

(v) that the client will be entitled to a refund of all or a portion of the fee if the agreed-upon legal services are not provided.

(2) A lawyer may charge a fee to ensure the lawyer’s availability to the client during a specified period or on a specified matter in addition to and apart from any compensation for legal services performed. Such an availability fee shall be reasonable in amount and communicated in a writing signed by the client. The writing shall clearly state that the fee is for availability only and that fees for legal services will be charged
separately. An availability fee may be considered to be the lawyer’s property upon payment of the fee, subject to refund in whole or in part should the lawyer not be
available as promised.

(3) Fee agreements may not describe any fee as nonrefundable or earned upon receipt but may describe the advance fee payment as the lawyer’s property subject to refund. Whenever a client has paid a flat fee . . . and the lawyer-client relationship is terminated before the fee is fully earned, the lawyer shall refund to the client the unearned portion of the fee. If a client disputes the amount of the fee that has been earned, the lawyer shall take reasonable and prompt action to resolve the dispute.

Although flat fees and retainer fees do not have to be placed in a trust account until they are earned, they are still subject to refund. Flat fees are subject to a partial refund if the work is not fully performed. They are also subject to a full refund if the work is not performed at all. Retainer fees are subject to refund if the attorney is not available as promised. Such fee agreements also must be communicated in writing to the client.

The amended Rule 1.5 presents ethical pitfalls for Minnesota attorneys, particularly when the client makes advance payments of flat fees and the agreed-upon service is not fully provided or not provided at all.

Here are five tips to avoid ethical pitfalls in flat fee agreements for specified legal services: 

1. Choose the clients you love and love the clients you have

Good client relations and effective, regular communication between the attorney and client reduce the likelihood of a breakdown in the relationship and an early termination of representation. When agreed-upon legal service is not fully performed, it’s usually because the client fires the attorney or the attorney withdraws from the case.

To minimize breakdowns in the relationship or to avoid fee disputes, you want to have good clients who appreciate the value you bring.

If the client had many prior attorneys before he met with you, this could be a red flag. Look out for warning signs of a bad client.  Then once you accept a case, work on it diligently, provide excellent service, and give ongoing status updates to the client.

2. Break down the representation into stages or segments

Flat fees are most appropriate in relatively simple or routine matters, such as writing a basic will, overseeing a real estate closing, or preparing an uncontested divorce petition. They also work well in complex cases where the representation can be broken into segments and stages.  A separate fee can be charged for each segment or stage individually.

If the attorney carefully outlines, in the fee agreement, what is and isn’t covered in each segment or stage of the representation, it’s easier to determine what work is already done versus work yet to be done.

For example, a U.S citizen client may hire an immigration attorney for full representation in obtaining an immigrant visa for his foreign national spouse who lives overseas. The process starts with filing an I-130 immigrant petition, proceeds to the filing of the immigrant visa application, and ends with the immigrant visa interview, after which time the U.S. Consulate grants or denies the immigrant visa.

Instead of having one fee agreement that lumps in and does not distinguish the different stages, the attorney and client may have one fee agreement that clearly delineates each stage and the related fee, or have separate fee agreements for each stage and the related fee.

3. Have a written fee agreement that includes the required language

If  the advance fee payment is to be considered the lawyer’s property, subject to refund, the client must consent to this in a written fee agreement.

A written fee agreement that calls for advance payment of flat fees must also include the required language set forth in Rule 1.5(b).

The agreement must notify the client that he will be entitled to a refund of all or a portion of the fee if the agreed-upon legal services are not provided. It also cannot include any language describing an advance payment as non-refundable or earned upon receipt.

4. Don’t spend it all

Minnesota lawyers may accept full or partial payment of a flat fee in advance of performing the specified legal services. They may deposit the payment in an operating account instead of in a trust account, if they consider the payment their property (assuming the agreement is in writing).

But they have no right to a non-refundable flat fee. If they do not fully perform the agreed-upon services, they must refund the “unearned” portion of the fee upon termination of representation.

The safest thing to do is to wait until the work is done and then charge the fee, but this leads to cash flow problems and makes it practically impossible to pay bills and keep the law firm running.

Advance payments are necessary for most lawyers. But because flat fees cannot be non-refundable under Rule 1.5, it’s important to put money aside in the event of a fee dispute.

Although the ethics rule doesn’t require you to deposit advance payments in the trust account until earned, you still have the option to do so. Otherwise, keep a nominal amount of funds in the operating account for those rare occasions where you might need to give money back.

5. Keep a time record

One reason why lawyers prefer flat-fee arrangements is that you don’t have to present timekeeping records with your bills. Is there any lawyer out there who enjoys the painstaking chore of entering time?

But because unearned fees are subject to refund, lawyers need to maintain some type of time record for each case, even if it involves a flat fee arrangement. (At the very least, time keeping helps you determine whether you are working efficiently on a case and gives you a more realistic perspective on how much to charge for the next, similar case.)

If the agreed-upon work is not fully performed, the hourly metrics help to show how much of the fee the attorney has earned. Rule 1.5(a) states that a lawyer must charge reasonable fees, and the time and labor required to do the work are primary factors.

While you don’t have to track your time down to every minute in flat fee arrangements, as you would in hourly billing, you want to keep some type of time record. This backup documentation will help you resolve fee disputes and decide how much to refund to the client.

Although the time spent is not “an exclusive factor,” it “may be considered” in determining the value of the services that the lawyer completed, as Burns states in the Minnesota Lawyer article.

To a great extent, your knowing that advance payment is always subject to refund makes you a much more diligent attorney. You will do the work and communicate well with your client if you know you have to give money back if you don’t.

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Apply these five tips to avoid ethical pitfalls in flat fee arrangements, particularly when you accept partial payment or full payment before you complete all the work.

This article provides general information only. Do not consider it as legal advice for any individual case or situation.   The sharing or receipt of this information does not create an attorney-client relationship.

The author, Dyan Williams, is admitted to the Minnesota state bar and focuses on the Minnesota Rules of Professional Conduct in her articles.  Check your individual state rules of professional conduct, regulations, ethics opinions and case precedents, instead of relying on this article for specific guidance. 


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