Some Open Questions for Flat Fee Aficionados and Ethics Gurus
Over the past few years, I’ve transitioned my practice from the billable hour to flat fees. For me, the flat fee works because most of the matters that I handle are, if not entirely predictable, then easily divided into discrete segments, each of which can each be assigned a set price. Though I can’t tell you exactly how I price each matter, my firm turns a profit and I’ve never had a client complain – so I assume that I’m doing something right.
Still, I’d like to be able to provide newer lawyers with better guidance on setting flat fees than simply saying “I just know how much it should cost.” Moreover, even with my generally positive experience with flat fees, there are still some quirks that befuddle me, which I have yet to see flat fee aficionados address. And so here are some of my open questions about flat fees – both to those who love them and to ethics gurus who can offer guidance on them. Feel free to address these hypothetical questions in the comment section, or in a separate post at your blog; I’m happy to link to it.
HYPO #1: I practice in a jurisdiction that does not allow me to treat flat fees as earned on receipt. Instead, I am required to deposit a flat fee paid in advance into my trust account, and disburse the proceeds as they are earned. I handle [criminal law/family law/fill-in-the-blank cases] and I want to charge a flat fee for the entire matter, whether it goes to trial or not. What kind of language can I include in my retainer agreement that will allow me to keep the full fee if the case does not go to trial (and arguably, at least some of the fee is “unearned”)? [I have some thoughts here, but I’d like to hear from you experts]
HYPO #2: I handle cases under fee-shifting statutes, which means that if I win, I can recover my clients’ attorneys’ fees. To document my fee request, the court requires me to submit detailed, hourly time sheets – but I charge flat fees for these matters. What do I do to recover attorneys’ fees?
HYPO #3: I represent municipalities, state agencies or insurers which require hourly billing. Any thoughts on how I might make the case for flat fees for these types of clients?
HYPO #4: I charge flat fees to my clients, but I don’t have any associates. So if I get busy, I outsource to contract lawyers – who typically charge by the hour – and may run over budget or not complete the work that I need within the number of hours I’ve requested. How can I align fixed flat fees that I charge clients with contract lawyers’ hourly billing practices?
HYPO #5: A client filed a grievance against me, and is claiming that my $15,000 flat fee to defend a small business owner against a lawsuit by a former employee was unreasonable when I managed to resolve the case with a letter and a couple of phone calls. How do I defend myself before the disciplinary committee? Should I voluntarily offer a partial refund?
Just to make things interesting, I’ll give a shout out in my blog and send a small gift for the best responses (either posted in the comments below or at your own post).
Oh boy! You are asking all the right questions, and unfortunately I don’t think there are many good answers. I have been confused about flat fees for some time. My most recent comment on the subject is available here:
http://bernabepr.blogspot.com/2011/02/indiana-supreme-court-clarifies-whether.html
One of my first ones is available here:
http://bernabepr.blogspot.com/2010/01/can-flat-fees-be-non-refundable.html
I hope to be able to respond to a view of these, but let me start with number 5. The decision to offer a refund is a business decision, but you are on strong legal ground. Model Rule 1.5 lists 8 factors (and its a non-exclusive list) that are to be considered in determining the reasonableness of the fee. Time is only one element. The results obtained are another. As long as the basis for the fee was discussed with the client, you are in a strong position in terms of defending yourself.
No. 1: I do nothing but criminal law. The fee is to obtain a result – not a promised result, but the best result possible at a defined stage of litigation. So: $____.__ to represent you through the trial court. Or $ _____.__ to represent you in the court of appeals.
The furnace isn’t working, so you call the furnace guy who stares at the furnace for a couple of minutes, walks around it, stares some more. Then kicks it. Immediately the furnace starts working. “That’ll be $200.” “$200? You spent five minutes and then kicked the thing. That’s outrageous.” “Uh, huh. But I knew where to kick.”
Jeff,
I agree that in criminal law, anything other than a pre-paid flat fee isn’t going to fly (unless you’re representing a high end executive in a white collar case with an employer who’s footing the bill). And I agree, that if the quoted fee is $15k, then it is what is whether the matter is resolved in 20 minutes or 200 hours. I just wonder what kind of language needs to be included in an agreement to shut down the “well, he never took it to trial so I should pay less argument.” I guess if the retainer explains that the fee is for resolution of the case, through trial, or if the case is otherwise resolved whichever comes first” that would allow the lawyer to retain the $15k whether he goes to trial, pleads it or gets rid of the case with a phone call.
The answer to Hypo #2 actually seems quite easy to me: you should record your time just as diligently and with as much detail as if you were billing on an hourly basis. If you handle matters that involve fee-shifting on a regular basis, I think you’d be crazy not to record your time. This may seem like a pain in the rear, but if you’re going to get involved in fee-shifting, you’re going to run into the lodestar method. Now I suspect this would not necessarily be applicable in transactional or criminal matters where I imagine fee-shifting is not an issue. If you do not track your time in civil litigation, however, you are really taking the risk of not being able to take advantage of fee-shifting for your clients.
It also has the added bonus of giving you the information you will need to determine whether you are pricing your flat fee services properly. You may find you’re pricing your time far below market hourly rate (or below what you think your time is worth at least
).
Many “flat fee” purists urge lawyers to “trash the timesheet.” They argue that keeping track of time to see how your hourly rate stacks up under a flat fee is just another way of measuring time. As I understand, flat fee purists believe that legal services should be priced like airline tickets or cars – pay one price and then determine if you turn a profit or loss.
Of course, it you’re not a purist, your solution works quite well!
Which was my point. I haven’t actually written an agreement that way, though maybe I should start, but I think it would work.
I’d very much like to hear the answers / thoughts on hypo #4! Carolyn, thanks for raising these issues for us!!
I wrote this blog post on the subject being discussed here. Like to have your views. Thanks.
http://blog.lawrd.com/en/profit-and-loss-statement-of-a-matter/
Purism is great in terms of marketing (or defending) the flat fee, but if we’re looking at this from the perspective of fee-shifting, purism isn’t necessarily practical. A judge inclined to use the lodestar method – as many, if not most, judges are – probably isn’t going to respond well to a motion that informs the judge the lawyer has trashed the timesheet and informs the judge that legal services should be priced like airline tickets. I could be underestimating the interest of judges in changing the legal fee paradigm, however. I think if a purist wants to trash the timesheet, that person does so at their own risk when it comes to fee-shifting.
I’m not a lawyer but a business consultant (who has worked with many attorneys). I would not trash the timesheet for a different reason. This is how you know if you’re pricing properly. You can’t tell from one case, but you can see patterns over time and adjust.
In business terminology, your time is like your Cost of Goods and I don’t know any business that wouldn’t measure that.
To answer #4: if you want a freelance lawyer to work on a flat fee, then insist on it. While many freelance lawyers generally bill on an hourly basis (in part because most of the lawyers we work for are still billing that way), a freelance lawyer who really wants your business will quote you a flat fee if you ask for one. Our mutual friend, Allison Shields, even presented a program on how freelance lawyers can use alternative fee structures. It’s available at http://LegalResearchandWritingPro.com.
Of course, this dilemma underscores the importance of developing an ongoing relationship with a trusted freelance lawyer before you’re under the gun. When you’re working with a tight deadline, you may end up agreeing to terms you’re not happy with.
I have previously pulled authority on #1 and #5 pertinent to DC and MD. The issue is 1) reasonableness of fees, and 2) disposition of “unearned” fees. While particular jurisdictions will require an independent assessment, the following could be a good place to begin an inquiry.
You want to know whether you can take a retainer to apply to future
work and include language in the retainer that allows you to keep it if
some of the work is not performed. You also want to know whether you
can keep a $15,000 flat fee intended for defense of a lawsuit when you
resolved the lawsuit with a letter.
Value billers and consultants frequently argue in favor of any arrangement a client consents to. They justify it by reference to analogies similar to what I see in the comments already. If a client has a problem, and he agrees that $15,000 is worth it to you to be rid of the problem, then it shouldn’t matter how the lawyer rids him of the problem. The lawyer has provided that “value” to the client.
That’s an incomplete assessment because the rules require that fees be reasonable, and a lawyer is not allowed to deal with a client as a sophisticated counter-party to a contract. A lawyer has a duty to the client at the same time the lawyer is negotiating the fee agreement. That includes a duty to make sure the client understands the potentiality and likelihood that a $15,000 problem can be resolved with a letter. It also includes a duty to make sure the fee agreement is fair, notwithstanding what the client will agree to. A client could agree to an unfair arrangement, and the lawyer would have a duty to rectify it. Make not mistake, bar counsel sees it this way.
In Maryland and DC, your questions raise the difference between a non-refundable engagement fee and an advance fee retainer. In Maryland Ethics Opinion 96-34, the state ethics committee discussed the difference. It cited Ethics Docket 93-20 and 93-24 for a complete explanation.
In sum, an engagement fee is solely to compensate a lawyer for
being available.
It does not require any additional legal services, and it is earned upon
receipt. On the other hand, a retainer
is paid for and in contemplation of legal services to be rendered in the
future. This type of arrangement
requires that, if the services are not rendered, any unused portion is
refundable.
Whether a fee may be kept depends on whether it is “earned.” Comment [3] to Rule 1.15 in Maryland illustrates this. It explains that, while Rule 1.15(c) allows a lawyer to treat fee advances as if they were lawyer property (and put them into the operating account), “in any case” upon termination, advances against fees that have not been incurred must be returned to the client as provided in Rule 1.16(d).
An informative opinion in DC is In re
Manse, 980 A.2d 1196 (DC 2009).
It concerns the application of Rule 1.15 (in its contemporary form) to a
flat fee situation. The issue was
whether a flat fee, paid in advance, needed to be treated as property of the
client and promptly “delivered” to the client pursuant to Rule 1.15(d) after
termination. In that context, the court
discussed the question that you raise – when is a fee “earned.
Manse had received a flat fee in
advance for representing a criminal defendant.
Trouble arose when Manse was discharged and he delayed returning the
money to the client (though he did pay it all back). The hearing committee found that Rule 1.15(d),
requiring prompt delivery of client property, did not apply because a flat fee
is not an “advance” (which would be client property) but the agreed-upon fee,
regardless of how much legal work is required.
The DC Court of Appeals
disagreed. Referencing Rule 1.5(a), the
court affirmed that a fee must be reasonable.
The court then stated that “an attorney earns fees only by conferring a
benefit on or performing a legal service for the client. It simply makes no
sense to permit lawyers to enter into fee agreements with clients stating that
an advance payment such as a flat fee is earned upon receipt, when such
payments are subject to being refunded to the extent unearned.” Such a fee is earned “only to the degree that
the attorney actually performs the agreed-upon services.” “In
sum, a flat fee is an advance of unearned fee because it is money paid up-front for legal services that are yet to
be performed.”
This assessment is consistent with DC
Bar Opinion 264. The situation there was
similar to what you ask about. A firm proposed to
create a legal services plan whereby clients would pay a fixed fee for up to 40
hours of work during the ensuing year.
The firm wanted to know whether the fee would have to be refundable if the
relationship was terminated during the year.
The bar opined that a retainer that
is tied to provision of legal services (rather than designed solely to ensure
availability) constitutes a special retainer which is earned upon provision of
the services, rather than upon receipt.
It concluded that such a retainer must be refunded upon termination to
the extent it is not earned. This would preclude the use of, for example, a minimum fee not otherwise justified pursuant to the elements identified by Rule 1.5(a).
There is such a thing as an excessive fee. So, no, I don’t think any bar association would agree that $15K for a telephone call is a reasonable fee.
The ABA also suggests the following:
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; *(ed: but be careful what jurisdiction you are in regarding the ability for the fee to be due upon 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.