To Trust or Not To Trust: What to Do With Flat Fees? (Part I)

 Some lawyers refuse to experiment with flat fee billing – not because of confusion over how to set prices or concerns over under-charging — but because they believe that flat fees raise ethical red flags. Truth is, the vast majority of jurisdictions allow flat fee billing, but at the same time, they also impose caveats and restrictions wrapped up in ponderous ethics opinions that are so difficult to follow that most attorneys default to the billable hour.

So in the first part of this post, I’ve tried to make things easy by focusing on two questions and concluding with a summary of select state bar opinions and ethics rules on flat fees. In Part II, I’ve linked to and summarized to 15 jurisdictions’ policies on flat fees and ask your help to crowdsource the rest. There’s also lots of guidance on flat fees in The Legal ClauseIt.

Two Recurring Questions About Flat Fees:

  1. Can flat fees be paid up front and if yes, must the funds be deposited into the lawyer trust account?

All jurisdictions permit payment of flat fees upfront. But they vary on how funds must be handled. Some like North Carolina, Georgia and Massachusetts allow advance flat fees to go directly to the lawyer’s operating account. Others like California and Maryland permit lawyers to put flat fees in their operating account with certain disclosures to clients. And finally, jurisdictions like Virginia and District of Columbia require advance flat fees to go into lawyer trust accounts where they must remain until fees are earned (See Part II for more jurisdictions and detailed discussion). However, even with a trust account requirement for flat fees as in Virginia or the District, laywers needn’t wait months or years to resolve the case before taking payment but can, in their engagement agreements, deem some portion of fees earned when certain milestones are reached.

2.         Can lawyers make flat fees non-refundable and if yes, in what circumstances?

Flat fees raise the issue of refunds because if the service isn’t performed, a client needs a mechanism to get the money back or the resulting fee would be unreasonable.  For example, let’s say a client pays a $10,000 flat fee for a divorce and tells her lawyer a week later that she’s reconciled with her husband. If the lawyer hasn’t done anything besides open the file, it would be unreasonable for the lawyer to keep the full payment. In an hourly billing situation, the client is protected since the lawyer would return the portion of trust account funds remaining for work not performed. But the same isn’t true for flat fees – because if they are treated as earned when paid, then if the lawyer doesn’t do the work (or does a shoddy job), the client couldn’t obtain a refund to hire another lawyer.  Which is why most ethics opinions address the issue of flat fees and refundability in tandem.

The issue of refundability for flat fees arises where the contracted work isn’t done – and not where it’s been performed, but the matter resolved more quickly than anticipated. Consider a situation where a client pays $20,000 to a criminal defense attorney to defend against a charge that the lawyer manages to have dismissed after filing a single, three page motion.  Because the client received what he bargained for (defense against charges), the lawyer is entitled to the full fee even if the case took just a few hours to resolve. By contrast, say that same criminal defense attorney collects the $20,000 flat fee and ignores the file for a year.  Here, if the client asks for a refund, the lawyer would be obliged to provide some refund since retaining a $20,000 fee for work never performed makes the fee unreasonable.

Can lawyers state that a flat fee is non-refundable? In many jurisdictions, yes – but the non-refundable policy cannot result in an unreasonable fee and further must be commicated to the client. Here’s a drag and drop clause (from The Legal ClauseIt) that you can use:

Payment for these services is considered a prepaid flat fee for the scope of service described. Client understands that this fee is deemed earned upon receipt, will be deposited in the Firm’s operating account and is non-refundable unless required by Rules of Professional Conduct.

The beauty of the flat fee is that it’s simple and clear. It’s unfortunate that the ethics rules governing flat fees aren’t.