The author is with Armstrong Teasdale, LLP, St. Louis, and teaches legal ethics at Washington University School of Law. Please send feedback or questions for future columns to firstname.lastname@example.org.
Paradox rapped lightly on the door and was glad to see Ethox hanging up the telephone. “Paradox, my friend,” Ethox said, “You look confused. What is the problem?”
“ACME Products has demanded that we accept flat fees to handle small
product-liability claims. Senior Litigator agreed to handle the work for $30,000 per case, and has now asked me to figure out how we should handle the flat-fee payments and to prepare a standard engagement form.” Paradox stopped and groaned softly. “I have done a bunch of research, and although I understand that ‘flat fees’ and ‘fixed fees’ are the same thing, everything else seems a bit confusing.”
“This is a great question,” Ethox responded. “After all, if we place client funds in our firm’s operating account too soon, the firm could get into serious trouble with disciplinary authorities. What has your research shown so far?”
“In the past, we always moved a flat payment into our operating account as soon as we started working on a matter,” Paradox answered. “But I just found a recent bar journal article that says such treatment may not be correct.”
“Oh, you must have found discussion of ethics opinions like the 2010 opinions D.C. Ethics Opinion 355 and Missouri Formal Opinion 128.” Ethox stopped and glanced at the article in Paradox’s hand. “Those and similar opinions say two important things. First, a lawyer generally cannot have a truly ‘nonrefundable’ fee. If keeping an entire fixed-fee payment is not reasonable, the lawyer should return the unreasonable portion. After all, Rule 1.5(a) says a lawyer should not agree to, charge, or collect an unreasonable fee.”
“So, if the client hires the firm to handle the product-liability suit,” Paradox asked, “but the plaintiff dismisses it a week later, we may need to refund some or all of the fee?”
“Yes, that is how the D.C. and Missouri ethics authorities read Rule 1.5(a),” Ethox smiled. “But if the lawyer handles the full case, the lawyer will probably get to keep the whole fee under Rule 1.5, regardless of whether the case ends with a motion to dismiss with prejudice, or in settlement, or after a jury verdict. Of course this presumes the fixed fee is reasonable.”
“Oh, I get that,” Paradox responded.
Ethox continued, “Second, the opinions tell us that the fee should be placed in a trust account, then moved into the lawyer’s operating account in portions as the matter progresses or—presuming the entire fee is reasonable and the client agrees—move the entire flat fee into the operating account at the end of the engagement.”
“So, if we are going to charge $30,000 per case, we could move over $5,000 after we file a responsive pleading to the complaint, $10,000 after we commence discovery, another $10,000 when we start trial preparations, and the final $5,000 once trial begins?”
“Precisely.” Ethox was glad to see Paradox was catching on so quickly. “The firm should make sure that ACME Products accepts this arrangement, and the transfers should not be excessively front-loaded.”
“What happens if the case is dismissed with prejudice on the motion to dismiss, or if it settles early?”
“The lawyer and client could agree that, when the case is fully and finally resolved for any reason, the lawyer could treat the entire flat fee as earned and move it into the lawyer’s operating account,” Ethox explained. “Our firm would still have to make sure that, in the end, the fee was not unreasonable and that it was negotiated based on past experience on similar cases, with the firm and client each assuming risk regarding how the flat fee would compare with, say, our ordinary hourly billing for the matter. After all, the firm might feel it received too little if the litigation dragged on, just like ACME Products might think it paid too much if the case settled right away. Hopefully, it would all work out in the wash.
“The key thing,” Ethox continued, “is to figure out what our state’s law says about handling flat fees. Not every state has indicated it agrees with the D.C. and Missouri ethics opinions. Arizona Opinion 10-03 still allows lawyers to charge nonrefundable fees and to deposit those fees directly into their operating accounts at the start of a representation.”
“Okay,” Paradox mumbled, growing a bit more nervous.
“Also, your engagement letter should clearly state how we intend to handle the flat fee—where the firm will place the fee, when the firm intends to move portions of the fee to its operating account, and when the firm will consider the entire flat fee earned in full.” Ethox now sensed Paradox’s nervousness and added, “I would be happy to help you review your research and draft a standard agreement.”
“That would be great,” Paradox answered, relieved. “It is great to have a legal ethics lawyer down the hall.”