A new advisory opinion clarifies the propriety of flat-fee arrangements and the manner in which uch fees must be accounted for. According to the Ohio Supreme Court’s Board of Professional Conduct, the state’s Rules of Professional Conduct require a lawyer to deposit flat fees and expenses paid in advance for representation into a client trust account, and the lawyer can only withdraw funds as the fee is earned or as expenses are incurred. This requirement runs counter to the Board’s prior guidance, which instructed that flat fees be placed in the lawyer’s account. The revision brings Ohio’s position more in line with those of other states.
Fee Timing Is Crucial
“A flat fee is a type of fixed fee,” the opinion explained, noting that while “the terms ‘fixed fee’ and ‘flat fee’ are afforded the same meaning and are used interchangeably. . . . there are other types of fixed fees, such as a fixed hourly rate” and “[a] fixed fee may not necessarily be a ‘flat fee.’” When a flat fee is earned affects whether it must be placed in the lawyer’s trust account, the opinion held. Fees that are paid upfront but that have not yet been earned are still the client’s and must be placed in the trust account.
Conversely, an “earned upon receipt” flat fee is deemed earned upon payment regardless of the amount of future work performed. Those fees are considered the lawyer’s and should not be placed in a trust account. Doing so would impermissibly commingle a lawyer’s funds with those of a client. Regardless of whether the fee is designated as “earned upon receipt” or “nonrefundable,” the lawyer must advise the client that the client may be entitled to a refund if the lawyer fails to complete the representation for any reason.
“One thing that leads to the need for an opinion like this is that we think we know what these terms mean, but their meanings seem to be changing over time,” observes Gregory R. Hanthorn, Atlanta, GA, cochair of the ABA Section of Litigation’s Federal Practice Task Force. “Even careful lawyers might equate the terms flat fee and fixed fee. The Ohio opinion does a better job of defining its terms than some others, noting a flat fee is a type of fixed fee,” he adds.
Foregone Work a Consideration in Evaluating Reasonableness
“One of the issues that the Ohio opinion punted with, as do all of the other opinions in this area that I’ve seen, is how much weight to give to Model Rule 1.5(a)(2)—the likelihood that accepting this representation will preclude the lawyer from other employment, especially in the context of a criminal case,” Hanthorn remarks. “That is the single most significant thing that a criminal lawyer, particularly in a multi-defendant case, is giving up on day one. That can happen in an instant, as soon as he or she accepts representation of the client,” he explains.
Hanthorn notes that Georgia’s flat-fee rule, like Ohio’s, tracks Model Rule 1.5. The Georgia opinion expressly states “there is nothing in this obligation that prohibits an attorney from contracting for large fees for excellent work done quickly. When the contracted for work is done, however quickly it may have been done, the fees have been earned and there is no issue as to their non-refundability.” Like the Ohio opinion, the Georgia opinion recognizes that the “likelihood that the acceptance of the particular employment will preclude other employment by the lawyer” is a factor the attorney must consider in determining fee reasonableness under Rule 1.5. This preclusion, therefore, should be considered part of the attorney’s services in agreeing to represent a client.
“In my experience, in-house lawyers love flat-fee arrangements because it gives them some certainty, and they value certainty over a lot of other considerations,” says Joshua D. Jones, Birmingham, AL, cochair of the Section of Litigation’s Securities Litigation Committee. “There are three things to take into account before agreeing to a flat-fee arrangement,” Jones advises. “First, they work best in the litigation context when you are dealing with a series of cases with underlying similarities. Second, it’s important that both the client and the lawyer have experience with the type of case. It is difficult to build a flat-fee arrangement that works for both sides if one or both sides have a level of uncertainty with the type of work involved. Third, it’s important to have a process built in to the agreement that allows you to take specific matters out of the flat-fee structure.”
Unlike Ohio, however, not all states recognize an “earned upon receipt” designation, Jones cautions. “The concept of fees being earned upon receipt was rejected by Alabama,” he recalls. “In Alabama, if you have a flat fee, that money goes into the trust account, not to be distributed until earned. Even if it weren’t required by the Alabama opinion, I think that’s good business practice.” Similarly, Missouri does not allow funds to be “earned upon receipt.” Therefore, attorneys with offices in multiple states should be especially careful in how they approach flat fees and trust accounts.
Keywords: securities litigation, flat fee, fixed fee, Model Rule 1.5
Katerina E. Milenkovski, is senior legal counsel at American Electric Power in Columbus, Ohio. This piece originally appeared in Litigation News on July 7, 2016.