June 20, 2012 Top Story

Flat-Fee Arrangements May Carry Sharp Consequences

Attorneys should exercise care in preparing flat-fee agreements

Jonathan B. Stepanian

Alternative billing and fixed-fee agreements may be increasingly popular, but they may not be as simple as they seem. An Iowa attorney learned this the hard way after he refused to return a $2,500 non-refundable retainer paid by the client before the matter when it turned out the case required substantially less work than either party anticipated.

Flat-Fee Agreement Not as Simple as It Sounds

An Iowa criminal defense attorney entered into a fee agreement under which the client agreed to pay $225 per hour with a $2,500 retainer. The fee agreement stated that $2,500 would also be the minimum fee for the criminal defense representation. The client paid $2,500 and the attorney placed the funds into his trust account.

Prepared to defend the case, the attorney entered his appearance in the criminal proceedings. Shortly after entering his appearance, however, the court dismissed the charges against the defendant at the request of the state. (Federal authorities filed charges on the same matter, so the state dropped its case.)

The attorney did not represent the client in the federal action. Nonetheless, he subsequently withdrew the $2,500 retainer as payment for his services.

The client’s father (who had paid the retainer) requested return of the retainer and an accounting, but the attorney ignored his requests until the State disciplinary board became involved. At that point, it became apparent that the attorney worked a total of 3.7 hours in the case, including one hour responding to the request for an accounting.

The Iowa Supreme Court found that the attorney fee, notwithstanding the minimum fee agreement, was unreasonable. “The bottom line is that it is unethical for a lawyer to enter into a nonrefundable advance-fee contract except in a case involving a general retainer,” according to the court’s opinion. The court held that under Iowa precedent and court rule the minimum fee agreement “was clearly unethical.”

The court also analyzed the minimum fee agreement under Iowa Rule of Professional Conduct 32:1.5(a), which is identical to American Bar Association Model Rule of Professional Conduct 1.5(a). The court determined that “the amount of the fee charged . . . for performing the limited and insignificant services in representing his client was, without question, unreasonable” under the professional rules.

Earning a Reasonable Fee

Iowa Rule of Professional Conduct 32:1.5(a) and ABA Model Rule 1.5(a) require that counsel fees be reasonable. Both rules prohibit charging or collecting an “unreasonable fee” and establish eight factors used to assess the reasonableness of a fee.

Disciplinary boards of several states have distinguished between flat fees and general retainers. For instance, the Michigan Discipline Board has indicated that flat fees paid in advance are not earned until work commensurate with the amount of the fee is completed. The District of Columbia Bar Legal Ethics Committee also reached a similar conclusion.

By contrast, however, the North Carolina Bar Ethics Committee issued opinion 2008-10 expressly permitting minimum fees and noting that such fees are earned upon payment. The Committee stated that the lawyer does not have to refund a minimum fee simply because the value of the total representation did not rise to the amount of the fee. The fee, however, must still be reasonable. 

When to Measure Reasonableness of the Fee

When to measure reasonableness of a fee is subject to debate, with different states reaching different results. The American Bar Association has opined that reasonableness under Model Rule 1.5 is determined upon entering the fee agreement. Although states such as North Carolina are in accord in with the ABA opinion, others are not.

“Some states will focus on the term ‘agreed’ in Model Rule 1.5 and look at whether the fee agreed to is reasonable at the outset and will not necessarily look at what happened afterwards” offers Gregory R. Hanthorn, Atlanta, cochair of the ABA Section of Litigation’s Ethics and Professionalism Committee. “Other states will focus on the ‘charging and collecting’ language of Rule 1.5 to assess whether subsequent developments occurred that render collection of the agreed-upon fee unreasonable,” he adds.   

Clarifying When the Fee Is Earned

“In looking at any fee that a lawyer claims is earned at the outset—that is, any non-refundable fee—the first step is to figure out whether it can be fairly characterized as a general retainer,” says Hanthorn. “A ‘general retainer’ is fair compensation to the attorney for holding himself or herself available for the representation and turning down other potential engagements” he adds.

The attorney’s minimum fee in the Iowa case, however, was for representation in a specific engagement in a specific criminal case, which is not consistent with the purpose of a general retainer. It is difficult in Iowa and other states to establish that a fee paid in advance is a general retainer in criminal cases because there may be concerns related to “money being parked with an attorney to make it more difficult to get to under forfeiture statutes” says Hanthorn.

In civil cases, flat or minimum fees paid in advance may be acceptable if the fee is in exchange for something done or to be done by the attorney. “A careful attorney would, in the engagement agreement, point out that all or a portion of a nonrefundable fee is deemed earned at the outset by virtue of the lawyer no longer being able to represent competitors of the client on other similar matters” says Hanthorn. He cautions, however, that states have differing views on minimum fee arrangements. “In some states, such as Texas, for a fee to be earned at the outset the full amount of that portion of the fee has to be attributable to representing one client and foregoing others.”

Jonathan B. Stepanian is an associate editor for Litigation News.

Keywords: flat-fee agreement, alternative billing, fee arrangement

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