Questions about fee agreements are frequently asked on the OBLIC Hotline. Flat fee agreements seem especially problematic. Let’s take a closer look at these fee agreements.
Rule 1.5 of the Ohio Rules of Professional Conduct governs fees and expenses. The rule provides that:
- A lawyer shall not make an agreement for, charge, or collect an illegal or clearly excessive fee. A fee is clearly excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee.
The rule further specifies the factors to be considered in determining the reasonableness of a fee including:
- the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
- the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
- the fee customarily charged in the locality for similar legal services;
- the amount involved and the results obtained;
- the time limitations imposed by the client or by the circumstances;
- the nature and length of the professional relationship with the client;
- the experience, reputation, and ability of the lawyer or lawyers performing the services;
- whether the fee is fixed or contingent.
Rule 1.5(b) also states that the nature and scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.
Although Rule 1.5(b) allows a fee agreement to be “preferably in writing,” we recommend that attorneys ALWAYS have a written fee agreement as such assists attorneys in compliance with the requirements of Rule 1.5.
Flat fees are discussed in Rule 1.5, Comment [6A] Retainers. The Comment states that advance payments are of at least four types and identifies the characteristics of each:
- True” or “Classic” Retainer
- Fee paid in advance solely to ensure lawyer’s availability to represent client and precludes lawyer from taking adverse representation
- Advance payment
- Ensures fees paid when subsequently earned on either flat fee or hourly fee basis
- Flat fee
- Fee of set amount for performance of agreed work
- May or may not be paid in advance
- Not deemed earned until work performed
- Fee of set amount for performance of agreed work
- Earned upon receipt
- Flat fee paid in advance deemed earned upon payment regardless of amount of future work performed – BUT see Rule 1.5 (d)(3)
- True” or “Classic” Retainer
Comment [6A] notes that when a fee is earned affects whether it must be placed in the attorney’s trust account pursuant to Rule 1.15. The Comment also says this may have significance under other laws such as tax and bankruptcy.
The Ohio Board of Professional Conduct addressed flat fee agreements in Opinion 2016-1 Flat Fee Agreements Paid in Advance of Representation. The Opinion states that under Rule 1.15(c), a lawyer is required to deposit flat fees and expenses paid in advance for representation into an IOLTA account, unless designated as “earned upon receipt” or similarly, and only may withdraw the fees as they are earned or the expenses as they are incurred.
The Opinion indicates that a flat fee is a type of fixed fee. Fixed fees or flat fees are considered an alternative to hourly billing in different types of matters because they provide the client a degree of certainty about the cost of the legal services and that flat fees are based on factors independent of the actual number of hours involved in a representation. Of course, all flat fees must still meet the reasonableness standard in Prof. Cond. R. 1.5 described above.
Continuing the explanation of flat fees, that Opinion states that flat fees are based on factors independent of the actual number of hours involved in a representation and that a lawyer earns a flat fee by performing the services for which the fee was charged, and that fee is the maximum amount that will be charged for the services to be performed.
The Opinion further says that when a fee is denoted as “earned upon receipt,” those fees are considered the lawyer’s funds, and not the client’s funds. As a result, those fees should not be placed in the lawyer’s IOLTA account, as it is impermissible to commingle a lawyer’s own funds with those of a client.
This concept of unearned versus earned fees is discussed in Board of Professional Conduct Opinion 2007-3. This Opinion provides that a lawyer may accept credit card payments from clients for earned legal fees, reimbursement of legal expenses, advances on unearned legal fees and advances on future expenses. The Opinion says that credit card payments for earned fees and reimbursement of legal expenses belong in a business account, whereas, credit card payments for advances on unearned legal fees and advances on future legal expenses must go into a client trust account.
Opinion 2007-3 also allows that if a lawyer wants to accept all types of payments (for earned and unearned fees as well as for expense reimbursement and future expenses) and it is not practicable or feasible for lawyer to set up two merchant accounts, one where the credit card payment would go into a client trust account and one where the payment would go into a lawyer’s business account, the lawyer should set up a single merchant account as a client trust account. Under this alternate solution, all credit card payments would go into a client trust account, but the earned fees and reimbursement for expenses would be withdrawn from the trust account promptly and placed into the business account.
As noted in Comment [6A], a flat fee is a fee of set amount for performance of agreed work. It may or may not be paid in advance and it is not deemed earned until the work is performed. An “earned upon receipt” fee is a flat fee paid in advance deemed earned upon payment regardless of the amount of future work performed to complete the representation.
Rule 1.5(d)(3) requires that a lawyer shall not enter into, charge or collect a fee denominated as “earned upon receipt,” “nonrefundable,” or in any similar terms, unless the client is simultaneously advised in writing that if the lawyer does not complete the representation for any reason, the client may be entitled to a refund of all or part of the fee based upon the value of the representation pursuant to division (a) of Rule 1.5.
Opinion 2016-1 reviews Rule 1.5(d)(3) and notes it requires a lawyer to refund any unearned portion of a fee paid in advance if the representation is not completed for any reason. It also notes that additionally, Rule1.16(e) states that “[a] lawyer who withdraws from employment shall refund promptly any part of a fee paid in advance that has not been earned, except when withdrawal is pursuant to Rule 1.17.”
Comment  of Rule 1.5 also provides that a lawyer may require advance payment of a fee but is obligated to return any unearned portion. Comment  refers to the requirements of Rule 1.16(e).
However, as Comment [6A] indicates, while Rule 1.5(d)(3) requires that the client receive notice of a potential refund if the lawyer does not complete the representation for any reason, this does not mean the client will always be entitled to a refund upon early termination of the representation. The Comment says for example that the factor on determining reasonableness of a fee listed in Rule 1.5 (a)(2) that “the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer”, might justify the entire fee.
The Comment also states that Rule 1.5(d)(3) doesn’t determine how any refund should be calculated (e.g., hours worked times a reasonable hourly rate, quantum meruit, percentage of the work completed, etc.), but merely requires that the client be advised of the possibility of a refund based upon application of the factors set forth in division (a).
The Comment finally says that to be able to demonstrate the reasonableness of the fee in the event of early termination of the representation, it is advisable that lawyers maintain contemporaneous time records for any representation undertaken on a flat fee basis.
Rule 1.2 allows a lawyer to limit the scope of a new or existing representation if the limitation is reasonable under the circumstances and communicated to the client, preferably in writing. See Ohio Ethics Guide Limited Scope Representation. However, Comment  of Rule 1.5 states that an agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client’s interest. For example, a lawyer should not enter into an agreement whereby services are to be provided only up to a stated amount when it is foreseeable that more extensive services probably will be required, unless the situation is adequately explained to the client. Otherwise, the client might have to bargain for further assistance in the midst of a proceeding or transaction.
What does all this mean if you want to use a flat fee agreement?
BEST PRACTICES FLAT FEES
Clearly designate the fee as a flat fee and whether it is
Flat fee paid in advance
Flat fee earned upon receipt
Outline the scope of your representation in fee agreement
Consider limited scope representation if you anticipate client may prematurely terminate your services
Inform client may be entitled to refund if representation not completed
Deposit flat fee designated “earned upon receipt” in lawyer’s account NOT IOLTA
Note: Be sure to have funds available if refund is required
Keep track of your time in the event of refund issue
As always, if you have any questions about this or any other loss prevention topic, please feel free to contact me.
Gretchen Mote, Esq.
Director of Loss Prevention