The proposed rule changes contain two exceptions to the default rule. The “retainer exception” states that a lawyer may charge and deposit directly into his or her operating account a “classic” retainer fee (which, as former Opinion 186 defined, is a payment made in exchange for the lawyer’s availability to that client during a certain period of time).
The “flat fee exception” provides that a lawyer may charge a flat fee for specific legal services, which may be paid in whole or in part before the work is performed and deposited directly into the lawyer’s operating account, but only if the following conditions are met:
The flat fee must be agreed to in advance in a writing signed by the client and the written fee agreement must contain the following information, presented in a manner that the client can easily understand:
- The scope of the services to be provided;
- The total amount of the fee and the terms of payment;
- That the fee is the lawyer’s property immediately on receipt and will not be placed into a trust account;
- That the fee agreement does not alter the client’s right to terminate the client-lawyer relationship; and
- That the client may be entitled to a refund of a portion of the fee if the agreed-upon legal services have not been completed.
The proposed rule goes on to offer specific language for the retainer agreement that, if used in substantial form, would allow the retainer agreement to meet these requirements. If all of the requirements are met, then the advance payment is a flat fee that is the lawyer’s property upon receipt and must be deposited into the lawyer’s operating account.
If approved, these two exceptions would be set forth in RPC 1.5(f)(1) and (2). In addition, the Task Force’s proposals include substantial additions to the comments to Rule 1.5. Those proposed comments are too lengthy to summarize here, but include a significant amount of helpful guidance.1
Prohibited Terms for Characterizing Fees
The Task Force’s proposals also include a new section RPC 1.5(g), which reads: “A lawyer shall not characterize any fee as ‘nonrefundable,’ ‘minimum,’ or ‘earned upon receipt.’” According to the proposed comments, “nonrefundable” is misleading because it ignores the reasonableness requirement and refund possibility that applies to all fees; “minimum” is problematic because it implies that the fee is nonrefundable; and “earned upon receipt” is misleading because fees are not actually earned until work is performed.
Dispute Resolution Provision
As an additional component of the proposed rule change, the Task Force recommended a resolution mechanism for flat-fee disputes. If approved, this provision will be set forth in RPC 1.5(f)(3).
The process would place the burden on the attorney if a dispute occurs and require counsel, upon learning that a dispute exists, to immediately refund any portion of the fee to the client that the attorney reasonably believes is unearned. If the refund does not resolve the dispute, the proposed rule would further require the attorney, within 30 days of the initiation of the dispute, to deposit into the firm’s trust account “the amount that a reasonably prudent lawyer would believe to be reasonably in dispute.”
The attorney must keep the funds in trust pending resolution of the dispute. Further, the proposed rule requires the attorney to take reasonable and prompt action to resolve the dispute in compliance with Rule 1.15A(g) (requiring an attorney to “take reasonable action to resolve the dispute, including, when appropriate, interpleading the disputed funds”).
Practice Tips
In the interim, what should practitioners do to ensure compliance with the fluctuating rules regarding the use of flat fees? First, neither the current rules nor the proposed changes are designed to stop or discourage attorneys from using flat fees. So, if your practice is to charge flat fees for your services, do not be discouraged from doing so now.
Second, review your engagement letter regarding flat fees. Make sure it does not utilize the soon-to-be-proscribed fee descriptions. Avoid all language that suggests to the client that a refund is not possible. Third, avoid language that suggests that a client cannot terminate the attorney-client relationship. Fourth, review RPC 1.5 and do your best to ensure that the amount of your flat fees complies with this rule.
Fifth, keep good records regarding your flat-fee files, including records of all work performed on the client’s behalf and time records. These records may prove helpful. Presumably, if a dispute occurs before work on a flat-fee file is completed, the time spent and the hourly rate of the billing attorneys and paralegals will be a key element in determining the portion of a flat fee reasonably in dispute.
Sixth, calendar follow-up on this issue. Make sure you know when the Supreme Court acts regarding this proposed change and that you are ready to further ensure compliance as needed.
n
1 For the full text of the Task Force’s proposed changes, go to http://wsba.org/lawyers/groups/trustaccounttaskforce/default1.htm.
