How to manage flat fees
While a Colorado committee considers clarifying rules about flat fees, here are a few best practice suggestions.

 

By James Carlson

Summer 2016

 

Money may not be the root of all evil, but it's certainly the root of many attorney discipline complaints. Flat fees, in particular, can cause a lot of problems for lawyers. Somewhere between 10 and 20 percent of the cases seen by the Office of Attorney Regulation Counsel involve such an arrangement.

 

The issue is big enough that a Supreme Court subcommittee is considering a new rule to give attorneys further guidance. In 2015, the Court said in In re Gilbert that an attorney who is terminated prior to completion of a case may still retain a portion of the flat fee for services performed under the theory of quantum meruit, even if the flat-fee arrangement didn't specify when or how the attorney would earn the fee.

 

However, the Court also said "the wiser course" is to include milestones in your fee agreement, and in a comment it said rule clarifications to that effect should be considered. Hence, the flat-fee subcommittee.

 

In the interim, how do attorneys protect themselves against the potential pitfalls of flat fees? "You need to identify the client, identify the scope and identify the terms of payment," David Stark, past chair of the Attorney Regulation Committee and current chair of the Colorado Supreme Court Advisory Committee

A conversation with Stark; Attorney Regulation Counsel James Coyle; and Phil Cherner, an attorney who represents lawyers in discipline matters, revealed some best practices for how to do that.

Set benchmarks

While milestones might not yet be mandatory, they are the "wiser course."

 

"I've seen flat fees that don't have benchmarks and it's complete chaos," Cherner said.

 

Cherner offered an example. If you take on a client facing a felony drug charge, you may charge a $20,000 flat fee. (Be sure to put that straight into your trust account, Cherner noted, because it hasn't been earned yet.)

 

The first benchmark might be your first appearance in court for which you specify in your written arrangement that you earn a certain percentage of the fee. The next benchmark might be receiving and reviewing discovery, and for that the arrangement dictates you earn another percentage. Filing and litigating motions, and engaging in settlement discussions and attending a pre-trial disposition hearing may be two more benchmarks. And preparing for and/or trying the case might be the final benchmark.

 

In the event that a client terminates representation early, clear-cut benchmarks ensure that both the client and the attorney know how much of the flat fee the attorney will keep and why. And remember, the amount of fee earned at each benchmark must be reasonable in proportion to the benefit conferred upon the client at that point in the representation.

 

Communicate progress

Even if you've defined the scope, the benchmarks, and what is not in the scope, Stark said a lawyer holding an up-front lump sum in the trust account can have problems. What if there is a dispute over whether you actually reached a certain benchmark? "You have the lawyer's self-interest playing against the client's interest, and this could lead to a material limitation conflict. The safer practice may be to require payment as each benchmark is achieved.

 

Attorney Regulation Counsel James Coyle said some lawyers prudently send out a billing statement any time they reach a benchmark and are going to take money from the trust account. "That way the lawyer is protected," Coyle said. "You gave notice and the client has a chance to respond."

 

Address costs

Be sure to lay out in your written fee agreement how costs will be assessed. Expert witnesses and investigators likely won't be included in the flat fee; ensuring the client understands this by including a provision in the fee agreement can go a long way toward avoiding problems.

 

Expect the unexpected

You should also include a provision in any flat-fee arrangement for unintended contingencies, Cherner said.

 

What if, after a client pays a $20,000 flat fee, the district attorney dismisses the case during first appearance? It took only an hour of your time. Without some language in the written agreement that addresses contingencies, this situation could lead to a misunderstanding about how much you'll retain from the flat fee.

 

As always, Cherner said, communication is key. "If something unanticipated happens, the attorney is well-advised to reach out to the client and resolve it proactively."

 

Keep time records

Just because you're not charging an hourly rate, doesn't mean you shouldn't maintain hourly time records. In the unfortunate event that a client files a complaint over the amount of fee you retained, it's helpful to be able to show what services you provided and the time you spent for that fee. In a he-said, she-said situation, the onus is always on the person in a fiduciary role.

 

"The obligation is going to be a on the lawyer to justify why they should be able to keep some of the money," Cherner said.

As with so many misunderstandings between attorneys and clients, many problems arising out of flat fees can be avoided through clear written communication.

 

"It's very important to have an understanding with your client as to what it is you are agreeing to do," Stark said.

 

 

Want more information? For a few tips on crafting an engagement letter, read "Rules of Engagement" in this OARC Update. To read agendas and minutes from the flat-fee subcommittee, check out the Colorado Supreme Court Rules of Professional Conduct Standing Committee.

 

 

James Carlson is the Information Resources Coordinator for the Office of Attorney Regulation Counsel.