A Legal Fee By Any Other Name…

April 22, 2008

By Deanna S. Brocker and Douglas J. Brocker

This article is the third and final in a series examining fee agreements and the kinds of legal fees charged. The focus here is on what kinds of fees attorneys charge and where such funds should be placed when received. Attorneys use many different terms to describe various kinds of fees including retainers, prepaid fees, flat fees, contingent fees, advance fees, and hourly fees, among others. What you call your fee in your fee contract, however, is less important than how you treat the fee. To explain, let’s examine some of the types of fees attorneys charge.

  1. True General Retainer – For some reason there is much confusion about the nature of this fee. The True General Retainer is a fee obtained in advance of the representation to reserve the exclusive services of the attorney. In exchange for this fee, the attorney agrees not to take on conflicting interests and to be ready and able to devote his attention to the matter as necessary. This fee compensates the attorney for an opportunity cost.By agreeing to represent the client on this matter, the attorney, at least in theory, loses the opportunity to undertake another representation that may come along, either because there is a conflict or because he no longer has the time available. By agreement with the client, the True General Retainer is earned immediately and is placed directly into the operating account. This fee may be subject to refund, however, if it is determined to be clearly excessive under Rule 1.5(a). You don’t bill against the True Retainer because this fee bears no relation to the services yet to be rendered. If you try to bill against it, or defer billing until its equivalent in hourly billing has been expended, then you’ve turned this fee into an advance fee, which should have been placed in the trust account until earned.
  2. Advance Fee – If you want to accept a fee in advance and bill against it, then the fee is not a True General Retainer, but an Advance Fee which must be placed in the trust account until it is earned in accordance with the fee contract. This is the fee you accept if you are charging an hourly rate and will likely be billing the client on a regular basis or at certain stages during the representation. If this fee is exhausted prior to completion of the legal services, you can ask for additional advance fees to cover future services. If there are funds left over after the completion of legal services, the unearned fees must be returned to the client. There is no similar requirement for the True General Retainer because the entire retainer is deemed “presently owed” to the attorney.
  3. Flat Fee – The flat fee is a set fee for specific legal services. For example, Lawyer A tells the client, I will charge $5,000 to handle this district court matter – no more, no less. The client agrees and pays the fee upfront with the assurance that he will not have to pay a cent more. This is a popular way to bill clients in some practice areas. First, it’s easy and straightforward: $500 for a will; $400 for a traffic court representation. Second, there’s no trust account involved.By all accounts, the flat fee is a prepaid fee for services that have not yet been rendered. Nonetheless, the State Bar has made an exception here and, by specific agreement with the client, will allow the attorney to treat this fee as immediately earned and place it in his operating account. If something goes wrong (the client or attorney becomes dissatisfied with the relationship) all or part of the fee may have to be returned depending upon a number of factors, including the amount of work done by the attorney up to that point and how far the representation has advanced. This is particularly ticklish if the funds have already been spent.Many times, flat fees are used to cover certain stages of the representation. If the attorney chooses to limit the scope of his representation, however, the limitation must be reasonable. Rule 1.2(c). An appropriate limited scope representation would be as follows: “I’ll agree to represent you through prelitigation negotiation and settlement of your claim for a flat fee of X.” Whereas limiting the scope of a representation to non-litigation matters may be reasonable, an agreement to represent a client through only one day of trial is unreasonable, for obvious reasons. The flat fee is often combined with other types of fees. The same attorney can further agree, “If the matter does not settle, but requires litigation, I’ll bill at my hourly rate of Y.”
  4. Contingent Fee – A contingent fee is only received after it is earned because it is by definition contingent upon the outcome of the case. Ordinarily, it is not immediately deposited in the operating account because the attorney receives the funds as part of a total settlement. If the funds received by the attorney are mixed funds — those belonging in part to the attorney and those belonging in part to the client and third parties — then the entire amount must be deposited in the trust account first. When the funds have cleared, the legal fee should be transferred to the attorney’s operating account and the remaining funds should be disbursed promptly.The contingent fee is the only fee for which the Rules of Professional Conduct require a written fee agreement. Rule 1.5(c) is very specific about what information must be included in a contingent fee agreement. The contingent fee agreement must be signed by the client and must; (1) state the method by which the fee is to be determined including the percentage that the attorney receives in the event of settlement, trial or appeal, (2) specify which expenses are to be deducted from the final recovery and whether the expenses are deducted before or after the attorney’s fee is calculated, and (3) clearly notify the client whether he or she will be responsible for expenses regardless of the outcome of the case or whether such expenses will be forgiven if no recovery is received.

Regardless of the type of fee, you should clearly let your client know, preferably in writing, where the funds will be placed upon receipt. If you or your office staff makes a mistake and places the funds in the wrong account, correct the error and make a note of the circumstances to keep with your files. Also, make note of any steps you take to prevent future mistakes. Ultimately, it’s not what you call the fee but what you do with the funds when you receive them that’s important if State Bar Auditor Bruno DeMolli comes a’callin.’