A Quick Guide to Ethical Fee Agreements

February 22, 2008

By Deanna S. Brocker and Douglas J. Brocker

No matter how you structure your legal fees, whether you bill hourly, accept and bill against an advance retainer, charge a flat fee, a contingent fee, a true general retainer or some combination of these, the State Bar rules and ethics opinions govern how you draft your fee agreement and what you do with the funds you receive. This article is the first of three in a series relating to fees and fee agreements. It will provide some basic guidance in drafting ethical fee agreements. The second article will discuss other recommended provisions of a fee agreement that are practically useful although not ethically required. The third article will primarily address the types of fees attorneys charge and whether to place the collected funds in the trust account or in the operating account.

Below are several questions that may be helpful in reviewing and rethinking your fee contracts.

  1. Must the fee agreement be in writing? Not every fee agreement must be in writing, although it’s always good practice to do so. Rule 1.5(c) only requires that contingent fee agreements be in writing. Because Rule 1.5 also requires that the basis or rate of the legal fee, expenses, and the scope of representation be communicated to a new client, the writing serves as proof that the communication occurred. Discussion of the specific information that must be included in all contingent fee contracts will appear in a subsequent article. See Rule 1.5(c).
  2. Can you protect your fee in your agreement by calling it “nonrefundable?” No. The word “nonrefundable” should never appear in a fee agreement. See 97 Formal Ethics Opinion 4 and 2000 Formal Ethics Opinion 5. If the word is still in your fee agreement, take it out. This is a buzz word that can get you in trouble should your fee contract be the subject of scrutiny by the Bar. Why is this word problematic? Because the State Bar views every fee, even “true retainers” that are deemed “presently owed” to the attorney, as subject to refund if they are later determined to be clearly excessive under the circumstances. Therefore, saying your fee is nonrefundable is misleading, according to the Bar.
  3. What can you say about refundability? Lawyers who charge a flat fee for specified services or who charge a true general retainer at the beginning of the representation want some assurance that the client won’t pull the rug out from under them and demand the entire fee back part way through the representation. Both the flat fee and true retainer may be considered earned immediately and placed in the operating account so long as the client understands and agrees to these terms. 97 FEO 4; 2000 FEO 5. Although the State Bar has not opined on specific language, an acceptable alternative to the “nonrefundable” language may be the following:
    • This flat fee (or general retainer) is earned immediately upon receipt and will be placed in the attorney’s operating account. This fee is not subject to refund unless required by the North Carolina Rules of Professional Conduct.
  4. When is a fee clearly excessive? There is no precise measure or specific test to determine whether a fee is clearly excessive. For example, the State Bar has not set a ceiling for the maximum contingent fee that may be charged or a maximum hourly rate. There is, however, a nonexclusive list of factors in Rule 1.5(a) that are weighed or considered in determining whether a fee is clearly excessive, including: time and labor required, complexity of the issues, conflicts created by the representation, fees usually charged in the locality for similar services, time limitations imposed by the client, the experience, reputation, and ability of the lawyer, and whether the fee is fixed or contingent, among others.For example, if a senior partner with 30 years experience charges $300 per hour, his newly licensed associate, with little or no experience, should charge a significantly lesser amount. On the other hand, suppose two lawyers who concentrate in the same area of the law have the same level of experience. One practices in a metropolitan area and the other practices in rural North Carolina. Each may ethically charge vastly differing amounts depending upon the rate their local markets will support.The bottom line: when you’re fixing your fees, whether it’s an hourly rate, contingent fee percentage, or a flat fee, do a little research. Ask questions of colleagues if you have any doubt about your rates. Consider the factors in Rule 1.5(a) before charging ahead and charging the client.
  5. Can I combine different kinds of fees in a single fee agreement? Yes, so long as the multiple fees are clearly designated and explained to the client, and the total fee is not clearly excessive. 97 FEO 4. For example, an attorney may charge a flat fee for the negotiation and pretrial settlement phase of a case, and an hourly fee in the event of litigation. Alternatively, an attorney may charge an hourly rate to investigate the merits of a personal injury case, and a contingent fee if he decides to proceed with the representation. In this situation, however, the contingent fee charged by the attorney should take into account or give credit for fees already paid by the client. No matter how the fee agreement is structured, an attorney should review the total fee charged to ensure that it is not clearly excessive pursuant to Rule 1.5.
  6. What charges should be included in a written fee agreement? In addition to the agreed upon legal fee for your services, you can charge the client for any actual costs expended to advance the client’s representation. The rule of thumb is that if you charge the client for items other than your legal fee, include such items in the terms of the contract. If you charge your paralegal’s time, courier services, travel, meals, electronic research fees, postage, copy charges, etc. – put it in writing. Again, while the Rules of Professional Conduct do not require a written memorialization of the fee agreement, the idea is to avoid any possibility of a misunderstanding regarding fees or costs that could lead to a fee dispute later.The purchase of publications, computer software, equipment and supplies should not be charged to a client’s bill. With the possible exception of a publication that is only for the benefit of one client and will not generally enhance the legal library of the lawyer or the practice, these are considered operating or firm expenses and should not be passed along to the client.Can you charge for your legal secretary’s time? Maybe, depending upon the nature of the work performed. A recent ethics opinion appears to restrict the ability of attorney to bill for certain staff members’ time:
    • With regard to establishing hourly rates for staff members, if a lawyer’s hourly rate takes into consideration overhead costs for staff, the lawyer must consider whether the work of a particular staff member advances the legal representation of the client or is so derivative of the lawyer’s work that the expense should be subsumed in the lawyer’s hourly rate. For example, the services of a typist, filing clerk, receptionist, scheduler, or billing clerk may fall into the latter category.

    2007 Formal Ethics Opinion 13. A legal assistant or secretary performing the functions of a typist or filing clerk should not bill separately for her time. If she is acting as a paralegal, by reviewing and abstracting depositions or researching court files, for example, her time may be billed so long as it is disclosed to the client and it is not clearly excessive under Rule 1.5(a). Nonetheless, if you decide you are going to charge for the staff member’s time, put it in the agreement.

Take time to analyze your fee agreement to make sure that it’s doing all it should for your practice and your peace of mind. Discuss your fee agreement with your client on the front end so there are no misunderstandings. Your attorney-client relationship will benefit from a clearer understanding of your respective expectations.