Attorney Fees: Understanding the Key Components to Ethical Compliance

Attorney fees

Let us face it: attorney fees is the most important thing for lawyers in the private practice of law. Without it, nothing can really take place in the law firm.

It means that attorneys are both law officers and entrepreneurs. They run businesses that must generate enough profit to survive.

Therefore, there is always a thin line between charging prospects the right fee to keep the law firm afloat and being careful not to deny individuals legal presentation on the basis of not being able to afford your services.

This is where ethical considerations and rules come into play. Small law firms and independent attorneys will understand what we are talking about better because they tend to wear both hats when it comes to running a law practice.

When setting the right attorney fees, there are five keys to complying with ethical rules that every lawyer must know.  Read on to learn more.

1. Setting the Fee

One of the most common questions that young attorneys who are just starting ask themselves is; how much money should I charge for my services?

Unfortunately, there is no straightforward answer to the question. Typically, what you charge as attorney fees will depend on a wide range of business factors such as your practice area, target audience, the amount of your overhead expenses, and what your competitors are currently charging.

However, the ultimate decision on how much you should charge will be limited by ethical rules designed to keep clients from being overcharged.

The American Bar Association (ABA) Model Rules of Professional Conduct stipulates that an attorney must not make an agreement for a charge or collect an unreasonable amount of money for legal services.

So, how can you know if the fee is unreasonable?  The following factors will dictate whether your fee is unreasonable or not:

  • The time and effort required to litigate the case. This includes the skill requisite to perform the legal service.
  • The likelihood, if apparent to the prospect, the acceptance of their case will deter the attorney from taking upon similar cases.
  • The fee customarily charged by other lawyers for similar cases.
  • The amount of money involved and potential outcomes.
  • The time expectations/limitations imposed by the prospect or the case circumstances.
  • The nature and length of the professional relationship between the prospect and the attorney.
  • The experience, reputation, and ability of the attorney (s) providing the legal services.
  • Whether the fee is fixed or contingent.

However, this rule is customized in California to add four more factors, namely;

  • The time and labor required to litigate the case.
  • The informed consent of the client.
  • The relative sophistication of the client and the attorney.
  • The amount of attorney fee charged in proportion to the value of legal services offered.

Sometimes, market forces may drive you to charge what the client can bear, but individual circumstances might present unique opportunities for overreaching. For instance, you may be dealing with a desperate client who has a lot of tangible assets.

No matter the circumstance, ethical attorneys will never forget the 12 factors outlined above when setting attorney fee. Therefore, any ethical lawyer won’t even consider taking advantage of their clients.

2. Documenting the Fee Agreement

Lawyers love written agreements. Therefore, documenting the agreed-upon fee should be obvious. A signed agreement makes the exact terms of engagement more clear and eliminates room for conflicts.

The fee agreement must clearly state the attorney’s work so that he/she isn’t on the hook for work beyond the agreement’s scope.

Sadly, many attorneys out there continue to represent their clients without written fee agreements. Some even offer legal representation without an attorney fee agreement at all despite the rules and their best interests.

It is not uncommon for lawyers to use boilerplate agreements that have been borrowed from their friends practicing in the same field of law. The assumption is that if it worked for someone else, it would also work for me.

Attorney fee

However, the ABA Model Rule requires that the written fee agreement is shared with the client. Even the contingent fee agreement must be in writing.

California has modified the rule further and made it mandatory for all attorney fee agreements to be in writing.

Two of the most significant inherent risks in law practice are not getting paid and legal malpractice. A well-thought-out and crafted attorney fee agreement is a critical tool in managing these risks.

In fact, the fee agreement should be a living document that is continuously re-evaluated and re-examined, and updated based on law changes and lessons learned along the way.

3. Securing the Attorney Fees

Typically, setting and documenting the fee is of little use to the attorney if the client fails to pay the agreed-upon amount. Fortunately, there are several ethical rules addressing ways lawyers can use to secure their fees.

The best security is requesting the client to pay the fee in advance. In this case, the client will settle the attorney fee at the beginning of the representation. However, this isn’t done blindly.

ABA Rule 1.15(c) stipulates that the attorney will deposit any advance fee received into a client trust account. He/she can then withdraw the funds only as fees earned or expenses incurred as the case progresses. When the representation is terminated, any unearned fees and costs must be refunded to the client.

Another way of securing attorney fees is by holding a client’s property or taking an interest in their business. This is allowed as long as specific measures are put in place to safeguard both the client’s and attorney’s best interests.

But, an attorney cannot take full ownership of a client’s business or property unless the transaction is fair and everything is outlined in writing.

Failure to adhere to the rules of professional conduct while securing attorney fees may lead to disciplinary action. Violations may result in suspension from law practice and disbarment.

4. Communicating the Fee

ABA Model Rule number 1.4(a)(3) requires attorneys to keep their clients reasonably informed at all times.  It means that the lawyer must explain everything to the client to help him/her make an informed decision.

Besides the general duties of being in constant communication with the client and avoiding dishonest or fraudulent behavior, there are no specific guidelines on when the lawyer should provide billing statements to the client.

Some states have drafted statutes to guide attorneys on when to provide their clients with billing statements. For instance, in California, lawyers are required to provide billing statements within ten days if requested by the client.

Attorney fees

Generally, frequent and accurate billing statements that account for work done and fees incurred are essential for every attorney’s ethical duty to communicate with the client.

Keep in mind that your client has the right to complain to disciplinary agencies about lack of proper communication.  Such allegations may result in serious repercussions, more than anything else.

5. Earning the Attorney Fees

ABA Model Rule 1.16(d) stipulates that an advance payment of attorney fee or expense that has not been duly earned or incurred must be refunded to the client upon termination of the agreement.

However, California has modified this rule to add the concept of “retainer.” In this case, a retainer can be viewed as a fee paid for the primary purpose of ensuring the attorney’s availability for the case. The retainer isn’t refunded even when the agreement is terminated.

The retainer concept has helped many attorneys who would love to avoid refunding any unearned fees upon completion/termination of legal representation and not always out of bad motives.

Consider a divorce attorney who, having conducted the initial consultation, incurred the expense of setting up the client file and maybe turned down other clients to focus on this client is informed that the client has reconciled with his/her spouse and the attorney’s services are no longer required. That could be devastating.

Small law firms also need constant cash flow to remain viable. As a result, many lawyers, especially in the marital dissolution area, have tried to structure their legal fee as non-refundable despite the clear intent of rule 1.16(d) that no unearned fee should be kept if the contract is terminated.

To avoid breaking this rule, most attorneys are slowly moving towards the concept of flat fees and other unconventional fee agreement structures.

Flat fees provide certainty to clients who may want to know what their legal situation will fully cost them. It is also a good model for lawyers who can predict how much work will be done on a particular legal matter.

But the big question is; if an attorney with a flat fee structure is terminated before completion of work set out in the terms of engagement is accomplished, which part of the fee is earned and which one needs to be refunded?

If the attorney is on hourly billing, the calculation is pretty easy and straightforward. You simply take the number of hours worked and multiply it by the hourly rate to arrive at the earned fee.

But how do you calculate that with a flat fee model? California has proposed a new rule to solve the impasse.

The law stipulates that the written agreement for a flat fee must include:

  • The scope of work to be done.
  • The total amount of fee to be paid and terms of payment.
  • A clause stating that the fee is attorney’s property immediately after receipt.
  • A clause stating that the fee agreement doesn’t stop the client from terminating the contract
  • The client may be entitled to a partial refund if the agreed-upon legal services haven’t been completed.

The language and intent of this law partially solve the problem because it requires the client to dispute the lawyer’s entitlement to the entire fee through some form of fee arbitration. But it still doesn’t help resolve the issue of how much of the flat fee should be refunded.

Summary

The truth is that ethical compliance and sound risk management when it comes to handling the issue of attorney fees doesn’t end with the points highlighted above.

Attorneys must continuously use their working knowledge and experience to understand the rules in their jurisdiction and know how to apply them.

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