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Official Magazine of the Denver Bar Association

How Regulators Are Blocking the Flat-Fee Revolution ~ By Keith Lewis

 

 

Dollar-Sign-Business

 

 

Clients love flat fees because of the cost certainty that they bring. One of the most common complaints about lawyers is the billable hour and the pervading perception among clients that lawyers are always on the clock. That is why clients are practically begging for flat fees. However, in view of the highly regulated nature of attorney fees, lawyers are discovering that there are huge disincentives for granting clients whatever they want. Perhaps a more predictable, transactional practice lends itself to flat fees. However, flat fees in non-routine litigation do not make economic sense under the current regulatory structure.

When you browse through any of the cutting-edge legal media outlets, such as Lawyerist.com or AboveTheLaw.com, you will find dozens of articles touting the flat-fee revolution that clients are demanding and that many attorneys (and even larger firms) are starting to consider. However, the unintended consequences of ethics rules can thwart the concept of the flat-fee revolution and cost attorneys money when they try to respond to their clients’ demands by offering flat fees.

Under the Colorado Rule of Professional Conduct 1.5(g):

“Nonrefundable fees and nonrefundable retainers are prohibited. Any agreement that purports to restrict a client’s right to terminate the representation, or that unreasonably restricts a client’s right to obtain a refund of unearned or unreasonable fees, is prohibited.”

Comment 12 to that rule goes on to state:

“Rule 1.5(f) Does Not Prohibit Lump-sum Fees or Flat Fees
[12] Advances of unearned fees, including ‘lump-sum’ fees and ‘flat fees,’ are those funds the client pays for specified legal services that the lawyer has agreed to perform in the future. Pursuant to Rule 1.15, the lawyer must deposit an advance of unearned fees in the lawyer’s trust account. The funds may be earned only as the lawyer performs specified legal services or confers benefits on the client as provided for in the written statement of the basis of the fee, if a written statement is required by Rule 1.5(b). See also Restatement (Third) of the Law Governing Lawyers §§ 34, 38 (1998). Rule 1.5(f) does not prevent a lawyer from entering into these types of arrangements.”

In a recent opinion on point, the Colorado Supreme Court recognized that “[t]he flat fee merely established the maximum that the client may owe.” In Matter of Gilbert, 2015 CO 22 at ¶36 (13SA254) (dated April 6, 2015). Indeed, many have characterized a flat-fee arrangement in Colorado as just an attorney agreeing to cap his hourly fee at a certain amount.

Our profession has long recognized a distinction between earned and unearned fees, as well as the importance of safeguarding the latter in a trust account. The legal system has also long recognized the concept of mutual consideration in contracts. For an attorney to agree to cap his fee at a fixed amount, he must receive something in return, such as the assurance of “nonrefundability.” While clients certainly deserve consumer protection from unscrupulous lawyers, they would receive better service if the market for legal services were more consistent.

In states that allow nonrefundable retainers, clients are protected by other mechanisms. An ethics board will still step in if the lawyer simply takes the fee and ignores the client’s matter. The term “special retainers” is often used in states where an attorney may classify a retainer as nonrefundable. Special retainers acknowledge the trade-offs that attorneys face when agreeing to represent a client; they also allow attorneys the freedom to openly contract for their fee. In those states, the Supreme Court seeks to regulate the attorney’s attention to the case — not his or her fee agreement. Other states have embraced the flat-fee trend and have created built-in incentives to encourage attorneys to meet the demand for flat-fee legal representation. Colorado, by contrast, prohibits classifying a retainer as nonrefundable. See Colo. RPC 1.5(g); compare State Bar of Georgia Formal Advisory Opinion 03-1 (“Generally, fees paid in advance under a special retainer are earned as the specified services are provided. Some services, for example, the services of the attorney’s commitment to the client’s case and acceptance of potential disqualification from other representations, are provided as soon as the contract is signed.”). The distinction is that other states recognize that an attorney has conferred a benefit to the client by simply agreeing to the representation.

When someone seeks an attorney after having just been served with a summons in a civil trial, one of the first questions that the prospective client will ask will be the cost. Neither attorney nor client can accurately predict the duration or scope of the litigation because the pleadings can be amended, and discovery can often take a winding course. By agreeing to a flat-fee structure, the attorney will take on a significant risk by limiting his or her fee to a particular fixed rate, even though the work to be performed remains uncertain.

Flat fees make no business sense for litigation attorneys under the current regulatory system because the attorney assumes the client’s risk of uncertainty in litigation without being offered anything in return. In such a scenario, the attorney would have to (foolishly) agree to perform an indefinite amount of work for a definite price. I am not suggesting that clients should be denied the right to terminate representation; I am arguing that shifting the uncertainty of litigation onto lawyers is not the correct approach.

The frustration is that many ethics bylaws, including those in place in Colorado, prohibit the use of flat fees in any way that would make sense for litigators. Sorry clients: There won’t be any flat fees until the rules are reformed. But do not fret: According to the government, it’s for your own good.

The author, Keith Lewis, is a Denver-based attorney with his own appellate and trial litigation practice. He can be reached at Keith@LewisLawDenver.com.

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