The following is a guest blog post by Megan Zavieh. Megan focuses her practice exclusively on attorney ethics, providing guidance to attorneys, representing attorneys facing State Bar discipline, podcasting, and writing extensively on ethics issues.
California’s new Rules of Professional Conduct, effective November 1, 2018, recognizes a trend in legal services billing—flat fees. Flat fees are becoming more common as an alternative to the traditional billable hour. As they rise in popularity outside of criminal law, the rules directly address them. Here’s what you need to know and do.
The new Rules of Professional Conduct make a few important changes when it comes to flat fees.
First, the rules make explicit that if the lawyer doesn’t complete the representation, the fee may be partially refundable. This isn’t actually a change, as it was always true that if you didn’t earn your fee, it would be unconscionable to keep it and you may have to refund all or part of it. This was true even if your fee agreement said “earned upon receipt.”
Second, most lawyers are going to need a trust account, even if it’s rarely used. Lawyers can no longer state the fee is earned on receipt and place it in our operating accounts. Instead, all fees paid in advance (including flat fees) by default must be placed into trust until earned.
But there are ways to avoid placing the funds in trust. The funds may be placed in an operating account if the following disclosures are made to the client:
- The client has a right to require the fee be placed in trust until earned, and
- If representation is terminated before the services are fully rendered, the client is entitled to a refund of the unearned portion.
These disclosures must be in writing. And, if the fee exceeds $1,000, the client must sign off on these provisions and authorize the deposit of the fee into the operating account.
As to the potential refund, the lawyer and client may agree on when the fee is earned and may be withdrawn from the trust account. So your fee agreement should spell out exactly when the fee is earned and whether it’s all at once or in stages.
Before the new rules take effect, modify your flat fee agreement to prepare for the changes:
- Provide for disclosures. Unless you’re going to deposit all flat fees into trust and not collect them until the end of the representation, fee agreements must be revised to include the required disclosures. It can be a one-way notice from attorney to client if the fee is $1,000 or less; the client must sign if the fee exceeds $1,000. A best practice is to have the client sign regardless of the amount.
- Specify fee earning. Determine when and how the fee is earned and spell this out in your agreement.
- Open a trust account. If you don’t already have a trust account, open one now. If a client insists on the funds being held in trust, you need a place to deposit them.
- Learn the new rules. Make sure that you and anyone assisting you in billing and preparing fee agreements is up to speed on these new details. It’s useful to read the rules, the standards, and the comments to get a greater understanding of exactly how they fit together and translate into practice.
The Office of Chief Trial Counsel prosecutes attorneys who fail to follow the Rules of Professional Conduct, and financial errors are among the top reasons for prosecution. Avoid possible disciplinary action by ensuring that you’re prepared for the new requirements.
For more on the rules, check out CEB’s upcoming webinar The New Rules of Professional Conduct: What All Attorneys Need to Know on October 9th at noon.
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