|Oregon State Bar Bulletin NOVEMBER 2011|
What's in a Fee?
By Helen Hierschbiel
While lawyers and clients are generally free to contract for whatever fee they want, fee agreements are not simple business contracts. Lawyers owe fiduciary obligations to their clients, obligations that require lawyers to adequately explain their fee arrangements and prohibit them from taking advantage of their clients. See, e.g., RPC 1.4(b) and 1.5(a).
Although hourly billing remains the most common billing method used by lawyers,1 some have theorized that the economic downturn is driving changes in traditional billing practices as clients seek greater predictability and greater value for their money. Alternative billing arrangements have the potential to provide clients with greater control over their legal costs and a sharing of risk between the client and the firm.2
One of the most popular alternative pricing models is the fixed or flat fee, which is a set price for defined services.3 It is regularly used in criminal defense cases, bankruptcy and immigration matters, to name a few. In an effort to address the changing needs and demands of clients, however, lawyers recently have been asking general counsel’s office about the ethical propriety of other, more creative, compensation arrangements.
Client has a compelling but risky case and cannot afford your regular hourly fee to pursue it. You don’t want to assume all the risk of loss by accepting the case on a contingency fee basis. Instead, you would like to charge a modest hourly rate for services provided plus a bonus at the end of the case, depending on the results achieved. May you?
Several jurisdictions have explicitly approved such arrangements. For example, in Nevada Formal Ethics Op 4 (1987), the law firm reduced its usual monthly fee by 80 percent in exchange for a lump-sum bonus of $150,000, plus 50 percent of any punitive damages, should the client prevail in the litigation. The committee was persuaded that the fee was reasonable because both the risks and the potential reward in the litigation were high.
The Oregon State Bar Legal Ethics Committee has also said that split contingent/hourly fee agreements do not automatically violate the rules of professional conduct. See OSB Formal Op No 2005-54. However, the committee cautions lawyers that a fee that appears to be lawful at the outset, may turn out to be clearly excessive in the end. Further, changing a contingent fee to an hourly fee when a client rejects a reasonable settlement offer could interfere with a client’s right to decide whether to settle. See RPC 1.2(a).
Finally, lawyers would be wise to put such agreements in writing and otherwise comply with the requirements set forth in ORS 20.340, or risk the agreement being unenforceable.
Client seeks assistance with setting up business entity for web design business, but has no money to pay for your services. You have been meaning to set up a website. May you propose an exchange of legal services for client’s web design services? What about an ownership interest in the client’s business?
This is a variation on the flat or fixed fee. The value of the services is a set amount, but compensation is made through in-kind payment rather than monetary payment. Again, the rules of professional conduct do not prohibit such payment arrangements per se, but the devil is in the details. The key to making such arrangements work, and to ensuring no violations of the ethics rules, is the development of a clear written contract for services and agreement on both sides that the values exchanged are equivalent.
With limited exceptions, written fee contracts for legal services are not required in Oregon. However, when a lawyer accepts in-kind payment for legal services, whether the payment consists of the client providing services to the lawyer or an ownership interest in the client’s business, the lawyer is going beyond simply establishing a contract for legal services, and instead is doing business with a client. When entering into a business transaction with a client, lawyers must follow the requirements of RPC 1.8(a). Among other things, RPC 1.8(a) requires that the terms of the agreement be fair and reasonable to the client and that they be reduced to writing in a manner that the client can understand.
Further, lawyers who fail to complete the legal services contemplated in this type of arrangement must determine how to issue a refund when payment is not monetary. The Oregon Supreme Court has made clear that when a lawyer agrees to perform legal services for a flat fee and fails to complete the work, the lawyer must refund a portion of the fee in proportion to the services not provided. Failure to issue a refund in these circumstances would be a violation of RPC 1.5. See, e.g., In re Balocca, 342 Or 279 (2007).
Client doesn’t have much money, and you want to make sure you get paid regularly. You would like to charge client half of your hourly rate as long as client makes regular monthly payments on the bill. Your agreement would further provide that if client is late or misses a monthly payment, then your hourly rate would double. May you enter into such a fee agreement?
Again, the rules of professional conduct do not prohibit fee agreements that provide for discounted or variable rates. See OSB Formal Op No 2005-45. In practice, however, lawyers should be careful to clearly set forth the terms and conditions of these types of fee arrangements. While written fee contracts are not required, lawyers who fail to immediately and clearly reduce the terms of payment to writing risk problems in proving their right to a particular fee and risk the possibility of discipline. Charging more than the agreed upon amount is considered a “clearly excessive” fee in violation of RPC 1.5. See In re Sassor, 299 Or 720 (1985); OSB Formal Op No 2005-69 and 2005-15. Moreover, some courts have held that the lawyer has the burden to establish the terms of a fee agreement in the event of a dispute. See Com on Legal Ethics of W Va v. Tatterson, 319 SE2d 381 (W Va 1984).
Modification of Fee Agreements Midstream
Whatever pricing model you choose, it should be set forth at the beginning of the representation. Changes to fee agreements made after representation has begun bring additional considerations into play because of the fiduciary nature of the lawyer-client relationship. See ABA Formal Op No 11-458 (“The courts are generally in accord that once the initial contract has been formed and the fiduciary relationship of client and lawyer has begun, any change in the contract will be regarded with great suspicion.”)
The Oregon State Bar Legal Ethics Committee has determined that modifications of fee agreements in the lawyer’s favor require client consent based on an explanation of the reason for the change and its effect on the client, and they must be objectively fair. OSB Formal Op No 2005-97. As a general rule, general counsel’s office recommends that any modification to a fee agreement follow the requirements set forth in RPC 1.8(a) for business transactions with a client.
What is Reasonable?
The overarching guideline that governs lawyers’ fees, no matter what the context or method of billing, is that the fee must not be unreasonable or excessive. Courts and rules of professional conduct typically cite the following (nonexclusive) factors to consider in evaluating the reasonableness of a fee:
1. The time and labor required, the novelty and difficulty of the questions involved and the skill requisite to perform the legal service properly;
2. The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
3. The fee customarily charged in the locality for similar legal services;
4. The amount involved and the results obtained;
5. The time limitations imposed by the client or by the circumstances;
6. The nature and length of the professional relationship with the client;
7. The experience, reputation and ability of the lawyer or lawyers performing the services; and
8. Whether the fee is fixed or contingent.4
Lawyers may also want to consider court precedent prior to setting a fee in a particular case. Courts throughout the country have alternately looked to prevailing market rates, lodestar methods and contingent-fee calculations as methods for determining reasonable attorney fee awards to prevailing parties under fee-shifting statutes. It is also appropriate for lawyers to consider what the going rate is in the community for the particular services provided. Some have asked why the Oregon State Bar does not provide guidance in this regard. The bar regularly conducts surveys on hourly rates charged by attorneys in specific areas of practice.5 The bar does not, however, set fee schedules, as doing so would violate antitrust law. See Goldfarb v. Virginia State Bar, 421 US 773 (1975).
1. Hourly billing has a relatively recent, and some say “ugly” history. For more on the rise of hourly billing for legal services, see Stephen W. Jones & Melissa Beard Glover, “The Attack on Traditional Billing Practices,” 20 U Ark Little Rock L J 293 (1998).
2. Katherine L Brown and Kristin A. Mendoza, “Ending the Tyranny of the Billable Hour: A Mandate for Change for the 21st Century Law Firm,” 51 N.H.B.J. 66 (2010).
3. Last month’s Bar Counsel column discussed the ethical ins and outs of charging fixed fees. Read more atwww.osbar.org/publications/bulletin/11nov/barcounsel.html.
ABOUT THE AUTHOR
Helen Hierschbiel is general counsel for the Oregon State Bar. She can be reached at (503) 620-0222, or toll-free in Oregon at (800) 452-8260, ext. 361, or by email at firstname.lastname@example.org.
© 2011 Helen Hierschbiel