|Oregon State Bar Bulletin OCTOBER 2011|
"New" Guidelines for Fixed and So-called Nonrefundable Fees
By Amber Hollister
Clients love certainty. For this reason, fixed fee agreements have a certain appeal — clients can skip the guesswork of wondering about the number on their next bill. Fixed fee arrangements are also attractive to lawyers because they ensure payment for services in advance. But like many apparently simple concepts, entering into a fixed fee agreement the right way can be surprisingly complex.
In a typical fixed fee or flat fee agreement, a lawyer charges the client a set amount to complete a defined legal task, regardless of how much time it takes for the lawyer to perform the task. Fixed fee agreements usually provide that the fee is “earned upon receipt” or “nonrefundable.” But often lawyers have questions about how much they can charge in a fixed fee agreement, and what the terms earned upon receipt and nonrefundable really mean. In the recently revised OSB Formal Ethics Op No 2005-151, the OSB Legal Ethics Committee provides helpful guidance on how lawyers can do the right thing.
New Language Required
As a starting point, nonrefundable fixed fee agreements must be in a writing signed by the client and clearly state fees are “nonrefundable” or “earned on receipt,” and must not charge excessive or unreasonable amounts. RPC 1.5; see e.g. In re Hodges, 313 Or 618, 623 (1992) (nonrefundable fixed fee agreements must be stated in a “clear and specific” writing between the lawyer and client).
But just any written agreement is not enough. In December 2010, the Oregon Supreme Court adopted a new subsection to RPC 1.5. Based on newly created RPC 1.5(c)(3), lawyers must include special explanatory language in any fee agreement which asserts that a fee is “nonrefundable” or “earned on receipt.” Specifically, any fee agreement claiming a fee is earned on receipt or nonrefundable must be based on a written agreement signed by the client, which explains that:
(1) the funds will not be deposited into the lawyer trust account, and
(2) the client may discharge the lawyer at any time and in that event may be entitled to a refund of all or part of the fee if the services for which the fee was paid are not completed.
Lawyers should take time to update their fee agreement forms, because without this language a nonrefundable fixed fee agreement will violate RPC 1.5. See Fee Agreement Compendium chapter 11 (updated April 2011, available in Bar-Books online library).
When is a Fixed Fee Too Much?
How much, you might ask, is too much to charge in a fixed fee agreement? The Oregon Supreme Court has held that the sole fact that a lawyer makes more money in a fixed fee agreement than the lawyer would have made by charging an hourly rate does not, in itself, make a fixed fee unethical. In re Biggs, 318 Or 281, 293 (1994). Instead, lawyers must apply the test outlined by RPC 1.5(b) to determine whether, given the totality of the circumstances, a fixed fee is permissible.
It may take some lawyers by surprise to learn that certain factors used to determine whether a fixed fee is excessive require evaluating the reasonableness of the fee after the services have been rendered. See, e.g., RPC 1.5(b)(4) & (5); In re Gastineau, 317 Or 545, 551-552 (1993) (holding excessiveness of fee “may be determined after the services have been rendered, as well as at the time the employment began”). Lawyers are not expected to predict the results that will be obtained, but to re-assess the reasonableness of the fee after the representation is completed, as circumstances may change that could impact the reasonableness of a fee.
Despite this challenge, lawyers with experience in a particular area of law can likely judge many of the RPC 1.5(b) factors in advance, such as the time and labor required, the novelty and difficulty of the questions involved and the skill required to perform the legal service properly, with a fair amount of accuracy. Ultimately, a fixed fee will be permissible if, after considering all of the factors outlined in 1.5(b), a lawyer of ordinary prudence would not be left with a definite and firm conviction that the fee is in excess of a reasonable fee.
Regardless of the factors outlined by RPC 1.5(b), fees become excessive as a matter of law when a lawyer seeks to charge more money than was agreed upon in a fixed fee agreement for the specified work. OSB Formal Ethics Op No 2005-151. Even so, in OSB Formal Ethics Op No 2005-151, the committee acknowledges that lawyers may change the amount due under a fixed fee agreement if: 1) the agreement allows for changes over time; or 2) the fixed agreement is permissibly modified as described by OSB Formal Ethics Op No 2005-97.
The Lawyer’s Pocket or the
The general proviso is that all legal fees paid in advance must be placed in a lawyer trust account, separate from the lawyer’s personal property, until the fees are earned. RPC 1.15-1; seeOSB Formal Ethics Op No 2005-140. But, lawyers may ask, how do these rules apply in a fixed fee situation?
The answer depends on whether the fees are appropriately designated as “earned upon receipt” in a written agreement that complies with Oregon RPC 1.5(c)(3). Fixed fees paid pursuant to an agreement that complies with RPC 1.5(c)(3) are in fact already “earned” by the lawyer. For this reason, they cannot be deposited in a lawyer trust account, but must be kept with the lawyer’s personal property because they belong to the lawyer. RPC 1.15-1(c).
In OSB Formal Ethics Op No 2005-151, the committee explains, “(i)f there is a written agreement with the client that complies with the requirements of Oregon RPC 1.5(c)(3), the funds belong to the lawyer and may not be put in the lawyer’s trust account.” But, the committee states, “if no such agreement exists, the funds must be placed into the trust account and can only be withdrawn as earned.”
Refunding the Nonrefundable Fee
When, if ever, does a lawyer have to refund so-called nonrefundable fees? The short answer is that lawyers must refund “nonrefundable” fees for work they agreed to do, but did not perform. See In re Sousa, 323 Or 137, 143(1996); In re Gastineau, 317 Or 545, 547-552 (1993). As concisely stated by the Oregon Supreme Court, “Any fee that is collected for services that is not earned is clearly excessive regardless of the amount.” In re Thomas, 294 Or 505, 526(1983).
When a lawyer has done part, but not all, of the work agreed upon in a fixed fee agreement, calculating a refund due may be complicated. Generally speaking, a lawyer must return the amount of a fixed fee that is proportionate to the amount of work not completed. See In re Okai, 23 DB Rptr 73 (2009);In re Vance, 20 DB Rptr 92 (2006). For instance, if a lawyer finishes half of the agreed upon work, half of the fee must be returned to the client. A lawyer may not simply calculate the refund required by subtracting the amount of money the lawyer would have charged for the work, had the lawyer charged an hourly rate. In re Balocca, 342 Or 279 (2007). Such an hourly rate computation in the fixed fee context would “deny [the client] the benefit of the flat-fee arrangement.” Id. at 292.
Even completing substantial work does not relieve a lawyer from providing a refund of unearned fixed fees. For instance, in the case of In re Fadeley, the accused accepted $10,000 to represent his client in a dissolution proceeding. Although the accused did not obtain a written fee agreement, he believed that the payment was a nonrefundable minimum fee. 342 Or 403 (2007). The accused started working on the case, but about a month later, his client sent him a letter terminating the representation and asking for a refund, less fees incurred. Even though the dissolution was not finished, the accused refused to refund any fees because he considered the fees to be nonrefundable. The court held that the accused violated our rules because he failed to provide a prompt refund of the unearned portion of the $10,000 fee. Id. at 410-411 (finding violations of DR 2-106 and DR 2-110(A)(3)).1 Lawyers should also be careful to keep records of how they spend their time on fixed fee cases. Lawyers have an obligation to provide an accounting to clients of unearned fixed fees, upon request. RPC 1.15-1(d); RPC 1.4(a).
Despite the challenges discussed above, fixed fee agreements are often a useful option for lawyers and their clients. Nonrefundable fixed fee agreements are generally held to the same standards as more traditional fee agreements, but lawyers should take care to understand the special requirements of 1.5(c)(3) and update their fee forms with the required language. Lawyers should also take a moment to consider the true meaning of so-called “nonrefundable” fixed fees.
1. The Oregon Supreme Court has yet to provide guidance on whether a refund would be required when a client terminates an attorney in bad faith near the end of a matter. In OSB Formal Ethics Op No 2005-151, the committee notes, “[w]hether, or to what extent, a bad-faith termination by a client near the end of a matter requires a refund of fees paid in advance is a question beyond the scope of this opinion.”
ABOUT THE AUTHOR
Amber Hollister is deputy 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. 312, or by e-mail at email@example.com.
© 2011 Amber Hollister