The Perils of Flat-Fee Agreements

With the adoption of the new Rules of Professional Conduct in November 2018, California joined the vast majority of jurisdictions that require attorneys to deposit all client monies, including advanced attorney fees, into a client trust account. Former Rule 4-100 only required deposits for costs to be deposited into a CTA. However, advanced fees did not have to be deposited into a CTA. Many attorneys did not routinely deposit advanced fees into a CTA. Now advanced fees need to be deposited into a CTA pursuant to Rule 1.15, which covers safekeeping funds and property of clients and other persons in almost all cases.

The only carve-out for requiring advanced fees to be deposited into a CTA is for a flat fee, and then only in specific circumstances. Attorneys who routinely perform legal work on a fixed-fee or flat-fee basis need to pay special attention to Rule 1.15(b) so they do not run afoul of the new trust accounting rules.

Flat fees are appropriate in relatively simple matters such as a non-contested divorce or writing a basic trust. They can also work on more complex cases when the representation can be broken down into distinct segments or phases, such as an immigration case which clearly delineates the process for obtaining the visa, including the filing of the petition, the filing of the immigrant visa application and the representation at the Consulate interview. Instead of one fee agreement stating a flat fee for all these services, the attorney can break down each segment and charge a separate flat fee for each service.

The first important point for attorneys accepting flat fees under the current Rules of Professional Conduct is that all flat-fee agreements should be in writing, no matter the amount of the flat fee, since the attorney has to disclose in writing that the client could require the flat fee to be deposited into a CTA and that the client is entitled to a refund of any part of the flat fee that has not been earned.

The other important provision is that the attorney should keep accurate time records on all flat-fee cases since the attorney must be able to determine what part of the flat fee has been earned if the attorney is terminated prior to completing the legal services. A flat fee is not earned until full performance. Once the attorney has fully performed, the attorney has earned only the flat fee, not the value of all the time invested in the case. (See Reynolds v. Sorosis Fruit Co. (1901) 133 Cal. 625, 628.)

Until the attorney has fully performed on a flat-fee matter, the attorney is only entitled to quantum meruit, or the reasonable value of the services, and must provide an accounting on demand. In the Matter of Johnson (Review Dept. 2000) 4 Cal. State Bar Ct. Rptr. 179, 188-189. Time records are invaluable to proving up quantum meruit. However, for a flat-fee arrangement, the time records won’t be the final word on the reasonable value of the attorney’s services even if the work performed on an hourly basis exceeded the flat fee. This is because the client did not enter into an hourly arrangement with the attorney, but an agreement for the attorney to fully perform the contracted services for a certain flat fee. If the attorney has not fully performed prior to termination, it is expected that the attorney has not fully earned the flat fee.

In determining the value of the attorney’s services, the time spent by the attorney, how far along the work is on the client’s matter, and how much is left to be completed to fully perform the contracted work are all important factors to consider. For instance, an attorney who brought a criminal case all the way to a preliminary hearing who is terminated the night before is likely to be able to show the attorney fully earned the flat fee based on the hours worked and how far along the attorney advanced the client’s matter. Conversely, an attorney who spent many hours completing a trademark application who did not yet submit the application to the Patent and Trademark Office will likely owe a refund if the flat-fee agreement provided for the filing of the trademark application and the response to the first office action, based on how far the representation had advanced at the time of termination.

An attorney who accepts flat fees for legal services needs to comply with Rule 1.15(b) to avoid potential trust accounting violations.

Erin Joyce specializes in State Bar defense, moral character proceedings and ethics consultations. In her more than 18 years as a State Bar prosecutor, she gained extensive experience in State Bar investigations and disciplinary proceedings. She has handled all aspects of discipline cases against attorneys in State Bar Court, from the filing of the complaint through trial and review. She has personally tried dozens of State Bar trials and several appeals, and she has a comprehensive understanding of how State Bar investigations and proceedings unfold. She can be reached at (626) 314-9050 and [email protected].