|
|
|
 |  |
 |
 |
WSBA Info | |
|
For Lawyers | |
|
For the Public |  |
 |
For the Media |  |
|
CLE |  |
| | Bench Bar Guidelines | News Releases | Publications | |
|
|
February 2008“Flat Fee” RPC Amendments Under Consideration by the Supreme Courtby Mark A. Johnson Abstract (2) Lawyers have long charged flat fees, and since the repeal of 186 and the decision not to adopt 198, lawyers have continued to do so and have continued to place those fees into their operating accounts, using fee agreements containing terms such as “earned upon receipt” and “nonrefundable.” The WSBA Office of Disciplinary Counsel (ODC) believes that under current decisional authority and the RPCs, fee arrangements of this type are ethically improper and expose the lawyer to discipline. Lawyers, particularly in the criminal defense, family law, and immigration law bars, contend that clients appreciate the security of knowing the extent of their fee exposure, that the law firms operate on low margins which require that they have immediate access to fees for operating, that the first fee payment may be the only one they receive, and that being able to place advanced fee payments into an operating account allows them to provide access to justice for semi-indigent individuals who do not qualify for a public defender or civil legal aid. The criminal defense bar also asserts that courts are reluctant to let them withdraw even if they are not being paid. (3) The TARRTF proposed amendments to RPC 1.5 and 1.15(A)(c)(2) create two exceptions to the general rule that advanced fee payments must be placed into trust to be withdrawn only as services are performed: (4) The proposed amendments provide that a lawyer may place an AR or FF into the firm operating account when received if there is a writing signed by the client. With regard to FFs, the rules establish a five-part written disclosure requirement which includes: (7) The WSBA Office of Disciplinary Counsel opposes the rule changes, contending that the rules do not provide adequate protections for the client. The Washington Association of Criminal Defense Lawyers and the WSBA Family Law Section support the rules changes. The BOG voted to unanimously to approve the changes.
The proposed RPC amendments expressly permit two types of advance fee payments, flat fees (a defined amount for specified services) and availability retainers (a fee charged for to secure a lawyer’s availability for a specified time or on a specified matter), to be placed into a lawyer’s operating account rather than a trust account if the client signs a written fee agreement containing certain disclosures. The proposed RPC amendments also impose obligations on lawyers in the event of a dispute over the fee and prohibit the use in fee agreements of terms which imply that the fee is nonrefundable. Historical Background Lawyers frequently receive money from clients in advance of providing services. The general rule with respect to the treatment of money so received is that it must be placed into a trust account, to be withdrawn as services are performed. When the relationship terminates, the client is entitled to a refund of any fee advance that has not been earned. See RPC 1.15(A) and RPC 1.16(d). With the exception of a true “availability,” “engagement,” “general,” or “classic” retainer — an agreement between a lawyer and a client whereby the lawyer agrees simply to be available to the client for a specified time or for a specified matter, exclusive of charges for services to be provided — money so received is characterized as an advance payment for services and must be placed in trust.1 In an attempt to clarify the distinction between funds that must be held in a trust account and those that should not be, in 1990 the Board of Governors approved Formal Ethics Opinion No. 186, entitled “The Proper Handling of Advance Fee Deposits and Retainers.” At its December 2005 meeting in Bremerton, the Board withdrew Formal Ethics Opinion No. 186 and declined to adopt a replacement opinion proposed by the RPC Committee (Proposed Formal Ethics Opinion 198, entitled “Engagement Retainers and Advance Payments”). The decision to withdraw Formal Opinion 186 was precipitated by the Washington State Supreme Court’s decision in In re Discipline of DeRuiz, 152 Wn.2d 558, 99 P.3d 881 (2004), in which the Court disciplined a lawyer who failed to return unearned fees pursuant to a “nonrefundable” fee agreement. In his defense, Mr. DeRuiz contended that his fee agreement complied with Formal Opinion 186. The DeRuiz Court disagreed, distinguishing between the type of fee agreement referenced in Formal Opinion 186 and the agreement drafted by Mr. DeRuiz, and noting that the former was a true “retainer” intended “to secure a lawyer’s availability over a given period of time.” Id. 573 (emphasis in original). According to the Court, Mr. DeRuiz’s fee was “more accurately characterized as a flat fee for legal services in a particular matter . . . .” Id. at 573. The primary holding in DeRuiz was that the fee was unreasonable because the services were not provided; the Court did not find flat fees to be impermissible, nor did it address the trust account issue. The Board’s withdrawal of Formal Opinion 186 and its declination to adopt a proposed replacement created a void in guidance for our members with respect to advanced fee payments. It also crystallized a difference of opinion between the Office of Disciplinary Counsel and many criminal defense, family law, and other practitioners about the proper trust account treatment of flat fees received in advance of providing services. The Bremerton meeting was well attended by vocal practitioners who contended that their economic survival depended on their ability to charge flat fees received in advance of services, coupled with the ability to deposit those funds upon receipt into their firm operating accounts. The Task Force At the December 2005 meeting, the Board authorized creation of a task force to address the issues raised by the withdrawal of Formal Opinion 186 and ambiguities concerning the way lawyers handle certain fees paid in advance. The members of the Task Force appointed by the Board of Governors reflected all major perspectives on the issue. Ten lawyer members and one nonlawyer member participated actively in the work of the Task Force. Members of the Task Force were Mark A. Johnson (chair, Seattle), Randy Beitel (WSBA Office of Disciplinary Counsel), Professor David Boerner (Seattle University), Marc Christianson (Tacoma), David Heller (Burien), Alison Holcomb (Seattle), Marijean Moschetto (Bellevue), Art Lachman (Seattle), Jody McCormick (Spokane), Nancy Pacharzina (Seattle), and Ann Guinn (nonlawyer, Seattle). Liza Burke (District 7-East, Seattle) was the Board of Governors liaison. The Task Force was aided by then-WSBA Assistant General Counsel Douglas Ende, who served as staff counsel and reporter, and Seattle University School of Law student Jason Holman, who served as the TARRTF intern. Between July 2006 and June 2007, the full Task Force met on nine occasions. Most members also participated on subcommittees, each of which spent substantial time and effort evaluating particular aspects of the problem and drafting proposals for consideration of the full Task Force. Many additional hours were devoted to individual study and consideration of proposed drafts and revisions of rules and comments, which culminated in the suggested amendments that are now being submitted to the Board for approval. In discharging its task, the Task Force requested and considered comments and suggestions conveyed to them by organizational stakeholders, including the Washington Association of Criminal Defense Lawyers (WACDL) (represented on the Task Force by Alison Holcomb), the Legal Foundation of Washington (represented on the Task Force by Nancy Pacharzina), the Washington State Trial Lawyers Association (WSTLA), the WSBA Solo and Small Practice Section (represented on the Task Force by Ann Guinn), the WSBA Family Law Section (represented on the Task Force by Marc Christianson), the WSBA Creditor-Debtor Section, the Access to Justice Board, and the WSBA Law Office Management Assistance Program (LOMAP). Analytic Approach of the Task Force Lawyers are fiduciaries. The fiduciary nature of the client-lawyer relationship imposes many obligations, including unfailing loyalty; complete disclosure; and utter honesty, good faith, and fair dealing. Our fiduciary obligations extend to the amount we can charge our clients for our services, whether that money must, or must not, be placed into a trust account, and the circumstances under which money deposited into trust may be withdrawn. Our obligations with respect to the treatment of money we receive from our clients are memorialized in Rules of Professional Conduct 1.5, 1.15, 1.16(d), applicable ethics opinions, and decisional authority addressing issues of the reasonableness of various types of fee agreements, lawyer discipline, and civil liability. The TARRTF initially considered whether the issue delegated by the Board of Governors would be resolved most effectively by issuance of a formal ethics opinion or by adoption of a Rule of Professional Conduct. Believing that clarity was of utmost importance, that an RPC would be more accessible to practitioners and the public, and that the Office of Disciplinary Counsel is able to charge violation of an RPC only, but not an ethics opinion, the Task Force chose the rule-drafting option, resulting in a recommendation to add new provisions to RPC 1.5, together with counterpart amendments to RPC 1.15(A). In addition to the text of the rule amendments set forth and described below, the TARRTF is recommending adoption of amendments to the official Washington Comments to the rule, which will illustrate the meaning and purpose of the amendments and provide interpretive guidance. The Task Force believes that the suggested rule amendments proposed herein reflect a reasonable balance of interests, and that the proposal as a whole has been conscientiously crafted to protect our clients’ right to informed consent. The Suggested Solution The solution proposed by TARRTF is to create two exceptions to the general rule that fees paid in advance of services must be placed in trust: an exception for the classic availability retainer and an exception for a “flat” fee, i.e., a fixed amount prepaid in whole or in part for specified services. The policy foundations for the exception for flat fees are as follows: 1. A significant number of our members, the vast majority of whom are scrupulously honest, contend that the ability to charge fixed fees for specified services and to place that money upon receipt into their firm operating account is necessary for their economic survival; 2. In certain circumstances, particularly in criminal defense representation, the initial payment will often be the only money the lawyer ever receives — and in criminal cases a lawyer may ordinarily withdraw from the representation only with court permission; 3. Clients appreciate knowing the extent of their fee exposure; 4. Allowing criminal defense lawyers to accept flat fees will increase the availability of legal services to middle- and low-income individuals and take pressure off an overburdened indigent criminal defense system; 5. Clients entering into flat-fee arrangements will be protected by the requirement of a signed fee agreement disclosing that the client’s right to terminate the client-lawyer relationship is not affected by prepayment; and 6. The rule places an affirmative duty on the lawyer to act reasonably in the event of a dispute over a right to a refund. The Office of Disciplinary Counsel contends that the proposed rule does not adequately protect the public and that, absent availability retainers, funds received in advance of services always remain the property of the client until the services are performed and must be placed in a trust account to be withdrawn as earned. Payments Received by Attorneys in Advance of Services: The TARRTF Proposed RPC 1.5(f) and (g) The TARRTF amendments to RPC 1.5 create two exceptions to the general rule that fees paid in advance of services remain the property of the client and must be kept in trust. The exceptions are: (1) availability retainers, and (2) flat fees for specified services. See paragraphs 1.5(f)(1) and (2) of the draft rule. The rule, for both types of fee agreements, requires a writing signed by the client. Id. Flat fees require an additional disclosure substantially similar to the form set out in the rule, the purpose of which is to advise the client that the fee will immediately be placed into the lawyer’s operating account and that payment of a flat fee in advance does not impair the client’s right to terminate the client-lawyer relationship, nor does it extinguish the possibility that the client may, or may not, have the right to a refund. Id. The rule also contains a dispute resolution mechanism, see paragraph (f)(3), and prohibits the use of the terms “nonrefundable,” “earned upon receipt,” and “minimum.” See paragraph (g). TARRTF Proposed RPC 1.5(f) The first sentence of the TARRTF proposed rule is intended to state the general rule that advanced fee payments must be handled in compliance with RPC 1.15(A). The general rule is immediately followed by its two exceptions. Paragraph (f)(1) sets out the definition of what is commonly referred to as the “true,” “general,” “availability,” “classic,” or “engagement” retainer. This paragraph identifies such a retainer as an exception the general rule that a fee is required to be placed in trust if so agreed in a writing signed by the client. TARRTF Proposed RPC 1.5(f)(2) Paragraph (f)(2) is the “flat fee” portion of the proposed rule. It creates a second exception to the general rule that advance fee payments must be placed in trust. The exception applies to flat fees for specified services, whether paid in whole or in part in advance of services. The rule requires that the fee agreement contain a five-part written disclosure (addressing scope of services, total amount of fee, that the fee upon receipt becomes the lawyer’s property and will not be placed in trust, that the agreement does not alter the client’s right to terminate the client-lawyer relationship, and that the client may, or may not, have a right to a refund if the agreed-upon services have not been provided). TARRTF Proposed RPC 1.5(f)(3) — The Dispute Resolution Mechanism Situations will arise when a lawyer has received an availability retainer or a flat fee in advance of services pursuant to RPC 1.5(f)(1) or (2) and the relationship terminates before the specified period ends or the matter resolves (in the case of an availability retainer) or before the specified legal services are provided (in the case of a flat fee). Because of the scientific certainty that such disputes will arise, the TARRTF determined that Proposed Rule 1.5 should contain a dispute resolution mechanism. The Task Force considered three alternative mechanisms, including the one ultimately proposed.2 One of the dispute resolution mechanisms not selected called for the lawyer to place the “lesser of” the amount in dispute or 50 percent of the fee collected into a trust account and “take reasonable and prompt action” to resolve the dispute. Another simply required the lawyer to “take reasonable and prompt action to resolve the dispute.” Since parties in disputes over money often take extremely self-interested positions with respect to the amount in issue, it may not be uncommon for the lawyer to believe that he or she is entitled to 100 percent of the fee and for the client to believe that the lawyer is entitled to nothing. Given this backdrop, the TARRTF concluded that the best protective mechanism for both parties would be to place on the lawyer — the party better acquainted with the value of the legal services, the RPCs, and the decisional authority with respect to fees — an obligation to determine amount in dispute by applying a reasonably prudent lawyer standard. For example, a lawyer may have essentially completed the representation when the client fires the lawyer and demands his or her money back. Faced with these facts, the lawyer knows that pursuant to the doctrine of substantial completion, he or she is reasonably entitled to the full fee.3 If, on the other hand, the lawyer is in a situation more akin to that in DeRuiz, supra, the lawyer is in the best position to appreciate the degree to which a portion of the work has not been performed and assess how much money ought to be returned to the client. TARRTF Proposed RPC 1.5(g) — The Terms “Nonrefundable,” “Minimum,” and “Earned Upon Receipt” The Rules of Professional Conduct mandate that every fee be reasonable, as measured by the factors specified in RPC 1.5(a) which are relevant to the type of fee agreement at issue. A variety of circumstances may cause a fee treated by a lawyer as “nonrefundable,” “minimum,” or “earned upon receipt” to be, or to become, unreasonable, the most fundamental being situations where the agreed-upon services are not provided.4 In addition, the pertinent decisional authority establishes that a client’s right to terminate the client-lawyer relationship is absolute, and that a client may discharge a lawyer at any time even without a reason. In re Discipline of Kagele, 149 Wn.2d 793, 72 P.3d 1067 (2003). A corollary to the client’s absolute right to discharge a lawyer is that no fee agreement may restrict that right by imposing a financial penalty on the client’s right to discharge. Accordingly, no fee agreement may contain terms that a client could justifiably construe as implying that the lawyer cannot be discharged without the client automatically incurring the financial penalty of forfeiting all money paid. Fee agreements that characterize money paid in advance as “nonrefundable,” “minimum,” or “earned upon receipt” may mislead lawyers into believing that they can insist on a legal right to keep an unreasonable fee even if the client-lawyer relationship is terminated before the services are provided. Additionally, such terms may mislead clients into believing that they will be subject to a financial penalty if the client exercises the absolute right to discharge counsel. In light of these risks, the Task Force concluded that the three terms should be expressly prohibited. TARRTF Proposed Amendment to the Trust Account Rule — RPC 1.15(A)(c)(2) Conclusion If the Supreme Court votes to adopt the proposed amendments to RPC 1.5 and 1.15, practitioners and the Office of Disciplinary Counsel will have finally have clear guidance on the trust account treatment of advance fee payments. The rule changes are intended to reflect the reality that the vast majority of attorneys are honest, hard-working professionals. Mark A. Johnson practices plaintiffs’ professional liability and personal-injury law at the law firm of Johnson-Flora, PLLC in Seattle. He served on the WSBA Board of Governors from 2003–2006. He is the WSBA president-elect and will become WSBA president in September 2008. He can be reached at mark@johnsonflora.com. Notes
|
