Giving fee guidance

What works in theory doesn’t always translate to practical application when it comes to attorney fees and agreements that might be considered ethical violations.

A line of Indiana Supreme Court decisions during the past 16 months has offered some guidance to lawyers on what actions may amount to a professional conduct violation, but the lack of bright-line rules in those decisions has left some with more questions than answers. Some attorneys say they provide more uncertainty than before and turn lawyers away from alternative billing practices.

These attorneys question how they’re supposed to charge and collect fees without any assurance that what they do will be allowed if a client disagrees. Some have shifted billing and trust account deposit routines to allow for a better accounting of the work they’re doing as it is completed, and some have stricken words like “non-refundable” entirely from their fee agreement vernacular.

Rochester attorney Ted Waggoner is pleased to see the state’s justices fleshing out questions surrounding fee agreements, but he isn’t sure the guidance is practical for attorneys who face these fee questions.

Waggoner

“I do think the court and Disciplinary Commission are really trying to give us an understanding of what we should be doing as attorneys,” said Waggoner, who lectures on legal ethics and referral matters. “While it’s good in the abstract sense, I’m not sure the way they’re pushing lawyers on these fee questions is practical. That practical nature concerns me.”

Starting in September 2010, the court recognized the usefulness of lawyers structuring fee agreements so that their fees are based more closely on the services that will actually be provided to the client. In February 2011, the court held that regardless of the label used to describe an advance fee payment or nature of a fee, the lawyer must refund any advance payment that is unearned. The justices found that using a non-refundable provision in a fee agreement, even though it is unenforceable, could impact a client’s decision making in terminating the representation out of fear of losing the unearned portion of a fee. The court gave limited guidance on the amount of work that goes into a fee being earned. In subsequent cases, the justices analyzed the “reasonableness” of fees and arrangements and held in broad terms that the reasonableness can change over the course of a case. The court held that contingency fees can be greater than a fee for the same work if charged at an hourly rate or as a flat fee because the lawyer who takes a case on a contingency fee assumes the risk of not being paid for the work done in the event there is no recovery.

“I think that the cases have a major impact for lawyers who do not charge by the hour and use some form of contingency or flat fee or an alternative fee agreement,” said Westfield attorney John Conlon, a legal billing consultant with a focus on ethics. “These cases have an impact on those attorneys who believe that moving from the hourly billing model to a contingency or alternative fee agreement model is the correct way to go. Understandably, attorneys who are moving from hourly billing to AFA are looking to make more, not less money. However, the net effect of these cases may be to cause some attorneys to re-think an AFA in some situations.”

Interest in alternative fee agreements has been growing in recent years as lawyers and firms have more regularly moved away from billable hours. The alternative arrangements range from fixed fees, conditional or contingent fees, blended rates, capped fees and performance or incentive-based fees.

The troubling aspects of the Indiana Supreme Court rulings have been they don’t provide any specific guidance on what might be earned or unearned, what might constitute a windfall or how lawyers are supposed to charge for legal work that turns out to be easier than originally expected, Conlon said.

Without clear definitions, lawyers don’t have practical guidance on that, he said.

Lundberg

“The bottom line: avoid fee disputes if at all possible,” said staff attorney Dennis McKinney with the Indiana Supreme Court Disciplinary Commission. “A big theme in the recent rulings is that all unearned fees must be refunded, and the earned definition is based on the work done, not on what’s written and signed in a fee agreement.

“Even if the contingency fee appeared to be reasonable when the lawyer and client agreed to it, subsequent developments may make the fee unreasonable,” McKinney said.

In order to avoid questions about what’s “earned” and how much of a fee might have to be returned, McKinney suggested tiered fee agreements with benchmarks that allow for attorneys to tailor their fees to more closely reflect the work actually performed. This would reduce the chance a client would be overpaying or underpaying for legal work. A criminal law attorney could price a flat fee based on the assumption that the case would plead out quickly but the fee would increase incrementally if the case went to trial, involved a particular amount of work, or if it went to trial and eventually settled in a plea agreement. The same system could be used in civil cases, and McKinney said the tiers would make it easier to identify any unearned portion of a flat fee in the event a lawyer’s representation is terminated early and the fee earned is disputed.

The Supreme Court requires that attorneys inform clients about their ability to get a second opinion if changes in a fee agreement are made during the course of the case, but Waggoner said that doesn’t seem like a realistic solution as it could endanger the attorney-client relationship. Other attorneys have referred their clients to Waggoner to consult on fee questions, and he’s spent hours reviewing another lawyer’s arrangements. Telling clients they can get a second opinion may lead the clients to question whether the attorney is trying to dump the representation or cheat them, Waggoner said. Clients may also have concerns about how much the second lawyer will cost.

Conlon

Waggoner says the biggest issue he takes away from these Supreme Court cases is the use of “non-refundability” in fee negotiations and contracts.

“Really, the brightest red flag in fee ethics is the ‘non-refundable retainer,’ and I don’t think it should be used or even hinted at because that’s the lose-your-license type of violation,” he said, noting that the court hasn’t specifically forbidden the phrase, but hasn’t approved of its use in any opinion during the past eight years. “I see why the court doesn’t want to draw bright lines there, because attorneys have been using that phrase for 100 years … but in so many ways, people are giving out fee agreements and hoping an issue doesn’t arise.”

When trying to navigate the sometimes unclear waters on attorney fees, former disciplinary chief Don Lundberg said the cases don’t offer a specific solution to every situation, but the rulings provide a simple message for attorneys trying to maneuver through questions about attorney fees.

“There is no one-size-fits-all answer, but the core notion is that the lawyer should not be able to use rhetorical flummery to turn unearned client money into lawyer property,” he said. “In the end, that is what a lot of legal ethics is about – making honest and good faith judgments about what is fair under the circumstances.”•