Protecting Your Practice: Avoid problematic fee agreements

It is crucial to have a clear, written agreement with your client explaining not just the scope of your services, but how you will be paid for those services. Be careful that you don’t run afoul of your professional obligations in that fee agreement or in your billing. In particular, there are three types of fee arrangements that can lead to trouble unless you are very careful about how you draft and implement them: flat fees, nonrefundable retainers, and fee-sharing agreements.

Flat fees

This type of arrangement is very common in certain practice areas, such as criminal defense, family law, and consumer bankruptcy. And there is a push to adopt a flat-fee approach in areas where lawyers have traditionally billed by the hour. But flat fees carry their own risks for lawyers.

Regardless of whether you characterize a flat fee as “earned upon receipt,” you cannot treat the fee as nonrefundable; and, your agreement must not state or imply that the fee is nonrefundable. Our Supreme Court has made clear that such an agreement is unreasonable and therefore violates Indiana Rule of Professional Conduct 1.5(a). Matter of Kendall, 804 N.E.2d 1152 (Ind. 2004). If the attorney-client relationship breaks down and is terminated before you complete the work, you must refund the “unearned” portion of the fee. Matter of O’Farrell, 942 N.E.2d 799 (Ind. 2011). Of course, this requirement begs the question of how you determine what part of a flat fee is “earned” as opposed to “unearned.” One way to address this conundrum is to track your time as you do the work. If you ordinarily spend 10 hours on a bankruptcy petition, and you and your client part ways after you’ve done nine hours of work but before the petition is filed, you have a solid basis for refunding only 10 percent of the fee.

Nonrefundable retainers

Though flat fees cannot be treated as nonrefundable, there are some instances where nonrefundable retainers may pass muster with our Supreme Court. In Matter of Thonert, 682 N.E.2d 522 (Ind. 1997), the Indiana Supreme Court explained that “[t]here are many circumstances where, for example, preclusion of other representations or guaranteed priority of access to an attorney’s advice may justify such an arrangement.” While this language may sound at first blush like our Supreme Court has given its seal of approval to nonrefundable retainers, the very next sentence suggests that there are actually very few instances where the court would approve of such an arrangement: “But here there is no evidence of, for example, any value received by the client or detriment incurred by the attorney in return for the nonrefundable provision.”

Before you consider demanding a nonrefundable retainer, consider whether you can credibly claim, not just in theory but by reference to specific evidence, that the client’s retention has precluded you from other cases in which you may have been retained or has caused you some other clear detriment. Of course, any time we are retained to represent a client, we are precluded from representing opposing parties; however, the Supreme Court has made clear that this sort of theoretical “detriment” will not suffice. Rather, before considering charging a nonrefundable retainer, determine whether you can credibly identify other potential clients who likely would have hired you but for your commitment to the existing client. Are you, for instance, one of only two antitrust lawyers in a city where dozens of antitrust cases are filed every year, such that taking one client inevitably means turning down other potential clients? Because such situations are likely to be quite rare, the safer course is probably to forgo the use of nonrefundable retainers altogether.

Fee-sharing agreements

Problems with fee-sharing agreements usually arise in the context of referrals. Simply put, you cannot share a fee with another lawyer in order to compensate that lawyer simply for referring a case to you, or receive such a fee for a referral. A lawyer cannot receive a share of a fee from another lawyer who is not in the same firm unless the division of fees is in proportion to the services performed by each lawyer, or, pursuant to a written agreement with the client, each lawyer assumes joint responsibility for the representation. Indiana Rule of Professional Conduct 1.5(e). Moreover, the client must be advised of, and not object to, each lawyer’s participation; and, as with all attorney fees, the total fee must be reasonable. Rule 1.5(e)(2) and (3).

In other words, you cannot receive part of a fee unless you are prepared either to do part of the work or to assume responsibility for the client’s case, and the client consents. These requirements seriously limit the number of situations in which you should consider accepting or sharing part of a fee. For instance, suppose you are a criminal defense lawyer, and you refer a client who has been injured in a car accident to a personal injury lawyer because you have no experience in personal injury litigation. You could theoretically share in any fee recovered by the personal injury lawyer, but only if your fee is in proportion to the work you perform on the case, or you assume joint responsibility for the case, and your client is informed of the arrangement and consents in writing. However, if you have no experience in personal injury law in the first place, it is unlikely that you should assume responsibility for any part of the client’s personal injury case. If you choose to do so because of a relationship of trust with the lawyer to whom you referred the case, you must be prepared to take responsibility for any errors committed by that lawyer.

In sum, how you perform legal work for your clients is crucial, but how you charge for that work can be just as important. Make sure your client fully understands how he or she will be billed; and, just as importantly, make sure your billing arrangement is fully compliant with the Rules of Professional Conduct.•

Neal Bowling and Dina M. Cox are attorneys with Lewis Wagner LLP in Indianapolis. Bowling focuses his practice on complex business litigation as well as the defense of lawyers in malpractice and disciplinary matters. Cox’s practice areas include professional liability defense, consumer class-action defense, and insurance bad-faith defense litigation. The opinions expressed are those of the author.