In September 2007, the WSBA Board of Governors unanimously approved proposed changes to Rules of Professional Conduct 1.5 and 1.15A, addressing whether and under what circumstances Washington lawyers may deposit a flat fee payment for work not yet performed into his or her firm’s regular operating account, versus the firm’s trust account.1 The Board then forwarded the proposed rules to the Washington Supreme Court for its review.
On October 28, after a public comment period, the Court adopted most — but not all — of the Board’s proposed changes. Notably, the version the Court adopted contains a greatly abridged version of the Board’s proposed fee dispute resolution provision and does not contain any prohibition on the characterization of fees as nonrefundable, minimum or earned upon receipt.
New RPCs 1.5 and 1.15A as adopted by the Court became effective on November 18. This article summarizes the new rules and offers some practice tips for dealing with flat fees. The full text of the new rules is posted on the Supreme Court’s website under “Rules of General Application” at http://www.courts.wa.gov/court_rules/.
Summary of Flat Fee Rule
The general, default rule for a payment received for work not yet performed is that the payment must be placed into a trust account and may be withdrawn only as it is earned. At the end of the attorney-client relationship, the client is entitled to any unearned portion of the advance payment.
The new rules are set forth primarily in RPC 1.5(f) and contain two exceptions to the default rule. The first exception — a “retainer exception” — states that a lawyer may charge and deposit directly into his or her operating account a “classic” retainer fee, which is a payment made in exchange for the lawyer’s availability to that client during a certain period of time. The second exception — a “flat fee exception” — provides that a lawyer may charge a flat fee for specific legal services and deposit the fee directly into the lawyer’s operating account, before work is performed, as long as the following requirements are met:
- The flat fee must be agreed to in advance in a writing signed by the client;
- The written fee agreement must contain the following information, presented in a manner that the client can easily understand:
- the scope of the services to be provided;
- the total amount of the fee and the terms of payment;
- that the fee is the lawyer’s property immediately on receipt and will not be placed into a trust account;
- that the fee agreement does not alter the client’s right to terminate the client-lawyer relationship; and
- that the client may be entitled to a refund of a portion of the fee if the agreed-upon legal services have not been completed.
RPC 1.5(f)(2) also sets forth specific language for the written fee agreement that, if used in substantial form, ensures the agreement meets the new requirements. When a flat fee is agreed to in a writing that complies with the new rules, the fee is the lawyer’s property upon receipt and must be deposited into the operating account; the fee may not be deposited into the trust account.
Conversely, a deposit received in advance of services, to be withdrawn by the attorney only as fees are earned or expenses incurred, must be deposited into the trust account, and may not be deposited into the operating account. [See RPC 1.5(f)(2) and Comment 12; RPC 1.15A(c)(2) & (h)(3)].
No Prohibited Terms for Characterizing Fees
The Supreme Court did not adopt the Board’s proposed rule prohibiting the use of certain terms for characterizing fees. The Board’s proposal included a new section RPC 1.5(g), which stated, “A lawyer shall not characterize any fee as ‘nonrefundable,’ ‘minimum,’ or ‘earned upon receipt.’” According to the Comment 18 that would have accompanied this section, “nonrefundable” is misleading because it ignores the reasonableness requirement and refund possibility that applies to all fees; “minimum” is problematic because it implies that the fee is nonrefundable; and “earned upon receipt” is misleading because fees are not actually earned until work is performed.
The Supreme Court, however, declined to adopt the proposed section 1.5(g) and Comment 18. Under the current Rules of Professional Conduct, therefore, there is no categorical prohibition on using the terms “nonrefundable,” “minimum” or “earned upon receipt” to characterize a fee.
Dispute Resolution Provision
The Court also declined to adopt the dispute resolution procedures that the Board proposed for RPC 1.5(f)(3) or the accompanying Comment 17 that elaborated on the Board’s proposed process. The Board’s proposal placed the burden on the attorney to immediately refund any portion of the fee to the client that the attorney reasonably believes is unearned upon learning of a fee dispute. Then, if the refund did not resolve the dispute, the attorney, within 30 days of the initiation of the dispute, would have been required to deposit into the firm’s trust account “the amount that a reasonably prudent lawyer would believe to be reasonably in dispute.”
Instead of those provisions, the Court adopted text for section 1.5(f)(3) that states: “In the event of a dispute relating to a fee under paragraph (f)(1) or (f)(2) of this Rule, the lawyer shall take reasonable and prompt action to resolve the dispute.” The rule adopted by the Court keeps the instruction broad by requiring simply that the attorney take “reasonable and prompt action” in the event of a fee dispute.
What should practitioners do to ensure compliance with the new rules? We offer the following recommendations:
- Review the full text and comments of the new RPC 1.5 and 1.15A for a thorough understanding of the current requirements. Remember that the new rules are already effective as of November 18.
- Consult the WSBA’s ethics line whenever an issue arises relating to flat fees that is not clearly covered by RPC 1.5 and 1.15A.
- Make sure that you always have a written agreement, signed by the client, when charging a flat fee.
- Review your engagement letter regarding flat fees and ensure that it meets Rule 1.5’s requirements regarding explaining the scope of services, the total amount of the fee and the payment terms.
- Place flat fees received in advance of work performed into your operating account; do not place them in your trust account.
- Ensure that your engagement agreement states that a flat fee paid is your (the attorney’s) property immediately on receipt and will not be placed into a trust account.
- Ensure that your engagement agreement states that the agreement does not alter the client’s right to terminate the client-lawyer relationship.
- Avoid language in your engagement letter that suggests to the client that the client cannot terminate the attorney-client relationship.
- Ensure that your engagement agreement states that the client may be entitled to a refund of a portion of the flat fee if the agreed-upon legal services have not been completed.
- Avoid language in your engagement letter that suggests to the client that a refund is not possible.
- Although specific terms are not strictly prohibited, it is advisable to avoid language in your engagement agreement that tends to contradict the new rules, such as “nonrefundable,” “minimum” and “earned upon receipt.”
- Keep good records regarding your flat fee files, including records of all work performed on the client’s behalf and time records. These records may prove helpful if a fee dispute ever occurs.
- As always, ensure that your fees meet the fundamental “reasonableness” test set forth in RPC 1.5.
Lori Rath has a solo practice in Seattle concentrating on estates and trusts, probate and property agreements. Stacey L. Romberg, Attorney at Law, focuses her firm’s practice in the areas of business law, estate planning and probate. www.staceyromberg.com.
1 For information regarding the history of this proposal, please see our article published in the December 2007 issue of the King County Bar Bulletin entitled “Proposed Amendments to Rules 1.5 and 1.15A.” Also see Mark Johnson’s article published in the February 2008 issue of the Washington State Bar News entitled “Flat Fee RPC Amendments Under Consideration by the Supreme Court.”
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Reprinted from January 2009, King County Bar Association Bulletin, by Lori Rath and Stacey Romberg