Prelude: Yes, I intend to post a quiz later today.
Sometimes I get stuck not blogging because I try to make every post edgy & interesting. Alas, most of the time, legal ethics & professional responsibility is neither. That said, the less-than-enthralling basics are important and as likely, if not more so, to lead to disciplinary complaints than issues associated with the “exciting” topics.
Which brings me to today’s post: the basics of the rules that apply to legal fees. This post addresses:
- Fee Disputes.
- Standard Hourly Fee Agreements
- Contingent Fees
- Referral Fees/Fee Sharing
- Flat Fees, Fees Paid in Advance, and fees labeled “non-refundable” or “earned upon receipt.”
Fee Disputes
Before I address the various types of fees, here’s a reminder about fee disputes.
V.R.Pr.C. 1.5(a) sets out the general rule: “a lawyer shall not make an agreement for, charge, or collect and unreasonable fee or an unreasonable amount for expenses.” Comment [9] to Rule 1.5 reminds lawyers that:
- “If a procedure for resolution of fee disputes, such as arbitration or mediation, has been established in the representation agreement, the lawyer must comply with the procedure when it is mandatory, and, even when it is voluntary, the lawyer should submit to it if the client requests. Law may prescribe a procedure for determining a lawyer’s fee, for example, in representation of an executor or administrator, a class or a person entitled to a reasonable fee as part of the measure of damages. The lawyer entitled to such a fee and a lawyer representing another party concerned with the fee should comply with the prescribed procedure.”
Indeed, the Vermont Bar Association offers a Committee for the Arbitration of Fee Disputes. For more information, contact the current chair, and regular member of the Five for Friday Honor Roll, Jeff Messina.
General Rule – All Fees
Again, V.R.Pr.C. 1.5(a) sets out the general rule: “a lawyer shall not make an agreement for, charge, or collect and unreasonable fee or an unreasonable amount for expenses.”
Critical to remember is that it’s a violation to agree to an unreasonable fee. Indeed, the mere fact that a client agrees to a fee does not render it reasonable. Indeed, the Vermont Supreme Court has rejected that exact argument, stating that “lawyers, unlike some other service professionals, cannot charge unreasonable fees even if they are able to find clients who will pay whatever a lawyer’s contract demands.”[1] Rather, the reasonableness of a fee is judged by applying the criteria set out in V.R.Pr.C. 15(a).[2]
Standard Hourly Fee Agreements
Rule 1.5(a) states that “the scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.” While the rule does not require an hourly fee agreement to be in a writing, I don’t know why a lawyer wouldn’t want to reduce the agreement to a writing that is signed by the client.
Contingent Fees
Rule 1.5(c) governs contingent fees.
Like any fee, a contingent fee shall not be unreasonable. Further, a contingent fee agreement must:
- be in a writing that is signed by the client;[3]
- state the method by which the fee is to be determined;[4] and,
- clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party.
Upon the conclusion of a contingent fee matter, a lawyer must provide the client with a written statement showing the outcome of the matter and, if there is a recovery, the remittance to the client and the method by which it was determined.
Rule 1.5(c) prohibits charging a contingent fee while representing the defendant in a criminal case. It also prohibits fees that are “contingent upon on the securing of a divorce or upon the payment of spousal maintenance or support, or property settlement in lieu thereof.” However, the rule permits the use of contingent fees in certain post-judgment family matters.[5]
Referral Fees & Fee Sharing
I’ve blogged about referral fees before. The most recent post is here. Check it out. If you don’t want, remember this: Vermont does not allow straight referral fees.
Flat Fees Paid in Advance
Vermont allows fees to be paid in advance of any services being performed. We also allow flat fees and flat fees that are paid in advance of any services being performed.
The general rule is this: if a client advances a fee that you will bill against as you provide legal services, the fee must remain in trust until the services are provided and the fee is earned. However, in very specified situations, we permit lawyers to treat fees that are paid in advance as “earned upon receipt.”
A prior post on the rule that governs fees labeled as “non-refundable” and “earned upon receipt” is here. Sometimes I worry that lawyers are charging “non-refundable” fees without complying with the rule that permits them to do so. Therefore, I’m going to cut and past from the prior post.
Rules 1.5(f) & (g) took effect in May 2016.
As amended, Rule 1.15(f) states that a lawyer may characterize a fee as “nonrefundable” and accept such a fee in advance of services being rendered only if:
- “(1) The lawyer confirms to the client in writing before or within a reasonable time after commencing representation (i) that the funds will not be refundable, and (ii) the scope of availability and/or services the client is entitled to receive in exchange for the nonrefundable fee.”
In addition,
- “(2) A lawyer shall not solicit or make any agreement with a client that prospectively waives the client’s right to challenge the reasonableness of a nonrefundable fee, except that a lawyer can enter into an agreement with a client that resolves an existing dispute over the 2reasonableness of a nonrefundable fee, if the client is separately represented or if the lawyer advises the client in writing of the desirability of seeking independent counsel and the client is given a reasonable opportunity to seek such independent counsel.”
It is only under these specific conditions that a fee may be characterized as “nonrefundable” or other similar term. Indeed, here’s the next paragraph:
- “(3) Where it accurately reflects the terms of the parties’ agreement, and where such an arrangement is reasonable under all of the relevant circumstances and otherwise complies with this rule, a fee agreement may describe a fee as “nonrefundable,” “earned on receipt,” a “guaranteed minimum,” “payable in guaranteed installments,” or other similar description indicating that the funds will be deemed earned regardless of whether the client terminates the representation.”
Finally, paragraph (g) directs the way fees will be handled:
- “(g) A nonrefundable fee that complies with the requirements of (f)(l)-(2) above constitutes property of the lawyer that should not be commingled with client funds in the lawyer’s trust account. Any funds received in advance of rendering services that do not meet the requirements of (f)(1)-(3) constitute an advance that must be deposited in the lawyer’s trust account in accordance with Rule 1.15(c) until such funds are earned by rendering services.”
Again, I must stress that, no matter how designated, a fee that paragraphs (f) and (g) authorize a lawyer to treat as earned upon receipt remains subject to the reasonableness standard in paragraph (a). The rule and the 2016 Reporter’s Note make this clear. In my view, an unreasonable fee must be refunded even if labeled “non-refundable.”
As always, let’s be careful out there.
[1] In re Sinnott, 2004 VT 16, §16.
[2] In re Sinnott, 2004 VT 16, §14
[3] The agreement must be signed “up-front.” See, In re Fink, 2011 VT 42, ¶17 (“The purposes of the rule is to set forth the parties’ obligations up-front to avoid later confusion or disagreement about the terms of the representation or the fee due.”) See also, In re Anonymous Attorney, 2015 VT 101 (lawyer admonished for failure to reduce contingent fee agreement to writing.)
[4] Including the percentage that will accrue to the lawyer in the event of settlement, trial or appeal;
the litigation & other expenses that will be deducted from any recovery; and, whether such expenses will be deducted before or after the contingent fee is calculated.
[5] V.R.Pr.C. 1.15(d) states that “contingent fees are not forbidden in domestic relations matters which involve the collection of (i) spousal maintenance or property division after a judgement is entered; or (ii) child support and maintenance supplement arrearages due after final judgment, provided that the court approves the reasonableness of the fee agreement.”