Understanding client engagements and compensation structures

I am a collector of fee agreements. Admittedly, it's an odd hobby. When working as a trial counsel at the State Bar, I became fascinated by the many ways lawyers memorialize their client engagements. I've seen everything from the backside of a business card to detailed, small-font tomes that go on for 17 pages or more. I had plenty of examples, as the fee agreement is the first document investigators ask for when opening an investigation. The inquiry makes sense. The fee agreement outlines everyone's expectations-the scope of the engagement, the identity of the client, who is paying for the services, and how much they will cost. It is a critical document when a dispute arises.

First, who is the client? Rule 1.13 of the Rules of Professional Conduct addresses a lawyer representing organizations. Though many lawyers are familiar with issues arising when representing a corporation, limited liability companies and partnerships present similar concerns. Check the operating agreement to understand who has authority to act for the entity. If you are representing both an LLC and a managing member or members, consider including a potential conflicts waiver in the agreement. When representing a non-profit or a mutual benefit corporation, such as a homeowner's association, clarify who will be giving direction to the lawyer and who is entitled to progress updates. Criminal defense attorneys should enter into fee agreements with the accused, not with family members.

Ancillary to the need to identify the client, is determining who is paying the fees. Rule 1.8.6 requires the client's informed written consent before accepting fees from a third party. This is a common pitfall for criminal defense attorneys where family members generally pay the bills. The issue also arises with employer benefit group legal service plans. When legal fees are paid by a third party, the lawyer must get informed written consent from the client.

Carefully identify the scope of services. When working with a flat fee arrangement, identifying the scope is critical. Without clarity, lawyers easily find themselves obligated to perform services beyond what they anticipated when setting the flat fee. Equally as important as identifying what is included in the scope of employment is clarifying what is excluded from the scope. For example, family law attorneys often identify the scope of services to include obtaining a dissolution of marriage. Consider specifically excluding QDROs to avoid an uncomfortable conversation with a client about paying extra for a specialist. The better personal injury fee agreements specifically exclude providing advice to the client regarding the tax implications of settlements.

Per Business and Professions Code sections 6147 and 6148, fee agreements must set forth the basis for compensation. There are four main types of fee arrangements: flat fee, hourly, contingency, and that unicorn of fee arrangements, the true retainer. Other than a true retainer, attorneys fees are never earned on receipt, i.e., they are never nonrefundable. Undisputed, unearned legal fees must be returned to the client promptly. Include a provision in the fee agreement setting an hourly billing rate regardless of the compensation structure. That way, the parties have agreed to an hourly rate if it becomes necessary to determine a quantum meruit recovery of fees.

Flat fee agreements take several forms. Lawyers can charge a flat fee in advance, a flat fee upon completion, or a flat fee broken into milestones. Rule 1.15 permits lawyers to place flat fees paid in advance directly into their operating accounts under specific conditions. The biggest condition being that the client has to be informed in writing that they can insist that a payment of advance flat fees be placed in trust. Whether the client must give informed written consent depends on the amount of the fee. Regardless of when the flat fee is paid by the client, if there is a failure to complete performance, then the unearned portion of the flat fee is refundable.

Hourly fee agreements are the traditional fee arrangement. The client agrees to a rate and the lawyer tracks the time spent on the matter. A client may or may not pay advances against fees or costs. Any advances must be deposited into a trust account. The advance may or may not be replenished throughout the representation.

The contingency fee arrangement, or percentage of recovery, is a common basis for compensation in some practice areas. The product of public policy providing access to justice for individuals who would not otherwise be able to afford legal representation, contingency fee agreements are highly regulated and are beyond the scope offered here. Lawyers utilizing contingency fee agreements must keep abreast of changes in the law and regulations governing these arrangements. Note that disputes commonly arise when a client changes lawyers mid-representation. The first lawyer is entitled to a portion of the ultimate recovery. But that recovery is now based on a reasonable fee rather than the agreed percentage. Again, the best practice is to set a per hour rate in the fee agreement. Tracking time spent working on the case is also useful for establishing a reasonable fee.

A true retainer agreement is a rare thing. This basis for compensation is covered in Rule 1.5(d). In a true retainer, the client is purchasing a lawyer's availability for a set period. The agreement has a start date and an end date during which the lawyer will be available to the client. It is not an agreement for legal services. If the client uses the lawyer's services during the retainer period, then fees for those services are charged separately. A true retainer is non-refundable, but only if the client gives informed written consent.

Other considerations: the fee agreement must disclose if the lawyer does not maintain malpractice coverage (Rule 1.4.2). Keep in mind that Corporations Code section 16956 requires limited liability partnerships and law corporations to maintain insurance or otherwise make arrangements for financial responsibility. Finally, the client must be provided a duplicate copy of the fee agreement.

Although not required by the Rules, it is good practice to disclose that the client is entitled to mandatory fee arbitration in the event of a fee dispute. Also, providing for handling the client file at the conclusion of the representation, i.e., disclosing the office records retention policy if the client does not request a copy of their file, can avoid headaches down the road. A final practice pointer, I always advise lawyers to review their fee agreements periodically to ensure documents meet current regulations. Consider performing a "document audit" every three years timed to coincide with your MCLE compliance. Consider earning some continuing education hours by taking a course on law practice management.

Christine C. Rosskopfis senior counsel at Klinedinst PC. The Klinedinst PC Ethics and Risk Management Team writes a monthly Practical Ethics Column to assist California Practitioners understand cutting edge ethics issues, manage risk, and ensure compliance. More about the Team and the authors--Heather Rosing, Dave Majchrzak, Christine Rosskopf, and Joanna Storey-- can be found here: https://klinedinstlaw.com/practice/legal-ethics-law-firm-risk-management.