Legal Ethics

The “F” Word: The Good, the Bad, and the Ugly of Flat Fees

December 13, 2017

By: Marissa C. Marxen

Marxen Law does not accept flat fee cases, and this article details why you should be skeptical of attorneys that do accept such cases. Flat fees are a “dirty little secret” of sorts for the legal community that no one wants to discuss. In fact, many attorneys may not want you to know or understand how they really work. That being said, there are exceptions to every rule, and sometimes, flat fees may be a great option, and many attorneys handle flat fees ethically. The problem is that it can be very difficult to know whether or not your attorney is one of those ethical attorneys until it is too late.

There are three main fee arrangements offered by attorneys, and the below chart contains a brief, general description of those fee arrangements as well as their corresponding pros and cons.

The Benefit of Capping Your Legal Fees is Probably Not Worth the Downsides

As discussed above, flat fees provide a great benefit to clients of “capping” legal fees, which is why many insurance carriers now demand that law firms handle cases on a fixed fee basis if they want the carrier’s business. While flat fees may work for some matters, like the preparation of a will, where (1) opposing counsel is not involved and (2) the attorney and the client control the time and issues involved, they may not work for others. For example, even with a prenuptial agreement, each spouse needs separate counsel, so it can be very difficult to predict how long the preparing the agreement will take, and as a result, how much the fee should be. If both parties agree on all the terms, a prenuptial agreement could take 4 hours. If the parties disagree on what the agreement should cover, it could take 10-15 hours. If that occurs, do you really want your attorney thinking, “My profit is already out the door. I need to get this done as quickly as possible because it’s taking longer than expected”? Now, that does not mean that type of attitude is appropriate or ethical. It’s not, and any time an attorney does not give 100% to your case merely because your case may not provide a profit to them, that attorney violates his or her duties of loyalty and competence to you as a client. However, any time an attorney feels discouraged and/or disincentivized to work on your case, the client suffers. As tempting as flat fee arrangements may be, I encourage you to resist the urge to “cap” fees by choosing a flat fee arrangement. The below chart shows how easily a flat fee rate of $4,500.00 can become a “losing” file for an attorney:

With a flat fee, every minute an attorney spends on your case “eats away” at the attorney’s profit. In some attorney’s minds (albeit unethical ones), this discourages them from doing necessary work on the case.

While Insurance Carriers Like Flat Fees, They May Not be in the Insured’s Best Interests

For the insured on an insurance policy where the insurance carrier wants to settle, but the insured feels they did nothing wrong and does not understand why the carrier will not “fight,” settlement is a double-edged sword. With flat fees, there is a risk that both the insurance carrier and its appointed defense counsel for the insured will be motivated to “churn and burn” the case (e.g., reach a quick settlement early on) even if the insured/client has no liability, and doing so may not be in the best interests of the insured/client.

On the one hand, frequently, even if the insured has no liability and obtains a complete defense verdict, it would cost the carrier $30,000.00 to take the case to trial (and most attorneys would consider that a very conservative estimate). Further, both the insurance carrier and insured run the risk of a jury finding the insured liable because juries are human and subject to error. If the jury returned a verdict against the insured, the insurance carrier would have to pay more than $30,000.00. Thus, the $30,000.00 figure becomes the “cost of defense,” or in more sinister terms, “extortion value” of the case—the plaintiff knows he or she can likely recover at least that amount because that is what the insurance carrier will have to pay to defend the case anyways.

On the other hand, the insurance carrier could pay $30,000.00 early on to settle the case, which is the estimated cost of fighting the case anyways and also avoids the risk of potentially having to pay more if a jury finds the insured liable. However, many insureds experience frustration and anger when their insurance carrier wants to pay to settle a frivolous and/or unmeritorious lawsuit, and for good reason. Not only may a settlement harm the insured’s reputation, but it also jeopardizes the insured’s ability to obtain insurance in the future, including by potentially raising the cost of obtaining insurance. Further, insurance carriers do not have much incentive to consider the insured’s concerns over the insured’s future insurability when resolving claims. (See, e.g., Hurvitz v. Hoefflin (2000) 109 Cal.App.4th 918, 929-30 [noting that general liability insurers are unlikely to face bad faith liability for settlements that have such effects].)

With flat fees, the insurance carrier knows its cost of defending the case will not exceed $X amount. However, insurance carriers like flat fees because they benefit carriers who handle voluminous amounts of claims, many of which might cost the carriers a lot more money without the “cap” on fees provided by flat fees. Whenever a flat fee case ends up nearing or proceeding to trial, the insurance carrier usually got a great bargain on attorneys’ fees, while the law firm typically takes a loss.

While some law firms make money off of flat fee programs, they also lose money off of them. Many insurance carriers provide the main source of business for certain firms and may require those firms to accept all cases on a flat fee basis. This benefits no one—the insurance carrier, insured, and law firm all lose when flat fees are agreed to before conducting an independent analysis of potential liability, potential settlement amounts, and the anticipated cost of defense. Where flat fees are “blindly” agreed to without conducting this analysis, then, the insured/client may end up in a situation where the cost of defense greatly exceeds any profit the law firm could expect to make off of the case, so the law firm begins to learn relatively early on that the case is a “losing case.” This may (even though ethically, it should not) cause the law firm to realize the insurance carrier is going to have to pay a significant settlement no matter how much the law firm puts up a fight. As a result, the law firm, which knows they are not going to make a profit, may view “putting up a fight” as futile. This, of course, is wrong and unethical because attorneys always have a duty to zealously defend their clients. However, the unfortunate reality is that it happens. In fact, many insurance carriers and/or law firms offer bonuses to attorneys who resolve flat fee cases within a certain period of time. (See, e.g., Crowell & Moring and Association of Corporate Counsel, “Handbook for Value-Based Billing Engagements” at p. 17, http://www.acc.com/advocacy/valuechallenge/toolkit/loader.cfm?csModule=security/getfile&pageid=1309263&page=/legalresources/resource.cfm&qstring=show=1309263&title=Guide%20to%20Value%20Based%20Billing&recorded=1.) These incentives may encourage attorneys to avoid time consuming litigation tasks such as participating in discover or even attending hearings and/or mediations. In other words, the attorneys’ bonuses are on the line, and if the attorney works “too much” on a case, he or she loses the bonus. Such a bonus scheme is highly problematic and is discussed in further detail below.

The California State Bar’s Opinions on Flat Fees

In speaking with the California State Bar (the “Bar”) regarding flat fee programs, the representative noted several problems with flat fees.

First, in some cases, law firms charge a flat or fixed rate of $X amount, but it is not for enumerated services (e.g., drafting a will). Rather, the fee is structured so that the attorney earns $X amount if the case settles within a certain period of time (e.g., the first six months), a second installment of $X amount if it stills within the next period of time (e.g., between six months and a year), and a third installment of $X amount if the case settles between the second period of time and trial. Further, the attorney still bills time. In this scenario, the fee is really an “advanced fee” not a “flat fee” because (1) the fee is not for specific services (e.g., doing a motion or drafting a contract) but rather general service covering a specific period of time and (2) the attorney is still billing time.

Rule 4-100 of the Rules of Professional Conduct, subdivision (A), fn. 1, however, requires “[a]ll funds received or held for the benefit of clients by a member or law firm, including advances for costs and expenses” to be deposited in a client trust account. As a result, a problem arises because true “flat fees” are earned upon receipt, the attorney does not need to bill for his or her time, the fee need not be deposited in the attorney’s client trust account, and the fee may be deposited directly into the firm’s operating account. (San Francisco Bar Opinion 1980-1 [“When the client pays the attorney a fixed fee for services to be performed, the fee belongs to the attorney, and the attorney is obligated to render services to the client”].) However, with an advanced fee, the fee has not been “earned” yet at the time it is paid, so it should be placed in a client trust account, but frequently, is not. The Bar has made clear that the name of a fee arrangement—whether a flat fee or advanced fee—does not matter; rather, how it is handled matters. It has also made clear that flat or fixed fees should not be deposited in a trustee savings or checking account, but rather should be placed in the firm’s general account. However, if the attorney fails to produce the product contracted for in exchange for payment of the fee (i.e., render services the attorney promised to render), the attorney must refund any portion of unearned fees to the client. (Ibid.)

For example, in Baranowski v. State Bar (1979) 24 Cal.App. 3d 153, the court noted that Rule 4-100 does not expressly deal with “advance legal fees.” The court distinguished between a retainer, where a client pays a sum of money to secure an attorney’s availability for a given period of time and is earned when paid, and an advanced fee, which qualifies as payment “for the performance of a particular legal service.” (Id. at p. 164 [holding that advanced fees are not “earned” until services are actually performed, and as a result, “flat or fixed advance fee payments are funds held by an attorney in trust ‘for the benefit of clients’ within the meaning of rule 8-101 until the services are performed and, thus, the fees ‘earned’”].) In another case, T & R Foods, Inc. v. Rose (1996) 47 Cal.App.4th Supp. 1, 6, the court ordered return of the unused portion of an advanced fee retainer where the client was charged a “non-refundable” advanced fee retainer, later terminated the attorney, and demanded the unused portion of the fee. The court ordered the refund due to the fact that the attorney had placed the fee in the client trust fund account and billed against it. (Ibid.) As a result, the fee was considered an advanced fee retainer rather than a “true retainer,” and the client was entitled to a refund for any unearned fees. (See, e.g., Rule 3-700 of the California Rules of Professional Conduct, subd. (D), (2) [while an attorney whose employment has been terminated must promptly refund any part of an advanced fee that has not yet been earned, that is not the case for “a true retainer fee which is paid solely for the purpose of ensuring the availability of the member for the matter”].) Thus, where flat fee agreements are for a “stage” of litigation, such as all initial pleadings, and the attorney still bills time, in theory, if the attorney resolves the matter before filing any initial pleadings, the insurance carrier and/or client may be entitled to a partial refund of the fee paid.

A second problem arises where attorneys receive bonuses, whether from the insurance carrier or the law firm, to resolve a case within a certain number of days or hours. First, this may be viewed as delaying suit for the attorney’s gain if the attorney is not taking necessary litigation steps (e.g., noticing depositions and/or propounding discovery) in order to try and reach a settlement before spending billable time litigating the case. (See, .e.g., Bus. & Prof. Code, § 6128 [providing that “[e]very attorney is guilty of a misdemeanor” if he or she, inter alia, willfully (1) “delays his client’s suit with a view to his own gain” or (2) “receives any money or allowance for or on account of money which he has not laid out or become answerable for”].) Any attorney violation section 6128 of the California Business and Professions Code, may be punished by “imprisonment in the county jail not exceeding six months, or by a fine not exceeding two thousand five hundred dollars ($2,500), or by both.” Further, according to the Bar, where law firms encourage attorneys to bill as little as possible on flat fees to maximize profits, this could be construed as soliciting a violation of the Rules of Professional Conduct. (See Rules of Prof. Conduct, Rule 1-120 [providing that a member of the bar may “not knowingly assist in, solicit, or induce any violation of these rules or the State Bar Act”]; Rule 3-110, subd. (A) [“A member shall not intentionally, recklessly, or repeatedly fail to perform legal services with competence”].)

Finally, where the attorney succeeds in making a profit on the flat fee by resolving a case extremely early on in litigation, the attorneys runs the risk of the fee being deemed unconscionable. (Rules of Prof. Conduct, Rule 4-200, subd. (A) [“A member shall not enter into an agreement for, charge, or collect an illegal or unconscionable fee”].) Unconscionability is “determined on the basis of all the facts and circumstances existing at the time the agreement is entered into except where the parties contemplate that the fee will be affected by later events.” (Rules of Prof. Conduct, Rule 4-200, subd. (B).) “[I]n determining the conscionability of a fee,” several factors are considered, including but not limited to the following: (1) “[t]he amount of the fee in proportion to the value of the services performed,” (2) “[t]he amount involved and the results obtained,” (3) “[t]he time limitations imposed by the client or by the circumstances,” (4) “[w]hether the fee is fixed or contingent,” (5) “[t]he time and labor required,” and/or (6) “[t]he informed consent of the client to the fee.” (Rules of Prof. Conduct, Rule 4-200, subd. (B) (1), (5), (6), (9)-(11).) Based upon the aforementioned factors, if an attorney earns, for example, a $10,000.00 flat fee for handling the initial phase of litigation and reaches a settlement within five hours of receiving the file, the amount involved ($10,000.00, or 67 hours’ worth of attorney time) is likely unconscionable for the settlement given the time and labor involved, unless it was a “phenomenal” settlement.

Conclusion

Flat fees may be a “dirty little secret,” but there are attorneys who handle flat fees ethically. However, unless you know and trust your attorney, you should approach flat fees with skepticism, request assurance from your attorney that he or she has no intention of cutting corners merely because the case is a flat fee, and follow the status of your case to ensure the attorney is “working your file.” At the end of the day, only an hourly rate will guarantee your attorney will have no reluctance to perform necessary work, and you can always request updates on the amount billed to avoid a “surprise” bill far beyond your expectations. You can also request a fee agreement with a cap, pursuant to which, the attorney bills you at an hourly rate but agrees not to exceed $X amount in legal fees without notifying you first.

Even though Marxen Law does not offer flat fees, we are always willing to work with our clients to try and make our legal services affordable and offer competitive hourly rates. Please feel free to contact us at any time to discuss your case.