THE PERILS OF FLAT FEE AGREEMENTS UNDER THE NEW RULES OF PROFESSIONAL CONDUCT
By Erin Joyce
Erin was a State Bar prosecutor for over 18 years, and now specializes in State Bar defense, moral character determinations and ethics consultations. She practices in Pasadena.
With the adoption of the new Rules of Professional Conduct in November 2018, California joined the vast majority of jurisdictions which require attorneys to deposit all client monies, including advanced attorney fees, into a client trust account (CTA). Former Rule 4-100 only required deposits for costs to be deposited into a CTA. Best practices were to deposit advanced fees in a CTA, since such "funds belong in part to a client and in part presently or potentially to the member or the law firm" and could be properly be deposited into a CTA pursuant to former Rule 4-100(A)(2). An attorney always had the obligation to "[p]romptly refund any part of a fee paid in advance that has not been earned" under former Rule 3-700(D)(2), so having the funds in trust was the safest course. However, advanced fees did not have to be deposited into a CTA. Many attorneys did not routinely deposit advanced fees into a CTA. Now, advanced fees need to be deposited into a CTA pursuant to Rule 1.15, which covers safekeeping funds and property of client and other persons in almost all cases. Under Rule 1.5(d), an attorney need not deposit a true retainer in a CTA since a true retainer is not a payment for advanced fees, but instead a payment made to ensure an attorney's availability.
The only carve out for requiring advanced fees to be deposited into a CTA is for a flat fee, and then only in specific circumstances. Attorneys who routinely perform legal work on a fixed fee or flat fee basis need to pay special attention to Rule 1.15(b), so they do not run afoul of the new trust accounting rules. Rule 1.15(b) provides:
(b) Notwithstanding paragraph (a), a flat fee paid in advance for legal services may be deposited in a lawyer's or law firm's operating account, provided:
(1) the lawyer or law firm discloses to the client in writing that the client has a right under paragraph (a) to require that the flat fee be deposited in an identified trust account until the fee is earned, and that the client is entitled to a refund of any amount of the fee that has not been earned in the event the representation is terminated or the services for which the fee has been paid are not completed; and
(2) if the flat fee exceeds $1,000.00, the client's agreement to deposit the flat fee in the lawyer's operating account and the disclosures required by paragraph (b)(1) are set forth in a writing signed by the client.
Flat fees are appropriate in relatively simple matters such as a non-contested divorce or writing a basic trust. They can also work on more complex cases when the representation can be broken down into distinct segments or phases, such as an immigration case which clearly delineates the process for obtaining the visa, including the filing of the petition, the filing of the immigrant visa application, and the representation at the Consulate interview. Instead of one fee agreement stating a flat fee for these services, the attorney can break down each segment and charge a separate flat fee for each service.
The first important point for attorneys accepting flat fees under the new Rules of Professional Conduct is that flat fee agreements should be in writing, no matter the amount of the flat fee, since the attorney has to disclose in writing that the client could require the flat fee to be deposited into a CTA and that the client is entitled to a refund of any part of the flat fee which has not been earned. The attorney must make these written disclosures for any flat fee arrangement so the attorney should secure a written agreement to deposit the flat fee into the attorney's operating account for all flat fee cases when the attorney intends to use the operating account.
The other important provision is that the attorney should keep accurate time records on all flat fee cases since the attorney must be able to determine what part of the flat fee has been earned if the attorney is terminated prior to completing the legal services. A flat fee is not earned until full performance. Once the attorney has fully performed, the attorney has earned only the flat fee, not the value of all the time invested in the case.
Until the attorney has fully performed on a flat fee matter, the attorney is only entitled to quantum meruit, or the reasonable value of the services, and must provide an accounting on demand. Time records are invaluable to proving quantum meruit. However, for a flat fee arrangement, the time records will not be the final word on the reasonable value of the attorney's services even if the work performed on an hourly basis exceeded the flat fee. This is because the client did not enter into an hourly arrangement with the attorney, but an agreement for the attorney to fully perform the contracted services for a certain flat fee. If the attorney has not fully performed prior to termination, it is expected that the attorney has not fully earned the flat fee.
In determining the value of the attorney's services, the time spent by the attorney, how far along the work is on the client's matter, and how much is left to be completed to fully perform the contacted work are important factors to consider. For instance, an attorney who brought a criminal case all the way to a preliminary hearing who is terminated the night before is likely to be able to show the attorney fully earned the flat fee based on the hours worked and how far along the attorney advanced the client's matter. Conversely, an attorney who spent many hours completing a trademark application who did not yet submit the application to the U.S. Patent and Trademark Office will likely owe a refund if the flat fee agreement provided for the filing of the trademark application and the response to the first office action based on how far the representation had advanced at the time of termination.
An attorney who accepts flat fees for legal services needs to comply with Rule 1.15(b) to avoid potential trust accounting violations.
 (See Reynolds v. Sorosis Fruit Co.,133 Cal. 625, 628 (1901), "the fact that the services performed by [the attorney] were reasonably worth more than the price for which he agreed to perform them cannot be considered. If the services had proven to be much less than the parties had in mind, and had only been worth ten dollars, the defendant [client] would have been bound by its contract, and would have been liable for the four hundred dollars. The fact that [the attorney] made a bad bargain, and was compelled to do more than four hundred dollars' worth of labor, cannot relieve him of his contract.")
 In the Matter of Johnson, 4 Cal. State Bar Ct. Rptr. 179, 188-189 (Review Dept. 2000).