Attention all practicing attorneys in the District, there is a new rule for flat-fee agreements: “[A]ttorneys earn funds advanced on a flat-fee payment only when all the legal services pertaining to the flat fee are complete.”[1]
In its recent Opinion, the Court of Appeals revisited D.C. Rule of Professional Conduct 1.15 – Safekeeping Property, the rule that governs the use of flat-fee arrangements. Traditionally, under these types of fee agreements, a client advances an agreed-upon sum to the attorney, which the attorney then holds in a trust account until the fee is earned by the attorney. This is because the unearned fees and unincurred costs are considered property of the client until they are earned or incurred by the attorney.[2]
Recently, in In re Alexei, the Court of Appeals was faced with a critical question—at what point of an attorney’s representation are fees “earned?” Mr. Alexei, who had a $5,000 flat-fee agreement with his client, had periodically withdrawn portions of the flat-fee along the way as he performed legal work for his client. He argued “that attorneys may earn portions of the advance throughout the representation as they work toward their clients’ legal needs.” Bar Counsel had a different interpretation of Rule 1.15, arguing “that attorneys may earn advances on a flat fee only after they complete the entirety of the assigned task.”
The Court engaged in a lengthy discussion of its prior decision in In re Mance, in which it held that advanced payments on flat fees are client money and must be earned by the lawyer’s performance of legal services until it can be deposited into the attorney’s operating or personal account.[3] However, the Court pointed out that In re Mance did not answer the question posed in this case—whether performing legal services in flat fee cases “means the complete or partial performance of those services.” Thus, In re Alexi presented a case of first impression.
To address the novel issue, the Court held that under Rule 1.15, “as a default rule, attorneys earn funds advanced on a flat-fee payment only when all the legal services pertaining to the flat fee are complete.”[4] The Court offered three reasons to support its conclusion: “(1) it best fits the nature of a flat fee; (2) it places the onus to contract differently on the party generally best positioned to do so; and (3) it facilities clarity and better enforcement of the rules of professional conduct.” Id. at *15.
With respect to its first reason, the Court noted that flat-fee agreements are designed to “embrace all work to be done,” regardless of the simplicity or complexity. Id. It further observed that flat fees can be beneficial to both the client and the attorney because flat fees can help avoid disputes over hourly billing or rates. Id.
As to the second reason, the Court explained the default rule favors the client by clearly delineating that the advanced flat fees are the client’s property until the services the client contracted for are completed in full. Id. at 16. At the same time, lawyers and their clients may contract around the default rule. This will encourage attorneys to negotiate and draft their engagement agreements carefully and to include specific benchmarks or tasks that, upon completion, would permit fees to be deemed earned during the course of the representation. Id. at 16-17. To this end, the Court provided examples of how an attorney could specify “when and how” portions of the flat fee are earned. For example, the engagement agreement could specify that the attorney earns the flat fee at a set hourly rate up to but not exceeding the total flat fee or, alternatively, by attaching separate prices for the services or milestones within a representation that add up to the total flat fee. Id. at 21-22. Arrangements such as these that deviate from the default rule would still need to meet Rule 1.5(a)’s reasonableness requirement. Id. at 22. Alternatively, the attorney can obtain his or her client’s informed consent and draft the engagement agreement to treat any unearned fees as attorney property. Id. at 22. Under this approach, fees are still unearned until all legal services (or a contractually specified alternative arrangement) are completed. Id. at 22-23 However, with a client’s informed consent, the attorney may use the unearned fees “for personal ends because their client has allowed them to treat the funds as attorney property.” This course of conduct mandates compliance with the informed consent requirements detailed in In Re Mance. Id. at 23.
Finally, as to the third point, the Court reasoned that the default rule will better facilitate the enforcement of Rule 1.15 and avoid the situation where an attorney must attempt to retroactively calculate how much of an advanced fee was actually earned if the attorney-client relationship terminates early. Id. at 17. The Court observed that avoiding uncertainty and ambiguity about whether a portion of an advanced fee had been earned would circumvent potential disciplinary proceedings for misappropriation (which the Court noted almost always results in disbarment). Id. at 17-20.[5]
In light of the recent In re Alexei opinion, if you or your firm use flat fees, you should review your existing fee agreements in light of the Court’s decision. Unless your fee agreement specifically includes language authorizing partial collection of the advance fee based on tasks, milestones, or performance of specific activities during your representation, the entirety of the advance fee is considered your client’s property and must remain in your trust account until the full scope of the agreed upon legal services are performed, at which point the fee will be earned. It is anticipated that that DC Bar will further revise Rule 1.15 of the Rules of Professional Conduct to comport with the In re Alexei opinion in the near future.
[1] In re Alexei, No. 23-BG-0591, slip op. at *15 (D.C. Aug. 1, 2024) (emphasis added).
[2] See D.C. R. Prof’l Conduct 1.15(e) (“Advances of unearned fees and unincurred costs shall be treated as property of the client pursuant to paragraph (a) until earned or incurred unless the client gives informed consent to a different arrangement. Regardless of whether such consent is provided, Rule 1.16(d) applies to require the return of any unearned portion of advanced legal fees and unincurred costs at the termination of the lawyer’s services in accordance with Rule 1.16(d).”).
[3] In re Mance, 980 A.2d 1196 (D.C. 2009)
[4] See note 1.
[5] The Court noted that the more appropriate course to resolve the “client money versus attorney money” dispute is through an action for quantum meruit or, if agreed upon in the contract for legal services, through arbitration with the Attorney/Client Arbitration Board.
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