Sep. 28, 2018
Tips for attorneys who are addressing disputes over advance fees
Given the requirement to promptly refund unearned advance fees, once the disputed funds are identified and segregated, lawyers should move diligently to resolve the matter.
In the private sector, the typical transactional model between a lawyer and a client is that the lawyer provides legal services and, in exchange, the client provides payment. Often, as security for the obligation to pay, lawyers request and clients provide advance fees, which are then placed into the lawyer's trust account until the fees are earned. Yet sometimes, once the legal services are provided, for the first time, clients dispute the amount of fees being charged. This may be either because of the results of the lawyer's services, or in spite of them. Regardless of the reason, that circumstance triggers a number of issues for lawyers to address.
In such instances, a lawyer's obligations start with properly handling the funds that the client has already paid. Current Rule of Professional Conduct 3-700(D)(2) provides that, following termination, lawyers must promptly refund any part of a fee paid in advance that has not been earned. This requirement will carry over under new Rule 1.16(e)(2). It is a relatively simple concept to adhere to when there is no dispute regarding what has been earned, and what is unearned. In such cases, lawyers move the fees into their operating accounts when they are earned and then refund to the clients (or the payers, if no alternative agreement has been reached) any unearned amounts.
But when there is a dispute regarding how much is earned, the lawyers do not have a definitive answer regarding how much to refund. In those cases, lawyers should refund any amounts over which there is no controversy, retain any undisputed fees, and then, pursuant to Rule of Professional Conduct 4-100(A)(2) (and new Rule 1.15(c)(2)), hold the disputed sums in the client trust account until the dispute is resolved.
Given the requirement to promptly refund unearned advance fees, once the disputed funds are identified and segregated, lawyers should move diligently to resolve the matter. There are several things that lawyers should keep in mind during this process.
First, it makes sense to analyze the ability to prevail on a fee dispute. Doing so may lead to a conclusion that there really should not be a dispute at all, or that the lawyer should, in fact, refund an additional portion consistent with a client's request. This exercise may involve more than looking at applying the engagement agreement's terms to the services provided. Although often serving as great evidence of what has been earned, an engagement agreement does not necessarily establish that fact. Enforcement of the contract's provisions may be limited to the extent that they were fairly negotiated and do not seek payment of unconscionable fees.
Of note, such an analysis applies unilaterally. Whereas a client's promises to a lawyer are generally reviewed for conscionability, lawyers will not likely receive relief from terms that weigh heavily in the clients' favor. Rather, they will typically be limited to what they bargained for, without any "bonuses" beyond that.
As part of this process, after reviewing the contract, lawyers should assess their bills, time sheets, and other correspondence they have provided to their clients. These items will be reviewed critically when determining conscionability. Many lawyers who bill on flat fee or contingency matters elect against keeping time records. But, whereas time records may not be required, they often provide useful evidence in fee disputes where conscionability is an issue. Whether analyzing under Rule of Professional Conduct 4-200(B) or new Rule 1.5(b), factors include the skill required to address the novelty and difficulty of questions involved, time limitations imposed on the lawyer, and the time and labor required. Detailed contemporaneous records on tasks performed throughout the representation are helpful in addressing these factors.
Of course, while time spent is not the only factor considered to determine the reasonableness of the fee, it is one of the most important. Where there are few or no time records, lawyers should look for alternative ways, such as filings, transcripts, drafts, or other documents that reflect the amount of work put into the matter. To the extent that the fees seem out of line with the work employed, the other factors in Rule 4-200(B) or new Rule 1.5(b) should be evaluated to determine whether the client should receive more of a refund.
Finally, lawyers should determine whether the methodology they employ to resolve the dispute is appropriate. If bringing an action to resolve fees, lawyers must comply with Business and Professions Code section 6201, subdivision (a), and provide notice of the right to arbitration. Failure to do so could give grounds for the action to be dismissed. And lawyers should also avoid bringing an action for fees in the underlying matter unless permitted by statute.
Sometimes, lawyers first learn about a problem with the attorney-client relationship for the first time as it is ending. This often arises in the form of a fee dispute. There are a number of different forums to resolve such issues. But it is important for lawyers to handle the situation adroitly so that they may avoid any unnecessary complications that may arise out of the dispute. Two ways of doing so is to make sure they handle any advance fees properly and to take steps to resolve the matter promptly.