Flat fees can provide lawyers with an easier way to charge for their services, but they can also create difficult questions when a client asks for a refund. This is especially true when the client terminates the relationship before the end of the representation.
Some lawyers incorrectly assume the flat fee is earned when paid and therefore no part of the fee must ever be returned, even if the client terminates the representation before the matter concludes. However, a flat fee is not earned until the representation ends and all work has been completed to meet the client’s objective. See the State Bar Texas publication, “A Lawyer’s Guide to Trust Accounts”. This is true even if the lawyer calls the fee “fixed” or “nonrefundable,” or includes language in the representation agreement that the fee is “earned upon receipt.” A flat fee tells the client how much the representation will cost; not when that fee becomes earned.
Flat fees that have not yet been earned are client funds and must remain the lawyer’s trust account until the scope of the representation ends. See, Texas Professional Ethics Committee Opinions 611 and 701. The only caveat to this is when the fee agreement establishes specific benchmarks during the representation for when the fee is earned. See, “A Lawyer’s Guide to Trust Accounts”.
When a client terminates the representation before the matter has concluded, the lawyer must determine whether there is any portion of the flat fee that is unearned and which must be returned to the client in accordance with Texas Disciplinary Rule of Professional Conduct 1.16(d). Usually, this is done by determining the work performed to date, the time spent for that work, and the hourly rate the lawyer would charge for those services had it not been a flat fee matter.
Below are ways to approach the most typical scenarios that can arise in the context of flat fees and demands for refunds:
1. The client terminates the representation before completion, and only part of the flat fee has been earned. Suppose the engagement agreement provides for a $10,000 flat fee but also states that, for purposes of determining the amount earned if the representation ends early, services will be valued at $400 per hour. If the client terminates the representation after the lawyer has reasonably performed 15 hours of work, the lawyer has earned $6,000 under the agreed methodology and generally should return the remaining $4,000. The lawyer should provide the client with an accounting showing how the earned portion was calculated and promptly return the undisputed unearned balance. TDRPC 1.15(b) requires a lawyer to promptly deliver funds the client is entitled to receive and, upon request, provide a full accounting. If the client disputes the lawyer’s entitlement to some or all of the $6,000, the disputed portion should remain in trust until the dispute is resolved. See, TDRPC 1.15(c).
2. The client terminates the representation before completion, but the entire flat fee has already been earned. The answer can be different if the lawyer’s work before termination, measured under the methodology established in the engagement agreement, equals or exceeds the flat fee. For example, if the client paid a $10,000 flat fee and the agreement provides that the amount earned upon early termination will be determined at $400 per hour, 25 hours of qualifying work would equal the entire $10,000 fee. In that situation, there is no unearned fee to refund merely because the client terminated the representation before its anticipated conclusion. The lawyer should nevertheless carefully document the services performed and provide an accounting supporting the determination. Importantly, the fee must still comply with TDRPC 1.04‘s prohibition against illegal or unconscionable fees, and the lawyer should not manufacture or inflate time after a refund request simply to justify retaining the flat fee.
3. The representation has been completed, but the client nevertheless demands that the flat fee be returned. If the lawyer completed the agreed scope of representation and the flat fee has been fully earned under the engagement agreement, a client’s subsequent demand for a refund does not, by itself, convert an earned fee into an unearned one. The lawyer does not necessarily have to refund a flat fee which has been earned simply because the client is dissatisfied or demands its return. The lawyer should review the engagement agreement, confirm that the agreed services were completed, and respond in writing explaining why the fee was earned. The fee must, of course, remain permissible under Rule 1.04, which prohibits an illegal or unconscionable fee.
The best way to prevent these disputes is to have a written flat-fee agreement with the client at the outset that clearly identifies the scope of the representation, the amount of the flat fee, when and how portions of the fee become earned, and specify how the earned portion will be calculated if the representation ends early. The “A Lawyer’s Guide to Trust Accounts” recommends establishing earning benchmarks in the fee agreement. Until funds are earned, they should remain in the lawyer’s trust account; once earned, they may be transferred to the lawyer’s operating account.
TLI has several forms available in our form bank that address the flat fee situations described above: 1) sample flat fee agreements (criminal and immigration); 2) a sample letter to the client regarding the return of the unearned portion of the flat fee; 3) a sample letter to the client regarding the return of the unearned portion of the flat fee based on benchmarks; 4) a sample letter to the client when there are no unearned fees to return; and 5) a sample letter to the client when the representation concluded and the flat fee was fully earned. Use the code provided in the weekly Top Tip email and in your renewal packet to gain access to the forms in the form bank.