Money. Get back. I’m alright, Jack. Keep your hands off of my stack.
-Roger Waters—Pink Floyd-
Tennessee is pretty wide open when it comes to structuring legal fees for the representation of a client. Even as some states have prohibited certain types of fee structures, Tennessee has not outlawed any specific type of fee arrangement, although there are restrictions in the types of cases that can be taken in some instances.
The various types of fees include: referral fees, consultation fees, general retainers, flat fees, hourly fees, contingent fees, and hybrid fees which are a combination of two or more types of fees. Some fees can be non-refundable in whole or in part if handled appropriately. Each of these fee structures require attention to detail and an understanding of the proper treatment as it relates to deposit and transfer of funds. Communication with the client is also an essential part of any fee transaction.
The first rule is golden and must be adhered to in every instance with every fee. The fee must be reasonable. RPC 1.5(a) makes it clear that “[a] lawyer shall not make an agreement for, charge, or collect an unreasonable fee . . .” The Rule lists the following ten factors to be considered in determining the reasonableness of a fee:
(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;
(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
(3) the fee customarily charged in the locality for similar legal services;
(4) the amount involved and the results obtained;
(5) the time limitations imposed by the client or by the circumstances;
(6) the nature and length of the professional relationship with the client;
(7) the experience, reputation, and ability of the lawyer or lawyers performing the services;
(8) whether the fee is fixed or contingent;
(9) prior advertisements or statements by the lawyer with respect to the fees the lawyer charges; and
(10) whether the fee agreement is in writing.
It should be noted that Comment [1] to the Rule clarifies that such factors are not exclusive nor will each factor be relevant in each instance.
Referral Fees
A referral fee is a fee paid to a lawyer for referring a client to another lawyer. Let’s start with RPC 7.2(c) which states that “[a] lawyer shall not give anything of value to a person for recommending or publicizing the lawyer’s services” subject to certain exceptions which are irrelevant to this analysis. Wait a minute! The Tennessee Supreme Court ordered the deletion of that Rule effective March 12, 2021. What gives? Well, the language was effectively moved to RPC 7.3(f), so the prohibition still exists. Does that mean a lawyer can’t be compensated for referring a case to another lawyer? No . . . because lawyers are shrewd and there is another exception contained in a separate rule which would make payment of a referral fee ethically sound. RPC 1.5(e) allows a division of a fee between lawyers who are not in the same firm if they follow three steps: “(1) the division is in proportion to the services performed by each lawyer OR each lawyer assumes joint responsibility for the representation; (2) the client agrees to the arrangement, and the agreement is confirmed in writing; and (3) the total fee is reasonable.” The referring lawyer does not actually have to perform any legal services for the client if he or she is included in a joint representation agreement with the recipient lawyer, the agreement indicates that the fee will be shared by the lawyers, and the agreement is signed by the client. RPC 1.5, Note [7] states that “[i]t (the agreement) does not require disclosure to the client of the share that each lawyer is to receive.”
Consultation Fees
A consultation fee is a fee paid to a lawyer in exchange for his or her analysis and discussion of a legal matter. Some consultation fees are clearly limited to that purpose while others may lead to further representation by the lawyer. Lawyers recognize that their expertise and time is valuable and so may require clients to pay a consultation fee to render legal opinions about a matter. These fees are typically paid in advance, but some lawyers offer free consultations to their clients in the hope of taking on a new case. A legal consultation is a limited scope representation and is subject to RPC 1.2(a). The representation must be reasonable under the circumstances and the client must give informed consent, preferably in writing. Comment [7] to the Rule clarifies that if “a client’s objective is limited to securing general information about the law the client needs in order to handle a common and typically uncomplicated problem, the lawyer and client may agree that the lawyer’s services will be limited to a brief telephone consultation. Such a limitation, however, would not be reasonable if the time allotted was not sufficient to yield advice upon which the client could rely.” Additionally, legal consultations are of such limited duration that obtaining a written agreement from the client is not always feasible, but is required if the fee is to be non-refundable. Lastly, if the consultation fee is required to be paid in advance, it must be deposited into the lawyer’s trust account until the fee has been earned absent a written agreement signed by the client otherwise. This can be frustrating and cumbersome for lawyers, especially if the services are performed shortly after receipt of payment, but there is no exception in the Rule which would allow the deposit of an unearned fee into the attorney’s operating account. However, if the client is paying by check or cash, the funds could be kept in a lockbox prior to the next regular bank deposit and, if the consultation has been completed by then, the funds may be deposited into the lawyer’s operating account.
General Retainer Fees
A general retainer fee covers an attorney’s time for a designated period. This fee is often used when a client needs regular but limited services from an attorney on a recurring basis. This type of fee agreement generally allots a certain number of hours each month in which the attorney is available to provide legal advice and/or services to his or her client. This type of fee is generally paid by the client each month to secure such representation, and is often non-refundable as long as the signed writing requirement is met. Legal services expected to go beyond the designated period of time must be handled through a separate agreement.
Flat Fees
A flat fee is a sum certain fee charged to a client to carry out a legal representation from start to finish. Consumers of legal services can see the totality of the fee on the front end while lawyers can avoid keeping up with the billing required under an hourly fee structure. Flat fees can sometimes be advantageous to lawyers if a case is successfully resolved faster than expected, but can sometimes be advantageous to clients if a case takes longer than expected to complete. The fee should be deemed reasonable if it is based upon the reasonable time necessary to complete a particular case given the lawyer’s experience in handling similar matters. A flat fee can be non-refundable in whole or in part if the fee has been fully explained to the client and is memorialized in a signed agreement. In any event, the fee must be reasonable. Any portion of a flat fee which is not non-refundable must be deposited into the lawyer’s trust account. These fees may be withdrawn in stages during the representation until the legal services have been completed. The lawyer should inform the client each time a withdrawal is made so there is no misunderstanding about the application of the fees.
Hourly Fees
An hourly fee is the amount charged by a lawyer for one hour of his or her legal services or some fraction thereof. Hourly fees may be based upon numerous factors, including geographic location, experience in the legal profession, experience in a particular field of practice, and the complexity of a given matter. As with flat fees, a lawyer may require some portion of a fee paid in advance by a client to be non-refundable. This portion is considered fully earned and may be deposited directly into the lawyer’s operating account with the appropriately signed retainer agreement. The lawyer will give credit to the client for any fee paid in advance by billing against that amount until it is reduced to zero. All hourly fees in excess of that amount will be billed to the client. Lawyers may require the client to replenish fees when the balance gets below a certain dollar amount during the representation. This requirement is sometimes referred to as an “evergreen retainer”. These fees must be deposited into the trust account until earned unless otherwise specified in writing and signed by the client. Lawyers should also send billing invoices to the client in regular intervals to show an itemization of all legal services performed and the time spent and the fees associated with such work to satisfy the obligation of communication to the client. All billing invoices should include services performed during a particular period and are considered fully earned fees. These fees may be transferred to the operating account from the trust account if funds are available or deposited directly into the operating account if funds are received after the work is performed.
Contingent Fees
A contingent fee is a fixed fee dependent upon a particular outcome in a case. Contingent fees are typically based upon a percentage of the settlement funds recovered through negotiation or judgment. Contingent fees are prohibited in most domestic relations matters and criminal representation, but are routinely used in cases involving personal injury, workers compensation, and social security disability. The latter two examples include a statutory cap. Every contingent fee must be reasonably explained in a writing signed by the client. Any settlement of a contingent fee case requires the advanced approval by the client. It is best to get any settlement authority in writing when possible. Contingent settlements must be first deposited into the trust account before funds may be distributed. RPC 1.5(c) also requires the lawyer, at the conclusion of the case, to provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination. This statement should provide an itemized breakdown of all deductions from the settlement amount before disbursal to the client. Additionally, RPC 1.15(d) requires the lawyer to promptly notify any third party who has a just claim to proceeds of the settlement and to promptly deliver such funds to the third party. There may be a time, however, when a dispute arises as to who is entitled to funds in the trust account. This may be a dispute between the lawyer and client or third party. In such instance, RPC 1.15(d) requires that the funds remain in the trust account until the dispute is resolved. The lawyer may not unilaterally resolve the dispute, but must either reach an agreed settlement or should consider interpleading the funds with the court for a determination.
Hybrid Fees
Hybrid fees are merely a combination of two or more types of fee structures in a single agreement. For instance, an agreement could involve a flat fee through a particular stage of a case, and if the case goes beyond the specified stage, it would evolve into an hourly fee. Hybrid fees must adhere to the requirements of each type of fee used in the hybrid structure. It is always advisable to clearly explain the parameters of the fee in a writing signed by the client to avoid any misunderstanding.
As a reminder, spell out your fee agreement with clarity and specificity and make it a habit to obtain a signed agreement from your client in every instance. This will ensure protection of both attorney and client and will limit the possibility of risk and throbbing headaches down the road.