The Indiana Supreme Court finally gave some direction to the profession and the public about fees in the recent O’Farrell case. It is about time.

For years (since Kendall at least) the Court has punished lawyers for trying to collect “non-refundable retainers.” The idea that a client can pay a “retainer” and yet then forfeit the fees paid for the retainer without getting full value of the work performed is just not going to be allowed in Indiana. Thank goodness for that. So, it is time to remove the offending words, and more importantly the concept, from engagment agreements. If a client pays a fee and then the lawyer does not complete the legal work, for any reason, the client is entitled to some or all of the fees back.

That is not the rule is when the client agrees to a specific type of different arrangement, for other value received, under a “general retainer” which is most often (meaning only occasionally) used in business law matters. By definition a general retainer makes the lawyer unavailable to other clients in an area of law (could be business or family among others0, and creates an expectation of the lawyer becoming conversant in the legal issues for the client. A general retainer is considered “earned when paid” since the payment is not a payment for specific future efforts by the lawyer.

One example from the 1980s was legendary lawyer Joe Jamail, a litigator who was hired by a number of companies solely to assure the company that Jamail would not work for anyone who might be interested in engaging in a hostile acquisition. Jamail was able to command large annual fees due to his extraordinary success in hostile business acquistion cases. The client knew what it was paying for.

A second form of engagement is “advance fee” or a security fee. The client provides funds that must be placed in the law firm’s trust account. The purpose is to have a pool of funds available to pay fees to the lawyer as they are earned, or to be returned to the client. Most lawyers have had clients with a case that looks good until all the evidence is found. As the case weakens, the client’s desire to pay may wane as fast as the quality of the case fails. As Jay Foonberg says in Foonberg’s Third Rule “Cash Up Front”, because “The client who can’t or won’t pay at the beginning of the case is the same client who can’t or won’t pay at the end of the case.” The advance fee is the best protection against such a problem. The lawyer’s staff and landlord expect their payment, so the lawyer needs to protect herself from the fickle client.

The advance fee can be used with either a flat fee or an hourly fee, or some blend of the two fees. More on that later.

The third form of engagement is the flat fee. This is where the professional shows a high degree of professionalism to the client. This is evidence of experience, of confidence, and of mastery of the issue the client has. As a result it carries the most risk for both the lawyer and client. The risks are that the lawyer will underestimate the efforts needed to resolve the client’s concerns, and the risk that the lawyer will overestimate the efforts needed. In future posts we will discuss risks and rewards of flat fees, and the need to engage in the fee setting with integrity.

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