Calculating Refunds in Earned Upon Receipt Fee Arrangements

Earned upon receipt fee agreements offer certainty to lawyers and clients: work will not commence unless the fee is paid and the client knows exactly how much the legal work will cost.  But what happens if the services contemplated by the fee are not performed?  Oregon Formal Opinion 2005-151 gives this guidance:

A lawyer who does not complete all contemplated work will generally be unable to retain the full fixed fee. This is consistent with In re Thomas, 294 Or 505, 526, 659 P2d 960 (1983), in which the court stated: “It would appear that any fee that is collected for services that is not earned is clearly excessive regardless of the amount.” Moreover, Oregon RPC 1.5(c)(3)(ii) requires the lawyer to inform the client in the written fee agreement that the client may be entitled to a refund of all or part of the fee if the services for which the fee was paid are not completed…

Accordingly, even a fee designated as “nonrefundable” is subject to refund if the specified services are not performed.  Thus, designation of a prepaid fixed fee as “nonrefundable” may be misleading, if not false, in violation of Oregon RPC 8.4(a)(3) (prohibiting conduct involving “dishonesty, fraud, deceit or misrepresentation that reflects adversely on the lawyer’s fitness to practice law”).

This begs the question: how should the client’s refund be calculated?  Roughly speaking, the fee must be apportioned based on the work completed.  If you finish half the agreed upon work, return half the agreed upon fee.

Perhaps the best solution is to address this issue up front in your fee agreement. Many lawyers base refunds on time spent multiplied by the lawyer’s hourly rate.  When using “time spent” as a basis for calculating a refund, keep in mind that the overall fee must still be reasonable.  See Amber Hollister, How Much Do I Owe You?: “New” Guidelines for Fixed and So-called Nonrefundable Fees.

Copyright 2012 Beverly Michaelis

Supreme Court to Consider Change to Earned on Receipt Fees

On October 29, 2010 the Oregon State Bar House of Delegates voted 118-10 to amend Oregon Rules of Professional Conduct 1.5 and 1.15 regarding “earned upon receipt” fees.

As noted in a prior post, the proposed changes would explicitly require a written fee agreement informing the client:

  • The funds will not be deposited into the lawyer trust account; and
  • The client may discharge the lawyer at any time and in that event the lawyer may be required to refund all or part of the fee if the services for which the fee was paid have not been completed.

Additionally, ORPC 1.15(c) would be amended to state:

(c) A lawyer shall deposit into a lawyer trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred, unless the fee is denominated as “earned on receipt,”“nonrefundable” or similar terms and complies with Rule 1.5(c)(3).[Proposed language in bold.]

While existing case law and OSB Formal Ethics Opinions already support these requirements, General CounselDisciplinary Counsel, and the BOG have found them “elusive to many practitioners.”

The proposed rule change will now be submitted to the Supreme Court for final approval.

Copyright 2010 Beverly Michaelis

Accounts Receivable Do Not Improve Like Fine Wine

Unlike a fine cabernet sauvignon, your accounts receivable are at their best when less than 30 days old – and they definitely do not improve with age. Quite the opposite, in fact. The older you allow your accounts receivable to become, the more they cost you and the less likely your chance of 100% recovery. The trick is to keep from building up past-due accounts in the first place. Stay on top of your accounts receivable and keep that cash flow pouring into your bank account.

I couldn’t have said it any better!

This quote was offered by Ann Guinn in her presentation, Maximizing Firm Profits in a Challenging Economy, at the 2010 ABA Annual Meeting.  Ann is the author of Minding Your Own Business: The Solo and Small Firm Lawyer’s Guide to a Profitable Practice, published by the ABA in May 2010. 

Ann’s presentation was terrific.  Her advice was realistic, no-nonsense, and on-point.  With my own spin, here is some of what she had to say:

  • Collecting accounts receivable begins long before a potential client crosses your doorstep. The first step is to get a clear picture of your firm’s financial health.  For example, do you know the cost and profitability of your practice areas?  Your overhead-to-income percentage?  Your realization rates (percentage of fees actually collected)?  Your effective rate (your true hourly rate considering your realization rate)?  This information is key to assessing profitability.  
  • Do you have a written business plan and budget?  Don’t fall into the trap of thinking you don’t need these tools because you’re not applying for a loan or line of credit.  At all times you should know where you’re going, why, and how much it will cost to get there.
  • Properly screen clients and their cases to ensure payment.  Many a collection problem can be traced back to a client or case the lawyer should never have taken.
  • Communicate billing practices and procedures at the outset of representation.  Clients are more likely to pay and less likely to dispute your bill if they understand what to expect.  How are costs and fees billed?  What is your billing cycle?  When is payment expected?  What will happen if payment is not received?  These and other billing questions can be addressed in a client brochure or handout.  The PLF offers a sample billing brochure for clients on the PLF Web site.  Select Practice Aids and Forms > Client Relations > Billing Info Brochure.
  • Get adequate retainers up front or collect earned upon receipt fees.  Getting money before you begin work on a case is a no-brainer.  However, if you compromise and enter into an agreement allowing the client to make incremental payments, then monitor the arrangement closely.  Hold clients accountable and be prepared to withdraw if they don’t keep up their end of the bargain. 
  • Put it in writing.  Even if you do an excellent job of explaining your billing practices and follow-up your discussion with a brochure, you should still have a written fee agreement. If you are collecting a fee earned upon receipt, you may soon be required to put your agreement in writing.
  • Capture all your billable time contemporaneously. Lawyers who record their time after the fact almost always shortchange themselves by underestimating how much time a task actually took.
  • Resist writing your time off.  Clients should see all the work and effort put in on their case.  If you elect to mark an item “no charge,” that’s your decision, but don’t deprive clients of the complete picture.   
  • Clients love detail!  Studies show the more detailed your billing statement, the less likely the client is to dispute it, and the more likely he or she will pay promptly.  Your bill isn’t just the amount due, it’s an opportunity to demonstrate the value of your services.
  • Instead of tracking what Guinn calls the 4 P’s – Postage, Phones, Photocopies, and Phaxes – considering charging a flat two or three percent of monthly fees to cover these expenses.  Incorporate this approach into your written fee agreement, and your billing just got substantially easier.
  • Bill promptly and on schedule. If accounting isn’t your forte, outsourcing to a competent bookkeeper may be just the ticket.  In any case, get those bills out the door.  Clients can’t pay you if they don’t know what they owe.
  • Have a collections policy in place and follow it.  The first step might be as simple as sending a re-bill noting that payment was not received as expected.  For example, if your clients are expected to pay within 30 days of the billing date and no payment is received by day 31, a re-bill should be issued.  If the re-bill does not result in payment, outline the next step to to be taken and when.
  • Review your aged accounts report weekly.  If you have accounts that are more than a year past due, Guinn recommends writing them off (or making one last effort to collect, then writing them off).  Any account that is more than 90 days past due should be on a payment plan.  According to Guinn, you should have no more than two months’ worth of revenues in outstanding receivables.  For example, if you average $10,000 in revenue each month, your receivables shouldn’t exceed $20,000.
  • Last but not least:  Avoid suing your client for fees.

Minding Your Own Business: The Solo and Small Firm Lawyer’s Guide to a Profitable Practice, can be purchased at a discount through the PLF.  From the PLF home page, select ABA Products under the Loss Prevention heading.

Copyright 2010 Beverly Michaelis

Earned Upon Receipt Fees – Proposed Rule Change

At the Board of Governors meeting last Friday, the BOG approved for referral to the House of Delegates three amendments to the Oregon Rules of Professional Conduct:

  • ORPC 1.5 and 1.15 relating to  fees earned upon receipt
  • ORPC 3.4 and 1.2 to prohibit violating or assisting a client to violate court rulings and standing rules
  • ORPC 3.3 to clarify the rule of candor

You can read more about the amendments to ORPC 3.4, 1.2, and 3.3 here, beginning at page 75 of the PDF.

Earned Upon Receipt Fees

The proposed changes to ORPC 1.5 and 1.15 would explicitly require a written fee agreement informing the client:

  • The funds will not be deposited into the lawyer trust account; and
  • The client may discharge the lawyer at any time and in that event the lawyer may be required to refund all or part of the fee if the services for which the fee was paid have not been completed.

Additionally, ORPC 1.15(c) would be amended to state:

(c) A lawyer shall deposit into a lawyer trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred, unless the fee is denominated as “earned on receipt,” “nonrefundable” or similar terms and complies with Rule 1.5(c)(3). [Proposed language in bold.]

While existing case law and OSB Formal Ethics Opinions already support these requirements, General Counsel, Disciplinary Counsel, and the BOG have found them “elusive to many practitioners.”

The House of Delegates is scheduled to meet on October 29, 2010.  It is not clear at this time whether the proposed amendments to the ORPCs, if adopted, would be effective immediately or at some future date.

Mandatory Ethics School

One other ethics development of note:  The bar is moving forward with a proposed Ethics School.  Attorneys who are sanctioned or suspended for ethics violations would be required to attend a one-day course of study on ethics issues prior to readmission to the bar.  Read more about the proposed Ethics School at page 84 of the BOG Meeting Agenda.

Copyright 2010 Beverly Michaelis