I am often asked questions on the Ethics Hotline about fees, and I frequently review lawyers’ written communications with their clients about fees. Because SCR 20:1.5 requires that certain information about fees be communicated to clients, lawyers commonly refer to these communications as “fee agreements,” even though the rule does not use that term. Lawyers also refer to these communications in various other ways, such as “engagement agreements,” “legal services agreements,” “representation agreements,” or “retainer agreements.”

In addition to the provisions that are required to be communicated to the client by SCR 20:1.5, there are provisions that are prohibited by other rules or should be avoided. Moreover, there are provisions based on other rules that are recommended to be communicated to the client.

In this article, I answer some of the frequently asked questions about fees and the information that must be communicated to the client under SCR 20:1.5 as well as questions about provisions that are prohibited or should be avoided in communications with clients. For ease of reference, I use the term “fee agreement” to refer to these communications. In a future article, I will discuss recommended provisions.

Advanced Fees, Retainers, and Flat Fees

Many of the frequently asked fee questions involve advanced fees, retainers, and flat fees.

Question: What is the difference between an “advanced fee” and a “retainer”?

Answer: An “advanced fee” is an amount paid for future legal services. A “retainer” is paid solely to secure the availability of the lawyer and not for any legal services.

An advanced fee is defined in SCR 20:1.0(ag) as “an amount paid to a lawyer in contemplation of future services, which will be earned at an agreed upon basis, whether hourly, flat, or another basis.” Any amount paid to a lawyer in contemplation of future services is an advanced fee regardless of whether that fee is characterized as an “advanced fee,” a “minimum fee,” a “retainer,” or any other term. Advanced fees must be reasonable under SCR 20:1.5(a), must be deposited in the lawyer’s trust account pursuant to SCR 20:1.5(f) or deposited in the lawyer’s business account in compliance with the alternative protection provisions of SCR 20:1.5(g), and must be refunded pursuant to SCR 20:1.16(d) if not earned.

A retainer is defined in SCR 20:1.0(mm) as “an amount paid specifically and solely to secure the availability of a lawyer”; it does not constitute payment for legal services, whether past, present, or future. Consequently, a retainer cannot be billed against for fees or costs. A retainer must be reasonable under SCR 20:1.5(a) and must be refunded pursuant to SCR 20:1.16(d) if not earned. A retainer is unearned, for example, if the lawyer cannot ensure availability because of a conflict. See Revised Wis. Ethics Op. E-93-4.

The Wisconsin Committee Comment to SCR 20:1.5 specifically cautions lawyers to distinguish between an advanced fee and a true retainer.

Question: How can a flat fee be an advanced fee? I thought flat fees were earned upon receipt.

Answer: Until it is earned, a flat fee is an advanced fee.

A flat fee is defined in SCR 20:1.0(dm) as “a fixed amount paid to a lawyer for specific, agreed-upon services, or for a fixed, agreed-upon stage in a representation, regardless of the time required of the lawyer to perform the service or reach the agreed-upon stage in the representation.” A flat fee “is not an advance against the lawyer’s hourly rate and may not be billed against at an hourly rate.” Consequently, if representation is terminated before the completion of the agreed-upon service, a lawyer may not use an hourly rate to determine the amount that must be refunded. Instead, the representation should be divided into units or tasks and each unit or task assigned a value. The value of the units or tasks that are not completed must be refunded to the client.

While SCR 20:1.0(dm) states that flat fees “become the property of the lawyer upon receipt,” this language does not mean that flat fees are earned upon receipt. (This language, which is the source of confusion, was included in the rule to protect unearned flat fees from confiscation in certain circumstances.) In fact, the rule states that flat fees are subject to the requirements of SCR 20:1.5(a), SCR 20:1.5(f) or (g), and SCR 20:1.16(d). In other words, the flat fees must be reasonable, must be deposited in the lawyer’s trust account or deposited in the lawyer’s business account in compliance with the alternative protection provisions, and must be refunded if not earned.

Information That Must Be Communicated to the Client

SCR 20:1.5 addresses seven specific circumstances in which certain information must be communicated to the client: 1) matters in which the total cost of representation, including attorney fees, is more than $1,000; 2) matters in which it is reasonably foreseeable that the total cost of representation, including attorney fees, will be $1,000 or less; 3) matters in which the fee is contingent on the outcome; 4) matters in which there are changes in the basis or rate of fees or expenses; 5) matters in which there are advanced fees; 6) matters in which there are advanced costs; and 7) matters in which there is a withdrawal of noncontingent fees from the trust account.

For each of these circumstances, the communication to the client has specific requirements. The following questions address each of these circumstances.

Question: What are the specific requirements for matters in which the total cost of representation, including attorney fees, is more than $1,000?

Answer: SCR 20:1.5(b)(1) and (2) govern this circumstance and establish five specific requirements.

1) The communication must be in writing, but the client is not required to sign it. See SCR 20:1.0(q) for a definition of writing.

2) The written communication must include the scope of the representation. While the rule does not require a particular degree of specificity, the description should be sufficient to identify the services for which the lawyer has been retained. For example, “legal representation for OWI” is not specific enough. A better description would be “legal representation through trial in connection with the pending criminal charge of third-offense OWI in Grant County.”

3) The written communication must include the basis or rate of the fee and expenses, except when the lawyer will charge a regularly represented client on the same basis or rate as in the past. While the rule provides no specific standard, the intent of the rule is that the information should be sufficient to enable the client to understand how the fee will be calculated. The information should be communicated to the client in a way that is clear and easy to understand. If the client will be charged for expenses such as copying, experts, and travel, the expenses and the amounts charged, when known at the time, should be specified in the written communication.

Moreover, neither the rule nor the comment defines “regularly represented client.” The rule does not use the term “continuously represented client.” While there is no magic number of cases per year that constitutes “regularly represented,” it seems reasonable to assume that a client is regularly represented if a client routinely comes to a specific lawyer or firm when matters arise and matters actually arise on more than a sporadic basis.

4) The written communication should clearly explain the purpose of any retainer or advanced fee. See SCR 20:1.0(ag) and (mm) for definitions of advanced fee and retainer.

5) The written communication must be made before or within a reasonable time after commencing the representation.

A lawyer may not seek to impose financial penalties on a client for discharging the lawyer.

Question: What are the specific requirements for matters in which it is reasonably foreseeable that the total cost of representation, including attorney fees, will be $1,000 or less?

Answer: SCR 20:1.5(b)(1) governs this circumstance and establishes four specific requirements.

1) The communication may be oral or in writing. There is, however, one exception to this rule. If the representation is a limited scope representation pursuant to SCR 20:1.2(c), then the informed consent must be in writing, even if the total cost of representation will be $1,000 or less. See SCR 20:1.0(q) for a definition of writing.

2) The communication must include the scope of representation. While the rule does not require a particular degree of specificity, the description should be sufficient to identify the services for which the lawyer has been retained.

3) The communication must include the basis or rate of the fee and expenses, except when the lawyer will charge a regularly represented client on the same basis or rate as in the past. While the rule provides no specific standard, the intent of the rule is that the information should be sufficient to enable the client to understand how the fee will be calculated. Moreover, neither the rule nor the comment defines “regularly represented client.” While there is no magic number of cases per year that constitutes “regularly represented,” it seems reasonable to assume that a client is regularly represented if a client routinely comes to a specific lawyer or firm when matters arise, and matters actually arise on more than a sporadic basis.

4) The communication must be made before or within a reasonable time after commencing the representation.

Question: What are the specific requirements for matters in which the fee is contingent on the outcome?

Answer: SCR 20:1.5(c) governs this circumstance and establishes six specific requirements.

1) A contingent fee agreement must be in a writing that is signed by the client. See SCR 20:1.0(q) for a definition of writing.

2) The written contingent fee agreement must include the scope of representation. While the rule does not require a particular degree of specificity, the description should be sufficient to identify the services for which the lawyer has been retained.

3) The written contingent fee agreement must include the method by which the fee is to be determined. The written contingent fee agreement must state the percentage(s) that will accrue to the lawyer in the event of settlement, trial, or appeal. It must state the litigation and other expenses to be deducted from the recovery and must state whether such expenses are to be deducted before or after the contingent fee is calculated.

4) The written contingent fee agreement must include a clear statement of expenses for which the client will be liable whether or not the client prevails.

5) The written contingent fee agreement must be signed by the client before or within a reasonable time after commencing representation. The rule does not require that the written agreement be signed by the client before the work on the matter commences, even though that is preferable. In situations in which time is of the essence, lawyers may commence work on the matter and have the client sign the written contingent fee agreement within a reasonable time. What is a reasonable time depends on the specific situation, but the written contingent fee agreement should be signed by the client as soon as reasonably possible.

6) Upon conclusion of the matter, the lawyer must provide the client with a statement showing the remittance to the client and the method of its determination.

Question: What are the specific requirements for matters in which there are changes in the basis or rate of fees or expenses?

Answer: SCR 20:1.5(b)(1) governs this circumstance and establishes two specific requirements.

1) Any changes in the basis or rate of the fee or expenses must be communicated in writing to the client. See SCR 20:1.0(q) for a definition of writing.

2) The writing requirement applies to all representations, regardless of whether the rule required a written communication at the start of the representation. A lawyer who has regularly represented a client on the same basis or rate as in the past and who wishes to implement an annual increase in hourly rates must communicate those changes in writing to the client. Even though the lawyer was not required at the outset to communicate the basis or rate of the fee in writing, the change must be communicated in writing. The change in the basis of the fee for a regularly represented client may be communicated on the billing statement. See Wisconsin Committee Comment to SCR 20:1.5.

While the rule does not require a particular degree of specificity, the description should be sufficient to identify the services for which the lawyer has been retained.

Question: What are the specific requirements for matters in which there are advanced fees?

Answer: SCR 20:1.5(b)(2), (f), and (g) govern this circumstance and establish four specific requirements.

1) The written communication should clearly explain the purpose of the advanced fee as required by SCR 20:1.5(b)(2).

2) All advanced fees, including advanced flat fees, are required by SCR 20:1.5(f) to be placed in the lawyer’s trust account unless the lawyer complies with the alternative protection provisions of SCR 20:1.5(g).

3) A lawyer who complies with the alternative protection provisions of SCR 20:1.5(g) need not place any of the advanced fees in the lawyer’s trust account. Under this provision, a lawyer may place advanced fees directly into the lawyer’s business account if the lawyer delivers to the client a writing that contains certain information, delivers to the client a final accounting, and agrees to submit disputes regarding the lawyer’s fee to fee arbitration.

4) A lawyer who accepts advanced fee payments from third parties must comply with SCR 20:1.8(f) and should determine in advance to whom any unearned fees should be refunded. The Wisconsin comment to SCR 20:1.5(f) provides guidance.

Question: What are the specific requirements for matters in which there are advanced costs?

Answer: SCR 20:1.5(f) and (b)(1) govern this circumstance and establish two requirements.

1) Advanced costs and expenses must be placed into the trust account. The alternative protection provisions of SCR 20:1.5(g) apply only to advanced fees; they do not permit a lawyer to place advanced costs and expenses into the lawyer’s business account.

2) The lawyer must communicate pursuant to SCR 20:1.5(b) the basis and rate for the costs and expenses.

Question: What are the specific requirements for matters in which there is a withdrawal of noncontingent fees from the trust account?

Answer: SCR 20:1.5(h) governs this circumstance and establishes several requirements.

1) This rule requires lawyers to wait five business days after providing written notice to the client that advanced fees have been earned before withdrawing the fees from the trust account. The written notice must include an itemized bill or other accounting showing the services rendered, notice of the amount owed and the anticipated date of the withdrawal, and a statement of the balance of the client’s funds in the lawyer’s trust account after the withdrawal.

2) SCR 20:1.5(h)(2) permits lawyers to avoid the five-day-notice requirement by giving a client prior notice that advanced fees that have been earned will be withdrawn from trust on the date a bill is transmitted to the client. Client consent is not required for the alternative notice, and lawyers may avail themselves of this provision by placing adequate language in the fee agreement.

3) SCR 20:1.5(h)(3) governs when a client makes a particularized and reasonable objection to the disbursement of funds from the trust account.

Provisions That Are Prohibited or Should Be Avoided in Fee Agreements

Some of the older fee agreements that have been passed down through generations of lawyers contain provisions that are prohibited by the rules or should be avoided. The following questions address the seven specific provisions that are prohibited by the rules as well as two provisions that should be avoided.

Question: May a lawyer assert a lien or interest in the client’s file?

Answer: No, a lawyer is prohibited from asserting any sort of lien or interest in the client’s file. In OLR Public Reprimand 2005-9, the lawyer was disciplined for failing to provide the file to the client when the client requested it, in violation of SCR 20:1.16(d); and for asserting a frivolous claim, in violation of SCR 20:3.1, by asserting a lien on the client’s file for unpaid fees.

Question: May a lawyer seek to limit the client’s right to file a grievance against the lawyer with the Office of Lawyer Regulation (OLR)?

Answer: No, a lawyer is prohibited by SCR 20:1.8(h)(3) from seeking to limit the client’s right to file a grievance against the lawyer with the OLR.

Question: May a lawyer seek to prospectively limit a lawyer’s malpractice liability to the client?

Answer: A lawyer is prohibited by SCR 20:1.8(h)(1) from seeking to prospectively limit a lawyer’s malpractice liability to the client unless the client is independently represented in making the agreement.

A contingent fee agreement must be in a writing that is signed by the client.

Question: May a lawyer seek to restrict or to impose financial penalties on a client’s right to settle a matter?

Answer: No, a lawyer is prohibited from seeking to restrict or to impose financial penalties on a client’s right to settle a matter. SCR 20:1.2(a) requires a lawyer to abide by the client’s decision to settle. Lawyers who ignore the client’s instructions with respect to settlement or who settle matters without the client’s consent are routinely disciplined. A lawyer is also prohibited by SCR 20:1.2(a) from drafting an agreement with clients that give the lawyer the authority to settle the matter. See N.C. Ethics Op. 145 (1993). A lawyer may not circumvent this prohibition by drafting an agreement that requires the lawyer’s consent to settle. See N.Y. Cty. Ethics Op. 699 (1994).

A lawyer may not impose financial penalties on a client who does not follow the lawyer’s advice with respect to settlement. See, e.g., Neb. Ethics Op. 95-1 (1995); Conn. Informal Ethics Op. 99-18 (1999). Moreover, a provision that gave the lawyer the right to withdraw and receive quantum meruit compensation if the client rejected the lawyer’s settlement advice was found to be unethical. Philadelphia Ethics Op. 2001-1.

Question: May a lawyer seek to limit or to impose financial penalties on the client’s ability to discharge the lawyer?

Answer: No, a lawyer is prohibited from seeking to limit or to impose financial penalties on the client’s ability to discharge the lawyer at any time and for any reason. A client has the right to fire his or her lawyer at any time for any reason or for no reason, and the lawyer is required by SCR 20:1.16(a)(3) to withdraw when discharged. The failure of the lawyer to withdraw when discharged will result in discipline. Disciplinary Proceedings against Kinast, 180 Wis. 2d 32, 508 N.W.2d 380 (1993).

A lawyer may not seek to impose financial penalties on a client for discharging the lawyer. This protects the client’s right to counsel of his or her choice by prohibiting the lawyer from imposing on the client financial burdens beyond the obligation to pay for the reasonable value of the services already rendered.

A lawyer cannot by a fee agreement contract away these obligations under the rules. Consequently, a lawyer was disciplined for including a discharge provision that gave the lawyer the greater of an hourly fee or a percentage of the largest settlement offer if the lawyer was discharged. The court concluded that the discharge provision was intended to intimidate the client into not exercising her right to discharge the lawyer from representation and to penalize any such exercise of that right. Florida Bar v. Doe, 550 So. 2d 1111, 1113 (Fla. 1989).

Contingency fee cases are the most frequently disputed cases involving fees upon discharge. In Wisconsin, the general rule is that a lawyer discharged without cause is entitled to the value of the contract minus the reasonable value of the successor lawyer’s services. Tonn v. Reuter, 6 Wis. 2d 498, 95 N.W.2d 261 (1959); Tesch v. Laufenberg, Stombaugh & Jassak S.C., 2013 WI App 103, 349 Wis. 2d 633, 836 N.W.2d 849.

Lawyers who are discharged for cause, however, are not entitled to fees in the amount of the contract. Consequently, when a lawyer is discharged for cause for failing to provide adequate services and has provided no value to the client, the lawyer is not entitled to any fees. This is true even if the lawyer has a statutory lien pursuant to Wis. Stat. sections 757.36-.38 because the lawyer has breached the contract giving rise to the lien. McBride v. Wausau Ins. Co., 176 Wis. 2d 382, 500 N.W.2d 387 (Ct. App. 1993). However, when a lawyer is discharged for cause for failing to provide adequate services but has provided some value to the client, the lawyer may be entitled to an award of fees in quantum meruit. Lorge v. Rabl, 2008 WI App 141, 314 Wis. 2d 162, 758 N.W.2d 798.

Question: May a lawyer seek to assert that a payment of an advanced fee is nonrefundable upon receipt?

Answer: No, a lawyer is prohibited from asserting that a payment of an advanced fee is nonrefundable upon receipt.

SCR 20:1.16(d) requires that any advanced fee not earned must be refunded to the client. A determination as to whether a refund is due cannot be made until the representation is concluded. Consequently, asserting that an advanced fee is nonrefundable on receipt is misleading and might violate SCR 20:7.1(a) and SCR 20:8.4(c). Asserting that an advanced fee is nonrefundable upon receipt might also violate SCR 20:1.5(a), which prohibits a lawyer from making an agreement for an unreasonable fee.

“Because both advanced fees and retainers must be earned as required by SCR 20:1.16(d), and unforeseen circumstances may prevent such fees from being earned, a lawyer may not describe such fees as ‘nonrefundable’ in communications with clients, including fee agreements.” Revised Wis. Ethics Op. E-93-4.

Question: May a lawyer seek to assert that the lawyer may withdraw from representation if the client does not agree to a modification of the fee agreement?

Answer: No, a lawyer is prohibited from asserting that the lawyer may withdraw from representation if the client does not agree to a modification of the fee agreement. Although modification of an existing fee agreement is permissible under the Wisconsin Rules of Professional Conduct, such modification is usually subject to special scrutiny because of the fiduciary nature of the lawyer-client relationship. The lawyer must show that the modification was reasonable under the circumstances at the time of the modification as required by SCR 20:1.5(a), that the modification was communicated to the client as required by SCR 20:1.5(b) and SCR 20:1.4(b), and that the client accepted the modification. Even if the client accepts, the modification is suspect. The client may feel compelled to accept the modification because it is burdensome to change lawyers or because the client fears the lawyer’s resentment.

While a lawyer may seek to modify a fee agreement, a lawyer may not withdraw from representation if the client does not agree to the modification. A lawyer must comply with the requirements of SCR 20:1.16 to withdraw from representation. SCR 20:1.5(a), (b); SCR 20:1.4(b); SCR 20:1.16(b); ABA Comm. on Ethics & Prof'l Responsibility Formal Op. 11-458 (2011) (Changing Fee Agreements During Representation); Restatement (Third) of The Law Governing Lawyers § 18 (2000).

Question: May a lawyer include a provision that unilaterally imposes responsibility for collection costs on the client?

Answer: A lawyer should avoid or at least be cautious of provisions that unilaterally impose responsibility for collection costs on the client. Although a lawyer may seek legitimate fees and costs in an action to collect legal fees when appropriate, a lawyer should avoid provisions that seek to unilaterally and prospectively impose such costs on the client. Statements in fee agreements that the client will be responsible for any collection costs are not explicitly prohibited by the rules, and there is no Wisconsin ethics opinion or case that forbids or even addresses the issue. Case law from other jurisdictions concludes that these provisions are unenforceable and possibly unethical.

A provision that allows recovery of attorney fees if the lawyer prevails in a fee collection action but does not grant the client a corresponding right if he or she wins is fundamentally unfair and unenforceable. A provision that requires the client to pay a fixed percentage of the balance due regardless of the collection costs is particularly unfair. Moreover, a provision that unilaterally and prospectively imposes collection costs on the client has the potential for silencing a client’s complaint about fees because of the client’s fear of retaliation for the nonpayment of even unreasonable fees. See, e.g., Lustig v. Horn, 732 N.E.2d 613 (Ill. App. Ct. 2000).

Question: May a lawyer include a provision that deems late payment as consent for the lawyer’s withdrawal?

Answer: A lawyer should avoid clauses that deem late payment as consent for the lawyer’s withdrawal. There is nothing improper with a provision notifying the client that continued delinquency in fees may result in withdrawal after the client has been given a reasonable opportunity to become current. However, a lawyer should not include a provision that deems late payment as the client’s consent for the lawyer to withdraw.

SCR 20:1.16 provides various grounds for withdrawal. SCR 20:1.16(b)(5) permits a lawyer to withdraw if the client fails to substantially fulfill an obligation to the lawyer, such as the payment of fees as previously agreed, and if the client has been given reasonable warning that the lawyer will withdraw because of the unfulfilled obligation. It is highly unlikely that such a provision in the engagement letter, which deems late payment as the client’s consent for the lawyer to withdraw, constitutes a reasonable warning.

Conclusion

SCR 20:1.5 requires lawyers to communicate certain information about fees to clients. Other rules prohibit certain provisions from being included in communications with clients. Yet, effective communication with clients includes more. In a future article, I will discuss areas of content that lawyers should consider when drafting agreements.