Formal Advisory Opinion No. 11-1
Ethics & Discipline / Advisory Opinions / Formal Advisory Opinions / Formal Advisory Opinion No. 11-1
STATE BAR OF GEORGIA
ISSUED BY THE FORMAL ADVISORY OPINION BOARD
PURSUANT TO RULE 4-403 ON APRIL 14, 2011
FORMAL ADVISORY OPINION NO. 11-1
Ethical Considerations Bearing on Decision of Lawyer to Enter into Flat Fixed Fee Contract to Provide Legal Services.
Contracts to render legal services for a fixed fee are implicitly allowed by Georgia Rule of Professional Conduct (Ga. R.P.C.) 1.5 (a)(8) so long as the fee is reasonable. It is commonplace that criminal defense lawyers may provide legal services in return for a fixed fee. Lawyers engaged in civil practice also use fixed-fee contracts. A lawyer might, for example, properly charge a fixed fee to draft a will, handle a divorce, or bring a civil action. In these instances the client engaging the lawyer's services is known and the scope of the particular engagement overall can be foreseen and taken into account when the fee for services is mutually agreed. The principal ethical considerations guiding the agreement are that the lawyer must be competent to handle the matter (Ga. R.P.C. 1.1) and the fee charged must be reasonable and not excessive. See Ga. R.P.C. 1.5(a).
Analysis suggests that the ethical considerations that bear on the decision of a lawyer to enter into a fixed fee contract to provide legal services can grow more complex and nuanced as the specific context changes. What if, for example, the amount of legal services to be provided is indeterminate and cannot be forecast with certainty at the outset? Or that someone else is compensating the lawyer for the services to be provided to the lawyer's client? It is useful to consider such variations along a spectrum starting from the relatively simple case of a fixed fee paid by the client who will receive the legal representation for a contemplated, particular piece of legal work (e.g., drafting a will; defending a criminal prosecution) to appreciate the growing ethical complexity as the circumstances change.
1. A Sophisticated User of Legal Services Offers to Retain a Lawyer or Law Firm to Provide It With an Indeterminate Amount of Legal Services of a Particular Type for an Agreed Upon Fixed Fee.
In today's economic climate experienced users of legal services are increasingly looking for ways to curb the costs of their legal services and to reduce the uncertainty of these costs. Fixed fee contracts for legal services that promise both certainty and the reduction of costs can be an attractive alternative to an hourly-rate fee arrangement. A lawyer contemplating entering into a contract to furnish an unknown and indeterminate amount of legal services to such a client for a fixed fee should bear in mind that the fee set must be reasonable (Ga. R.P.C. 1.5(a)) and that the lawyer will be obligated to provide competent, diligent representation even if the amount of legal services required ultimately makes the arrangement less profitable than initially contemplated. The lawyer must accept and factor in that possibility when negotiating the fixed fee.
This situation differs from the standard case of a fixed-fee for an identified piece of legal work only because the amount of legal work that will be required is indeterminate and thus it is harder to predict the time and effort that may be required. Even though the difficulty or amount of work that may be required under such an arrangement will likely be harder to forecast at the outset, such arrangements can benefit both the client and the lawyer. The client, by agreeing to give, for example, all of its work of a particular type to a particular lawyer or law firm will presumably be able to get a discount and reduce its costs for legal services; the lawyer or law firm accepting the engagement can be assured of a steady and predictable stream of revenue during the term of the engagement.
There are, moreover, structural features in this arrangement that tend to harmonize the interests of the client and the lawyer. A lawyer or law firm contemplating such a fixed fee agreement will presumably be able to consult historical data of the client and its own experiences in handling similar matters in the past to arrive at an appropriate fee to charge. And the client who is paying for the legal services has a direct financial interest in their quality. The client will be the one harmed if the quality of legal services provided are inadequate. The client in these circumstances normally is in position to monitor the quality of the legal services it is receiving. It has every incentive not to reduce its expenditures for legal services below the level necessary to receive satisfactory representation in return. Accordingly, such fixed-fee contracts for an indeterminate amount of legal services to be rendered to the client compensating the lawyer for such services are allowable so long as the fee set complies with Ga. R.P.C. 1.5(a) and the lawyer fulfills his or her obligation to provide competent representation (Ga. R.P.C. 1.1) in a diligent manner (Ga. R.P.C. 1.3), even if the work becomes less profitable than anticipated.
2. A Third-Party Offers to Retain a Lawyer or Law Firm to Handle an Indeterminate Amount of Legal Work of a Particular Type for a Fixed Fee for Those the Third-Party Payor is Contractually Obligated to Defend and Indemnity Who Will Be the Clients of the Lawyer or Law Firm.
This situation differs from the last because the third-party paying for the legal services is doing so for another who is the client of the lawyer. An example of this situation is where a liability insurer offers a lawyer or law firm a flat fee to defend all of its insureds in motor vehicle accident cases in a certain geographic area. Like the last situation, there is the problem of the indeterminacy of the amount of legal work that may be required for the fixed fee; and, in addition, there is the new factor that the lawyer will be accepting compensation for representing the client from one other than the client.
Several state bar association ethics committees have addressed the issue of whether a lawyer or law firm may enter into a contract with a liability insurer in which the lawyer or law firm agrees to handle all or some portion of the insurer's defense work for a fixed flat fee. With the exception of one state, Kentucky, all the other state bar associations' ethics opinions have determined that such arrangements are not per se prohibited by their ethics rules and have allowed lawyers to enter into such arrangements, with certain caveats. It should be noted that all of the arrangements approved involved a flat fee per case, rather than a set fee regardless of the number of cases.
Although the significance of this fact was not directly discussed in the opinions, it does tend to reduce the risks arising from uncertainty and indeterminacy. Even though some cases may be more complex and time-consuming than the norm, others will be less so. While the lawyer will be obligated under the contract to handle each matter for the same fixed fee, the risk of a far greater volume of cases than projected is significantly reduced by a fixed fee per case arrangement. The lawyer or law firm can afford to increase staff to handle the work load, and under the law of large numbers, a larger pool of cases will tend to even out the average cost per case.
In analyzing the ethical concerns implicated by lawyers entering into fixed-fee contracts with liability insurers to represent their insureds, several state bar association ethics opinions have warned of the danger presented if the fixed fee does not provide adequate compensation. An arrangement that seriously under-compensates the lawyer could threaten to compromise the lawyer's ability to meet his or her professional obligations as a competent and zealous advocate and adversely affect the lawyer's independent professional judgment on behalf of each client.
As Ohio Supreme Court Board of Commissioners Opinion 97-7 (December 5, 1997) explains it:
If a liability insurer pays an attorney or law firm a fixed flat fee which is insufficient in regards to the time and effort spent on the defense work, there is a risk that the attorney's interest in the matter and his or her professional judgment on behalf of the insured may be compromised by the insufficient compensation paid by the insurer. An attorney or law firm cannot enter into such an agreement.
The same point was echoed in Florida Bar Ethics Opinion 98-2 (June 18, 1998) in which the Florida board determined that such flat fixed-fee contracts are not prohibited under the Florida Rules but cautioned that the lawyer "may not enter into a set fee agreement in which the set fee is so low as to impair her independent professional judgment or cause her to limit the representation of the insured."
In addition to the Georgia Rules referenced above, a Georgia lawyer considering entering into such an agreement should bear in mind Ga. R.P.C. 1.8(f) and 5.4(c) as well as Ga. R.P.C. 1.7(a) and its Comment .
Rule 1.8(f) cautious that "A lawyer shall not accept compensation for representing a client from one other than the client unless. . . (2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship. . .
Ga. R.P.C. 1.7(a) provides that:
A lawyer shall not represent or continue to represent a client if there is a significant risk that the lawyer's own interest or the lawyer's duties to another client, a former client, or a third person will materially and adversely affect the representation of the client, except as provided in (b) [which allows client consent to cure conflicts in certain circumstances].
Ga. R.P.C. 1.7(c) makes it clear, however, that client consent to cure a conflict of interest is "not permissible if the representation . . . (3) involves circumstances rendering it reasonably unlikely that the lawyer will be able to provide adequate representation to one or more of the affected clients."
When a lawyer agrees to handle an unknown and indeterminable amount of work for a fixed fee, inadequate compensation and work overload may result. In turn, such effects could not only short-change competent and diligent representation of clients but generate a conflict between the lawyer's own personal and economic interests in earning a livelihood and maintaining the practice and effectively and competently representing the assigned clients. See Comment  to Rule 1.7: "The lawyer's personal or economic interests should not be permitted to have an adverse effect on representation of a client."
As other state bar ethics opinions have concluded, this situation does not lend itself to hard and fast categorical answers. Nothing in the Georgia Rules of Professional Conduct would forbid such a fee agreement per se. But "it is clear that a lawyer may not accept a fixed fee arrangement if that will induce the lawyer to curtail providing competent and diligent representation of proper scope and exercising independent professional judgment." Michigan Bar Ethics Opinion RI-343 (January 25, 2008). Whether the acceptance of a fixed fee for an indeterminate amount of legal work poses an unacceptable risk that it will cause a violation of the lawyer's obligation to his or her clients cannot be answered in the abstract. It requires a judgment of the lawyer in the particular situation.
A structural factor tends to militate against an outsized risk of compromising the ability of the lawyer to provide an acceptable quality of legal representation in these circumstances just as it did in the last. The indemnity obligation means the insurer must bear the judgment-related financial risk up to the policy limits. Hence, "the duty to indemnify encourages insurers to defend prudently." A liability insurer helps itself - not just its insured - by spending wisely on the defense of cases if it is liable for the judgment on a covered claim. Coupled with the lawyer's own professional obligation to provide competent representation in each case, this factor lessens the danger that the fixed fee will be set at so low a rate as to compromise appropriate representation of insureds by lawyers retained for this purpose by the insurer.
3. A Third-Party Offers to Retain a Lawyer or Law Firm to Provide an Indeterminate Amount of Legal Work for an Indeterminate Number of Clients Where the Third-Party Paying for the Legal Service Has an Obligation to Furnish the Assistance of Counsel to Those Who Will Be Clients of the Lawyer But Does Not Have a Direct Stake in the Outcome of Any Representation.
A situation where a third party that will not be harmed directly itself by the result of the lawyer's representation is compensating the lawyer with a fixed fee to provide an indeterminate amount of legal services to the clients of the lawyer may present an unacceptable risk that the workload and compensation will compromise the competent and diligent representation of those clients. Examples might be a legal aid society that contracts with an outside lawyer to handle all civil cases of a particular type for a set fee for low-income or indigent clients or a governmental or private entity that contracts with independent contractor lawyers to provide legal representation to certain indigent criminal defendants.
In contrast to the earlier sets of circumstances, several structural factors that might ameliorate the danger of the arrangement resulting in an unmanageable work load and inadequate compensation that could compromise the legal representation are absent in this situation. First, and most obviously, there is a disconnection between the adequacy of the legal service rendered and an impact on the one paying for the legal representation. The one paying for the legal services is neither the client itself nor one obligated to indemnify the client and who therefore bears a judgment-related risk. While the third-party payor is in a position to monitor the adequacy of the legal representation it provides through the lawyers it engages and has an interest in assuring effective representation, it does not bear the same risk of inadequate representation as the client itself in situation No. 1 or the liability insurer in situation No. 2.
Second, and perhaps less obviously, this last situation is fraught with even greater risk from indeterminacy if there is no ceiling set on the number of cases that can be assigned and there is no provision for adjusting the agreed-upon compensation if the volume of cases or the demands of certain cases turns out to far exceed what was contemplated. Sheer workload can compromise the quality of legal services whatever the arrangement for compensation. But, where the payment is set at a fixed annual fee rather than on a fixed fee per case basis, the ability of the lawyer to staff up to handle a greater-than-expected volume with increased revenue is removed.
Accordingly, as compared to the other examples, the risk that inadequate compensation and case overload may eventually compromise the adequacy of the legal representation is heightened in these circumstances. A lawyer entering into such a contract must assess carefully the likelihood that such an arrangement in actual operation, if not on its face, will pose significant risks of non-compliance with Ga. Rules of Professional Conduct 1.1, 1.3, 1.5, 1.8(f) or 1.7.
In this regard, a fee arrangement that is so seriously inadequate that it systematically threatens to undermine the ability of the lawyer to deliver competent legal services is not a reasonable fee. Ga. R.P.C. 1.5 Comment  warns that:
An agreement may not be made, the terms of which might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client's interest. For example, a lawyer should not enter into an agreement whereby services are to be provided only up to a stated amount when it is foreseeable that more extensive services probably will be required. . . .
And Comment  to Ga. R.P.C. 1.3 reminds that "A lawyer's work load should be controlled so that each matter can be handled adequately."
A failure to assess realistically at the outset the volume of cases and the adequacy of the compensation and to make an informed judgment about the lawyer's ability to render competent and diligent representation to the clients under the agreement could also result in prohibited conflicts of interest under Ga. R. P.C. 1.7(a). If an un-capped caseload or under-compensation forces a lawyer to underserve some clients by limiting preparation and advocacy in order to handle adequately the representation of other clients or the fixed fee systematically confronts the lawyer with choosing between the lawyer's own economic interests and the adequate representation of clients a conflict of interest is present. Ga. R. P. C. 1.7 (c) makes it clear that a conflict that renders it "reasonably unlikely that the lawyer will be able to provide adequate representation to one or more of the effected clients" cannot be under-taken or continued, even with client consent.
It is not possible in the abstract to say categorically whether any particular agreement by a lawyer to provide legal services in this third situation violates the Georgia Rules of Professional Conduct. However, arrangements that obligate lawyers to handle an unknown and indeterminate number of cases without any ceiling on case volume or any off-setting increase in compensation due to the case volume carry very significant risks that competent and diligent representation of clients may be compromised and that the lawyer's own interests or duties to another client will adversely affect the representation. Lawyers contemplating entering into such arrangements need to give utmost attention to these concerns and exercise a most considered judgment about the likelihood that the contractual obligations that they will be accepting can be satisfied in a manner fully consistent with the Georgia Rules of Professional Conduct. A lawyer faced with a representation that will result in the violation of the Georgia Rules of Professional Conduct must decline or terminate it, Ga. R. P. C. 1.16(a)(1), unless ordered by a court to continue.
1. Kentucky Bar Association Ethics Opinion KBA E - 368 (July 1994). This opinion prohibiting per se lawyers from entering into set flat fee contracts to do all of a liability insurer's defense work was adopted by the Kentucky Supreme Court in American Insurance Association v. Kentucky Bar Association, 917 S.W.2d 568 (Ky. 1996). The result and rationale are strongly criticized by Charles Silver, Flat Fees and Staff Attorneys: Unnecessary Casualties in the Continuing Battle Over the Law Governing Insurance Defense Lawyers, 4 Conn. Ins. L. J. 205 (1997-98).
2. Florida Bar Ethics Opinion 98-2 (June 18, 1998) (An attorney may accept a set fee per case from an insurance company to defend all of the insurer's third party insurance defense work unless the attorney concludes that her independent professional judgment will be affected by the agreement); Iowa Supreme Court Board of Professional Ethics and Conduct Ethics Opinion 86-13 (February 11, 1987) (agreement to provide specific professional services for a fixed fee is not improper where service is inherently capable of being stated and circumscribed and any additional professional services that become necessary will be compensated at attorney's regular hourly rate.); Michigan Bar Ethics Opinion RI-343 (January 25, 2008) (Not a violation of the Rules of Professional Conduct for a lawyer to contract with an insurance company to represent its insureds on a fixed fee basis, so long as the arrangement does not adversely affect the lawyer's independent professional judgment and the lawyer represents the insured with competence and diligence.); New Hampshire Bar Association Formal Ethics Opinion 1990-91|5 (Fixed fee for insurance defense work is not per se prohibited; but attorney, no matter what the fee arrangement, is duty bound to act with diligence.); Ohio Supreme Court Board of Commissioners on Grievances and Discipline Opinion 97-7 (December 5, 1997) (Fixed fee agreement to do all of liability insurer's defense work must provide reasonable and adequate compensation. The set fee must not be so inadequate that it compromises the attorney's professional obligations as a competent and zealous advocate); Oregon State Bar Formal Ethics Opinion No. 2005-98 (Lawyer may enter flat fee per case contract to represent insureds but this does not limit, in any way lawyer's obligations to each client to render competent and diligent representation. "Lawyer owes same duty to 'flat fee' clients that lawyer would own to any other client." "Lawyers may not accept a fee so low as to compel the conclusion that insurer was seeking to shirk its duties to insureds and to enlist lawyer's assistance in doing so."); Wisconsin State Bar Ethics Opinion E-83-15 (Fixed fee for each case of insurance defense is permissible; attorney reminded of duty to represent a client both competently and zealously.)
3. Rule 5.4(c) similarly commands that: "A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering such legal services."
4. Silver, note 1 at 236.
5. Ga. R. P. C. 1.1 requires that a lawyer "provide competent representation to a client." Comment  spells out the thoroughness and preparation that a lawyer must put forth, noting that "[c]ompetent handling of a particular matter includes inquiry into and analysis of the factual and legal elements of the problem, and use of methods and procedures meeting the standards of competent practitioners. It also includes adequate preparation. (emphasis added).
6. See ABA Formal Opinion 06-441 (May 2006) titled "Ethical Obligations of Lawyers Who Represent Indigent Criminal Defendants When Excessive Caseloads Interfere With Competent and Diligent Representation," suggesting that if a caseload becomes too burdensome for a lawyer to handle competently and ethically the lawyer "must decline to accept new cases rather than withdraw from existing cases if the acceptance of a new case will result in her workload becoming excessive."
7. ". . . When ordered to do so by a tribunal, a lawyer shall continue representation notwithstanding good cause for terminating the representation." Ga. R. P. C. 1.16(c).
The second publication of this opinion appeared in the June 2011 issue of the Georgia Bar Journal, which was mailed to the members of the State Bar of Georgia on or about June 6, 2011. The opinion was filed with the Supreme Court of Georgia on June 23, 2011. No review was requested within the 20-day review period, and the Supreme Court of Georgia has not ordered review on its own motion. In accordance with Rule 4-403(d), this opinion is binding only on the State Bar of Georgia and the person who requested the opinion, and not on the Supreme Court of Georgia, which shall treat the opinion as persuasive authority only.
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