Practitioner Pitfalls Surrounding the Earned Upon Receipt Fee
Reprinted with permission from the 7/6/23 edition of The Legal Intelligencer’s Ethics Column© 2023 ALM Global Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-256-2472 or firstname.lastname@example.org.
To be sure, Pennsylvania practitioners are permitted to charge earned upon receipt fees. But, when doing so, lawyers should exercise extreme caution to ensure their handling and retention of such fees would survive the Office of Disciplinary Counsel’s scrutiny in the event of a complaint. The earned upon receipt fee calls into question multiple Pennsylvania Rules of Professional Conduct (rules) and, where lawyers’ compliance efforts fall short, they could face sanctions.
Generally speaking, an earned upon receipt fee is a fee that a lawyer charges upfront, before performing any actual work on a client’s matter. A lawyer may claim that this type of fee is “earned” once paid, and therefore nonrefundable.
Rules 1.4, 1.5 and 1.15 are directly tied to issues underlying earned upon receipt fees. Rule 1.4 mandates that clients be informed “to the extent reasonably necessary to permit them to make informed decisions regarding there presentation.” And, as should be universally known, under Rule 1.5(b), when a lawyer has not regularly represented a client, the lawyer must confirm in writing the basis or rate of the fee to be charged. As applied to the earned upon receipt fee, a lawyer can easily confirm in writing that a fee is “earned upon receipt.” Lawyers must be mindful, however, of Rule 1.4 and its requirement that clients be provided all requisite information up front to make an informed decision regarding the representation. Inserting the “earned upon receipt fee” phrase in writing without additional context may be insufficient to support a lawyer’s contention that the fee is nonrefundable. Rather, where lawyers wish to charge an earned upon receipt fee that they truly deem to be “earned” and therefore nonrefundable, the lawyers must explicitly advise the client that the fee is nonrefundable. Absent such explanation, it’s not hard to imagine that a client may later claim a misunderstanding of what the earned upon receipt fee designation meant.
To evidence compliance with Rule 1.4, a lawyer is best served by memorializing the information explained to the client regarding the type of fee to be charged, and its significance, within the fee agreement. Better still, the lawyer should have the client initial that section of the agreement. Ideally, when charging an earned upon receipt fee, the lawyer should spell out, in writing, the following client agreements/understandings: the client agrees and understands that the fee is earned upon receipt and nonrefundable (“the charged fee”); the charged fee will cover the entire scope of work detailed in the fee agreement; the client agrees and understands that the lawyer will not deposit the charged fee into an attorney IOLTA or other trust account; the client agrees and understands that the lawyer will deposit the charged fee upon receipt into his operating or business account; and the client agrees and understands that the lawyer will not bill against the charged fee since it is earned upon receipt. Where the fee agreement contains such language, and where the client initials this section, the lawyer should be able to effectively thwart any future claims alleging that the client was not adequately informed about the earned upon receipt fee designation’s significance. Moreover, detailing this language in the fee agreement should also absolve the lawyer from any potential violations concerning the general rule that mandates all advance fees be deposited into an IOLTA or other trust account.
Be cautioned, a client’s agreement to pay an earned upon receipt fee does not relieve a lawyer from the duties owed under Rule 1.5(a) that prohibit a lawyer from charging or collecting a “clearly excessive fee.” Lawyers must be cognizant of the fact that clients always have the right to terminate a lawyer’s services. Thus, even where: a lawyer fully explained the ramifications of the earned upon receipt fee, memorialized those ramifications in writing, and the client signed the writing, thus confirming his understanding thereof, if the lawyer is subsequently terminated but attempts to retain the entire fee, he may run afoul of Rule 1.5(a) unless that lawyer can demonstrate that the services rendered as of the termination date were commensurate with the collected fee. It is highly recommended that where earned upon receipt fees are charged, lawyers should maintain contemporaneous time keeping records throughout the representation. Where the lawyer cannot establish that the collected fee was commensurate with work performed, the lawyer may be obligated to return the excessive amount. Thus, timekeeping records can become of paramount importance.
Accordingly, while the rules permit the charging of earned upon receipt fees, lawyers that pursue this fee structure should take steps to ensure they are well positioned to defend against any subsequent claimed rule violations.
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