Many new business owners have never dealt with an attorney before. If you happen to be one of the lucky people who have never needed legal help, you may not understand the way that legal fees work. To help make sure that you are not surprised when meeting with an attorney for the first time, here are the most common fee arrangements and some basic information about each.
A lawyer typically charges a contingent fee in litigation with the likely potential of a large award such as personal injury or product liability cases. A lawyer will prepare and litigate a case for a certain percentage of the award – typically anywhere from 25% to 40%. An attorney will typically only take a contingent fee case when the possibility of a jury or judge awarding a large sum is high. The client typically pays for all fees and costs associated with the matter – for example, court costs and filing fees, copy charges, private investigation fees, expert witness fees, etc. If the client does not win the case, typically the client only pays for the costs. The client will usually pay the contingent fee whether he or she settles out of court or if a jury or judge awards a client an amount for his or her case. The advantage to the client is that he or she does not have to pay a large sum to have a case taken. The disadvantage to the client is that he or she will have to pay a large percentage of whatever a judge or jury awards him or her to his or her attorney.
This is probably the most popular type of attorney fee arrangement. An attorney usually charges an hourly rate for litigation matters other than personal injury or other high-dollar award cases. Hourly fees are also popular for many other types of cases including business, divorce, employment, intellectual property, real estate, and tax just to name a few. Attorneys charge clients in six-minute increments. The client typically pays for all fees and costs associated with the matter – for example, court costs and filing fees, copy charges, private investigation fees, expert witness fees, etc. The advantage to the client is that he or she can find an attorney to handle almost any matter if he or she pays an hourly rate. The disadvantage is that it may be expensive to pay an hourly rate for a case as there is no telling how much as case may costs (even if an estimate is given, due to the uncertainty of handling many legal matters, fees may always be more than estimated).
Flat fees are becoming popular for attorneys (but are not quite as popular as hourly rates yet). Although attorneys rarely every take a litigation matter on a flat fee basis, contracts, business agreements and setup documents, wills and estate work, and bankruptcy cases are increasingly done with a flat fee. The client typically pays for all fees and costs associated with the matter – for example, filing fees for business documents, copy charges, private investigation fees, accounting fees, etc. Flat fees are popular with new businesses as it gives a definite amount due for services provided and allows new businesses to budget better. The advantage to the client is that he or she knows exactly how much he or she will spend on legal services (with the exception that fees and costs associated with the matter may vary). The disadvantage is that paying an hourly rate may sometimes result in a lower dollar figure as flat fees are usually an average of the hourly costs estimated over time (although by that same token, it may be more expensive if done on an hourly rate).
Lawyers usually use hybrid agreements in litigation cases where the chances of receiving a large award are low, but not out of the realm of possibilities. It allows the attorney to receive any hourly rate for work in return for receiving less than the typically contingent fee. For example, an attorney may discount the hourly rate by 25% in return for taking 25% less in the contingent fee than normally would be charged. The client typically pays for all fees and costs associated with the matter – for example, court costs and filing fees, copy charges, private investigation fees, expert witness fees, etc. The advantage is that the client knows the attorney will handle the case. The disadvantage is, unlike contingent cases, the client will have to pay attorney fees regardless of the outcome of the case.
A retainer is a pre-paid amount given to an attorney. In Colorado, the attorney must place the funds in a trust account overseen by the Colorado Bar Association. The attorney is to withdraw money only for work done. The lawyer is to return any amount left over upon settlement of the matter to the client. Many lawyers will not provide any work without the client providing a retainer upfront. The amount of retainer varies from lawyer to lawyer and may depend on the type of fee agreement. For example, a retainer may not be required for a contingent fee agreement. A large retainer may be required for complex litigation matters handled on an hourly basis. The flat fee may be required for any flat fee agreements.
Each attorney has his or her own preference on fee agreements. In addition to personal preference, an attorney’s firm or state’s ethical rules may require a certain type of fee agreement. For example, many times attorneys cannot charge a contingent fee in divorce cases in many states. Personally, I like flat fee agreements for the initial business setup if there are only one or two members and hourly rates for additional services. However, most personal injury attorneys I know swear by the contingent fee for all matters. Before determining which fee agreement is best for you, it is best to talk to your attorney about the options, determine whether the attorney you want to deal with even offers the option you want (or if for your matter, even can), and determine what your best option given the whole situation is.
If you have any questions about fee arrangements, please call me at 720-258-6647 or email me at Elizabeth.Lewis@eclewis.com