1. © 2011 Gray Reed & McGraw, P.C. The information contained herein is subject to change without notice ANATOMY OF AN ENGAGEMENT CONTRACT Amy C. Allen Gray, Reed & McGraw, PC 1300 Post Oak Blvd, Suite 2000 Houston, Texas 77056 713.986.7000 (p) 713.986.7100 (f) aallen@grayreed.com

2. © Gray Reed & McGraw, P.C. Goal 1. Considerations in drafting an effective engagement contract, particularly as it relates to fee agreements, and 2. Compliance with the disciplinary rules applicable to the attorney client relationship.

3. © Gray Reed & McGraw, P.C. TDRPC – Texas Disciplinary Rules of Professional Conduct Purpose is to define conduct for professional discipline; minimum standards. The comments are designed as permissive standards for professional discretion; are guidance for interpretation. Professionalism vs. Moral Judgment

4. © Gray Reed & McGraw, P.C. Engagement Contract Attorney – Client Relationship is simply defined by contract. The terms of the contract control. Broad vs. Specific – the question.

5. © Gray Reed & McGraw, P.C. Representation  Identify the client.  Distinguish individual from business entities.  How much language is necessary – adverse interests, independent counsel, etc.

6. © Gray Reed & McGraw, P.C. Scope of Representation  Governed by 1.02 of the TDRPC.  General or Limited  Considerations:  History of working with the client  State whether you are obligated to represent the client in matters not covered by the contract.  Provide what steps should be taken if the client requests you handle additional matters requiring representation.

7. © Gray Reed & McGraw, P.C. Obligations 1. Firm to Client 2. Lawyer to Lawyer/ Lawyer to Judge 3. Client to Firm *See Texas Lawyers Creed

8. © Gray Reed & McGraw, P.C. Fee Agreements – Generally  General terms governed by Rule 1.04  Strict compliance to avoid possible disciplinary action or the inability to recover fees. “ A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee.” TDRPC 1.04(a).

9. © Gray Reed & McGraw, P.C. Fee Agreements – Unconscionable “A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable.” TDRPC 1.04(a). WHAT DOES THAT MEAN:  The standard is based on that of a competent lawyer, not the client.  Personal circumstances of the individuals involved (unsophisticated v sophisticated)

10. © Gray Reed & McGraw, P.C. REASONABLENESS OF THE FEE  Rule 1.04(b) sets forth factors to consider, but are not exhaustive. Includes the time required, experience, ability, and reputation, the nature of the employment, the responsibility involved and the results obtained, generally. TDRPC 1.04(b).

11. © Gray Reed & McGraw, P.C. FEES FOR SERVICES  Rule 1.04 of TDRPC  The client should have a clear understanding of how they will be charged for services rendered in their case.  Discuss with client and memorialize in contract.

12. © Gray Reed & McGraw, P.C. TYPES OF FEES: 1. Contingency Fees – divorce cases  NO 2. Hourly Rates 3. Flat Fee Arrangements 4. Combination

13. © Gray Reed & McGraw, P.C. RETAINERS – Managing Expectations  Impossible to determine in advance the amount of time or legal fees that will be needed to complete each matter.  Anticipated cost of providing services are estimates and do not represent the maximum amount that may be incurred for such representation.

14. © Gray Reed & McGraw, P.C. RETAINERS - GENERALLY  A true retainer “is not a payment for services.”  It is an advance fee to secure a lawyer’s services, and compensate him for loss of the opportunity to accept other employment.” Cluck case.  A retainer fee should be deemed earned at the moment it is received only if the lawyer can substantiate that other employment will probably be lost by obligating himself to represent the client.

15. © Gray Reed & McGraw, P.C. ETHICS OPINIONS:  Tex. Comm. On Professional Ethics, Op. 391, V. 41 Tex. B.J. 322 (1978)  Tex. Comm. On Professional Ethics, Op. 431, V. 49 Tex. B.J. 1084 (1986)  Tex. Comm. On Professional Ethics, Op. 611, September 2011

16. © Gray Reed & McGraw, P.C. ETHICS OPINION 391 Requirements for the handling of funds: 1. Client funds paid to the attorney/firm must be placed into a "trust" account(s), separate and apart from the attorney's personal accounts or the law firm's operating accounts; and 2. Attorney must maintain complete records of those funds and render appropriate accounts to his client regarding them; accurate bookkeeping.

17. © Gray Reed & McGraw, P.C. ETHICS OPINION 391- Cont.  A non-refundable retainer belongs entirely to the attorney at the time it is received.  The fee is earned at the time the fee is received and therefore may be placed into the attorney's general operating account.

18. © Gray Reed & McGraw, P.C. ETHICS OPINION 391- Cont.  However, ANY portion that represents payment for services not yet rendered is refundable and:  belongs to the client at the time the funds come into the possession of the attorney and,  therefore, must be deposited into a separate, "trust" account – (Interest on Lawyer Trust Accounts (IOLTA)) If one check represents both a non-refundable retainer and a refundable advance payment, the entire check should be deposited into a trust account and only the non-refundable amount may then be transferred to the operating account.

19. © Gray Reed & McGraw, P.C. ETHICS OPINION 391- Flat Fees  For flat fees, because there is no guarantee that the attorney will be entitled to the full amount, the attorney must place those funds into the client trust account.  The attorney may withdraw portions of those funds when that portion of the fee is due (earned) and not before. NOTE: Look to the contract and how it was memorialized.

20. © Gray Reed & McGraw, P.C. ETHICS OPINION 431 - Background  Belief is that Ethics Opinion 431 based on the Bar’s growing concern that attorneys were contracting for non-refundable retainers and then neglecting the client’s matter.  failing to communicate with the client,  getting fired, and  then using the “non-refundable” language as an excuse to refuse a demand for a refund or for an accounting.

21. © Gray Reed & McGraw, P.C. ETHICS OPINION 431  The analysis indicates that Texas Ethics Opinion 391 is still viable, BUT is overruled to the extent that: Every retainer designated as non- refundable is not necessarily earned at the time it is received.  A fee is not earned simply because it is designated as non-refundable.

22. © Gray Reed & McGraw, P.C. ETHICS OPINION 431 – True Retainer  As long as a retainer (true - nonrefundable) is not excessive, it will be deemed earned at the time it is received, and may be deposited in the attorney's account.  However, if the attorney is discharged for cause, or voluntarily withdraws before opportunities have been lost, a duty it imposed upon the attorney to promptly refund an equitable portion of the retainer.  The contract - funds constitute a retainer or an “advance fee” deposit.

23. © Gray Reed & McGraw, P.C. ETHICS OPINION 431 – Summary A true retainer is not a payment for services – it is an advance fee to secure a lawyer's services, and compensate him for loss of the opportunity to accept other employment.  Burden - Substantiate that other employment will probably be lost as a result of the representation.  However, if discharged for cause before any “opportunities” have been lost, or if the attorney withdraws voluntarily, then the attorney should refund an equitable portion of the retainer.

24. © Gray Reed & McGraw, P.C. ETHICS OPINION 431 – Potential Problems Non-refundable retainers are not inherently unethical, but must be utilized with caution. Potential problems: 1. Interference with the client's right to discharge the attorney if the client fears the retainer will be forfeited. 2. If the attorney's action causes the value of the retainer to be reduced and he is discharged for cause or voluntarily withdraws, an equitable portion of the retainer should be refunded to the client. 3. The fee may be excessive if not determined by relevant factors such as the degree of likelihood that other employment will actually be precluded, and the experience, reputation and ability of the lawyer.

25. © Gray Reed & McGraw, P.C. ETHICS OPINION 611 A legal fee relating to future services is a non- refundable retainer at the time received only if the fee in its entirety is a reasonable fee to secure the availability of a lawyer’s future services and compensate the lawyer for the preclusion of other employment that results from the acceptance of employment for the client.

26. © Gray Reed & McGraw, P.C. ETHICS OPINION 611  Distinguishes between “true retainers” and a pay­ment for services.  Pronounces that, even a true “non-refundable retainer” might have to be refunded in the event of discharge for cause and before the attorney actually loses any further employment opportunities.  Clearly prohibits an attorney from entering into an agreement for a client to pay a “non-refundable retainer” when the Client is actually providing an advance payment for services to be rendered, e.g., up to the time of trial.

27. © Gray Reed & McGraw, P.C. ETHICS OPINION 611 - Analysis Two-part analysis (in conformance with Cluck) mandated in determining the ethics of a “non- refundable retainer.” 1. Does the representation contemplate that the attorney is to provide future services under the agreement? 2. Does the fee agreement clearly communicate that the fee will be fully earned and payable to the attorney (i.e., become truly “non-refundable”) at some specific benchmark of the project?

28. © Gray Reed & McGraw, P.C. CONCLUSIONS FOR NONREUNDABLE FEES 1. Set up a trust account 2. Have a written fee agreement 3. Stay away from the term “non-refundable” 4. Deposit entire fee into the trust account 5. Keep records 6. Manage client‘s expectations 7. The disgruntled client

29. © Gray Reed & McGraw, P.C. Discharge – Generally  List other individuals (such as paralegals and associates) involved in the case who are likely to expend time on the case, and specifically list the standard hourly rates of the billable individuals.  It may be practical to explain in the engagement contract that the hourly rates will vary depending upon the level of experience of attorneys and staff members.

30. © Gray Reed & McGraw, P.C. Discharge – Generally  Provide an explanation that while you will be designated to primarily handle the matter, other attorneys and non-lawyer staff members may be assigned in order to handle the matter efficiently and control costs.  Advise the client whether or not the standard hourly rates are periodically adjusted, and if so, are they adjusted with or without notice to the client.

31. © Gray Reed & McGraw, P.C. Discharge – Generally  Unless otherwise specified, time will be recorded in quarterly hour increments, multiplied by the attorney’s or the paralegal’s standard hourly rate.

32. © Gray Reed & McGraw, P.C. Payment of Costs/Expenses  The client agrees to pay you for photocopying and printing at the rate of $.20 per page.  Charges for computerized research such as “Lexis” or “Westlaw” may be incurred for access to such services.  In the event automobile travel is necessary, mileage may be billed at the rate of _____.

33. © Gray Reed & McGraw, P.C. Payment to Third Parties  Invoices will be sent to the client for payment directly to the vendor or provider.  You will pay third party vendors or providers directly as an advance or loan to the client and will be billed for all costs, expenses and other disbursement items.

34. © Gray Reed & McGraw, P.C. Dispute Resolution The most recent pronouncements on the subject provide that as long as a law firm apprises a client of the advantages and disadvantages of arbitration and other alternative dispute resolution opportunities for the resolution of disputes, as opposed to litigation, a firm and a client may agree to resolve fee disputes and malpractice claims through an alternative dispute resolution process.

35. © Gray Reed & McGraw, P.C. General Disclaimer It is impossible to determine in advance the amount of time or legal fees that will be incurred, and any statement made by any attorney of the firm relating to an estimated or anticipated result of any negotiation, transaction, or litigation shall constitute an opinion only.

36. © Gray Reed & McGraw, P.C. General Disclaimer The client is financially responsible for all judgments, damages, taxes, deficiencies, interest, penalties, etc., which have been, or later may be, determined to be payable by the client and the firm is not liable for a client’s obligations.

37. © Gray Reed & McGraw, P.C. Tax Advice The client acknowledges that any tax advice contained in any communication with your firm is not intended or written to be used, and cannot be used, by the client or any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code or (2) promoting, marketing or recommending to another party any tax-related matters addressed in such communication.

38. © Gray Reed & McGraw, P.C. Hold Harmless The client agrees to indemnify the Firm and to hold the Firm harmless against all losses, claims, damages, liabilities, costs and expenses (including for the firm’s time at the standard hourly rates charges by the firm and all expenses) incurred by or asserted against the firm in connection with, arising out of, or in any way otherwise related to the engagement contract or the firm’s representation of the client.

39. © Gray Reed & McGraw, P.C. Hold Harmless The Client’s obligations do not apply to any loss, liability, claim, damages or action to the extent there is a final determination by a court of final jurisdiction and/or an arbitrator that any such loss, liability, claim, damages or action resulted from the professional negligence of the Firm.

40. © Gray Reed & McGraw, P.C. Grievance Process  All Texas attorneys are required to give notice to the client of the existence of the grievance process.  The State Bar of Texas investigates and prosecutes professional misconduct committed by Texas attorneys. Although not every complaint against, or dispute with a lawyer involves professional misconduct, the State Bar’s Office of General Counsel will provide Client with information about how to file a complaint. Please call 1-800-932-1900 or visit www.texasbar.com for more information. www.texasbar.com

41. © Gray Reed & McGraw, P.C. Disclaimer of Reliance The client acknowledges this agreement is being made by the client of its own free choice, without any inducement offered in any way other than the express agreements contained in this Agreement. Client warrants and represents that no promise, agreement, representation, inducement or condition not set forth in this Agreement has been made or relied upon by Client in executing this Agreement. Client is relying solely upon its own judgment in executing this Agreement and Client acknowledges Firm is relying upon all of Client’s representations, including this Disclaimer of Reliance, in agreeing to undertake Client’s representation.

42. © Gray Reed & McGraw, P.C. Other Considerations  Destruction of files  Conflict of Interest  Informed Consent  Client Acknowledgment

43. © Gray Reed & McGraw, P.C. Thank You & Be Careful Out There! Amy C. Allen Gray, Reed & McGraw, PC 1300 Post Oak Blvd, Suite 2000 Houston, Texas 77056 713.986.7000 (p) 713.986.7100 (f)