Washington Lawyer - July/August 2024 - 8

PRACTICE MANAGEMENT
A Cautionary Tale About
Earning Mechanisms
By Dan Mills
hat is an earning mechanism
and why should
you care?
An earning mechanism refers to a set of specific
provisions in a fee agreement describing the
conditions under which a lawyer is entitled to
earn a fee that has been paid in advance for
their services. Essentially, the earning mechanism
details the how and when of the fee's
transition from advance fee to earned income.
The most common earning mechanism is a
lawyer's hourly rate, but earning mechanisms
for flat or fixed fees must also be established
before beginning work for the client.
For example, let's assume you have onboarded
a new client and now possess a $10,000 advance
fee. Hopefully that sum has been deposited
into your IOLTA and you are preparing the
fee agreement. For a D.C. Bar member in this
situation, regardless of the legal matter, how
you negotiate and describe the way in which
you will work for the client and earn this sum is
crucial. You must do so in conformity with In re
Mance,1
but you should also conform to the expectations
of the Office of Disciplinary Counsel
(ODC), as set forth in a pending disciplinary
matter, In re Michael Alexei.2
Otherwise, you
might find yourself facing disbarment by the
D.C. Court of Appeals, as Alexei did. More about
that case in a moment. For now, let's focus on
the earning mechanism.
You and your client need to agree upon and
document the process through which the
$10,000 held in your firm's IOLTA transitions to
your ownership once you have performed the
legal services - detailing at what point you are
entitled to transfer these earned funds into
your firm's operating or business checking account.
Mance
says you can do this by tying the earning
process to stages of the case, passage of time,
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* JULY/AUGUST 2024
or any other method that is reasonable in terms
of the work performed and amount earned. You
can always wait until the entire representation
has been accomplished to transfer the funds,
but this is not practical for many representations
that last for months. Law firms have cash
flow needs and often cannot wait until the end
of the matter to earn the fee.
The nature of the lawyer's problem-solving is
the real driver of the terms. For example, if the
lawyer is preparing a certain form for the client
who is seeking a particular immigration status,
then a reasonable portion of the advance fee
can be earned after the lawyer does research,
gathers information, examines data, and completes
the form for the client's review. Assuming
the form is then filed, other stages of earning
the fee can be tied to progression of the
case, such as responding to the government,
meeting with the government and client, and
appearing for a hearing.
For the estate planning lawyer, the first earning
stage is often obtaining information and then
creating the instruments for the client's review.
The next stage could be editing and executing
the instruments, at which time the entire fee
has been earned.
For the criminal defense lawyer, tying the earning
mechanism to stages of the case as it progresses
though court is often practical, with
the final sum being earned upon conclusion
of the case, whether by plea agreement or trial.
If the matter ends before completion and not
all the fee has been earned, Mance requires the
lawyer to make a refund of any unearned fee to
the client.
If the fee agreement does not say when and
how an advance fee is going to be earned, and
if the lawyer transfers portions of the advance
fee into the firm's operating or business account
based on the lawyer's belief about what
has been earned, the lawyer runs the risk of a
disciplinary prosecution. This can happen even
if the client is satisfied with the lawyer's work
and does not object to the transfer of funds.
ODC argues that Alexei's fee agreement was
not Mance-compliant because it did not specify
when and how the advance fee would be
earned. However, the Hearing Committee3
the Board on Professional Responsibility4
and
determined
that Alexei had performed all the work
and had earned the advance fee. Neither the
Hearing Committee nor the Board on Professional
Responsibility found a violation of any
D.C. Rule of Professional Conduct. The Board
decision recommended a dismissal of the disciplinary
charges.
ODC appealed, arguing before the D.C. Court
of Appeals in May that Alexei is guilty of misappropriation
and urging the court to disbar him.
Regardless of the outcome of this particular
matter, D.C. lawyers would be wise to embrace
ODC's most recent interpretation of Mance and
include precise earning mechanisms in their
fee agreements.
D.C. Bar practice management advisors Dan Mills
and Kaitlin McGee can be reached at dmills@dcbar.
org and kmcgee@dcbar.org, respectively.
NOTES
1 980 A.2d 1196 (D.C. 2009).
2 D.C.C.A No. 23-BG-591. Oral argument can be
viewed at youtube.com/watch?v=JusAT4611c0.
3 Report and Recommendation of Ad Hoc Hearing
Committee BDN 20-BD-018 / DDN 2016-D375 /
March 7, 2023.
4 Order of the Board on Professional Responsibility
20-BDN-018 / DDN 2016-D375 / June 30, 2023.
For an in-depth lesson on creating an appropriate
fee agreement and transferring
funds, attend the D.C. Bar's next Managing
Money course on September 26. Visit
dcbar.org/pmas to register.
http://www.youtube.com/watch?v=JusAT4611c0 http://www.dcbar.org/pmas
Washington Lawyer - July/August 2024

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