Proposed 2025 Formal Ethics Opinion 3: Client Consent to Annual Rate Increase

Inquiry #1:

Client seeks to retain Lawyer for representation in a domestic case. Lawyer presents Client with a fee agreement outlining, among other things, the scope of the representation and the hourly billing rate Lawyer’s firm will charge Client for legal services during the representation that are provided by Lawyer, other lawyers at the firm, and support staff. Lawyer’s fee agreement also contains a clause that states the following:

The billing rate may change during the course of the representation. At least once each calendar year, the billing rates of all firm employees are reviewed and may be increased. Client will be notified on the client’s billing statement when these billing rate changes occur.

Client and Lawyer signed the fee agreement, and Lawyer’s representation of Client began.

Over the next year, Client received billing statements from the law firm charging Client the hourly rates stated in the fee agreement. Client timely paid each bill. One year into the representation, Client received a bill for the law firm’s services. The bill contained a 20% increase in the billing rate for the various firm employees that worked on Client’s case. Client received no advance notice of the increase before it was imposed. Client contacted Lawyer and objected to the imposed increase. Lawyer informed Client that Client had the right to terminate the representation if the rate was unacceptable to Client. Lawyer also explained that Client agreed to the potential increase in billing rates in the fee agreement, and that Client would still be responsible for the bill if Client terminated the representation because the services had already been provided. Desiring to not start over with a new lawyer, Client accepted the rate increase and paid the bill.

One year later, law firm increased the hourly billing rates again and imposed the increase on Client’s latest billing statement without notice to Client. Client again objected to the increase; Lawyer again noted that Client agreed to the potential increase in the original fee agreement and suggested Client terminate the representation if the rate was unacceptable.

May Lawyer increase the hourly rate billed to Client per the fee agreement?

Opinion #1:

No.

Rule 1.5 requires a lawyer to communicate to a client “the scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible...preferably in writing, before or within a reasonable time after commencing the representation.” Rule 1.5(b); see Rule 1.5, cmt. [2]. Generally, after the representation begins, a lawyer may attempt to renegotiate a fee agreement with a client during the course of the representation, but a lawyer may not abandon or threaten to abandon a client to “cut the attorney’s losses or to coerce an additional or higher fee.” Rule 1.5, cmt. [5]. As noted in the comment to Rule 1.5:

Once a fee agreement has been reached between attorney and client, the attorney has an ethical obligation to fulfill the contract and represent the client’s best interests regardless of whether the lawyer has struck an unfavorable bargain. An attorney may seek to renegotiate the fee agreement in light of changed circumstances or for other good cause, but the attorney may not abandon or threaten to abandon the client to cut the attorney’s losses or to coerce an additional or higher fee. Any fee contract made or remade during the existence of the attorney-client relationship must be reasonable and freely and fairly made by the client having full knowledge of all material circumstances incident to the agreement. If a dispute later arises concerning the fee, the burden of proving reasonableness and fairness will be upon the lawyer.

Id.; see also RPC 166; cf. ABA Formal Ethics Op. 11-458 (2011) (Model Rule 1.5 does not have language in its comment that is similar to North Carolina’s Rule 1.5, cmt. [5]).

Here, Lawyer executed a fee agreement with Client setting forth the hourly rate to be billed for legal services provided, including a provision that permits Lawyer to increase the billing rate in an unspecified amount on an unknown, periodic basis. While not exactly a renegotiation of a fee agreement due to the consent of Client to some type of fee increase structure, if Lawyer desires to increase the billing rate under this agreement, Lawyer may not unilaterally increase the billing rate without reasonable notice to Client regarding the intended increase. Regardless of Client’s purported consent, Lawyer’s inclusion of a provision in the fee agreement that grants Lawyer the authority to unilaterally increase the billing rate without notice to the client and without limitation on the increase does not comply with Lawyer’s obligation to communicate to Client the basis or rate of the fee “before or within a reasonable time after commencing the representation.” Rule 1.5(b). Accordingly, Lawyer may not increase the billing rate under the fee agreement as described.

Importantly, whether Lawyer’s 20% increase to Client’s billing rate is permissible depends on whether the increase results in a fee that is clearly excessive. Pursuant to Rule 1.5(a), “[a] lawyer shall not make an agreement for, charge, or collect an illegal or clearly excessive fee or charge or collect a clearly excessive amount for expenses.” A number of factors must be considered in determining whether a fee is clearly excessive, including the time and labor required, the novelty and difficulty of the representation, the fee customarily charged in the locality for similar services, and the experience, reputation, and ability of the lawyer(s) providing legal services. Rules 1.5(a)(1) – (8). Prior to charging Client any fee—be it an initial fee or a proposed increase to the original fee or billing rate—Lawyer must determine that the fee to be charged is not clearly excessive.

Inquiry #2:

Same facts as Inquiry #1. Client refused to pay the increased hourly billing rate, and instead paid law firm the rate that was originally set out in the fee agreement. Lawyer informed Client that if Client did not pay the outstanding bill in full at the increased hourly rate, Lawyer would move to withdraw from the representation.

May Lawyer withdraw from representing Client based on Client’s refusal to pay the increased hourly rate?

Opinion #2:

Yes, provided the withdrawal complies with Rule 1.16 and the client received adequate notice of the proposed increase. Lawyer “may not abandon or threaten to abandon the client to cut the attorney’s losses or to coerce an additional or higher fee.” Rule 1.5, cmt. [5]; see Opinion #1. Although Lawyer may withdraw from the representation based on Client’s refusal to pay the increased hourly rate if Client receives adequate notice and the increased fee is not clearly excessive (see Opinion #3, below), Lawyer may not immediately withdraw under these circumstances due to the coercive effect withdrawal may have on Client. See also Virginia Ethics Op. 1705 (1997) (“[Changes to existing fee agreements] are permitted so long as they reflect a fairly negotiated agreement by the client and lawyer to modify or supplant their original understanding on fees, and are not the result of any undue influence or coercion by the lawyer.”).

Notably, Lawyer retains the ability to withdraw as provided in Rule 1.16(b).

Inquiry #3:

Same facts as Inquiry #1, except Client was notified of the specific intended increase to the hourly rate 30 days prior to the imposition of the increased hourly rate. If Client does not object to the proposed increase, may law firm increase the hourly rate?

Opinion #3:

Yes, as long as the resulting fee is not clearly excessive per Rule 1.5(a). As noted above, Lawyer may have an existing contract that provides for a fee increase (see Opinion #4, below) or seek to renegotiate the fee with Client “in light of changed circumstances or for other good cause,” and “[a]ny fee contract made or remade during the existence of the attorney-client relationship must be reasonable and freely and fairly made by the client having full knowledge of all material circumstances incident to the agreement.” Rule 1.5, cmt. [5]. Changed circumstances that may warrant revisiting an existing fee agreement include changes related to the factors used to determine whether a fee is clearly excessive, such as the time and labor required for the representation, market forces reflecting the fee customarily charged in the locality for similar legal services, and the experience and reputation of the lawyer performing the services. Rule 1.5(a)(1)-(8); see ABA Formal Ethics Op. 11-458 (“Changes in circumstances, including changes in the factors listed in Rule 1.5(a), occurring after the client-lawyer relationship was formed may cause the client, the lawyer, or both, to seek to revisit the fee arrangement.”). Furthermore, the reasonableness of an amended fee agreement with a client will depend on the context and circumstances of the representation and the attorney-client relationship, as well as a variety of considerations including but not limited to the sophistication of the client, the practice area and its related customs, the length of the representation and the complexity of the issue(s), and the history of interaction between the client and the lawyer. See ABA Formal Ethics Op. 11-458 (“The reasonableness of a modified fee agreement should therefore be assessed in relation to the circumstances at the time of the modification.”).

Here, Lawyer notified Client of the potential for an intended increase in the original fee agreement, then provided Client with reasonable notice of the specific intended increase prior to charging the increased rate. Client has “full knowledge of all material circumstances” regarding the fee agreement and the proposed increase, and Lawyer has provided sufficient reasonable notice to permit Client to make an informed decision about continuing or terminating the representation. Rule 1.5, cmt. [5]. Under these circumstances, if Client does not respond to Lawyer’s notice regarding the intended increase, Lawyer may infer Client’s acceptance of the modified fee agreement and impose the intended increase as described in the notice. ABA Formal Ethics Op. 11-458 (2011).

Inquiry #4:

Same facts as Inquiry #1, except the original fee agreement limits any increase in hourly rates to occur no more than annually and to be no greater than a set percentage. May Lawyer increase the hourly rate billed to Client based upon the fee agreement, regardless of any notice provided to Client?

Opinion #4:

Yes, provided the resulting rate is not clearly excessive. Under these facts, Lawyer has informed Client of “the basis or rate of the fee and expenses for which the client will be responsible...before or within a reasonable time after commencing the representation[,]” including any increase to the billing rate, in the fee agreement to which Client consented. Rule 1.5(b). If the resulting rate is not clearly excessive, Lawyer may increase the billing rate as set forth in the fee agreement. Rule 1.5(a). Although not required under these circumstances, Lawyer is encouraged to provide Client with reasonable notice prior to the imposition of any increased billing rate.

Inquiry #5:

Same facts as Inquiry #4. Client refused to pay the increased hourly billing rate, and instead paid law firm the rate that was originally set out in the fee agreement. May Lawyer withdraw from representing Client based on Client’s refusal to pay the increased hourly rate?

Opinion #5:

Yes. A lawyer may withdraw from representing a client for a variety of reasons, including if “the client fails substantially to fulfill an obligation to the lawyer regarding the lawyer’s services and has been given reasonable warning that the lawyer will withdraw unless the obligation is fulfilled[.]” Rule 1.16(b)(6). Under these circumstances, the provision in the fee agreement describing the potential increase in fees was appropriate under the Rules of Professional Conduct, and therefore Client’s refusal to comply with the terms of the fee agreement constitutes Client’s “fail[ure] to substantially fulfill an obligation to the lawyer regarding the lawyer’s services[.]” Id. Provided Lawyer reasonably notifies Client about Lawyer’s withdrawal if Client refuses to comply with the fee agreement, Lawyer may withdraw from the representation based on Client’s refusal to pay the increased hourly rate.

Inquiry #6:

Same facts as Inquiry #1, except Client has requested or directed Lawyer to include the language set out in Inquiry #1 in the fee agreement. Does the analysis change if Client—rather than Lawyer—requests or insists upon the inclusion of language permitting a periodic, unspecified fee increase such as that set out in Inquiry #1?

Opinion #6:

Yes. The analysis set out in Opinions #1-5 addresses the scenario where Lawyer is requesting or requiring Client agree to the fee increase language as a condition of representation; the analysis also presumes Client is an infrequent or unsophisticated user of legal services. Under these facts, Client has requested or insisted upon the inclusion of broad language permitting Lawyer to increase fees on a periodic basis without advance notice, indicating Client’s understanding, consent, and desire for such an arrangement, presumably for the convenience of Client. As noted in Opinion #3, above, the reasonableness of an amended fee agreement with a client will depend on the context and circumstances of the representation and the attorney-client relationship. The inclusion of such fee increase language originating from Client, rather than Lawyer, is a relevant consideration in determining the provision’s permissibility. Accordingly, Lawyer may include the provision in a fee agreement permitting a periodic, unspecified fee increase when Client, on Client’s own initiative, requests or instructs Lawyer to include such language. Additionally, the notice required—if any—when implementing the fee increase may follow the terms of the provision requested by Client in the fee agreement. Any increase in fees under these circumstances must still not be clearly excessive pursuant to Rule 1.5(a). See Opinion #1.

Inquiry #7:

Corporate Client is a large corporate entity that regularly uses legal services, and whose constituents have regularly entered agreements with lawyers on behalf of Corporate Client for legal services. Law Firm has previously been retained by Corporate Client on multiple occasions, and Corporate Client now wants to retain Law Firm for assistance with a particular aspect of its business; Corporate Client and Law Firm intend the relationship to be ongoing and anticipate the representation will last multiple years. Law Firm proposes the fee agreement include a provision permitting Law Firm to increase fees on a periodic basis and in an unspecified amount for the lawyers assigned by Law Firm to work on Corporate Client’s matters; Law Firm does not intend to provide advance notice of any increase, but will inform Corporate Client when the increase is implemented. Corporate Client agrees to this fee increase structure. Does the analysis set out above change under these circumstances?

Opinion #7:

Yes.

Again, as set out in Opinion #3, the reasonableness of an amended fee agreement with a client will depend on the context and circumstances of the representation and the attorney-client relationship, as well as a variety of considerations including but not limited to the sophistication of the client, the practice area and its related customs, the length of the representation and the complexity of the issue(s), and the history of interaction between the client and the lawyer. See ABA Formal Ethics Op. 11-458 (“The reasonableness of a modified fee agreement should therefore be assessed in relation to the circumstances at the time of the modification.”). The Rules of Professional Conduct and prior ethics opinions have recognized that the level of client sophistication and familiarity with the engagement of legal services is a relevant consideration when determining a lawyer’s professional responsibility in a given situation. See, e.g., Rule 7.3(b)(3) (creating an exception to the general prohibition on direct solicitation for legal services when the potential client is a “person who routinely uses for business purposes the type of legal services offered by the lawyer.”); Rule 5.7, cmt. [8] (recognizing that, when offering law-related services, “a sophisticated user of law-related services, such as a publicly held corporation, may require a lesser explanation than someone unaccustomed to making distinctions between legal services and law-related services”); 2009 FEO 11 (explaining that a lawyer seeking consent to a conflict from an unsophisticated individual client may need to provide more disclosure and explanation to effectively obtain the client’s consent).

As previously stated, the analysis provided in Opinions #1-5 presumes the client is not a regular or sophisticated consumer of legal services. Here, Corporate Client is a sophisticated and frequent user of legal services that has agreed to the proposed periodic fee increase structure at the outset of the representation. To impose the same notice requirements on Corporate Client as an unsophisticated consumer or infrequent user of legal services would be impractical, if not a hinderance to the consistent provision of legal services and effective maintenance of the attorney-client relationship. Accordingly, Law Firm is not required to adhere to the notice requirements set out above when engaging with a sophisticated or regular user of legal services. Law Firm must, however, ensure that Corporate Client understands the terms of the fee agreement, including the proposed fee increase structure, and Law Firm must ensure any implemented fee increases are not clearly excessive. Rule 1.5.