How retainers can lead to ethics issues
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Lawyers must tread carefully when they take a client’s money, particularly when labeling funds as “nonrefundable” and assuming they have earned the entirety of that fee even if the attorney-client relationship ends early.
In a comprehensive opinion, the ABA Standing Committee on Ethics and Professional Responsibility explains that lawyers cannot keep such payments even when the fee agreement is described as “nonrefundable,” except under certain circumstances. Instead, lawyers may need to return any unearned money when the attorney-client relationship ends.
These sorts of arrangements may be referred to as a:
• Nonrefundable retainer.
• Engagement fee.
• Earned-on-receipt.
• Fixed fee.
• Flat fee.
Attorneys may believe they can take a fee, consider it earned and place it in their own account rather than a client trust account compliant with ABA Model Rule 1.15. This ethical disconnect is not new: A 2018 Missouri ethics opinion explains that “part of the confusion surrounding this topic may stem from the historical view that a flat fee is earned upon receipt for trust account purposes.”
Clearing up confusion
Formal Opinion 505 dispenses with misapprehensions about keeping unearned fees, explaining that such fees must generally be placed directly in the client trust account and can only be removed when the lawyer has actually done the required amount of work to earn that fee.
Ethics expert Peter A. Joy, who teaches professional responsibility courses at Washington University in St. Louis School of Law, says that many lawyers label such fees as “nonrefundable” and end up doing the requisite amount of legal work to earn the fee. But he warns that “there is some evidence that some lawyers fail to do the required amount of work and fail to return the unearned fees.”
When a lawyer labels fees as “nonrefundable” and places those funds directly into their own account, this could violate the Model Rules of Professional Conduct, specifically Rules 1.5, 1.15 and 1.16. Model Rule 1.5 generally prohibits attorneys from charging unreasonable fees. Model Rule 1.15 provides that lawyers must place client monies into a special fund that is separate from the lawyer’s account.
This rule furthers the so-called anti-commingling principle—that a lawyer shall not commingle client money with the lawyer’s money. Model Rule 1.16 deals with the termination of a lawyer’s representation of a client. A general requirement of this rule is that a lawyer must return unearned fees upon the end of the representation.
The first part of Formal Opinion 505 addresses different types or labels placed upon fees, including advance fees. “When a client pays an advance to a lawyer, the lawyer takes possession—but not ownership—of the funds to secure payment for the services the lawyer will render to the client in the future,” the committee explains.
The opinion acknowledges that there is a type of fee called a general retainer whereby a client pays the lawyer a fee to “reserve the lawyer’s availability.” However, the opinion notes that general retainers are quite rare and not consistent with the modern practice of law. The opinion also cautions that a general retainer “may be determined to be an unreasonable fee, or even unearned if the lawyer does not make himself or herself available.” Instead, the term “retainer” should normally be labeled as an advance.
The opinion also addresses flat or fixed fees, where the client pays a specific sum of money for the lawyer’s services. The opinion notes that if such a fixed or flat fee is paid by the client in advance of the lawyer performing the legal work, the fees would be considered an advance.
“The Model Rules of Professional Conduct do not allow a lawyer to sidestep the ethical obligation to safeguard client funds with an act of legerdemain: characterizing an advance as ‘nonrefundable’ and/or ‘earned upon receipt,’” the opinion says. Instead, Model Rule 1.15(c), which was adopted in 2002, provides that “a lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.”
In a particularly incisive passage, the opinion explains:
Advances are unearned because they are payment today for work to be performed in the future. They were unearned upon receipt and remain unearned until the work is performed. The Model Rules mandate that advances belong to the client, must be preserved until they are actually earned and must be refunded if the representation terminates before the fees are earned.
A fee by any other name
The opinion identifies three hypothetical scenarios involving lawyer fees. In the first, a lawyer charges a client a $6,000 retainer to handle the client’s divorce to be billed against $300 an hour. The client agreement states that after the lawyer works 20 hours, the attorney can charge additional retainers. However, after the lawyer has drafted a complaint, worked 5.5 hours and paid a $150 filing fee, the client reconciles with her spouse and wants to terminate the relationship.
The opinion explains that the client is entitled to a portion of that $6,000 even though the agreement labeled the retainer as “nonrefundable.” The opinion explains that the “$6,000 entitles client to 20 hours of lawyer’s work on the matter.” Thus, the lawyer must refund $4,200—the $6,000 minus the earned lawyer fees of $1,650 (for 5.5 hours of work) and the $150 filing fee.
In the second scenario, the facts are identical except that the client agreement provides that the lawyer is charging $6,000 as an “engagement fee” instead of a retainer. The opinion explains that the same result ensues, as the lawyer only worked 5.5 hours on the case and the client is entitled to the same refund.
There are no magic words a lawyer can use to change an advance payment into a general retainer, the opinion says. “An attorney cannot treat a fee as ‘earned’ simply by labeling the fee ‘earned on receipt’ or referring to the fee as an ‘engagement retainer.’”
In the third and final scenario, the lawyer charges a $15,000 “nonrefundable” flat fee for representing a client in a criminal law matter. The client pays the full fee and the lawyer does some preliminary work on the case, including reviewing the police report, contacting the prosecutor’s office and law enforcement, handling the arraignment and filing an appearance. However, shortly thereafter, the client terminates the relationship and wants a partial refund.
The opinion explains that the lawyer must refund the portion of unearned fees, even though this was labeled as a nonrefundable fixed fee. “Flat fees are not general retainers and must not be treated as such,” the opinion reads.
Impact on fee agreements
The enduring impact of the opinion, according to Wake Forest University School of Law professor Ellen Murphy, is that it reiterates the difference between earned and unearned fees.
“Fundamentally, there are just two types of fees: earned and unearned. The rules are clear on how a lawyer, as fiduciary, must handle both. This opinion, while not novel, reminds us that our increasingly complicated contract terms do not change this.”
While many state ethics opinions have addressed the question, the ABA opinion likely will have much more impact, Joy says. “This ABA opinion is helpful because it is likely to gain more public attention than state ethics opinions. It is also likely to make its way into new editions of professional responsibility textbooks, and [be] the subject of continuing legal education programs.”
While the opinion is comprehensive, Joy says that it may be more of an uphill challenge to get some family and criminal law attorneys to switch from what is often a common practice of flat or nonrefundable fees.
Criminal lawyers regularly charge flat fees and often require full payment or a substantial down payment up front.
“Historically, the lawyers have considered the fee earned—regardless of the amount of work required,” Joy says. “They explain this to their clients, and they believe it is perfectly fine because the client agrees to the arrangement. Because of this practice, I believe many criminal law practitioners will continue to charge in this way and will think that the ABA ethics opinion does not cover their type of practice.”
This story was originally published in the August-September 2023 issue of the ABA Journal under the headline: “Retainers Can Lead to Ethics Issues: Formal opinion says fees must be earned.”
David L. Hudson Jr. teaches at Belmont University College of Law. He is the author, co-author or co-editor of more than 40 books. For much of his career, he has focused on the First Amendment and professional responsibility.
