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.