Nonrefundable Advance Fees
Opinion rules that a lawyer may not tell a client that any fee
paid prior to the rendition of legal services is "nonrefundable"
although, by agreement with the client, a lawyer may collect a flat fee for
legal services to be rendered in the future and treat the fee as earned
immediately upon receipt subject to certain conditions.
Inquiry:
The North Carolina State Bar frequently receives complaints from
clients who have entered into fee agreements that require lump sum payments in
advance of the provision of legal services. Such fees are frequently described
as "nonrefundable" in the fee agreement. Typically, the lawyer
collects the fee from the client for legal work that is to be done in the
future and deposits the money in the firm's operating account instead of the
trust account. The fee may be paid for a certain number of hours of the
lawyer's services or it may be a flat fee for a particular legal service such
as obtaining a divorce. The State Bar usually receives a complaint when the
client-lawyer relationship is terminated prematurely, before the legal services
are rendered in full, and the lawyer declines to refund any of the advance
payment to the client.
Although 97 Formal Ethics Opinion 4 clarifies some of the issues
relating to advance or "prepaid" fees, this opinion provides
additional guidance to lawyers who desire to collect a flat fee for services at
the beginning of a representation.
Opinion:
A lawyer may charge and collect a fee prior to providing legal
representation to a client. However, the Revised Rules of Professional Conduct
require that the lawyer do three things with regard to every fee: (1) refrain
from entering into an agreement for, charging, or collecting a fee that is
clearly excessive; (2) deal honestly with the client; and (3) put all client
funds in a trust account. See Rule 1.5(a), Rule 8.4(c), and Rule 1.15-1.
Given these ethical considerations, a lawyer may treat an advance
payment of a fee as the lawyer's money, and deposit the money in the lawyer's
own account or the lawyer's firm account, only if the client agrees that
payment may be treated as earned by the lawyer when it is paid. See RPC 158. 97
Formal Ethics Opinion 4 states that there are only two types of fees paid at
the beginning of the representation that may be deposited directly into the
lawyer's or the firm's operating account: a "true" general retainer1 and a flat fee. A flat
fee is a fee paid for specified legal services to be completed for the
designated amount of money regardless of the amount of time required of the
lawyer to complete the services. See 97 Formal Ethics Opinion 4.
Although a flat fee may be deposited into an operating account at
the beginning of the representation, when the client-lawyer relationship ends,
if the fee is clearly excessive in light of the services actually rendered, the
portion of the fee that makes the total payment clearly excessive must be
returned to the client. As stated in 97 Formal Ethics Opinion 4,
"[w]hether a fee is described to a client as 'nonrefundable' or no mention
is made as to whether the fee is refundable, if a particular collected fee is
clearly excessive under the circumstances, the portion of the fee that is
excessive must be refunded."
The duty to refund any portion of a fee that is
clearly excessive exists regardless of the type of fee that was paid. This
means that there is always a possibility that a lawyer will have to refund some
or all of any type of advance fee, if the client-lawyer relationship ends
before the contemplated services are rendered. At the conclusion of the
representation, the lawyer must review the entire representation and determine
whether, in light of the circumstances, a refund is necessary to avoid a
clearly excessive fee. See Rule 1.5(b).
The possibility that a refund to the client will
be required means that no fee is truly "nonrefundable." To call such
a payment a "nonrefundable fee" is false and misleading in violation
of Rule 7.1. Moreover, the designation of the fee as "nonrefundable"
in the fee agreement has a chilling effect on the client's right to terminate
the representation at anytime. A lawyer may refer to such a fee as a
"prepaid flat fee." The lawyer may also reach an agreement with the
client that some or all of the fee may be forfeited under certain conditions
but only if the amount so forfeited is not clearly excessive in light of the
circumstances and all such conditions are reasonable and fair to the client.
See, e.g., Rule 1.8(a).
Since it is difficult for clients to understand
when a prepaid flat fee is earned upon receipt, and proof of such understanding
may be required in subsequent proceedings, it is recommended that the lawyer
obtain the client's consent in a written fee agreement. See, e.g., Rule 1.5(c)
and Rule 1.8(a).
Endnotes:
1. An advance payment for legal services must be distinguished from
a true "nonrefundable retainer." As explained in RPC 50, a
nonrefundable retainer is "consideration for the exclusive use of the
lawyer's services in regard to a particular matter…." It is later
explained in the opinion that
[r]etainers and advance payments should be carefully
distinguished. In its truest sense, a retainer is money to which an attorney is
immediately entitled and should not be placed in the attorney's trust account.
A 'retainer' which is actually a deposit by the client of an advance payment of
a fee to be billed on an hourly basis is not a payment to which the attorney is
immediately entitled. It is really a security deposit and should be placed in
the trust account. As the attorney earns the fee, the funds should be withdrawn
from the account.