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.
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.
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).
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.