Ethics Question of the Month October 2022

Allow Me to Be Upfront With You

The Question

Non-refundable fees and retainers - what's permissible?

The Situation

Arden and Morgan are well-known, successful criminal defense attorneys. Each has a solo practice, and both work part-time to limit their practice to a small handful of cases that they find interesting or challenging.  The rest of the time they travel and spend time volunteering for non-profit organizations.

The two have different fee structures:

  • Arden charges an hourly rate with a non-refundable retainer of $10,000 and up, depending on the anticipated work required. After the retainer is exhausted, the client is required to pay additional, refundable retainers until the case is over. 
  • Morgan charges a flat, non-refundable fee, starting at $20,000 and up, depending on the amount of work anticipated.  However, that flat fee covers pre-trial matters, the trial, post-verdict motions, and appeals, regardless of the amount of time expended. 

Their respective fee structures work well because they are simple and easy for the client to understand.  Sometimes, Morgan loses money when the case turns out more complicated than expected, while Arden’s retainer prevents that outcome.  But both Arden and Morgan occasionally have cases that end quite quickly and allow them to keep the nonrefundable retainer or flat fee.      

The Question

Which of these two fee structures is permissible under the ethics rules?

The Correct Answer is D Of 246 Responses, 39% are correct.

  1. A 32
  2. B 54
  3. C 62
  4. D 98

The Explanation

Rule 1.04 of the Texas Disciplinary Rules of Professional Conduct requires that legal fees be “reasonable” under the circumstances of the particular representation.” The Rule applies regardless of whether the fee is hourly or flat and whether a retainer is involved: 

a) A lawyer shall not enter into an arrangement for, charge, or collect an illegal fee or unconscionable fee. A fee is unconscionable if a competent lawyer could not form a reasonable belief that the fee is reasonable.

(b) Factors that may be considered in determining the reasonableness of a fee include, but not to the exclusion of other relevant factors, the following:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly;

(2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;

(3) the fee customarily charged in the locality for similar legal services;

(4) the amount involved and the results obtained;

(5) the time limitations imposed by the client or by the circumstances;

(6) the nature and length of the professional relationship with the client;

(7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and

(8) whether the fee is fixed or contingent on results obtained or uncertainty of collection before the legal services have been rendered.

While attorneys may use the term “non-refundable retainer” to mean varying things, the only truly “non-refundable” retainer is one that secures the availability of a busy attorney who turns away other work. It does not pay for legal services.  In Ethics Opinion 611 (2011), the Professional Ethics Committee, citing Ethics Opinions 391 (1978) and 431 (1986), found that:

A legal fee relating to future services is a non-refundable retainer at the time received only if the fee in its entirety is a reasonable fee to secure the availability of a lawyer’s future services and compensate the lawyer for the preclusion of other employment that results from the acceptance of employment for the client. A non-refundable retainer meeting this standard and agreed to by the client is earned at the time it is received and may be deposited in the lawyer’s operating account. However, any payment for services not yet completed does not meet the strict requirements for a non-refundable retainer (as that term is used in this opinion) and must be deposited in the lawyer’s trust or escrow account. Consequently, it is a violation of the Texas Disciplinary Rules of Professional Conduct for a lawyer to agree with a client that a fee is non-refundable upon receipt, whether or not it is designated a “non-refundable retainer,” if that fee is not in its entirety a reasonable fee solely for the lawyer’s agreement to accept employment in the matter. A lawyer is not permitted to enter into an agreement with a client for a payment that is denominated a “non-refundable retainer” but that includes payment for the provision of future legal services rather than solely for the availability of future services. Such a fee arrangement would not be reasonable under Rule 1.04(a) and (b), and placing the entire payment, which has not been fully earned, in a lawyer’s operating account would violate the requirements of Rule 1.14 to keep funds in a separate trust or escrow account when funds have been received from a client but have not yet been earned.

Here, Arden only works part-time and maintains a light case load and is therefore unlikely to be eligible for a retainer that secures availability.

To be clear, flat fees are common and permitted by the Rules.  But they should be kept in the lawyer’s trust account until earned and should not be deposited in an operating account upon receipt or before any work is performed.  If the amount of the flat fee for the work performed turns out to be unreasonable under Rule 1.04(b), then at least part of that fee is refundable.  If Morgan intends the flat fee to be nonrefundable regardless of the amount of work performed, the fee is inappropriate.  The best response is D. 

Bluebook Citation

Allow Me to Be Upfront With You: Ethics Question of the Month - October 2022, Texas Center for Legal Ethics (2022), from https://legalethicstexas.com/ethics-question-of-the-month/ethics-question-of-the-month-october-2022/ (last visited Dec 02, 2022)