Obligations When Receiving Flat Fees and Other Fees Paid in Advance

The committee emphasized that the opinion seeks to clarify the proper handling and disposition of fees paid in advance for legal work to be performed in the future and concluded that fees paid in advance, including flat fees, have to be deposited in a client trust account until the fee is earned. For lawyers charging flat fees, especially where the jurisdiction’s version of Model Rule 1.15 does not specifically address flat fees, this opinion may clash with their current practices. The opinion emphasizes that labeling a fee as “fixed,” “nonrefundable,” or “earned-on-receipt” does not relieve a lawyer from the obligation to deposit the fee in a client trust account. We discuss the primary conclusions the standing committee reached and explain the ramifications of the opinion.

Distinguishing Advances from Retainers

The opinion observes that some terms lawyers use to describe fees, such as “retainer” or “retainer fee,” are not found in the Model Rules. It then distinguishes money paid at the start of representation as security for future billings from an “availability retainer” or “general retainer,” which is paid in exchange for the lawyer’s promise to be available to represent the client. Such general retainers are solely to reserve the lawyer’s availability and are the only type of retainer that may be deemed earned upon receipt.

While a general retainer is considered earned upon receipt, the opinion points out that it is not truly nonrefundable. If the amount charged is unreasonable or if the attorney is not able or available to represent the client when needed, the retainer is subject to being refunded to the client.

The opinion notes that general retainers “are quite rare” and have “largely disappeared from the modern practice of law.” Given the rarity of general retainers, the balance of the opinion focusses on advance fees paid to a lawyer, such as for defense of criminal charges or discreet legal matters not handled on a contingent fee basis.

Earning a Flat Fee in Stages

In our experience, most lawyers providing criminal defense representation usually charge a fixed or flat fee for most state court and many federal court matters other than white-collar crimes or the representation of corporate and wealthy clients. When charging a flat fee, most lawyers want all or most of the flat fee paid in advance to ensure payment no matter the outcome of the case. The opinion states that such payments, no matter what they are called, are fees paid in advance of the legal work to be completed and must be placed in a client trust account until earned through the lawyer completing work for the client.

While the opinion’s conclusion may be surprising to many lawyers charging flat fees for criminal defense or discrete legal services, such as drafting a will or incorporating a small business, the opinion explains that several courts and ethics opinions permit dividing the representation into segments so that portions of the flat fee may be considered earned before completing the representation. Some jurisdictions have adopted this approach in their rules. For example, Rule 1.5(h) of the Colorado Rules of Professional Conduct recognizes that portions of a flat fee may be earned in stages. Comment [15] to Colorado Rule 1.5 explains that “in a criminal defense matter, a lawyer and client may agree that the lawyer earns portions of the flat fee upon the lawyer’s entry of appearance, initial advisement, review of discovery, preliminary hearing, pretrial conference, disposition hearing, motions hearing, trial, and sentencing.”

Approaching the representation in stages, which the opinion also refers to as “milestones” of representation, allows a lawyer to be partially paid prior to the end of the representation. Such an approach also helps to establish what would have to be refunded in case the representation terminates prior to the end of a case or the agreed-upon legal work. When using a stages approach with a flat fee, the opinion cautions that “extreme ‘front-loading’ of payment” may make a fee unreasonable.

“Nonrefundable” and “Earned-upon-Receipt” Fees

The opinion emphasizes that using labels such as “nonrefundable retainer,” “nonrefundable fee,” or “earned on receipt” in a fee agreement does not make advance fees in fact earned or nonrefundable. Additionally, the opinion states that these are not recognized types of fees and using such terms is misleading.

In support of its position, the opinion cites Model Rule 1.5(a), which states that “[a] lawyer shall not make an agreement for, charge, or collect an unreasonable fee or unreasonable amount for expenses.” Comment [4] further explains that “[a] lawyer may require advance payment of a fee, but is obliged to return any unearned portion.”

To illustrate how a fee may not be fully nonrefundable or earned upon receipt, consider the following example. A client retains a lawyer for representation in a drug possession case and pays a flat fee of $7,500. The day after paying the flat fee, the lawyer has spent only an hour on the matter when the client decides to hire another lawyer. If the lawyer does not refund all but the equivalent of a reasonable hourly rate for one hour’s work on the case, the fee would be unreasonable. The same is true if, after the initial client meeting and receipt of the fee, the lawyer discovered a conflict and had to withdraw from representing the client.

Anti-commingling Rule and Protection of Client Funds

The opinion discusses why the advance payment of fees, including flat fees, has to be deposited in a client trust account. Model Rule 1.15(a) states that client property, which includes fees paid in advance, must be held “separate from the lawyer’s own property” and “kept in a separate account in the state where the lawyer’s office is situated, or elsewhere with the consent of the client.” In 2002, Model Rule 1.15 was amended to address advance fees by adding a new paragraph (c), which states: “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 are incurred.”

Rule 1.15 was amended because the Commission on Evaluation of the Rules of Professional Conduct (the Ethics 2000 Commission) found “that the single largest class of claims made to client protection funds is for the taking of unearned fees.” With the addition of paragraph (c), Model Rule 1.15 provides more explicit guidance to lawyers. However, not all jurisdictions have amended their Rule 1.15 to provide similar guidance.

Jurisdictional Variations

The opinion recognizes that a minority of jurisdictions have not taken the Model Rule approach to flat fees or fees labeled “nonrefundable” or “earned upon receipt,” either through variations in their ethics rules or through advisory ethics opinions. In some of those jurisdictions, such fees may be considered earned upon receipt and nonrefundable if the client signs a fee agreement where the amount paid is labeled as such. In a few jurisdictions, a flat fee that does not exceed a certain amount—for example, $1,000 in California or $2,000 in Missouri—does not have to be deposited in a trust account. Jurisdictions that do not follow the Model Rule approach usually provide that flat fees and other forms of advance fees must be refunded if the amount charged was unreasonable or if the lawyer does not complete all of the work. The opinion finds these jurisdictional variations to be in conflict with the safekeeping policy of the Model Rules and to create “unnecessary risks for the client.”

Conclusion

As ABA Formal Opinion 505 explains, in most jurisdictions advance fees, no matter how they are labeled, have to be deposited in a client trust account until earned. Given the fact that some states have taken a different position on this issue, either through their ethics rules or via advisory ethics opinions, lawyers who currently charges flat fees or so-called earned-upon-receipt or nonrefundable fees should check the authority in their jurisdictions. If their jurisdictions have not addressed such fees, they should follow the guidance of this new ethics opinion.