Opinion #206. Non-Refundable Flat Fee Agreements (Vacated 12/03/2014)
Issued by the Professional Ethics Commission
Date Issued: December 12, 2012
The Commission has been asked to review and advise as to the current ethical propriety of a flat fee arrangement whereby the lawyer agrees to perform all services for a set price. The fee agreement specifically states that the fee is a non-refundable minimum fee deemed earned by the Lawyer upon the execution of the agreement. The agreement also states that the client acknowledges the fee is not excessive.
The question is whether such an agreement is enforceable and/or proper under the Maine Rules of Professional Conduct.
An opinion on this question requires a review of the definitions and provisions of several of the Maine Rules of Professional Conduct, as illuminated by reference to opinions in other jurisdictions.
M. R. Prof. Conduct 1.5(a) lists the factors to be considered in determining the reasonableness of a fee, which include, inter alia, the time and labor required, the responsibility assumed, the amount involved and the results obtained. Comment 4 to the Rule states that “[a] lawyer may require advance payment of a fee, but is obligated to return any unearned portion.” See also M. R. Prof. Conduct 1.16(d), which provides that upon termination of representation “a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests,” and specifically requires an attorney’s “refunding [of] any advance payment of fees or expenses that has not been earned or incurred.”
M. R. Prof. Conduct 1.15(b) (7) (iii) defines “retainer” as
a fee paid to an attorney for professional services that is earned upon the attorney’s engagement. A retainer payment is the property of the attorney when received. “Retainer” does not include a payment by a client as an advance payment that will be credited toward fees for professional services as the attorney earns the fees.
The fee in question calls for performance of “all services for a set price” and thus falls into the category of what is sometimes referred to as a “special retainer” rather than a “general retainer” or “classic retainer,” as contemplated by Rule 1.15(b)(7)(iii). The “general” or “classic” retainer, also called an “engagement” retainer, secures an attorney’s “availability” for any legal services that may arise during a specified term. Kelly v. MD Buyline, Inc., 2 F.Supp.2d 420, 445 (N.Y. 1998); In re Mance, 980 A.2d 1196, 1202 (D.C. App. 2009). “A flat fee is different from an engagement retainer, which ‘is a fee paid, apart from any other compensation, to ensure that a lawyer will be available for the client if required.’ ” Id., citing RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 34 cmt. e (2000) and In re Sather, 3 P.3d 403, 410 (Colo. 2000).
As of 1996, the American Bar Association “and bar association ethics boards in at least eighteen states ha[d] addressed the permissibility of nonrefundable retainers,” and noted that the states were “still split on the issue.”1 Five states took “a strong stance against nonrefundable retainers,” seven states and the ABA had “decided nonrefundable retainers [were] permissible, but only with substantial qualifying rules” and “five states allow[ed] nonrefundable retainers with only minimal qualifiers.”2 The engagement retainer under M. R. Prof. Conduct 1.15(b) (7) (iii) is “earned upon receipt,” subject to restrictions, discussed below, in rare occasions, i.e., death, incapacity or other premature termination.
In contrast, a flat fee, in most jurisdictions, is considered to be a “special retainer” for specific services or a specific assignment and should be treated as “an advance,” deposited into the attorney’s trust account until earned and not treated as property of the attorney when received. As of 1996, not many jurisdictions had had occasion to decide the precise issue of how flat fees were to be treated. In September, 2009, the D.C. Court of Appeals in In re Mance, supra, provided a summary of the prevailing views across the country as of that date, most of which had reached the conclusion that flat fees are generally to be treated as “advances of unearned fees.”3
This treatment of flat fees, and nonrefundable fees in general, has developed considerably over the past 20 years. “While the ethical issues surrounding nonrefundable retainers were certainly considered prior to the late 1980s, the New York Court of Appeals case In re Cooperman4 and the academic work of professors Lawrence Cunningham and Lester Brickman,” who authored an amicus curia brief in Cooperman and several law review articles on the subject, “mark[ed] the beginning of a resurgence of debate on this topic.”5 The New York Court of Appeals in Cooperman upheld the decision of the Appellate Division, which imposed a two year suspension on Attorney Cooperman, for violating the New York Code of Professional Responsibility by repeatedly using special nonrefundable retainer fee agreements with his clients.
Essentially, such arrangements are marked by the payment of a nonrefundable fee for specific services, in advance and irrespective of whether any professional services are actually rendered. The local Grievance Committee twice warned the lawyer that he should not use these agreements. After a third complaint and completion of prescribed grievance proceedings, the Appellate Division suspended the lawyer from practice for two years. It held that the particular agreements were per se violative of public policy.
633 NE.2d at1070.
One abiding principle that is referenced in virtually all of the writings on the issue of “non-refundability” is that the client must retain at all times the unfettered right to terminate the attorney /client relationship, with or without cause.
That the client may at any time for any reason or without any reason discharge his attorney is a firmly established rule which springs from the personal and confidential nature of the relation which such a contract of employment calls into existence. If the client has the right to terminate the relationship of attorney and client at any time without cause, it follows as a corollary that the client cannot be compelled to pay damages for exercising a right which is an implied condition of the contract.
Kelly v. MD Buyline, Inc, supra., 2 F.Supp.2d at 444 - 445, citing Martin v. Camp, 219 N.Y. 170, 174, 114 N.E. 46, 48 (1916). Accordingly, “it may become necessary to refund even a portion of a[n engagement] retainer if the lawyer withdraws or is discharged prematurely,” although the case law and treatises on the subject of “nonrefundable retainers” tend to involve “special retainers” or “flat fee” cases. In re Mance, supra, 980 A.2d at 1202, citing RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 38 cmt. g (2000).
In re Mance involved a $15,000.00 flat fee for representation in a homicide defense case. The court adopted the Board on Professional Responsibility’s recommended sanction of a public reprimand over the objection of Bar Counsel, who had recommended a period of suspension in the case. Mance involved charges of misappropriating client funds, commingling funds with client funds, failing to maintain complete records of client funds, failing to treat an advance as client funds, failing to take timely steps to surrender client funds and failing to deposit client funds in a specially-titled trust or escrow account.6
The attorney in Mance returned the full $7,500.00 deposit made by the client’s father, but it was not until 4 – 5 months after he was discharged, very soon after the retainer was paid. The attorney had deposited $6,010.00 of the retainer into a client escrow account and the balance into his operating account and although he immediately agreed to refund the payment, he “did not have the funds readily available.” 980 A.2d at 1200. The hearing committee found that the flat fee was not an “advance” but that the attorney improperly “commingled funds.” The committee did not find that the attorney failed “to take timely steps to surrender client funds,” instead “noting that he acted honorably, and after some delay, refunded his entire fee” even though he had spent some time advising the client and his father. Id. at 1201. The Court, however, agreed with Bar Counsel’s argument that the flat fee was “an advance of an unearned fee” and that the “fee remained [the father’s] property upon transfer to Respondent, as no client consent was provided to a different arrangement” contrary to the hearing committee’s finding that the client’s father “had agreed that the $7,500 belonged to respondent upon receipt” and the Board’s interpretation that “a flat fee is not an advance on unearned fees.” Id.
Referencing D.C.’s Rule 1.5(a) which requires that “a lawyer’s fee shall be reasonable,” the Court stated that “an attorney earns fees only by conferring a benefit on or performing a legal service for the client.” 980 A.2d 1202, citing the Colorado Supreme Court in Sather, supra, 3 P.3d at 410. The Mance Court went on to state that a flat fee is earned “only to the degree that the attorney actually performs the agreed-upon services.” Id., citing Alan Rothrock, The Forgotten Flat Fee; Whose Money is it and Where Should it be Deposited?, 1 FLA. COASTAL L.J. 293, 346 (1999). In a lengthy discussion of the history and competing interests of the client and attorney in flat fee agreements, the Court concluded “that the client’s interest in protecting the funds override that of the lawyer’s in immediate access to them and that the public is ultimately better served by requiring that the lawyer keep flat fees in a trust or escrow account” until earned. 980 A.2d at 1203. The Court went on to discuss the preservation of the client’s right to choose his or her counsel, including the right to discharge an attorney. Indeed, the Court found that the respondent’s delay in returning the flat fee hindered the complainant from obtaining new counsel for his son.
The Mance Court acknowledged that its holding would foreclose a widely-used practice by attorneys of treating “flat fees and other forms of advance fees as their own property,” but expressed its confidence that the “Board of Governors, the Bar’s relevant sections, and the Board and Bar Counsel will take steps to inform the Bar and provide attorneys with helpful guidance on how to conform their practice to the rule” announced in its decision. 980 A.2d at 1206. Lastly, the Court referred to its decision as a “default rule” and noted that “an attorney may obtain informed consent from the client to deposit all of the money in the lawyer’s operating account or to deposit some of the money in the lawyer’s operating account as it is earned, per their agreement” and continued on to define “informed consent.” See M. R. Prof. Conduct 1.0(e).
While one author has suggested that Mance “may seem like a killjoy for practitioners considering flat fees” or those who currently use them, he noted that the Court in Mance provides sufficient “methods by which attorneys can accelerate access to flat fee funds” such that the “high bar” for attorneys drafting fee agreements is not insurmountable and that with careful drafting, attorneys may “ethically gain immediate access to flat fees.”7
Accordingly, the Commission concludes that a “flat fee agreement,” which specifically states that the fee is “a non-refundable minimum fee earned by the lawyer upon the execution of the agreement” is impermissible under the Maine Rules of Professional Conduct. Flat fee agreements may not describe any fee as non-refundable or earned upon receipt but may describe the advance fee payment as the lawyer’s property subject to refund. The client and the attorney may agree upon a set price for certain services, and the agreement may provide that portions of the fee are earned, and become property of the attorney, at certain clearly defined benchmarks or milestones in the representation. The agreement may also specify that a flat fee constitutes complete payment for specified services and may require that the fee be paid in whole or in part in advance of the lawyer providing the services so long as the client is advised that the client-lawyer relationship may be terminated at any time and that the client will be entitled to a refund of all or a portion of the fee if the agreed-upon legal services are not provided.8
Whether or not a fee is excessive is ultimately determined, generally at the end of the representation, by applying the factors set forth in M .R. Prof. Conduct 1.5(a) regardless of what the written agreement may say. The only exception to the rule that all fees are refundable would be a true availability-only retainer, as set forth in M. R. Prof. Conduct 1.15(b) (7) (iii).
1 Alexander K. McKinnon, Analytical Approaches to the Nonrefundable Retainer, 9 Geo. J. Legal Ethics 583 (Winter, 1996).
2 Id., f.n. 2 – 4 and Appendix attached thereto. There has been a developing body of law since 1996. This opinion will not provide an exhaustive nationwide update but rather will reference the reasoning behind decisions that have assisted the Commission in its interpretation of the Maine Rules of Professional Conduct and its opinion on the question before it.
3 980 A.2d at 1205. The opinion indicates the case was argued on October 5, 2007 and decided on September 24, 2009. It is unknown whether the delay was due to a court backlog or the court’s difficulty in reaching a decision.
4 633 N.E.2d 1069 (N.Y. 1994).
5 Tyler Moore, CURRENT DEVELOPMENT 2009 – 2010: Flat Fee Fundamentals: An Introduction to the Ethical Issues Surrounding the Flat Fee After In re Mance, 23 Geo. J. Legal Ethics 701, 704 (Summer, 2010); See Lester Brickman & Lawrence A. Cunningham, Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law, 57 FORDHAM L. REV. 149 (1988); Lester Brickman & Lawrence A. Cunningham, Nonrefundable Retainers Revisited, 72 N.C. L. REV. 1 (1993); Lester Brickman & Lawrence A. Cunningham, Nonrefundable Retainers: A Response to Critics of the Absolute Ban, 64 U. CIN. L. REV. 11 (1995).
6The Complainant told Bar Counsel that he wished to withdraw his complaint after he received his full retainer back (and prior to Respondent becoming aware of the Bar Complaint) but Bar Counsel refused to drop the case.
7 See Moore, supra at note 5, at 714.
8 See Minn. R..Prof. Conduct 1.5(b)(1) (effective July 1, 2011).