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ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS
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Year 1991 Ethics Opinions
Formal Opinion 1991-4 Formal Opinion 1991-2
Formal Opinion 1991-3 Formal Opinion 1991-1

THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK

FORMAL OPINION 1991-3

COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS

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May 16, 1991

ACTION: Formal Opinion

OPINION:

The Committee has received several inquiries concerning the ethical propriety of "nonrefundable retainers" for lawyers practicing in New York. This Opinion addresses whether a lawyer may ethically enter into a fee agreement with a client providing for a fee paid in advance of the performance of the services that is to be "nonrefundable". We conclude that (i) various types of fee agreements that may commonly be thought of or referred to as "nonrefundable" are ethically permissible; however, (ii) no fee paid in advance can be literally "nonrefundable" in all circumstances; and, therefore, (iii) a lawyer may not ethically represent or characterize to a client a fee being paid in advance as "nonrefundable".

I.

There has been controversy over the ethical appropriateness of "nonrefundable retainers". For example, the Bar Association of Nassau County has opined that a lawyer may never enter into a fee agreement with a client that calls for a nonrefundable retainer and that unearned advance fee payments must be refunded to a client upon discharge from employment. Opinion 85-5 (June 18, 1985). See also Bar Association of Greater Cleveland Opinion 84-1 (October 26, 1984) (a lawyer may not require a nonrefundable retainer to secure his or her availability over a specified period of time without regard to a specified matter); Brickman and Cunningham, "Nonrefundable Retainers: Impermissible Under Fiduciary, Statutory and Contract Law", 57 Fordham L. Rev. 149 (1988).

At what might appear to be the other end of the spectrum, the Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility has expressly disagreed with the Nassau County Bar. In Formal Opinion 85-120 (Jan. 29, 1987), the Pennsylvania Committee concluded that a nonrefundable retainer places a lawyer on call so that the lawyer must forego other employment and that it is proper to compensate a lawyer for that factor. That Committee concluded, therefore, that Pennsylvania lawyers could enter into "nonrefundable retainer" agreements with clients provided that the fee charged was reasonable and not excessive and that such agreements were fully explained to the clients and reduced to writing.

To some degree, these apparently differing views about "nonrefundable retainers" result from differing uses of the term. For purposes of this Opinion, we distinguish among three types of fee arrangements, each of which may on occasion be referred to as a "nonrefundable retainer", as follows:

(i) Minimum fee. A "minimum fee" is a stated minimum payment a lawyer receives for undertaking a representation regardless of the amount of work actually involved. Such a minimum fee may entitle the client to some amount of legal services, with additional charges for work beyond that amount, but the client would normally receive no refund if the actual services are less than the total covered by the minimum. Often, the minimum fee amount is collected in advance. Such a minimum fee might reflect the recovery of necessary start-up costs that are incurred with each new matter -- costs which alternatively, for example, could be recovered through a higher than normal charge for the first few hours of representation -- or compensation for the fact that other employment will be foreclosed as a result of taking on the new matter.

(ii) Flat fee. A "flat fee" is a stated amount for the representation contemplated, to be paid regardless of the actual hours that are ultimately required. The agreement might provide for an additional fee if the representation extends to an additional phase (e.g., the case goes to trial or there is an appeal). The flat fee reflects a sharing of risks between lawyer and client and generally provides the client with the security or comfort of a known cost for a particular service.

(iii) Retainer. A "retainer" is an amount paid for reserving the availability of a lawyer, generally with respect to a particular period of time. The retainer may also provide that the lawyer be on call to represent a specific client in connection with a particular event or transaction, if the client decides to use the lawyer. In the latter case, the retainer agreement may implicitly contemplate that the lawyer could not represent anyone else in connection with the event or transaction where such representation could interfere, by reason of a conflict of interest or otherwise, with the representation of the client who is reserving the services of the lawyer. Where the retainer is for a specified period of time, it is generally contemplated that the lawyer will limit his or her other commitments so as to be available for the client paying the retainer. Fees for actual legal services performed might be credited against the retainer amount (in which case the retainer would resemble a minimum bill) or they might be billed in addition to the retainer.

These distinctions reflect basic differences in the nature of fee arrangements both in terms of the client's expectations and the lawyer's justification. Any of these three types of arrangements might, under various circumstances, be called "nonrefundable", since the client would not generally have an expectation of receiving a refund at the end whether as a consequence of the results obtained, the hours actually worked or the nature of the services actually performed. n1 Therefore, each of these fee arrangements is clearly distinguishable from a simple "advance" against future fees and expenses. In addition, each might be referred to as a "nonrefundable retainer".

n1 We discuss separately below the issue of refund where the lawyer withdraws or is discharged by the client.

II.

The principal ethical issue involving "nonrefundable" fee arrangements is whether the lawyer is thereby charging a fee that is "excessive" within the prohibition of DR 2-106(A) of the Lawyer's Code of Professional Responsibility (the "Code").

DR 2-106(B) defines what is an excessive fee and lists a number of relevant factors to be considered in determining a fee's reasonableness. DR 2-106(B) states in full:

"A fee is excessive when, after a review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee. Factors to be considered as guides in determining the reasonableness of a fee include 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 or made known 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 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.

8. Whether the fee is fixed or contingent."

The standard set forth in DR 2-106(B) is highly fact-specific, and the Committee does not express any opinion on its operation in the abstract.

DR 2-106(A) provides that a "lawyer shall not enter into an agreement for, charge or collect an illegal or excessive fee". Thus, every fee agreement must be justifiable at the time it is entered into based upon the factors listed in DR 2-106(B). The Committee concludes that, in the case of fees agreed to and paid in advance of the time the services are performed, the point of termination of the representation constitutes a time at which the fee is "charge[d]" or "collect[ed]" by the lawyer. Therefore, ethically, no fee or fee agreement can ever be absolutely "nonrefundable" as that term may be literally understood, since it will always be subject to the proscription of DR 2-106(A), as explicated by DR 2-106(B).

At the same time, it is the opinion of this Committee that flat fees, minimum fees and traditional retainers can satisfy the criteria of reasonableness. In fact, one can argue that such fee arrangements are at least implicitly contemplated by DR 2-106(B). The relevant factors clearly include more than the number of hours of legal services actually performed, the lawyer's skill and experience, and the results obtained. For example, DR 2-106(B)(2) expressly lists the likelihood that the representation in question will preclude other employment if that likelihood is "apparent or made known to the client". The preclusion of other employment would appear to be a principal justification for a traditional "retainer" (although, not necessarily the lawyer's only motivation in seeking a "retainer") and may be relevant to "minimum fee" and "flat fee" arrangements as well. n2 Similarly, the factors set out in subparagraphs (3), (5), (6), (7) and (8) of DR 2-106(B) could be relevant to the reasonableness of and provide justification for flat fees, minimum fees and retainers. All of these factors could justify a fee that might otherwise appear, when viewed after the fact, to be high relative to the actual number of hours of service performed or the results obtained.

n2 If that factor is a basis for the fee arrangement, then that circumstance should normally be explained to the client in order to fall clearly with DR 2-106(B)(2).

III.

Additional issues arise where the lawyer withdraws from the representation or is discharged by the client prematurely.

The case of withdrawal is expressly addressed by DR 2-110(A)(3) -- "any part of a fee paid in advance that has not been earned" shall be "promptly" refunded. What it means for a fee to have been "earned" is not clear. Certainly, the factors relevant to the reasonableness of the fee would apply here as well, and any amounts in excess of a reasonable fee must be refunded. The Committee believes, however, that the concepts of "reasonableness" and "earned" are not identical. How much of the fee has been "earned" will depend upon the express terms of the fee arrangement and the parties' expectations, as a matter of contract interpretation, as well as the extent to which the lawyer satisfied the client's legitimate expectations, the benefits received by the client, what the lawyer actually did during the representation and the situation in which the client is left after withdrawal. The fee "earned" may be less than an amount that might otherwise be considered not to be "excessive".

The case of discharge is affected by significant legal issues. As a matter of law, the client's right to discharge a lawyer is essentially absolute, and well-established legal precedent dictates that a client should not be compelled to continue being represented by a lawyer in whom the client has lost confidence or trust. See, e.g., Martin v. Camp, 219 N.Y. 170, 114 N.E. 46 (1916). These policies can be jeopardized by fee arrangements that purport to be "nonrefundable", especially where the lawyer is discharged before any meaningful services have been performed. Such an arrangement, if enforced, could effectively compel some clients to continue an unsatisfactory relationship with a lawyer because the client would otherwise be required to pay twice for the contemplated representation or be unable to afford new counsel. Therefore, courts have generally been reluctant to enforce such agreements and have, instead, based the compensation to a lawyer who has been discharged upon quantum meruit. See, e.g., Jacobson v. Sassower, 122 Misc. 2d 863, 474 N.Y.S. 2d 167 (1983), aff'd, 107 A.D. 2d 603, 483 N.Y.S. 2d 711 (1st Dept.), aff'd, 66 N.Y. 2d 991, 489 N.E. 2d 1283, 499 N.Y.S. 2d 381 (1985). See also Brickman and Cunningham, supra, at 153-170.

This Committee does not opine on legal questions; and, therefore, we express no view as to the legal enforceability of a "nonrefundable" agreement where an attorney has been discharged or the proper legal standard for determining the amount of the fee to which the lawyer is entitled.

As a matter of ethics, however, the Committee looks to the proscriptions and guidelines of DR 2-106. In the case of discharge where a fee has been agreed to and paid in advance, this Committee believes it appropriate to apply the analysis of DR 2-106(B), with the benefit of hindsight, to all the circumstances as they exist at the time of the discharge. That analysis would include consideration of the actual amount of work performed, the results achieved and the various other factors that could not have been known in advance when the agreement was entered into and the payment made. That analysis, therefore, could result in the conclusion that the amount of the fee already paid is unreasonable and that a refund is required.

IV.

To this point, we have discussed the ethical issues concerning the substance of various types of fee agreements that could be loosely termed "nonrefundable". We turn now to the matter of the actual usage in fee agreements of the word "nonrefundable" or other language purporting to state that the fee paid will not be refunded under any circumstances, whether such agreements are oral or written.

Because we conclude that no agreement can make a fee literally nonrefundable, being subject to (i) the reasonableness standard of DR 2-106(A) in all cases, (ii) the "not earned" standard of DR 2-110(A)(3) in the case of withdrawal, and (iii) potential legal limitations in the case of discharge, the Committee also concludes that the use of the word "nonrefundable" or equivalent language in a fee agreement is necessarily misleading. At minimum, it may be likely to cause the client to reach mistaken conclusions as to his or her legal rights. In addition, we have already noted that the words "nonrefundable retainer" as applied to fees appear to be subject to various meanings and interpretations with in the profession so that the usage is ambiguous in fact. Finally, if the issue of a possible refund arises, the lawyer will be in an obvious and untenable position of conflict. The lawyer's duty to the client would require that the lawyer advise the client that the "nonrefundable" fee is not or may not actually be nonrefundable under the particular circumstances as a matter of law, while at the same time the lawyer would presumably be desirous of retaining the amounts already paid pursuant to the fee agreement. We believe that these circumstances raise ethical problems under EC 2-19, EC 5-2, DR 5-101(A), EC 7-8, EC 7-9, DR 7-101(A), EC 9-1 and EC 9-2.

Therefore, we conclude that a lawyer may not properly denominate or characterize a fee as "nonrefundable" or otherwise use words that could reasonably be expected to convey to the client the understanding that a fee paid before the services are performed will not be subject to refund or adjustment under any possible circumstance.


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