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THE ASSOCIATION OF THE BAR OF THE CITY OF NEW YORK

FORMAL OPINION 1996-5

COMMITTEE ON PROFESSIONAL AND JUDICIAL ETHICS

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May 31, 1996

ACTION: FORMAL OPINION

OPINION:

TOPIC: Fees; Nonrefundable Retainers; Advertising of Fees; Competence.

DIGEST: A lawyer may not charge an "initiation/retainer" fee that may be forfeited in its entirety if the client chooses to terminate the attorney-client relationship. It is likewise improper for a lawyer to advertise that certain clients may be afforded a discount from "standard" fees without also making available to prospective clients information concerning those fees.

CODE: DRs 2-101(c)(4), 2-101(E), 2-102, 2-103(D), 2-106(A), 2-110(A)(3), 2-110(13)(4), 2-110-(c)(1)(f), 6-101; EC 2-33.

QUESTIONS

1. May a lawyer charge a client an "initiation/retainer fee" that may be forfeited in its entirety upon discharge of the lawyer by the client?

2. May a lawyer advertise that certain clients may be afforded a discount from "standard" fees without also making information concerning such fees available to prospective clients?

OPINION

The inquirer plans to institute a program to provide prepaid legal services to persons involved in a certain industry. The program would be limited to services in connection with questions that do not require substantial legal research, and would not be for clients who have substantial transactional legal work. The inquirer's advertising literature will make these limitations clear.

Participating clients would sign a retainer agreement and pay an "initiation/retainer" fee of $1,000 plus, beginning 60 days after the initial payment, a fee of $500 per month payable in advance. The participant would be entitled to receive: (a) unlimited telephone consultations n1 of not more than 15 minutes each and not more than one every twenty-four hours; (b) two in-office consultations per month each up to one hour in length; and (c) review of up to three contracts per month. Client telephone calls would be returned within 48 hours.

n1 "Telephone consultation" refers to a client-initiated call seeking legal advice. The inquirer's return call responding to the client's inquiry would have no time limit and would not count against the client's number of telephone consultations.

Although participants would be permitted to terminate the relationship at any time, the initiation fee would be forfeited if termination occurs more than five days after that fee is paid. In addition, if termination occurs more than 90 days after payment of the initiation fee, participants would receive a refund of their last monthly fee payment only if termination occurs within 10 days of the date of that payment. If a participant leaves the program and later seeks to rejoin, payment of another initiation fee would be required. The program would allow termination of any participant for failure to pay two consecutive monthly payments. A participant would be entitled to a 25% discount from the inquirer's "standard hourly rates or flat fees" for work outside the scope of the program.

The Committee has the following concerns regarding the proposed program:

1. Fees. The Committee is of the view that certain aspects of the proposed fee structure violate the rule against nonrefundable retainers articulated by the New York Court of Appeals in Matter of Cooperman, 83 N.Y.2d 465 (1994). n2 Under that decision, an agreement that "compromise[s] the client's absolute right to terminate the unique fiduciary attorney-client relationship" is void as against public policy and violative of the Code of Professional Responsibility, particularly DR 2-110(A)(3), DR 2-110(B)(4) and DR 2-106(A). Id. at 471. Under the inquirer's proposal, a client who decided to terminate the relationship after the fifth day could do so only upon penalty of forfeiting the entire initiation fee. Likewise, under the proposal, a client who terminated after the 10th day following the making of a monthly payment would forfeit the entire payment. As the Court of Appeals wrote in Cooperman, such agreements:

diminish the core of the fiduciary relationship by substantially altering and economically chilling the client's unbridled prerogative to walk away from the lawyer. To answer that the client can technically still terminate misses the reality of the economic coercion that pervades such matters.

Thus, the inquirer's agreement with the client must provide that, upon termination, the client will receive a refund of all unearned fees. We do not believe that the forfeiture inherent in the proposed arrangement, with respect to the initiation fee or otherwise, can be justified as compensation for the administrative costs of opening a file for the client and setting up necessary computer records, as the inquirer suggested. These costs are properly chargeable to overhead, and are not directly billable to the client. See ABA 93-379.

n2 While EC 2-33 encourages lawyers to cooperate with qualified legal assistance organizations providing prepaid legal services, the proposed program does not fall within the definition of a "Qualified Legal Assistance Organization" set forth in Definition 8 and DR 2-103(D)(1) through (D)(4). The program is simply a method for selling legal services for prepaid retainer amounts and for advertising the availability of that program.

This conclusion is bolstered by the provisions of DR 2-110, which deal with withdrawal from employment. Withdrawal is mandatory if the inquirer is discharged by the client (DR 2-110(B)(4)) and permissive if the client "deliberately disregards an agreement or obligation to the lawyer as to expenses or fees," DR 2-110(c)(1)(f). Particularly pertinent here are the provisions of DR 2-110(A)(3) that require withdrawing attorneys to "refund promptly any part of a fee paid in advance that has not been earned."

Finally, we note that the proposed plan calls for specified and agreed-upon delays in the time the inquirer will take to return telephone calls, and otherwise contains certain restrictions on the extent of work to be performed. The inquirer should at all times be mindful of -- and nothing in the plan relieves the inquirer from -- the obligation, as set forth in DR 6-101, not to handle a legal matter without preparation adequate in the circumstances and not to neglect entrusted legal matters. We express no opinion on the implications of a limitation on the nature or scope of an engagement for legal malpractice or other civil liability purposes.

2. Advertising. The inquirer should be careful to comply with the requirements of DR 2-102 both with respect to the format and content of any advertising, as well as with the requirements for filing of copies with the applicable Departmental Disciplinary or Grievance Committee. In particular, the Committee is troubled by the inquirer's concept of a fee discount being offered to plan participants for work not covered by the plan. What are the inquirer's "standard hourly rates or flat fees"? DR 2-101(c)(4) authorizes advertising of a range of fees for services, hourly rates and fixed fees. To the extent that advertising a discount from a standard flat fee constitutes advertising a fixed fee, DR 2-101(E) requires a written statement be available to the public "clearly describing the scope of each advertised service," which statement must be delivered to the client "at the time of retainer for any such service." Advertising a discount from an unstated hourly rate or fixed fee is only half of the equation and might be considered misleading or, if no standard fee schedule and service description in fact exists, untruthful.

CONCLUSION

For the foregoing reasons, the questions presented are answered in the negative.


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