Yikes! ABA’s Latest Ethics Opinion Prohibits Nonrefundable Fees: Does It Change Things in Pa.?

Many solos and small firms charge their clients “nonrefundable” fees, intending to take an advance fee that can be used immediately to pay bills. In Pennsylvania, lawyers have termed these fees “nonrefundable,” and, have placed these funds directly into their operating accounts. In early May, the American Bar Association issued Formal Ethics Opinion 505, in which it opined that a fee is never “nonrefundable” and that a fee paid in advance of the provision of services can never be placed into a lawyer’s operating account. The opinion’s synopsis states:

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Under the Model Rules of Professional Conduct, a fee paid to a lawyer in advance for services to be rendered in the future must be placed in a client trust account …This protects client funds and promotes client access to legal services in the event the representation terminates before all contemplated services have been rendered. All fees must be reasonable, and unearned fees must be returned to the client. Therefore, it is not accurate to label a fee “nonrefundable” before it actually has been earned, and labels do not dictate whether a fee has been earned.

The opinion interprets several Model Rules, including: 1.5(a), 1.5(b), 1.15(a), 1.15(c), 1.15(d), and 1.16(d).

How does this affect lawyers in Pennsylvania? ABA Ethics Opinions are authored by the Standing Committee on Ethics and Professional Responsibility, a group of attorneys who specialize in the field. These opinions are considered authoritative interpretations of the Model Rules and are often cited in scholarly literature and court opinions, so they must be considered. On the issue of “nonrefundable” and “earned upon receipt” fees the Opinion takes a stand that such fees are not only disfavored, but they are also prohibited and, in fact, no such thing can exist. The opinion states:

Some lawyers use labels like “nonrefundable retainer,” “nonrefundable fee,” or “earned on receipt” in the body or title of a fee agreement. These are not actual types of fees.

The Model Rules of Professional Conduct do not allow a lawyer to sidestep the ethical obligation to safeguard client funds with an act of legerdemain: characterizing an advance as “nonrefundable” and/or “earned upon receipt.” This approach does not withstand even superficial scrutiny.

I confess that I did not know what the word “legerdemain” meant. (It means “sleight of hand” as in a magic trick.) The point the opinion makes here is undisputed (and really did not need repeating): no matter what a fee is called, if it is excessive, a portion of it must be refunded. Unfortunately, the tone of this opinion is off-putting to the point of undermining its message. This is especially true given the fact that the use of “nonrefundable” fees has been approved in some states, including Pennsylvania. Despite the ABA’s Opinion that “nonrefundable” fees only exist in the imagination, they do exist here. In fact, Comment 7 to Rule of Professional Conduct 1.15 states—“Lawyers often receive funds from which the lawyer’s fee will be paid. Unless the fee is nonrefundable, it should be deposited to a trust account and drawn down as earned.”

Further, Opinion 505 does not change the ability of Pennsylvania lawyers to place any fee into its operating account, if certain conditions are met. RPC 1.15(i) provides that fees must be placed in trust until “earned;” the rule also permits the lawyer to place an unearned fee into an operating account if there is informed consent in writing to do so. Because neither the Comment 7, nor RPC 1.15(i) are in the Model Rule, the advice in Opinion 505 does not apply in Pennsylvania. However, be sure to look at the rules in any other jurisdiction in which your matter is being litigated.

So where can the attorney looking to use flat, nonrefundable, or earned upon receipt fees turn for advice? In 2022, the Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility and the Philadelphia Bar Association Professional Guidance Committee issued Joint Formal Opinion 2022-300 on “Ethical Considerations in the Handling of Flat, Earned Upon Receipt and Nonrefundable Fees.” The opinion concludes “that, if the fee is not only simply a “flat fee” but a fee deemed ‘earned upon receipt,’ attorneys may deposit these fees into an operating account rather than a Rule 1.15 IOLTA account or other trust account.

Any fee not earned upon receipt is deemed an advance fee that may only be deposited into the operating account if the client provides informed consent, confirmed in writing in accordance with Rule 1.15(i).” Opinion 2022-300 also makes the point discussed above, that, under certain circumstances, (for instance, non-performance), a non-refundable fee might need to be fully or partially refunded if it violates RPC 1.5’s prohibition against “excessive fees.”

Based on my experiences representing Respondents before the Disciplinary Board, I advise my clients who want to deposit fees directly into their operating account to use extra caution in their fee agreements. Though not strictly required by the rule, in the agreement, label the fee as “earned upon receipt” AND include the fact that the fee will be deposited directly into operating and not held in trust. Make sure the fee agreement is in writing and counter-signed by the client. This counter-signature should be accompanied by a discussion to ensure that your client understands the difference between a trust account and an operating account and is providing true “informed consent.”

Speaking of fee agreements, I want to add a couple of practice pointers that have cropped up in my disciplinary practice recently. First, RPC 1.5(b) requires that the “basis of or rate of the fee shall be communicated to the client in writing” within a reasonable time of the commencement of the representation. The writing can be a letter, an email or, even, a text. However, according to RPC 1.5(c), a fee agreement is included in the financial records that must be preserved by a lawyer for five years. Therefore, whatever the medium of the agreement, preserve it!

Of course, if you are sending your fee agreements in texts, you are missing an opportunity to memorialize important terms and conditions of your representation. For instance, if the representation only covers a preliminary hearing, and not a trial, you must have the client’s informed consent to that limitation. Though in this case informed consent is not required to be in writing—get it in writing! So many of the problems that lead to discipline arise from miscommunications in the beginning of the representation. Putting these issues in writing protects the client and the lawyer. At a minimum, a fee agreement should include the scope of the representation, the basis of the fee, and who will work on the matter. You can also set reasonable expectations about your ability to respond to emails and calls, whether the use of email will be acceptable to your client, how the matter will be closed, and how long files will be retained. The fee agreement provides a wonderful opportunity to avoid problems in the future.

Also, while Rule 1.5(b) provides that a fee agreement is not required if the lawyer has “regularly represented the client” before, my advice is, use a new fee agreement for each matter. For criminal defense attorneys, this may seem cumbersome, but it will pay off in the end. Also, if a third party is paying the fee, the fee agreement should still be sent to the client, wherever they are, and a countersignature obtained, as soon as possible.

Ethics Opinions interpret the Rules of Professional Conduct, but remember—the rules are a “minimum” standard. As attorneys, we always aspire to reach a higher standard of excellence— for our clients, our profession and our best hope of getting a good night’s sleep!

Reprinted with permission from the July 19, 2023 issue of The Legal Intelligencer. © 2023 ALM Media Properties, LLC. Further duplication without permission is prohibited.  All rights reserved.

You can also find this article, as published, here.