Monday, May 8, 2023

Non-refundable retainers impermissible - ABA Formal Opinion 505

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to a lawyer in advance for services to be rendered in the future must be placed in a client trust account and may be withdrawn only as earned by the performance of the contemplated services. 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. 

Formal Opinion 505 examines a lawyer’s ethical obligations under the ABA Model Rules of Professional Conduct that relate to fees and safekeeping clients’ prepaid payments for nonrecurring legal work, including matters such as divorce, defense of criminal charges or civil matters not handled on a contingent fee basis.

The opinion notes that an advance on fees is often incorrectly labeled as a nonrefundable retainer. It says in a footnote that a retainer should not be construed as a “payment for the performance of services, but rather is compensation for the lawyer’s promise of availability … (and) is not an advance deposit against future legal services.”

 [T]he model rules “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. A lawyer may not charge an unreasonable fee.”

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