In Formal Opinion 505 (the Opinion), the ABA wades into the discussion about nonrefundable attorney fees paid in advance, and declares that such a label “is not accurate” and should “not dictate whether a fee has been earned.” The Opinion goes on to explain that the 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.” In short, lawyers who provide services for clients on a flat-fee basis and collect said fees up front are on notice: The ABA believes such fees should be treated as client funds and should not be denominated as nonrefundable in any way. The purpose of this alert is to note that this Opinion does not change the law in the jurisdictions that already speak specifically to nonrefundable fees.
The ABA’s position on this issue stands in stark contrast to the law of several jurisdictions. In fact, the law on this issue varies widely across the country. Many states have varied RPC 1.5 to specifically address this issue because Model Rule 1.5 is silent. For instance, in California, a lawyer may charge a nonrefundable fee if the fee is a true retainer—“a fee that the client pays to ensure the lawyers availability.” CA RPC 1.5(d). Tennessee, on the other hand, permits nonrefundable fees outside the true retainer context, as do Vermont, Oregon, Washington, and Maine, so long as the nonrefundable fee is agreed to in writing, among other things. Colorado flatly prohibits nonrefundable fees, as do Hawaii, Minnesota, and others. Many states are silent on the subject, including Alaska, Alabama, Arizona, Arkansas, and many others.
The Opinion also advises that fees paid in advance must be placed in the lawyer’s trust accounts until they are earned, and without regard to their label. This so-called requirement is again at odds with express requirements in several states. For instance, Oregon, Washington, Maine, and Vermont prohibit lawyers from placing nonrefundable fees in their trust account. OR RPC 1.5(c)(3); ME RPC 1.5(h)(3)(i); VT RPC 1.5(g); WA RPC 1.5(f)(2). Louisiana, on the other hand, permits lawyers to place fixed fees not yet earned in either the operating account or the trust account. LA RPC 1.5(f)(2). Many other jurisdictions are silent on this issue.
In sum, the Opinion conflicts with the express requirements of the ethics rules in several states. For lawyers in states whose rules do not expressly speak to nonrefundable fees, the Opinion may signal a new approach to regulating such fees. Lawyers who use nonrefundable fees with any regularity in their practice should ensure that they understand how such fees should be handled in the jurisdiction in which the fee will most likely be regulated (see RPC 8.5), and consider the Opinion, if any, in responding to a client’s request for a refund of a nonrefundable fee.
This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.