17.07. Nonrefundable Fees & Retainers

There is a great deal of confusion when it comes to the labels placed on various types of fee arrangements and whether these arrangements are ethical.  The retainer is a very specific type of arrangement – whereby the client hires the lawyer to be available to perform work for the client any time the client needs it (a proposed revision to the California Rules of Professional Conduct would define it as “a fee paid solely for the purpose of ensuring the availability of the lawyer for the matter”[1]).  A true retainer is ethical and is earned upon receipt. 

A nonrefundable fee (also sometimes confusingly referred to as a nonrefundable retainer) is essentially upfront payment of a fee that the lawyer draws down on as the representation progresses.  So, for example, Larry Lawyer may agree to represent Clarence Client in a divorce action for $150 per hour and require that Client pay Lawyer $1,000 up front – with Lawyer taking his fee from the $1,000 as he performs work on the matter.  This situation is not a retainer.  It is simply a representation where the lawyer requires some payment up front.  The money is not earned by the lawyer until the lawyer actually performs the work.

Why does this distinction matter?  It matters because ethically these situations are treated in a very different manner.  First, as discussed below, a lawyer that receives funds that belong to a client has an obligation to safekeep funds that belong to the client (Rule 1.15).  As part of this obligation, the lawyer must maintain a separate checking account for client funds (called a trust account).  The failure to keep client funds separate from funds belonging to the lawyer is an ethical no-no (the Mississippi Supreme Court has called it a “cardinal sin.”)  Another ethical obligation you need to be aware of is found in Rule 1.16(d), which provides that upon termination of representation – whether because the matter is complete, because the client fired the lawyer, or because the lawyer withdrew – the lawyer must “refund[ ] any advance payment or expense that has not been earned or incurred.”  Because a lawyer must return any unearned portion of the fee given to the lawyer by the client, a lawyer cannot claim that that an upfront fee is non-refundable.  Under the ABA Rules, Rule 1.15(c) makes this explicit:  “[a] lawyer shall deposit into a client trust account legal fees and expenses that have been paid in advance, to be withdrawn by the lawyer only as fees are earned or expenses incurred.”[2]

[1] Proposed revision to California Rule of Professional Responsibility 1.6(e).

[2] ABA Rule 1.15(c).