On May 3, 2023, the ABA issued Formal Opinion 505 providing guidance to lawyers on how to handle fees paid in advance by clients for services to be performed in the future. See ABA Formal Opinion 505 (May 3, 2023).
ABA Issues Guidance on Handling Prepaid Fees For Clients
According to the ABA:
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to a lawyer in advance for services to be rendered in the future must be placed in a client trust account and may be withdrawn only as earned by the performance of the contemplated services.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.
See ABA Formal Opinion 505 at 1 (May 3, 2023)
Understanding the Types of Fees
Lawyers must understand the options available for structing fee agreements with clients.
- Advance Fee: Fees paid by a client to a lawyer in advance for legal work to be performed by the lawyer in the future are sometimes referred to as an “advance fee,” an “advanced fee,” an “advance fee payment,” an “advance fee deposit,” a “fee advance,” or simply an “advance.” Advances are also sometimes called “special retainers,” “security retainers,” or simply “prepaid fees.” See id. at 2.
- Retainer: True retainers are very rare. A retainer is a payment solely to reserve the lawyer’s availability. See id. at 3. An advance fee is not a retainer if the lawyer contemplates billing time against the advance. See Id. at 11. This is true even if the lawyer’s fee agreement uses the term “retainer.”
- Flat or Fixed Fees: A flat fee is one that “embraces all work to be done, whether it be relatively simple and of short duration, or complex and protracted.” Id. at 4. The opinion explains that “’Flat’ or ‘fixed’ does not even mean that the fee must be paid at the commencement of the representation, although most lawyers who do not have an existing relationship with a client may want to ensure payment and may, therefore, ask for the fee to be paid in advance before committing to the representation.” Id. at 4.
- Hourly Fees: A lawyer often uses an hourly fee structure when the lawyer cannot determine from the outset the amount of time that will be necessary to pursue the legal matter. The lawyer must inform the client of the hourly rate, the time increments that the lawyer will use to track time, and then bill accordingly.
Earning the Fees
Lawyers must understand when the fee becomes the property of the lawyer and when the fee is earned.
- Advance Fee: Under the Model Rules, when a client pays an advance to a lawyer, the lawyer takes possession – but not ownership – of the funds to secure payment for the services the lawyer will render to the client in the future. The lawyer may use the money as he works or incurs reasonable expenses and bills for them.
- Retainer: A retainer is earned upon the commencement of the contract.
- Flat or Fixed Fees: If paid in advance for legal services, the Model Rules of Professional Conduct require that the lawyer place the fee in a Rule 1.15-compliant trust account to be disbursed to the lawyer only after the fee has been earned. Note that the Louisiana Rules of Professional Conduct significantly depart from the Model Rules as to flat fees paid in advance. Under Louisiana Rule 1.5(f)(2) “when the client pays the lawyer all or part of a fixed fee . . . with services to be rendered in the future, the funds become the property of the lawyer when paid… Such funds need not be placed in the lawyer’s trust account, but may be placed in the lawyer’s operating account.” Note, however, if a dispute arises as to a fixed fee, the lawyer must place the amount of the disputed portion in trust until the dispute is resolved. See Louisiana Rule 1.5(f)(5). Also, to the extent any of the fees are “unearned,” the lawyer must return them. Id. On the contrary, under the Model Rules of Professional Conduct, an
Best Practices
- Remember that that the price set for representation on a flat fee case is not based on hours worked, but instead based on the completion of certain described services. For flat fees, although Louisiana does not require lawyers to place the flat fee into trust, lawyers should consider retaining the funds in trust until earned. Lawyers can “divid[e] the representation into segments such that certain portions of a flat fee advance are considered earned before completion of all the contemplated work.” Id. at 5. These “milestones” or segments may be detailed in the engagement agreement. The lawyer may then remove the earned portions of the flat fee from trust prior to the completion of the full scope of the representation as certain predefined “milestones” are reached.
- Eliminate the term “nonrefundable” and “earned upon receipt” from your engagement agreement. As explained in Formal Opinion 506, “These are not actual types of fees.” A lawyer’s fee must always be reasonable, and it would be unreasonable to retain a fee that a lawyer did not earn. Under the rules, a lawyer may collect an advance fee payment but the lawyer is required to return any unearned portion. “Labeling a fee paid in advance for work to be done in the future as “earned upon receipt” or “nonrefundable” does not make it so.”
- Do not commingle a lawyer’s earned funds with advance deposits. The Rules of Professional Conduct require that lawyers keep their own property separate from a client’s funds, including unearned fees paid in advance.
- If a lawyer structures his fee agreement as a general retainer, be “prepared to demonstrate a valuable benefit to the client and/or an actual detriment to the lawyer.” The lawyer must be able to show that the lawyer’s prioritizing of the client’s work, turning away other work, etc., were actually done and that they were necessary for the representation (i.e., not just part of the lawyer’s basic representation). See id. at 11.
- Include clear and direct language in the fee agreement. Formal opinion provides the following tips. For example, use the word “advance” and explain that it is a “deposit for fees” instead of calling it a retainer. See id. at 12. “Explain that the sum deposited will be applied to the balance owed for work on the matter, and how and when this will happen.” Id.“ Under the Model Rules, there are no magic words that a lawyer can use to change what is actually an advance payment for fees into a general retainer: “an attorney cannot treat a fee as ‘earned’ simply by labeling the fee ‘earned on receipt’ or referring to the fee as an ‘engagement retainer.’” Id. at 11. Moreover, “the purpose of the fee dictates its character and treatment irrespective of labels or terminology used.” Id.
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