The Myth of the "Nonrefundable" Lawyer Fee

Calling a fee “nonrefundable” doesn't make it so. Whether a client is entitled to a refund of fees when the lawyer-client relationship ends depends upon whether the fee paid by the client in advance is clearly excessive under the circumstances, not the terminology used by the lawyer to describe the fee.

Although terminology doesn't determine “refundability,” it is nonetheless useful to begin any discussion of lawyer fees by clarifying the terms. In general, fees paid by clients at the beginning of the representation fall into one of the following three categories: (1) Advance: A pre-payment of fees to be billed, usually on an hourly basis, which is essentially a security deposit belonging to the client and must therefore be deposited into the lawyer's trust account and withdrawn as it is earned; (2) Prepaid Flat Fee: A one-time payment for specified legal services to be completed within a reasonable period of time, to which the lawyer asserts immediate entitlement and which is, therefore, deposited into the general operating account; or (3) True Retainer: A payment that reserves the exclusive services of the lawyer but is not used to pay for the legal work done by the lawyer. A lawyer is immediately entitled to a true retainer upon payment because the reservation of the lawyer's services is the consideration for the retainer. The true retainer therefore should be deposited in the general operating account. The majority of fees paid at the inception of the lawyer-client relationship are either advances or flat fees, notwithstanding the tendency of many lawyers to refer to any initial payment as a “retainer.”

These three types of up-front fees are distinct, and it is incumbent upon the lawyer to explain the nature of his or her fees to the client. Flat fees and true retainers may only be treated as earned upon receipt if the lawyer clearly explains this arrangement to the client and the client agrees.¹ Otherwise, the payment is (by default) an advance: It is presumed to be a “deposit securing the payment of a fee which is yet to be earned.” (RPC 158) Fee arrangements may provide for more than one type of fee, but “[t]here should be a clear agreement between the lawyer and client as to which portion of the payment is a true general retainer, or a flat fee, and which portion of the payment is an advance. Absent such an agreement, the entire payment must be deposited into the trust account and will be considered client funds until earned.” (97 FEO 4)

While it is important to differentiate these types of paid-in-advance fees so that both lawyer and client clearly understand the nature of the fee paid, it is improper for the lawyer to refer to any fees as “nonrefundable.” “[N]o fee is truly ‘nonrefundable.'” (2000 FEO 5) This is true because of the cardinal rule prohibiting clearly excessive lawyer fees. Rule 1.5(a). The permissive guidelines regarding lawyer fees in the ethics opinions are subordinate to the ethical prohibition on clearly excessive fees in Rule 1.5. Accordingly, in order to avoid charging a clearly excessive fee, a lawyer may ultimately have to refund all or part of any type of fee paid in advance. When a client-lawyer relationship ends, the lawyer must “consider all of the circumstances associated with the case in retrospect for the purpose of determining whether the fee...was reasonable. To the extent that the fee charged and collected exceeded a reasonable fee under the circumstances, a refund [is] necessary.” (RPC 106)

Because “there is always a possibility that a lawyer will have to refund some or all of any type of advance fee if the lawyer-client relationship ends before the contemplated services are rendered,” it “is false and misleading in violation of Rule 7.1” to call such a payment a ‘nonrefundable fee.'” Moreover, the designation of the fee as ‘nonrefundable' in the fee agreement has a chilling effect on the client's [absolute] right to terminate the representation at any time.” (2000 FEO 5)

In short, within the parameters of the Rules of Professional Conduct there is no such thing as a “nonrefundable fee,” so lawyers must not purport to collect one. All fees paid by a client at the outset of the representation should be clearly explained, and none should be called nonrefundable.

Carmen Hoyme is deputy counsel at the North Carolina State Bar.

Endnote

1. “Since it is difficult for clients to understand when a prepaid flat fee is earned upon receipt, and proof of such understanding may be required in subsequent proceedings, it is recommended that the lawyer obtain the client's consent in a written fee agreement.” 2000 FEO 5. See also RPC 50 (noting that because a true retainer is an “unusual fee arrangement and one likely to be misunderstood, the lawyer should be careful to offer the client an adequate explanation of the agreement”); 97 FEO 4 (“Written fee agreements are not required . . . Nevertheless, a prudent lawyer will insist upon a written fee agreement . . . [which] makes certain what too often rests in uncertainty when differences occur.”).