Washington Lawyer - June 2019 - 8

PRACTICE MANAGEMENT

RISK
Y
BUSINESS
'NON-REFUNDABLE' LEGAL FEES
By Dan Mills

s it ever a good idea to have the term "non-refundable
engagement fee" in a fee agreement governed by the
D.C. Rules of Professional Conduct?
I was recently consulting with a law firm partner about an unrelated issue. In
reviewing the firm's standard fee agreement, my eye caught the paragraph
heading "Non-Refundable Engagement Fee," which was high-risk language
that arguably confused the concepts of an advance fee and an engagement
retainer.
So I told the partner it was time to revisit In re Mance, 980 A.2d 1196 (D.C.
2009). Mance essentially ended the practice in the District of Columbia of
collecting a fee before work is performed and declaring it earned on receipt
and non-refundable.
Prior to October 2009 when the D.C. Court of Appeals handed down the
opinion, it was common practice in the District for a criminal defense
lawyer, for example, to get paid up front by the client, to consider the fee
earned upon receipt and thus non-refundable, and to deposit the fee into
the firm's operating or business account. Indeed, the fee agreement would
reflect this practice and deem the upfront fee "non-refundable" and "earned
on receipt."
The court in Mance said: "We hold that when an attorney receives payment
of a flat fee at the outset of a representation, the payment is an 'advance of
unearned fees' and 'shall be treated as property of the client . . . until earned
unless the client consents to a different arrangement.' Rule 1.15(d)." (This
language is now contained in Rule 1.15(e).)
For lawyers practicing in the District for the last 10 years, the upshot of this
holding has been that to keep an advance fee, you must earn it. And until you
earn it, it must stay in the firm's Interest on Lawyers' Trust Account (IOLTA), all
pursuant to Rule 1.15 of the D.C. Rules of Professional Conduct. Yes, the court
referenced the language from Rule 1.15(e) - "unless the client gives informed
consent to a different arrangement" - but that (waiver of entrustment) is not
at issue here; that is a topic for another day.
Because the advance fee remains the property of the client when it is in the
lawyer's IOLTA and is subject to being refunded if it is not earned, the term
"non-refundable" simply cannot be used to describe the fee.
The court quoted In re Sather, 3 P.3d 403 (Colo. 2000), at 410: "It simply makes
no sense to permit lawyers to enter into fee agreements with clients stating
that an advance payment such as a flat fee is earned upon receipt, when such
payments are subject to being refunded to the extent unearned."
My advice to lawyers is to never use the term "non-refundable" in a fee
agreement. But, someone might contend, isn't an engagement retainer nonrefundable, relying upon Mance?
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WASHINGTON LAWYER

JUNE 2019

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Let's be clear about the definition of an engagement retainer. As the court in
Mance said, an engagement retainer is a fee paid, apart from any other compensation, to ensure that a lawyer will be available for the client, if required.
While it is earned when received, the court noted that it may become necessary
to refund some or all of the engagement retainer if the lawyer cannot be available or is discharged.
For example, a client may request that a family law attorney be available in the
event the client's spouse files for divorce. The client may not want a divorce and
may be working on saving the marriage, but in the event the spouse files to
dissolve the marriage, the client has reserved a specific lawyer by paying an
availability fee, which is what an engagement retainer really is. If the spouse
files, the client enters into a whole new fee agreement for task-based representation at a new fee. Or, if the spouse files and the lawyer cannot for some reason
represent the client (perhaps the lawyer is too busy or ill), then arguably the
engagement retainer would be refunded.
Most prospective clients have need of the lawyer performing services upon
being engaged, and for this reason such task-based agreements have no
vestige of "availability" within them. When a lawyer is retained to be available,
there is nothing to do unless and until the event arrives that requires the lawyer
to begin problem solving. The problem solving necessitates a whole new fee
agreement and a new fee.
In my experience, especially for small firm lawyers in consumer-based practice
areas (family law, small business law, estate planning, immigration, bankruptcy,
and criminal defense), true engagement retainers are and should be very rare.
To answer the question posed at the outset, because of the distinct possibility
that not all of an advance fee will be earned, because the same is true with
an availability fee, and because unearned fees must be returned to the client
pursuant to Rules 1.15 and 1.16 and the mandate of Mance, use of the term
"non-refundable" in conjunction with legal fees is high-risk conduct and sure
to draw the attention of the Office of Disciplinary Counsel.
The D.C. Bar Practice Management Advisory Service has helped thousands of Bar
members launch, grow, and manage firms. Its services are free and confidential
under Rule 1.6(j). Practice management advisors Dan Mills and Rochelle Washington
can be reached at 202-780-2762 or dmills@dcbar.org, and 202-780-2764 or
rwashington@dcbar.org.

https://www.dcbar.org/

Washington Lawyer - June 2019

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