An attorney may not enter into a fee agreement with a client for a particular case or service if the agreement requires the client to pay a retainer which is non-refundable.
Facts: An attorney has asked whether he may enter into written fee agreements with clients for particular cases or services which agreements require the clients to pay non-refundable retainers.
Discussion: As an initial matter, the committee emphasizes that the type of "non-refundable retainer fee" here in question involves a fee paid in advance to an attorney for particular services. Accordingly, the committee expresses no opinion concerning a "general retainer" arrangement wherein a client makes a payment to an attorney solely to ensure that the attorney will be available to handle the client's legal problems during a specific period of time.
In general, when a client makes an advance fee payment to an attorney for a particular service or for a particular case, this "retainer" does not belong to the lawyer immediately but must instead be earned as the services are provided. While the attorney may be drawing against the prepayment as it is earned, the retainer will be subject to some refund to the extent it is not earned. The funds belong to the client until they are earned and accordingly are subject to the rules for safeguarding clients' funds and should be kept in a client's fund account. See C. Wolfram, Modern Legal Ethics, 505-506 (West, 1986). See also DR 9-102 and MBA Opinion 78-11.
The issue presented by this inquiry is whether an attorney may change the general rule by designating some or all of the retainer as "non-refundable" in the fee agreement. The committee believes that both public policy and the Canons of Ethics prohibit an attorney from charging a non-refundable retainer for a particular service or case. If a retainer for a specific engagement were truly non-refundable, it would conflict with public policy in that it would interfere with a client's right to discharge his lawyer:
Essential to the lawyer client relationship is the client's right to change his lawyer at any time -- even without cause. Moreover, if he discharges his lawyer, the client is not bound to pay for services not rendered. Otherwise, the right to change lawyers would be of little value.
Smith v. Binder, 20 Mass. App. Ct. 21, 23 (1985), quoting Salem Realty Co. v. Matera, 10 Mass. App. Ct. 571-575 (1980).
In addition, such non-refundable retainers run contrary to several disciplinary rules. DR 2-106(A) states that "[a] lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee." If a client were to discharge his attorney shortly after the attorney had been engaged and prior to the attorney taking any substantial action on the subject of the representation, the attorney's fee might be clearly excessive under DR 2-106.
DR 2-110(B)(4) provides that "[a] lawyer ... shall withdraw from employment, if ... he is discharged by his client." DR 2-110(A)(3) further provides that "[a] lawyer who withdraws from employment shall refund promptly any part of a fee paid in advance that has not been earned."
Taking all of these disciplinary rules into consideration, the committee believes that it would be unethical for an attorney to charge a non-refundable retainer fee for a particular service or case.
As a final point, the committee notes that the same conclusion was reached by the Court of Appeals of New York in Matter of Cooperman, 83 N.Y.2d 465, 633 N.E.2d 1069 (1994). In that case, a lawyer received a two-year suspension for using non-refundable fee arrangements with three clients. The court ruled that "... special non-refundable retainer fee agreements clash with public policy and transgress provisions of the Code of Professional Responsibility (see, DR 2-110 (A)(3); (B)(4); 2-106(A)), essentially because these fee agreements compromise the client's absolute right to terminate the unique fiduciary attorney-client relationship." Ibid. at 1071; see also Wong v. Michael Kennedy. P.C., 853 F. Supp. 73, 78-80 (E.D.N.Y. 1994) (following Cooperman, but distinguishing general retainer).
Permission to publish granted by the Board of Delegates on March 28, 1995. As stated in the Rules of the Committee on Professional Ethics, this advice is that of a committee without governmental status.