Feature Article: ABA Formal Opinion 505: Advanced Fee Arrangements
Author: Dr. Michael H. Hoeflich
This article is featured in Volume 4, Number 5 of the Legal Ethics and Malpractice Reporter.
On May 3, 2023, the ABA issued Formal Opinion 505, “Fees Paid in Advance for Contemplated Services.” Many lawyers require clients, especially new clients, to pay money in advance as a means of ensuring that the client will pay bills as they come due. These advanced payments go by many names, and the ethics of their use are often not clear to lawyers taking them. Opinion 505 brings a greater degree of clarity to this area of billing practice.
The Opinion starts out by explaining the lack of clarity in the practices and nomenclature of advanced payments. It goes on to lay down a clear rule:
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.
Then, it takes care to distinguish “true retainers” from advanced fee payments:
This opinion will also refer to the term “retainer” fee. Neither the term “retainer” nor “retainer fee” is found in the Model Rules of Professional Conduct. Regrettably, many lawyers use the term loosely to mean any sum of money paid to the lawyer at or near the commencement of representation. Whereas an advance is a deposit of money with the lawyer to pay for services to be rendered in the future, there is another type of payment that is not for services. Rather, “[t]he purpose of [a retainer] is to assure the client that the lawyer will be contractually on call to handle the client’s legal matters.” This type of agreement and payment is variously referred to as a “general retainer,” “classic retainer,” “true retainer,” “availability retainer,” or an “engagement retainer.” Because all of these terms mean the same thing, this opinion will use the term “general retainer” to refer to this arrangement. A general retainer is paid – and deemed earned – upon the promise of availability to represent a client, whether or not services are actually needed or requested by the client. Thus, a general retainer has been conceptualized as a form of an option contract. In other words, hourly time is not billed against a general retainer and a general retainer is not a flat fee for a specific amount of the lawyer’s time – it is solely to reserve the lawyer’s availability. An important result of these related features is that the money paid by the client in connection with a general retainer should not be placed in a trust account since it is considered earned upon the commencement of the contract.
(emphasis added).
These paragraphs lay out a basic framework for understanding advanced fee payments. Most advanced payments will be refundable and, therefore, not earned by a lawyer until the work is actually done. General retainers, which are rare, are paid to the lawyer and become the lawyer’s property as soon as they are paid—because they are payments for a lawyer’s promise of future availability to the client for a specific period.
The Opinion also addresses several specific ethical pitfalls in taking an advanced fee. First is how the Rules impact advanced fee payments in the context of a flat fee agreement:
If a flat or fixed fee is paid by the client in advance of the lawyer performing the legal work, the fees are an advance. Use of the term “flat fee” or “fixed fee” does not transform the arrangement into a fee that is “earned when paid.” “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. If they do, as will be emphasized below, then that fee must be placed in a Rule 1.15-compliant trust account, to be disbursed to the lawyer only after the fee has been earned.
Second, the Opinion addresses the idea of non-refundability:
The Model Rules of Professional Conduct do not allow a lawyer to sidestep the ethical obligation to safeguard client funds with an act of legerdemain: characterizing an advance as “nonrefundable” and/or “earned upon receipt.” This approach does not withstand even superficial scrutiny. A lawyer may not charge an unreasonable fee. See Model Rule 1.5(a) (“A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.”). Comment [4] to Rule 1.5 provides this additional guidance: “A lawyer may require advance payment of a fee, but is obliged to return any unearned portion. See Rule 1.16(d).” See also, Model Rule 1.15(c) and others discussed in connection with Hypothetical 1 below. Therefore, under the Model Rules, an advance fee paid by a client to a lawyer for legal services to be provided in the future cannot be nonrefundable. Any unearned portion must be returned to the client. 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.
…
Some jurisdictions have authorized lawyers to treat advances as the lawyer’s property upon payment, so long as the client signs a fee agreement designating the sum as “nonrefundable” or “earned on receipt” or some other variation on this theme. This approach departs from the safekeeping policy of the Model Rules described herein and creates unnecessary risks for the client.
The Opinion provides three hypothetical scenarios to clarify how the Rules apply to advanced payments and distinguish between advanced payments and true general retainers. Each hypothetical is worth a study for the interplay of Rules 1.15, 1.16, 1.5, 1.4, and 8.4 and why “the purpose of fee dictates its character and treatment irrespective of labels or terminology used.”
Advanced payments can be an extremely useful tool for lawyers. They can provide additional security that money will be available to pay a client’s bills. They can also provide a lawyer with much needed funds early in a representation. However, a lawyer who structures an advanced fee improperly may face charges that he has violated a multitude of rules.
ABA Formal Opinion 505 provides a useful guide to navigating this minefield. Of course, it is also critical for lawyers to recognize that this opinion is based on the Model Rules; and so it is necessary to consult local variations of the Rules as they have been adopted and interpreted in each jurisdiction.
READ THE FULL ISSUE OF LEMR, Vol. 4, No. 5
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