an arms-length negotiation. 22 Mr.
Connelly, the attorney, discussed
the fee on two occasions with the
client and the client’s mother, an
attorney in Chicago, and the flat
fee was actually negotiated down
from the $75,000 Mr. Connelly
initially asked for to $50,000.23
Mr. Connelly successfully resolved the case without filing any motions or going to trial. The client
then filed a Bar complaint accusing Mr. Connelly of charging an
unreasonable fee, without complaining to Mr. Connelly or seeking fee arbitration.
The Court held that because
the only issue presented was the reason-
ableness of Mr. Connelly’s fee (which he
defended with an accounting and expert
testimony), the case should have been re-
ferred to fee arbitration and only gone to
discipline if and when the arbitrators found
the fee was unreasonable. 24 However, the
Court also reaffirmed its acceptance of
nonrefundable fee agreements. 25 The Court
reasoned that a nonrefundable flat fee:
reflects “a negotiated element of risk
sharing between attorney and client”
whereby the “attorney takes the risk
that she will do more work than
planned without additional compen-
sation; and the client, in return agrees
that the attorney will have earned
the agreed-upon amount even if that
amount would exceed the attorney’s
usual hourly rate” because “the client
often has limited resources and there-
fore requires the certainty of a preset
fee.” 26
The Court acknowledged that because of
the balancing of risks to both client and
lawyer, a flat fee can, at times, be larger than
a fee generated by hourly rates without being excessive. 27
Those observations were hardly novel
or surprising, but they addressed only the
second of the two potential issues raised by
nonrefundable fee agreements—that is, the
possibility they will generate excessive fees.
What is surprising is the Court’s complete
failure to discuss the first issue—the burden
such agreements place on a client’s right
to discharge a lawyer at any time for any
reason.
The 2003 amendment to E.R. 1. 5 argu-ably addresses the first issue by requiring a
lawyer’s fee agreement to inform the client
that notwithstanding the fee charged is
“nonrefundable,” the client may still discharge the attorney at any time and “may
be entitled to a return of all or part of the
fee based upon the value of the representation.” 28
“Nonrefundable” Advance
Fees Since 2003
In theory at least, labeling a fee paid in advance as nonrefundable should not affect
whether the client can obtain a refund if the
lawyer fails to perform as required. Both
E.R. 1. 7 and Comment 7 expressly require
a lawyer to explain in the written fee agreement, now required in every engagement,
that even if the retainer is called “earned
upon receipt,” “nonrefundable” or something similar, the client can still discharge
the lawyer and may be entitled to a full or
partial refund based “upon the value” of
the work actually performed up until that
date. 29 That statement is, of course, simply
a summary of the holding of In re Swartz. 30
Unfortunately, the client’s theoretical
right to a refund often breaks down in prac-
tice. A nonrefundable fee paid in advance
immediately becomes the lawyer’s property
and is not deposited in the lawyer’s Trust
Account. 31 As several commenta-
tors have noted, such fee agree-
ments are used primarily in fam-
ily law, immigration, bankruptcy,
and criminal law cases, often with
unsophisticated clients. 32 In a per-
fect world, all prospective clients
would carefully read and under-
stand a lawyer’s retention letter/
fee agreement. But the reality is
we do not practice in that world
and never will. Some clients have
limited English reading skills, and
many fail to understand that the
“nonrefundable retainer” their
lawyer told them they have to pay
before he or she will start to work
on their case is, in fact, refundable. Even if
the written fee agreement does contain the
required language, in practice many clients
rely primarily on what the lawyer (and/or
the non-lawyer assistant who often handles
most of the client contact) tells them.
Even if clients recognize they have a
right to a refund, a lawyer who has received
a nonrefundable advance fee as current income and spent it may have little incentive
(or ability) to provide a refund, even if he
or she has performed poorly or not at all. A
client whose request for a refund is refused
or ignored must file a lawsuit and/or a bar
complaint and face months or years of delay
before having even a chance of receiving a
refund. Again, that assumes the client is sophisticated enough to bring such an action
on their own or has the money to pay a second lawyer to do so on their behalf.
This problem has been compounded by
the growing use of “nonrefundable” advance fee agreements by lawyers who accept
partial payments “on account.” That is,
lawyers who agree to accept a nonrefundable advance fee for specified services from
clients who cannot pay the full agreed-upon
fee when the lawyer is initially hired. Often these lawyers encourage the clients to
make partial payments on a lay-a-way type
arrangement. These lawyers take the position that the partial payments are earned on
receipt and therefore need not be deposited
into their trust accounts even though no
work has been or will be performed unless and until the full retainer is received.
“Nonrefundable” Advance Fees
In a perfect world, all
prospective clients would
carefully read and understand
a lawyer’s retention letter/fee
agreement. But the reality
is we do not practice in
that world.
