Fees are a seemingly inexhaustible topic of interest to lawyers. For most of us, they are our economic life blood. One fee issue that has been given considerable attention is nonrefundable fees. Indiana cases have established the general proposition that attorney fees cannot be nonrefundable. This can mean different things under different fee arrangements. But in general it means that when an attorney-client relationship terminates prematurely, the lawyer must refund to the client fees that have been collected but not earned. Rule of Professional Conduct 1.16(d).
In contingent fee matters, the lawyer will not typically have collected any fees, and is will generally not owe the client any money if the attorney-client relationship is interrupted. Nonrefundability isn’t an issue.
In fixed fee arrangements, the client usually pays in advance for an entire matter or phase of a matter under representation. When the relationship ends before the matter is concluded, the lawyer will typically owe a partial refund to reflect that the lawyer will no longer be completing the contemplated work.
When the client pays for work on an hourly fee basis, the lawyer will sometimes require the client to pay in advance for future work. The lawyer hasn’t earned the advanced fee yet. This is sometimes confusingly called a “retainer,” which is simply a polite way of saying that the lawyer doesn’t trust the client to pay bills for services after they are rendered. If the attorney-client relationship terminates before the lawyer earns the entire advanced fee, the lawyer will owe a refund of the unearned fees.
Nonrefundable Fees Do Not Compute
It is a fact of economic life that many lawyers hate to refund money to clients. Who would? Some lawyers have hit upon a purported solution to the refund problem—call the fee nonrefundable. If the client fires the lawyer, no refund is owed. Right? Wrong! Attorney-client representations are built on trust, and the client should be free to discharge the lawyer at any time, for any reason. If in discharging the lawyer, the client forfeits fees that have been tendered, but are unearned, the lawyer’s windfall creates an economic disincentive to the client exercising that unfettered right. The greater the windfall or the poorer the client, the more powerful is the disincentive. The size of the forfeiture might induce the client to continue with an attorney in whom trust and confidence is lost.
Not all fees paid by clients to lawyer must be refundable. Matter of Thonert, 682 N.E.2d 522, 524 (Ind. 1997). When a client pays a lawyer to establish an attorney-client relationship, but not to provide any specific services, the value to the client is in the creation of the relationship itself and the fee payment is considered fully earned when paid, even if no particular representation ensues. These are sometimes called general retainers, in part to contrast them with special retainers—terminology often used to describe a fee deposit by the client to be earned by the lawyer in the future.
Why would a client pay a general retainer to obtain nothing more than the empty vessel of an attorney-client relationship? Most clients wouldn’t. Most consumers of legal services are willing to pay for legal services, but unwilling to pay for the privilege of being able to say a particular lawyer is their lawyer.
Occasionally, it is important for a client to know that a particular lawyer with a known area of expertise will be available to it when a need arises. Moreover, because the payment of a general retainer creates an attorney-client relationship, albeit one not yet directed at any specific matter under representation, the client’s status as a current client is assured. The lawyer is precluded by Rule 1.7, the concurrent conflict of interest rule, from taking on new clients adverse to the client who paid the retainer. In effect, the client pays a premium to purchase the lawyer’s loyalty for a specified period of time. In unusual cases, there might even be value to the client to be able to say “Jane Doe is my lawyer.” The mere availability of a lawyer with special expertise could have economic value to the client. Finally, when a client needs periodic, but not continuous, representation, a retainer will assure that the lawyer remains available to the client after a hiatus when there is no active representation.
Refundability of General Retainers
Even the notion that a general retainer is nonrefundable has limits. For example, if a client pays a lawyer a general retainer to be available for one year and the client terminates that relationship after six months, the lawyer will owe a refund for some part of the retainer. It may well be that, to use my example, the refund will be for something other than fifty percent of the general retainer. The lawyer may have incurred significant costs to meet the client’s availability demands by investing in personnel or technology or by turning down other profitable business in anticipation of the client’s work. Those are worthy considerations in deciding how much of a refund, if any, the client is entitled to under these circumstances. A stunning example involved a law firm that accepted a $1 million nonrefundable general retainer to handle the defense of a series of products liability cases and was allowed to keep it when the client terminated the law firm after only two months. Ryan v. Butera, Beausang, Cohen & Brennan, 193 F.3d 210 (3rd Cir. 1999). The reasons for the favorable outcome to the law firm were complicated, but it illustrates the point that calculating how much of a general retainer, if any, must be refunded can be a very complex balancing of equitable considerations.
A Wolf in Sheep’s Clothing
Some lawyers try to dress up fixed fees or advance fee payments as nonrefundable to justify them as general retainers. In fact, the fee agreement itself might use general retainer-type language where the client recognizes that the nonrefundable fee secures priority of access to the lawyer’s services or assures that the lawyer will not take on conflicting representations. In attempting to justify the nonrefundability of a fee, one lawyer described routine client fee advances using the gibberish of “limited/hybrid, fully-earned-upon-receipt, nonrefundable retainers.” Using general retainer-type language does not magically transform a simple client fee advance into a general retainer.
To do so in the context of a particular legal representation is downright silly. By hiring a lawyer to handle a particular matter, the client and lawyer, by definition, create a relationship that obligates the lawyer to be competent, diligent, and appropriately communicative. See Rules of Professional Conduct 1.1, 1.3 and 1.4. The client cannot be required to pay a premium to receive what the lawyer is ethically obligated to provide. Further, the mere existence of an attorney-client relationship compels the lawyer to turn down conflicting representations. See Rule 1.7. The client can’t be forced to pay a premium to obtain conflict-free legal representation. By hiring a lawyer to handle a particular matter, the client is entitled to all this (and more). The consideration that purportedly supports the nonrefundability provision is illusory.
The Size of the Refund
If a client discharges a lawyer or the lawyer withdraws from a representation, how much of a refund does the lawyer owe? In hourly fee cases, this is usually easy—the amount of advanced fees left over after the lawyer has deducted what she has earned and billed on an hourly basis.
Calculating refunds in fixed fee cases can be more complicated. Generally, once a representation has ended the lawyer’s entitlement to compensation converts from a contractual claim to an equitable claim. Estate of Forrester v. Dawalt, 562 N.E.2d 1315, 1317-18 (Ind. Ct. App. 1990). In other words, under the equitable principles of quantum meruit and unjust enrichment, the lawyer owes the client what is fair under the circumstances. We don’t have extensive case law developing that equitable analysis in fixed fee cases, but we do have the benefit of the Supreme Court’s similar analysis in Galanis v. Lyons & Truitt, 715 N.E.2d 858 (Ind. 1999). The issue in Galanis was how to equitably divide a single contingency fee between successor counsel. There, the Court held that absent an agreement, it would be rebuttably presumed that successive lawyers will share in the fee in proportion to the hours they invested in the representation. Id. at 862. That presumption can be rebutted by demonstrating that a lawyer’s contribution was disproportionate to the presumed fee division or that a lawyer’s work was more or less efficient. Id.
In fixed fee cases, a court might examine the hours actually invested by the lawyer as a percent of the total hours that would be expected to handle the case to conclusion. This will inevitably be complicated by the fact that lawyers in fixed fee cases rarely keep time records, but that didn’t stop the Supreme Court in Galanis from looking at hours as the basis for dividing fees even though lawyers rarely keep hours in contingency fee cases.
Again, by analogy to Galanis, it might be that, by including a termination clause in the fee agreement, the method for calculating the refund owed in a fixed fee representation could become contractual, rather than equitable, so long as the contractual method is objectively reasonable. Reasonableness could be a problem where application of the termination clause results in the client’s forfeiture of the entire fee even though the case is far from over or even results in the client owing the lawyer more money.
Holding Fees in Trust
Fee advances paid by clients to be earned on an hourly basis must be held in trust until earned. Matter of Kendall, 804 N.E.2d 1152, 1160 (Ind. 2004). If the representation ends before the fee advance is earned, the funds for the refund will still be in trust and the refund will be made by a trust account disbursement.
What about fixed fees? Does it follow from the fact that a portion of a fixed fee must be refunded that the fee must be held in trust until the end of the representation or until it is earned by some other measure of the lawyer’s progress on the case? In a number of other states, yes; but not in Indiana. In Matter of Stanton, 504 N.E.2d 1 (Ind. 1987) (opinion on rehearing), that was the precise question our Supreme Court addressed. It held that the duties to refund the unearned portion of a fixed fee and to hold fees in trust were independent of each other. A lawyer may deem a fixed fee earned when paid. Thus, it becomes the lawyer’s property, subject to the possibility that an obligation to refund might arise if the lawyer’s services end prematurely. Because it is the lawyer’s property, the fixed fee need not be deposited into trust. That fact doesn’t free the lawyer from making a prompt refund from the lawyer’s own funds when one is due.
Is it proper for a lawyer to enter into a nonrefundable fee agreement with a client, but still be willing to make a refund if the client discharges the lawyer before the representation is concluded? This is clearly improper. That was, in fact, the position taken by the respondent in Kendall, 804 N.E.2d at 1162. Even though the lawyer would refund the unearned fee when called upon to do so, the client’s perception that the fee is nonrefundable chills the client’s exercise of the right to fire the lawyer if the client loses confidence in the lawyer (or for any other reason). See also, Estate of Forrester, 562 N.E.2d at 1317, quoting Jacobson v. Sassower, 474 N.Y.S.2d 167, 169 (N.Y.Sup.Ct. 1983).
Nonrefundability of fees often seems like a good idea to lawyers. But the word “nonrefundable” should not be misused to justify keeping unearned fees or handcuffing a client. Lawyers need to unlink the words “fees” and “nonrefundable” in their vocabularies. It is a rare case when they can properly coexist.
In last month’s column, speaking of provisional and business counsel licensees, I stated that the required annual 12-hour Indiana law update seminar requirement “is in addition to annual minimum continuing legal education requirements imposed on all Indiana lawyers.” It would have been more accurate to state that the 12-hour update requirement counts toward the annual minimum CLE requirements applicable to all Indiana lawyers, but not all CLE credits count toward the annual 12-hour update requirement imposed on provisional and business counsel licensees.
This will be the last Ethics Curbstone that identifies me as Executive Secretary of the Disciplinary Commission. Susan Ferrer, my editor par excellence, has agreed to let me continue holding forth in these pages on topics related to legal ethics and professional responsibility. No longer will I need to disclaim that my views are not necessarily those of the Indiana Supreme Court or its Disciplinary Commission (although that will continue to go without saying); instead I will be expressing views that are not necessarily those of Barnes & Thornburg, the firm I will join as a partner effective January 1, or its clients. This seems as good an occasion as any, in this, my forty-fifth column in almost five years, to pause and thank you for your readership, suggestions for column topics (keep them coming), encouragement and occasional disagreement.