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Ethics Opinion

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RI-10

April 6, 1989

SYLLABUS

    It is not unethical for a lawyer who has been discharged without cause to keep all of a lump sum paid at the inception of representation, notwithstanding that this sum is only partially "earned" on an hourly rate basis, provided that:

      (a) the complexity of the case and its likelihood of preempting the lawyer from other work is apparent to the client at the outset; and

      (b) the retainer agreement is in writing, clearly identifies the client's expectations in hiring the lawyer, and unambiguously articulates that the lump sum purchases something in addition to a fixed amount of lawyer hours; and

      (c) the client is of sufficient intelligence, maturity, and sophistication to understand the agreement and that the fee is nonrefundable; and

      (d) the lawyer in fact sets aside a block of time, turns down other cases, and marshals law firm resources in reliance on the fee agreement.

    References: MRPC 1.5(a) and (b), 1.16(d); CI-559. CI-962 is distinguished.

TEXT

In representing a client in complex litigation, such as a hostile tender offer or antitrust suit, a lawyer offered and the client agreed to a written fee agreement which stipulates a large nonrefundable retainer and which also sets the hourly rate at which the client will be billed for the lawyer's services. The lawyer then set aside time, declined other cases, and marshaled firm resources in preparation for the impending suit. But before hourly charges have equalled or exceeded the retainer, the client discharges the lawyer without cause and demands that the difference between the retainer and the fee calculated on the hourly basis be refunded.

In this context, reconsideration of CI-962 is sought. That opinion held, in the context of a contingency-based personal injury suit, that "an attorney who charges a nonrefundable retainer to accept a case must, if discharged, return that portion of the retainer unearned."

MRPC 1.5 is identical to DR 2-106 in its prohibition and definition of clearly excessive fees:

    "A fee is clearly excessive when, after review of the facts, a lawyer of ordinary prudence would be left with a definite and firm conviction that the fee is in excess of a reasonable fee."

Furthermore, MRPC 1.5 reiterates the eight factors which MCPR DR 2-106 includes for determining whether a fee is reasonable. Thus, the ethical standard which applied in CI-962 has not changed.

A survey of other jurisdictions reveals the ambivalence of the national bar on this issue. Three jurisdictions prohibit nonrefundable retainer agreements, Nassau County Op 85-5; 86-3; Cleveland Op 84-1; Virginia Op 646 in the context of a criminal defense. Illinois Op 722 expressly approves these agreements "no matter how much work the lawyer does, provided the fee is not excessive." In accord, Maryland Op 87-9, as long as the retainer fee is "reasonable." Texas Op 431 overruled a previous opinion which held that nonrefundable retainers are earned when received, stating on reconsideration that such fees are not per se unethical, but may be excessive if the lawyer withdraws or is fired, or if the retainer is not based upon factors such as reputation, experience, and preclusion of other employment. The ABA Op 88 notes that where a lawyer accepts a retainer predicated upon a false statement by the client, and subsequently declines to pursue the litigation, the lawyer may keep a "reasonable" amount of the retainer as compensation for the prelitigation investigation. And finally, Pennsylvania Op 85-120 recognizes three types of nonrefundable retainers, all of which may be ethical if the fee agreement is properly drafted.

Such differences arise from two causes. First, by employing verbs, nouns, and adjectives in inappropriate contexts, there is created "pseudo-proposition": when is a non-refundable retainer earned? Second, by focusing solely on lawyer time devoted to the case, the ethical issue is obscured by an unstated, but false, premise that the client is purchasing only measurable increments of a lawyer's day. In actuality, a reasonable fee is never improper regardless of when collected, and therefore, agreements to pay for legal services in anticipation of performance are not per se unethical. Each retainer agreement must be judged in its own factual context by the eight touchstones of reasonableness contained in MRPC 1.5.

1. Time, labor, and skill required by the difficulty of the case. In this inquiry, it is stipulated that the litigation is complex and that law firm resources were marshaled on behalf of the client prior to discharge. While the facts are not specific, it is not difficult to envision substantial firm resources redirected in favor of the client (assigning legal assistants to research the subject, preparation of witness lists, drafting a proposed complaint, scheduling depositions, etc.) without the lawyer billing more than an hour or two. Note that this factor refers merely to time and labor required, not to billable hours. To the extent the lawyer or law firm paid for this time and labor, the retainer fee is partly justified, even if the client dissipates the benefit of that effort by firing the lawyer.

2. The likelihood, if apparent to the client, that the lawyer will be unable to take other employment. Note that actual preemption is not required, only its possibility. The client's understanding of what the retainer is buying is crucial. In this inquiry, it is stipulated that the lawyer set aside a block of time and declined other cases in anticipation of this representation; it is further stipulated that the client understood the retainer agreement. Both these factors weigh heavily in favor of a fully "earned" retainer. This element alone, as applied to the instant case, would justify a result different from CI-962. However, if the written fee agreement is ambiguous, or if the client is unsophisticated or uneducated, the risk that the retention agreement will be misunderstood by the client, and subsequently viewed as an unconscionable exploitation of the client, must be borne by the lawyer.

3. The customary fee in the locality. This factor is not applicable. One may assume that nonrefundable retainers are not customary, but even if they were, their common use would not preclude an inquiry into whether any particular retainer fee was excessive.

4. The amount involved and the results obtained. In a hostile tender offer or antitrust litigation, one may presume that the amount involved is substantial. Because the lawyer was discharged, one may also presume that the results obtained were minimal. These factors appear to counterbalance one another in the instant case. But it should not be forgotten that the client's firing the lawyer deprived the lawyer of the opportunity to obtain any result at all. Although the Comment to MRPC 1.16 states "A client has a right to discharge a lawyer at any time, with or without cause," it wisely adds "subject to liability for payment for the lawyer's services." It does not say that a whimsical, ignorant, or mean-spirited client is entitled to refund on demand of an amount based upon some unarticulated calculation.

5. Time limitations imposed by the client or circumstances. The inquiry is silent on this factor, but if the client demands the lawyer immediately dedicate all efforts on the client's problem, or if the timing of the case requires the lawyer to change schedules, a large retainer may be completely justified, even though not "fully earned" on the basis of time-sheet calculations.

6. Nature and length of the lawyer-client relationship. This factor cannot be analyzed under the facts given. But, as with factor #2, the underlying rationale of this criterion is the understanding and expectations of the client. MRPC 1.5(b) addresses this precise concern:

    "When the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation."

Prior to adoption of this Rule, the Committee approved a fixed-fee-for-limited-services agreement in a divorce case where the entire fee was required to be paid in advance, CI-559. This thoughtful opinion focuses on the client's expectation and understanding of the arrangement, and placed the burden on the lawyer to disclose all relevant information to the client prior to execution of the agreement. See MRPC 1.4.

If a fee agreement is ambiguous, it should be interpreted in favor of the client. Thus, if firing a lawyer is prompted by some development unforeseen by the client, but which should have been anticipated by the lawyer and mentioned in the fee agreement, the lawyer should refund the difference between the total amount paid and that earned on an hourly basis. Had the potential problem been disclosed, the client might never have hired the lawyer at all, or paid a large retainer.

7. Experience, reputation, and ability of the lawyer or law firm. Does the client believe, and does the agreement reflect that the client is merely renting space on the lawyer's calendar? Or is the client paying for an intimidating name on the letterhead? Is it important to the client that Paladin and not Gabby Hayes show up at a deposition? If so, a fee wholly or partially divorced from the actual time expended by the lawyer is reasonable. Again, as with the other factors, client expectations are important, and it is crucial that the fee agreement address these expectations with clarity.

8. Whether the fee is fixed or contingent. CI-962 was originally considered in the context of a contingent fee. In that opinion the lawyer elicited a nonrefundable retainer as insurance against the case being summarily dismissed, while simultaneously contracting for the maximum percentage fee in the event of a quick settlement. By attempting to "hedge bets," counsel ran the risk that subsequent events would make the agreed upon fee unfair to the client, and cast an appearance of impropriety over the entire transaction. In the factual context given, CI-962 reached the right result, but neglected to translate that context to the syllabus. The text of the opinion stops short of a blanket condemnation of nonrefundable retainers. Words such as "viewed with caution," "unwise," and "to be discouraged" appear in lieu of "unethical."

Notwithstanding the disfavor expressed in CI-962, the Committee sees nothing wrong with a risk-sharing proposition in which the client pays a guaranteed fee in advance in exchange for a reduced percentage of a contingent recovery, provided that:

    (a) the retainer amount is appropriate to the complexity and dollar value of the case; and

    (b) the client is fully informed and understands the terms of the retainer agreement and that the fee is nonrefundable; and

    (c) the client is offered the choice of a conventional hourly rate-based agreement or contingent fee agreement in lieu of the nonrefundable retainer arrangement.

In short, with respect to reasonableness factor #8, mixed retainer-contingent fee agreements are not per se unethical even in the context of personal injury cases.

Nor are nonrefundable retainer fee agreements unethical in other cases where compensation is primarily determined on an hourly rate basis. In CI-962, the Committee, quoting former disciplinary rules, summarily held that "a lawyer who withdraws from employment shall refund promptly any part of a fee paid in advance that has not been earned." This concept has been retained by MRPC 1.16(d). But neither the former rules, CI-962, nor MRPC 1.16(d) define the term "earned." At least three types of fee agreements relying on this language have come to the attention of the Committee:

    1. agreements which contain the phrase "this retainer shall be considered fully earned upon receipt";
    2. agreements which state, "In consideration of accepting employment, the lawyer will bill client at the rate of $1,000 per hour for the first hour of billable time, and $150 per hour thereafter";
    3. agreements which are not called retainer agreements at all, but rather "engagement fee agreements," or by some other label.

A fee agreement between a lawyer and a client is a contract like any other contract.

Less attention should be paid to whether a fee is paid in advance or in arrears; the focus should be on the amount of the retainer in relation to the complexity of the case, the content of the fee agreement, and particularly, how client expectations are addressed in that fee agreement. The ethical focus always should be whether, under the totality of the circumstances, the fee arrangement is reasonable, notwithstanding the adjectives used to label it.

In conclusion, where a client has solicited a lawyer's representation in complex litigation, and the client signs and understands a written fee agreement requiring payment of a large up-front "nonrefundable" retainer, then discharges the lawyer for reasons not attributable to the lawyer's misfeasance after the lawyer has expended resources and declines other employment in reliance on the agreement, it is not unethical for the lawyer to keep the entire retainer even though the amount kept exceeds what would have been earned on an hourly rate basis.

 
     

 

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