Press Releases

Use of a Flat, Nonrefundable Monthly Fee in a Retainer Agreement: A New York City Bar Association Formal Ethics Opinion

FOR IMMEDIATE RELEASE

Contact:
Eric Friedman
(212) 382-6754

Kathryn Inman
(212) 382-6656

Use of a Flat, Nonrefundable Monthly Fee in a Retainer Agreement: A New York City Bar Association Formal Ethics Opinion

New York, March 5, 2015 – The New York City Bar Association’s Committee on Professional Ethics has issued an Opinion (2015-2), stating that although the use of a flat, nonrefundable monthly fee in a retainer agreement raises a number of ethical issues, it is permissible in certain circumstances, provided it is not excessive, is fully earned, and does not impede the client’s right to terminate the representation. The retainer agreement must also clearly disclose how the fee is calculated, what services it covers, and under what circumstances the fee becomes fully earned and, thus, nonrefundable.

New York lawyers are prohibited from entering into an arrangement for a “nonrefundable retainer fee,” according to Rule 1.5(d)(4) of the New York Rules of Professional Conduct. They may, however, charge a “reasonable minimum fee” if the retainer agreement “defines in plain language and sets forth the circumstances under which the fee may be incurred and how it will be calculated.” For the purpose of Rule 1.5(d), the Committee believes that the difference between a minimum and flat fee is immaterial and that a flat fee is ethically permissible if it satisfies the other requirements of Rule 1.5.

Generally fees paid to a lawyer in advance are nonrefundable only to the extent they have been earned; see Rule 1.16(e). A “general retainer,” a fee that is paid solely to secure a lawyer’s availability and not intended to compensate them for legal services, is earned whether or not the lawyer performs any legal work, provided the arrangement is made clear to the client. Alternatively, a fee paid in advance for legal services for specific, identified matters, or “special retainer,” is not earned unless those services are performed. To determine whether the nonrefundable monthly fee is ethically permissible, notes the opinion, it must be analyzed as a “hybrid retainer” – a fee that combines aspects of both types.

As the opinion states, in light of Rule 1.5(d)’s prohibition against nonrefundable retainers, charging a nonrefundable monthly fee raises significant concerns and should be analyzed carefully, specifically in regard to four key questions:

Is the Fee “Excessive” Under Rule 1.5(a)? A lawyer must determine whether the amount of the fee would be “excessive” under the relevant circumstances. Rule 1.5(a) lists some of the factors to be considered, such as: the time and labor required, the novelty and difficulty of the work, and the skill required to perform the services; the likelihood that acceptance of the employment will preclude other employment by the lawyer; the experience, reputation and ability of the lawyer; and whether the fee is fixed or contingent. As the opinion notes, “a monthly fee is not excessive solely because it involves a minimum or flat amount.”

Is the Fee Fully Earned? Assuming the fee is not excessive, then it will be fully earned, so long as either: (1) the client has not requested any services from the lawyer during the month; or (2) the lawyer has provided any services requested by the client that month, which fall within the scope of the retainer agreement. The lawyer must consider, however, what happens if the client requests services in a particular month which the lawyer fails to provide. One way to address this concern is to agree that the monthly fee is nonrefundable only if no services are requested during the month or the lawyer performs any services requested during the month. If, on the other hand, the client requests services that the lawyer fails to perform, then the monthly fee would be fully or partially refundable. Whether this approach works would depend in part on the reasonableness of the allocation in light of the factors to be considered in assessing whether a fee is excessive. The retainer agreement should explain the basis for making any portion of the monthly fee non-refundable.

Does the Fee Impede the Client’s Termination Right? A nonrefundable monthly fee must not operate as a disincentive for the client to terminate the representation. Thus, in setting the amount of the monthly fee, the lawyer must consider whether it will create a meaningful financial disincentive for the client to terminate his or her relationship with the lawyer. This determination will depend, among other things, on the amount of the fee and the client’s financial circumstances and expectations.

Is the Fee Adequately Disclosed in the Retainer Agreement? Rule 1.5(b) requires a lawyer to “communicate to a client…the basis or rate of the fee and expenses for which the client will be responsible.” In addition, Rule 1.5(d)(4) permits a lawyer to charge a “reasonable minimum fee” if the retainer agreement “defines in plain language and sets forth the circumstances under which the fee may be incurred and how it will be calculated.” The retainer agreement should explain clearly which services are included in the monthly fee if requested by the client. It should also explain why and to what extent the monthly fee is nonrefundable, and must avoid any suggestion that the monthly fee is nonrefundable without being earned.

As the Committee concludes, while use of a flat, nonrefundable monthly fee in a retainer agreement raises a number of ethical issues that must be considered carefully, ultimately such a fee may be permissible in certain circumstances, provided it is not excessive, is fully earned, does not impede the client’s right to terminate the representation, and is adequately disclosed.

The opinion can be read here: http://bit.ly/1E4rDhg

About the Association
The New York City Bar Association, since its founding in 1870, has been dedicated to maintaining the high ethical standards of the legal profession, promoting reform of the law and access to justice, and providing service to the profession and the public. The Association, through its 24,000 members, continues to work for political, legal and social reform, while implementing innovative means to help the disadvantaged. Protecting the public’s welfare remains one of the Association’s highest priorities. www.nycbar.org