When is it Acceptable for a Texas Lawyer to Charge a Non-refundable Fee?
The ethical rules around charging, collecting, and managing attorney fees are commonly misunderstood, leading to inadvertent violations. One particular area of confusion is the notion of a “non-refundable” fee. Some attorneys believe that contractually designating fees as “earned upon receipt” and “non-refundable” makes them so, but this is rarely the case. In Texas, there are very few instances where it is appropriate to charge a “non-refundable” legal fee. To understand when a non-refundable fee is acceptable, it is important to look at what it actually represents and the rationale for treating it as non-refundable or earned upon receipt. This requires a closer examination of how fees are categorized and the terminology that contributes to the confusion in this area.
Advanced Fees
Advanced fees are any legal fees paid in advance for legal work to be performed in the future. “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.”[1] Advanced fees are frequently called “deposits” or “retainers.” But, this has led to tremendous uncertainty because a true “retainer” is not an advanced fee, nor is it intended to compensate the lawyer for work to be performed on the case. The proper terminology for advanced fees is therefore “advanced fee” or “deposit.”
Retainers
The term “retainer” has engendered enormous confusion when it comes to classifying legal fees. Authorities have noted that over time, “the word ‘retainer’ has been used so inconsistently that it has practically lost all definable meaning.”[2]
The primary issue seems to be that the term “retainer” has been used to describe two entirely different types of fees - one which is properly classified as non-refundable and one which is not.
● The True Non-Refundable Retainer
A true non-refundable retainer, also referred to as a “general retainer,”[3] is not an advanced legal fee and in no way is intended to compensate the lawyer for future legal services. A true non-refundable retainer is a fee that is paid solely “to secure the availability of a lawyer’s future services and compensate the lawyer for the preclusion of other employment that results from the acceptance of employment for the client.”[4] If a fee meets this criteria, it is appropriate to deposit it directly into the attorney’s operating account and consider it earned upon receipt.
When will a fee meet this criteria?
● The non-refundable retainer must constitute a “reasonable” fee for securing the lawyer’s availability and compensating the lawyer for lost employment opportunities. What is reasonable depends on the case and the circumstances, but any fee that is large enough to appear to be actual compensation for legal services will raise red flags.
● The lawyer must be able to substantiate that other employment will probably be lost by obliging himself to represent the client.[5]
When will a fee NOT be considered a true non-refundable retainer?
● When the fee is too large to be considered reasonable compensation just to secure the lawyer’s services or compensate for lost opportunities.
● When there are not likely to be any lost employment opportunities.
● When the lawyer intends the fee to compensate him or her for work to be done on the case. This could be evidenced in several ways, such as when the lawyer bills hourly against the retainer or asks for more than one retainer. A dead give-away is when the “retainer” constitutes the fee for the entire case. A true non-refundable retainer would be collected separately and in addition to any payment for legal services, because it is not intended to pay the lawyer for performing legal services.
Any legal fee that does not meet the strict criteria of a true non-refundable retainer must be placed in a lawyer’s trust or IOLTA account until earned. “It is a disciplinary violation for a lawyer to agree with a client that a fee is non-refundable upon receipt, whether or not it is designated a ‘non-refundable retainer,’ if that fee is not in its entirety a reasonable fee solely for the lawyer’s agreement to accept employment in the matter.”[6]
Lawyers frequently attempt to disguise “advanced fees” as “non-refundable retainers” in order to allow immediate access to the funds and to provide assurance that the fees won’t have to be returned if the representation is cut short. The more savvy lawyers even know to put certain buzzwords in their fee agreements when describing non-refundable fees. But such language won’t protect a lawyer from a disciplinary sanction if the fee itself is not a true non-refundable retainer. Regardless of the language used in the contract, or what the client is willing to agree to, a fee intended to pay for future legal services can never be transformed into a non-refundable fee.
● All Other Fees Labeled as “Retainers”
The term “retainer” is often used loosely to describe “any sum of money paid to the lawyer at or near the commencement of representation.”[7] This generic designation is meaningless in terms of whether a fee is “non-refundable” or “earned upon receipt.” Again, any fee designated as a “retainer” that does not constitute a true non-refundable retainer, is not earned upon receipt and is refundable unless and until it is earned through the rendition of legal services. It must go into the lawyer’s IOLTA account until earned. Ultimately, a fee is determined by its purpose–what it is intended to purchase–and not by its label.[8]
Flat or Fixed Fees
A flat or fixed fee (hereinafter “flat fee”) is a fee “that embraces all work to be done, whether it be relatively simple and of short duration, or complex and protracted.”[9] Flat fees are often paid at the beginning of the representation, prior to any legal work being done. When this occurs, the fee is both an “advanced fee” and a “flat fee.”
Certain areas of practice lend themselves to flat fees, such as the practice of criminal law or family law. There is nothing wrong with charging flat fees for a representation, and there is nothing wrong with collecting the fee up front. However, in Texas it is never the case that a flat fee is “earned upon receipt” or “non-refundable.” It doesn't matter what the fee agreement says or what the client is willing to agree to. In Texas, flat fees must remain in trust until earned.[10]
Depending on how the fee agreement is structured, this may be once the legal matter concludes, or once certain milestones within the representation are completed. It is perfectly acceptable to designate these milestones within the fee agreement and to transfer the apportioned funds from trust once they are earned. However, because the disciplinary rules require that fees be reasonable, any “extreme ‘front-loading’ of payment milestones in the context of the anticipated length and complexity of the representation” may run afoul of the rules.[11]
Conclusion
In Texas there is almost no such thing as an “non-refundable fee.” A true non-refundable retainer is permissible, but it is a rarity, and is highly scrutinized. Any fee designated to cover future legal services cannot be classified as "non-refundable" or "earned upon receipt," irrespective of a client's consent. The determining factor for when a fee is considered earned and how it must be managed by the attorney lies in the fee's purpose—what it is intended to compensate for.
[1] ABA Formal Op. 505 (2023).
[2] Id. (citations omitted).
[3] Ronald D. Rotunda, Legal Ethics: The Lawyer’s Deskbook on Professional Responsibility 175 (2023-2024 ed.).
[4] See Tex. Comm. on Prof’l Ethics, Op. 611 (Sept. 2011).
[5] Cluck v. Commission for Lawyer Discipline, 214 S.W.3d 736, 740 (Tex. App.--Austin 2007, no pet.).
[6] See Tex. Comm. on Prof’l Ethics, Op. 611 (Sept. 2011) (emphasis added).
[7] ABA Formal Op. 505 (2023).
[8] See id. at n.18 (citations omitted).
[9] ABA Formal Op. 505 (2023).
[10] See Tex. Comm. on Prof’l Ethics, Op. 611 (Sept. 2011). Some jurisdictions authorize lawyers to treat advances as the lawyer’s property upon payment if the client agrees to such in the fee agreement. ABA Formal Op. 505 (2023). Texas is not one of those jurisdictions.
[11] ABA Formal Op. 505 (2023); see Tex. Disciplinary Rule Prof’l Conduct 1.04.