New ABA ethics opinion addresses prepaid fees

An ethics opinion recently issued by the American Bar Association provides guidance on how lawyers should handle fees paid in advance by individual clients.

On May 3, the ABA’s Standing Committee on Ethics and Professional Responsibility released a formal opinion addressing a lawyer’s ethical obligations regarding fees paid for legal work to be performed by the lawyer in the future.

As explained by the committee’s announcement, Formal Opinion 505 in large part relies on the ABA Model Rules of Professional Conduct relating to fees and safekeeping of others property to explain how lawyers should handle advance fees paid by individual clients, usually for a single legal matter that will not recur on a regular basis.

According to the ABA committee, such matters typically include divorce, defense of criminal charges, and civil matters not handled on a contingent fee basis.

The opinion notes that a retainer is often conflated with an advance fee, and says in a footnote the former should not be construed as a “payment for the performance of services, but rather is compensation for the lawyer’s promise of availability [and] is not an advance deposit against future legal services.”

“Given the rarity and unusual nature of a general retainer, and the fact that very few clients would actually need or benefit from one, the nature of the fee and lawyer’s obligations and client’s benefits under such an agreement must be explained clearly and in detail,” the opinion states.

Formal Opinion 505 identifies the underlying problem with advance fees by pointing to the fact that such terms of payment are most often used by a lawyer in an effort to make the fee nonrefundable.

The opinion makes clear that the model rules “do not allow a lawyer to sidestep the ethical obligation to safeguard client funds with an act of legerdemain: characterizing an advance as ‘nonrefundable’ and/or ‘earned upon receipt.’ This approach does not withstand even superficial scrutiny. A lawyer may not charge an unreasonable fee.”

The ethics opinion also provides three hypothetical situations, including scenarios involving a divorce case, to examine situations when a lawyer might tell a client that the prepaid fee was nonrefundable. In most cases, the opinion indicates, the lawyer would be acting contrary to the model rules.

“We offer the following suggestions in relation to the matters addressed in this opinion. Use plain language,” the opinion states. “Thus, instead of ‘retainer’ say ‘advance’ and explain that it is a ‘deposit for fees.’ Explain that the sum deposited will be applied to the balance owed for work on the matter, and how and when this will happen.”


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