The Truth about True Retainers

At the outset of an attorney-client relationship, it is crucial to define the scope of the engagement and establish payment terms. Lawyers commonly refer to a client's opening payment as a "retainer" and often state that it is "nonrefundable." However, that can be a big mistake. Indeed, many attorneys are confused about the proper treatment of retainers and, specifically, whether a particular retainer payment really is nonrefundable. An examination of leading authority reveals that only "true retainers" are nonrefundable - and these are very, very rare.

Governing Rule
When a client discharges an attorney, the Rules of Professional Conduct require the attorney to "[p]romptly refund any part of a fee paid in advance that has not been earned." The rules also state that a refund is unnecessary if the money is "a true retainer fee ... paid solely for the purpose of ensuring the availability of the member for the matter." (Rule 3-700(D)(2).) That is, money advanced by a client but not earned by the lawyer must be refunded, unless it constitutes a true retainer.

Why is it crucial to understand the difference? Improper retention of client funds can result in discipline, even disbarment. Moreover, an attorney may face civil liability for breach of fiduciary duty, which may be determined as a matter of law based on a breach of the rules of professional conduct which "help define the duty component of the fiduciary duty which an attorney owes to his [or her] client." (Stanley v. Richmond, 35 Cal. App. 4th 1070, 1086 (1995).) Avoiding these consequences depends on accurately structuring the attorney-client relationship.

Retainer Problems
The State Bar addressed the issue of retainers in Arbitration Advisory Opinion 01-02 (calbar.ca. gov/state/calbar/calbar_generic.jsp?cid =11337&id=6493). The opinion states that "unless the attorney and client have contracted for a 'true retainer' (also known as a 'classic retainer'), the attorney must refund any portion of the advance fee that the attorney has not yet earned."

The key characteristic of a true retainer is that it is paid solely to secure the availability of the attorney over a given period of time and is not paid for the performance of any other services. When a valid true retainer exists, if the attorney's services are eventually needed, those services are billed and paid for separately, and no part of the retainer is applied to pay for them. Thus, any fee arrangement in which the attorney bills against the retainer is not a true retainer.

As explained in Advisory Opinion 01-02, a true retainer may be nonrefundable because it takes the attorney out of the marketplace and precludes him or her from undertaking other work. Such an arrangement requires that the attorney be generally available for consultation and legal services to the client. A true retainer may be a single, up-front payment to guarantee that the attorney will be available for a specified period of time, or it may be a recurring payment, where, for example, the client pays a monthly fee solely to ensure the attorney's availability to represent the client for that month.

Scarcer than Hen's Teeth
Although true retainers once were common, the State Bar does not contemplate many appropriate situations for them today. In fact, Opinion 01-02 speculates that there are probably only a handful of situations in which a client would want to pay a true retainer. Such an arrangement may be appropriate to secure the availability of an attorney whose reputation could cause a threatened lawsuit to vanish. In addition, a true retainer may be a reasonable way to ensure that an especially talented attorney is available to handle a matter; it may also be used to prevent the attorney from representing an adverse party. The opinion goes on to note that "[o]ther than these examples ... true retainers would seem to be of little use to clients in everyday legal matters."

Cases have also helped to define the true retainer. Consistent with the State Bar opinion, cases identify two main characteristics of a true retainer: the money is (1) paid to reserve the availability of a specific attorney and (2) not used to pay hourly fees. Note also that the language of Rule 3-700 (D)(2) and the cases interpreting it indicate that a true retainer reserves the time of only a specific attorney at a firm, and not the firm in general.

In one case, the court defined a true retainer, as "a sum of money paid by a client to secure an attorney's availability over a given period of time. Thus, such a fee is earned by the attorney when paid since the attorney is entitled to the money regardless of whether he actually performs any services for the client." (Baranowski v. State Bar, 24 Cal. 3d 153, 164 n. 4 (1979).)

Another court discussed the circumstances under which a law firm may retain client funds, identifying three types of payment arrangements: (1) the classic/true retainer, (2) the security retainer, and (3) the advance payment retainer. The court concluded that only a true retainer is earned upon receipt by the attorney; all other retainers must be placed in a client trust account and refunded to the client if unearned. (See T & R Foods v. Rose, 47 Cal. App. 4th Supp. 1, 7 (1996).)

Securing Availability
In T & R Foods, the court identified a true retainer as the payment of a sum of money to secure availability over a period of time, finding that the attorney is entitled to the fee whether or not services are ever rendered (T & R Foods, 47 Cal. App. 4th Supp. at 6).

The court went on to observe that a "security" retainer, in contrast, is a sum of money held by the attorney to secure payment of fees for future services that the attorney is expected to render. It is important to note that a security retainer remains property of the client until the attorney applies it to fees and costs for services actually rendered, and that any portion of the funds that are not earned must be returned to the client.

An "advance payment" retainer occurs when the client pays in advance for some or all of the services that the attorney is expected to perform. In such a case, the court said, "ownership of the funds is intended to pass to the attorney at the time of payment." (47 Cal. App. 4th Supp. at 7.) However, the court also found the law unsettled as to whether funds can be retained by the attorney if unearned. Ultimately, the court concluded that there was an intent expressed in the State Bar rules that funds "retain an ownership identity with the client until earned." (See T & R Foods, 47 Cal. App. 4th Supp. at 7.)

The fee agreement in the T & R Foods case did not create a true retainer because it stated that the attorneys would charge their services against the retainer, which was to be replenished by the client each month to assure that the attorneys were always holding $25,000 on their books to cover ongoing fees. The court properly found that the $25,000 deposit was in fact "an advance payment retainer." The court required the attorneys to segregate the funds until they had been earned (T & R Foods, 47 Cal. App. 4th Supp. at 6).

In cases where counsel has not properly structured a true retainer, the State Bar repeatedly finds that clients are due a refund of unearned fees, even if a payment is denominated as nonrefundable in the parties' agreement. In other words, the actual treatment of the funds trumps the language of the retainer agreement.

In an earlier case (Matthew v. State Bar, 49 Cal. 3d 784 (1989)), an attorney was retained to handle a real estate fraud matter. The attorney required his client to provide a nonrefundable retainer "to ensure that his client would 'work with him on the case.' " The fee agreement required $5,000 up front, with a $10,000 ceiling on fees, and stated that the attorney would "bill for his time at the rate of $70 per hour until the bill reached $5,000." (49 Cal. 3d at 787.) The attorney represented the client for seven months, and the client paid more than $6,000 in attorneys fees during that time. The attorney kept no time records and provided no billing statements, but he estimated he spent 32 to 40 hours on the case. After unsuccessfully seeking a refund, the client took the attorney to arbitration to recover unearned fees. The arbitration panel found in the client's favor, but the attorney still did not refund the money.

In another fee agreement, the same attorney provided for a $1,000 nonrefundable retainer. After the client terminated that representation, a dispute arose as to unearned fees. The attorney failed to perform needed work, provided no billing statements, was unavailable, and "admitted that he was not diligent in this matter and that he was unable to work on the matter in a timely fashion due to his caseload." (49 Cal. 3d at 789.)

The California Supreme Court emphasized the seriousness of the attorney's misconduct, identifying failure to refund "unearned fees as serious misconduct warranting periods of actual suspension, and in cases of habitual misconduct, disbarment." (49 Cal. 3d at 791.) In addition to being disciplined, the attorney was required to return all unearned fees, notwithstanding the nonrefundable language in the retainer agreements (49 Cal. 3d at 792).

Proper Language
To be valid, an agreement calling for a true retainer should show that the client is purchasing something valuable. For example, the agreement may refer to specific blocks of time when a specific attorney will be available, or state that the payment guarantees the attorney will refrain from taking adverse clients. The agreement might also state that the payment secures the attorney's availability for a future engagement.

In addition to having a proper written agreement, the attorney also should be prepared to demonstrate that he or she has provided real value. For the average attorney, a true retainer is unlikely to be appropriate unless the lawyer is setting aside specific blocks of time for the client. A highly experienced or specialized attorney may justify a true retainer more easily, as long as the attorney arranges to be available and the retainer agreement reflects that. It may be appropriate to outline the attorney's specialized reputation or experience in the agreement to demonstrate the value purchased by the client.

In drafting an effective true retainer, attorneys should state as specifically as possible the time that the client is buying and what the attorney will do with that time. The attorney may agree to sit in the office and wait for the client's weekly phone calls between 10 a.m. and noon on Tuesdays. In this situation, office records should demonstrate that the attorney was available (perhaps by entering data in a time log).

True retainer funds should be placed in an attorney's general account and not in a trust account. If the attorney places funds in a trust account and bills against them, the arrangement collapses and loses its status as a true retainer no matter what the fee agreement says.

Alternative Fee Agreements
Many clients wish to avoid hourly billing rates and prefer to pay a flat fee. Such an arrangement can be valuable to clients who want to avoid surprise bills and stay within a budget. Attorneys who perform work for a flat fee should be careful in how they structure the client relationship so as to comply with the rules governing true retainers.

A flat fee is not necessarily a true retainer; in fact, based on State Bar Opinion 01-02, in a true retainer situation attorney services (as opposed to availability) would be charged to the client separately, and no part of the retainer would be applied to pay for actual services. A flat fee for services may be acceptable if it is tied to the accomplishment of a specific milestone and refunded if the milestone is not reached.

For example, to form a limited liability company a lawyer may charge a flat fee of $1,000 that is advanced by the client; the parties may stipulate that the fee is earned after the attorney files articles of organization and delivers the completed operating agreement to the client. Under these circumstances, the fee should be deposited in the attorney's trust account. If the attorney does not complete the specified tasks, the fee has not been earned and must be refunded.

A well-drafted flat fee agreement should state exactly what services will be performed and when the fee is considered earned. If several services are involved, a portion of the fee should be earned after each service is completed. Not only is this fair to both parties, but it also avoids confusion if the attorney's services are terminated short of the final milestone.

For clients who seek to economize, there are alternatives to the flat fee. For example, an attorney may choose to bill the client by the hour but cap the fee at a specific amount within the client's budget.

In large part, the true retainer seems to be a vestige of days gone by. Today it is rarely used correctly, although many attorneys continue to insist on collecting nonrefundable retainers. Such agreements are risky and must be structured carefully.

Not only must a nonrefundable retainer fit within the narrow definition of a true retainer, it also must be appropriate to the client's situation. The State Bar will scrutinize the arrangement to determine whether the fee is unconscionable - that is, if a client receives little or no value at all by ensuring the availability of the attorney; if the attorney has no particular reputation or expertise to justify a nonrefundable payment; or if there is "an abundance of other competent attorneys available to handle the client's matter." (See Opinion 01-02 at subsection C (Unconscionability).)

True retainers exist, but they are not very common. In most cases, advance payments are just that: advances that cover fees to be earned in the future. And remember that if the fees are not earned, they must be returned to the client at the conclusion of the engagement.

Leigh Chandler and Aaron Shechet are the founders of Chandler & Shechet, a business-development law firm based in Los Angeles (solutionsllp.com).

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