Buyer and seller beware: Advance fees for legal services are refundable

The State Bar’s Office of Chief Trial Counsel (OCTC), which is tasked with investigating and prosecuting complaints of attorney misconduct, regularly receives complaints regarding attorneys’ fees, including many complaints that attorneys have failed to return unearned fees following the termination of representation. Recently, OCTC has seen an increasing number of complaints in which the underlying fee agreements have characterized a client’s advance payment as a “non-refundable deposit” or a “non-refundable retainer.” It is important for both consumers and attorneys to understand that, under the California Rules of Professional Conduct (RPC), advance payments are truly non-refundable, and may be designated as such, only under very limited and specific circumstances.

RPC 1.16(e)(2) provides that upon termination of representation, “the lawyer promptly shall refund any part of a fee or expense paid in advance that the lawyer has not earned or incurred.” The only exception to this refund requirement is for “a true retainer fee paid solely for the purpose of ensuring the availability of the lawyer for the matter.”

RPC 1.5(d) defines what constitutes a “true retainer,” stating that it is “a fee that a client pays to a lawyer to ensure the lawyer’s availability to the client during a specified period or on a specified matter, but not to any extent as compensation for legal services performed or to be performed.” RPC 1.5(d) specifies that a lawyer may “make an agreement for, charge, or collect a fee that is denominated as ‘earned on receipt’ or ‘non-refundable,’ or in similar terms, only if the fee is a true retainer and the client agrees in writing after disclosure that the client will not be entitled to a refund of all or part of the fee charged.”

Importantly, both prongs of RPC 1.5(d) must be satisfied for an advance payment truly to be non-refundable. If the fee is actually an advance deposit for payment for legal services to be performed in the future, it remains refundable even if the client agrees in writing after disclosure that they will not be entitled to a refund and even if the fee agreement wrongfully denominates the fee as a “non-refundable retainer.”

The State Bar Court addressed this issue in In the Matter of Lais (1998) 3 Cal. State Bar Ct. Rptr. 907. There, a written retainer agreement stated: “Client agrees to pay to [respondent] for [his] services a fixed, non-refundable retaining fee of $2,750.00 and a sum equal to $275.00 per hour after the first 10 hours of work. This fixed, non-refundable retaining fee is paid to [respondent] for the purpose of assuring availability of [respondent] in this matter.” 3 Cal. State Bar Ct. Rptr. at 920. Two days after the client signed the retainer agreement and paid the $2,750.00, they changed their mind, told the attorney they wanted no work done, and asked for a refund. The attorney failed to send a refund until Aug. 7, 1992, after the clients complained to the State Bar.

The State Bar Court concluded that by delaying the refund, because “the $2,750 was not a true retainer fee,” the attorney failed to comply with the requirement of former RPC 3-700(D)(2) that a lawyer “refund any unearned part of an advanced fee promptly upon the termination of his services.” 3 Cal. State Bar Ct. Rptr. at 923. In reaching this conclusion, the court made clear that the retainer agreement’s “characterization of the $2,750 as a ‘non-refundable retaining fee’ is not determinative.” Id. Rather, looking to the underlying facts, the court held that this $2,750 was an advance payment for the first 10 hours of the attorney’s legal services: “The $2,750 was not earned when paid, but was intended to cover the initial 10 hours of respondent’s work. According to the retainer agreement, respondent’s fees were to consist of the $2,750 plus $275 per hour for his services after the initial 10 hours of work. [Client] testified that she understood the $2,750 to be an advanced payment for services, and the bills which respondent sent to the [clients] showed the $2,750 as a credit for services to be rendered.” Id. Also important to the court was that the retainer agreement “did not specify a period of time” for which the attorney was to be available to the clients nor did “the record show that respondent set aside a particular period of time to devote to” the clients’ matter. Id.

The lesson of this case is that under the RPC, if the facts surrounding a client’s advance payment indicate that it is compensation for future legal services, that advance payment will remain refundable regardless of efforts in the fee agreement to characterize it as a non-refundable deposit or non-refundable retainer. A failure promptly to refund any unearned portion of the fee will violate RPC 1.16(e)(2). Moreover, the fee agreement’s denomination of the advance payment as non-refundable will itself violate RPC 1.5(d).

To avoid potential RPC violations and forestall potential disagreements between client and attorney over the nature and refundability of advance payments, both parties should be absolutely clear in their understanding and agreement as to what an advance payment is for. If it is a true retainer, the fee agreement should specify for what time period or what matter the payment reserves the attorney’s availability, make clear that this payment is in addition to other payments for and will not be used to cover any portion of the costs of legal services provided, and include a clear statement that as a result the payment is a true retainer for which the client will not be entitled to a refund. If it is an advance deposit to cover the costs of future legal services, the retainer agreement should make this clear and may not characterize it as a non-refundable deposit or non-refundable retainer. By being clear, clients will not be misled into thinking a deposit is non-refundable when it is not, and attorneys will avoid violating RPC 1.5(d).