A major component of the government’s attack
on the private criminal defense bar has been the deprivation
of a defendant’s constitutional right to counsel of
choice by the seizure of funds which would be used
to pay counsel. Silber, A., The War on Drugs is
Destroying an Independent Defense Bar, The
Champion (March 1991). When the law firm has
accepted fees at the outset of the case, it may have
to defend against the government’s efforts to seize
the funds directly from them, even after counsel has
already spent the money.
Usually, fees earned by law firms
prior to the institution of forfeiture claims,
and other similar government claims upon funds or
prior to counsel’s knowledge of those claims,
may be kept by the law firm. Thus, having the money
received deemed fully earned before counsel acquires
any knowledge that the fee may be forfeitable or otherwise
seized, will help the law firm keep the fee, and the
client his counsel of choice. The retainer agreement
itself will be analyzed to determine whether the retainer
paid was earned at the time it was paid or will be
earned in the future when legal services are performed.
A civil case, SEC v. Interlink Data
Network of Los Angeles, Inc., 77 F.3d 1201 (9th
Cir. 1996), explains the desirability for categorizing
fees received as already earned rather than monies
held as advanced payments. The SEC filed a civil
action alleging securities fraud, and obtained a TRO,
which froze the assets of Interlink, even if held
by a third party. Third parties were required to
retain (and ultimately return) the funds which were
actually Interlink’s. Therefore, fees could not be
earned by the law firm after it had received
actual notice. The SEC sought the fees that
had been paid to counsel, while the law firm claimed
the fees had been earned and were “already in our
account”. The Ninth Circuit put the issue as “whether
under the terms of the . . . fee agreement,
the advance deposit was earned by [the law firm] upon
payment or when services were [actually] rendered.”
Ultimately, it was the terms of the retainer agreement
itself which categorized the fees paid as advanced
fees that was the law firm’s undoing.
Retainer agreements use different terms
and concepts to identify and define the financial
arrangement between lawyer and client. The nomenclature
given to the money which is received from the client
at the beginning of the lawyer/client relationship
can have an effect both on counsel’s ability to keep
the fee in the event the government comes calling,
and on compliance with applicable ethical rules.
The word “retainer” covers different concepts: (a)
a general retainer, sometimes called classic retainer,
is money paid by a client to secure an attorney’s
availability over a period of time. The general rule
is that this fee is earned by the attorney when paid.
However, the concept needs to be tortured to fit the
case of the criminal defendant, and can cause more
problems than it solves (i.e., the consigliore allegation);
(b) frequently, what is called a retainer is actually
an advanced deposit against future fees. Such a retainer
has been held to be the client’s property, which is
required to be held in trust until earned by the lawyer’s
actual performance of legal work; and (c) non-refundable
retainer is a term indicating that, regardless of
events, the fee will never be less, so the fee has
been earned by the law firm when paid. The term and
the concept “non-refundable” have presented ethical
problems. Other commonly used terms are minimum fee
and flat fee.
In order to be able to say that the fee
was earned -- and therefore, the firm was entitled
to keep the fee because at the time title to the funds
vested with it the law firm was an innocent owner
(no knowledge that the funds were subject to forfeiture
or other seizure) -- the funds cannot still be the
property of the client. It is essential that the
terms of the retainer agreement specify that title
to the funds has passed to the law firm and why.
Those reasons can be the extensive scope of the legal
work to be done on an immediate basis; the need to
hire additional personnel; the need to devote a substantial
portion of the firm’s resources so it could not take
another large case if offered; that the firm will
be conflicted out of a substantial opportunity to
represent a co-defendant; or, any other reason that
is unique to specific facts. However, when a minimum
fee has been described as a non-refundable retainer,
courts and commentators have found ethical problems.
A growing wave of law review articles and
judicial opinions have criticized non-refundable retainers
as forbidden and unethical. The rationale is that
such agreements create an impermissible chilling
effect on the client’s inherent right, upon public
policy grounds, to discharge the attorney at any time
with or without cause. Because that inherent
right is fundamental, a pure contract analogy does
not fit the agreements governing financial relations
between lawyers and clients. The client always
has the right to fire his counsel without cause
or reason. No financial arrangement can burden that
right.
[1] In the Matter of Edward Cooperman,
83 N.Y.2d 645; 633 N.Ed. 1069, 611 N.Y.S. 2d 465 (Court
of App. N.Y. 1994); Olsen & Brown v. City of
Englewood, 867 P.2d 96, aff’d. 889 P.2d
673 (Colo. 1995); Brickman & Cunningham, Non-refundable
Retainers Revisited, 72 N.C.L. Rev. 1,
6 (1993); Brickman & Cunningham Non-refundable
Retainers: Impermissible Under Fiduciary, Statutory,
and Contract Law. 57 Fordham Law Review
149 (1988); Lubet, The Rush to Remedies: Some Conceptual
Questions About Non-refundable Retainers, 73 N.C.L
Rev. 271 (1994); Note, No Leg to Stand on:
The General Retainer Exception to the Ban on Non-refundable
Retainers Must Fall, 17 Cardozo Law Review
719 (1996); Rothrock, On Retainers, Flat Fees,
and Commingling, 26 Colorado Lawyer 83
(1997); Dipippa, Lawyers, Clients and Money,
18 U. Ark Little Rock LJ 95 (1995); Wong
v. Kennedy, 853 F.Supp. 73 (E.D.N.Y. 1994); partial
judgment for plaintiff, at 1995 WL 322204 (E.D.N.Y.
May 18, 1995).
We must take great care to never burden
the client’s inherent right to get rid of us as his
counsel at any time. His right to a refund under
those circumstances -- no matter what we call his
payment of money -- is essential to avoiding potential
ethical problems. We should include in all retainer
agreements a paragraph similar to:
However, notwithstanding the above,
if you choose to discontinue our services prior to
completion of [describe the legal services for which
the firm has been retained] any unearned portion of
the minimum fee (less out-of-pocket expenses) shall
be returned to you.
While the term “non-refundable retainer”
has become suspect, it is not the word “non-refundable”
but the terms that are spelled out within the retainer
agreement that control. In the very New York case
which held that non-refundable retainers were unethical,
In the Matter of Edward Cooperman, the Court
of Appeals (New York’s highest court) specifically
stated that minimum fee arrangements were acceptable.
What is the difference between a non-refundable retainer
and a minimum fee? A minimum fee has been defined
as “an arrangement with a client that provides for
the payment of a specific amount below which the fee
will not fall based upon the handling of the case
to its conclusion.” Rosen v. Rosen, 614
N.Y.S. 2d 1018 (Sup. Ct. Queens Cty. 1994), (emphasis
added). Cooperman refused to give back any portion
of his “non-refundable retainer” when discharged by
the client after the case had just begun. He was
suspended from the practice for two (2) years. Unlike,
the “non-refundable” retainer in Cooperman,
the minimum fee in Rosen “did not provide for
retention of unearned fees” and thus continues to
be valid and does not subject a lawyer to discipline.
Id. See also Kelly v. M.D. Bayline, Inc.
F.3d (S.D.N.Y. 97 Civ.
0096 (KMW) 4/1/98) (general retainer not limited by
Cooperman prohibition).
“Flat fees” or “fixed fees” have been called
into question as well. Oregon’s Proposed Formal Ethics
Opinion No. 1998-151 highlights the need to clearly
spell out the details of the financial arrangement
with the client in a written retainer agreement.
Whatever we call monies we have taken, we must do
two things: (1) specify in the retainer agreement
why the fee has been earned and ensure that it is
not an advanced deposit against future fees; and (2)
make unmistakably clear that the client always has
the right to terminate the relationship at any time,
and that he will owe only the amount of money that
the lawyer has earned on a quantum meruit basis.
See, Analytical Approaches to the Non-refundable
Retainer, 9 Georgetown Law Journal of Legal
Ethics 583 (1996).
Earned fees may not be kept in the firm’s
trust account. A lawyer may not commingle his own
funds with the client’s. It is a mark of the unearned
fee, which has been advanced by a client, that it
is kept in the trust account. Indeed, such a fee
must ethically be kept in the trust account, and cannot
be used by the law firm before it is earned. Earned
fees must be deposited in the firm’s business account.
Brickman, The Advanced Free Payment Dilemma: Should
Payments Be Deposited to the Client Trust Account
or the General Office Account? 10 Cardozo
Law Review 647 (1989).
In SEC v. Interlink, the Ninth Circuit
used deposit of the Interlink fees into the firm’s
trust account as support for the conclusion that the
firm had not yet earned that money. However, it is
a wise management policy to spend only the monies
which have been earned, even if counsel is entitled
to the full payment. Not everyone has the ability
to pay the money back after it has been spent.
A practical answer is to open a special
account in the name of the firm. When the money moves
to that account, it is earned for tax purposes. However,
if drawn only as earned (by hours), the money is there
for refund should the client terminate the lawyer/client
relationship.
Conclusion
Written retainer agreements are compelled by many
states, and are universally favored. Model Rules
of Professional Conduct 1.5(b). There are precious
few circumstances where having a written retainer
agreement is not the most professional, safest and
most desirable route. The existence of a retainer
agreement with specific terms not only maximizes a
client’s right to counsel of choice, but also the
practitioner’s right to be fairly compensated for
his efforts on his client’s behalf.
