In May 2023, the ABA Standing Committee on Ethics and Professional Responsibility (“Committee”) issued Formal Opinion 505 (“Opinion”) concerning a lawyer’s ethical duties and safekeeping of their client’s property for fees paid to the attorney in advance of their legal services. Specifically, the ABA addressed fees paid before legal services are performed such as advanced fees, retainer fees, and flat fees.
One of the primary purposes of the ABA Model Rules of Professional Conduct (“Model Rules”) is to protect the public by preventing financial harm to clients. Under the Model Rules, the Committee concluded, “a client’s advanced fees must be placed in a Rule 1.15-compliant trust account, to be disbursed to the lawyer only after the fee has been earned.”
The Opinion defined common terms that lawyers use to describe fee arrangements. The Committee defined “advanced fees” as fees paid to the lawyer for legal work to be performed in the future. The Opinion laid down a clear definition of an advanced fee and the rules associated with advanced fees: “When a client pays an advance fee to a lawyer, the lawyer takes possession, but not ownership of the fees to secure payment for the services of the lawyer in the future.” Consequently, when a lawyer receives an advanced fee, the Model Rules require the fees to be placed in a lawyer’s trust account for safekeeping until the lawyer earns the fees.
The Opinion clearly stated that “[t]he purpose of [a retainer] is to assure the client that the lawyer will be contractually on call to handle the client’s legal matters.” Usually, a general retainer is paid – and deemed earned – upon the promise of availability to represent a client, whether or not services are actually needed or requested by the client. The general retainer fee is solely to reserve the lawyer’s time and availability should the occasion arise for the need for legal services. By definition, a general retainer is earned upon commencement of the general retainer fee legal services agreement. Consequently, a general retainer should be placed in a lawyer’s operating account (not a trust account) since it is considered earned upon execution of the agreement.
The Opinion laid out the framework on how “flat” or “fixed fees” must be handled under the model rules stating:
a flat or fixed fee is paid by the client in advance of the lawyer performing the legal work, the fees are an advanced fee. Use of the term “flat fee” or “fixed fee” does not transform the arrangement into a fee that is “earned when paid.”
The Committee opined that a flat or fixed fee under the Model Rules requires a flat fee to be placed in a “Rule 1.15-compliant trust account, to be disbursed to the lawyer only after the fee has been earned.” The Committee explained 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.’” In justification for the Committee’s position on this matter, they referenced Model Rule 1.5(a) (“A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses.”) The Committee discussed Comment  to Rule 1.5 for additional guidance, “A lawyer may require advance payment of a fee, but is obliged to return any unearned portion. See Rule 1.16(d).” In conclusion, the Committee ruled that:
an advance fee paid by a client to a lawyer for legal services to be provided in the future cannot be nonrefundable. Any unearned portion must be returned to the client. Labeling a fee paid in advance for work to be done in the future as “earned upon receipt” or “nonrefundable” does not make it so.
The Committee was cognizant of the fact that many jurisdiction’s model rules allow lawyers to treat an advancement (or fixed or flat fees) as the lawyer’s property upon payment, meaning the lawyer may place the advance in their operating account. The opinion explicitly opined that “this approach departs from the safekeeping policy of the Model Rules,” specifically, Model Rule 1.16(d) (requiring a lawyer to refund “any advance payment of fee or expense that has not been earned or incurred”) and Model Rule 1.15 (requiring advanced fees to be placed in a trust account). Simply put, under the Model Rules, flat fees are to be treated as advanced fees and should be placed in a lawyer’s trust account.
Maryland Attorneys’ Rules of Professional Conduct and Attorney Trust Accounts
It is important to note the differences between the ABA Model Rules and the Maryland Attorneys’ Rules of Professional Conduct and Attorney Trust Accounts (“Maryland Rules”).
What is clear about the Maryland Rules is that an attorney is prohibited from entering into an “agreement for, charge, or collect[ing] an unreasonable fee.” See Rule 1.5(a). In addition, under Rule 301.15(c), “[u]nless the client gives informed consent, confirmed in writing, to a different arrangement, an attorney shall deposit legal fees and expenses that have been paid in advance into a client trust account and may withdraw those funds for the attorney’s own benefit only as fees are earned or expenses incurred.” Id. Those are the similarities.
The Maryland State Bar Association Committee on Ethics (“MSBA Committee”), which issues written opinions (“MSBA Ethics Docket”) on the proper interpretation of the Maryland Rules, has considered engagement fees, non-refundable retainer fees, flat fees, and subscription fees. Counsel should take caution and become familiar with the opinions and nuances of the below opinions before engaging in a contract for legal services for any type of these fees.
- Engagement fees. An “engagement fee” is a fee for the attorney to accept a case, to be available to handle it, and not represent another party. See MSBA Ethics Docket Nos. 1993-20, 1993-24, and 1992-41. The Committee has interpreted engagement fees as earned upon receipt and should not be deposited into a client trust account. Id.; see also MSBA Ethics Docket No. 1987-09 (upfront payments are “ethically proper so long as the amount involved is reasonable”); Docket No. 1988-21 (upholding earned retainers in such circumstances). So long as this “availability fee” is reasonable, it may be placed in the attorney’s operating account as earned when received.
- Non-Refundable Retainers. MSBA Ethics Docket Nos. 1987-09 and 1988-21. The MSBA Committee endorsed “nonrefundable” retainers, but only used the label in situations where such retainers were both reasonable and truly “earned.”
- Retainer Fees. If a retainer is an engagement fee and if it is reasonable under Rule 1.5(a), then the fee can be placed in the firm’s general account. If, however, the retainer fee is simply payment to the lawyer for legal services before they are performed, the fee must be placed into the trust account until they are earned. See MSBA Ethics Docket No. 1992-41.
- General Retainer Fee. No ethical improprieties in entering into a general retainer agreement with clients where the lawyer would receive a monthly or annual fee for specific legal matters. However, the committee cautioned that the “devil is in the details.” For this reason, the MSBA Committee has forewarned previous inquiries regarding this subject.” MSBA Ethics Docket No. 2000-39.
- Attorney Grievance Comm’n v. Stinson, 428 Md. 147, 50 A.3d 1222 (2012). The court placed a heightened scrutiny upon alternative fee arrangements, e.g. avoid the “nonrefundable” label in fee agreements. In Stinson, the Court of Appeals sanctioned an attorney for handling legal fees as “engagement fees” when the fee under the agreement was “nonrefundable.”
- Flat Fees. The MSBA Committee addressing flat fees stated, “ As noted, Rule 1.5 requires that a fee be reasonable.” Therefore, the MSBA Committee opined that “circumstances may arise after representation has begun which may compel an attorney to make a refund of all or a portion of a ….fee.” However, “[e]thically , the Committee sees no problem with the parties agreeing to a fixed fee which the attorney may immediately deposit into his or her operating account so long as that fee is reasonable.” MSBA Ethics Docket No. 1993-20.
- Subscription Plans for Legal Services. In Docket No. 2020-01, the MSBA Committee considered whether a legal “subscription” plan offering a package of legal services in exchange for a determined amount of a monthly, quarterly, or annual fee was allowable. The Committee determined that subscription fee plans are ethical so long as they meet the requirements of Rule 1.5 (reasonableness). The MSBA Committee encouraged caution before entering into such agreements. Next, the MSBA Committee addressed whether such fees must be placed into the client trust account or the extent to which portions of this fee must be refunded to clients who do not avail themselves legal services.
All of the above MSBA Ethics opinions and additional opinions on attorney’s fees can be found on the MSBA Ethics Opinion & Hotline website.
The determination of when a fee is “earned” ultimately is a question of law. MSBA Ethics Docket 1993-20. However, after ABA Opinion 505, there is no guarantee that the Supreme Court of Maryland would allow non-refundable fee arrangements.
The issue of legal fees between an attorney and client is of a contractual nature. The ABA highlighted the importance of communicating clearly with the client concerning the terms of the legal services agreement in writing. The ABA recommends the agreement should clearly define the amount the lawyer will charge the client, how and when the client will be billed; and, a provision that if the legal services are not completed for some reason, then the client may be entitled to a refund of any unearned portion of the fee paid in advance. The ABA also recommends avoidance of the phrase “unearned fees.” Prepaid fees are a useful tool for many lawyers. Review the authority on fees to ensure compliance with all these rules and proceed with caution.