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New ABA Formal Opinion on Fees Paid in Advance Contrasts with 2016 Ohio Advisory Opinion
Post on June 6th, 2023

OBLIC has often stressed the importance of good client communication, including succinctly and clearly informing clients in writing about legal fees for representation. Earlier this month, the ABA in Formal Opinion 505 addressed Fees Paid in Advance for Contemplated Services. As we report on this ABA Opinion, it is important to note the differences from the Model Rules in the Ohio Rules of Professional Conduct and the discussion of flat fees paid in advance in the Ohio Supreme Court Board of Professional Conduct’s Advisory Opinion 2016-1, discussed below. Attorneys also licensed in other states should check the applicability of the advice in the ABA Opinion in those states.

The ABA Opinion, issued under the Model Rules of Professional Conduct, finds that Model Prof. Cond. Rule 1.15 requires that fees paid in advance must be held in a trust account and may be withdrawn only when the services for which the fees are paid are actually rendered. The Opinion also reminds attorneys that all fees must be reasonable and unearned fees must be returned to the client. According to this ABA Opinion, it is therefore not accurate to label a fee as “nonrefundable” before it is actually earned. Labeling a fee “earned on receipt” also does not accurately determine whether a fee has actually been earned.

The ABA Opinion defines the common terms used to label fee arrangements: advances, retainers, flat or fixed fees, and “nonrefundable” or “earned-upon-receipt” fees. It examines the anti-comingling rule under Model Rule 1.15 and the need to protect client funds, including advances. The Opinion also discussed Model Rule 1.16(d) to refund any advance fee or expense payment that has not been earned.

The ABA Opinion includes three helpful hypothetical situations about a “nonrefundable retainer,” a purported general retainer, and a flat fee. These are instructive in illustrating the position taken in the Opinion that labeling a “retainer” nonrefundable or “earned upon receipt” do not magically change the fee as the purpose of the fee dictates its character and treatment irrespective of labels and terminology used.

The ABA Opinion offers these suggestions for all fees paid in advance (including flat fees or deposits for future hourly work):

  • Use plain language: avoid use of the word “retainer” and instead explain that fees paid ahead are an “advance payment.”
  • Explain that pre-payment is a “deposit for fees” and share with the client that the funds deposited will be applied to the balance owed for work on the matter, and how and when this will happen.
    • For example, the fee agreement may state that the client will be regularly (e.g. monthly) invoiced for the time expended by the lawyer and that the sum reflected in the invoice will be withdrawn from the trust account.
  • When the arrangement is for hourly billing, explain that if the deposit exceeds the final billing any balance will be remitted to the client.
  • If the advanced fee is fixed and the representation may continue for some time or involve several stages, consider dividing the representation into reasonable segments and providing for withdrawal of a reasonable portion of the deposited fee as the representation progresses and the fee becomes partially earned.
  • Anticipate the potential for early termination and include a provision explaining what will happen if the representation is terminated before the matter is completed.

For Ohio lawyers, ABA Opinion 505 must be read in conjunction with Ohio Board of Professional Conduct Opinion 2016-1 Flat Fee Agreements Paid in Advance of Representation. This Opinion, issued under Ohio Rules of Professional Conduct, addresses a flat fee of a fixed amount paid by a client in advance of representation. It does not address payment of a retainer to secure availability of a lawyer’s services as in ABA Opinion 505.

Opinion 2016-1 finds that the flat fee agreement must comport with the Ohio Rules of Professional Conduct. Like ABA Opinion 505, Opinion 2016-1 finds that under Prof.Cond.R. 1.15(c), a lawyer is required to deposit flat fees and expenses paid in advance for representation into an IOLTA account and may withdraw the fee only as it is earned or the expense as it is incurred.

However, Opinion 2016-1 states that an “earned upon receipt” fee is a flat fee paid in advance that is deemed earned upon payment regardless of the amount of future work performed, thus permitting the flat fee to be deposited into an operating account. If a lawyer designates a fee “earned upon receipt,” “nonrefundable,” or similarly, however, the attorney must advise the client in writing that the client may be entitled to a refund under Ohio Prof. Cond. R. 1.16(e) if the work anticipated for the flat fee is not completed. Under Ohio Prof. Cond. R. 1.5(a), the flat fee must not be excessive.

The Ohio Rules of Professional Conduct differ from the Model Rules. The Ohio Rules include Prof. Cond. R. 1.5(d)(3) and Comment [6A]. For additional information, please see Hotline Questions: Flat Fee Agreements and New Advisory Opinion on Flat Fee Agreements.

The takeaway from these Opinions is the importance of clearly defining the fee the lawyer will charge the client, how and when it will be billed, and that if for any reason the representation is not completed, the client may be entitled to a refund of any unearned portion of the fee paid in advance. A few proactive sentences can be effective at preventing fee disputes or other conflicts and instead creating greater clarity and trust between attorneys and clients.

As always, we’re here to answer your questions.

Gretchen K. Mote, Esq.
Director of Loss Prevention
Ohio Bar Liability Insurance Co.
Direct:  614.572.0620
[email protected]
Merisa K. Bowers, Esq.
Loss Prevention Counsel
Ohio Bar Liability Insurance Co.
Direct:  614.859.2978
[email protected]