Ethics Opinion No. 258
Adopted October 17, 1969
The Committee has been asked for an opinion as to the propriety under the Canons of Ethics of a proposed “Attorney’s Title Opinion Fund.” A proposed Trust Agreement and other material has been submitted. The reasons stated for the proposed organization of the Fund are the increasing concern over the continuing loss of title and real property law practice and the belief that its causes are the hostility of real estate brokers, competition of lenders and title insurers, reluctance of laymen to seek legal services, and failure of attorneys to provide insurable title opinions and adequate title service. Proponents of the Fund state that its operation will eliminate or combat these factors and convince attorneys that better opinions and title service are needed.
As the Committee understands it, the Fund would be organized as a business trust, the trustees to be attorneys who are “active in titles or real property law.” The trustees would appoint officers and employees and would possess usual business powers as well as the right to appoint additional trustees, create subsidiaries and convert to corporate form on approval of certificate holders.
“Membership” in the Fund would be limited to attorneys who are, or desire to become, active in the practice of real estate law, and would be accorded by majority vote of the trustees. Trustees would periodically check members to see that a satisfactory quality of professional competence and service is being maintained. Members could be suspended or removed by the trustees for negligence, incompetence or other cause under rules established by the trustees.
A prerequisite to membership is the deposit with the Fund of a minimum of $100 for which the member is issued a “certificate of participation”, but a certificate owner is not necessarily a “member.” The certificates evidence the owner’s beneficial interest in the Fund, are personal property and entitle the owner thereof to participate in all dividends and distributions of principal, interest, or other trust property in the proportion which the number of certificates owned bears to the total number issued and outstanding. No certificate owner, as such, has any voice in the management or control of the property or business of the Fund, or any power of control over the trustees in that respect. Acquisition of a certificate by an attorney does not entitle such attorney to membership in the Fund, to attend meetings of members or to vote therein unless he becomes a member.
Except for the trustees’ discretion, there is apparently no limitation on the number of certificates which a member may acquire by making the necessary “deposit.” The trustees would be authorized to issue certificates or options to purchase certificates for services rendered in organizing the Fund or subsequently rendered to the Fund on such terms as they deem fair and reasonable.
The certificates are freely transferable upon compliance with designated procedures. There is no requirement limiting ownership of the certificates to “members” of the Fund or to attorneys. On the death or “retirement” of a member, the trustees would have the option to purchase certificates owned by the deceased or “retired” member on such terms and conditions as may seem reasonable to the trustees.
Liability of certificate owners, including members, would be limited to their interest in the Fund and notice of such limitation would be included in all agreements, obligations, instruments, correspondence, etc., issued by the Fund.
Trustees would be paid such compensation as they deem reasonable and proper and are exculpated from liability for all acts or omissions of other trustees and agents of the Fund. Trustees would be indemnified and reimbursed by the trust estate for any personal liability or loss incurred in connection with the business or operation of the Fund except any arising from his own willful breach of trust.
The Committee is advised that the Fund is not to be operated as a “referral” type organization. The individual members would service their own client’s title problems and when writing an opinion will use a uniform title opinion form which is similar to those now in use by attorneys examining titles for title insurers. Capital funds will be accumulated from the sale of certificates, annual dues of members of $25 and opinion deposits of $1.00 per opinion from members. It is believed that these sources will provide sufficient revenue to meet operating expenses. Deposits will be invested and the income used by the Fund, if needed, or distributed to certificate holders.
The attorney writing an opinion will be paid by the Fund to service and defend it if he is active, has not been negligent and incompetency is not indicated, or the Fund will pay up to $500 in lieu thereof at the option of the Fund and the owner, lender or title insurer. This is to provide visible financial support for the opinions of its members. Errors and omissions coverage or conventional title insurance will also be available at the option and cost of the client, from commercial or bar-related title insurance companies. It is believed that a group contract can be negotiated with the Fund which will provide this additional coverage at favorable rates.
Rules for the acceptance of prior opinions of members and other approved attorneys as starting points for current examinations are to be developed, and master opinions for subdivisions and condominia will be provided, possibly on a fee or royalty basis to the attorney or attorneys writing the opinion. The Fund would assist members in making studies of particular client groups’ requirements for services and forms.
Printed forms and “title services” would be provided to members at “about cost to enable them to compete more effectively for title law business”. It is said that although the Fund is not planned primarily as a profit-making organization, an expanded title practice and better professional fees for all members should result, and “if an operating profit should develop, it should be distributed to members in proportion to the number of opinion deposits paid the fund.”
The Committee is advised that the Fund would advertise its availability and services, but that it would not advertise any individual attorneys or members of the Fund. The proposed entity would, if successful initially, do business in various Oklahoma cities and towns.
While the Committee recognizes and deplores the encroachment of lay agencies into various areas of the law practice, it is noted at the outset that the proposed entity would be a commercial venture composed of practicing attorneys whose operations its proponents hope and expect will earn a profit for its investors, to be derived from the practice of law through supervision or “checking” of its members to see that “satisfactory quality of professional competence and service is being maintained”, the furnishing of “title services”, the promulgation of rules by the trustees for the acceptance of prior opinions of members, and the maintenance and providing of master opinions on subdivisions and the like, seems clear to the Committee. The “practice of law” consists of any service involving legal knowledge whether of representation, counsel, or advocacy, in or out of court, rendered in respect of the rights, duties, obligations, liabilities or business relations of the one requesting it, or for whom the service is rendered. Advisory Opinion No. 11, Oklahoma Bar Association. The fact that a layman can lawfully render certain service does not necessarily mean that the same service would not be a “legal service” when rendered by a lawyer. Advisory Opinion No. 240, Oklahoma Bar Association.
The proposed entity is not one for the joint practice of law such as a partnership or a professional corporation, but rather would be a lay agency operated by lawyers to perform what are essentially legal services for the purpose of earning a profit therefrom with the avowed hope that its operations will result in “an expanded title practice and better professional fees for all Fund members”.
While these are laudable aims for a Bar Association, they cannot be approved by the Bar Association as proper aims for a commercial venture involving attorneys, particularly where membership in, and the benefits to be derived therefrom, are regulated by what is a “lay agency.” The proposed entity in the opinion of the Committee is a “lay agency” even though its operations are essentially conducted by attorneys. See Advisory Opinions Nos. 1 and 20 of the Oklahoma Bar Association.
Accordingly, it is the opinion of the Committee that a lawyer could not properly participate in the activities of the proposed Fund because to do so would violate the provisions of Canon 47 of the Canons of Professional Ethics:
“No lawyer shall permit his professional services, or his name, to be used in aid of, or to make possible, the unauthorized practice of law by any lay agency, personal or corporate.”
In addition to the foregoing, the Committee is of the opinion that it would be virtually impossible as a practical matter for atorneys [sic] serving as trustees, or otherwise closely connected with the operation of the Fund, to prevent the Fund from acting as a “feeder” for his own private law practice.
In Opinion 57, the American Bar Association said:
“It is not necessarily improper for an attorney to engage in a business; but impropriety arises when the business is of such a nature or is conducted in such a manner as to be inconsistent with the lawyer’s duties as a member of the bar. Such an inconsistency arises when the business is one that will readily lend itself as a means for procuring professional employment for him, is such that it can be used as a cloak for indirect solicitation on his behalf, or is of a nature that, if handled by a lawyer, would be regarded as the practice of law. To avoid such inconsistencies it is always desirable and usually necessary that the lawyer keep any business in which he is engaged, entirely separate and apart from his practice of the law and he must, in any event, conduct it with due observance of the standards of conduct required of him as a lawyer.”
The Committee wants to state clearly that it entertains no doubt whatever as to the respect for the Canons of Ethics held by the attorneys who have submitted the plan for consideration in advance of its implementation. We commend their circumspection in doing so. We are constrained to hold, however, that the Oklahoma Bar Association cannot approve as ethical a commercial venture founded and operated by attorneys active in private practice the operation of which would, in our opinion, inevitably act as a “feeder” for their individual law practices and which would necessarily, although indirectly, advertise them or hold them out to the public as “specialists” in a particular field of the law as to which no specialization has as yet been recognized.
Adopted December 13, 2002
TOPIC: Non-Refundable Retainer Agreements
INQUIRY: Is a non-refundable fee agreement a per se violation of the Oklahoma Rules of Professional Conduct (“ORPC”)?
ABSTRACT: Every attorney fee must be earned and must be reasonable. ORPC, Rule 1.5 comment  provides: “A lawyer may require advance payment of a fee, but is obligated to return any unearned portion.” Neither decisional authorities of the Oklahoma Supreme Court nor the ORPC expressly prohibit advance fees which are designated as non-refundable retainers. However, ORPC Rule 1.16(d) provides, upon termination of representation, a lawyer must refund “any advance payment of fee that has not been earned.”1 Generally, any portion of a reasonable advance fee payment that is deemed earned should not be subject to a refund. Although there are certain fee agreements where the advance fee might be considered earned when paid,2 ordinarily an hourly fee agreement for services to be performed in the future indicates any fees advanced would not be considered earned until the services are actually performed by the attorney. If the attorney is discharged or the representation terminates before the retainer fee is earned, the client would ordinarily be entitled to a refund of the remainder. In some circumstances, a non-refundable retainer agreement in an hourly fee contract for services to be performed in the future may contravene Rule 1.16(d) if it materially impairs the client’s right to discharge the attorney at any time.3
I. The Basics of Fee Agreements
Every fee agreement must be reasonable.4 ORPC Rule 1.5(a) lists eight factors that can be considered when establishing a reasonable fee.5 All fee agreements must also comply with Rule 1.16(a)(3) which recognizes the client’s right to discharge the attorney at any time and (d) which states that upon termination of representation, the unearned portion of any fee paid in advance must be returned.6 Thus, when and if an advance fee payment is deemed earned is an important consideration in determining whether the non-refundable retainer provision is enforceable.
The Oklahoma Supreme Court has previously refused to uphold or enforce a fee contract “where the compensation is so excessive as to evidence a purpose on the part of the attorney to obtain an improper or undue advantage over the client.”7
II. A Brief Discussion of Various Fee Agreements
A number of jurisdictions that have addressed the issue of non-refundable retainers recognize that a reasonable non-refundable advance payment to assure the attorney’s availability is enforceable.8 Fees paid in advance for this purpose are sometimes known as an “availability fee,” an “engagement fee,” or a “general retainer fee.” The attorney earns this kind of “retainer” by agreeing to be available, regardless of whether any actual services must be performed.9 From the client’s point of view, one benefit of such a retainer is to make a particular attorney unavailable to a potential adversary in the event of litigation.
A fee paid in advance for this purpose is generally considered to belong to the lawyer when it is paid, and it should be deposited into the attorney’s operating account and should not be commingled in the clients’ trust account.10 When and if the client actually needs legal services it is common for the attorney to provide them for an additional hourly fee that is lower than the attorney’s ordinary rate.11 It is the attorney’s responsibility to draft the fee contract clearly and concisely to ensure that the client understands the fee paid in advance is intended to guarantee the attorney’s availability and is not intended to pay for future services. The engagement fee should bear a reasonable relationship to the income the lawyer sacrifices by accepting it.
The term “non-refundable retainer” is sometimes applied to a “fixed fee” paid by a client at the outset of a matter intended to be the entire fee attributable to a specific task. Fees paid in advance for this purpose may also be referred to as a “flat fee” or “lump sum fee.” Fees paid in advance for this purpose are intended to cover a specified amount of work estimated by the attorney for a particular matter. The attorney usually does not receive any additional fee even if more work is required, unless specifically agreed to by the client. Clients often prefer fees determined in advance to be a specified sum because it allows the client to know in advance how much the total cost for legal services will be, permitting the client to budget based on a fixed sum rather than face potentially unlimited hourly fees that may exceed the client’s ability to pay.
A fee in this category is not necessarily based on an estimate of hours. The attorney’s reputation is a valid factor in establishing the fee.12 For example, a flat fee may be determined based on an attorney’s “towering reputation” for making a civil case “vanish” just by agreeing to the representation, or resolving a criminal matter with a few telephone calls. Having obtained the desired result, the attorney is entitled to keep the fee.13 Even if the result is not particularly successful, if the fee is reasonable, the terms have been adequately explained to the client in the fee contract, and the services agreed upon have been performed, the lawyer ordinarily will not be required to refund any of the fee to the client.14
A number of jurisdictions that have addressed flat fees determined they are earned when paid and, therefore, must be deposited into the attorney’s operating account.15 In reaching this conclusion, jurisdictions consider whether the flat fee is fully explained to the client in a written agreement; whether the arrangement specifies the dollar amount of the retainer and its application of the scope of the representation, and/or the time frame in which the agreement will exist; and whether the fee is reasonable.
Sometimes an hourly fee contract providing for the attorney’s services to be compensated by the amount of time expended may be joined with a provision designated as “non-refundable retainer.” The use of the term “non-refundable retainer” which represents an advance payment of fees for hours of legal services that the attorney will perform in the future is impermissible. These fees may be designated “minimum,” “fixed” or “hourly” fees, but cannot impair the client’s rights under Rule 1.16(d). These fees are not “non-refundable” because if the attorney withdraws from the case, or is terminated before completing the work, the attorney must refund the unearned portion of the advance.
In Wright v. Arnold,16 the attorney charged a four thousand dollar ($4,000) non-refundable retainer to handle a domestic case.17 Several days later, the client discharged the attorney who testified he had worked twenty-two and one-half (22.5) hours on the case. The Oklahoma Court of Civil Appeals held that a “non-refundable retainer provision in an hourly-rate contract for legal services is unenforceable.” The Court found that the retainer was “an impermissible restraint on the right of a client to freely discharge her attorney” and was, therefore, in contravention of ORPC Rule 1.16(d).18 The Court specifically limited its holding to hourly-rate contracts and declined to address the issue of contingency fee contracts or fixed-rate contracts.19 the case was remanded for a determination of the reasonable value of the attorney’s services.
In light of the decision in Wright v. Arnold, the LEC is of the opinion that a non-refundable retainer provision in an hourly-fee agreement for service to be performed in the future may be unenforceable and may contravene ORPC Rule 1.16(d) if it materially impairs the client’s right to discharge the attorney at any time. Accordingly, any advance payment made pursuant to this type of fee contract should be held in the lawyer’s trust account until the funds are earned by the attorney. when the representation terminates, any unearned funds must be refunded to the client.
The LEC does not offer an opinion regarding the enforceable nature of fee contracts containing non-refundable “engagement fee” or “fixed fee” provisions.20 Nevertheless, the likelihood of enforcement of these types of non-refundable retainers is enhanced by implementing certain safeguards.21 For example, the fee contract should be in writing, the writing should fully and precisely explain the purpose of any fee paid in advance, the language should be clear and unambiguous regarding the scope of the attorney’s rights and obligations, as well as the client’s rights and obligations, the contract should be signed at the outset of the relationship, and the fee must be reasonable.
1 OKLA. STAT. ANN. tit. 5 Ch. 1 App. 3-A Rule 1.16(d)
2 See discussion of various fee agreements below.
3 Wright v. Arnold, 1994 OK CIV APP 26, 877 P.2d 616.
4 OKLA. STAT. ANN. tit. 5 Ch. 1 App. 3-A Rule 1.5(a).
5 These factors include:
1. The time and labor required, the novelty and difficulty of the questions involved, and the skill required to perform the legal service properly;
2. The likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer;
3. The fee customarily charged in the locality for similar legal services;
4. The amount involved and the results obtained
5. The time limitations imposed by the client or by the circumstances;
6. The nature and length of the professional relationship with the client;
7. The experience, reputation, and ability of the lawyer or lawyers performing the services; and
8. Whether the fee is fixed or contingent.
6 The relevant portions of OKLA.. STAT. ANN. tit. 5 Ch. 1 App. 3-A Rule 1.16 state:
(a) Except as stated in paragraph (c), a lawyer shall not represent a client or, where representation has commenced, shall withdraw from the representation of a client if:
(5) the lawyer is discharged.
(d) Upon termination of representation, a lawyer shall take steps to the extent reasonably practicable to protect a client’s interests such as giving reasonable notice to the client, allowing time for employment of other counsel, surrendering papers and property to which the client is entitled and refunding any advance payment of fee that has not been earned. The lawyer may retain papers relating to the client to the extent permitted by other law.
7 Robert L. Wheeler, Inc. v. Scott, 1991 OK 95, 818 P.2d 475, 480 (Okla. 1991) (citing Reneger v. Staples, 1964 OK 207, 388 P.2d 867, 872 (Okla. 1964).
8 Alaska Op. 87-1; Arizona State Bar Ass’n, Op. 99-02; California Rule of Professional Conduct No. 3-700(D)(2) (which defines “true retainer fee” as one “paid solely for the purposes of ensuring the availability of the attorney for the matter”); Connecticut Bar Assoc. Committee on Professional Ethics Op. 00-12 (2000); District of Columbia, Opinion No. 264 (1996); Florida State Bar Ass’n Comm. on Professional Ethics, Op. 93-2 (1993); 4 Hawaii B.J. 14, Ethics and Issues (May, 2000); Illinois State Bar Ass’n, Op. 90-10 (1991); Kentucky Bar Ass’n Ethics Comm., Op. E-380 (1995); Maryland State Bar Ass’n, Comm. on Ethics, Informal Opinion 92-41, 93-20 (1992); State Bar of Michigan, Standing Committee on Professional and Judicial Ethics, Op. R-7 (1990); Minnesota Opinion No. 15 (1991); New Jersey Supreme Court Advisory Comm. on Professional Ethics, Op. 644 (1990); Oregon Formal Opinion 1998-151; Pennsylvania Op. 85-120, Op. 95-100; South Carolina Bar, Ethics Advisory Op. 81-15 (1981); Supreme Court of Texas Opinion 431 (1986); Tennessee Board of Professional Responsibility, Formal Ethics Op. 92-F-128 (a) & (b) (1992); Utah State Bar Ethics Opinion Advisory Comm., Op. 136 (1993); Virginia Legal Ethics Comm., Op. 1606 (1994); Wisconsin Op. E-93-4; State of Washington Opinion 173 (1980); Virginia Opinion LEO 1606 (1994); West Virginia Opinion 99-03.
See also In re Hirschfeld, 192 Ariz. 40, 960 P.2d 640 (1998); In re Scimeca, 265 Kan. 742, 962 P.2d 1080, 1091-92 (1998); In re Hathaway Ranch Partnership, 116 Bankr. 208, 216 (Bankr. C.D. Cal. 1990)(wherein the court stated that “[a] true earned upon receipt retainer is one paid to a lawyer for which the only consideration exchanged is the promise to represent the client and no other party in the particular matter);In the Matter of Larry Sather, 3 P.2d 403, 414 (Colo. 2000); Iowa Bd. of Ethics v. Apland, 577 N.W. 2d 50 (Iowa 1998); In re Lochow, 469 N.W.2d 91, 98 (Minn. 1991); Cohen v. Radio Electronics, 679 A2d 1188 (N.J. 1996); Toledo Bar Assoc. v. Zerner, 718 N.E.2d 1283 (Ohio 1999). See also Restatement of the Law Third, The Law Governing Lawyers sec. 34 (2000); ABA/BNA Lawyers’ Manual, 45:110-11(1993); Lester Brickman & Lawrence A. Cunningham, Nonrefundable Retainers Revisited, 72 N.C. L. Rev. 1, 6 (1993).“
9 Why is it appropriate for this fee to be “non-refundable”? Imagine, for example, a client pays $20,000 as an availability retainer to an attorney in a case that will take an entire month. The attorney crosses off the month of May, for example, and takes on no new clients and schedules no work during that period. Perhaps the attorney hires extra staff to handle the case. Then the client decides to forego the case, or hires other counsel. The attorney has lost one month’s worth of income in order to be available for the client. The client paid for the attorney to be available. The attorney is available. The attorney, who otherwise is losing income, should not be penalized by the fact that the client chooses not to take advantage of that availability. See Generally Thomas D. Morgan & Ronald D. Rotunda, Professional Responsibility, at 154 (7th ed. 2000).
10 Commingling occurs when the client’s funds are combined with the attorney’s personal funds. Okla. Bar Assoc. v. Cummings, 863 P.2d at 1172. See also OKLA. STAT. ANN. tit. 5 Ch. 1 App. 3-A Rule 1.15(a) which requires that “[a] lawyer shall hold property of clients or third persons that is in a lawyer’s possession in connection with a representation separate from the lawyer’s own property”.
11 Wolfram, Modern Legal Ethics at p. 506 (1996).
12 See supra, note 3 (OKLA. STAT. ANN. tit. 5 Ch. 1 App. 3-A Rule 1.5(a)(7)).
13 See Howard Fischer, “Retainer Fees for Lawyers are ‘Gray Area’ for Courts,” Ariz. Bus. Gaz. (August 6, 1998); Restatement of the Law Third, The Law Governing Lawyers § 34 (2000).
14 See Connecticut Bar Assoc. Committee on Professional Ethics Op. 00-12 (2000). See also Raymark Industries, Inc. v. Butera, 193 F.3d 210 (3rd Cir. 1999)(wherein the Court permitted a law firm to retain a one million dollar non-refundable fixed fee paid ten weeks before the client fired the firm.)
15 In re Rogers, 2000 Ariz. Lexis 74 (Ariz. 2000); In the Matter of Larry Sather, 3 P.2d 403, 414 (Colo. 2000); Connecticut Bar Ass’n, Comm. on Professional Ethics, Informal Op. 90-29 (1990); District of Columbia, Opinion No. 264 (1996); Florida State Bar Ass’n Comm. on Professional Ethics, Op. 93-2 (1993);Disciplinary Board of the Hawaii Supreme Court, Formal Op. 29 (1985); North Carolina State Bar, Revised Ethics Op. 158 (1994); Oregon Formal Opinion 1998-151; Pennsylvania Op. 85-120; Tennessee Board of Professional Responsibility, Formal Ethics Op. 92-F-128 (1992); Supreme Court of Texas Opinion 431 (1986); Utah State Bar Ethics Opinion Advisory Comm., Op. 136 (1993);Virginia Legal Ethics Comm., Op. 1606 (1994); Restatement of the Law Third, The Law Governing Lawyers § 34 (2000).
But see 4 Hawaii B.J. 14, Ethics and Issues (May, 2000); Iowa Bd. of Ethics, 577 N. W. 2d at 54-55; South Carolina Bar, Ethics Advisory Op. 81-15 (1981); Vermont Bar Ass’n, Op. 97-07 (1997).
16 1994 OK CIV APP 26, 877 P.2d 616. See also In re Cooperman, 83 N.Y. 2d 465, 633 N.E.2d 1069, 611 N.Y.S.2d 465 (1994); Kelly V. MD Buyline, Inc., 2 F. Supp. 2d 420 (S.D.N.Y. 1998) (limiting Cooperman’s restriction of non-refundable retainers to “special” retainers. Where the retainer is a fixed amount, a non-refundable feature is permissible.)
17 The pertinent portion of the contract stated: “In consideration of the services rendered and to be rendered, I/we agree to pay my/our attorney for services . . . in the amount of $100 her hour for in-office time and $125 for in-Court time, based upon 15 minute increments, promptly upon receipt of his itemized periodic billing. I/we hereby tender to the attorney a retainer in the sum of Four Thousand and No/100’s Dollars ($4,000.00), the receipt of which is hereby acknowledged. I/We understand that this retainer is non-refundable.”
18 Id. at 618.
19 Wright v. Arnold, 877 P.2d at 619 n.3.
20 The Court’s decision in Wright v. Arnold, does not prohibit an attorney from entering into more than one fee agreement with a client.
21 See generally, P. Thomas Thornbrugh, “The Non-Refundable Retainer Minefield,” 80 A.B.A.J. 105 (1994).