Ethics Opinion No. 265
Adopted June 11, 1971
The Opinion of the Committee has been requested on the following facts: An attorney was initially employed to defend a doctor in a state court malpractice suit. The doctor’s professional liability insurer refused to defend or to indemnify the doctor against any judgment that might be rendered. Following almost three years of extensive and complicated litigation in the state court, plaintiff recovered judgment against the doctor.
Thereafter the liability insurer filed a declaratory judgment action in federal court seeking a determination that its policy did not cover the state court judgment and it claimed collusion and fraud in the procurement of that judgment.
It will probably be necessary for the attorney to testify in the federal court proceedings concerning the handling and disposition of the state court litigation. When he initially accepted employment by the doctor, it was not anticipated that it would ever be necessary for the attorney to testify on behalf of the client.
The Committee is asked:
(1) To what extent does the Code of Professional Responsibility prevent the attorney from continuing to represent the doctor in the federal court proceedings; and
(2) If it becomes “necessary and essential to the ends of justice that the client continue to receive the benefit of (his) counsel, knowledge and experience because of (his) prior representation in the state court proceeding” whether it would be proper “to continue to participate in the federal court case to the extent of assisting newly employed counsel who would handle the actual trial” of the federal court action.
The Code of Professional Responsibility, Canon 5, requires that a lawyer should exercise independent professional judgment on behalf of a client. Ethical Considerations 5_9 and 5_10 provide as follows:
“EC 5_9. Occasionally a lawyer is called upon to decide in a particular case whether he will be a witness or an advocate. If a lawyer is both counsel and witness, he becomes more easily impeachable for interest and thus may be a less effective witness. Conversely, the opposing counsel may be handicapped in challenging the credibility of the lawyer when the lawyer also appears as an advocate in the case. An advocate who becomes a witness is in the unseemly and ineffective position of arguing his own credibility. The roles of an advocate and of a witness are inconsistent; the function of an advocate is to advance or argue the cause of another, while that of a witness is to state facts objectively.”
“EC 5_10. Problems incident to the lawyer-witness relationship arise at different stages; they relate either to whether a lawyer should accept employment or should withdraw from employment. Regardless of when the problem arises, his decision is to be governed by the same basic considerations. It is not objectionable for a lawyer who is a potential witness to be an advocate if it is unlikely that he will be called as a witness because his testimony would be merely cumulative or if his testimony will relate only to an uncontested issue. In the exceptional situation where it will be manifestly unfair to the client for the lawyer to refuse employment or to withdraw when he will likely be a witness on a contested issue, he may serve as advocate even though he may be a witness. In making such decision, he should determine the personal or financial sacrifice of the client that may result from his refusal of employment or withdrawal therefrom, the materiality of his testimony, and the effectiveness of his representation in view of his personal involvement. In weighing these factors, it should be clear that refusal or withdrawal will impose an unreasonable hardship upon the client before the lawyer accepts or continues the employment. Where the question arises, doubts should be resolved in favor of the lawyer testifying and against his becoming or continuing as an advocate.”
Disciplinary Rule, DR 5_101(B) holds:
“A lawyer shall not accept employment in contemplated or pending litigation if he knows or it is obvious that he or a lawyer in his firm ought to be called as a witness, except that he may undertake the employment and he or a lawyer in his firm may testify:
(1) If the testimony will relate solely to an uncontested matter.
(2) If the testimony will relate solely to a matter of formality and there is no reason to believe that substantial evidence will be offered in opposition to testimony.
(3) If the testimony will relate solely to the nature and value of legal services rendered in the case by the lawyer or his firm to the client.
(4) As to any matter, if refusal would work a substantial hardship on the client because of the distinctive value of the lawyer or his firm as counsel in the particular case.”
Upon the facts given, it is the opinion of the Committee that it would be ethically improper for the attorney to continue to represent the client in the federal court proceedings. It appears clear at the outset, as the inquiry recognizes, that the attorney’s testimony on behalf of the doctor will be highly material to the doctor’s case. It has long been recognized by the courts that, in the absence of a statute to the contrary, the testimony of an attorney for his client is competent and the fact that he is or has been an attorney in the case affects only his credibility. At the same time the courts have condemned the practice as one that should be discouraged holding that it is a breach of ethical propriety for an attorney to accept employment in any matter in which he knows that he will be a material witness for the party seeking to employ him, or having accepted employment, for him to testify for his client except in those rare occasions where, for some unforeseen event occurring in the progress of a trial, his testimony becomes indispensable to prevent an injustice. Formal Opinion 50. Committee on Professional Ethics, American Bar Association; Advisory Opinion No. 114, Legal Ethics Committee, Oklahoma Bar Association; Onstott v. Edel, Ill., 82 N.E. 854; Flood v. Bollineier, Ia., 138 N.W. 1102; Ferraro v. Taylor, Minn., 265 N. W. 829.
The nature of the anticipated testimony apparenty will relate to contested material issues going substantially beyond mere formalities. It would seem from the facts given in the inquiry that the credibility of the expected testimony could be a highly significant aspect of the client’s cause. If so, it would be unethical for the attorney to undertake or continue representation of the client in the federal court action. It is assumed that the federal court action is still in a relatively early stage, and no facts are given to suggest that this is an exceptional situation in which it would be manifestly unfair to the client to refuse, or withdraw from, employment, or that an unreasonable hardship would thereby be imposed on the client. Neither is it suggested that competent new counsel cannot be obtained.
The second part of the inquiry is more difficult because it is not clear what is meant by continuing “to participate” in the federal court case “to the extent of assisting newly employed counsel who would handle the actual trial”. Assuming, as we do, that the inquiring attorney’s testimony is essential to the doctor’s cause, it would not only be ethical but necessary for the inquiring attorney to testify as a witness and, to that extent, his “participation” and “assistance” of newly employed counsel would not be improper.
On the other hand, if the lawyer is to be a witness on behalf of the doctor, he should not be counsel or co-counsel in the case and should confine his participation to that of witness.
Since it is ethically improper, except in exceptional circumstances, for an attorney to represent a party in a case when he knows that he or a lawyer in his firm, will be called to testify as a material witness in the case (Code of Professional Responsibility, DR 5_101(B); and Formal Opinions 50 and 185, Committee on Professional Ethics, American Bar Association), the Committee considers that it would be no less improper for co-counsel to so testify on behalf of a client even though the lawyer conducting the trial is not in the same firm.
Our opinion is not intended to preclude the inquiring attorney from cooperating with the new counsel by conferring with him or making available to him any information which may properly be helpful to the client’s cause.
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).