APRL Annual Meeting San Francisco, California August 6, 2010 THE IMPORTANCE OF BEING EARNED: RETAINERS, ADVANCE FEES, & TRUST ACCOUNTS APRL Annual Meeting San Francisco, California August 6, 2010

PANELISTS Art Lachman, Seattle, WA Don Campbell, Southfield, MI Doug Richmond, Chicago, IL

COMMON GROUND [HOPEFULLY] All fees must meet the Rule 1.5 reasonableness requirement Flat fees are permitted if they meet the Rule 1.5 reasonableness requirement Any type of fee (including advanced) must be “refunded” to the client (or “disgorged” from the lawyer) to the extent: it is “unreasonable”; or it is “unearned” upon termination of the representation (under Rule 1.16(d)) “True” retainers (for availability only) need not be deposited in trust

A NOTE ON “RETAINERS” “Over the years, attorneys have used the term ‘retainer’ in so many conflicting senses that it should be banished from the legal vocabulary.” Black’s Law Dictionary 1342 (8th ed. 2004), quoting Mortimer Schwartz & Richard Wydick, Problems in Legal Ethics 100, 101 (2d ed. 1988)

TERMINOLOGY FOR TODAY [HOPEFULLY] “Retainer” (aka true, general, classic, engagement retainer) for availability ONLY “Advance fee” A fee received in advance of services being performed; can be flat or hourly “Flat fee” (or “fixed fee”) A fixed charge for legal services that constitutes complete payment for those services & does not vary with the amount of time or effort expended by the lawyer to complete them

WASHINGTON DEVELOPMENTS Prior law: Client funds must be deposited into a trust account under Wash. RPC 1.15A(c) Prepaid fees are generally considered “client funds” (must be placed in trust account) WSBA Formal Ethics Op. 186 (1990) : if the lawyer labels the prepaid flat fee as “nonrefundable” or “earned upon receipt,” the funds are considered the lawyer’s property upon receipt & are deposited in the lawyer’s operating account

WASHINGTON DEVELOPMENTS Several liability & disciplinary cases involved lawyers failing to refund the unearned portion of prepaid flat fees using “nonrefundable” or “earned upon receipt” labels WSBA withdrew Formal Ethics Op. 186 (December 2005) The Washington Supreme Court adopted amendments to RPC 1.5 and RPC 1.15A effective in November 2008 to deal specifically with retainers, advance fees, & prepaid flat fees

WASHINGTON DEVELOPMENTS: NEW RPCs General Rule (new RPC 1.15A(c)(2)): Advance fees must go into trust account Limited Exceptions (new RPC 1.5(f)): Retainers (defined to be for availability only) Prepaid flat fees (with detailed written disclosures) The Washington Supreme Court rejected a proposal to ban the use of the terms “nonrefundable,” “earned upon receipt,” and “minimum” to describe fees The Court also rejected a proposed refund/put-back requirement for fee disputes in the advance flat fee context

RECENT ETHICS OPINIONS Washington: availability retainer label, “pro bono credit” for specified hours, violates revised RPCs Missouri: all advance fees to trust (label irrelevant) Arizona: “nonrefundable”/“earned upon receipt” label controls, with disclosures in Ariz. RPC 1.5(d)(3); “minimum fee” contemplating additional hourly charges OK (use label; don’t call it a “flat fee”) D.C.: generally, all advance fees to trust; exception for flat fees, with client’s informed consent (label irrelevant); lawyer & client can agree how flat fees deposited in trust are earned; absent agreement, burden on lawyer to show funds have been earned

SUMMARY/TRENDS An increasing number of states now require all advance fees to be deposited into trust; e.g., By rule in CO, DE, HI, VT, maybe ME By ethics opinion or case law in IA, KS, MO, VA Advance fees described as “nonrefundable” subject to a refund requirement if unreasonable E.g., ethics opinions/court decisions in AK, AL, GA, IN, NE, NV, NY, TX Likely true everywhere (even Michigan?) AK, NY ban “nonrefundable” terminology altogether

SUMMARY/TRENDS Several states permit flat fees to avoid trust account requirement (with conditions; label not dispositive) By rule in LA, WA; proposed rule in MN By case law/ethics opinion in DC, MT A few states have adopted MR 1.15(c) (all advance fees must be deposited into trust), with a general exception for written agreements with client otherwise CT, MD, PA

SUMMARY/TRENDS In several states, agreements with client about where the money goes are generally honored: By rule in OH, SC, WI (subject to conditions, including disclosure & informed consent) In several states, “nonrefundable” or “earned upon receipt” language controls For any fee (apparently): KY, MI For any fee (with disclosures): AZ For flat fees: case law/ethics opinion in OK, OR; proposed rules in TN, CA (?)