Thursday, August 15, 2013

North Dakota Supreme Court opinion on non refundable "minimum fees"

I have written many times before on the concept of flat fees and whether they can be non refundable. See here, here and here, for example. In one of those posts I summarized what appeared to be the state of the law (at least in one jurisdiction) this way: "A flat fee can be non-refundable as long as there is nothing to refund; but if there is something to refund, it must be, unless there is a good reason not to. Easy." Sounds confusing? It is confusing! I understand the concern behind some of the decisions but the decisions have not been very clear.

Now comes the North Dakota Supreme Court with a new decision on the subject in a case called In re Hoffman, N.D., No. 20120290, 7/23/13. It explains some things well but for others we are still left with same of the problems we have seen before. Let's take it step by step.

In this case, the lawyer charged a $30,000 non-refundable “minimum fee” for his work in a criminal matter. After working on the case for about 26 billable hours he was discharged and then refused to refund any part of the fee. Bar counsel argued that the fee was “unreasonable”, that the lawyer violated the rules by putting the fees into an operating account rather than a client's trust account, and that he violated the rules by not providing a refund.

The court disagreed with the first two allegations but agreed with the last one.

The court found that the fee was not per se unreasonable because the jurisdiction “has not yet adopted a rule barring the use of non-refundable fee agreements.”

As to the second allegation, the court also held the law in the jurisdiction does not prevent a lawyer from negotiating that advance fees will be the lawyer's property upon payment.

So far so good. But then, citing sources from different jurisdictions, the court agrees that “Even if advance fees are by agreement not being held in trust for a client, they may still be subject to refund if later determined not to have been unearned.”

This is what I don't understand. If it is agreed that the fee is earned upon payment, then how can it be considered to be unearned? (If on the other hand, was was agreed was that an unearned fee will be deposited in the lawyer's operating account, the court is saying that a lawyer and client can agree to allow the lawyer to commingle funds.)

So, in sum, the court says the fee is not unreasonable and the lawyer is free to negotiate that it is earned, only that the client can later claim it wasn't earned. That does not make sense to me.
The court is concerned with the fact that an attorney could end up keeping a huge fee for little work and that a client may be tied to an attorney they would rather fire. As the court says "the retainer in circumstances of termination of representation may represent a windfall".

All that is fine, but if the court wants the fee to be refundable, then it should hold that fees can't be non refundable. Period. Instead, what the court ended up saying is that fees can be non refundable and earned, unless the client wants a refund or thinks they were not earned. And that is confusing, to say the least.