Way back in 2016 the Board of Professional Conduct of the Ohio Supreme Court released an advisory ethics opinion on whether a lawyer may enter into an agreement requiring a client to pay a flat fee in advance of representation and on whether a lawyer must deposit such a fee into a trust account. See Board of Professional Conduct of the Supreme Court of Ohio, Opinion 2016-1 (February 12, 2016). Upon reading it, I thought the opinion reflected a common problem among jurisdictions that results in a confusing inherent contradiction within the applicable rule. So, I wrote an article for Ohio Lawyer magazine (available here) in which I argued why the Board should have corrected the deficient drafting and interpretation of the rule.
In essence, I argued a few relatively simple principles: that it would be unethical to charge or collect a fee that was not earned and that, therefore, if the fee was paid in advance, it had to be kept in trust until earned. And, I made very specific suggestions on how to amend the rule and its comment to reflect the correct doctrine and to help lawyers better apply it.
The problem with the Ohio opinion, which is not uncommon among a number jurisdictions, is that it concluded it would be fine for lawyers to “deem earned” fees that had not been earned yet in order to allow the lawyers to place the money in their general accounts rather than in their trust accounts, while, at the same time, assuring clients that if the money was not earned eventually, they would be guaranteed a refund of the unearned portion of the fee.
In my article, I argued this resulted in making the fees both earned and unearned at the same time, and inevitably lead to commingling regardless of where the money was placed. It also prioritized the lawyers’ interests in getting their hands on the money at the expense of clients who were placed at risk of losing their money. Thus, I suggested specific changes to the Ohio rules to fix the contradiction and to balance the interests of lawyers and clients.
But no one listens to me, and nothing changed.
So why am I writing about this today? Because last week the ABA’s Standing Committee on Ethics and Professional Responsibility issued a new Formal Opinion (No. 505, available here), in which it adopts the views I argued for way back then. I guess it took a long time, but finally we have a good opinion on the subject and hopefully jurisdictions will take notice.
Opinion 505 frames the issue from a slightly different perspective, but in the end addresses the same questions. The opinion focuses on the question of whether lawyers can label advance fees as “non refundable” but in the process talks about the same practice I discussed years ago – the practice of saying that fees are “deemed earned” when in reality they are not. On this point, the opinion is very clear:
“The Model Rules of Professional Conduct do not allow a lawyer to sidestep the ethical obligation to safeguard client funds with an act of legerdemain: characterizing an advance as “nonrefundable” and/or “earned upon receipt.” This approach does not withstand even superficial scrutiny. A lawyer may not charge an unreasonable fee.” Thus, as the opinion points out, “[t]his approach departs from the safekeeping policy of the Model Rules described herein and creates unnecessary risks for the client.”
“Legerdemain,” by the way, means a skillful hiding of the truth in order to trick people. Hiding of the truth to trick people. That sounds bad. You wouldn’t want to be known as a lawyer who hides the truth to trick people, would you?
Interestingly, the ABA Opinion has generated some criticism from some that say that lawyers and clients should be free to contract in any way they see fit. Yet, this view forgets that rules of professional conduct interfere with lawyers’ “rights” all the time, for many reasons and on many topics because there are other interests at stake. In response to that, some then argue that there is no valid interest at stake on the topic of fees paid in advance. Yet, there is. As the opinion argues, the interest is client protection. The rules are there to protect clients and they do so by making sure that the lawyers abide by the rules related to safekeeping of money and the rules that mandate refunds of unearned fees.
Some have argued that lawyers who might steal money from clients will take the money from trust accounts anyway, so mandating which account must be used to keep fees paid in advance makes no difference. But this forgets that the idea behind mandating the use of trust accounts is not only to protect clients from the lawyer, but, more importantly, from the lawyer’s creditors.
Finally, I’ve also heard some cite a case from Michigan called Grievance Administrator v. Cooper, 757 N.W. 2d 867 (Mich. 2008), in support of the position that it would be fine for a lawyer to charge a non-refundable flat fee paid in advance. Unfortunately, this analysis is wrong for a basic reason: the case was wrongly decided since it did not involve a flat fee paid in advance. It involved a security retainer, which, by definition, would be unreasonable if it were non-refundable.
One last point: the ABA Opinion refers to circumstances in which a lawyer does not have consent from a client. An interesting question is whether a lawyer should be allowed to place an unearned fee in the lawyer’s operating account if the client gives consent. In the District of Columbia, for example, that is allowed. See In Re Mance 980 A. 2d 1197 (D.C. 2009).
So, in conclusion, I think we can agree that when fees are paid in advance, they raise some ethical concerns. One way to address these concerns is to ban lawyers from asking clients to pay in advance. Another solution might be to stop requiring that lawyers use client trust accounts. See, here and here, for example. Yet, many reasons justify allowing the practice of asking for payment in advance and of requiring lawyers to keep separate trust accounts.
The concerns can be addressed without having to go that far. A better alternative is to eliminate the “legal fiction” of “deeming” a fee as “earned” when it is just a way to pretend that the amount of the fee belongs to the lawyer even though the work it is supposed to pay for has not been performed. Instead of allowing this, lawyers and clients should agree on how (or when) portions of the fee are actually earned so that ownership of that portion of the money can be transferred to the attorney. This way, the fee amount paid in advance is kept in the trust account, but the attorney can withdraw funds as they are earned before the end of the representation.
