by Robert K. Sall

California attorneys have a variety of options to choose from when negotiating fee arrangements and retainers with their clients. There are generally four types of fees that may be charged—hourly fees, fixed or flat fees, true retainers, and contingent fees. Sometimes, an engagement agreement will provide for a hybrid, such as a combination of hourly fees and a designated flat fee for a specific service, or a blend of part hourly and part contingent fees. No matter how the fee is structured, payments are often collected by lawyers for fees or costs at the time of retention and before any services are performed. These payments, commonly referred to as retainers, may be for flat fees paid in advance, future hourly fees, costs or merely to secure the availability of the lawyer. How these retainers are treated and whether they must be deposited in the trust account or may instead be taken directly into the operating account depends upon their purpose and intended application, and the rules applicable to each. Proper handling of retainer payments requires an understanding of three of the Rules of Professional Conduct read together: Rule 1.5 (Fees for Legal Services), Rule 1.15 (Safekeeping Funds and Property of Clients and Other Persons), and Rule 1.16 (Declining or Terminating Representation).

Rule 1.15(a) provides the general rule that all funds received or held by a lawyer or law firm for the client’s benefit “including advances for fees, costs and expenses” are required to be deposited in the trust account. The costs retainer—one collected as a deposit for payment of future costs—is the most straightforward. Cost retainers must always be held in the trust account until applied to the payment of costs. This was also a requirement under former Rule 4-100, which was effective until November 1, 2018.

Various types of retainers are treated differently now under Rule 1.15. Advance payments for hourly fees are required to be held in trust, as they are encompassed within the general rule of subdivision (a). Conversely, the “true retainer” (defined in Rule 1.15 (d)) would never be held in the client trust account because that unique type of retainer is earned at the time of receipt. For flat fee payments, the lawyer or law firm may take such a payment into the operating account, but authority to do so is subject to specific requirements of written disclosure and client consent.

The flat fee is defined as “a fixed amount that constitutes complete payment for the performance of described services regardless of the amount of work ultimately involved and which may be paid in whole or in part in advance of the lawyer providing those services.” Rule 1.5(e). Under Rule 1.15(b)(1), the lawyer or law firm may take the flat fee into the operating account only if disclosure has been made to the client in writing that the client has the right to require that the flat fee be deposited in the trust account until it is earned, and that the client is entitled to the refund of any amount of the flat fee that has not been earned in the event the representation is terminated or the services have not been completed. If the amount of the flat fee exceeds $1,000, subdivision (b)(2) requires that the client’s agreement that the fee may be deposited in the lawyer’s operating account and the required disclosures must be in a writing signed by the client. Comment [3] to Rule 1.15 makes clear that absent both the written disclosure and the client’s signed agreement, the lawyer must deposit the flat fee into the trust account until it is earned.

One rationale for the distinction between the treatment of an advance payment for hourly fees versus a flat fee would be that it is relatively easy to determine the amount of hourly fees that have been earned, thus easily permitting periodic payment from the trust account, while it is more difficult to determine an appropriate benchmark for withdrawal from trust where only part of a flat fee service has been performed. Whether or not the flat fee deposit has been placed in the trust account, the fee is not earned until the specified services have been performed. Rule 1.16(d) requires that upon the termination of representation the lawyer promptly shall make a refund of any part of a fee paid in advance that the lawyer has not earned. Thus, defining the scope of services intended to be included to earn the flat fee is important. This obligation to promptly refund unearned fees applies not just to flat fees paid in advance but also to advance payments for hourly fees. Comment [3] to Rule 1.15 places the burden on the lawyer to establish in either instance that the fee has been earned.

Flat fees lend themselves to specific tasks with a definable point of completion. Common examples of such engagements might be the lawyer’s agreement to charge a fixed fee to prepare a will, form a trust, create a legal entity, or prepare an application for the client’s registration with an agency. Caution is warranted with flat fees to avoid ambiguity about when the task has been completed. Often there are related legal tasks the client may need in order to implement the project for which the flat fee was paid. Lawyers should be careful to unambiguously define which services are included and those additional legal services that, while they may be necessary, are not contemplated within the flat fee.

Unlike advance fee deposits, which relate to the performance of future legal services, a true retainer is one paid only to secure the availability of the lawyer. Although true retainers are rare, they can be described in the agreement as “non-refundable” or “earned on receipt.” True retainers were not addressed in the former rules other than by an oblique reference in Rule 3-700(D)(2) (effective prior to November 1, 2008) to the lawyer’s obligation to refund a fee that had not been earned. Former Rule 3-700(D)(2) stated: “This provision is not applicable to a true retainer fee which is paid solely for the purpose of ensuring the availability of the member for the matter.” In a 1979 decision, Baranowski v. State Bar, 24 Cal. 3d 153 (1979), the California Supreme Court distinguished the true retainer from an advanced fee: “A retainer is a sum of money paid by a client to secure an attorney’s availability over a given period of time. Thus, such a fee is earned by the attorney when paid since the attorney is entitled to the money regardless of whether he [or she] actually performs any services for the client.” Id. at 164, n.4.

In actual practice, the rarity of the true retainer is self-evident. Most clients would be unwilling to pay money to have a lawyer merely be available without actually receiving any legal service. Instead, the deposit of an advance retainer for a specified number of hours would accomplish virtually the same purpose while not being earned until the service is performed. The true retainer is more commonly used when it is important for the client to assure the availability of a specialist in a particular field, a powerhouse firm, or an attorney with a towering reputation, even though no services are currently required. While true retainers are explicitly authorized in Rule 1.5 and may have their place, they can be challenged when the amount is unconscionable, the terms unreasonable, or their unique features are not adequately disclosed.

The definition of the true retainer set forth in California’s Rule 1.5(d) expands upon the definition in Baranowski: “A true retainer is a fee that a client pays to a lawyer to ensure the lawyer’s availability to the client during a specified period or on a specified matter, but not to any extent as compensation for legal services performed or to be performed.” (Emphasis added.) The true retainer is not used for advance payment of future billable work. It secures the reservation of availability, nothing more. The rule allows that a lawyer may make an agreement for, charge, or collect a fee that is denominated as “earned on receipt” or “non-refundable” (or using words of similar import), but terms of that nature are permissible only if the fee is a true retainer and the client agrees in writing after disclosure that the client will not be entitled to a refund of all or part of the fee charged.

In years past, some lawyers sought to characterize the deposit for an advance fee as fully earned and non-refundable. If the lawyer agreed to provide the client a certain  number of hours of legal services in exchange for the payment, it was not a true retainer. The characterization of the deposit as being earned on receipt did not make it non-refundable when the relationship later terminated before the services were fully performed. Nor did such a provision protect the lawyer from disciplinary consequences. Under former Rule 3-700 the lawyer was, and under current Rule 1.16(e) the lawyer is, required to return that portion of the fee paid in advance that is not fully earned. See Matter of Lais, 3 Cal. State Bar Ct. Rptr. 907, 920-24 (1998).

In the more than forty years since Baranowski, case law and ethical standards have developed to more clearly distinguish between accounting for a true retainer versus an advance fee. The true retainer is not refundable and does not compensate for future services. A payment that is allocated to actual performance of services (whether flat fee or hourly) is an advance fee, refundable at the time of termination if the services are not fully performed. It is important to note with an advance payment for future services that nothing in Rule 1.15 permits it to be placed in the operating account unless it is a flat fee, the required disclosures have been made, and agreement with the client has been obtained.

Finally, with respect to contingent fees, they are governed, in combination, by Rule 1.5 and by Business & Professions Code section 6147, a provision of the State Bar Act. Section 6147 specifies required terms for a written fee agreement in a contingency representation, and the failure to obtain such a writing or include such terms will make the fee agreement voidable at the option of the client. Rule 1.5(c) prohibits contingent fees in two types of matters—representing a defendant in a criminal case, and in a family law matter, for obtaining a dissolution or declaration of nullity of marriage, determining the amount of spousal or child support, and/or a property settlement. The ethical requirements for cost and expense retainers obtained in contingency fee representation were not materially changed with the adoption of Rule 1.5 insofar as deposits for costs must still go into trust. However, where a contingency fee arrangement is a hybrid of a percentage recovery and a flat fee, the advance payment of the flat fee portion will be subject to Rules 1.5(e) and 1.15(a) and (b). Thus, if the relationship ends before the contingency representation is completed, any unearned portion of the flat fee will be subject to refund.

As with all retainers and deposits for fees paid in advance, caution is dictated to make sure that adequate disclosure has been provided to the client of the terms governing the advance payment and when the client will or will not be entitled to a refund. When there is a dispute, the rules plainly place the burden on the attorney to establish that the fee has been earned.

Robert K. Sall is a shareholder with Sall Spencer Callas & Krueger in Laguna Beach. A Certified Specialist in Legal Malpractice Law by the State Bar of California’s Board of Legal Specialization, he lectures frequently for the OCBA on lawyer conduct, fee disputes, and legal ethics. He can be reached at rsall@sallspencer.com.