Can a Texas lawyer label a fee a non-refundable retainer when it actually pays for legal services up to trial, and deposit it in the operating account?

Plain-English summary

The opinion addresses a proposed engagement agreement under which the client pays an amount labeled a "non-refundable retainer" that covers all the lawyer's services up to trial, with additional fees due if the case goes to trial, and the lawyer plans to deposit the initial payment in the operating account.

The Committee applies Rule 1.04 (reasonable and not unconscionable fees), noting the Rule 1.04(b)(2) factor about whether accepting the employment precludes other work, and Rule 1.14 (handling client funds, which must go in trust). Drawing on Opinions 391 and 431 (and Cluck v. Commission for Lawyer Discipline), the Committee explains that a true non-refundable retainer is not payment for services; it is an advance fee to secure the lawyer's availability and compensate for lost opportunities for other employment. Such a retainer is earned when received and may go in the operating account, though it may have to be partially refunded if the lawyer is discharged for cause or withdraws before opportunities are lost.

Applying that distinction, the Committee concludes a fee is a non-refundable retainer only if the entire amount is a reasonable fee solely to secure availability. A payment for services not yet completed does not qualify, regardless of label; calling it non-refundable when it includes future services is not a reasonable fee under Rule 1.04(a) and (b), and placing that unearned amount in the operating account violates Rule 1.14's requirement to keep unearned client funds in trust. The Committee adds that a lawyer may take both a true non-refundable retainer and an advance for future services, but the two must be treated separately, with only the true retainer going in the operating account and the advance held in trust until earned.

In practice

Under this opinion, and under the Texas rules as they stood at the time, the label "non-refundable retainer" does not control; the substance does. The Committee treats a payment as a true non-refundable retainer only where the whole amount reasonably compensates the lawyer for securing availability and precluding other employment, in which case it is earned on receipt and may go in the operating account. A payment that covers future legal services (here, all work through trial) is not a non-refundable retainer; denominating it as one is unreasonable under Rule 1.04, and the unearned portion must be deposited in a trust or escrow account under Rule 1.14 and moved out only as earned. The opinion permits combining a true retainer with an advance fee so long as each is treated and held separately.

Common questions

Q: Can I charge a flat non-refundable fee that covers all my work up to trial?

A: Not as a non-refundable retainer. Per Opinion 611, a fee covering future services is not a true non-refundable retainer; treating it as non-refundable and earned on receipt is unreasonable under Rule 1.04, and the unearned part must be held in trust under Rule 1.14.

Q: What makes a retainer truly non-refundable?

A: It must be solely to secure the lawyer's future availability and compensate for precluding other employment, not payment for services. The Committee says such a retainer is earned when received and may be deposited in the operating account.

Q: Can I take both a true retainer and an advance for future work?

A: Yes, if they are separated. The opinion permits a true non-refundable retainer in the operating account plus an advance payment for future services held in a trust or escrow account and transferred out only as earned.

Q: Even a true retainer can be earned on receipt, so is it ever refundable?

A: Sometimes. The Committee, following Opinion 431, notes a true retainer may have to be partially refunded if the lawyer is discharged for cause before opportunities for other work are lost, or if the lawyer withdraws voluntarily.

Background and rules framework

The opinion interprets Texas Disciplinary Rule 1.04 (fees), corresponding to ABA Model Rule 1.5, including 1.04(a)'s bar on unconscionable fees and the 1.04(b)(2) factor on preclusion of other employment, and Rule 1.14 (safekeeping property), corresponding to ABA Model Rule 1.15, which requires client funds to be held in a trust or escrow account. It builds on the Committee's prior Opinions 391 and 431 on non-refundable retainers.

Citations and references

Rules of Professional Conduct:

• MR 1.5 (fees)
• MR 1.15 (safekeeping property)
• Texas Disciplinary Rule 1.04(a) and 1.04(b)(2)
• Texas Disciplinary Rule 1.14(a)

Cases:

• Cluck v. Commission for Lawyer Discipline, 214 S.W.3d 736 (Tex. App.-Austin 2007, no pet.), on the nature of a true non-refundable retainer

Other opinions cited:

• Texas Professional Ethics Committee Opinion 391 (February 1978): a true non-refundable retainer is earned on receipt and may go in the operating account; refundable advances must go in trust
• Texas Professional Ethics Committee Opinion 431 (June 1986): non-refundable retainers are not inherently unethical but must be used with caution; partially overruling Opinion 391

See also

• TX Ethics Op. 606: Holding Refundable Fees on Suspicion of an Illicit Source
• TX Ethics Op. 610: Security Interest in the Subject Matter of Litigation

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-611/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_611.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

QUESTION PRESENTED

Is it permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer to include in an employment contract an agreement that the amount initially paid by a client with respect to a matter is a “non-refundable retainer” that includes payment for all the lawyer’s services on the matter up to the time of trial?

STATEMENT OF FACTS

A lawyer proposes to enter into an employment agreement with a client providing that the client will pay at the outset an amount denominated a “non-refundable retainer” that will cover all services of the lawyer on the matter up to the time of any trial in the matter. The proposed agreement also states that, if a trial is necessary in the matter, the client will be required to pay additional legal fees for services at and after trial. The lawyer proposes to deposit the client’s initial payment in the lawyer’s operating account.

DISCUSSION

Rule 1.04(a) of the Texas Disciplinary Rules of Professional Conduct provides that a lawyer shall not enter an arrangement for an illegal or unconscionable fee and that a fee is unconscionable “if a competent lawyer could not form a reasonable belief that the fee is reasonable.” Rule 1.04(b) sets forth certain factors that may be considered, along with any other relevant factors not specifically listed, in determining the reasonableness of a fee for legal services. In the case of a non-refundable retainer, the factor specified in Rule 1.04(b)(2) is of particular relevance: “the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer . . . .”

Rule 1.14 deals in part with a lawyer’s handling of funds belonging in whole or in part to the client and requires that such funds when held by a lawyer be kept in a “trust” or “escrow” account separate from the lawyer’s operating account.

Two prior opinions of this Committee have addressed the relationship between the rules now embodied in Rules 1.04 and 1.14.

In Professional Ethics Committee Opinion 391 (February 1978), this Committee concluded that an advance fee denominated a “non-refundable retainer” belongs entirely to the lawyer at the time it is received because the fee is earned at the time the fee is received and therefore the non-refundable retainer may be placed in the lawyer’s operating account. Opinion 391 also concluded that an advance fee that represents payment for services not yet rendered and that is therefore refundable belongs at least in part to the client at the time the funds come into the possession of the lawyer and, therefore, the amount paid must be deposited into a separate trust account to comply with the requirements of what is now Rule 1.14(a). Opinion 391 concluded further that, when a client provides to a lawyer one check that represents both a non-refundable retainer and a refundable advance payment, the entire check should be deposited into a trust account and the funds that represent the non-refundable retainer may then be transferred immediately into the lawyer’s operating account.

This Committee addressed non-refundable retainers again in Opinion 431 (June 1986). Opinion 431 concluded that Opinion 391 remained viable and that non-refundable retainers are not inherently unethical “but must be utilized with caution.” Opinion 431 additionally concluded that Opinion 391 was overruled “to the extent that it states that every retainer designated as non-refundable is earned at the time it is received.” Opinion 431 described a non-refundable retainer (sometimes referred to in Opinion 431 as a “true retainer”) in the following terms:
“A true [non-refundable] retainer, however, is not a payment for services. It is an advance fee to secure a lawyer's services, and remunerate him for loss of the opportunity to accept other employment. . . . . If the lawyer can substantiate that other employment will probably be lost by obligating himself to represent the client, then the retainer fee should be deemed earned at the moment it is received. If, however, the client discharges the attorney for cause before any opportunities have been lost, or if the attorney withdraws voluntarily, then the attorney should refund an equitable portion of the retainer.”
Thus a non-refundable retainer (as that term is used in this opinion) is not a payment for services but is rather a payment to secure a lawyer’s services and to compensate him for the loss of opportunities for other employment. See also Cluck v. Commission for Lawyer Discipline, 214 S.W.3d 736 (Tex. App.-Austin 2007, no pet.).

It is important to note that the Texas Disciplinary Rules of Professional Conduct do not prohibit a lawyer from entering into an agreement with a client that requires the payment of a fixed fee at the beginning of the representation. The Committee also notes that the term “non-refundable retainer,” as commonly used to refer, as in this opinion, to an initial payment solely to secure a lawyer's availability for future services, may be misleading in some circumstances. Opinion 431 recognized in the excerpt quoted above that a retainer solely to secure a lawyer’s future availability, which is fully earned at the time received, would nonetheless have to be refunded at least in part if the lawyer were discharged for cause after receiving the retainer but before he had lost opportunities for other employment or if the lawyer withdrew voluntarily. However, the fact that an amount received by a lawyer as a true non-refundable retainer may later in certain unusual circumstances have to be at least partially refunded does not negate the fact that such amount has been earned and under the Texas Disciplinary Rules may be deposited in the lawyer’s operating account rather than being subject to a requirement that the amount must be held in a trust or escrow account.

In view of Opinions 391 and 431, the result in this case is clear. A legal fee relating to future services is a non-refundable retainer at the time received only if the fee in its entirety is a reasonable fee to secure the availability of a lawyer’s future services and compensate the lawyer for the preclusion of other employment that results from the acceptance of employment for the client. A non-refundable retainer meeting this standard and agreed to by the client is earned at the time it is received and may be deposited in the lawyer’s operating account. However, any payment for services not yet completed does not meet the strict requirements for a non-refundable retainer (as that term is used in this opinion) and must be deposited in the lawyer’s trust or escrow account. Consequently, it is a violation of the Texas Disciplinary Rules of Professional Conduct for a lawyer to agree with a client that a fee is non-refundable upon receipt, whether or not it is designated a “non-refundable retainer,” if that fee is not in its entirety a reasonable fee solely for the lawyer’s agreement to accept employment in the matter. A lawyer is not permitted to enter into an agreement with a client for a payment that is denominated a “non-refundable retainer” but that includes payment for the provision of future legal services rather than solely for the availability of future services. Such a fee arrangement would not be reasonable under Rule 1.04(a) and (b), and placing the entire payment, which has not been fully earned, in a lawyer’s operating account would violate the requirements of Rule 1.14 to keep funds in a separate trust or escrow account when funds have been received from a client but have not yet been earned.

When considering these issues it is important to keep in mind the purposes behind Rule 1.14. Segregating a client’s funds into a trust or escrow account rather than placing the funds in a lawyer’s operating account will not protect a client from a lawyer who for whatever reason determines intentionally to misuse a client’s funds. Segregating the client’s funds in a trust or escrow account may however protect the client’s funds from the lawyer’s creditors in situations where the lawyer’s assets are less than his liabilities and the lawyer’s assets must be liquidated to attempt to satisfy the lawyer’s liabilities. In those situations, client funds in an escrow or trust account may be protected from the reach of the lawyer’s creditors.

Accordingly, if a lawyer proposes to enter into an agreement with a client to receive an appropriate non-refundable retainer meeting the requirements for such a retainer and also to receive an advance payment for future services (regardless of whether the amount for future services is determined on a time basis, a fixed fee basis, or some other basis appropriate in the circumstances), the non-refundable retainer must be treated separately from the advance payment for services. Only the payment meeting the requirements for a true non-refundable retainer may be so denominated in the agreement with the client and deposited in the lawyer’s operating account. Any advance payment amount not meeting the requirements for a non-refundable retainer must be deposited in a trust or escrow account from which amounts may be transferred to the lawyer’s operating account only when earned under the terms of the agreement with the client.

CONCLUSION

It is not permissible under the Texas Disciplinary Rules of Professional Conduct for a lawyer to include in an employment contract an agreement that the amount paid by a client with respect to a matter is a “non-refundable retainer” if that amount includes payment for the lawyer’s services on the matter up to the time of trial.

Tex. Comm. On Professional Ethics, Op. 611 (2011)