The end of nonrefundable retainers in Minnesota?

June 21, 2011

Minnesota, where the Reference Attorneys are located and where many of us have practiced, currently allows for the retainer of a lawyer by means of a nonrefundable retainer fee.  In fact, here in Minnesota it’s not uncommon for solo practitioners, particularly those practicing in areas such as criminal defense or estate planning, to use such retainer agreements almost exclusively.  Under the current writing of Minnesota Rules of Professional Conduct Rule 1.5:

All agreements for the advance payment of nonrefundable fees to secure a lawyer’s availability for a specific period of time or a specific service shall be reasonable in amount and clearly communicated in a writing signed by the client.

There is no requirement that the fee be held in a trust account, and if the client terminates the representation, often times that means forfeiture of the retainer as well.

Minnesota seems on par with other states in this respect.  See, e.g., In re Connelly (2002) 203 Ariz. 413, 55 P.3d 756 (Ariz. 2002) (stating because a non-refundable flat fee reflects a balancing of the risk to both client and lawyer, a flat fee can be larger than the fee generated by hourly rates without being excessive under the rules of professional conduct under Ariz. R. Prof. Cond. Rule 1.5); FL ST BAR Rule 4-1.5.  But see, CO ST RPC Rule 1.5 (“Nonrefundable fees and nonrefundable retainers are prohibited.”) (effective July 1, 2011); In re Stephens, 2006, 851 N.E.2d 1256  (Ind. 2006) (holding nonrefundable retainer provision of attorney’s malpractice employment agreement with client violated rule of professional conduct requiring that a lawyer’s fee be reasonable, as it locked client to attorney, thereby chilling client’s right to terminate the representation under Ind. R. Prof. Cond. Rule 1.5).

However the Minnesota Supreme Court recently opted to change language of Rule 1.5.  Under the new wording:

A lawyer may charge a flat fee for specified legal services, which constitutes complete payment for those services and may be paid in whole or in part in advance of the lawyer providing the services. If agreed to in advance in a written fee agreement signed by the client, a flat fee shall be considered to be the lawyer’s property upon payment of the fee, subject to refund as described in Rule 1.5(b)(3). Such a written fee agreement shall notify the client:
(i) of the nature and scope of the services to be provided;
(ii) of the total amount of the fee and the terms of payment;
(iii) that the fee will not be held in a trust account until earned;
(iv) that the client has the right to terminate the client-lawyer relationship; and

(v) that the client will be entitled to a refund of all or a portion of the fee if the agreed-upon legal services are not provided.
. . . .

(3) Fee agreements may not describe any fee as nonrefundable or earned upon receipt but may describe the advance fee payment as the lawyer’s property subject to refund. Whenever a client has paid a flat fee . . . and the lawyer-client relationship is terminated before the fee is fully earned, the lawyer shall refund to the client the unearned portion of the fee. If a client disputes the amount of the fee that has been earned, the lawyer shall take reasonable and prompt action to resolve the dispute.

Minn. R. Prof. Cond. 1.5(b)(1) (effective July 1, 2011) as amended by MN ORDER 11-0005.

While not prohibiting nonrefundable language as expressly as Colorado, one can’t help but wonder if the de facto application of this amendment will have the same result. 

Under the new language of the rule, the nonrefundable fee is considered “the lawyer’s property subject to refund.”  The lawyer must return the unearned portion of the fee to the client if the relationship is terminated prior to the fee being fully earned.  This is where things get tricky…

How exactly does one know when a fee has been fully earned?  A typical flat-fee retainer would state a dollar amount for services to be performed, but not necessarily an hourly rate by which that would be computed.  Seemingly, though, such an hourly arrangement would be the only way to determine if the attorney has earned the fee on a quantum meruit basis upon termination of the relationship. 

As an illustration, if an attorney were to charge a flat, nonrefundable $2,000 retainer to represent a client in connection with a first-offense DWI, go into court for the initial appearance, get an offer for a diversionary program, and help his client enter a plea that day.  How would that attorney be able to establish a right to the full amount of the retainer if no hourly amount had been agreed upon for the purposes of such calculation?  And if that is the method of choice for the determination, is that not a de facto hourly retainer agreement, but with a cap on the amount the attorney can earn in the event the case proceeds to trial?

And then comes the issue of the impact on the lawyer’s accounting practices.  Presumably many attorneys working on flat-fee arrangements treated a nonrefundable retainer as money in the bank.  Literally.  But now, as the rule specifies that it is the lawyer’s property subject to refund, would the prudent lawyer put the money in trust so as to avoid an accounting headache should a refund be necessary?  Moreover, does the typical solo attorney used to working on flat fees have the facilities or business practices to track when a fee is earned so as to keep track of refunds?

Certainly this amendment to the rule raises some questions.  It will be interesting to see how this plays out over the next few years as attorneys adapt.

Additional Research References:

See Section 1:3 of Robert L. Rossi’s treatise: “The use of nonrefundable retainers or nonrefundable fee advances has become the subject of increasing controversy in recent years…” 1 Attorneys’ Fees § 1:3 (3d ed.)
Ethics Texts and Periodicals (Westlaw Database: ETH-TP):  TI,PR(NON-REFUND! /2 RETAINER) (12 Docs)
A simple search for nonrefundable retainer on WeslawNext delivers 328 state and federal cases .