A Second Look at Nonrefundable Fees and the Ethical Requirement that Fees Be Reasonable

by Nancy Bickford Miller, WSBA Office of Disciplinary Counsel

Nonrefundable fees are subject to the reasonableness requirement of Rule of Professional Conduct (RPC) 1.5 and the refund requirements of RPC 1.15, as confirmed by our Supreme Court in a recent decision and by the WSBA Rules of Professional Conduct Committee in an informal opinion earlier in 2004.

The Supreme Court, in an October 21, 2004, disciplinary decision, rejected the argument that a lawyer is entitled to keep a nonrefundable fee whether or not services are performed. The Court distinguished a "retainer" to secure a lawyer's availability over a period of time, as discussed in WSBA Formal Opinion 186, from a flat fee for legal services in a specific matter. Because the lawyer failed to provide the contracted services, his failure to return unearned money violated RPCs 1.5 and 1.15(d).¹

Informal Opinion 2034, issued on July 2, 2004,² states that although reasonableness is ordinarily determined when the agreement between the client and the lawyer is made, there are situations in which reconsideration may be required:

In some circumstances, the reasonableness of a fee agreement must be re-evaluated because subsequent unforeseen events have so altered the relationship between the lawyer and the client that a fee agreement that was reasonable at the time the agreement was made is no longer reasonable. Examples of such subsequent events may include, but are not limited to, death of the client or lawyer, lawyer's loss of his license, or failure of lawyer to perform the contracted services.

The Court's decision in DeRuiz, together with the RPC Committee's informal opinion, confirms the understanding of the Office of Disciplinary Counsel, and most lawyers, that there may be occasions when a lawyer must refund a fee to a client notwithstanding the terms of a fee agreement that refer to the fee paid as being nonrefundable.³ Washington thus joins the great majority of states that require — through rule, rule interpretation, or court decision — that if a "nonrefundable" fee is or becomes unreasonable, a refund should be made.

Two recent, well-reasoned Court of Appeals decisions, Cotton v. Kronenberg⁴ and Loveless v. Holmes & Kruger,⁵ have also considered the issue of the continuing reasonableness of a fee when circumstances change.

Kronenberg took his client's home (which he sold several months later for $42,000) as a nonrefundable fee to complete work in a criminal case through trial. Before trial, the court disqualified Kronenberg from further representation. In a lawsuit concerning fees and malpractice, the Court of Appeals held that under RPC 1.8 the transaction was not fair and reasonable, and the client was entitled to a refund under RPC 1.5.

Loveless involved a commercial matter. Referring to RPC 1.5, which sets out the factors to be considered in determining reasonableness, the court held that it would be unreasonable to continue enforcing a 1972 contingent-fee agreement. The agreement provided for a law firm to receive five percent of the cash distributions from a client joint venture indefinitely, in exchange for a discounted rate on legal fees charged for services performed. The fee discount was valued at $8,000, but the actual five-percent distributions to the law firm under the agreement totaled approximately $380,000 by 2001. Citing Cotton v. Kronenberg, the court held that the fee agreement should also be reviewed under RPC 1.8(a), relating to business transactions with clients. The court noted that although Cotton did not directly address the excessive-fee prohibition of RPC 1.5(a), "an attorney's ethical obligation to avoid charging an excessive fee is continuous throughout the life of the agreement."⁶

Both the Loveless and the Cotton decisions focus on RPC 1.8 as well as RPC 1.5, and Loveless addresses a contingent-fee agreement rather than a nonrefundable fee. But these decisions complement the Supreme Court's DeRuiz decision and WSBA Informal Opinion 2034 by recognizing that subsequent events may obligate a lawyer, in certain circumstances, to terminate a fee agreement, or refund all or part of a fee originally understood to be nonrefundable.

Nancy Bickford Miller can be reached at  nancym@wsba.org or 206-733-5934.

NOTES
¹ In re Disciplinary Proceeding Against DeRuiz, 2004 WL 2360586, 99 P. 3d 881 (2004). (The lawyer was suspended for a total of one year due to multiple violations of these and other rules.)
² Informal Opinion #2034 is available on the WSBA website at http://pro.wsba.org/io/search.asp. Informal Opinions are provided for the education of the Bar and reflect the opinions of the RPC Committee, but are not individually approved by the WSBA Board of Governors and do not reflect the official opinion of the Bar Association.
³ WSBA Formal Opinion 186 opines that advance fee deposits must be placed in the lawyer's trust account, while nonrefundable fees are to be placed in the lawyer's general account, because they are generally earned upon receipt. Formal Opinion 186 does not, however, address RPC 1.5 and the requirement that a fee be reasonable. Informal Opinion 2034 addresses the reasonableness issue.
⁴ Cotton v. Kronenberg, 111 Wn. App. 258, 44 P.3d 878 (2002).
⁵ Loveless v. Holmes & Kruger, 122 Wn. App. 470, 94 P.3d 338 (2004).
⁶ Loveless, 122 Wn. App. at 478.