LEO #1606  FEES (COMPENDIUM OPINION).

November 22, 1994

Inquiry: Because a number of existing opinions pertaining to fee
arrangements are sometimes inconsistent or incomplete in the
description and definition of those arrangements, this Committee
has chosen to review existing opinions and issue a compendium
opinion discussing the propriety of fee arrangements. Some of the
issues the Committee has decided to consider include the various
types of fee arrangements, when the fee is the property of the
client and when it can be considered the property of the
attorney, and when and under what circumstances a client is
entitled to a return of fees paid to an attorney. Specifically,
the Committee has chosen to address the following types of legal
fees:

Retainers

Advanced Legal Fees

Non-refundable Legal Fees (" Non-refundable Retainers" or
"Minimum Fees" )

Fixed Fees

Contingent Fees

Applicable Disciplinary Rules: The appropriate and controlling
disciplinary rules relevant to the questions raised are:

DR 2-105(A) which requires that a lawyer's fees be reasonable and
adequately explained to the client.

DR 2-105(B) which requires that upon request a lawyer shall
furnish to the client the basis or rate of the lawyer's fee.

DR 2-105(C) which permits (with exceptions) a fee contingent on
the outcome of a matter for which the service is rendered.

DR 2-108(A) (3) which requires a lawyer to withdraw from
representing a client if the lawyer is discharged by the client.

DR 2-108(D) which requires that upon termination of
representation a lawyer shall refund any advance payment of fees
that has not been earned.

DR 9-102(A) which requires a lawyer to deposit all funds received
on behalf of a client, except reimbursement of costs and
expenses, in a separate identifiable account which does not
contain funds belonging to the lawyer.

DR 9-102(A)(2) which permits the lawyer to deposit into the trust
account funds which belong in part to the client and in part
presently or potentially to the lawyer. The portion belonging to
the lawyer must be withdrawn when earned unless the right to
receive it is disputed by the client.

DR 9-102(B)(4) requiring a lawyer to promptly pay or deliver to
the client or another all funds in the possession of the lawyer
which the client is entitled to receive.

 Prior Legal Ethics and Court Opinions: The following opinions
and court cases have dealt with the issue of legal fees:

Legal Ethics Opinions: LE Op. 189, LE Op. 214, LE Op. 510, LE Op.
528, LE Op. 568, LE Op. 646, LE Op. 681, LE Op. 1062, LE Op.
1246, LE Op. 1322, LE Op. 1370 

Case Law:  

AFLAC, Inc. v. Williams, 1994 Ga. LEXIS 466 (Ga. 1994); County of
Campbell v. Howard, 133 Va. 19 (1922); In the Matter of Edward M.
Cooperman, 83 N.Y.2d 465, 633 N.E.2d 1069, 611 N.Y.S.2d 465 (N.Y.
1994); Heinzman v. Fine, Fine, Legum and Fine, 217 Va. 958
(1977); Mullins v. Richlands National Bank, 241 Va. 447 (1991);
Tazwell Oil Co. v. United Virginia Bank, 243 Va. 94 (1992); Wong
v. Kennedy, 1994 U.S. Dist. LEXIS 6875 (E.D.N.Y. 1994); Wood v.
Carwile, 231 Va. 320 (1986).

 Opinion:  

1. Fees in General. An analysis of legal fees begins with the
proposition that contracts for legal services are not construed
as are other commercial contracts. Citing with approval Drippner
v. Mutz, 205 Minn. 497, 287 N.W. 19 (1939) the Virginia Supreme
Court has noted:

It is a misconception to attempt to force an agreement between an
attorney and his client into the conventional modes of commercial
contracts. While such a contract may have similar attributes, the
agreement is, essentially, in a classification peculiar to
itself. Such an agreement is permeated with the paramount
relationship of attorney and client which necessarily affects the
rights and duties of each. Heinzman v. Fine, Fine, Legum and
Fine, 217 Va. 958, 962 (1977).

The Disciplinary Rules set certain restrictions on all legal fees
that cannot be avoided by the employment contract. Regardless of
the agreed terms, the designation of the fee in the employment
contract cannot alter the true nature of the fee and will not be
dispositive in determining whether there is a violation of the
Disciplinary Rules. Neither will the terminology used to describe
the fee determine whether the fee has been earned by the lawyer
or into which type of account the fee must be placed. LE Op. 510. 
A lawyer cannot by contract alter the nature or the ownership of
fees received, nor can he legitimize a fee that is otherwise
prohibited by the Disciplinary Rules.

DR 2-105 directs that a lawyer's fees be adequately explained to
the client, and that the basis of the fee be furnished to the
client.  EC 2-21 suggests that there be a clear agreement as to
the basis of the fee as soon as feasible after a lawyer has been
employed. It also encourages the use of written contracts of
employment as the preferred means of complying with the
requirement of  DR 2-105. A lawyer must, upon request, furnish to
his client an itemized breakdown of legal fees, costs and related
expenses paid by that client. LE Op. 214. 

All fees must be reasonable.  DR 2-105(A). In determining the
reasonableness of the fee, one may take into account the lawyer's
experience, ability and reputation, the nature of the employment,
the responsibility and effort involved and the results obtained. 
EC 2-20. It is also proper to consider such circumstances as the
time consumed, the effort expended, the nature of the services
rendered, and other attending circumstances. Tazwell Oil Co. v.
United Virginia Bank, 243 Va. 94 (1992); Mullins v. Richlands
National Bank, 241 Va. 447 (1991).

The Committee has previously opined that the fact that a fee is
stated and agreed to in a contract is not dispositive of whether
it is reasonable under the Code of Professional Responsibility.
LE Op. 528.  It is also important to note that because of the
unique nature of the legal contract, a determination of the
reasonableness of the fee is not necessarily limited to the
circumstances which existed at the time of the agreement. The
occurrence of unusual or extraordinary events not contemplated by
the parties at the outset of the representation may effect the
ultimate reasonableness of the agreed upon fee.

A client retains the absolute right to discharge the lawyer at
any time for any reason or without reason. Disciplinary Rule
2-108 imposes no restriction or condition on the client's right
to discharge his lawyer. Even when the discharge constitutes a
breach of the employment contract, the lawyer is entitled only to
that portion of the fee that has been actually earned prior to
the termination. LE Op. 681. When the attorney is discharged
prior to the completion of the representation he may only recover
the reasonable value of the services which he has rendered. He
cannot recover for damages for the breach of the contract, and,
in instances where the fee is contingent upon the out of the
matter, the attorney may not recover the full agreed upon fee. He
is entitled only to a recovery in quantum meruit for services
actually rendered. Heinzman, supra. The quantum meruit
determination must look to the reasonable value of the services
rendered, not to the benefit received by the client. Wood v.
Carwile, 231 Va. 320 (1986); County of Campbell v. Howard, 133
Va. 19 (1922).

Finally, if the lawyer is discharged by the client, he must
refund to the client all advanced legal fees which have not been
earned.  DR 2-108(D). 

2. Retainers. This Committee has on several occasions addressed
the unique features of a retainer. The Committee is mindful,
however, that the term is probably misused more often than not (a
fault for which the Committee must accept some responsibility),
to describe any type of advanced legal fees. As the Committee
opined previously in LE Op. 1322, a retainer (or advance periodic
payment) is a payment by a client to an attorney to insure the
attorney's availability for future legal services and/or as
consideration for his unavailability to a potential adverse party
in the future. A retainer is not a pre-payment for legal services
to be rendered in the future, and is thus distinguished from
advanced legal fees. A retainer seeks to guarantee the client's
right to secure the attorney's employment for representation of
his interests in a matter which may arise in the future. This
Committee has previously opined, and continues to believe that a
retainer is not violative of the Disciplinary Rules. LE Op. 1178.


The Committee is further of the opinion that because retainers
are paid to secure the availability of an attorney in the future,
and not as payment for future legal services, retainers are
earned when paid and become the property of the attorney upon
receipt. Such fees are deemed earned by the lawyer at the time of
payment in consideration for the lawyer's availability to the
client and unavailability to potential adverse parties. LE Op.
1178.  Because retainer fees are the property of the lawyer when
paid, they may not be deposited into the attorney's trust
account.  DR 9-102(A). 

The Committee recognizes that it is common practice for lawyers
to accept fees described as retainers to secure the lawyer's
future availability and agree to credit those fees against legal
services to be provided in the future. The Committee is of the
opinion that while such an arrangement is not improper, if the
employment agreement provides for fees, regardless of their
designation, to be applied against future services to be rendered
by the attorney, the fee is not a retainer, but rather an
advanced legal fee and must be handled as discussed below. LE Op.
510. 

LE Op. 1178, LE Op. 1322 and LE Op. 1370 properly define and
distinguish the terms "retainer" and "advanced legal fees". As
noted previously, however, various other opinions have used the
term "retainer" in a generic sense which often is inconsistent
with its true meaning. Accordingly, to the extent, and only to
the extent, that previous opinions, including LE Op. 186-A, LE
Op. 558, LE Op. 646, LE Op. 681, LE Op. 1081, LE Op. 1117, LE Op.
1238, LE Op. 1246 and LE Op. 1318 have used the word "retainer" 
to describe a fee arrangement that is inconsistent with this
opinion, they are overruled. See generally, L. Brickman and L.
Cunningham, Nonrefundable Retainers Revisited, 72 N.C.L. Rev. 1,
3-5 (1993).

3. Advanced Legal Fees. Fees paid in advance for particular legal
services not yet performed are advanced legal fees regardless of
the terminology used in the employment contract. Advanced legal
fees are not violative of the Disciplinary Rules as long as they
are properly deposited and identified as belonging to the client
until earned. The Committee has consistently opined that the
element of payment for future legal services differentiates
advanced legal fees from a retainer. LE Op. 1322, LE Op. 1178. 
The two terms are not synonymous.

Because advanced legal fees do not belong to the lawyer until the
services are rendered, it is the opinion of the Committee that
they must be deposited in an identifiable account (trust account)
and remain the property of the client until they are earned by
the attorney. The Committee notes that in some situations, the
employment contract may provide that a portion of an advanced
legal fee is considered to be earned at the time it is paid. In
this case the earned portion becomes the property of the lawyer
and may not be deposited in the lawyer's trust account.

Upon termination of the representation it is the duty of the
attorney to refund any portion of an advanced legal fee which has
not been earned. In addition, all fees charged against the
account must be reasonable and must be adequately explained to
the client.  DR 2-105(A). 

4. Non-refundable Legal Fees. The Committee has previously opined
and continues to be of the opinion that any fee arrangement
involving advanced legal fees and providing for a non-refundable
or minimum fee violates the Disciplinary Rules and is thus
improper. LE Op. 1322 and LE Op. 1370.  If the fee is an advance
payment for legal services, as described above, it continues to
be the property of the client. The fee must be deposited in a
trust account and may only be paid over to the lawyer when and if
it is earned. An advanced legal fee cannot, by employment
contract or otherwise, be termed non-refundable without violating
the Disciplinary Rules. See LE Op. 510, LE Op. 1246 and LE Op.
1322.  And, as noted above, using the term "retainer" to describe
what is, in reality, an advanced legal fee does not change the
true nature of the fee, nor does it allow the fee to be
considered non-refundable. See Wong v. Kennedy, 1994 U.S. Dist.
LEXIS 6875 (E.D.N.Y. 1994).

The Committee believes that the concept of a non-refundable or
minimum fee paid in advance for specific legal services is
violative of the Disciplinary Rules for the following reasons:

A. A non-refundable fee compromises the client's unqualified
right to terminate the attorney client relationship and is
violative of  DR 2-108(A)(3). See also In the Matter of Edward M.
Cooperman, 83 N.Y.2d 465, 633 N.E.2d 1069, 611 N.Y.S.2d 465 (N.Y.
1994). The client's absolute right to discharge a lawyer
contained in  DR 2-108(A)(3) would be of little value if the
client must risk paying for services not rendered. Such a
situation could force the client to continue the services of an
attorney in whose integrity, judgment or capacity the client had
lost confidence.

B. If the client discharges the lawyer prior to the fee being
earned, the retention of a non-refundable fee would violate the
attorney's responsibility to refund to a client any advanced fee
that had not been earned.  DR 2-108(D). 

C. A fee that is not earned is per se an unreasonable fee. Thus
the retention of an unearned non-refundable fee would result in
the lawyer collecting an unreasonable fee in violation of  DR
2-105(A). 

5. Fixed Fee. The term fixed fee is used to designate a sum
certain charged by a lawyer to complete a specific legal task.
Because this type of fee arrangement provides the client with a
degree of certainty as to the cost of legal services, it is to be
encouraged.

A fixed fee is an advanced legal fee. It remains the property of
the client until it is actually earned and must be deposited in
the attorney's trust account. If the representation is ended by
the client, even if such termination is without cause and
constitutes a breach of the contract, the client is entitled to a
refund of that portion of the fee that has not been earned by the
lawyer at the time of the termination. LE Op. 681.  In such
circumstances, what portion of the fee has been earned requires a
quantum meruit determination of the value of the lawyer's
services in accordance with Heinzman and County of Campbell v.
Howard, Va. 19 (1922).

6. Contingency Fees. The Committee notes that  DR 2-105(C)
permits fees that are contingent on the outcome of a matter for
which the service is rendered, except in criminal cases or other
matters in which such a fee is prohibited by law. Contingent fees
are generally ethically permissible in any legal matter that
generates a res from which the fee can be paid, unless otherwise
prohibited. One purpose of a contingent fee arrangement is to
encourage a lawyer to accept a case which carries inherent risks
of nonpayment of legal fees. This Committee has previously
opined, and continues to believe that ministerial matters that
carry no such risk, such as recovering funds that could be
obtained by the client without the services of the lawyer, are
not matters in which a contingent fee arrangement is proper, nor
do they create the type of res from which a contingency fee may
be paid. It would, therefore be improper for a lawyer to receive
a contingent fee to recover medical compensation payments which
an insurance carrier is contractually obligated to pay to the
client. LE Op. 1461. 

The Council of the Virginia State Bar has opined that, except in
extremely rare situations, it is ethically improper for an
attorney to enter into a contingent fee arrangement in family law
and domestic relations cases. LE Op. 189. "Because of the human
relationships involved and the unique character of the
proceedings, contingent fee arrangements in domestic relations
cases are rarely justified."  EC 2-22. Thus it would be improper
for an attorney to enter into a contingent fee agreement to
represent a divorced spouse in a claim against her husband's
military retirement pay. LE Op. 568.  It would similarly be
improper to enter into a fee agreement where the attorney's fee
would consist of a percentage of a lump sum property settlement.
LE Op. 423. 

This Committee has opined that only where the following four
factors exist may a contingent fee agreement be employed in a
domestic relations matter:

1. There has been the passage of a sufficient length of time so
as to preclude the continued existence of any meaningful human
relationship which might be undermined by litigation handled on a
contingent fee basis;

2. The client is not able to pay reasonable attorney's fees
charged on an hourly or fixed basis;

3. Any attorney's fees awarded by the court will be credited
against the contingent fee; and

4. The contingent fee charged would be fair and reasonable under
all the circumstances. LE Op. 189, LE Op. 405, LE Op. 423, LE Op.
588, LE Op. 667, LE Op. 850 and LE Op. 1062. 

Contingency fee arrangements must state the method by which the
fee is determined, including the percentage or percentages that
shall accrue to the lawyer in the event of settlement, trial or
appeal, expenses to be deducted from the recovery, and whether
expenses are to be deducted before or after the contingent fee is
calculated. Upon conclusion of a contingent fee matter, the
lawyer shall provide the client with a closing statement showing
the fee and the method of its determination.

Committee Opinion
November 22, 1994