Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association.


Advance Payments Are Not True Retainers Under 3-700(D)(2)

My phone rang one fateful day last week, and I answered to the voice of my ecstatic friend:

“Jen!  Oh my – Jen!  Jen!”

“Yes – hi, Ainsley – yes?”

“Do you remember that crazy client I was telling you about?  The one who was blowing up my phone the entire time we were at our meeting last week?  The one who blames the victim for being stabbed because if she hadn’t made my client so mad, he never would have stabbed her in the first place?”

“Of course, Ainsley – how could I forget?”

“Well, he fired me!  He put me through so much and I did a ton of work for him, and then he got mad at me because I wasn’t just telling him what he wanted to hear – and today he got a new lawyer!”

I laughed.  Ainsley sounded thrilled.  “Congratulations, my friend.”

“And the best part,” she continued, “is that I don’t have to refund any of the retainer he paid me!”

Nope.  That does not sound right to me.  “Ainsley … that would be very unusual.”

“I know!  But I looked it up.  You’ll love this, Little Miss Ethics.  California Rules of Professional Conduct, Rule 3-700(D)(2) says to promptly refund any part of a fee paid in advance that has not been earned but it is not applicable to a true retainer fee!”

Ah.  This is a rule I know.  “Sweetie, did you look up what ‘true retainer fees’ are?”

There’s a pause.  I can sense Ainsley preparing for the other shoe to drop.  “No … but I’m almost positive we have a true retainer fee agreement.  He gave me a big chunk of money as a retainer and I bill against it.”  The joyous confidence was gone from her voice.

A true retainer is a retainer that is paid solely for the purposes of ensuring the availability of the member, a definition which was adopted by the California Supreme Court in Baranowski v. State Bar, 24 Cal. 3d 153 (1979).  It is alluded to in the Rule Ainsley quoted.  Had she finished reading the entirety of Rule 3-700(D)(2), Ainsley would have realized it said “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 that matter.”  (Emphasis added.)  The key here is that the fees are paid solely for the attorney’s availability, and that the attorney has made him- or herself available to the client during the time period contemplated by the agreement, irrespective of the attorney’s schedule, other cases, workload, convenience, or other factors.  Notably, in a “true retainer” situation, the client is paying only for the availability, and if the attorney’s services are needed, the services would be paid for separately, and no part of the retainer would be applied to pay for such services.  See Arbitration Advisory 2011-01 (January 28, 2011).  These types of retainer agreements are quite rare, and Ainsley’s description of billing against her retainer makes me certain she does not have a true retainer agreement with Mr. I-Stabbed-My-Girlfriend-Because-I-Was-Angry.

Attorneys often confuse true retainer agreements with advance payment agreements, which is what Ainsley described.  She collected a “retainer,” or advance payment, and deducts her hourly rate from it as she performs work for her client and earns the fee.  But, in line with Rule 3-700(D)(2), an attorney must refund the balance of the advance payment that has not yet been earned. 

“But,” I say to Ainsley, “you’ve obviously kept track of your hours and can demonstrate that the fees you have earned equal or exceed the amount of the advance fee paid by your client.  So, you might not owe him a refund.  But not because of 3-700(D)(2).”

“What about the fact that my written agreement with him says the retainer is non-refundable?”

“It might say that, but 3-700 says differently.  If it walks like a duck and quacks like a duck…”

“And if I haven’t earned all of it?”

“Then you owe him a refund.”

Ainsley sighs.  “I owe him a refund.”

I nod into the phone, though she can’t see me.  “Think of it this way,” I say.  “This client made you nuts.  He called you all the time.  Blew up your personal cell phone at all hours of the night, every night, making irrational demands and driving you up a wall.  The money you have to return is probably the best money you’ll never earn.”

“Stupid ethics rules,” Ainsley grumbled, but I know she doesn’t mean it.  California’s legal ethics rules set out the standards of professional responsibility to which all attorneys must hold themselves, even when dealing with our most obstreperous clients.  Once Ainsley has had some time to recover from this client, she will feel better knowing that she adhered to these standards and did not retain ill-gotten gains as a result of unethical conduct.  She will know she managed her case in the best way – for everyone.

-- Jennifer Gilman