Beware the Specter of the Nonrefundable Advance Fee

Any fee is refundable if wasn't earned or isn't reasonable. Calling an advance fee "nonrefundable" is almost always asking for trouble.

As fall rounds the corner, Halloween naturally comes to mind. But ghosts and goblins aren't just for children and the supernaturally inclined.

The legal world has its own ghastly specter that not only goes bump in the night, but can also put a disciplinary bump in your practice - the nonrefundable advance fee. The only charm to ward off this malevolent apparition is knowledge of the Illinois Rules of Professional Conduct ("RPC") and a good dose of common sense.

Fees must be earned, reasonable

"Nonrefundable" may have been in the lexicon of standard legal business practices at one time. Some older secondary authority, including ISBA Professional Conduct Advisory Opinions, seem to recognize it. But on careful examination it becomes clear that a nonrefundable advance fee is ineffectual and just might contribute to disciplinary problems for an unwary lawyer.

No advance fee is nonrefundable. The prohibition against such fees is reflected in a number of RPC's and even some statutes (such as the Illinois Marriage and Dissolution of Marriage Act, 750 ILCS 5/508(f)).

All fees are subject to refund if they aren't earned or reasonable. A fee agreement that would permit a lawyer to keep a fee without performing any (or minimal) services, such as one that might include a nonrefundable advance fee provision, is unconscionable. In the Matter of R.S., 09-CH-38 (Hearing Board, June 24, 2010) Administrator's motion to approve and confirm allowed, M.R. 24427 (March 21, 2011) (in R.S., the hearing board gave no effect to the lawyer's nonrefundable fee provision that said his fee was earned solely by virtue of his being retained).

In addition, where a client discharges his or her lawyer, any fee agreement, including one that contains a nonrefundable advance fee provision, ceases to exist and is no longer operative. RPC 1.16(d); E.g. In re Smith, 168 Ill.2d 269, 293 (1995) ("Following discharge, a lawyer is not entitled to the full amount of fees agreed to between the lawyer and the client in contract. Instead, the lawyer is only entitled to be compensated on a quantum meruit basis for the legal services which the lawyer actually performed on the client's behalf.")

Finally, all fees are subject to a reasonableness test, and a claim that a fee is nonrefundable does not justify the retention of an otherwise unreasonable fee. RPC 1.5(a), Comment [4]; ARDC Client Trust Account Handbook, p. 19, Rev. May 2015; In the Matter of G.S., 03-SH-115 (Review Board, April 9, 2007) Administrator's and Respondent's petitions for leave to file exceptions denied, M.R. 21655 (September 18, 2007) ($10,000 advance fee unreasonable for three hours work which did not impact prosecutor's unilateral decision to drop the client's criminal charges is unreasonable).

Disciplinary trap

Not only is a nonrefundable advance fee ineffective, its use might be a disciplinary trap. When a lawyer is faced with a client demand for a refund, the lawyer may be tempted to rely on a nonrefundable fee provision to avoid returning the fee (or a portion of it). That will likely result in the dissatisfied client contacting disciplinary authorities. Given the authorities cited above, justifying a refusal to return all or part of a fee solely on a nonrefundable fee provision is an uphill climb.

So are nonrefundable advance fee provisions useless? Maybe not. One that puts a client on notice that any earned portion of an advance fee is nonrefundable might allow a lawyer to protect herself from a client who after a successful representation says, "I want a refund." After all, lawyers do not work for free and the RPC provide that lawyers are entitled to compensation they have earned. At least such a provision could be used to defeat clients' claims they believed they would get money back at the end of the representation.

No matter how much a nonrefundable advance fee provision beckons, it is merely a specter. It's likely unenforceable and it ceases to exist upon discharge. It's also potentially misleading to say to a client that the advance fee just paid is not refundable when we know that under the RPC it is under many circumstances.

As a business matter, too, it may send a bad message to present a client with such a one-sided provision. It could also lead to discipline. And a final note - lawyers should be careful about entering into agreements with lead generators who hold client money. They might claim such fees are nonrefundable or make no provision for how they are going to refund the fee when it's your obligation to do so.

Charles J. Northrup is the ISBA general counsel.
cnorthrup@isba.org