It’s tempting to put a nonrefundable retainer clause in your standard fee agreement. The client agrees that the funds are earned upon receipt so the money can go straight into your operating account. No need to mess with trust or IOLTA accounts. Seems easier, right? 

Not so much. It may result in disciplinary action. The old adage, “if it sounds too good to be true, it probably is,” applies here.  

Nonrefundable retainer clauses are often used inappropriately and are a common cause for fee disputes and potential disciplinary action. The following information provides some guidance on when nonrefundable retainers can and cannot ethically be used.  

Applicable Rules and Ethics Opinion 611 

When determining whether a nonrefundable fee agreement is appropriate under the circumstances, it is important to comply with the Texas Disciplinary Rules of Professional Conduct and the guidance provided in ethics opinion 611.   

1. Texas Disciplinary Rules of Professional Conduct 1.04 and 1.14. Rules 1.04(a) and (b) and Rule 1.14(a) are particularly relevant for nonrefundable retainers.
   
   1. Rule 1.04 governs fees.
      
      1. Rule 1.04(a) states that a lawyer must not charge, collect, or agree to an illegal or unconscionable fee. A fee is unconscionable “if a competent lawyer could not form a reasonable belief that the fee is reasonable.”
      2. Rule 1.04(b) provides a nonexclusive list of factors that may be considered in determining if a fee is reasonable, including 1.04(b)(2): “the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer.”
   2. Rule 1.14 governs safekeeping property.
      
      1. Rule 1.14(a) states that funds belonging in whole or in part to clients or third parties must be kept in a trust or escrow account, separate from the lawyer’s own property.
2. Ethics opinion 611 issued by the State Bar of Texas’ Professional Ethics Committee in September 2011 clarifies the appropriate use of nonrefundable retainers in the context of two prior ethics opinions (opinion 391 in February 1978 and opinion 431 in June 1986) issued on this matter.

When a Nonrefundable Retainer Can and Cannot Be Used 

1. When a Nonrefundable Retainer Cannot Be Used: A lawyer cannot make an agreement with a client to accept a nonrefundable payment for the provision of future legal services.¹
2. When a Nonrefundable Retainer Can Be Used: A lawyer can only make an agreement with a client to accept a nonrefundable payment when, at the time received, the fee in its entirety is reasonable to secure the lawyer’s availability of future services.² For reasons indicated below, note that it is not sufficient to simply state in the fee agreement that the fee is nonrefundable because the lawyer is making herself available to the client for future services. 
3. Guiding principles: Advance Payments vs. True Nonrefundable Retainers
   
   1. Advance Payments for the Provision of Future Legal Services are Always Refundable
      
      1. If an attorney makes an agreement with a client to provide legal services in exchange for a fee, that fee is always refundable to the extent that the attorney has not yet earned it by the performance of the promised legal services.
      2. The fee remains refundable regardless of:
         
         1. What the fee agreement says: Stating that the fee is nonrefundable or earned upon receipt in the fee agreement does not make it so.
         2. The client’s wishes: The fee is refundable even if the client wants it to be nonrefundable.
         3. The fee arrangement with the client: It does not matter how the fee is structured to be earned, whether it is on a time basis, fixed fee basis, or some other basis appropriate in the circumstances.
            
            1. Flat Fees: Questions often arise regarding flat fees. A flat fee is refundable to the extent that the fee has not yet met the benchmarks set forth in the fee agreement. Unless the fee agreement states specific benchmarks at which the flat fee is earned, lawyers should operate under the premise that none of the fee is earned until the representation ends and all work has been completed to meet the client’s objective.
         4. The type of matter handled: It does not matter if the fee is paid to handle a criminal matter, family matter, corporate matter, etc.
   2. Only True Nonrefundable Retainers Can Be Earned Upon Receipt (with Caveats)
      
      1. A true nonrefundable retainer is not a payment for services. It is a payment to secure a lawyer’s services and compensate the lawyer for the lost employment opportunities that may arise due to the lawyer accepting the client’s employment, such as when a client pays a retainer to ensure the attorney will take the client’s case in the future if the need arises.³
      2. A nonrefundable fee meeting the “strict requirements for a non-refundable retainer” set forth in ethics opinion 611 may be deposited into the lawyer’s operating account.⁴
      3. Per ethics opinion 611, a nonrefundable retainer must, at the time received:
         
         1. Be reasonable in its entirety under Rule 1.04(a) and (b),
         2. Be agreed to by the client,
         3. Not include “payment for the provision of future legal services rather than solely for the availability of future services,”⁵ and
         4. Be substantiated by the lawyer that other employment will likely be lost by agreeing to represent the client.
      4. Caveat: A nonrefundable retainer may still be refundable if the client reasonably terminates the relationship before any lost opportunity has occurred or if the attorney withdraws voluntarily. In these situations, the attorney should refund an equitable portion of the retainer.
      5. Caveat: If a nonrefundable retainer is paid together with an advance payment for providing future legal services, only the amount attributable to compensation for the lawyer’s availability is nonrefundable. The advance payment for the provision of future legal services is refundable until earned and must be segregated by placing it in a trust account.
      6. A nonrefundable retainer may be deposited in the lawyer’s operating account regardless of whether it must later be refunded due to the client’s reasonable termination of the relationship or the attorney’s voluntary withdrawal.