State Bar Should Propose a Prohibition of Redundant Rules

By Rafael Chodos
This article appears on Page 6

      The State Bar has recently released a draft of Proposed New Rule 1.5(f), which reads as follows: "A lawyer shall not make an agreement for, charge, or collect a non-refundable fee, except that a lawyer may make an agreement, for, charge or collect a true retainer fee that is paid solely for the purpose of ensuring the availability of the lawyer for the matter."
      The Bar has not indicated why the proposed language is needed, but whatever the perceived need might be, it is very clear that the language fails conspicuously to meet it, for the following reasons:
      The proposed rule cannot possibly mean what it actually says. The prohibition against collecting a non-refundable fee, if interpreted literally, would mean that every fee a lawyer collects, except for "true retainer fees," would have to be refundable - even fees charged for work done and completed. Under the proposed language, a lawyer could collect a retainer fee paid solely for the purpose of ensuring his availability for the matter, yet then be run over by a truck and not have to return the fee.
      The proposed rule does not address the issues that must really be on the draftsmen's minds, and those issues are already addressed elsewhere.
      The draftsmen's idea, surely, is that it should be improper to require a client to deposit money with an attorney that is intended to pay for identified work to be completed after the time of the deposit, and then to refuse to return the money when it turns out that the work never is actually completed. But already under present law, such money would be viewed as trust funds held by the attorney for the client's benefit to be applied to the designated purpose; and like all trust funds, the money would have to be returned to the client if the purpose for which it was entrusted evaporated. The real issue that the proposed rule is trying to address is not the nature of the fee agreement, but the obligation of the attorney to refund any unearned portion of the fee. But this obligation is already addressed in Rule 3-700(d), which states clearly that upon termination of the attorney-client relationship, the attorney must return to the client all unearned fees. See also Clark v. Millsap, 197 Cal. 765 (1926), for an early case applying this idea.
      The "true retainer" issue arises also when a client, eager to remove his assets from the reach of his creditors, transfers them to his trusted attorney characterizing them as "a true retainer." It might be desirable to pass a rule to prevent such schemes. But already, under existing law, the court may disbelieve the collusive characterization and require the attorney to treat the assets as trust funds. See e.g. Brothers v. Kern, 154 Cal.App.4th 126 (2007), a recent case in which this very thing happened. What is really at stake in these sorts of cases is the honesty of the characterization rather than the propriety of the alleged fee arrangement; and the proposed rule does not address that issue at all.
      Lurking behind the proposed language is an unspoken assumption that is both rigid and improvident. The characterization of a given fixed payment as a "retainer" must be left to the agreement of the attorney and the client. To the extent that any payment is said to be non-refundable it is, by definition, part of the true retainer. For if the lawyer says to the client, "I will not be available to work on your matter unless you give me $X in advance as a nonrefundable fee," then $X is a retainer - period.
      Even if the lawyer agrees to perform some specific work as part of the initial transaction, that does not render the fixed payment anything other than a true retainer. After all, making oneself available to work on a matter necessarily involves a lot of work: reading the existing papers, studying the applicable law, taking long walks in the forest to decide what the overall strategy should be, and clearing one's calendar in order to have time and focus available for the matter - all these things have to be done as part of the initial work. Depending on the circumstances, the nonrefundability of the fee should not be affected even if some of this work ends up not having to be done. If for example, the other side sees the error of its ways shortly after reading the new lawyer's first filings and settles quickly; or if the client changes his mind after the attorney has gone through his "make myself available" routine; or if a new case comes down that makes the legal landscape less hostile - none of these events should require the attorney to change the deal and refund the fee. As in all contracts, there is an allocation of risks and benefits imbedded in the arrangement between the lawyer and his client, and this allocation is part of the deal the courts must enforce.
      The proposed language emanates from the rigid assumption that lawyers' charges must be capable of being broken down into identified units, such as hours or specific tasks. But lawyers are not required to bill by hours, nor by specific tasks, nor is hourly or task billing always the best approach for the client. Nor is the contingent fee the only alternative: Sometimes mixed fee arrangements, with components drawn from hourly billing, task billing, and contingencies, are best for both parties. When the parties discuss all the myriad elements of risk and work, and make an agreement, that becomes their deal and it must be respected and enforced. The Bar should not be poking its bureaucratic nose into these negotiations so long as they are open, free from fraud, agreed to by both sides, and provided the fee agreement is in compliance with Rule 4-200.
      Too bad that there is no general prohibition in our law against passing a superfluous or redundant rule or statute. If there were such a meta-rule, our statute books would be a fraction of their present size and all our lives would be much easier - and this proposed Rule 1.5(f) would not have made it as far as it apparently has.
     
      Rafael Chodos is a sole practitioner in Los Angeles who specializes in business litigation and mediation, and he is the author of "The Law of Fiduciary Duties." He can be reached at rafael@chodos.com.