got 1.5(d)(3)?

If you are in private practice and you charge clients earned-on-receipt or non-refundable fees, immediately check the fee agreement you use to see if it contains ER 1.5(d)(3) language. 

[Go check. I’ll wait.]

ER 1.5(d)(3) language not ringing a bell? Here it is:

A lawyer shall not enter into an arrangement for, charge, or collect…a fee denominated as "earned upon receipt," "nonrefundable" or in similar terms unless the client is simultaneously advised in writing that the client may nevertheless discharge the lawyer at any time and in that event may be entitled to a refund of all or part of the fee based upon the value of the representation pursuant to paragraph (a).

Giving this information to clients – in writing -- is not simply a good business practice. It’s also not just a State Bar law office best-practice recommendation. Our Ethical Rules require it.

The Arizona Supreme Court added this language to ER 1.5 in 2003. For many years, the State Bar’s Lawyer Regulation Office took a lenient attitude toward lawyers who didn’t know about the rule or use its language only when necessary. Instead of seeking discipline, the office opted to tell lawyers to fix their fee agreements. But the rule has been in place for 15 years; any grace period is apparently over. A lawyer recently was disciplined for, among other reasons, not having this language in his fee agreement when he charged non-refundable fees.

What’s a non-refundable or earned-on-receipt fee? Both are versions of a flat fee. Comment [7] to ER 1.5 defines them: 

A flat fee is a fee of a set amount for performance of agreed work, which may or may not be paid in advance but is not deemed earned until the work is performed.  A nonrefundable fee or an earned upon receipt fee is a flat fee paid in advance that is deemed earned upon payment regardless of the amount of future work performed…. [T]he reasonableness requirement and application of the factors in paragraph (a) may mean that a client is entitled to a refund of an advance fee payment even though it has been denominated "nonrefundable," "earned upon receipt" or in similar terms that imply the client would never become entitled to a refund. 

When the Supreme Court added ER 1.5(d)(3), it also explained in ER 1.5’s comment [7] why:

So that a client is not misled by the use of such terms [non-refundable or earned-on-receipt fees], paragraph (d)(3) requires certain minimum disclosures that must be included in the written fee agreement.  This does not mean the client will always be entitled to a refund upon early termination of the representation (e.g., factor (a)(2) might justify the entire fee), nor does it determine how any refund should be calculated (e.g., hours worked times a reasonable hourly rate, quantum meruit, percentage of the work completed, etc.), but merely requires that the client be advised of the possibility of the entitlement to a refund based upon application of the factors set forth in paragraph (a).  In order to be able to demonstrate the reasonableness of the fee in the event of early termination of the representation, it would be advisable for lawyers to maintain contemporaneous time records for all representations undertaken on any flat fee basis.

When you put the ER 1.5(d)(3) language in your fee agreement, don’t get cute about where you put it or what size font you use. I’ve seen fee agreements in which the amount of the fee – and the fact that the fee is non-refundable – is on page 1 but the ER 1.5(d)(3) language is at the bottom of page 6. In a smaller font.

Also, don’t try to reword this disclose to try to dilute its import. Make life easier for yourself; just use the actual language from the rule. The State Bar includes this among its sample fee provisions:

Even though the fee is earned-on-receipt, you may nevertheless discharge us at any time and in that event may be entitled to a refund of all or part of the fee based upon the value of the representation. 

The ER 1.5(d)(3) language is not part of the American Bar Association Model Rules of Professional Conduct and may not be part of another state’s ethical rules. As a result, lawyers not licensed in Arizona may not realize you need to have this explicit disclosure in your fee agreement. For example, if you charge non-refundable or earned-on-receipt fees and you’re part of a multi-state law firm that uses a standardized fee agreement generated by your firm’s home office in another state, make sure the agreement you use includes this language.