Supreme Court of Virginia bars nonrefundable advanced legal fees

An upcoming amendment to the Virginia Rules of Professional Conduct may require some lawyers to update their fee agreements.

Ordered May 16 and effective July 15, the Supreme Court of Virginia approved a petition from the Virginia State Bar to amend Rule 1.5 of the Rules of Professional Conduct to add subsection (g), which states in full “[n]onrefundable advanced legal fees are prohibited.”

The high court also adopted two comments that delve into the logic behind amending the rule.

“A nonrefundable advanced legal fee compromises the client’s unqualified right to terminate the lawyer-client relationship because the right to terminate the representation would be negatively affected if the client would still risk paying for services not provided,” Comment 10 states.

The comment further states that an unearned fee would violate Rule 1.5(a), and that keeping a nonrefundable advanced fee after being discharged by a client would qualify as a violation of the rule.

Comment 11 to Rule 1.5 distinguishes between a retainer and an advanced legal fee. The comment states that a retainer is earned when paid if it is charged for the purpose of ensuring a lawyer’s availability or future legal services or as consideration for the lawyer’s unavailability to a potential adverse party.

The state bar and Supreme Court of Virginia have previously opined on nonrefundable advanced legal fees. Legal Ethics Opinion 1606, which was issued in 1994 and approved by the Supreme Court in 2016, states that “any fee arrangement involving advanced legal fees and providing for a non-refundable or minimum fee violates the Disciplinary Rules and is thus improper.”

Virginia State Bar Ethics Counsel Emily F. Hedrick said that despite several LEOs addressing the matter, the VSB still saw cases of nonrefundable fees being charged to clients.

“The VSB disciplinary system continues to see violations of this rule, including fee agreements that claim to establish non-refundable fees, and the Legal Ethics Committee determined that it was appropriate to move the prohibition into the text of Rule 1.5,” Hedrick said.

Richmond attorney Jim McCauley, who served as Virginia State Bar ethics counsel from 1995 to 2022, said attorneys should look at the language of their fee agreements.

“Lawyers should be thinking not only about taking nonrefundable fee clauses out of their agreements, but also looking at if they are using a flat fee agreement, consider mile posts at which portions of the total advance fees have been earned and conversion clauses that say if the client were to terminate representation before the lawyer has completed all the work in the case, there will still be money that the lawyer has earned,” McCauley said.

Rule proposal

For decades, the bar and the high court’s position on nonrefundable advance fees has been consistent in discouraging the practice.

“Nonrefundable advanced fees were addressed in a number of LEOs predating LEO 1606, and the prohibition on nonrefundable advanced fees was very clearly reiterated in LEO 1606,” Hedrick said, adding that LEO 1606 remains “the authoritative opinion on many issues related to legal fees.”

LEO 1606 clarified that an advance payment for legal services remains the property of the client and must be deposited into a trust account, with the fee only being paid over to the attorney “when and if it is earned.” The advance payment cannot be termed as nonrefundable without violating disciplinary rules against unearned fees.

Nonetheless, violations related to advanced fees remained an issue.

It simplifies the process and removes any doubt as to whether or not that conduct is proper under the rule.

— Jim McCauley, Richmond

Daniel Schumack, a Fairfax attorney who advises attorneys in Virginia, Washington, D.C. and Maryland on ethics compliance, said it is a common problem attorneys face. “Part of the problem stems from lawyers not necessarily reading the rules, and part of the problem is lawyers who are reading the rules don’t understand what the rule is trying to say,” Schumack said.

The VSB posted a notice seeking public comment on the proposed amendment to Rule 1.5 in March, following a 45-11 vote of VSB Council to approve the rule. McCauley and Schumack were among those who filed public comment on the rule proposal, each providing critiques on the proposed Rule 1.5(g).

“Any of the ethics opinions that were issued by the bar had to be reviewed by the court, and if they were approved by the court, they have the effect of being a binding decision,” McCauley said. “My comment was essentially that that’s in effect a binding rule which was expressed in the terms of an opinion, and it made me wonder why the bar needed to codify it by adding paragraph (g) to Rule 1.5.”

McCauley added that he agrees with the ethical principal that nonrefundable fees are a violation of Rule 1.5, but said that LEO 1606, as a legal ethics opinion that was approved the Supreme Court of Virginia, “really has the force and effect of law.”

Schumack said his comment requested different wording than “advanced legal fees” and noted a desire for clear terminology that all could understand.

“My experience has been in the states that have that language is that lawyers sometimes don’t know what that means,” Schumack said. “My hope would be that every state that currently uses the phrase ‘advanced legal fee’ would either amend their rule to use the phrase ‘prepaid legal fee’ or that they would add a comment explaining that ‘advanced legal fee’ means money you receive paid in advance to doing all the services you’re promising,” Schumack said.

Schumack added that the amendment to Rule 1.5 “is needed in Virginia.”

“I think that the rule that the court approved was needed, I just wish they would have used different language to say what they said,” Schumack said.

Looking ahead

Hedrick said it is the hope of the bar that moving the prohibition on nonrefundable advanced fees into Rule 1.5(g) will cut down on the number of violations.

“The VSB believes that this will serve an educational function as the rule change is publicized and that the language being incorporated into the [Rules of Professional Conduct] will result in lawyers who are not following the current prohibition becoming ethically compliant,” Hedrick said.

McCauley said that having a rule on the books like Rule 1.5(g) may make it easier for enforcement.

“You can point to the rule itself and say ‘Here’s the rule, here’s what it says, it says you can’t charge a nonrefundable fee, period,’” McCauley said. “No further explanation needed. So, it simplifies the process and removes any doubt as to whether or not that conduct is proper under the rule.”

McCauley said lawyers who charge flat fees will need to be careful not to violate the amended rule.

“Lawyers should understand that if they want to collect fees over the course of a representation, and they’re using a flat fee arrangement, they should look at LEO 1606 and more recently LEO 1899,” McCauley said, citing a 2023 legal ethics opinion on the use of conversion clauses in flat fee agreements.

Schumack said he believes Virginia “is not done” with the issue, citing his concerns that the new amendment to Rule 1.5 is not clear when paired with language in Rule 1.15, which governs safekeeping property.

“There’s something that’s incomplete here, that there really is a need for Virginia to go back and synchronize what they just added to 1.5 so that lawyers will understand how it plays with what is very difficult to understand in Rule 1.15 in Virginia,” Schumack said.

The VSB addressed Schumack’s concerns in its March petition to amend Rule 1.5, stating that “any issue raised by this comment would be separately addressed by amendments to Rule 1.15, not to the proposed amendment to Rule 1.5.”