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Orange alert: Careful what you call 'fees'

Diane Karpman

By Diane Karpman

Whether it is "profits per partner" or realization of a contingency fee, getting paid is the bottom line. Your dependents believe that you are gainfully employed and like, the baker or candlestick maker, you will receive compensation for your labor and continue to maintain their lifestyles. They don't have a clue about fiduciary duties. (Lawyer contracts are fortified with agency principles, resulting in potential fee forfeiture for a serious breach, such as the duty of loyalty.)

Wait a minute, this is supposed to be about fees. But you need to understand that a fiduciary relationship involves a client investing trust and confidence in the lawyer. If clients lose faith, they must be able to discharge their lawyers without a penalty. Discharge by clients is an unfettered right, therefore clients cannot be penalized or held hostage for exercising this right of discharge.

This can become a critical issue, sometimes conjoined with the type of fees the lawyer receives. "Retainer" is a term that is casually bandied about. It can be synonymous with "fee agreement," or employed as a verb, as where you are "retained" by a client.

Then, there is an entirely different type of "retainer," known as a general or "true retainer." It is consideration paid to a lawyer to "be there" for the client during a given period of time. It is not tied to performance in a particular case. True retainers are fully earned upon receipt, and therefore, must not be placed in the client trust account.

Truly exotic specialists are sometimes paid money to never show up on the other side. A famous bloodthirsty merger and acquisition firm is paid by a corporate client to never be adverse to their position. Yes, I know this may appear as almost "un-American" on its face or offend our collective puritanical beliefs, that is, being paid not to work.

"True retainers" are often used by criminal defense lawyers. The lawyer is being compensated for lost opportunities — cases that they have to refuse, such as representing other members of the Soprano "family." It is like "availability insurance."

Lawyers sometimes confuse the "true retainer" with a "nonrefundable" fee.

"Nonrefundable" is a confusing term for clients and is flat-out prohibited in New York. Legal fees are refundable until they are "earned," the old-fashioned way, by performance.

An advanced fee, or prepaid fee, is refundable until earned. Therefore, to label it as "nonrefundable" is contradictory.

Orange alert: the "label" is not controlling, because the purpose of the payment and conduct of the lawyer will be considered. Oops, if you bill against it, you could be changing its character, converting a "true retainer" to an advanced fee.

Usually, clients think that they are paying you to do "something." So, if you are getting paid for just "being on their side," make certain that clients understand what that means. If they actually want you to do something, that is separate from the "true retainer," and requires separate compensation.

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