Recent Ethics Opinions Give Guidance to In-House Counsel

Winter 2013

By: John M. Tanner

Corporate Counsel Section, State Bar of Texas - Winter Edition 2013 Newsletter

I. Ethical Issues with Flat Fees

Many in-house counsel appreciate flat-fee arrangements with their outside counsel because of the certainty of cost and budgeting.  Ethical issues may arise in such situations, however, and if the arrangement is unethical for outside counsel, then it is an ethical violation for in-house counsel to participate in it.  See Texas Disciplinary Rule of Professional Conduct (“Rule”) 8.04(a)(1)  (misconduct for a lawyer to “knowing assist or induce another” to violate the Rules).  In its Opinion 611 (2011), the Texas State Bar Ethics Committee addressed some of these issues. 

Opinion 611 addresses the recurring issue of whether a “non-refundable retainer” (which, on the facts discussed, was really the entire flat fee for the engagement) could be placed directly into an operating account.  Before analyzing the Opinion, an unusual note on terminology:  Terminology does not matter much here.  While there is some discussion that a “true” non-refundable retainer is to compensate the lawyer for turning down other work as opposed to a “flat fee” or regular “non-refundable retainer” being a total fee to do all the work, the transaction is going to be reviewed after the fact for substance, not nomenclature.  Most of the ethical analysis is the same under either term.1

The Opinion starts with reference to the two obviously-implicated Rules:  1.04(a) (fee shall not be unconscionable) and 1.14(a) (unearned fees are the property of the client and must be held in trust account).  Although not mentioned in the Opinion, also relevant is Rule 1.15(d), which requires refund of any unused retainer at the termination of the engagement.  Indeed, most of the ethical issues in this area arise when a client has paid a “non-refundable retainer” or “flat fee” for certain work, and then the engagement is terminated more quickly than the client expected, but the lawyer refuses to refund any part of the fee. 

The Texas State Bar Ethics Committee previously issued two opinions on the same topic:  Opinion 391 (1978) (issued under the former Code of Professional Responsibility) and Opinion 431 (1986) (issued under the Rules), and Opinion 611 builds on those.  Opinion 391 had concluded that non-refundable retainers were ethical and the funds paying them could be put into the lawyer’s operating account (and therefore spent) as soon as the funds were received.  Implicit in Opinion 391 was that no part of the fee that was earned upon receipt ever had to be refunded.  Opinion 431 expressly overruled Opinion 391 to this extent:  while some portion of a “non-refundable retainer” is earned upon receipt (the portion in exchange for the lawyer giving up other work), the rest is not.  The latter portion must be put into the trust account until it is earned. 

Opinion 611 essentially re-iterates Opinion 431 on this point, and states that the only portion of a “non-refundable retainer” that is earned upon receipt is that portion that is in exchange for the lawyer giving up other work, i.e., payment for the lawyer’s lost opportunity cost.  That portion can be put directly into the lawyer’s operating account; the rest must be placed in the lawyer’s trust account until it is earned.  This is consistent with the scant case law on the subject 2 and the obligation to return the unearned portion if the engagement is terminated prior to its conclusion.

Now, take that same analysis and apply it to a flat fee in a business context.  You are in-house counsel and you have asked your regular outside counsel to accept an ordinary assignment on a flat fee.  The fee is calculated based on the outside counsel’s last six tasks of the same type.  As an incentive, you offer to pay in advance.  What can your outside counsel do upon receipt of the flat fee without getting you into ethical trouble?  In most cases, lawyers performing business transactions for institutional clients are not so busy or lacking in support that they can be said to have given up any work to take the flat-fee work from a regular client.  Thus, in the first instance, the entire flat fee must go into the trust account and the lawyer cannot pay himself until the fee is actually earned.

When the fee is actually earned is left open in the Opinion (as it was in prior opinions), and it would be inadvisable if not impossible to try to come up with a single answer to that question.  A better approach may be to subdivide the “flat fee” into a series of benchmarks for the representation.  They may be sub-tasks or even time marks based upon the expected length of the engagement.  This would give both the outside counsel comfort that Rules 1.04(a) and 1.14(b) are being satisfied, and thus give in-house counsel comfort that Rule 8.04(a)(1) is not being violated.

II.  Direct Contact with Board Members of State Regulatory Agencies

In its Opinion 604 (2011), the Texas State Bar Ethics Committee responded to a query regarding the interaction between a lawyer and members of a state regulatory board.  As many in-house counsel have direct contact with regulators, this Opinion gives important guidance to in-house counsel.  The query regarded whether it was permissible to have ex parte contact with the Board or whether such contact violated the prohibition in Rule 3.05 of the Texas Disciplinary Rules of Professional Conduct on ex parte contact with a “tribunal”.  Like so many other times in the law, the answer was “it depends”.

Opinion 604 does an excellent job of noting that to answer the question one needs to know at what stage the regulatory Board is sitting.  If the Board is contemplating a rule or regulation, then the Board is acting in a quasi-legislative capacity and, therefore, is not a “tribunal” for purposes of Rule 3.05.  As a quasi-legislative body, an agency is subject to “petitions for grievances” as a constitutional right. Thus, the Rules do not in any way inhibit a lawyer (whether acting on behalf of a client or otherwise) from contacting a Board ex parte.

Once a regulation is put into effect, however, and the issue is whether or not the lawyer’s client has violated that regulation (or some similar question), the analysis changes.  When the Board is considering the application of a regulation to a particular person, then the Board is acting in the capacity of a tribunal, then Rule 3.05 applies and ex parte contact is prohibited.

Crucial to Opinion 604 are the precise terms of Rule 3.05, noting that Rule 3.05(c)(1) uses the term “matter,” which is defined in Rule 1.10(f).  In that definition, Rule 1.10(f) expressly excludes from the definition of matter, “Regulation making or rule making proceedings or assignments,” but does include (in this exclusion) adjudicatory proceedings before a regulatory body.

This is consistent with prior Opinion 587 (2009), which covers much of the same ground.  In Opinion 587, the question was limited to whether a lawyer can communicate with an administrative agency expressly for the purpose of getting a particular result in a particular matter.  Based on the question, the Professional Ethics Committee determined that such ex parte contact was improper.  The Committee notes that in most cases discretionary action by an agency is triggered when a “matter” becomes “pending” under Rule 305, and notes further that this is often a question of fact.

What is implicit in these two opinions is that it would be proper for a lawyer to have ex parte communication with an agency trying to get rules or regulations adopted which are favorable to the lawyer’s client.  That would constitute a “petition for grievances” under constitutional law guaranteed to every American citizen.  It is only after the rules are adopted that the tribunal becomes a quasi-judicial body in deciding how to apply those particular rules to a particular circumstance. 

The implications for in-house counsel of this Opinion are significant.  Many companies that are large enough to have staffs of in-house counsel are heavily involved in lobbying and other attempts at persuasion regarding rule-making by administrative agencies.  All of that can be done ex parte, even going so far as trying to persuade the agency that a rule favoring the lawyer’s clients be adopted.  Once the rules are adopted, however, then the regulatory body operates more like any other judicial tribunal, and ex parte contacts are prohibited absent some other aspect of the law that allows those contacts.

[1] See, e.g., Douglas R. Richmond, “Understanding Retainers and Flat Fees,” The Journal of the Legal Profession Vol. 34, p. 113, at p. 132 (2009).

[2] See Cluck v. Commission for Lawyer Discipline, 214 S.W. 3d 736 (Tex. App. Austin 2007) (“non-refundable fee” was in fact just advance payment and not earned until services provided; deposit of same into operating account was ethical violation).

[3] E.g. Office of Public Ins. Counsel v. Texas Auto. Ins. Plan, 860 S.W. 2d 231 (Tex. App. Austin 1993) (recognizing constitutional right to petition to rule making agency via proper procedures under Tex. Const. Art. 1 § 27 and U.S. Const. Amend. 1). 

This Article is published for general information, not to provide specific legal advice. The application of any matter discussed in this article to anyone's particular situation requires knowledge and analysis of the specific facts involved.

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John M. Tanner