Ethics and Professional Responsibility

New ABA Ethics Opinion Weighs in on Retainers and Advance Fee Payments

By Keith R. Fisher

Question: Is there any longer such a thing as a nonrefundable legal fee? Not according to a recent ABA ethics opinion, Formal Opinion 505.

Beginning with a taxonomy of various labels used to characterize advance fee payments, the opinion asserts that when such payments are made, “the lawyer takes possession—but not ownership—of the funds to secure payment for the services the lawyer will render to the client in the future.”

In general, the opinion takes issue with characterizing a payment as a “retainer” and prefers to use the term “advance.” Even a fixed fee or a flat fee, if paid by the client upfront, is deemed an “advance.” Advances are “unearned,” because they constitute—in stark contrast to Wimpy gladly paying next Tuesday for a hamburger today—payment today for work to be performed in the future. According to the opinion, such fees are unearned upon receipt and remain unearned until the work is performed.

The opinion uses three hypotheticals to illustrate the central point that regardless of how one characterizes an advance payment, the lawyer gets to keep only the portion that is earned, and any excess must be refunded when the client’s circumstances change and the engagement is terminated early. This includes a scenario where the advance is characterized as a nonrefundable, flat fee.

While acknowledging the existence of the phenomenon known as the “general retainer,” which is a fee paid by a client to “reserve the lawyer’s availability,” Formal Opinion 505 warns that such a retainer “may be determined to be an unreasonable fee, or even unearned if the lawyer does not make himself or herself available.” The opinion asserts that these are rare and are, moreover, anachronistic.

At this point, some readers may harbor some doubts that things are as cut and dried as the opinion suggests. Those readers are correct. Stay tuned for an article discussing some of these nuances in a forthcoming edition of BLT.

Federal Trade Commission Chair Lina Khan Declines Ethics Recusal Demand in FTC Case against Meta Platforms, Inc.

By Margaret M. Cassidy

Media has reported that Federal Trade Commission Chair Lina Khan refused to recuse herself from FTC matters related to the acquisition of another company by Meta Platforms, Inc. despite the recommendation of the FTC’s designated agency ethics official (“DAEO”) that she do so. The FTC’s DAEO, Lorielle L. Pankey, was called upon to assess whether federal ethics regulations supported Meta’s request that Khan recuse herself from FTC decisions related to Meta’s potential acquisition.

Meta argued that Khan should recuse herself because she was not impartial since, before becoming commissioner, Khan had publicly stated that Meta should be blocked from any future acquisitions, and in a report she had a key role in authoring as a congressional staffer, concern was expressed about acquisitions by the company.

FTC’s DAEO, citing to the Standards of Ethical Conduct for Employees of the Executive Branch,[1] federal ethics regulations that define ethics requirements for federal officials, advised that federal employees must avoid even the appearance of bias. Given that, FTC’s DAEO recommended that Khan recuse herself from the Meta acquisition matter to “avoid an appearance of partiality” given Khan’s previous statements around blocking future Meta acquisitions. FTC’s DAEO noted that ethics regulations do not require actual bias but instead provide that recusal is appropriate if a “reasonable person” would conclude that Khan may be biased or impartial if she adjudicated the possible Meta acquisition.[2] FTC’s DAEO noted that, among other things, the recency of some of Khan’s statements along with the fact that her statements were pointedly directed at Meta (at the time of the statements called Facebook) favored Khan’s recusal. Ultimately, however, the DAEO left the recusal decision to Khan since, in the DAEO’s opinion, a failure to recuse would not be a per se violation of federal ethics regulations.

New York Repeals Brick-and-Mortar Office Rule

By Lakshmi Gopal

On June 7, 2023, the New York State Assembly voted to repeal Judiciary Law Section 470, a 1909 law that required attorneys in practice in New York to maintain a physical office in the state to better facilitate service and communication. Originally, the rule required any attorneys in practice in New York to reside in New York. The New York Court of Appeals struck down the residency requirement in 1979 on the grounds that it violated the Privileges and Immunities Clause of the state constitution, but Section 470 still required a New York attorney to maintain a “brick-and-mortar” office within the state. With increasing reliance on electronic communication, including email communications and efiling by New York courts, the move aims to enhance access to legal services, promote flexibility in the legal profession, and align with the evolving nature of legal practice in an increasingly digital era.

Lawyers Sanctioned for Failure to Correct Faulty Reliance on Fake Cases, Quotations, and Citations Invented by ChatGPT

By Lakshmi Gopal

On June 22, 2023, the United States District Court for the Southern District of New York issued Rule 11 sanctions against lawyers who had “submitted non-existent judicial opinions with fake quotes and citations created by the artificial intelligence tool ChatGPT.” The Court jointly sanctioned the lawyer who had originally relied on ChatGPT for the false information, the lawyer who subsequently took over the case when it moved to another jurisdiction, and the firm representing respondents, finding that they acted in bad faith and misled the court because they “consciously avoided” signs that the cases they were using were fake. The Court stated that while there was “nothing inherently improper about using a reliable artificial intelligence tool for assistance,” the way the lawyers continued to stand by the fake materials led “many harms [to] flow from the submission.” The Court stated that the record might have been different had the lawyers been more upfront about their mistake early on. The lawyers and their firm were jointly fined $5,000 and further ordered to mail individual letters to each judge falsely identified as the author of fake opinions cited, providing information related to the sanctions and the fake “opinion” attributed to the recipient judge.

The fine was issued on the principle that since technological advances are commonplace, “existing rules impose a gatekeeping role on attorneys to ensure the accuracy of their filings.” The decision highlights the importance of technological competence in the face of evolving technology. The lawyer who generated the false results was quoted as saying that he did not realize that ChatGPT was doing more than just summarizing search results. It is, in fact, a generative language-processing tool. Generative-language tools can produce what has become known as AI hallucinations. AI hallucinations occur when an AI generates fake results not backed by real-world data and presents it as true. The case highlights the ongoing importance for lawyers to understand the basic workings of the technologies they incorporate into their practice.

  1. 5 CFR Part 2635.

  2. FTC Designated Agency Ethics Official Memo Federal Ethics Response to Meta Petition for Chair Khan’s Recusal to Christine S. Wilson, FTC Commissioner (August 31, 2022).



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