YourABA: June 2013
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Division of legal fees: New ethics opinion

By Peter Geraghty
Director, ETHICSearch
ABA Center for Professional Responsibility

On Aug. 19, the American Bar Association Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 464, Division of Legal Fees With Other Lawyers Who May Lawfully Share Fees With Nonlawyers (2013).

In this opinion, the committee considered the question of whether a lawyer in a jurisdiction that follows Model Rule 5.4 Professional Independence of a Lawyer’s prohibition against sharing legal fees with nonlawyers violates the rule when he shares fees with a lawyer from a jurisdiction that does not have a similar prohibition and who may share fees with a nonlawyer.

Model Rule 5.4 states that a lawyer may not share legal fees with a nonlawyer but recognizes four exceptions, including 1.) the payment of money over a reasonable period of time after the lawyer’s death to the lawyer’s estate or other specified persons, 2.) in the sale of a law practice context, the lawyer may pay the purchase price to the estate of a deceased lawyer, 3.) compensation or retirement plans that include nonlawyer firm employees that are passed on a profit-sharing arrangement the payment and 4.) the sharing of court-awarded fees with a not-for-profit organization that retained the lawyer in the matter.

The committee noted that it has become common practice for lawyers to work with lawyers who are admitted to practice in other jurisdictions. Ethics 20/20’s addition of a new paragraph 6 to the Comment to Rule 1.1 Competence in 2012 expressly recognizes this reality, laying out the circumstances under which a lawyer may engage lawyers outside the firm:

[6] Before a lawyer retains or contracts with other lawyers outside the lawyer’s own firm to provide or assist in the provision of legal services to a client, the lawyer should ordinarily obtain informed consent from the client and must reasonably believe that the other lawyers’ services will contribute to the competent and ethical representation of the client. See also Rules 1.2 (allocation of authority), 1.4 (communication with client), 1.5(e) (fee sharing), 1.6 (confidentiality) and 5.5(a) (unauthorized practice of law).The reasonableness of the decision to retain or contract with other lawyers outside the lawyer’s own firm will depend upon the circumstances, including the education, experience and reputation of the nonfirm lawyers; the nature of the services assigned to the nonfirm lawyers; and the legal protections, professional conduct rules and ethical environments of the jurisdictions in which the services will be performed, particularly relating to confidential information.

Most jurisdictions have rules that contain restrictions with regard to fee sharing with nonlawyers that are similar to Rule 5.4, but there are exceptions, most notably in the District of Columbia and in the United Kingdom. The District of Columbia’s Rule 5.4(b) allows nonlawyers to have an ownership interest in law firms and also permits lawyers to share legal fees with them.

The committee observed that Model Rule 1.5(e) Fees permits lawyers who are not in the same firm to share fees so long as the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the matter. In the committee’s view, the lawyer from the jurisdiction that prohibits the sharing of legal fees with nonlawyers does not violate Rule 5.4 when he shares fees with the D.C. lawyer because he has only shared fees with another lawyer. Furthermore, even if the D.C. lawyer subsequently shares fees with a nonlawyer, this should not subject the lawyer from the Model Rules jurisdiction to discipline since the application of Rule 5.4 in his jurisdiction has not been affected. The committee stated:

… In the situation assumed above, however, the lawyer from the Model Rules jurisdiction does not violate Model Rule 5.4(a). That lawyer divided a legal fee only with “another lawyer,” and a lawyer may divide legal fees with a lawyer admitted in another jurisdiction. Any concerns of the lawyer subject to the Model Rules regarding inter-firm division of legal fees should end at that point.

The possibility that the District of Columbia firm may, or may not, eventually “share” some fraction of that firm’s portion of the fee with a nonlawyer should not expose the lawyer in the Model Rules jurisdiction to discipline. The lawyer subject to the Model Rules has complied with those rules. The compensation system of the District of Columbia firm does not threaten the application of Model Rule 5.4(a) within the Model Rules jurisdiction, and there is no reason to attempt to enforce Model Rule 5.4(a) in the District of Columbia. — ABA Formal Opinion 464

The committee also considered the underlying policy considerations of Rule 5.4, which is to protect the lawyer’s independent professional judgment from nonlawyer influence. Subpart (c) of the rule states:

A lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate a lawyer’s professional judgment in rendering such legal services.

The committee stated that threats to a lawyer’s independent professional judgment were unlikely since the nonlawyer would be practicing in a different firm from a different jurisdiction. Furthermore, the lawyer would still be bound by Rule 5.4(c).

The committee also noted several reasons that a contrary conclusion finding that a lawyer could not share legal fees with a lawyer in a jurisdiction that permitted fee sharing with nonlawyers would have negative implications for the profession:

  • The lawyer from the Model Rules jurisdiction would be at the mercy of the bookkeeping practices of the D.C firm. If the D.C. firm’s compensation plan that included nonlawyers were not tied to specific matters, this would not implicate Rule 5.4. If the plan was tied to specific matters, but if the firm decided not to compensate its nonlawyers on that basis in a given year, there would be no fee-sharing concerns. Therefore, the lawyer’s exposure in his own Model Rules jurisdiction could depend on the bookkeeping and annual compensation decisions of the D.C. firm.

  • To the extent that such fee-sharing arrangements were considered to be violative of Rule 5.4, the result could be that lawyers would decide to avoid working with D.C. firms unless their clients retained them separately, which would add unnecessary expense and complication to the matter and undoubtedly prove vexatious to clients.

  • It might also interfere with the lawyer’s ability to work with other lawyers who are best suited to serve the needs of their clients.

In conclusion, the committee stated that while a lawyer may share fees with lawyers in jurisdictions that permit fee sharing with nonlawyers, lawyers must be ever cognizant of Rule 5.4(c) and must never allow nonlawyers to interfere with their independent professional judgment. The committee stated:

… Lawyers must continue to comply with the requirement of Model Rule 5.4(c) to maintain professional independence. Even if the other law firm may be governed by different rules regarding relationships with nonlawyers, a lawyer must not permit a nonlawyer in the other firm to interfere with the lawyer’s own independent professional judgment. As noted above, the actual risk of improper influence is minimal. But the prohibition against improper nonlawyer influence continues regardless of the fee arrangement.

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