On New Year’s Day 2021, a quiet revolution in the legal profession took place in Arizona.
A new Arizona Supreme Court rule took effect that abolished the century-old ban on lawyers sharing attorney fees with those who are not lawyers—“nonlawyers,” as we lawyers and the courts like to call them. Every Arizona lawyer can now share attorney fees with anyone they want.
This was just one part of an overall package of lawyer regulatory reforms intended to forcefully address the access to justice crisis. The Arizona Supreme Court also authorized nonlawyers to own law firms in businesses they call alternative business structures (ABSs), but only on special application to, and by approval from, the Court. The Court also allowed all Arizona lawyers to pay for referral of cases.
You could almost feel the ground shake all over the country.
There can be no doubt that the access to justice crisis is real.
In 2022, a Legal Services Corporation (LSC) study revealed that low-income Americans do not get any, or enough, legal help for 92 percent of their substantial civil legal problems. This was the LSC’s fourth similar study since 2005, and the 2022 study showed the problem worsened noticeably since the last one in 2017. Other data showed that access to legal services is little better for middle-income people, but that’s not exactly good news.
It's uncomfortably clear that the profession cannot “pro bono” its way out of this crisis. The ABA’s 2016 Report on the Future of Legal Services in the United States relied on data from prominent academic Gillian Hadfield to find that “U.S. lawyers would have to increase their pro bono efforts . . . to over 900 hours each to provide some measure of assistance to all households with legal needs.”
Arizona faces this same crisis, just like the rest of the country. The Arizona Supreme Court responded, and one of its responses was to lift the fee-sharing ban.
So far, no other jurisdiction has followed their lead. And reasonable people may question whether allowing lawyers to share fees will solve or mitigate the access-to-justice crisis.
But any reasonable observer of Arizona’s decision should separately consider whether the fee-sharing ban Arizona repealed—still in place everywhere else— is good public policy, no matter how long-standing. After all, if it’s not good policy, reasonable policymakers should be more willing to repeal or limit it, even on the chance that it might help make legal services more accessible.
The purpose of the ban, as expressed even in the Rule’s title, is to protect the “Professional Independence of a Lawyer.” The Comment says that is to “protect the lawyer’s professional independence of judgment.” The notion apparently is that, allowing lawyers to contract to provide anyone who is not a licensed lawyer a portion of their legal fees will risk the lawyer becoming dominated by, and allowing their professional judgment to be controlled or influenced by, that nonlawyer, to the detriment of their clients.
To begin to test that premise, consider with me this question: Does today’s law on what is, and is not, prohibited as fee-sharing with nonlawyers make sense? Does it consistently protect a lawyer’s professional independence?
I submit that no rational person—note I did not say “lawyer”—could believe that the law as it stands today is a sensible and good policy, consistently aimed at protecting the independence of lawyer judgment. I invite you to check my work.
Virtually every state follows reasonably closely the core verbal formulation of ABA Model Rule of Professional Conduct 5.4(a): “A lawyer or law firm shall not share legal fees with a nonlawyer,” followed by a series of exceptions, about which more later.
First, what is it that we cannot share? “Legal fees.” Easy enough?
A legal fee is the $1 that Perry Mason occasionally asked a new client to give him to seal the deal to become their lawyer (and prove their innocence within the hour).
But once Perry hands the $1 to his confidential secretary Della Street to put in the firm’s cash drawer, is it still a legal fee? And what about when Perry has Della pull out that $1, plus more, to pay ace private detective Paul Drake for expected expenses in tailing the truly guilty party—is that $1 still a legal fee? Or when Perry withdraws that $1 and $50 more as his draw for the week to pay himself?
Your CPA will tell you this $1 is fungible—completely interchangeable with every other dollar in the firm’s cash drawer or bank account. So once the $1 is mixed with other dollars, to the CPA it loses its character as legal fees. It becomes revenue of the firm, an asset of the firm and once expenses are paid, the remainder is profit.
Lawyers are not accountants, but every ethics opinion on this subject takes a much more expansive view of a legal fee. We ethics lawyers uniformly tell lawyers that the fee-sharing ban means that not only can Perry not share that $1 before he hands it to Della, he also cannot share his revenue from his firm, or the profits from his firm, with any nonlawyer.
Knowing now that the ban actually covers fees, revenues and profits, Rule 5.4(a) means we cannot “share” them “with a nonlawyer.” Sounds like we cannot give a nonlawyer a portion or percentage of them.
Clearly, Perry can, in fact, pay Paul Drake’s expenses or the rent with money that comes from fees.
But many authorities blur this line. Sadly, some aim directly at innovative services that would, in fact, aid in the availability of legal services.
Perhaps the most prominent example is a series of eight ethics opinions from 2016 to 2018 concerning the pricing structure of Avvo Legal Services marketing program, best chronicled by Professor Alberto Bernabe.
Avvo proposed to charge lawyers a specific, fixed marketing fee for successful marketing of certain carefully described legal services. The fixed amount varied depending on the service (as did the lawyer’s fee). The amount paid to Avvo was not framed as a percentage of the fee the lawyer received, though higher attorney fees were associated with higher marketing fees. These opinions repeatedly found these marketing fees to be unlawful fee-sharing by lawyers with Avvo, based on a very broad interpretation of “sharing.”
And Avvo ended its Avvo Legal Services program.
Over the decades, a patchwork of exceptions to the ban have been recognized, many ill-defined. Many seem to have little justification when compared to similar situations where the ban remains strong. See if you can find the common policy thread, tied to lawyer independence, that controls.
Percentage leases versus credit card providers. Authorities interpret the ban on fee-sharing to prohibit percentage leases—the lawyer who rents office space in the front of a grocery or other retail store cannot pay a share of her revenues as rent. But lawyers everywhere are permitted to share a percentage of their fees with credit card providers and other payment services.
Recruiters. A law firm can pay a lawyer recruiter a percentage of a recruited lawyer’s annual salary, but not a percentage of the fees collected from the lawyer’s work for the first year. (What about a percentage of the hired lawyer’s first year’s fees billed to clients—who knows?)
Profit-sharing bonuses with employees versus consultants. Nonlawyer employees of lawyers can be paid a share of the firm’s profits, so long as they are not paid a share of fees on individual cases or specific groups of cases. But employees certainly cannot be paid a share of the profits from the cases on which they worked. And there’s no exception at all for consultants to lawyers and law firms, as opposed to employees, even if the consultants are doing the same work as an employee—for example, marketing.
Financing. Someone who advances money for a law firm’s expenses—say, to market or pay the expenses of a new line of work—cannot be paid a fee for that financing based on the profits resulting from that line of work. Unless, of course, the financier is a licensed lawyer, in which case, that’s perfectly fine.
Sharing court-awarded fees. In most states, a lawyer may share court-awarded fees with a nonprofit organization that employed, retained or recommended the lawyer’s employment. But not with a for-profit organization that did the same.
So, do you think that lawyers who engage in conduct prohibited above are less independent in their professional judgment for clients than lawyers controlled by these prohibitions?
First, is the professional judgment of a lawyer who does share fees with a nonlawyer impaired, or somehow less than, the professional judgment of a lawyer who does not? I have never understood that logic, especially in the face of so many other sources of a lawyer’s obligation to maintain the independence of her professional judgment for, and her undivided loyalty to, a client.
Think of the other ethics rules that require this, including Model Rules 5.4(c) (prohibiting a lawyer from allowing a third person from directing or regulating the lawyer’s professional judgment) and 1.7 (concurrent conflicts of interest). And think of the obligations imposed by the standard of care and our fiduciary duty.
Second, even assuming an affirmative answer to the first question, does the current patchwork, inconsistent ban on fee-sharing effectively separate problematic fee-sharing from benign fee-sharing? Clearly not. Are we really worried about percentage leases, or fee-sharing with law firm employees leading to lack of professional independence?
In the wake of Arizona’s repeal of its fee-sharing ban, and the vast number of lawyers and other innovators trying new things to reach legal services consumers, it’s time for us all to re-think some of our traditional notions about lawyer regulation, in a fresh light. And it might well be time to cast aside our long-standing ban on fee-sharing with nonlawyers.
