December 2018 | Ethics in View

Meditation on Model Rule 5.4

by Dennis A. Rendleman, ABA Ethics Counsel

“You just keep thinkin’, Butch. That’s what you’re good at.” – The Sundance Kid

In 2013, the Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 464 interpreting Model Rules 1.5 and 5.4:

Lawyers subject to the Model Rules may work with other lawyers or law firms practicing in jurisdictions with rules that permit sharing legal fees with nonlawyers. Where there is a single billing to a client in such situations, a lawyer subject to the Model Rules may divide a legal fee with a lawyer or law firm in the other jurisdiction, even if the other lawyer or law firm might eventually distribute some portion of the fee to a nonlawyer, provided that there is no interference with the lawyer’s independent professional judgment.

Much like an ember from a blaze, this opinion set off certain members of the bar who were outraged with the opinion as an assault on the core principles of lawyering, specifically the professional independence of lawyers. 

Similarly, during the debate over Ethics 2000 and Ethics 20/20, the same arguments were raised. The debate has focused on so-called “alternative business structures” and “multiple disciplinary practices.” 

But, as Mike Stoller and Jerry Leiber wrote for Peggy Lee, “is that all there is?”

Having seen this debate extend for many years, I would argue that it has hardened into distortion.  The questions of professional independence of the lawyer, dividing or sharing fees and non-lawyer investment in law firms is not a simple binary concept. Rather, Rule 5.4 should be considered in its constituent parts.

For example, what is the meaning of “share legal fees with a nonlawyer”? One envisions a lawyer being paid by the client and then taking that cash and giving part of it to a non-employee, non-lawyer individual such as a “runner” who brought the client to the lawyer.  From that simplistic vision, the real politick of so-called “sharing legal fees with a nonlawyer” has evolved to allow payment to a lawyer’s estate and/or heirs (Rule 5.4(a)(1); payment as part of the sale of the law practice under Rule 1.17 (Rule 5.4(a)(2); payment to nonlawyer employees as part of a retirement or profit-sharing plan (Rule 5.4(a)(3) ) with mandates in some states that there be no link to a specific matter; payment to a nonprofit organization a part of the matter (Rule 5.4(a)(4). 

So, what is the meaning of Rule 5.4(a)? Provisions Rule 5.4(a)  1 and 3 do not appear to be sharing of legal fees. Rather, it appears to be distributions from the general revenue from the firm. Provisions (2) could and (4) must come from individual cases or from general revenue.

Given the operation of modern law firms, including solo and small firms (as well as current tax laws), it is hard to envision that individual fees are subject to inappropriate division or sharing.

There is no definition of “fees” in the terminology section of the Model Rules. Looking at Rule 1.5 and the discussion of “fees” throughout the Rule and Comments, there is no indication that the term is intended to apply to something more than the fee in a particular case. Put another way, “fee” does not appear to apply to a law firm’s general operating account. Indeed, Model Rule 1.15 and innumerable articles and ethics opinions discuss the obligation of a lawyer to put client money in trust accounts, but transfer any money belonging to the lawyer into the lawyer’s personal or operating accounts. Does this not demonstrate that once money is transferred into the lawyer’s account, it is transmuted from a “fee” to a lawyer’s property?

Making this interpretation of the meaning of “fee” would arguably obviate the necessity of any change to Rule 5.4(a).

But what about Rule 5.4(b)? The terminology section defines “partner” as a “member of a partnership, a shareholder in a law firm organized as a professional corporation, or a member of an association authorize to practice law.” Though the drafting is inartful, it is reasonable to rely on that definition for interpreting the prohibition on forming a “partnership with a nonlawyer.” 

Historically, however, and particularly in the practice of law, “partnership” was a term of art.  Other than solo practice, the only “organization” in which more than one lawyer could practice law was a partnership. And, at law, partners were/are jointly and severally responsible for all acts of the partnership. This was heightened by the responsibility of a lawyer to a client.

While that law is still extant, few lawyers now practice in a pure partnership. The evolution of the law and the legal practice since the 1980s has revolutionized law firm organization. To paraphrase, “Where have all the partnerships gone?” They are PC, LLC, LLP, etc., and are generally no longer jointly and severally liable for the lawyer in the next office. In effect, has Rule 5.4(b) become moot?

Of more currency is Rule 5.4(c). The obligation of a lawyer to maintain independent professional judgment is the sine qua non of the rule. It is the title and prime directive of the rule. What is unclear is whether, in the 21st century, the same fears of the past should prevent adjustments for the future. Will the professional independence of the lawyer be impinged by some degree of financial relationship with nonlawyers?

Returning to the proposition that the discussion is not a binary question, would allowing a degree of financial participation in a law firm by a non-lawyer interfere with professional independence any more than a bank loan or other line of credit? Rule 5.4(d) prohibits any practice including a nonlawyer or alternative form of practice. But those two restrictions need not be combined. The rules could authorize nonlawyer financial participation without authorizing alternative business structures.

One proposal previously discussed in North Carolina suggested up to a 49 percent ownership of stock in a professional corporation by nonlawyers with provisions guaranteeing a lack of interference with the attorney/client relationship. This is significantly different than the fear bandied about in the past – then called the “fear of Sears” (though now Walmart or Amazon would be more appropriate) – that large commercial consumer corporations would market legal services. Would this or other proposals that keep the lawyer in charge interfere with a lawyer’s independent judgment? It has always been a significant challenge for both in-house corporate counsel or “captive” insurance counsel and others similarly situated to vigorously work to preserve their independent judgment in practice for their clients. See Rule 1.13.

None of this addresses the question of alternative business structures or practice – that may be a meditation for another time – or a bridge too far. 

But, despite the continued, consistent protest that any change to Rule 5.4 is an assault to the core values of the profession, there is a compelling need to evaluate what exactly is the core value and what is simply nostalgia for days gone by or misapprehension of today’s needs. It seems peculiar that the Model Rules view filthy lucre as the greatest threat to the core value of a lawyer’s exercise of independent professional judgment.  The other core value to consider was said by Heraclitus: “The only thing that is constant is change.”