Ethics Opinion 233
Payment of “Success Fees” to Nonlawyer Consultants
A law firm may agree with its clients that, depending on the outcome of a particular matter, a "success fee" will be paid to both the law firm and a consulting firm of nonlawyer experts retained by the law firm to assist it in connection with the matter. The fact that the portion of the "success fee" payable to the nonlawyer consultants flows from the client through the law firm does not result in a "sharing" by the law firm of legal fees with a nonlawyer proscribed by Rule 5.4.
- Rule 5.4 (Professional Independence of a Lawyer)
The inquirer, a District of Columbia law firm, has developed a practice representing clients in connection with the litigation, arbitration and mediation of contract and other disputes in connection with international construction projects. In that connection, the law firm has built a close relationship with a consulting firm of professional engineers and other nonlawyer specialists who provide expert advice and opinions relating to analysis of construction delays, damage calculations, etc.
While the consulting firm occasionally is retained directly by the law firm's client, the more common arrangement is for the law firm to retain the consulting firm, compensating it on the basis of hourly rates. The law firm's own work for its clients in this area is typically charged on an hourly-rate basis, but with a "success payment" to the law firm in the event of a successful result.
The law firm wants to enter into a contractual arrangement with the consulting company pursuant to which the consulting company not only would be compensated by the law firm on an hourly basis, but also would participate in any "success fees" received by the law firm from its clients on the construction projects. The "success fees" would be shared with the consulting company in any given case only with the prior knowledge and consent of the law firm's client.
The questions posed are (1) whether the law firm's proposed fee arrangement with its clients and the consulting firm constitute a sharing of legal fees by the law firm and the nonlawyer consultants that is proscribed by Rule 5.4(a); and (2) if so, whether the fee arrangement is removed from that general proscription if the consulting firm agrees to abide by the conditions set forth in Rule 5.4(b)(1)-(4).
The Committee does not reach the second question because we conclude that, so long as the client is fully informed and gives prior consent to the fee agreement in a particular matter, the payment of a success fee by the client to the law firm and, through the law firm, to the consulting firm does not constitute a sharing of legal fees proscribed by Rule 5.4(a).
The bans on fee-sharing and partnerships with nonlawyers have long been a feature of codes of legal ethics. They were motivated by a number of concerns, chiefly that nonlawyers might through such arrangements engage in the unauthorized practice of law, that client confidences might be compromised, and that nonlawyers might control the activities of lawyers and interfere with the lawyers' independent professional judgment. Opinion No. 146.
The Kutak Commission of the American Bar Association, which drafted the ABA Model Rules of Professional Conduct, proposed a dramatically different approach that would have allowed a wide range of business associations between lawyers and nonlawyers. The Kutak Commission thus recognized the important and integral role that a variety of types of nonlawyers—from paralegals to economists, social workers and accountants—have come to play in modern law practice. Compare Opinion No. 93, in which this Committee in 1980 similarly recognized the increasing role of nonlawyers in law practice. The ABA's House of Delegates, however, rejected the Kutak Commission proposal and adopted, in Rule 5.4 of the Model Rules, general bans on sharing of legal fees with nonlawyers and on partnerships with nonlawyers paralleling those contained in Disciplinary Rules 3-102 and 3-103 of the old ABA Model Code of Professional Responsibility.
The Rules of Professional Conduct adopted in the District of Columbia, effective January 1, 1991, contain a version of Rule 5.4 that, like the Kutak Commission proposal, reflects a more liberal approach to the subject of fee-sharing and association of nonlawyers in the legal practice. Rule 5.4(a), the general ban on fee-sharing, contains not only the traditional exceptions for payments to a deceased lawyer's estate and inclusion of nonlawyer employees in a retirement plan based on profit-sharing, but also, in Rule 5.4(a)(4) and 5.4(b), an exception permitting the sharing of fees in partnerships or other organizations in which nonlawyers have an interest, provided that certain safeguards are observed.1
We believe that the more liberal approach embodied in the D.C. Rules, together with a recognition of the vital role that nonlawyer experts from many disciplines play today in assisting lawyers in providing legal services to their clients, counsels against a broad reading of the Rule 5.4 proscription of fee-sharing with nonlawyers in this context. We also think that the present inquiry must be viewed in the light of several propositions that, it seems to us, are incontestable. First, nothing in the Rules of Professional Conduct would prohibit a direct arrangement between the law firm's client and the consulting firm for the payment of a "success fee" to the consulting firm. Second, it is commonplace for lawyers to retain and pay outside consultants directly and to pass on their charges as an expense in billing their clients; no-one suggests that this constitutes the "sharing" by the lawyer of a fee with the nonlawyer consultant. Third, Comment 8 to Rule 3.4, reflecting another liberalization of the traditional approach in the District of Columbia, permits payments of contingent fees to expert witnesses so long as they are not based on a percentage of the recovery.
With these considerations in mind, the Committee concludes that, so long as the client is fully informed and consents to the arrangement, a success fee of the kind contemplated by the inquiring firm does not constitute a sharing of legal fees with nonlawyers proscribed by Rule 5.4.2 The client would be agreeing at the outset of a matter that a success fee will be paid to both the law firm and the consulting firm. This is different from a situation in which the client pays a fee to a lawyer, unaware of the fact that the lawyer is obligated to share that fee with a nonlawyer.
The fact that the client's payment of the consulting firm's portion of the success fee flows through the law firm does not transform the payment into a legal fee being "shared" by the consulting firm any more than does the more typical arrangement in which a client reimburses a law firm for consulting fees paid by the law firm to a consultant. In substance, the transaction that results in a payment to the nonlawyer consulting firm is between the client and the consulting firm; the fact that the money passes through the hands of the law firm is a formality of no consequence for purposes of Rule 5.4.
Because of our disposition of this question, we have no occasion to decide whether the inquiring law firm's contractual arrangement with the consulting firm could qualify as a "partnership or other form of organization" within the meaning of Rule 5.4(a)(4) and 5.4(b).
1. Rule 5.4 provides, in pertinent part:
(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
(4) Sharing of fees is permitted in a partnership or other form of organization which meets the requirements of paragraph (b).
(b) A lawyer may practice law in a partnership or other form of organization in which a financial interest is held or managerial authority is exercised by an individual nonlawyer who performs professional services which assist the organization in providing legal services to clients, but only if: (1) the partnership or organization has as its sole purpose providing legal services to clients; (2) all persons having such managerial authority or holding a financial interest undertake to abide by these rules of professional conduct; (3) the lawyers who have a financial interest or managerial authority in the partnership or organization undertake to be responsible for the nonlawyer participants to the same extent as if nonlawyer participants were lawyers under Rule 5.1; (4) the foregoing conditions are set forth in writing.
2. In cases in which a member of the consulting firm will testify as an expert witness, the inquiring law firm should bear in mind that while the D.C. Rules permit payment of fees to expert witnesses contingent on the outcome of the litigation, such fees may not be based on a percentage of the recovery in the case. Rule 3.4, Comment .