Speaking of Ethics: Fee Sharing With the Feds?
From Washington Lawyer, September 2001
By Susan D. Gilbert
In its recent Opinion 307 (May 2001), the Legal Ethics Committee was asked whether District of Columbia Bar members could participate in a General Services Administration (GSA) program or whether the program runs afoul of the prohibition against sharing legal fees with nonlawyers. The GSA program provides federal agencies with a schedule of prenegotiated contracts for various goods and services, including contracts for certain types of legal services.
The ethical quandary presented relates to a fee that GSA charges each contractor to participate in the program, a fee based on a percentage of earnings under the contract. For nonlawyer contractors this presents no difficulty. But does the fee, when required of a lawyer-contractor, require the lawyer, in essence, to share legal fees with the GSA in violation of the D.C. Rules of Professional Conduct?
Through its Federal Supply Service, the GSA solicits and awards contracts for commercial products and services used by government agencies. The service streamlines government purchasing by sparing agencies the time and expense of independent procurement and offering price advantages as a result of contracting for goods and services on a large volume. To fund its administrative costs, the service requires participating contractors to pay an “industrial funding fee” (IFF) equal to 1 percent of the contract earnings. The IFF became an ethics issue when prenegotiated legal services were added to the program in January 2000.
Given that the IFF is a percentage of the lawyer’s earnings under the GSA contract, two rules, potentially at odds with each other, are at issue: Rule 7.1, which permits a lawyer to pay administrative fees of a lawyer referral service, and Rule 5.4(a), which prohibits sharing legal fees with nonlawyers. Opinion 307 untangles the issues from this knot of rules.
Rule 7.1 allows a lawyer to participate in a referral program and pay fees necessary for its administration, provided the lawyer informs the potential client of the fee and its effect, if any, on the lawyer’s total legal fees. Thus, lawyers are not barred from participating in government-run contracting programs for legal services, provided they give notice of the IFF to their government clients. However, Comment  to Rule 5.4 prohibits lawyers from sharing fees with nonlawyers to ensure “the lawyer’s professional independence of judgment.”
The question presented here is whether the IFF, based on a percentage of “the fee income of the lawyer making the payment,” constitutes prohibited fee sharing. Opinion 307 concludes that it does not.
Using D.C. Bar Opinion 286 (1998) as a starting point, the committee quotes from the opinion as it considers the nature of the IFF: “A non-contingent payment for the referral of legal business, i.e., one that is paid regardless of the success or outcome of the representation, is not a division of legal fees.” However, Opinion 286 also notes that payment of a “contingent referral fee, tied to the amount of the lawyer’s fees or recovery on behalf of the client” would constitute impermissible fee sharing.”
The committee considered several factors in determining that the IFF does not constitute impermissible fee sharing. First, the committee determined that the service “is an established, organizational referral service rather than an individual third-party intermediary. Comment  to DC Rule 7.1 distinguishes between a ‘recognized or established agency or organization’ offering a ‘lawyer referral program,’ to which a lawyer may ‘pay the usual fees charged by such programs,’ [to] ‘payments to intermediaries to recommend the lawyer’s services,’ . . .” According to the committee, Comment  suggests that the drafters’ primary focus was on “preventing non-lawyer intermediaries from using their power over lawyers who rely on them for business referrals to influence those lawyers’ ‘professional independence of judgment,’ ” a situation not at risk for occurring under the GSA program.
The committee also consulted and relied upon ethics opinions and case law from other jurisdictions. American Bar Association (ABA) formal and informal opinions, from as early as the 1950s and 1960s, have determined that a bar association could operate a lawyer referral service that is financed by fees from participating lawyers that are as high as 25 percent of the fees collected by the participating lawyers. The Michigan and Pennsylvania legal ethics committees have followed the ABA in this regard, concluding that where the participating lawyer’s professional judgment is preserved—that is, not subject to “undue influence,” as the Michigan opinion says—and where the fee itself is reasonable, the rule against fee splitting with nonlawyers is not violated. Similarly, a California state court of appeals has found that none of the evils created by fee splitting with nonlawyers are present where a lawyer referral service “seeks not individual profit but the fulfillment of public and professional objectives.”
The committee, in Opinion 307, adopts this approach: “We are likewise persuaded by this reasoning. [The Federal Supply Service] is a nonprofit service aimed at achieving important public policy objectives, including holding down the cost to taxpayers of legal services provided to government agencies. It presents no risks of interfering with participating lawyers’ independent professional judgment.”
Finally, the committee concludes that the 1 percent IFF charge is reasonable, especially when compared with fees that the bars and court above approved as being reasonable, fees ranging from 10 to 30 percent of the participating lawyer’s earnings. Adding to the reasonableness of the program itself is the fact that a federal agency can opt out of the program if the agency wishes to pursue its own negotiations for lower prices. The Federal Supply Service, the committee states, “offers a reasonable, cost-effective means for government agencies to contract for legal services” to those agencies that opt to use it.
The opinion closes with a reminder: lawyers using the Federal Supply Service must comply with the notice requirements of Rule 7.1(b)(5). This includes providing notice to the client of the consideration paid to the service and the effect, if any, that such payment will have on the total fee to be charged.
Ethics counsel Susan D. Gilbert and Ernest T. Lindberg are available for telephone inquiries at 202-737-4700, ext. 231 and 232.