Washington Lawyer

Speaking of Ethics: Fee Sharing With Nonlawyers

From Washington Lawyer, September 2005

By Lisa Y. Weatherspoon

Illustration by Mick Wiggins Lawyers are increasingly interested in establishing relationships with nonlawyers or referral services in which a fee is paid in exchange for referring the lawyer’s services. The question of whether such arrangements are appropriate and how these arrangements should be structured has been addressed in several opinions of the D.C. Bar Legal Ethics Committee. The issue is addressed again in recently published Opinion 329 (2005).

Opinion 329 considers an inquiry in which a nonprofit organization pays an attorney a retainer fee of $10,000 per year for handling small compensation claims for day laborers. The lawyer represents the day laborers for a 10 percent contingency fee that is paid by the represented person. The attorney later reimburses the organization’s out-of-pocket expenses by returning the first $10,000 earned. The reimbursement is not tied to the actual fees received.

The committee considered Rules 5.4(a) and 7.1(b)(5) of the D.C. Rules of Professional Conduct. The relevant part of Rule 5.4(a) provides that a lawyer or law firm shall not share legal fees with a nonlawyer. Rule 7.1(b)(5) provides:

A lawyer shall not seek by in-person contact or through an intermediary, employment (or employment of a partner or associate) by a non-lawyer who has not sought the lawyer’s advice regarding employment of a lawyer if: . . . (5) The solicitation involves the use of an intermediary and the lawyer has not taken all reasonable steps to ensure that the potential client is informed of (a) the consideration, if any, paid or to be paid by the lawyer to the intermediary, and (b) the effect, if any, of the payment on the intermediary on the total fee to be charged.

Comment 6 to Rule 7.1 further explains that lawyers may participate in referral programs and pay the fees associated with such services.

The two rules, when taken together, seem to conflict. As such, the committee further weighed two public policy considerations. The first was whether such arrangements interfered with the lawyer’s independent judgment. The second was whether refusing such arrangements would adversely affect the public by reducing the number of affordable legal resources.

In Opinion 307 (2001) the committee considered a federal government referral service that negotiated contracts that provided that lawyers submit 1 percent of fees collected to the government office. This agreement was acceptable even though it involved fee sharing with nonlawyers because of the underlying policy considerations. Specifically, the agreement lowered taxpayer costs for legal services and “presented no risks of interfering with participating lawyers’ independent professional judgment.”

Opinion 286 (1998) held that a referral service agreement that provided that referral fees would be paid only when a lawyer received revenue from the referral violated Rule 5.4. It explained that Rule 7.1 permitted the payment for the referral of a legal service only when such payment was noncontingent and made irrespective of the outcome, as that type of payment was not a division of the legal fees. This analysis was further supported in Opinion 302 (2000), which provides that “any fee a law firm pays to a service provider cannot be linked to or contingent on the amount of legal fees the lawyers obtain from a posted project . . . since such an arrangement would violate D.C. Rule 5.4’s prohibition against lawyers sharing legal fees with non-lawyers.”

These opinions are distinguished from the issue raised in Opinion 329 in that the arrangement is not tied to the amount of fees the lawyer collects. Instead the organization is reimbursed for its expenses. Arrangements in which the referral fee is contingent upon or linked to the revenue the lawyer receives are prohibited. The committee stated that “Rule 5.4’s prohibition on fee-sharing does not preclude a non-profit from recouping its out-of pocket expenses by requiring a lawyer to whom cases are referred to repay the expenses if sufficient funds are received from contingent fees obtained from various representations.”

The opinion explains that the primary concern of Rule 5.4 is not to limit the way in which nonprofit lawyer referral services structured their payment arrangements, but to prevent nonlawyer intermediaries from using their position, as referral agents, to inappropriately influence the judgment of the lawyers who received referrals from them. It further cites Opinion 225 (1992), which states:

Nothing in the Rules of Professional [Conduct] purports to limit or discourage the use of innovative ways of providing legal services. . . . ‘Innovative approaches and fresh ideas in this area may result in the availability of necessary low-cost legal services to individuals who could not previously afford to employ an attorney.’

In sum, referral service agreements that involve sharing legal fees with nonlawyers may not be prohibited by Rule 5.4 when they satisfy certain requirements. Arrangements in which the fees are not contingent or in any way linked to the outcome, and that do not threaten to unduly influence the lawyer’s independent professional judgment, may not violate the rule. Further, creative agreements, such as the one presented in Opinion 329, promote an important public service by increasing access to legal services and providers for those who have few alternatives.

Legal ethics counsel Lisa Y. Weatherspoon and Ernest T. Lindberg are available for telephone inquiries at 202-737-4700, ext. 231 or 232, or by e-mail at ethics@dcbar.org.