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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.
Applicable Rule
- Rule 5.4 (Professional Independence of a Lawyer)
Inquiry
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.
Discussion
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).
Inquiry No. 92-9-30
Adopted: January 26, 1993
- 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.
- 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 [8].
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