Ethics Opinion 329
Non-Profit Organization Fee Arrangement with an Attorney to whom it Refers Matters
* [NOTE: See how Opinion 329 has been substantively affected by the amendments to the D.C. Rules of Professional Conduct that became effective on February 1, 2007]
Non-Profit Organization Fee Arrangement with an Attorney to whom it Refers Matters
An arrangement by a non-profit organization to pay an attorney an annual $10,000 retainer fee for handling small compensation claims for day laborers on a contingent fee basis and then receive back the first $10,000 the attorney receives each year in fees to cover the organization’s costs does not violate Rule 5.4(a) so long as the reimbursements are restricted to recouping out of pocket expenses and are not tied to the amount of fees collected by the attorney in the representation of a particular client or clients.
- Rule 5.4(a) (Lawyer May Not Share Legal Fees With a Non-Lawyer)
- Rule 7.1(b)(5) (Consideration May be Paid by a Lawyer to an Intermediary for the Referral of Legal Business)
The inquirer, a District of Columbia non-profit entity, would like to assist day laborers in pursuing small workers’ compensation claims. The non-profit has learned from experience that the day laborers have a difficult time finding competent counsel who are willing to provide representation in these types of cases. To help facilitate adequate representation, the non-profit proposes to pay a qualified attorney a $10,000 annual retainer for handling these matters; allow the attorney to take a 10 percent contingency fee from client awards; and then require the attorney to pay the non-profit the first $10,000 he receives in contingent fees each year to permit it to recoup its out-of-pocket retainer costs. Other than recouping out-of-pocket costs, the financial arrangement the non-profit has with the attorney is not in any way tied to the amount of fees collected by the attorney in the representation of a particular client. The non-profit has asked the Committee to opine whether this arrangement complies with the DC Rules of Professional Conduct. The Committee concludes that it does for the reasons set forth below.1
Rule 5.4(a) of the DC Rules states that "a lawyer or law firm shall not share legal fees with a non-lawyer" except in certain narrow circumstances not pertinent to this inquiry. This provision could be interpreted to preclude a lawyer from ever sharing a portion of the fees that the lawyer receives from a client with an organization that made the referral. DC Rule 7.1(b)(5), however, indicates otherwise. It specifies that referral fees arrangements with intermediaries can be proper if the lawyer "takes 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 to the intermediary on the total fee to be charged." In addition, Comment 6 to Rule 7.1 notes that "a lawyer may participate in lawyer referral programs and pay the usual fees charged by such programs."
There appears to be an inherent conflict, therefore, between the flat prohibition on fee-sharing between lawyers and non-lawyers found in Rule 5.4 and the implied acceptance of sharing fees with non-lawyers found in Rule 7.1. Numerous ethics opinions here and in other jurisdictions have examined this conflict to determine whether fee-sharing arrangements are permitted under certain circumstances. Generally, these opinions have looked to the public policies that underlie Rule 5.4 and have determined that the arrangements are permissible if they comply with them. In reaching this conclusion, the ethics opinions, including one by this Committee, have focused on two of the policy considerations: 1) whether a proposed arrangement would interfere with a lawyer’s independent judgment; and 2) whether refusing to permit the arrangement would result in fewer legal resources being available for those in need of them.
This Committee opined in 2001 that a lawyer may "participate in a federal government referral service that negotiates contracts to provide legal services to federal agencies where that program requires the lawyer to submit one percent of the legal fees received through the service to the government office in order to fund the program." D.C. Legal Ethics Comm., Op. 307 (2001) The Committee concluded that the arrangement was acceptable even though it would involve fee-sharing between lawyers and non-lawyers because of the policy considerations underlying the rule. Id. The Committee noted that Comment 6 to Rule 7.1 "suggests that the drafters of the D.C. Rules were not particularly concerned about the manner in which non-profit lawyer referral services structured their fee arrangements; their principal 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.’. (citing Rule 5.4 cmt. 1). The Committee then concluded that the proposed arrangement obviated this concern because the inquiring organization presented "no risks of interfering with participating lawyers’ independent professional judgment." Id.2 In addition, the Committee pointed out that the referring organization "is a non-profit service aimed at achieving important public policy objectives, including holding down the cost to taxpayers of legal services provided to government agencies." Id.3
Opinion 307 cited several opinions from other jurisdictions that have also permitted fee-sharing between lawyers and non-lawyer non-profits. For example, it referred to a Michigan decision that held that "a not-for-profit lawyer referral service registered with the state bar may charge as a referral fee a percent of the fee collected by the referred." Mich. State Bar Comm. on Prof. and Judicial Ethics, Op. RI-75 (1991) In rendering its opinion, the Michigan committee pointed to the same policy reasons for its decision, noting that so long as the referral service takes measures to protect against undue influence on the lawyers, "the professional judgment of the lawyer is not interfered with and the rule against fee-splitting with nonlawyers is not violated." Id.
Opinion 307 also referred to Pennsylvania, Arkansas and Virginia opinions which concluded that lawyer referral services operated by local bar associations may accept a percentage of fees earned by lawyers from referred clients. See Pa. Bar Assoc. Ethics Op. 93-162 (1993); Ark. Bar Assoc. Op. 95-01 (1995); and Va. Legal Ethics Comm. Op. 1744 (2001). These opinions noted that a number of jurisdictions help fund their legal referral services through the return of fees from referred lawyers. The Arkansas Bar Association further stated that "the increase in revenue produced for the Bar Association will help maintain this public service." Ark. Op. 95-01 The Virginia opinion also provides support for the idea that fee-sharing is permissible when the arrangement would not interfere with a lawyer’s professional judgment and furthers the public policy of providing legal services to those in need of them. It concluded that a private practitioner who received pro bono work from a non-profit association could return court-awarded attorney’s fees to the association. Va. Legal Ethics Comm. Op. 1744 (2001) In reaching this conclusion, the committee pointed out that "a legal ethics rule prohibiting lawyers from sharing court awarded fees with public interest groups would jeopardize this important source of funding." Id.4
The American Bar Association has indicated on at least three occasions that similar fee sharing arrangements did not violate its earlier Code of Professional Responsibility. In Formal Opinion 291, the ABA determined that "a bar association may require members of a lawyer referral panel to help finance the service either by a flat charge or a percentage of fees collected." ABA Formal Op. No. 291 (1956) In addition, the ABA concluded that it was "ethically proper" for a lawyer referral service to require attorneys to return all or part of consultation fees, as well as a percentage of fees earned, to the service. ABA Informal Op. 1076 (1966) Finally, Formal Opinion 93-374 noted that a lawyer may perform pro bono litigation services and then share a portion of any court awarded fees with the non-profit organization that referred the lawyer to the client. ABA Formal Op. 93-374 (1993)
The Restatement of the Law Governing Lawyers reflects the same view that concerns about fee-sharing are not present when fees are shared with a referring non-profit organization. The Restatement contains a provision similar to Rule 5.4(a) of the D.C. Rules. See Restatement (Third) of The Law Governing Lawyers § 10(3) (1998) ("a lawyer or law firm may not share legal fees with a person not admitted to practice as a lawyer," except in certain irrelevant circumstances). Comments to Section 10 indicate that the fee-sharing prohibition should only be interpreted strictly where policy concerns warrant a narrow interpretation. Comment b notes, for example, that "this section should be construed so as to prevent non-lawyer control over lawyers’ services, not to implement other goals such as preventing new and useful ways of providing legal services or making sure that non-lawyers do not profit indirectly from legal services in circumstances and under arrangements presenting no significant risk of harm to clients or third persons." Id. § 10 cmt. b. In addition, the comments note that although fee-sharing gives power to the non-lawyer referrer, "that incentive is not present when the referral comes from a nonprofit referral service." Id. at cmt. d.5
Case law provides further support for the view that sharing fees between a lawyer and a referral service is acceptable under the various rules of professional conduct. In Emmons v. State Bar of California, 6 Cal. App. 3d 565 (1970), for example, a California court denied the plaintiff’s request for a declaratory judgment that would allow the plaintiff to avoid paying a one-third referral fee to the bar association’s lawyer referral service.6 See Id. Similar to the opinions issued by the various states’ ethics committees, the court in Emmons relied on policy reasons for permitting this fee-splitting. The court noted that "there are wide differences - in motivation, technique, and social impact - between the lawyer reference service of the bar association and the discreditable fee-splitting" prohibited by the rules. Id. at 573. Fee-splitting that should not be allowed "carries with it the danger of competitive solicitation; poses the possibility of control by the lay person, interested in his own profit rather than the client’s fate; facilitates the lay intermediary’s tendency to select the most generous, not the most competent, attorney." Id. at 573-74. On the other hand, fee-splitting with the bar association’s lawyer reference service was permissible because "the bar association seeks not individual profit but the fulfillment of public and professional objectives. It has a legitimate, nonprofit interest in making legal services more readily available to the public." Id. at 574.7
While these opinions, court decisions, and standards suggest strong support for the proposed arrangement, there is one aspect, namely the fact that the attorney will be representing the day laborers on a contingent fee basis, that requires further analysis. In an opinion rendered in 1998, this Committee determined that Rule 5.4 precluded a lawyer from making payments to a referral service if the payments are "contingent upon, and tied to, the lawyer’s receipt of revenue from the referred legal business and is tied to the amount of those fees." D.C. Legal Ethics Comm., Op. 286 (1998) According to this Opinion, the only departure from the ban on fee-sharing that Rule 7.1 permits is the authorization of payments to referring organizations when the payments are non-contingent and "paid regardless of the success or outcome" because that does not represent a division of legal fees. Id.8 A later opinion from this Committee relating to soliciting plaintiffs for class action lawsuits or obtaining legal work through Internet-based web pages expressed approval of this interpretation of the rules. See D.C. Legal Ethics, Op. 302 (2000) (agreeing with the view that "any fee a law firm pays to a service provider [on the internet] 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 two opinions could be interpreted to preclude any fee-sharing arrangement where the fees are contingent upon a lawyer’s receipt of revenue from a referred client. But the opinions are narrower than that and do not address whether a non-profit that refers its clients to lawyers may recoup its out-of-pocket costs in situations where the lawyer collects sufficient funds to pay them from the various contingent fees he or she receives.9 This fee arrangement is different from the one precluded in Opinion 286 and referred to in Opinion 302 because it is not tied to the amount of fees collected by the lawyer in his or her representation of a particular client. In addition, both of these opinions pre-dated Opinion 307 which supports a fee-splitting arrangement which is far more analogous to our situation than those referred to in Opinions 286 or 302.
This Opinion, however, is limited to the specific facts of this Inquiry and should not be interpreted as a deviation from previously-expressed concerns about contingent fee-sharing arrangements which are explicitly linked to the amounts of fees collected by an attorney in the representation of a specific client or specific clients.
It is the opinion of the Committee 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. Opinion 307 makes it clear that:
’[T]he drafters of the D.C. Rules were not particularly concerned about the manner in which non-profit lawyer referral services structured their fee arrangements; their principal focus was on preventing non-lawyer intermediaries from using their power over lawyers who rely upon them for business referrals to influence those lawyers’ professional independence of judgment.’
D.C. Rule 5.4, Comment .
Because the particular structure of the relationship between the non-profit and the lawyer here is comparable to that which normally exists with a lawyer and a non-profit referral service, the Committee concludes that the Committee’s rationale for its Opinion 307 applies equally to this type of arrangement because it: 1) does not interfere with the lawyer’s independent judgment;10 and 2) will benefit the public by facilitating the provision of legal services to those who are in need of them.11 As pointed out in the Committee’s Opinion 225, which concluded that a prepaid legal services plan complied with the Rules of Professional Conduct:
"Nothing in the Rules of Professional Responsibility 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’
As part of the arrangement, however, the inquiring non-profit and the attorney providing the services, must comply with the notice provisions set forth in Rule 7.1(b)(5).
1. For the purposes of this Opinion, the Committee is assuming that the non-profit is not otherwise profiting from its relationship with the attorney. Under § 32-1530 of the D.C. Code, it is unlawful for a person to make it a "business" to solicit employment for a lawyer in respect of any claims or award for workmen’s compensation. The arrangement as described to the Committee would not be proscribed by this Code provision.
2. D.C. Legal Ethics Comm., Opinion 233 also addresses the policies behind the ban on fee-sharing: "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 judgement." In the opinion, payments of "success" fees to non-lawyer consultants were acceptable even though the payments were passed through a law firm because the payment procedure was "a formality of no consequence." D.C. Legal Ethics Op. 233 (1993).
3. See also D.C. Legal Ethics Comm., Op. 253 (1994) (holding that a referral arrangement between an insurance company and a law firm that involved payments made for each referred case "would not run afoul" of rules 5.4 and 7.1 even though the referral fee "would be paid by the firm from its percentage contingency fee," but that the arrangement could fail if there are potential conflict of interest problems under rules 1.7 and 1.3).
4. See also Va. Legal Ethics Comm. Op. 1751 (2001) (noting that many jurisdictions accept arrangements permitting a referral service to receive a percentage fee from referred attorneys, and stating that this widespread acceptance "indicates a strong support by the various bars for increasing public access to legal services").
5. Other provisions of the Restatement that address fees similarly indicate concern with arrangements that might compromise a lawyer’s independence. See e.g. id. § 47 cmt. b ("the traditional prohibition of fee-splitting among lawyers is justified primarily as preventing one lawyer from recommending another to a client on the basis of the referral fee that the recommended lawyer will pay, rather than the lawyer’s qualifications"); id. § 134 cmt. c (noting that a lawyer’s loyalty to a client must not be compromised by a third party source of payment).
6. This case has been widely cited by ethics committee opinions. See e.g. D.C. Legal Ethics Comm., Op. 307; Va. Op. 1751; Ark. Op. 95-01; Pa. Op. 93-162; Mich. Op. RI-75.
7.Kean v. Stone, 966 F.2d 119 (3rd Cir. 1992), also supports the idea that fee-splitting between a lawyer referral service and a lawyer may be permissible. Kean holds that a union may "benefit indirectly from the proceeds of law practice" where litigation fees are "paid into a separate account used solely by lawyers for litigation purposes." 966 F.2d at 123.
8. This opinion relied in part on an opinion issued by the Florida Bar Professional Ethics Committee, which held that "a nonlawyer hired to engage in permissible marketing activities on behalf of a lawyer may be paid a straight salary," but that "if commissions would be tied to legal fees derived from business brought to the firm by the nonlawyer’s efforts, payment of those commissions would constitute a violation of [the Florida rule that] forbids a lawyer to divide a legal fee with a nonlawyer." Fla. Bar Prof. Ethics Comm., Op. 89-4 (1989).
9. The Committee does not address the question whether the attorney must return any portion of the retainer that is not utilized to provide legal services to day laborer clients. The situations in which all or a portion of the retainer needs to be returned are governed by the Committee’s Opinion 264. It is our understanding that this is a retainer to ensure availability which is explicitly permitted in that Opinion.
10. That the non-profit in question does not appear to be affiliated with any bar association should not affect the non-profit’s ability to receive a portion of fees from referred lawyers. See Prof. Ethics Comm. of the State Bar of Tex., Op. 502 (1994) (holding that a non-profit service that was not established by a bar association may refer clients to a lawyer and then receive a portion of the fee collected by the lawyer in part because Texas public policy supports the establishment of lawyer referral services, and the fees received through this arrangement would benefit this policy).
11. It should also be noted that both ethics committees and courts have indicated that if an attorney were to raise a client’s fee to cover the cost of returning some of the funds to a referral service, the arrangement would be ethically unacceptable. See, e.g., Cal. State Bar Ethics Op. 1983-70 (1983) (holding that a lawyer referral service may require attorneys to return to the service a percentage of all fees above a minimum threshold that the attorney receives from referred clients, but that the attorney may not raise the legal fees to cover the amount paid to the service, as "such arrangements should be structured in order to avoid the risk of increased costs to the clients"); Alpers v. Hunt, 86 Cal. 78, 88 (Cal. 1890) (holding that a contract made with a non-lawyer through a third party who would receive one third of any recovered funds was invalid in part because "such a practice would tend to increase the amounts demanded for professional services. In such a case an attorney would be induced to demand a larger sum for his services, as he would have to divide such sum with a third person"). In addition, The D.C. Rules of Professional Conduct require that any fee charged to a client be reasonable. See D.C. Rules of Professional Conduct R. 1.5. See also American Bar Association Formal Op. 00-420 (2000); Blum v. Stenson, 465 U.S. 886 (1984). However, by allowing an attorney only a 10% contingency fee and by requiring the attorney to return only the $10,000 that had been advanced, the proposed arrangement avoids offending these fee-based concerns.