Washington Lawyer

Legal Ethics: Whether a Nonlawyer Employed by a Law Firm May Be Partly Compensated by a Percentage of the Profits of the Cases on Which He Works

From Washington Lawyer, April 2004

Opinion 322
Whether a Nonlawyer Employed by a Law Firm May Be Partly Compensated by a Percentage of the Profits of the Cases on Which He Works

(Opinion 322, which was discussed in the April 2004 “Speaking of Ethics” column, allows for attorneys to form joint partnerships with nonlawyers to share in fees stemming from litigating cases, while it disallows compensation for nonlawyer employees “based on a percentage of the profits earned” from individual or sets of cases. Rule 5.4 (Professional Independence of a Lawyer) and diverse jurisprudence are heavily examined in Opinion 322.)

. . . .

The inquirer(,) … a small law firm(,)…has hired an employee—a nonlawyer (-- )… who has worked as a consultant in the relevant industry, to assist it in this series of cases. … The firm wishes to alter the compensation system for this employee. It proposes to continue paying him a modest salary, but for future cases, plans to compensate him from the revenue received from the series of class actions. …

. . . .

The inquiry is whether this compensation system satisfies the requirement of Rule 5.4(a)(3), which is one of the exceptions to the prohibition on a lawyer or law firm sharing legal fees with a nonlawyer.

A lawyer or law firm may include nonlawyer employees in a compensation . . . plan, even though the plan is based in whole or in part on a profit-sharing arrangement.

If this proposed compensation system does not fall within this exception, the inquirer asks whether, pursuant to Rule 5.4(b), the firm and the employee could enter into a joint venture arrangement. The employee would be a principal of and have a financial interest in the joint venture, which would represent the plaintiffs in this series of class actions. …

Comment [1] to Rule 5.4 provides, without further elaboration, that the rule is “to protect the lawyer’s professional independence of judgment.” Presumably, the notion is that a nonlawyer with a stake in the outcome might influence the handling of the case, for instance by pressuring the lawyer either to settle faster or to hold out for more, based on the nonlawyer’s financial interest. Comment [10] says, however, that when a nonlawyer becomes a partner or principal in a law firm, as permitted by Rule 5.4(b), he or she may share in the fees.

Some of this Committee’s opinions, issued after Rule 5.4 was adopted, have taken a liberal approach to what might be called fee-sharing. …

The opinions of other jurisdictions weigh against the inquirer’s proposal. …

If we accept Opinion 286’s distinction between bonuses contingent on the fees from a specific case or series of related cases, as opposed to bonuses contingent on overall profitability, we must conclude that the inquirer’s proposal would violate Rule 5.4(a). …
If the underlying policy is to diminish the incentive for the nonlawyer to interfere with the lawyer’s practice, tying the compensation to a small, identifiable set of related cases is no different than tying the compensation to a single case.

If Rule 5.4(a) prohibits the proposed compensation system, the inquirer asks whether the firm can enter into a similar compensation arrangement with the consultant if, rather than hire the consultant as an employee, the firm and the nonlawyer were to form a joint venture organization pursuant to Rule 5.4(b).

Rule 5.4(b) provides

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;6

(4) The foregoing conditions are set forth in writing.

From the description the inquirer has provided, we assume that the employee “performs professional services which [would] assist the organization in providing legal services to clients.” Rule 5.4(a)(4) provides, “Sharing of fees is permitted in a partnership or other form of organization which meets the requirements of paragraph (b).”

The District of Columbia Court of Appeals, which governs the D.C. Bar, has determined that lawyers and nonlawyers should be permitted to form a partnership or some other form of business venture. … See D.C. Rule 5.4, comments [3], [4], and [7]. Our Court of Appeals has decided that so long as the principals of these business units adhere to the Rules of Professional Conduct, such ventures are permissible.

We conclude, therefore, that forming such an organization is permissible under Rule 5.4(b). In reaching this conclusion, we recognize that it would clearly be permissible under Rule 5.4(b) for the law firm to admit the consultant as a partner. …(C)ompensation could be based on the success of the cases on which the partner/consultant works. … We take comfort from Rule 5.4(b)’s requirement that nonlawyer partners adhere to the Rules of Professional Conduct and that their lawyer partners are responsible for seeing that they do. Because the cases on which the consultant/partner would work are class actions … the joint venture would have to adhere to the various special rules that govern class actions and protect class members.

We point out, however, that the organization must adhere to the restrictions set out in Rule 5.4(b) as well as other restrictions set out in the Rules and elsewhere. For example, Rule 7.5(d) would require clients to be informed with clarity whether they were being represented by the law firm or by the joint venture organization, which would have to have … different names. … Efforts would have to be made to protect the client secrets of the law firm from the members of the joint venture organization who were not firm members. Many of the considerations set forth in our Opinion No. 303, which concern the sharing of office space by unaffiliated lawyers, would apply. …

… Were this joint venture organization to litigate any of these class actions in jurisdictions other than the District of Columbia, it might well face a claim that under the rules of the forum jurisdiction, it had entered into an unethical fee arrangement. See Rule 8.5(b) (choice of law rule applies disciplinary rules of foreign jurisdiction to conduct in connection with judicial proceedings in that jurisdiction.)…

Nevertheless, our Rules permit such organizations, and we see little distinction between forming such a joint venture organization with a consultant as a principal and the formation of a small public utilities law practice with an economist as principal. In each case the nonlawyer shares the fees, has a say in the organizational governance, and may be involved in every case. Rule 5.4 expressly allows the latter structure, and Comment 7 expressly endorses an economist’s joining a public utility practice. If our Rules allow one, they should allow both. So while the compensation plan would violate Rule 5.4(a) if implemented by a law firm, it is permitted by Rule 5.4(b) if the firm and the nonlawyer employee form a joint venture organization, provided that they adhere to the restrictions that the Rules impose on such an organization.

Adopted: February 16, 2004