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Ethics Opinion 300

Acceptance of Ownership Interest in Lieu of Legal Fees

It is not unethical for a lawyer to receive an ownership interest in a corporate client as compensation for legal services, so long as the fee arrangement is a reasonable one, is objectively fair to the client, and has been agreed to by the client after being informed of its implications and given an opportunity to seek independent counsel on the fee arrangement. A lawyer's current or expected ownership interest in a client may create a conflict of interest that may prevent the lawyer from undertaking the representation unless informed client consent is received.

Applicable Rules

  • Rule 1.5(a) (Fees)
  • Rule 1.7(b), (c) (Conflict of Interest: General Rule)
  • Rule 1.8(a) (Conflict of Interest: Prohibited Transactions)


Inquirer is a lawyer who has represented a limited liability company in a traditional fee-for-service relationship. The client has asked the inquirer to serve, on a part-time basis, as the client's general counsel. In lieu of fees for this work, the client has proposed to give inquirer an approximately 20 percent ownership interest in the limited liability company and a percentage of the company's profits, if any. If the inquirer accepted this position, he would continue his private practice representing other clients. Inquirer asks about the ethics of this fee arrangement.


1. Reasonableness of the Fee Arrangement

This inquiry is one of only a few in which this Committee has opined on the ethics of particular fee agreements between lawyers and clients. The ethical principles derive primarily from the six-word first sentence of District of Columbia Rule of Professional Conduct 1.5(a): "A lawyer's fee shall be reasonable." Rule 1.5(a) then continues with a list of factors to be considered in determining the "reasonableness" of a fee, including the time involved, the amount involved in the representation, and the lawyer's experience. Relevant to this particular inquiry is Comment 4 to Rule 1.5, which states that:

A lawyer may accept property in payment for services, such as an ownership interest in an enterprise. However, a fee paid in property instead of money may be subject to special scrutiny because it involves questions concerning both the value of the services and the lawyer's special knowledge of the value of the property.

As reflected in Comment [4], there is nothing in the "reasonableness" standard of Rule 1.5(a) that would prohibit a lawyer's receipt of an ownership interest in the lawyer's client (e.g., shares of stock in a corporation) as a fee.1 Thus, the pertinent question is not whether such a fee arrangement is ethical in principle; it clearly is. Rather, the question is whether a particular ownership-in-lieu-of-fees arrangement is "reasonable," which calls for an analysis of reasonableness factors similar to that we have described in prior opinions. See, e.g., D.C. Bar Op. 42 (Nov. 1977) (decided under Code of Professional Responsibility). Such an analysis would be the means of determining whether a specific fee arrangement was reasonable under the circumstances of the particular representation. Not to be ignored in evaluating the reasonableness of the fee is factor (8) under Rule 1.5(a) ("whether the fee is fixed or contingent"), since there is a risk that stock of a non-public start-up company received as a fee may be worthless if the client's business does not succeed.

Also relevant to the reasonableness analysis would be the disclosures and explanations made by the lawyer to the client concerning the proposed stock-for-fees arrangement. The listing of reasonableness factors in Rule 1.5(a) does not mention such conduct, but that list is not exhaustive, and we have no doubt that reasonableness would be measured, at least in part, by the extent to which the client's acceptance of the fee arrangement was informed by its understanding of its financial implications. Managers and owners of start-up companies may be unsophisticated consumers of legal services, or may not appreciate the financial implications of paying for legal services in stock instead of cash. It may be necessary under such circumstances for the lawyer to explain how the use of stock to pay for legal fees may provide significant near-term benefits to the client, but may result in a cost for legal services greatly in excess of what would have been paid under more traditional means.2 We have been given no information about the magnitude or difficulty of the legal work that will be expected of the inquirer under the proposed compensation arrangement, or about the value of the 20 percent interest in the client and the profit distributions.3 Even if we had such information, we would be judging it under the standard of "reasonableness," an amorphous concept under which, in the context of our ex parte proceedings in which we make no searching factual inquiries, we could likely condone or reject only those arrangements falling well inside or outside its indistinct boundaries. The "reasonableness" factors listed in Rule 1.5(a) should assist inquirer in applying the law to the details of his proposed fee arrangement.4

2. Stock in Lieu of Fees as Conduct Under Rule 1.8(a)

We agree with the commentators who have written on the subject (see Hazard & Hodes, Law of Lawyering (2d ed. 1998) at §1.8:202 et seq.; C. Wolfram, Modern Legal Ethics (1986), §8.11.2) that a stock-as-fees arrangement is subject to Rule of Professional Conduct 1.8(a), which governs certain transactions with or related to clients. The Rule provides as follows:

(a) A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless:

(1) The transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in a manner which can be reasonably understood by the client;

(2) The client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and

(3) The client consents in writing thereto.

In many respects, Rule 1.8(a) codifies the well-established common law principle that a lawyer occupies a fiduciary position vis-à-vis his client, which means that all transactions between lawyer and client are suspect and must be fair to the client. See Connelly v. Swick & Shapiro, 749 A. 2d 1264 (D.C. 2000); Curtis v. Fabianich, 200 A. 2d 382 (D.C. 1964).

There is some overlap of the ethical requirements of Rules 1.8(a) and 1.5(a). Adequate disclosure of the terms and implications of the fee arrangement, and the reasonableness of the arrangement, are common. But Rule 1.8(a) adds to the lawyer's ethical obligations to his client the requirements that the fee arrangement be "fair" to the client, that the fee arrangement and the disclosure be in writing, that the client be given an opportunity to seek the advice of independent counsel concerning the proposed fee arrangement, and that the client's consent to it be in writing.5

3. Conflict of Interest

A conflict of interest question is also presented when a lawyer receives an ownership interest in a client or the client's business venture as compensation, in full or in part, for legal services to be provided to the client. The relevant ethics principle is found in Rule 1.7(b)(4), which prohibits a lawyer from

represent[ing] a client with respect to a matter if . . . the lawyer's professional judgment on behalf of the client will be or reasonably may be adversely affected by the lawyer's . . . own financial, business, property, or personal interests.6

Depending on a number of factors, including the extent and value of the ownership interest acquired by the lawyer, its relationship to the total fees to be earned from the engagement, its relationship to the lawyer's total income and total assets, and the type of legal services being provided, an ownership-in-lieu-of-fees arrangement might affect a lawyer's exercise of professional judgment on behalf of the lawyer's client. For example, in a situation in which a lawyer is offering advice concerning the legality of a proposed transaction which, if consummated, will have a significant positive effect on the client's business and the value of its shares, under some circumstances the lawyer's judgment in the matter could (wittingly or unwittingly) be influenced by his ownership of the shares.

Opinions from this and other jurisdictions have long identified the conflict of interest implications of the relationship between a lawyer's personal financial interests and the interests of the lawyer's clients. For example, our Opinion 144 commented on the ethical conflict created when a lawyer was assigned a Criminal Justice Act representation before a judge who had a practice of inadequately compensating appointed counsel. We wrote as follows concerning the application of DR 5-101(A) (the predecessor to Rule 1.7(b)(4)):

This provision clearly prevents an attorney from accepting employment, without the client's consent, where the attorney's financial interests will impair, or "reasonably" may impair, his professional judgment. Thus, before he accepts a CJA case, inquirer must determine whether the assignment of Judge X, a circumstance that "reasonably" might occur, would affect his judgment. (Emphasis in original.)

While we can readily identify the theoretical potential conflict of interest in an ownership-in lieu-of-fees arrangement, determining when it exists and rises to the level of an ethical bar to a representation is difficult. The ethical prohibition is invoked only when the lawyer's professional judgment "will be or reasonably may be adversely affected" by the lawyer's personal financial interests. Unlike the bright lines created in Rules 1.7(a) and 1.7(b)(1) (prohibiting adversities with a lawyer's own client), the prohibition of Rule 1.7(b)(4) (like the simultaneous representation prohibitions of Rules 1.7(b)(2) and (b)(3)), is one which is highly dependent on the circumstances of the representation and the lawyer's own circumstances. In this Opinion, we can do no more than identify the conflict of interest considerations, and leave it to the inquirer to determine whether the particular circumstances of his representation of his client are such that his judgment "will be or reasonably may be adversely affected" by the fee arrangement. The test to be applied is an objective one, that is, whether a lawyer's judgment "will be or reasonably may be adversely affected" by certain circumstances is determined by the position of a reasonable lawyer under the circumstances. See note 6. The conflict is waivable by the client, based on full disclosure by the lawyer. Id.7

Inquiry No. 00-2-2
Approved: July 25, 2000


1. The Committee has once before addressed the ethics of stock-in-lieu-of-fees. In D.C. Bar Op. 179 (Mar. 1987), decided under the former Code of Professional Responsibility, we were asked to opine on an arrangement wherein a lawyer was to be compensated with stock of a client for representing it in a Federal Communications Commission license proceeding. The client’s only potential asset was the hoped-for license, such that the stock received by the lawyer would have value only if the license were granted to the client.
  The Committee examined this arrangement under DR 5-103(A), which prohibited a lawyer from acquiring “a proprietary interest in the cause of action or subject matter of litigation he is conducting for a client,” except for a reasonable contingent fee in a civil case. The Committee concluded that, while receiving stock under the circumstances of the inquiry was the acquisition of an interest in the subject matter of the litigation, it was tantamount to a contingent fee and so was excepted from the general prohibition of the rule. The Committee’s opinion noted that compensating lawyers with the stock of cash-poor start-up companies was a way of providing access to legal services for clients that might otherwise be unable to afford a lawyer.
2. D.C. Bar Op. 115 (1982) adverted to this concern in connection with a proposed fee arrangement in which a lawyer would receive a portion of revenue to be earned by athletes, artists and performers just beginning in their professions in return for current legal services to them. It urged explanation of the fee arrangement because “a person just embarking on his or her career, because of youthfulness or other factors, may be quite naïve about contingent fee matters.”
3. Where the stock received by the lawyer is not publicly traded, its value at the time it is transferred to the lawyer may be difficult to determine—a factor that may further complicate the Rule 1.5(a) analysis.
4. We are not aware that our Committee has ever opined whether a specific fee arrangement was reasonable or, under Code of Professional Responsibility DR 2-106, “clearly excessive.”
5. Rule 1.8(a) and the commentary thereto are silent on how fairness is to be determined, and whether it is to be determined only by reference to facts and circumstances existing at the time the arrangement is accepted by the parties, or by reference to subsequent developments (for example, a huge appreciation in the value of the shares received as fees such that the lawyer is effectively compensated at 100-fold the reasonable value of his services). For ethics purposes (and not for purposes of assessing common law fiduciary duties), we believe that the “fairness” of the fee arrangement should be judged at the time of the engagement. In other words, if the fee arrangement is “fair and reasonable to the client” at the time of the engagement, no ethical violation could occur if subsequent events, beyond the control of the lawyer, caused the fee to appear unfair or unreasonable. See Restatement of the Law Governing Lawyers (Preliminary Final Draft No. 1, 1996) §207, comment e (“Fairness is determined based on facts that reasonably could be known at the time of the transaction, not as the facts later develop.”).
6. This prohibition is waivable by the affected client following disclosure by the lawyer of the circumstances of the conflict. See Rule 1.7(c). As reflected in Comment [7] to Rule 1.7 and as we have previously noted (see, e.g., D.C. Bar Op. 257 (Sept. 20, 1995)), if an objective observer would find any reason to question the lawyer’s ability to provide competent and zealous representation, uninfluenced by the lawyer’s financial, business or property interests, the lawyer should seek and obtain the client’s informed consent to the representation.
7. The conclusions reached in this Opinion are similar to those reached in other jurisdictions and by the ABA on the subjects addressed. See, e.g., Assoc. of the Bar of the City of New York Formal Op. 2000-3 (2000), Utah Ethics Op. 98-13 (1998) and ABA Formal Op. 00-418 (2000).