United States: Playing Nicely With Others: Cross-Border Fee Sharing With Firms That Play By Different Rules

Last Updated: February 10 2016
Article by Nicole I. Hyland and Tyler Maulsby

As multijurisdictional practice continues to expand, lawyers in different states regularly work together on a litigation or transaction. For example, a New York lawyer handling a complex securities lawsuit may find it beneficial to bring on as co-counsel a D.C. lawyer who has a great deal of regulatory experience. Similarly, a New York lawyer advising a client about a business transaction with a company in the United Kingdom may want to partner with a London-based lawyer who can offer advice about any foreign implications of the transaction. These are not uncommon scenarios and the two lawyers will often reach an agreement about the best way to divide the legal fees. What happens, however, when the non-New York lawyer (in either scenario) works at a law firm that includes nonlawyer owners?

Under the New York Rules of Professional Conduct (NY Rules), lawyers generally may not share fees with nonlawyers. See NY Rule 5.4(a) (prohibiting lawyer from sharing fees with a nonlawyer); see also NY Rule 7.2(a) (prohibiting a lawyer from compensating any person or organization for recommending or obtaining employment by a client). NY Rule 5.4 also prohibits nonlawyers from possessing an ownership interest in a law firm. The main purpose of the Rule is to "protect the lawyer's professional independence of judgment." Id. Cmt. [1]. Every other U.S. jurisdiction, except the District of Columbia, has a similar version of this rule.

In addition to the District of Columbia, a number of other countries—including the United Kingdom and Australia—allow lawyers to share fees with nonlawyers who own interests in law firms. A question being asked with increasing frequency, therefore, is whether a New York lawyer may share fees with a law firm from another jurisdiction that, in turn, lawfully distributes its profits among lawyers and nonlawyers?

The New York State Bar Association (NYSBA), the New York City Bar Association (NYCBA), and the American Bar Association (ABA) have all issued instructive opinions and reports on this important question. Directly on point are ABA Formal Op. 464 (Aug. 19, 2013) (ABA Op. 464) and NYCBA Formal Op. 2015-8 (2015) (NYCBA Op. 2015-8). Both opinions concluded that a lawyer in a jurisdiction that prohibits nonlawyer ownership of law firms may share fees with a lawyer in a jurisdiction that permits nonlawyer ownership provided the nonlawyer owners do not interfere with the professional independence of the lawyers. ABA Op. 464 reasoned, "there is no reason to believe that the nonlawyer in the District of Columbia might actually influence the independent professional judgment of the lawyer in the Model Rules jurisdiction, who practices in a different firm, in a different jurisdiction."

NYCBA Op 2015-8 reached a similar conclusion. Specifically, the Committee concluded that a New York lawyer "may ethically divide legal fees with a lawyer who practices in a law firm where nonlawyers hold a financial interest or managerial authority, provided that the [out-of-state] law firm is based in a jurisdiction that permits such arrangements with nonlawyers." This Opinion also reasoned that such an arrangement would pose little risk of impairing the New York lawyer's independent professional judgment.

Before NYCBA Op. 2015-8, no New York ethics opinion had reached the same conclusion as ABA Op. 464. There had been, however, a great deal of discussion among several sections and committees of the NYSBA and NYCBA, all of whom ultimately voiced support for fee sharing with firms that have nonlawyer owners. To understand the basis for ABA Op. 464 and NYC Op. 2015-8, it is important to understand that discussion.

Proposed Comment [9] and ABA Op. 464

Before the ABA Standing Committee on Ethics and Professional Responsibility (ABA Ethics Committee) took up the inquiry that led to ABA Op. 464, the ABA Ethics 20/20 Commission (ABA Commission) proposed revisions to Model Rules 1.5 and 5.4 to permit some degree of fee sharing with nonlawyers. The ABA Commission considered the pros and cons associated with "inter-firm" fee sharing with nonlawyers (fee sharing between different law firms, at least one of which has a nonlawyer owner) and "intra-firm" fee sharing with nonlawyers (fee sharing within a single law firm that has nonlawyer owners). With regard to inter-firm fee sharing, the Commission proposed a new comment to Model Rule 1.5 (Comment [9]), which specifically stated that a lawyer in a jurisdiction that prohibits fee sharing with nonlawyers may share fees with a lawyer who is part of a firm operating in a different jurisdiction where it is duly authorized to share fees with nonlawyers. See ABA Comm. on Ethics 20/20: Draft for Comment, Fee Division Between Lawyers in Different Firms (Sept. 18, 2012). Though the ABA Commission ultimately abandoned both of these fee sharing proposals, it referred its proposal on inter-firm fee sharing to the ABA Ethics Committee. In response, the ABA Ethics Committee issued ABA Op. 464 the following year, essentially adopting the reasoning of proposed Comment [9].

ABA Op. 464 also cites to Phila. Op. 2010-7. This Philadelphia Bar Association opinion specifically contemplates a fee sharing agreement between a Pennsylvania lawyer and a D.C. firm who will jointly represent plaintiffs on a contingent fee basis. The Opinion reasons that when a Pennsylvania lawyer splits a fee with an out-of-state lawyer, the Pennsylvania lawyer is bound by the Pennsylvania Rules and the out-of-state lawyer is bound by the rules in his jurisdiction. Further, the fact that the D.C. firm may ultimately share profits with a nonlawyer under the D.C. Rules does not mean the Pennsylvania lawyer violates the Pennsylvania Rules because "[t]he D.C. Firm is a duly constituted law firm under the D.C. [Rules] and therefore fee sharing in accordance with Rule 1.5 is appropriate."

In 2011, the NYSBA Ethics Committee issued an opinion that appears to endorse the reasoning of Phila. Op. 2010-7. See NYSBA Formal Op. 889 (2011). There, the Committee concluded that an attorney who was admitted in both New York and D.C. (but practiced only in D.C.) could be part of a D.C. law firm that had nonlawyer owners and could share fees with a nonlawyer owner that assisted the D.C. firm in a lawsuit brought in New York. The Committee based its conclusion on the "choice of law" Rule, RPC 8.5. It reasoned that despite the fact that the lawsuit at issue was brought in New York, the "predominant effect" of the New York lawyer's conduct occurred in D.C. See N.Y. Rule 8.5(b)(2)(ii).

New York Task Force on Nonlawyer Ownership

In order to evaluate the ABA Commission's position on nonlawyer ownership, the New York State Bar Association created the Task Force on Nonlawyer Ownership (Task Force). The Task Force collected input from a number of sources on the pros and cons of nonlawyer ownership both with respect to inter-firm and intra-firm fee sharing.

Though the ABA Commission had abandoned its proposals by the time the Task Force was ready to issue its report, the Task Force believed it was still an important issue to address. The Task Force largely rejected proposed changes regarding intra-firm fee sharing, but did endorse the ABA's proposal on inter-firm fee sharing (proposed Comment [9], which ultimately became ABA Op. 464). The Task Force reasoned that inter-firm fee sharing presented "little, if any, risk" that a New York lawyer's independent professional judgment would be impaired if he or she shared fees with a lawyer or law firm duly authorized to share fees with nonlawyers. See New York State Bar Association: Report of the Task Force on Nonlawyer Ownership, 76 Alb. L. Rev. 865, 930-31 (2013) (Task Force Report). The Task Force reached a consensus that Comment [9] should be improved by adding an exception clause designed to protect clients and prohibit inter-firm fee sharing where the lawyer's independent professional judgment was "known to be at risk by virtue of a nonlawyer owner's influence." Id. Specifically, with the addition of such language, Comment [9] to New York Rule 5.4 would state that a New York lawyer:

may divide a fee with a lawyer from another firm in a jurisdiction that permits that firm to share legal fees with nonlawyers or to have nonlawyer owners, unless the lawyer who is governed by the [New York] Rules of Professional Conduct ... knows that the other firm's relationship with nonlawyers violates the rules of the jurisdiction that apply to that relationship, or knows that a nonlawyer owner is directing or controlling the professional judgment of a lawyer working on the matter for which fees are being divided. Id.

The Task Force recommended that Comment [9] be adopted, but that the matter should be referred to the NYSBA Committee on Standards of Attorney Conduct (COSAC)—the committee that is tasked with analyzing and recommending reforms to the New York Rules and other provisions that regulate lawyer conduct in New York—to determine whether the recommended change should be carried out through a comment or a change to the black letter text of the Rules.

COSAC and Inter-Firm Fee Sharing

In the meantime, COSAC also voiced support for a version of the ABA's proposed Comment [9] regarding inter-firm fee sharing. COSAC noted that the proposed Comment "properly emphasizes" that the lawyer sharing the fees must maintain his independent professional judgment and that it "will not present undue risks of nonlawyer influence on the practice of law by lawyers in such firms ... [because the risk is] significantly reduce[d] since a nonlawyer owner would have to extend his or her influence to a separate firm." Task Force Report at 923-24. COSAC is currently considering proposed changes to Rule 5.4, which would permit fee sharing with law firms that allow nonlawyer ownership, but has not yet issued a final report.

Further Support for Inter-Firm Fee Sharing

The NYCBA Committee on Professional Responsibility also wrote to the Task Force supporting the ABA Commission's proposals. Like the other proponents, the Professional Responsibility Committee based its support on the fact that there was little risk that nonlawyers would be able to improperly influence New York lawyers who share fees with other lawyers duly authorized to share fees with nonlawyers. The Committee also noted that the New York Rules already permit inter-firm fee sharing to some extent if the "predominant effect" of the New York lawyer's conduct took place in a jurisdiction that permitted fee sharing with nonlawyers. See N.Y. Rule 8.5(b)(2)(ii); Task Force Report at 922-23. Similarly, the NYSBA International Section issued a report recommending that New York lawyers be allowed, at a minimum, to "affiliate, as employees or partners, with U.S. and non U.S. law firms that comply with the ownership rules of their home jurisdiction." NYSBA Int'l Section Task Force on Non-Lawyer Ownership Interim Report (Feb. 24, 2012).

Finally, the NYSBA's Commercial and Federal Litigation Section endorsed the ABA's proposed changes concerning inter-firm fee sharing. Report of the Ethics and Professionalism Comm. of the Commercial and Fed. Litig. Section of NYSBA on the ABA Proposal for Comment on Choice of Law–Alt. Law Practice Structures (July 26, 2012). The Section concluded that the ABA's proposal "helps clients get multijurisdictional advice, ... frees attorneys from the difficult task of policing the compensation policies and ownership structure of independent firms in foreign jurisdictions, and ... does not interfere with the ability of New York lawyers to make judgments for the benefit of their clients free from the influence of non-lawyer members of the foreign firms." Id.

Practical Implications

In light of these authorities, there appears to be strong support for the proposition that a New York lawyer may share fees with a law firm duly authorized to share fees with nonlawyers. It is significant that all of the New York committees and sections that voiced support to the Task Force for inter-firm fee sharing did so before ABA Op. 464 was issued, suggesting that several influential New York bodies independently reached the same conclusion as the ABA Ethics Committee.

There are also strong policy considerations for New York to follow the reasoning of ABA Op. 464 and NYC Op. 2015-8, such as eliminating confusion about fee sharing among firms in different jurisdictions and conforming the interpretation of Rules 1.5 and 5.4 to the realities of existing law firm practices. As one commentator has argued, such an approach would "eliminate confusion, allowing attorneys to provide efficient and ethical services to their clients." Melissa Pender, Multijurisdictional Practice and Alternative Legal Practice Structures: Learning from EU Liberalization to Implement Appropriate Legal Regulatory Reforms in the United States, 37 Fordham Intl. L.J. 1575, 1635 (2014) (citing ABA Op. 464).

Naturally, there is a small risk that a court or disciplinary authority could reject the reasoning of ABA Op. 464 and NYC Op. 2015-8 and deem such a relationship to be improper fee sharing. Assuming, however, that the firm with nonlawyers is actually participating in the representation and not simply acting as a catalyst for the New York lawyer to share fees with one of their nonlawyer shareholders, such a risk would likely be minimal.

Conclusion

Only time will tell whether the New York Rules or their comments will go further than the ABA and expressly authorize inter-firm fee sharing with firms that allow nonlawyer owners. In the meantime, however, there seems to be strong support that such an arrangement is permissible. That being said, in any fee sharing arrangement, lawyers should still be mindful of Rule 5.4 and ensure that the professional independence of the lawyer is always at the forefront.

Originally published by the New York Legal Ethics Reporter, February 2016

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