Payments That Are Not Sharing

Payments That Are Not Sharing

Rule 5.4(a) forbids a lawyer or law firm to share legal fees with a nonlawyer, yet money leaves every law practice for nonlawyers each week, and most of it leaves properly.¹ The phrase share legal fees, as Hazard and Hodes read it, bars any financial arrangement in which a nonlawyer's profit or loss is directly related to the success of the lawyer's legal business.² A payment that does not rise and fall with the lawyer's fees is therefore not a share, even though the money began as client fees. The test asks how the nonlawyer is paid, and where the money came from does not matter. Every dollar a firm pays anyone comes from client fees in the end, so a source test would condemn the rent check along with the bonus.

The line sits there because each danger behind the prohibition needs a stake to feed it. A layperson with a financial stake in a lawyer's cases may solicit or refer clients, interfere in the lawyer's relationship with clients, or press on the lawyer's professional judgment.³ A nonlawyer who splits fees may also be tempted to practice law without a license, giving clients inexpert advice before passing them along.⁴ A fixed wage, a flat vendor price, or the cost of office supplies gives the payee no such stake, because the payee collects the same amount whether or not any client's matter produces a fee. A percentage of fees or a per-case bounty gives the payee exactly the stake the rule fears. The Rules of Professional Conduct do not apply to nonlawyers, which leaves the bar poorly placed to regulate a layperson with an incentive to profit from legal practice.⁵

Three boundary cases show the line at work: pay for staff, payments to marketing vendors, and referral or finder's fees.

Ordinary Compensation

A lawyer may pay nonlawyer assistants even though the money comes from the practice of law, because paying them from the office's general revenues is no more fee sharing than buying office supplies from a merchant with those same revenues.⁶ A lawyer may also pay a nonlawyer employee a bonus based on the quality of performance or the time committed to work.⁷ Both payments are measured against the employee's own labor. The employee's income therefore does not depend on whether a given client's matter ends in a large fee, a small one, or none, and the employee holds no stake in any particular case. Only pay measured against the office's overall profits rests on the separate permission for compensation and retirement plans covered earlier in this chapter.⁸ Do not be moved by a stem that stresses that the employee's pay comes out of client fees; it always does.

Suppose instead that the bonus formula gave her 10 percent of the fee in one named client's case. The payroll record would look much the same, but the payment now sits on the other side of the line. The measure has become a single matter's fee, and a lawyer may not pay a nonlawyer a portion of the specific legal fees earned in a particular matter, because that would give the layperson a direct stake in an individual client matter.⁹

Marketing and Lead Generation

The profession once treated paid promotion of legal services with open hostility: before 1977 most states banned lawyer solicitation and advertising outright, condemning the practice as crass and commercial.¹¹ Advertising is now permitted, and the rules draw a narrower line around what a lawyer may pay others to bring in clients. Rule 7.2(b) provides generally that a lawyer shall not give anything of value to a person for recommending the lawyer's services, but its first exception removes the reasonable costs of the advertisements and communications the rules permit.¹² The exception is needed because every newspaper, broadcaster, and website that carries an advertisement is, in a formal sense, paid by the lawyer for a recommendation, and the right to advertise would mean little if the lawyer could not pay for the space. A lawyer may therefore pay for directory listings, newspaper advertisements, television, radio, and internet advertising, and sponsorships.¹³ Comment 5 to Rule 7.2 extends the same permission to people hired to provide marketing or client development services, such as publicists, public-relations personnel, business-development staff, and website designers.¹⁴

Lead generation sits closer to the line. A lawyer may pay another to generate client leads, but the generator may not recommend the lawyer to the prospects it identifies, may not create a reasonable impression that it has analyzed a prospect's legal problem in choosing which lawyer receives the referral, and may not be compensated by a share of legal fees.¹⁵ The last condition brings Rule 5.4(a) into play, and it makes the vendor's pay formula the deciding fact.

The firm in that scene is dangerous for the reason the whole prohibition exists. A vendor paid a percentage has a motive to attract prospects by whatever persuasion produces clients, and the Rules of Professional Conduct cannot discipline it.¹⁶

Both kinds of vendor might bring a lawyer the same number of clients in a year, so the volume of business plays no part in the analysis. The formula that pays the vendor does. A flat price is earned when the work is done and leaves the vendor indifferent to what any client's matter produces.

Referral and Finder's Fees

Two separate provisions forbid a payment to a person for sending clients to a lawyer. Rule 5.4(a) reaches the payment when it is measured as a share of the fee, as with a finder who takes a percentage of every fee from the clients the finder brings in.¹⁸ Rule 7.2(b) reaches it whatever its measure, because it forbids giving anything of value to a person for recommending the lawyer's services.¹⁹

Two reasons support covering the finder under both rules. A lawyer who relies on a finder for a steady stream of clients becomes financially dependent on a person who is not subject to the ethical rules, and that dependence may encourage unscrupulous behavior or disrupt the confidential relationship between lawyer and client.²⁰ A layperson who expects to be paid for each client delivered is also tempted to solicit in ways forbidden to the lawyer, and because the Rules do not bind laypersons, such violations are difficult to police.²¹

What separates this payment from the permitted advertising payment is what the payee does for the money. A newspaper that runs the lawyer's advertisement delivers the lawyer's own message to its readers and is paid its published rate for the space, so the payment buys publication. An agent who tells a friend to hire a particular lawyer vouches for that lawyer in the agent's own voice, so the payment buys the recommendation itself. The same line separates a lead generator, which passes along prospects without endorsing anyone, from a finder, who endorses.²² A stem that relabels a finder's fee as a marketing fee or a referral bonus has not changed what is being bought, a point the next section develops under the heading of disguised fee sharing.