Companion Rules in Rule 5.4

Rule 5.4(a) opens a longer rule, and its first sentence states the bar this chapter has been teaching: a lawyer or law firm shall not share legal fees with a nonlawyer, except as the paragraph itself allows.¹ Two of its exceptions show how the rule treats money. One lets an agreement with the lawyer's firm, partner, or associate pay a deceased lawyer's estate, or specified persons, over a reasonable period after the lawyer's death. The other lets a firm include nonlawyer employees in a compensation or retirement plan, even one built wholly or partly on profit sharing.²

Money is only one way a layperson can come to matter in a law practice. A nonlawyer who obtains a financial stake in the lawyer's professional services may solicit or refer clients, interfere in the lawyer's relationship with clients, or try to influence the lawyer's professional conduct. Activities aimed at enhancing the shared profits may also break other norms, such as the limits on solicitation and the unauthorized practice of law.³ Rules 5.4 and 5.5, the rule on unauthorized practice, work together to keep the practice of law with lawyers, on the theory that only lawyers have the qualifications to practice competently and according to the rules of professional discipline.⁴

A ban on fee sharing cannot carry that whole load, because a layperson can gain a stake or a lever without taking a percentage of any fee. A nonlawyer who becomes a partner or an owner holds a stake in the practice itself. A nonlawyer who recommends, employs, or pays a lawyer to serve someone else can press on the lawyer's judgment without owning anything. The rest of Rule 5.4 closes those two routes, and each answers a different question:

Who may own part of a law practice, or practice law in partnership or in a corporation alongside a lawyer? Paragraphs (b) and (d) answer it, and they come first below.
Who may direct a lawyer's decisions about a client's matter? Paragraph (c) answers it, along with the third condition of the entity rule in paragraph (d).

An exam stem that puts a nonlawyer near a law practice should be run past all of these provisions, because an arrangement can clear the fee-sharing bar and still fail on ownership or on control.

Partnerships and Ownership

Rule 5.4(b) closes the first route: a lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.⁵ The operative word is any. A partnership that mostly prepares tax returns is covered if even one of its activities is legal work, so a lawyer cannot escape the rule by letting the nonlegal side dominate. Nor does a promise to control the legal work help. The rule flatly forbids sharing the profits and losses of a law practice with a nonlawyer, even though the lawyer keeps control over all legal aspects of the business.⁶

Three dangers explain the strictness: a nonlawyer who is part of the business arrangement may engage in the practice of law, may learn client confidences, and may impair the lawyer's independent professional judgment.⁷ The last danger is the sharpest. A lawyer who practices where she is subordinate to a layperson, or must share managerial authority with one, may become subject to the regulation or control of a person who is not bound by the ethical standards of the profession.⁸ A share of profits and losses also ties the layperson's return to the lawyer's legal income, which gives the layperson a reason to solicit or refer clients and to press on the lawyer's conduct.⁹

The same two people could form a partnership that only prepared tax returns, and Rule 5.4(b) would not touch it, since none of its activities would be the practice of law. A nonlawyer employee is a different matter. A firm may include nonlawyer employees in a compensation or retirement plan even when the plan rests in whole or in part on profit sharing,¹⁰ and a lawyer may pay nonlawyer assistants from the office's general revenues or give them a bonus based on quality of performance or time committed to work.¹¹ An exam stem that calls a staff member a “partner” therefore needs more facts. A nonlawyer who shares the profits and losses of a law practice falls within the prohibition; a nonlawyer employee paid through a plan or a bonus does not.

Rule 5.4(d) applies the same concern to a practice organized as an entity. A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit if any of three conditions exists.¹² A rule limited to partnerships would miss a corporation, which has shareholders and directors where a partnership has partners, so the three conditions reach each way a nonlawyer can gain influence over the entity:

A nonlawyer owns any interest in the entity.¹³
A nonlawyer is a corporate director or officer, or occupies a position of similar responsibility in an association other than a corporation.¹⁴
A nonlawyer has the right to direct or control the professional judgment of a lawyer.¹⁵

The conditions track three forms of influence, which are money, office, and a right of command over legal judgment, and one is enough. The first reaches any interest, so even a minority stake is covered. The second turns on the position held, so a nonlawyer who owns nothing but serves as a director or officer is covered too.

The ownership condition has one narrow exception: a fiduciary representative of the estate of a lawyer, such as an executor, may hold the lawyer's stock or interest for a reasonable time during administration.¹⁶ Without it, an executor who is not a lawyer would count as a nonlawyer owner the moment the shares passed to the estate. The words reasonable time and during administration keep the window temporary, so the fiduciary acts as a custodian for the estate and not as a lasting owner. The death-benefit exception to Rule 5.4(a) is limited in the same way, since it lets money flow to an estate only over a reasonable period.¹⁷

Rule 5.4(d) governs only entities authorized to practice law for a profit, so the first question to ask of any entity in an exam stem is whether it operates for profit. The profit limit tracks the danger. When the ABA added an express exception for sharing court-awarded fees with a nonprofit organization, a committee majority had reasoned that barring such sharing was unnecessary because a nonprofit has no economic incentive to interfere in the lawyer's relationship with a client. The Ethics 2000 Commission concluded that the threat to independent professional judgment is less than where a for-profit organization is involved.¹⁸

Seat the same two directors on the board of a law firm organized as a for-profit professional corporation, and Rule 5.4(d)(2) is violated, because a nonlawyer would then be a corporate director of an entity practicing law for a profit. The nonlawyer's role is identical in both settings, and the entity's profit orientation is the fact that moves the answer.

Read together, the paragraphs of Rule 5.4 effectively bar what is called a multidisciplinary practice: a fee-sharing association of lawyers and nonlawyers in a firm that delivers both legal and nonlegal services.¹⁹ A lawyer cannot share legal fees with nonlawyers, form a partnership with nonlawyers involving the practice of law, form a law firm in which a nonlawyer has an interest, or allow a nonlawyer to direct the lawyer's professional judgment. Each prohibition closes a separate door to a firm that would combine, for example, lawyers and accountants.²⁰

In Jacoby & Meyers v. Presiding Justices, a law firm and an affiliate asked a federal court to declare its state's version of the rule against nonlawyer equity investment in law practices unconstitutional.²¹ The court called the issue before it far more limited: whether the plaintiffs had standing to raise the constitutional claims they advanced. It held they did not. The plaintiffs challenged Rule 5.4 alone and disclaimed any attack on other provisions that independently barred the investment, so even a win would not have let them accept nonlawyer equity, and the declaration they sought would have been advisory. The court added that the larger questions the plaintiffs raised are, at least in the first instance, issues for the legislatures and professional rule-setting bodies that govern lawyer conduct.²² The decision therefore says nothing about whether the rule is constitutional, and an answer that reports a holding on the merits misstates it.

Control of Professional Judgment

Rule 5.4(c) reaches influence that neither the fee-sharing bar nor the ownership rules touch, which is the person standing behind the engagement. It provides that a lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer's professional judgment in rendering those services.²⁴ A payer needs no share of any fee and no ownership interest to be a danger. The rule names three roles, and any one is enough.

Two features of the text decide most problems. The rule names recommending, employing, and paying as alternative roles, so it governs a referral source or an employer as well as the person who writes the check. The phrase for another places its focus on third parties, meaning someone other than the person who receives the services. The rule's object is the lawyer's professional judgment, and its verb is permit. Payment alone is therefore not the violation; the violation lies in the lawyer's willingness to let the payer direct or regulate the lawyer's decisions.

The command runs to the lawyer because the person pressing is a layperson who is not bound by the profession's ethical standards, and the lawyer is. A lawyer who answers to such a person may find that the independent exercise of professional judgment has been compromised.²⁵ A footnote in Cincinnati Insurance Co. v. Wills lists the dangers of lay intermediaries, among them that an attorney's independent professional judgment may be impaired. In discussing a “captive” law firm, the same footnotes observe that such an arrangement carries with it enhanced danger of a violation of Rule 5.4(c).²⁶

An exam stem in which an insurer pays a defense lawyer turns on one question: who made the decisions?

Both insurers write the same checks, so the payment cannot be what separates the two scenes. The line falls at the lawyer's decision to let the payer control the representation. A payer's preferences about cost or strategy become a violation only when the lawyer permits them to govern, and a lawyer who is pressed but keeps control of the judgment calls has complied with the rule.

Rule 5.4(d)(3) addresses the same danger when it is built into an entity's structure instead of arriving through a single engagement. It bars a lawyer from practicing through a for-profit professional corporation or association if a nonlawyer has the right to direct or control the professional judgment of a lawyer.²⁷ The two provisions work at different levels. Rule 5.4(c) is a rule of conduct that attaches to an individual lawyer who permits direction from any recommender, employer, or payer, and its text does not depend on the form the practice takes. Rule 5.4(d)(3) is a structural condition that asks whether a nonlawyer holds the right of direction inside an entity practicing law for a profit. A nonprofit association falls outside paragraph (d), yet its lawyers remain subject to Rule 5.4(c) because the association too may employ or pay them. Both provisions protect the same thing, which is the lawyer's independent professional judgment.