Ethics Advisory Opinion 98-32AFACTS:
Lawyer was formerly employed as an associate at Law Firm. When Lawyer left Law Firm, Lawyer and Law Firm sent out a joint letter to inform clients on whose files Lawyer had worked, that he was leaving and offering clients the option of staying with Law Firm or continuing to be represented by Lawyer. Law Firm and Lawyer reached agreements between themselves that, as to any client who chose to continue to retain Lawyer, Lawyer would protect Law Firm as to any costs previously expended and would divide any fee derived from the case equally with Law Firm. Clients were not informed of this arrangement nor asked to consent.
At the later settlement of a matter, a client who had continued to retain Lawyer instead of Law Firm informs Lawyer that the client believed any prior relationship with Law Firm had ended and objects to anything being paid to Law Firm.
Can Lawyer honor the agreement with Law Firm over the objections of the client in these circumstances?
Although Rule 1.5(e) generally applies in situations in which one lawyer refers a case to another lawyer, nothing in the rule precludes its application in this situation as well. Thus, a lawyer should inform a client of any agreement to split fees other than in proportion to the work performed. Having failed to do so here, Lawyer is best advised to retain the disputed funds in the lawyer's trust account until any dispute between the client and the Law Firm is resolved.
The agreement between Law Firm and Lawyer provided for Lawyer to protect expenses incurred by Law Firm in its representation of the client and to share in the legal fee paid by the client. As to the expenses already advanced by Law Firm, Lawyer has promised to Law Firm that its claims will be paid out of any settlement, but Law Firm has not obtained any legal assignment of the proceeds from the client to Law Firm. Thus, Lawyer now is in the difficult position of holding client funds against the wishes of the client solely to carry out a promise made by Lawyer. Clearly, the better practice would have been for Lawyer to protect expenses only if the client signed a partial assignment of the settlement proceeds to Law Firm. In this situation, however, because Lawyer, who is an agent of the client, agreed to protect the amount of Law Firm's expenses, Lawyer should hold the amount of the disputed expenses in trust until the dispute is resolved.
As to the splitting of legal fees between lawyer and Law Firm, Rule 1.5(e) must also be considered. It is assumed for purposes of this Opinion that client will pay the same fee, regardless of whether Law Firm receives a portion of the fee. It also is assumed that Law Firm did not perform legal services for the client in proportion to the fee it would receive if the agreement is enforced. The issue is solely whether Lawyer can ethically share the earned fee with Law Firm in a manner disproportionate to the services performed without having advised the client of the agreement.
Rule 1.5(e) provides that lawyers not in the same firm may split a fee in a manner disproportionate to the services performed only if (1) each lawyer assumes joint responsibility by written agreement with the client; (2) the client is advised of the participation of all of the lawyers involved; (3) the client does not object to the arrangement; and (4) the total fee is reasonable. The rule is normally applied in circumstances in which the client retains a lawyer, who in turn associates other counsel to represent the client. In that context, the rule makes sense in its application. One lawyer may refer a matter to another lawyer and still receive a part of the fee, even though the first lawyer does no substantive work on the matter. The fee received by the first lawyer cannot be a pure referral fee, however, because under Rule 1.5(e), the referring lawyer must maintain joint responsibility for the matter.
In this context, however, Rule 1.5(e) is a less perfect fit. No referral fee is involved and arguably there is no reason to require joint responsibility on the part of Law Firm, which the client has fired. Nor is there a risk of Lawyer involving lawyers unknown to client. Client was aware of Law Firm's involvement and is aware of Lawyer's involvement. Client is left unaware only of the financial arrangement between Lawyer and Law Firm. Even under Rule 1.5(e), however, Lawyer is required to inform the client only that another lawyer will share in the fee and is not required to disclose the amount of each lawyer's share. See Comment SCRPC 1.5. Thus, Lawyer's failure to comply with the specific requirements of Rule 1.5(e) has caused little or no actual harm to the client in these circumstances.
Nevertheless, even though Rule 1.5(e) fits poorly in application to the current circumstance, it does purport on its face to apply whenever two lawyers not in the same firm split a fee. That is the case here. Therefore, in the absence of any specific exception for these circumstances, when a lawyer leaves a law firm and desires to enter into an agreement with the firm of the type at issue in this inquiry, it would be a safer course for the lawyer to inform the client of the fee-splitting arrangement, preferably in writing, at the earliest possible point in the representation. Because no such notice was given in this case, Lawyer is best advised to hold Law Firm's claimed share of the fee in Lawyer's trust account until the dispute is resolved.
The amount paid by the client will be the same, regardless of whether the splitting agreement is enforced. Therefore, retention of the funds in the trust account will protect the claims of Law Firm without prejudice to the client's interests. On the other hand, distribution of the funds to Law Firm could possibly be construed as a violation of Rule 1.5 and distribution to Lawyer's personal account could expose Lawyer to possible claims by Law Firm.