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4 N.J.L. 1487
July 17, 1995
141 N.J.L.J. 1540
July 17, 1995
ADVISORY COMMITTEE ON PROFESSIONAL ETHICS
Appointed by the Supreme Court of New Jersey
OPINION 681
Affiliation with Foreign Law Firm Based
in Part upon Referral of Clients with Pooling
and Distribution of the Firms' Respective Profits
The opinion of this Committee has been sought relative to
ethical questions arising out of an affiliation between a New
Jersey law firm and a foreign law firm. The inquirer's description
of the circumstances is as follows:
Law firm A, which has offices located in various states,
including New Jersey, and law firm B, which is located in
London, England, would be closely affiliated with one
another, but would not merge into a single law firm. The
purpose of the proposed affiliation would be to provide
enhanced legal services by making easily available to
clients the combined expertise of lawyers in both firms.
No referral fees would be paid by either firm if
attorneys from only one of the firms performed work for
a particular client, even if that work was referred by
one firm to the other. If attorneys from both law firm
A and law firm B worked on a matter for the same client,
then the fee charged to the client would be divided in
accordance with RPC 1.5(e) - that is, the division would
be in proportion to the services provided by each firm,
consent to the participation of all the lawyers involved
would be obtained from the client, and the total fee
would be reasonable.
At the end of the fiscal year, a portion of each firm's
profits would be pooled, and then distributed between the
two firms in accordance with a specified formula,
unrelated to the amount of any business referred from one
firm to the other. (As a practical matter, this probably
would be accomplished by a single year-end payment from
law firm A to law firm B, or vice versa.)
The Committee was provided with a copy of a draft of an
agreement between the two firms (the "agreement"). While it
expressly disclaims the formation of a partnership or joint venture
between the firms, the agreement in fact details an affiliation
with many of the elements of a partnership agreement. Two of the
partners of firm A will also be partners of firm B.
The agreement's stated purpose is as follows:
[A] and [B] desire, on the terms set forth in this
Agreement, to engage in certain collaborative projects
with the objectives of: (1) assisting each other to
enhance their existing client relationships and to
develop new client relationships; (2) expanding the
firms' respective international practices; and (3)
developing an international network of lawyers.
Although the agreement submitted by the inquirer is extensive,
the clear thrust is to establish a system of referring clients to
each other, and a method of compensating each firm for its efforts
in providing new clients and new work to the other firm.
Article V, Incentive Arrangement, section 5.1 of the agreement
provides:
The firms believe that each firm will benefit from the
growth of the other firm. To provide a system to
compensate each firm for its assistance to the other firm
in its efforts to develop new work from existing clients
and new work from new clients, while exposing neither
firm to the risk of excessive burden, the firms have
developed the arrangement set forth in this Article V.
Article V proceeds to call for the law firms to "pool" a
portion of each law firm's overall net profits to be distributed in
accordance with a specified formula unrelated to the amount of
business referred by one firm to the other.
The heart of the substantive undertaking under the agreement
is the referral obligation, described in Article III, section 3.2,
which provides:
Referrals
Each firm shall use its best efforts, and shall encourage
each of its lawyers to use his or her best efforts to (a)
promote the other firm to its existing clients as well as
to potential clients; and (b) refer client matters to the
other firm.
Specifically, the inquirer asks whether the proposed year-end
pooling and sharing of profits as described above constitutes a fee
division such that the law firms must comply with RPC 1.5(e), which
essentially requires fee divisions between firms to be based upon
the proportion of services rendered or responsibility assumed
(except where referrals are made to certified trial attorneys under
R. 1:39-6(d)), all with the consent of the client. In addition to
this inquiry, the Committee has, on its own initiative, addressed
the question of whether the profit sharing provision violates RPC
7.3(d) as an impermissible payment of a referral fee.
The Nature of the Relationship
The Committee believes there is a threshold question as to the
nature of the relationship of the two law firms. As mentioned, the
agreement expressly provides that the firms "do not intend to form
a partnership or enter into a joint venture with each other."
The agreement is framed as involving two separate and distinct
law firms, law firm A and law firm B. However, it provides for
dual partners (certain individuals who will be partners in both
firms), sharing of certain expenses, joint client development
activities, clearances for conflicts of interests, and sharing of
financial reports and billing data between the two firms, as well
as the profit sharing arrangement which is the specific focus of
this inquiry - all of which strongly suggest a merger or a joint
venture. Nonetheless, no new entity or fully merged firm is
created by virtue of the agreement.
The Committee notes in passing that whatever the purpose of
the disclaimer concerning partnership or joint venture, and however
efficacious it may be as between the parties, there is little doubt
that the self-characterization would not be binding upon third
parties for, say, taxation or professional liability purposes. We
do agree, however, that this is not a traditional law partnership,
and for the purposes of this inquiry, we concur that the two firms
have not formed a new partnership. In fact, the relationship does
not easily fit into any of the historical categories of lawyer
relationships that we are used to seeing. We must therefore decide
the ethical issues presented by treating this as an agreement
between two separate entities. Of course, the issues raised here
would be non-existent if the affiliation were, in fact, a merger or
joint venture.
The Committee is certainly aware of the growing trend of law
firms in this country to become "multi-national," not only by
establishing branch offices in other countries, but also by
affiliating themselves with foreign law firms under terms and
conditions which may range from the informal to written contracts.
The Lex Mundi Directory of Law Firm Affiliations in Martindale-
Hubbell's 1994 International Law Directory lists thousands of law
firms throughout the world that are affiliated in one form or
another. The most recent Lex Mundi directory lists in excess of
3,000 law firms involving more than 300,000 lawyers throughout the
world in such relationships. These firm affiliations include some
of the major law firms in the United States.
It has not been suggested that there is anything inherently
unethical about such affiliations, although this Committee has been
careful not to give blanket approval to multiple law firms or
associations. See e.g., Opinion 637, 125 N.J.L.J. 522 (1990)
(division of fees in partnership between New Jersey attorney and
out-of-state attorneys with New Jersey office.) However, in a
shrinking world, creativity in structuring international law firm
relationships so as to advance clients' interests at home and
abroad should not be met with suspicion or undue obstacles,
provided of course that participating New Jersey lawyers meet their
ethical obligations.See footnote 1
1
In this light, we now address the two broad
ethical issues raised by this inquiry.
Division of Fees - RPC 1.5(e)
RPC 1.5(e) provides:
(e) Except as otherwise provided by the Court
Rules, a division of fee between lawyers who are not in
the same firm may be made only if:
(1) the division is in proportion to the services
performed by each lawyer, or, by written agreement with
the client, each lawyer assumes joint responsibility for
the representation; and
(2) the client consents to the participation of all
the lawyers involved; and
(3) the total fee is reasonable.
The inquirer asked whether the proposed year-end pooling and
sharing of profits as described in the agreement constitutes a fee
division.
Clearly, the contemplated year-end pooling and profit sharing
formula, having net profits as its gauge, does not purport to
comply with the fee sharing requirements of RPC 1.5(e). The
inquirer submits that the proposed profit sharing is
distinguishable from fee sharing. We agree.
RPC 1.5(e) addresses the division of a single "fee" from a
particular client. Ethical regulation of fee sharing is grounded
in a concern for protecting clients, by insuring that in arriving
at the total fee, the participating law firms do not submit parts
which in sum exceed the whole. The premise is that the client
should be charged only one overall fair and reasonable fee,
calculated upon the totality of professional services rendered and
responsibility assumed. See, La Mantia v. Durst, et al, 234 N.J.
Super 534 (App.Div. 1989). In this regard, inquirer's agreement
specifically provides for sharing fees in a manner consistent with
RPC 1.5(e) when both firms perform work on a particular case.
Profits are another matter. They depend not only on total
fees received over a period of time, but also on other income and
the expenses attendant to the business of the firm's practice,
turning on efficiency, methods of operation, and many other
factors.
With regard to the present inquiry, neither the profitability
of a law firm nor the disposition of those profits raised concerns
within the scope of RPC 1.5(e). For example, law firms may and do
share their profits with non-lawyer employees under various forms
of pension and profit sharing plans. They may also share profits
with their non partner lawyers. See, e.g., ABA Formal Opinion 88-
356 (1988), where a law firm shared profits with a temporary lawyer
employee. The opinion considered whether Model Rule 1.5(e) requires
a law firm to reveal to the client its profit sharing arrangement
with the temporary lawyer, and concluded:
[T]he firm has no obligation to reveal to the client the
compensation arrangement with the temporary lawyer. RPC
1.5(e), relating to division of a fee between lawyers
does not apply in this instance because the gross fee the
client pays the firm is not shared with the temporary
lawyer. The payments to the temporary lawyer are like
compensation paid to nonlawyer employees for services and
could also include a percentage of firm net profits
without violation of the Rules....
Similarly, in ABA Informal Opinion 1440 (1979), a lay office
administrator was permitted to share in a law firm's net profits as
part of the administrator's compensation. The opinion found that
the profit sharing did not constitute dividing legal fees with a
non lawyer "because the compensation relates to the net profits and
business performance of the firm and not to the receipts of
particular fees."
The reasoning of these opinions is consistent with the
explicit language of New Jersey's RPC 1.5(e). Our rule applies
only to a "... division of fee between lawyers ...." (Emphasis
added.) As noted above, the use of the singular "fee," rather than
the plural or other more encompassing language, limits RPC 1.5(e)
to the division of a particular fee charged to an individual
client.
This interpretation is also consistent with the official ABA
Comments to Model Rule 1.5, which state that "[a] division of fee
is a single billing to a client covering the fee of two or more
lawyers who are not in the same firm." Although the New Jersey
Supreme Court did not formally adopt the official ABA Comments to
the Model Rules, those comments do provide guidance in interpreting
the New Jersey Rules of Professional Conduct. See Pressler, Rules
Governing the Courts of the State of New Jersey, at p. 309 (1994
ed.)
Profit sharing in and of itself does not present the risk of
overreaching that can be present with fee sharing. Under the facts
submitted by the inquirer, we conclude that the proposed pooling
and sharing of profits is not proscribed by RPC 1.5(e).
Compensated Referrals - RPC 7.3(d)
RPC 7.3(d) provides:
[A] Lawyer shall not compensate or give anything of
value to a person or organization to recommend or secure
the lawyer's employment by a client, or as a reward for
having made a recommendation resulting in the lawyer's
employment by a client except that the lawyer may pay for
public communications permitted by RPC 7.1 and the usual
and reasonable fees or dues charged by a lawyer referral
service operated, sponsored or approved by a bar
association.
Quite distinct from the concerns of RPC 1.5(e), RPC 7.3(d)
bars a lawyer from compensating another for making referrals to
that lawyer, except in the case of certain lawyer referral
services. As recognized in earlier opinions of this Committee, RPC
7.3(d) is grounded in a concern for protecting the public from
various profit-oriented schemes to steer clients to certain
lawyers, especially in circumstances where a client is likely to
rely on the referral as connoting an endorsement of competence,
expertise, integrity or some other positive value. The profit
motive beyond such schemes is recognized as undermining the
likelihood of independent or disinterested judgements about such
positive qualities.
The Committee concludes that under the language of RPC 7.3(d),
the agreement does in fact involve an effort to "compensate or give
something of value" (i.e., shared profits, "best efforts" to make
reciprocating referrals) to an "organization" (i.e., the other law
firm) in return for that firm's efforts "to recommend or secure the
lawyer's employment ..., or as a reward for having made a
recommendation ...." As described above, best efforts to refer
clients are the heart of the purpose and affirmative obligations
under the agreement. Referrals constitute at least two of the
three declared purposes (the third - "developing an international
network of lawyers" - either is simply just another way of talking
about referrals, or else is not actually addressed anywhere in the
substantive provisions of the agreement.
If the Committee were to approve this arrangement, nothing
would stop a virtually infinite number of similar arrangements
between and among firms, not just internationally but within the
United States and, indeed even within New Jersey, all in the name
of providing more comprehensive services to clients. The next step
could be similar arrangements between law firms and non-lawyers
organizations or individuals, tailored to avoid the strictures of
RPC 5.4, as long as the non-lawyer entities could be portrayed as
providing important services to clients. RPC 7.3(d) would thus be
effectively eviscerated and constructively repealed. Also
implicated are the related provisions of RPC 7.2(c) and 7.3(e).
Upon receiving an advance copy of this Opinion, the inquirer
asked that we reconsider our conclusions in light of the firms'
representation that they view the arrangement as a trial run to
explore the possibility of a merger or permanent partnership. We
do not believe an exception to applicable ethical rules can be made
concerning conduct which violates those rules just because the
involved firms are considering association or merger.
At bottom, a lawyer who refers a client to another lawyer, be
that second lawyer down the street or half-way around the world,
has several duties to that client. First are the core duties of
competence (RPC 1.1) and diligence (RPC 1.3) - the lawyer must
exercise appropriate care and inquiry, or disclose clearly that the
referral is being made in the absence of same. Second, the lawyer
owes a duty to make an independent judgment concerning what kind of
referral will be in the client's best interests, completely free
from any economic or other incentive that might weigh on the
lawyer's judgement. See, RPC 1.7(b), RPC 1.8(f), and RPC 5.4(c).
The latter considerations particularly appear to be invoked by the
undertaking detailed in the subject inquiry. We note that these
same considerations apply as well to referrals within a single
firm.
We do not in any way mean to impute any nefarious intent to
the firms who have entered into this agreement. This is a business
arrangement whose declared purposes are straightforward.
Nonetheless, as constituted, the agreement directly contravenes the
terms of RPC 7.3(d).
* * *
Footnote: 1 1
The ABA Standing Committee on Ethics and Professional
Responsibility has also begun to consider some of the issues
emerging from evolving law firm relationships. See ABA formal
Opinion 94-388 (1994).
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