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                                         4 N.J.L. 1487
                                        July 17, 1995

                                        141 N.J.L.J. 1540
                                        July 17, 1995


Appointed by the Supreme Court of New Jersey


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:

    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).

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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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