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Ethics Opinions from the Bar Association of San Francisco

OPINION 1976-2

It is ethically improper for an attorney to pay to a referring organization a percentage of the recovery obtained by the attorney on behalf of his client, pursuant to an agreement between the referring organization and the client.

QUESTION:

May an attorney who has been employed by a client to conduct litigation raising housing discrimination issues pay to a nonprofit organization which referred the case to the attorney a percentage of the recovery pursuant to a contract between the referring organization and the clients, the attorney not being a party to that contract?

OPINION:

It is ethically improper for an attorney to pay to a referring organization a percentage of the recovery obtained by the attorney on behalf of his client, pursuant to an agreement between the referring organization and the client.

DISCUSSION:

The facts presented to the committee are that a nonprofit organization located in California has referred a housing discrimination case to a California attorney. The clients had previously contacted the organization with a complaint regarding housing discrimination, and the organization had conducted its own investigation of the matter. The attorney met the clients for the first time at the premises of the organization. At that first meeting, he was told that a contract would be entered into by and between the referring organization and the prospective clients, whereby the referring organization would advance $200 as costs and the clients would be obligated to repay the costs to the referring organization from the recovery and would make a donation to the organization of 10% of any recovery. The attorney accepted the case and entered into a contingent fee contract directly with the clients. The referring organization advanced $200.00 directly to the attorney on account of costs for the prospective litigation, and the attorney signed a contract with the referring organization agreeing to reimburse the organization if and when recovery or settlement occurred. In the event that the litigation is not successful, it is the practice of the referring organization not to attempt to collect the costs advanced from the clients.

The referring organization was not a party to the contingent fee contract, and the attorney was not a party to any contract between the referring organization and the clients. At the time the advance against costs was made by the referring organization to the attorney, the referring organization requested the attorney to collect a 10% "contribution" from the attorney's clients by withholding that sum from any settlement fund or payment of a monetary award. We are informed that the clients have consented in writing to the attorney making the payment from the funds received from the litigation.

The California Rules of Professional Conduct, effective January 1, 1975, provide:

Rule 2-101. General Prohibition Against Solicitation of Professional Employment.

A member of the State Bar shall not solicit professional employment by advertisement or otherwise. Conduct permitted by Rules 2-102 through 2-106 shall not be deemed solicitation within the meaning of this rule.

Rule 2-104 . Recommendation of Professional Employment.

(B) Except as permitted under Rule 2-104(C), a member of the State bar shall not compensate or give anything of value to a person or organization to recommend or secure his employment by a client, or as a reward for having made a recommendation resulting in his employment by a client.

(C) The participation of a member of the State Bar in a lawyer reference service established, sponsored, supervised and operated in conformity with the Minimum Standards for a Lawyer Reference Service in California, as adopted and as from time to time amended by the Board of Governors is not, of itself, a violation of these Rules of Professional Conduct provided the name of such member of the State Bar is not publicized. Nothing in this rule shall prohibit a representative of such lawyer reference service from identifying a member of the State Bar who is participating in that service, and stating the address and telephone number of such member, in connection with the making of a requested reference in conformity with the said Minimum Standards.

(G) A member of the State Bar shall not accept employment when he knows or should know that the person who seeks his services does so as a result of conduct prohibited under this rule.

Rule 3-102. Dividing Fees with a Non-Lawyer.

A member of the State Bar or a firm of which he is a member shall not directly or indirectly share legal fees except with a person licensed to practice law except that:

  1. An agreement by a member of the State Bar with his firm, partner, or associate may provide for the payment of money, over a reasonable period of time after his death, to his estate or to one or more specified persons.
  2. A member of the State bar who undertakes to complete unfinished legal business of a deceased member of the State Bar may pay to the estate of the deceased member of the State Bar or other person legally entitled thereto that proportion of the total compensation which fairly represents the services rendered by the deceased member of the State Bar.
  3. A member of the State Bar or firm of which he is a member may include employees not members of the State Bar in a retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.

Rule 5-102. Avoiding the Representation of Adverse Interests.

(B) A member of the State Bar shall not represent conflicting interests, except with the written consent of all parties concerned.

Rule 5-104. Payment of Personal or Business Expenses Incurred By or For a Client.

(A) A member of the State Bar shall not directly or indirectly pay or agree to pay, guarantee, or represent or sanction the representation that he will pay personal or business expenses incurred by or for a client, prospective or existing and shall not prior to his employment enter into any discussion or other communication with a prospective client regarding any such payments or agreements to pay; provided this rule shall not prohibit a member:

  1. with the consent of the client, from paying or agreeing to pay to third persons such expenses from funds collected or to be collected for the client; or
  2. after he has been employed, from lending money to his client upon the client's promise in writing to repay such loan; or
  3. from advancing the costs of prosecuting or defending a claim or action or otherwise protecting or promoting the client's interests. Such costs within the meaning of this subparagraph (3) shall be limited to all reasonable expenses of litigation or reasonable expenses in preparation for litigation or in providing any legal services to the client.

Rule 8-101. Preserving Identity of Funds and Property of a Client.

(B) A member of the State Bar shall:

1. Promptly notify a client of the receipt of his funds, securities, or other properties.

4. Promptly pay or deliver to the client as requested by a client the funds, securities, or other properties in the possession of the member of the State Bar which the client is entitled to receive.

The narrow question propounded by the inquirer which leads to this opinion is limited to whether either the agreement between the clients and the referring organization, or the agreement between the attorney and the referring organization, or both, may violate Rule 3-102 of the Rules of Professional Conduct. In our opinion, the answer to this narrow question is that the relationship, as hereinabove described, does violate that rule.

Rule 3-102 prohibits a member of the State Bar from directly or indirectly sharing legal fees, except with a person licensed to practice law. The facts, as related to us, do not indicate that the referring organization in this case is a law corporation, as defined in Sections 6160 et seq. of the California Business and Professions Code. Thus, any division of legal fees with the referring organization by the attorney in question would be in violation of the Rule.

Rule 3-102 prohibits the sharing of fees in order to discourage solicitation of business and in order to discourage the potential practice of law by the unlicensed party. As stated by the Supreme Court in respect to a partnership between a member of the bar and his father, who had been disbarred:

Not only does the sharing of profits in such a situation tend to encourage solicitation and the practice of law by a layman [citations omitted], it also tends to lessen the independence from the influence of a layman necessary for an attorney to carry out his responsibilities. [Citations omitted.]

Crawford v. State Bar, 54 Cal.2d 659, 665, 7 Cal.Rptr. 746, 355 P.2d 490 (1960). See also Linnick v. State Bar , 62 Cal.2d 17, 21, 41 Cal.Rptr. 1, 396 P.2d 33 (1964).

The relationship presented here is somewhat unique, in that the attorney and the referring organization have not directly agreed to share fees. There are two separate contingent agreements, one for a "contribution" between the clients to the referring organization and one for a "fee" between the attorney and the clients. However, Rule 3-102 proscribes not merely the direct sharing of legal fees, but also the indirect sharing of such fees. The net effect of the relationships between the clients, the referring organization, and the attorney is that the net proceeds of the litigation to the client are reduced by a percentage, without regard to the nature of the services rendered, the time consumed, or the difficulties encountered by either the referring organization or the attorney. Indeed, if the attorney complies with the request of the referring organization, the funds will never reach the client. These relationships, accordingly, are tantamount to an indirect sharing of legal fees. The risks which Rule 3-102 is intended to obviate, such as solicitation and interposition of lay intermediaries, are magnified by the relationships presented here.

Sawyer v. State Bar 220 Cal. 702, 332 P.2d 369 (1934), is analogous. There, an organization investigated shareholders' claims with a view to litigation to protect the shareholders' interests. Employees of the corporation solicited business from members of the public, who were invited to join for membership fees equal to 10% of their investment in the shares of the target corporation. Those membership fees were divided 40% to the solicitors, 30% to the corporation, and 30% to the attorney. The Court held that the arrangement was contrary to the Rules of Professional Conduct, even though the sharing was not directly a sharing of legal fees.

In Cain v. Burns 131 Cal.App.2d 439, 280 P.2d 888 (1959), an agreement between an attorney and a private investigator, by which the private investigator was to be compensated by an amount measured by a designated percentage of the net fees received by the attorney, was held to be an unethical contract for the sharing of legal fees in violation of former Rule 3. The fee was not paid directly from the attorney's fees on which computation was based, but was paid from the "general funds" of the office of the attorney. The court stated:

It is clear that the devices of having plaintiff's fee paid out of defendant's "general fund" instead of directly from the attorney's fees upon which it was based, and using the latter fees as a "scale" were merely subterfuges to attempt to get away from the inhibition of Rule 3.

Id., 131 Cal.App.2d at 442.

If the clients in the question presented here choose to make a voluntary contribution to the referring organization from their net recovery after they have received it, neither the letter nor the spirit of the Rule would be violated. However, the attorney should not permit himself to engage in conduct which gives the appearance of indirectly sharing legal fees. Labeling the payment a "contribution" does not change its legal effect.

Moreover, the entire relationship between the referring organization and the attorney may, on the facts presented to us, be unethical. Rule 2-104(B) of the Rules of Professional Conduct prohibits a member of the bar from compensating or giving anything of value to an organization to recommend or secure his employment by a client, or as a reward for having made a recommendation resulting in his employment by a client. Rule 2-104(G) precludes a member of the State Bar from accepting employment when he knows or should know that the person who seeks his service does so as a result of conduct prohibited under the rule. Similarly, it is unlawful for any person or entity in any manner to act in the solicitation or procurement of business for an attorney at law. Cal. Bus. & Prof. Code §§6151, 6152, 6153. Any retainer agreement secured by an attorney through the services of a runner or capper is void. Cal. Bus. & Prof. Code §6154. The referring organization here appears to be acting in the nature of a solicitor, runner, or capper.

Although the payment to the referring organization here is labeled a "contribution", it appears that the referring organization is being remunerated for soliciting, directing, or influencing the employment of the attorney by the clients. While two separate contracts are involved in the contingent fee arrangements of the attorney and of the referring organization, the whole appears to be one overall transaction involving the division of the net compensation resulting from the litigation. While the attorney here may not have procured the two separate contracts into which the clients have entered, the two contracts appear to track the contractual relationship expressly disapproved by the Court in Hildebrand v. State Bar 36 Cal.2d 504, 512, 225 P.2d 508 (1950).

There is no indication that the referring organization is a lawyer reference service, established in conformity with the minimum standards for a lawyer reference service in California, or is organized for the provision of group legal services, or is an arrangement for prepaid legal services under Rule 2-104(C), (D), and (E) of the Rules of Professional Conduct. The referring organization may be a nonprofit organization formed for charitable or other public purposes which furnishes legal services pursuant to Rule 2-104(F) of the Rules of Professional Conduct. However, Rule 2-104(B) does not permit an attorney to give anything of value to an organization described in Rule 2-104(F). Lawyer reference services described in Rule 2-104(C) are the only exception stated in Rule 2-104(B).

The relationship here appears to exacerbate the problems intended to be obviated by the Rules of Professional Conduct, rather than to cure them. Reference panels are exempt from the prohibition against compensation under Rule 2-104(B) under the rationale that the risks of fee-splitting and interference by lay personnel in the representation of the client are obviated and because of the controls to which such panels are subjected.

There are wide differences--in motivation, technique and social impact--between the lawyer reference service of the bar association and the discreditable fee-splitting featured in the disciplinary decisions. Prohibited fee-splitting between lawyer and layman carries with it the danger of competitive solicitation (Crawford v. State Bar , 54 Cal.2d 659, 666 [7 Cal-Rptr. 746, 355 P.2d 490]); poses the possibility of control by the lay person, interested in his own profit rather than the client's fate ( Utz v. State Bar, 21 Cal.2d 100, 108 [130 P.2d 377]); facilitates the lay intermediary's tendency to select the most generous, not the most competent, attorney ( Linnick v. State Bar 62 Cal.2d 17, 21 [41 Cal.Rptr. 1, 396 P.2d 33]; Hildebrand v. State Bar, 36 Cal.2d 504, 523 [225 P.2d 508], separate opinion of Traynor, J.). Rule 3's prohibition against lay intermediaries seeks to bar both solicitation and the presence of a party demanding allegiance the lawyer owes his client. (People v. Merchants Protective Corp. (1922) 189 Cal. 531, 539 [209 P. 363].) None of these dangers or disadvantages characterizes the San Joaquin County Bar Association's lawyer reference activity. The bar association seeks not individual profit but the fulfillment of public and professional objectives. It has a legitimate nonprofit interest in making legal services more readily available to the public. When conducted within the framework conceived for such facilities, its reference service presents no risks of collision with the objectives of the canons on fee-splitting and lay interposition.

Emmons, Williams, Mires & Leech v. State Bar, 6 Cal.App.3d 565, 573-74, 86 Cal.Rptr. 367 (1970).

The relationship described in the facts presented to us indicate that the attorney would not have had any contact with his clients but for the conduct of the referring organization. The referring organization may profit from the litigation generated by the referral, regardless of the nature, extent, or value of the services it may have rendered to the clients. Indeed, on the facts presented, the referring organization would not have the ability to utilize the attorney as its agent for collection of the "contribution" before the clients received the proceeds of the litigation unless it had some control over the attorney which conflicted with the interests of the clients. The advancement of costs by the referring organization appears merely to have been a capital investment by that organization in the profits which result from the litigation. The implication of the facts presented to us is that the relationships between the organization, the client, and the attorney permit the organization to obtain clients for the attorney for financial remuneration and thereby to obtain profits for both the referring organization and the attorney.

Both the letter and the spirit of the Rules of Professional Conduct prohibit such activities. A member of the bar may not solicit professional employment. Rule 2-101, California Rules of Professional Conduct. An attorney should not accept employment where he knows or ought to know that it has improperly been solicited on his behalf, even if he did not authorize the alleged solicitation in advance. See, eg,, Fish v. State Bar 214 Cal. 215, 220, 4 P.2d 937 (1931).

It is the conclusion of this Committee that the entry into tripartite relationships of this type would not be protected by the existing Rules of Professional Conduct in this state. The express provisions of the rules do not protect the attorney from potential liability in these circumstances. The policies expressed and implied in California Business and Professions Code sections 6151, et seq., and in Rules 2-101, 2-104, and 3-102 prohibit the solicitation or obtaining of professional employment except within narrow limits. Cf., Geffen v. Moss , 53 Cal.App.3d 215, 225-26, 125 Cal.Rptr. 687 (1975).

The intent of both the referring organization and the attorney appear to have been laudable. Profits may not in fact be generated by this type of litigation. Thus, many of the motivational risks described in Emmons, Williams, Mires & Leech v. State Bar, supra, May be moot as a practical matter. However, the organization and the attorney are still bound by the proscriptions of the Rules of Professional Conduct and, in particular, by the distinction between Rule 2-104(C) and Rule 2-104(F) in relation to this Rule 2-104(B). We recommend that, to avoid the appearance of impropriety, the referring organization either take steps to qualify as a lawyer reference service or otherwise bring itself within the ambit of Rule 2-104(C).

The forgiveness of the advance against costs by the referring organization after the litigation does not, by itself, appear to be in violation of Rule 5-104 as presently worded. Rule 5-104, unlike American Bar Association DR 5-103(B), does not expressly require the clients ultimately to remain liable for the expenses of litigation. While we are not aware of any case interpreting Rule 5-104, it implies that forgiveness of such an obligation is permissible.

All opinions of the Committee are subject to the following disclaimer:
Opinions rendered by the Ethics Committee are an uncompensated service of The Bar Association of San Francisco. Opinions are advisory only, and no liability whatsoever is assumed by the Committee or The Bar Association of San Francisco in rendering such opinions, and the opinions are relied upon at the risk of the user thereof. Opinions of the Committee are not binding in any manner upon the State Bar of California, the Board of Governors, any disciplinary committee, The Bar Association of San Francisco, or the individual members of the Ethics Committee.

In using these opinions you should be aware that subsequent judicial opinions and revised rules of professional conduct may have dealt with the areas covered by these ethics opinions.

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