Fee Shifting with Non-Lawyers

As a general matter, the Rules of Professional Conduct prohibit lawyers from sharing fees with non-attorneys.  However, there are certain exceptions to that rule.  Rule 5.4 states that “a lawyer or law firm may include non-lawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.” A recent case out of Pennsylvania describes how a non-lawyer attempted to put this exception into action, albeit unsuccessfully.

The case originated with a complaint filed in the trial court by the non-attorney alleging that he had a an oral consulting contract with a law firm regarding the representation of various investors seeking to bring class actions for securities violations.  Based upon the agreement, the non-attorney alleged he assisted the law firm in becoming counsel for “the class representatives in virtually all of its cases.” Pursuant to the contract, the non-attorney was supposed to earn a percentage of the firm’s annual profits attributable to the cases he originated or worked on in addition to a yearly consulting fee. The non-attorney alleged that he was paid his fixed consulting fee but failed to receive his percentage of the profits for the year.

The law firm filed preliminary objections to the complaint – Pennsylvania’s version of a motion to dismiss – which were granted on the basis that the compensation plan was against public policy and violated Rule of Professional Conduct 5.4.  The non-lawyer appealed, arguing that the compensation agreement fell within exception 5.4(a)(3), which allows a lawyer to include a non-lawyer in a compensation plan, even though the plan is based in whole or in part on a profit sharing agreement.   The Pennsylvania Superior Court affirmed the ruling of the trial court.

The Superior Court found that the facts alleged in the complaint did not support the exception to the fee splitting Rule.   The non-attorney was not an employee of the firm participating in a program that benefited the employees based upon the profitability of the firm.  The trial court correctly found that a consulting firm could not be considered an “employee” under the exception, and therefore the employee requirement rendered the exception inapplicable.  The Court noted that the exception argued by the non-attorney is only sustainable in cases where there is no direct link between a specific fee and a specific payment to a non-lawyer.

It is not unusual for firms to retain consultants in highly technical matters such as securities class actions.  Working out the details of compensation before any services are rendered is important to avoid any confusion or misinterpretation down the line.  In the above matter, not only was the alleged compensation agreement oral but it also was in violation of the Rules of Professional Conduct.  Lawyers should be aware of any restrictions on fee sharing before entering into any agreement with someone other than the lawyer handling the file.