Ethical fee sharing
Let’s say you’re a sole practitioner who has a contingency-fee case that takes a really weird turn. You realize you’re in over your head and don’t know how to handle such a weird-turn case. So, you ask another sole practitioner -- one who knows how to handle really-weird-turn cases -- to work with you. You two agree that you will share any recovery.
But wait — do you know how to ethically share the fee? And do you know how important it is to follow the rules?
The ethical rule governing how a lawyer divides one client legal fee with another lawyer in a different law firm requires specific steps. Those steps are not just best practices or mere formalities but are required and are intended, as a disciplinary panel recently opined, to “avoid[] … chaos” in the attorney-client relationship.
Dividing one client legal fee “facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist.” ER 1.5, cmt [8].
ER 1.5(e) allows lawyers who are not in the same firm to divide a fee only if
(1) the division is in proportion to the services performed by each lawyer or each lawyer receiving any portion of the fee assumes joint responsibility for the representation;
(2) the client agrees, in a writing signed by the client, to the participation of all the lawyers involved and the division of the fees and responsibilities between the lawyers; and
(3) the total fee is reasonable.
Before 2016, ER 1.5(e) allowed lawyers in different firms to divide a single legal fee only if each lawyer receiving any portion of the fee assumed joint responsibility for the representation and the client agreed in a signed writing to the participation of all the lawyers involved. Assuming joint responsibility means at the very least that the involved lawyers are vicariously liable for any malpractice. Ariz. Ethics Op. 04-02.
Effective January 1, 2016, the Arizona Supreme Court made two significant changes to ER 1.5(e).
First, the court expanded ER 1.5(e)(1), adding an additional ground on which lawyers may divide a fee: if the division is in proportion to the services provided. If this ground applies, then lawyers do not have to assume joint responsibility for the representation. (As a result of this amendment, this portion of ER 1.5(e) now follows the ABA Model Rule 1.5(e).)
Second, the court enhanced the provision of ER 1.5(e) that deals with client consent, making this part of fee sharing more involved than the pre-2016 rule. To share a single fee under either ground of ER 1.5(e)(1), lawyers must get client written and signed consent not only to the participation of all lawyers involved (as the pre-2016 rule required), but also to “the division of the fees and responsibilities between the lawyers.” ER 1.5(e)(2). This means the lawyers involved need to thoroughly discuss with the client and document the scope of each lawyer’s representation and how the fee will be divided between/among them.
Complying with ER 1.5(e) is important not only because of the disciplinary implications but also because a contract against public policy – such as one that violates the ethical rules – is unenforceable.
Recent case involving ER 1.5(e)
Lawyer A and his firm represented Client. Lawyer A associated Lawyer B (in a different firm) as counsel of record. At some point, the two lawyers had a dispute and Lawyer A terminated Lawyer B’s services. Law Firm C took over representation from Lawyer A and settled the case.
Lawyer B filed an action against Law Firm C seeking quantum meruit for the value of his legal services. The trial court dismissed the complaint because “it is based on an arrangement that does not comply with the ethical rules for attorneys.” Lawyer B appealed. The Court of Appeals affirmed the trial court’s ruling. Levine v. Haralson, Miller, Pitt, Feldman & McAnally, P.C., 418 P.3d 1007 (App. 2018).
In a concurrent disciplinary proceeding against Lawyer B, a disciplinary panel found that Lawyer B had violated ER 1.5(e)(2) because he had not obtained an ER 1.5-compliant document signed by the clients.
Lawyer B contended during the disciplinary proceeding that he and Lawyer A had orally agreed to share in the contingency fee and that Lawyer A had agreed to obtain the client’s consent. He also contended that the fee agreement Lawyer A had with the client sufficed as the client consent because it authorized Lawyer A to associate counsel.
After a hearing, the disciplinary panel found otherwise, explaining:
The assertion by [Lawyer B] that the [Lawyer A/Client] fee agreement brought him into compliance is not an alternative argument. [Lawyer B] strives to make the unambiguous requirements of ER 1.5(e) unintelligible.
* * *
We find the language easy to understand and apply. It clarifies what is required of an associating lawyer if lawyers associating on a case [wish] to divide the attorney fees. The rule avoids precisely the chaos in the attorney client relationship [Lawyer B] brought by seeking to obtain a division of the fees contrary to the ethical rules.
* * *
We find there was no ER 1.5 compliant approval in writing signed by the clients. [Lawyer B] may have had an informal relationship with [Lawyer A]. But the language of the rule is clear and explicit. The client must agree “in a writing signed by the client.”
In the civil case, the Court of Appeals found that Lawyer B’s actions violated the ethical rules, “and his reliance upon the asserted existence of oral contingent fee and division of fee agreements are void as against public policy. Therefore, recovery in quantum meruit is not available.”
Lawyer B’s fee-sharing mistakes resulting in discipline and loss of fee
Lawyer B assumed Lawyer A would get client consent to comply with ER 1.5(e)(2).
Lawyer B also assumed Lawyer A’s fee agreement – which predated Lawyer B’s involvement – qualified as the ER 1.5(e)(2) consent.
Lawyer B did not have his own contingent-fee agreement with the client.
Lawyer B received a 90-day suspension, but not just because of the fee-sharing issue. The disciplinary proceeding also involved diversion and trust-account violations, and Lawyer B had a disciplinary history.
And Lawyer B didn’t get compensated for more than 400 hours of work he claimed.
Takeaways
If you’ve been sharing fees with other lawyers for years and think you know how to do it, review the 2016 version of ER 1.5(e) ASAP to make sure you’re doing it right.
If you’ve never shared a legal fee with a lawyer in another firm but intend to do so, read ER 1.5(e) very carefully and get advice if you don’t understand it.
If you’re the lawyer being associated, don’t assume the original lawyer’s fee agreement covers you. You need your own contingent-fee agreement with the client.
If you’re the lawyer being associated, don’t assume the original lawyer’s fee agreement complies with ER 1.5(e)(2)’s client consent and disclosure.
Also, If you’re the lawyer being associated, don’t assume the original lawyer will take care of getting the ER 1.5(e)(2)-compliant consent. Under the enhanced ER 1.5(e)(2), all lawyers involved should be involved with getting client consent and documenting the scope of each lawyer’s representation and how the fee will be divided between/among them.
If you’re already into a case and not sure you’ve complied with ER 1.5(e), consider whether you want to document the consent again. Sometimes belts and suspenders are good.
By the Way…
The hypothetical assumes you’re a solo practitioner. But what if you are in a multi-lawyer firm and ask one of your co-workers to work with you on the weird-turn case? ER 1.5(e) does not apply to sharing legal fees with other lawyers in same law firm.
What does dividing one legal fee mean? Think of it this way: If you ask another lawyer to help you on a case, and you each have fee agreements independently with the client and you each bill the client separately, you’re not sharing one legal fee.
Also, if you don’t comply with ER 1.5(e) but divide your single client fee with a lawyer in another firm, you are essentially paying the other lawyer an impermissible referral fee. Arizona, unlike some jurisdictions, has an explicit prohibition against lawyers paying referral fees for cases. ER 7.2(b) (“[a] lawyer shall not give anything of value to a person for recommending the lawyer’s services” except to pay the reasonable costs of advertisements, the usual charges of a legal service plan or not-for-profit or qualified lawyer referral service, and for a law practice under E.R. 1.17.).
Finally, if you are sharing one legal fee with an out-of-state lawyer, make sure you’re both on the same page. Arizona’s ER 1.5(e)(2) requirements for client consent are broader than the ABA Model Rule requirements. The lawyer with whom you are sharing a fee may come from a jurisdiction that has adopted the less-stringent Model Rule version.