Ethics Opinion 351

Sharing Legal Fees with Clients

In the particular circumstances presented, the payments to clients contemplated by the inquiries below do not violate Rule 5.4(a)’s prohibition against sharing legal fees with nonlawyers.

Applicable Rules

• Rule 1.5(a) (Fees)
• Rule 1.8(d) (Conflict of Interest: Specific Rules)
• Rule 1.15(b) (Safekeeping Property)
• Rule 5.4(a) (Professional Independence of a Lawyer)

Inquiry

The Legal Ethics Committee (“Committee”) has been asked whether two proposed payments by lawyers to their clients violate the fee-sharing prohibition of Rule 5.4(a) of the D.C. Rules of Professional Conduct (“D.C. Rules”).

Scenario One:  Plaintiff and Lawyer A have a contingent fee agreement under which Lawyer is to receive one-third of any recovery.¹ Plaintiff is offered a $90,000 settlement by Defendant, but Defendant insists that the settlement agreement designate $60,000 as attorney fees and $30,000 as compensatory damages. (The Plaintiff’s claim arises under a “fee-shifting” statute that provides for attorney fees.) As contemplated by her agreement with Plaintiff, Lawyer A wants to retain only $30,000 in attorney’s fees (one-third) and allocate the other $30,000 (of designated “attorney fees”) to Plaintiff. Plaintiff, therefore, would end up with $60,000 of the $90,000 settlement payment, as contemplated by the contingent fee agreement made by Plaintiff and Lawyer A at the beginning of the engagement.

Scenario Two: Pro bono Lawyer B receives attorney fees under a fee-shifting statute and wants to give the awarded fees to his client (“Client”), who is an individual. Lawyer B has not made an advance commitment to pay Client the attorney fee or any other sum.

Discussion

“A lawyer or law firm shall not share legal fees with a nonlawyer.” D.C. Rule 5.4(a). One of the five exceptions to this prohibition is relevant to, but not dispositive of, Scenario Two:

(5) A lawyer may share legal fees, whether awarded by a tribunal or received in settlement of a matter, with a nonprofit organization that employed, retained, or recommended employment of the lawyer in the matter and that qualifies under Section 501(c)(3) of the Internal Revenue Code.

The prohibition is intended “to protect the lawyer’s professional independence of judgment.” Comment [1] to D.C. Rule 5.4; accord Comment [1] to ABA Model Rule 5.4; Restatement of the Law Governing Lawyers § 10, cmt. b (2000) (“Restatement”). Other authorities have spoken of the need to ensure that the lawyer will control the litigation, the deterrence of solicitation by nonlawyer intermediaries, and the protection of clients from unreasonably high fees. Emmons, Williams, Mires & Leech v. California State Bar, 6 Cal. App. 3d 565, 573-74, 86 Cal. Rptr. 367, 372 (Ct. App. 1970); ABA Formal Op. 87-355 (1987); ABA Informal Op. 86-1519 (1986).

A Restatement comment on the prohibition focuses on the situation where the nonlawyer is entitled to share the lawyer’s fees—a situation that does not obtain in either scenario set out above:

A person entitled to share a lawyer’s fees is likely to attempt to influence the lawyer’s activities so as to maximize those fees. That could lead to inadequate legal services. The Section should be construed so as to prevent nonlawyer control over lawyers’ services, not to implement other goals such as preventing new and useful ways of providing legal services or making sure that nonlawyers do not profit indirectly from legal services in circumstances and under arrangements presenting no significant risk of harm to clients or third persons.

Restatement § 10, cmt. b (emphasis added). Moreover, this Committee has counseled against an unduly broad reading of Rule 5.4(a), D.C. Bar Legal Ethics Op. 233 (1993), and the Virginia Bar’s ethics committee has said that “application of Rule 5.4(a) must move beyond a literal application of language of the provision to include also consideration of the foundational purpose for that provision.” Va. Legal Ethics Op. 1783 (2003); see Emmons, Williams, Mires & Leech, 6 Cal. App. 3d at 575, 86 Cal. Rptr. at 373 (focusing on “policy objectives” of the rule).

Most federal fee-shifting laws make attorney fee awards the property of the client, rather than of the lawyer. Central States, Southeast and Southwest Areas Pension Fund v. Central Cartage Co., 76 F.3d 114, 116 (7th Cir. 1996) (Easterbrook, J.); see, e.g., Evans v. Jeff D., 475 U.S. 717, 730 (1986) (Civil Rights Attorney’s Fee Awards Act of 1976, 42 U.S.C. § 1988); Venegas v. Mitchell, 495 U.S. 82, 87 (1990) (same).² Some federal fee-shifting statutes, though, envisage awards to the lawyer, e.g., Rodriguez v. Taylor, 569 F.2d 1231, 1245 (3rd Cir. 1977) (Age Discrimination in Employment Act), and some state laws do the same, e.g., Flannery v. Prentice, 28 P.3d 860, 862 (Cal. 2001) (California Fair Employment and Housing Act).³ Awards made to the client, of course, do not implicate Rule 5.4(a). See Central States, 76 F.3d at 116 (where statutory fees are client’s property, their contractual allocation between client and lawyer does not raise a fee-splitting issue).

We do not think that either proposed payment would constitute a prohibited sharing of legal fees. In Scenario One, the “fee” for purposes of Rule 5.4(a) is the amount agreed upon in advance between Plaintiff and Lawyer A. It is not the sum designated in the settlement agreement as “attorney fees.” This is so even if the applicable fee-shifting statute assigns ownership of such funds to the lawyer. The fact of the advance agreement ensures that the proposed payment would not interfere with the lawyer’s independence of judgment or contravene the other rationales for the prohibition that are noted above. Indeed, a failure by Lawyer A to give Plaintiff $60,000 of the $90,000 settlement amount would violate the contingent fee agreement, see Venegas, 495 U.S. 82 (lawyer and client may agree to a fee that exceeds the amount ultimately awarded under 42 U.S.C. § 1988); Va. Legal Ethics Op. 1783 (2003) (sustaining payment to client of portion of “fee” received from adverse party that exceeds fee contractually agreed upon between lawyer and client), might constitute an improper withholding of client funds in violation of Rule 1.15(b), see In re Haar, 667 A.2d 1350 (D.C. 1995), and—given that $60,000 represents two-thirds of the settlement amount—might constitute an unreasonable fee in violation of Rule 1.5(a).

In Scenario Two, we assume that the fee award to which the inquiry refers is the property of Lawyer B rather than Client. Otherwise there presumably would be no issue under Rule 5.4(a). See Central States, 76 F.3d at 116; Turner v. Secretary of the Air Force, 944 F.2d 804, 808 (11th Cir. 1991) (court’s award of statutory attorney fees to client does not violate prohibition on attorney’s splitting fees with client). Also, we understand that there has been no advance commitment by Lawyer B to pay Client an amount equal to Lawyer B’s fee or, for that matter, any amount. Accordingly, we think the proposed payment is not the sharing of a fee but an ex gratia payment.⁴ See National Treasury Employees Union v. U.S. Dep’t of the Treasury, 656 F.2d 848, 853-54 (D.C. Cir. 1981) (noting that lawyers are not prohibited from donating their fees to charity or to their employers); Jordan v. United States Dep’t of Justice, 691 F.2d 514, 516 n. 14 (D.C. Cir. 1982) (same).

Finally, neither scenario implicates Rule 1.8(d)’s prohibition on advancing or guaranteeing financial assistance. This is because there is no indication in either instance that the lawyer promised, let alone made or guaranteed, any such payment while the litigation was pending.

This Committee’s charter limits it to addressing whether the proposed payments violate the D.C. Rules. D.C. Bar Legal Ethics Comm. R. A-1, C-4. We accordingly do not address such issues as the tax consequences of the proposed payments.

Conclusion

Accordingly, in the specific circumstances presented by these inquiries, neither proposed payment by a lawyer to the client would violate the fee-sharing prohibition of D.C. Rule 5.4(a).

Adopted: November 2009

1. Scenario One offers no explanation for Defendant’s proposed allocation of the settlement amount. We express no view on the propriety of Defendant’s proposed designation of $60,000 of the settlement amount as “attorney fees” and $30,000 as “compensatory damages,” or the propriety of any acquiescence by Plaintiff or Lawyer A in that designation.
2. The Supreme Court soon will consider whether Equal Access to Justice Act (EAJA) fee awards belong to the lawyer or the client. Compare Ratliff v. Astrue, 540 F.3d 800 (8th Cir. 2008) (EAJA awards are made to attorney, not client), cert. granted, 174 L. Ed. 2d 631, 2009 U.S. LEXIS 5148, 78 U.S.L.W. 3169 (No. 08-1322) (Sept. 30, 2009), and Marre v. United States, 117 F.3d 297, 304 (5th Cir. 1997) (same), with Stephens v. Astrue, 565 F.3d 131 (4th Cir. 2009) (EAJA awards are made to client), and Reeves v. Astrue, 526 F.3d 732 (11th Cir. 2008) (same). The Court’s decision in Ratliff should not affect the conclusions of this opinion. If EAJA fees are the property of the client, there presumably is no issue under Rule 5.4(a). If the award is the property of the lawyer, this opinion presumably will apply in respect of EAJA awards in the same way it applies to awards under other fee-shifting statutes.
3. Flannery indicates that its rule can be varied by “an enforceable agreement to the contrary” between lawyer and client. Flannery, 28 P.3d at 862.
4. Given the express, specific exception in Rule 5.4(a)(5) for payments to certain charitable organizations, though, we think the proposed payment would be prohibited by Rule 5.4(a) had it been agreed upon between Lawyer B and Client, an individual, or promised by Lawyer B, in advance. This is because a limited express exception ordinarily means that other, similar potential exceptions are not granted. The relevant legal maxim is expressio unius est exclusio alterius (i.e., the expression of one thing implies the exclusion of others).