FACTS

A lawyer who is licensed to practice law in Arizona is eligible to participate in a certain not-for-profit lawyer referral service if the lawyer (a) pays an annual fee, (b) carries a minimum amount of professional liability insurance, (c) agrees to provide the client with a free 30-minute consultation, and (d) signs an agreement promising to abide by the rules of the service.  One of the provisions of the agreement requires the lawyer to pay the service a percentage of any fees earned on any case that is referred to the lawyer by the lawyer referral service.

QUESTION PRESENTED

May a lawyer ethically participate in a not-for-profit lawyer referral service if, as a condition of such participation, the lawyer is required to pay the service a percentage of the fees earned on the case?

APPLICABLE ARIZONA RULES OF PROFESSIONAL CONDUCT (“ER __”)

ER 5.4  Professional Independence of a Lawyer

(a)  A lawyer or law firm shall not share legal fees with a nonlawyer, except that:

(1)  an agreement by a lawyer with the lawyer’s firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer’s death, to the lawyer’s estate or to one or more specified persons;
(2)  a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of ER 1.17, pay to the estate or other representative of that lawyer the agreed–upon purchase price;
(3)  a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement; and
(4)  a lawyer may share court-awarded legal fees with a nonprofit organization that employed, retained or recommended employment of the lawyer in the matter.

. . . .

ER 7.2  Advertising

(b)  A lawyer shall not give anything of value to a person for recommending the lawyer’s services except that a lawyer may:

. . .

(2)  pay the usual charges of a legal service plan or a not-for-profit or qualified lawyer referral service.  A qualified lawyer referral service is a lawyer referral service that has been approved by an appropriate regulatory authority;

. . . .

RELEVANT ETHICS OPINIONS

Ohio Ethics Op. 92-001; South Carolina Ethics Advisory Op. 93-09; Wisconsin Ethics Op. E-88-8
 
OPINION

Subject to specific exceptions, ER 5.4(a) provides that “[a] lawyer or law firm shall not share legal fees with a nonlawyer.”  The purpose of ER 5.4(a) is “to protect the lawyer’s professional independence of judgment.”  ER 5.4 (comment [1]).  If a non-lawyer is permitted to share legal fees, the non-lawyer, seeking to enhance that interest, and not being bound by the ethical standards to which lawyers are subject, may attempt to influence the lawyer’s exercise of professional judgment in a manner that is detrimental to the client or to the legal system or both.  Thus, unless one of the exceptions set forth in ER 5.4(a)(1)-(4) is applicable, a lawyer may not ethically participate in a lawyer referral service if, as a condition of such participation, the lawyer is required to pay the service a percentage of the fees earned on the case.

Whenever a rule or requirement seeks to protect an important interest, such as the professional independence of lawyers, “a[n] . . . exception to that requirement should be construed narrowly or the exception may swallow the rule.”  See Arizona’s Towing Professionals, Inc. v. State, 196 Ariz. 73, 76, 993 P.2d 1037, 1040 (App. 1999) (internal citations omitted).  We examine the exceptions set forth in ER 5.4(a)(1)-(4) with that standard in mind.

The exceptions set forth in ER 5.4(a)(1)-(3) are not applicable.

ER 5.4(a)(4) provides that “a lawyer may share court-awarded legal fees with a nonprofit organization that employed, retained or recommended employment of the lawyer in the matter.” If a court has approved the amount of the fee to be paid to the lawyer, the fee is, by definition, fair and reasonable.  In addition, in the case of a court-awarded fee, some person or entity other than the client is usually bearing the financial impact of the fee.  In such circumstances, there seems to be little, if any, danger that a lawyer’s professional independence of judgment will be compromised.  If the lawyer referral service is a nonprofit organization within the meaning of ER 5.4(a)(4), and if it employed, retained, or recommended employment of the lawyer in the matter, and if the fee to be paid to the lawyer has been approved by a court, then the lawyer may ethically share that fee with the nonprofit lawyer referral service that employed, retained, or recommended the lawyer.  With respect to the lawyer referral service plan described in this opinion, however, a lawyer who participates in the plan is required to pay the service a percentage of the fee earned in all cases, whether or not the fee received by the lawyer has been approved by a court.  ER 5.4(a)(4) does not extend that far.

ER 7.2(b)(2) permits a lawyer to “pay the usual charges of a legal service plan or a not-for-profit or qualified lawyer referral service,” but that provision is an exception to a general prohibition on “giv[ing] anything of value to a person for recommending the lawyer’s services.”  As noted above, exceptions to general prohibitions should be construed narrowly.

ER 7.2(b)(2) does not specifically address the question of fee sharing.  The usual rule of statutory construction in Arizona is that a more specific statute controls over the more general.  In re Guardianship/Conservatorship of Denton, 190 Ariz. 152, 945 P.2d 1283 (1997).  In addition, Comment 5 to ER 7.2 contains a cross-reference to ER 5.4, which suggests that any latitude permitted to a lawyer under ER 7.2 is subject to the restrictions on fee sharing that are set forth in ER 5.4.

The term “usual charges” cannot be construed to include a percentage of fees earned on the case.  A percentage fee would be different in each case, would not necessarily bear any relationship to any reasonable costs incurred by the lawyer referral service, and therefore cannot be said to be usual.  See South Carolina Ethics Advisory Op. 93-09 (state supreme court subsequently modified the comment to the rule).

In our view, the general language of ER 7.2(b)(2) is insufficient to overcome the specific prohibition contained in ER 5.4.

Other jurisdictions have permitted a lawyer to participate in a lawyer referral service even though the lawyer is required to pay the service a percentage of the fees earned on the case. [1] Two examples are found in Ohio and Wisconsin.  See Ohio Ethics Op. 92-001 and Wisconsin Ethics Op. E-88-8.  The Ohio and Wisconsin opinions are distinguishable, however, because they are supported by rules of professional conduct that are not found in Arizona.

In Ohio, a lawyer is permitted to pay “the usual charges for a nonprofit or lawyer referral service that complies with Rule XVI of the Supreme Court Rules for the Government of the Bar of Ohio.”  Ohio Rule 7.2(b)(3).  Ohio Supreme Court Rule XVI, Section 1(C)(1), specifically permits a lawyer referral service to require lawyers participating in the service to “[p]ay a fee calculated as a percentage of legal fees earned” to the service, but in exchange for that, the Ohio Supreme Court imposes significant regulations on the service.  Any fees received by the service “shall be used only to pay the reasonable operating expenses of the service and to fund public service activities of the service or its sponsoring organization, including the delivery of pro bono public services.”  Ohio Rule XVI, Section 1(C)(1).  The Ohio Supreme Court also prescribes detailed regulations on how the service is to be operated.  See Ohio Rule XVI, Section 1(A)(1)-(9).

In Wisconsin, “such a fee-sharing arrangement would only be permissible when the referral service is operated by a bar association and nonprofit, . . . [and] the fees remitted to the referral service should be reasonably related to the cost of operating the service.”  Wisconsin Ethics Op. E-88-8.

ER 7.2(b)(2), by contrast, imposes no such limitations.  If we were to construe ER 7.2(b)(2) as authorizing a lawyer to participate in a lawyer referral service and pay the service a percentage of the fees earned on the case, we would be extending a benefit to lawyer referral services without the service being subject to any correlative obligation.  There would be no restriction on the amount of the percentage that could be paid, the purposes for which the fees could be used by the service, or the manner in which the service is to be operated.  Without such restrictions, a lawyer, facing the prospect of reduced compensation, may be less willing to accept referrals or be tempted to increase the fee to be charged for the service provided.  The lawyer referral service would have an incentive to refer cases only to those lawyers willing to pay the highest percentage.  None of these actions would serve the public interest or protect the professional independence of lawyers.

We express no opinion on whether the Rules of Professional Conduct should be amended to authorize lawyers to share fees with a not-for-profit lawyer referral service operated by a bar association.

CONCLUSION

A lawyer may not ethically participate in a not-for-profit lawyer referral service if, as a condition of such participation, the lawyer is required to pay the service a percentage of the fees earned on the case.

Formal opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings. This opinion is based on the Ethical Rules in effect on the date the opinion was published. If the rule changes, a different conclusion may be appropriate. © State Bar of Arizona 2010

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[1] The Committee recognizes that other jurisdictions and the ABA have approved similar fee-sharing provisions. Several of these jurisdictions, however, have rules that regulate the amount of the percentage that may be paid, the purposes for which the fees can be used by the not-for-profit lawyer referral service, and the manner in which the service is to be operated. Arizona has no such rules.