ANALYSIS: Rule 5.4

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NEW RULES OF PROFESSIONAL CONDUCT

New Rule of Professional Conduct 5.4, like a few others, borrows concepts from a few different rules that all support a common policy. At the foundation of Rule 5.4 is the concept that lawyers should have professional relationships that minimize the risk that nonlawyers will interfere with their independent judgment. Primarily, this is achieved by removing financial incentives that third-party nonlawyers can receive.

This is done through many means. Specifically, the rule precludes sharing fees directly or indirectly with nonlawyers in nearly all instances. Driving the point home, the rule retains the prohibition against multidisciplinary practices by precluding lawyers from forming partnerships with nonlawyers or otherwise allowing nonlawyers to have an ownership stake in a law firm. Similarly, lawyers may not practice in a professional corporation or other organization authorized to practice law if a nonlawyer is in a position of control, whether through an ownership interest, as a director or officer, or through some other authority to direct or control the lawyer's conduct.

Likewise, lawyers may not allow third parties who play a role in the formation of the attorney-client relationship to influence how the lawyer achieves the client's objectives. Those who recommend, employ or even pay the lawyer to provide services, may not interfere with the lawyer's independent professional judgment. As a safeguard to this, lawyers may also only accept lawyer referral service clients from services that comply with the minimum standards established by the Board of Trustees of the State Bar. In fact, lawyers may not even practice with a nonprofit legal aid, mutual benefit or advocacy group if the nonprofit organization allows any third person to interfere with the lawyers' judgment or allows any person to practice law in violation of either the Rules of Professional Conduct or the State Bar Act.

As noted above, however, there is not a complete ban on sharing of fees with nonlawyers. It is permissible in a number of limited circumstances. These largely entail situations where a financial obligation is incurred as part of the ordinary practice of law. After a lawyer passes away, fees may be paid to the lawyer's estate or to specified persons if it is to fulfill an agreement with that lawyer's firm, partner or associate for payment over a reasonable period of time. Similarly, a lawyer may pay an agreed-upon purchase price for the practice of a deceased, disabled or disappeared lawyer to the lawyer's estate or representative. And a lawyer may pay nonlawyer employees in a compensation or retirement plan, even if the payment is based whole or in part on a profit-sharing arrangement. Though, the compensation may not be based on a share of fees in specific cases or legal matters. In other words, lawyers may not "employ" marketers and pay them based on a percentage of only what they bring in. Otherwise, the prohibition on running and capping would be vitiated.

Additionally, there are two instances where lawyers may share fees with nonlawyers who brought business to the lawyer. As before, lawyers may pay fees to a lawyer referral service that is established, sponsored, and operated in accordance with the State Bar's minimum standards. Rule 5.4 though also provides a new exception, which will permit lawyers to share court-awarded fees with a nonprofit organization that employed, retained or recommended the lawyer's employment.

The reality is that law firms generally generate funds through legal fees. And they need to pay some of those fees to cover expenses. The rule is not designed to prohibit payment of goods and services, so long as the amount paid is not tied to a percentage or share of the lawyer's fees. In this context, for example, a lawyer may pay a collection agency based on the amount of fees the agency recovers.

The import of Rule 5.4 is not new. Lawyers must follow those measures designed to mitigate risk that the lawyer's judgment will be improperly influenced by those who lack legal training and/or may not be pursuing the best interests of the client.