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New rules
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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.

Rule 5.4, Financial and Similar Arrangements with Nonlawyers (Rule Approved by the Supreme Court, Effective Nov. 1, 2018)

(a) A lawyer or law firm shall not share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law, except that:

(1) an agreement by a lawyer with the lawyer's firm, partner or associate may provide for the payment of money or other consideration 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 purchasing the practice of a deceased, disabled or disappeared lawyer may pay the agreed-upon purchase price, pursuant to rule 1.17, to the lawyer's estate or other representative;

(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, provided the plan does not otherwise violate these rules or the State Bar Act;

(4) a lawyer or law firm may pay a prescribed registration, referral or other fee to a lawyer referral service established, sponsored and operated in accordance with the State Bar of California's Minimum Standards for Lawyer Referral Services; or

(5) a lawyer or law firm may share with or pay a court-awarded legal fee to a nonprofit organization that employed, retained or recommended employment of the lawyer or law firm in the matter.

(b) A lawyer shall not form a partnership or other organization with a nonlawyer if any of the activities of the partnership or other organization consist of the practice of law.

(c) A lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal services for another to direct or regulate the lawyer's independent professional judgment or interfere with the lawyer-client relationship in rendering legal services.

(d) A lawyer shall not practice with or in the form of a professional corporation or other organization authorized to practice law for a profit if:

(1) a nonlawyer owns any interest in it, except that a fiduciary representative of a lawyer's estate may hold the lawyer's stock or other interest for a reasonable time during administration;

(2) a nonlawyer is a director or officer of the corporation or occupies a position of similar responsibility in any other form of organization; or

(3) a nonlawyer has the right or authority to direct or control the lawyer's independent professional judgment.

(e) The Board of Trustees of the State Bar shall formulate and adopt Minimum Standards for Lawyer Referral Services, which, as from time to time amended, shall be binding on lawyers. A lawyer shall not accept a referral from, or otherwise participate in, a lawyer referral service unless it complies with such Minimum Standards for Lawyer Referral Services.

(f) A lawyer shall not practice with or in the form of a nonprofit legal aid, mutual benefit or advocacy group if the nonprofit organization allows any third person to interfere with the lawyer's independent professional judgment, or with the lawyer-client relationship, or allows or aids any person to practice law in violation of these rules or the State Bar Act.

Comment

[1] Paragraph (a) does not prohibit a lawyer or law firm from paying a bonus to or otherwise compensating a nonlawyer employee from general revenues received for legal services, provided the arrangement does not interfere with the independent professional judgment of the lawyer or lawyers in the firm and does not violate these rules or the State Bar Act. However, a nonlawyer employee's bonus or other form of compensation may not be based on a percentage or share of fees in specific cases or legal matters.

[2] Paragraph (a) also does not prohibit payment to a nonlawyer third-party for goods and services provided to a lawyer or law firm; however, the compensation to a nonlawyer third-party may not be determined as a percentage or share of the lawyer's or law firm's overall revenues or tied to fees in particular cases or legal matters. A lawyer may pay to a nonlawyer third-party, such as a collection agency, a percentage of past due or delinquent fees in concluded matters that the third-party collects on the lawyer's behalf.

[3] Paragraph (a)(5) permits a lawyer to share with or pay court-awarded legal fees to nonprofit legal aid, mutual benefit and advocacy groups that are not engaged in the unauthorized practice of law. (See Frye v. Tenderloin Housing Clinic, Inc. (2006) 38 Cal.4th 23 [40 Cal.Rptr.3d 221]; see also rule 6.3.) Regarding a lawyer's contribution of legal fees to a legal services organization, see rule 1.0, Comment [5] on financial support for programs providing pro bono legal services.

[4] This rule is not intended to affect case law regarding the relationship between insurers and lawyers providing legal services to insureds. (See, e.g., Gafcon, Inc. v. Ponsor Associates (2002) 98 Cal.App.4th 1388 [120 Cal.Rptr.2d 392].)

[5] Paragraph (c) is not intended to alter or diminish a lawyer's obligations under rule 1.8.6 (Compensation from One Other Than Client).

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