Lawyer's Fees: Harder to Split Than the Atom

IMPORTANT NOTICE: This article is provided solely for research and archival purposes. MCLE self-study credit is no longer available. Even if you follow the instructions and submit payment you will not be granted MCLE self-study credit. Please note that low-cost MCLE is provided by the California Lawyers Association, pursuant to Business and Professions Code section 6056.

A new Supreme Court ruling gives a definitive interpretation of rule 2-200 of the Rules of Professional Conduct

Peck

By ELLEN R. PECK
© 2002 and 2003

"Splitting atoms has got to be easier than splitting lawyer's fees! I want to split fees in a number of cases with some other lawyers. I need to know what I can do and what I can't do without violating rule 2-200 of the Rules of Professional Conduct. California Joan — can you help me?" queried Sam Solo, a sole practitioner from Anywhere City.

"This is such a timely call!" California Joan exclaimed. "The California Supreme Court has just decided Chambers v. Kay (2002) __ Cal.4th __ [2002WL 31444916 (Cal.)] ("Cham-bers") giving a definitive interpretation of rule 2-200. As you know, rule 2-200 provides that a member of the State Bar "shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless. . . [t]he client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division. . . ."

Sam interjected a comment: "Hey, Cali, I'm a sole practitioner. I don't have any partners, associates or fellow shareholders. When I team up with another lawyer on a client's case, I can be disciplined for violating rule 2-200 if I split a fee, unless there is the written disclosure and consent required by the rule. Is there any public policy supporting the disparate treatment of solos and law firms and law corporations?"

"Actually, Sam, the policy of the rule has nothing to do with the form under which a lawyer chooses to practice. Rule 2-200 applies equally regardless of the lawyer's status as member of a law firm or corporation or a sole practitioner. The purpose of the rule is to protect the consumer of legal services," Cali replied.

"In the Chambers case, the Supreme Court recently reiterated the purpose of client protection which underlies rule 2-200. First, the rule's disclosure requirements protect a client's right to know the extent of and the basis for fee sharing by the client's attorneys.

"Second, the disclosure helps assure the client that unwarranted fees will not be charged so that the attorney who actually provides the client with representation on the legal matter has 'sufficient compensation' to be able to share fees with the referring attorney.

"Third, the written disclosure assures that the client not be expected to mentally retain fee splitting information throughout the pendency of the case.

"Fourth, the written consent requirement 'impresses upon the client the importance of his or her consent' and empowers the client's right to reject the fee sharing.

"Finally, the written disclosure requirements are indispensable to clients' decisions about whether to accept fee divisions and to retain or discharge attorneys since divisions of fees may reflect each attorney's responsibilities in a client's matter or may be made on some other basis," Cali recited.

Not limited to referral fees

"I thought that rule 2-200 regulates 'pure' referral fees where the referring lawyer receives a percentage of a contingent fee for doing nothing more than obtaining the signature of a client upon a retainer agreement while the referred attorney does all of the work," said Sam Solo.

"No, Sam, in Chambers, the Supreme Court explained that the scope of the rule is very broad, it not only encompasses 'pure' referral fee arrangements, but also any division of fees in which the attorneys working for a joint client are not partners or associations or shareholders in the same firm," Cali answered.

Serving as co-counsel on lawsuit

"I am representing Polly Plaintiff against Big Corporation in an employment discrimination action. Alice Attorney, an employment discrimination specialist, is serving as co-counsel with me in the action. We each maintain separate independent practices, but our names are jointly on the pleadings and we make joint court appearances on Polly's behalf. Isn't our true co-counsel function tantamount to being a partner or associate of one another, so that we are not required to comply with rule 2-200?" Sam asked.

"In Chambers, the court found otherwise," Cali said. "Rule 1-100(B)(1) (a) defines a law firm as 'two or more lawyers whose activities constitute the practice of law, and who share its profits, expenses, and liabilities.' The court held that when lawyers each maintain independent practices with separate identities, separate addresses of record with the State Bar and separate clients, expenses and liabilities even when the lawyers work together on one or more cases, they are not members of the same firm within the Rules of Professional Conduct. Moreover, unless the lawyers are formal partners, co-owners of a business, they are not 'partners' and therefore not exempt from the disclosure and consent provisions of rule 2-200.

"In your and Ms. Attorney's situation, it does not appear that you are co-owners of a law business, and share in profits and losses of that business; therefore you are not partners and in order to divide fees, you must comply with rule 2-200."

Joint ventures

"Let me give you another situation. I am engaged in a joint venture with two other law firms in representing joint clients in an expensive toxic tort action against multiple defendants. We have orally agreed to share among all attorneys 33 1/3 percent of any recovery. Isn't our joint venture a type of partnership which is exempt from the requirements of rule 2-200?" Sam asked.

"Sometimes the law generally applying to partnerships applies to joint ventures; however, rule 2-200 does not apply to joint ventures amongst attorneys who are not in the same firm. In Chambers, the Supreme Court observed that if it implied a joint venturer exemption, rule 2-200's exemptions would stretch to cover situations which were not contemplated by the rule to cover all fee divisions. For this reason, the court refused to recognize joint venture situations as exempt from the rule. Therefore, you and your joint venturers should comply with the written disclosure and consent requirements of rule 2-200 before any fee is divided," Cali answered.

Attorneys as associates

"Cali, I know I'm on safe ground on the next situation," Sam proclaimed confidently. "I referred a personal injury case to Barry Barrister in which I use his office resources and address. He's the trial attorney; I follow his direction on any discovery or motions that need to be produced; and he and I want to split the contingency fee from our joint client's recovery one-third to me and two-thirds to Barry. I researched this one! I found that Sims v. Charness (2001) 86 Cal.App.4th 884, 103 Cal.Rptr.2d 619 ("Sims") held that in my situation, I would be tantamount to an 'associate' or 'employee' of the referring attorney, and concluded that any fee-sharing agreement would not be subject to the rule 2-200 written disclosure and consent by the client."

Cali quickly replied: "Sam, you are no longer on safe ground. In Cham-bers, the Supreme Court expressly disapproved Sims! The court said that this holding was expressly inconsistent with the language of rule 2-200. Further, it used a three-part test proposed in State Bar Formal Opinion No. 1994-138 to measure whether an outside attorney working in the office of another attorney should be exempt from the rule:

1. the amount paid to the outside lawyer is compensation for the work performed and is paid whether or not the law office is paid by the client;
2. the amount paid by the attorney to the outside lawyer is neither negotiated nor based on fees which have been paid to the attorney by the client; and
3. the outside lawyer has no expectation of receiving a percentage fee. (State Bar Formal Opn. No. 1994-138, p. 2.)

"Your situation with Mr. Barrister does not meet this test because your compensation is contingent upon the client's recovery rather than being paid by the attorney as you perform the work; the amount of fees you will get is based upon fees which Barry will get and you have an expectation of receiving a percentage of the fee! Thus, you need to comply with rule 2-200 in order to obtain a fee," Cali stated.

Sam tried another situation: "Cali, the very good law firm of Able, Best and Competent want me to become 'of counsel' to the firm. They propose that I receive a referral fee for every client that I refer to them and that I pay them a referral fee for all clients referred to me. On projects where I perform work for their clients, they will pay me my hourly rate. Since I am going to be associated with the firm as 'of counsel,' we do not need a disclosure and consent from every client affected by this agreement, do we?"

"Sam, it depends," Cali answered. "In State Bar Formal Ethics Opinion No. 1986-88, the opinion observed that an 'of counsel' is not an employee or partner of a law firm:

• "'The lawyer who is described as being "Of Counsel" to another lawyer or law firm must have a continuing (semi-permanent) relationship with that lawyer or firm, and not a relationship better described as a forwarder-receiver of legal business. His relationship with that lawyer or firm must not be that of partner (or fellow member of a professional legal corporation) nor that of employee.' (Cal. Comp. on Prof. Resp., Cal Op. 1986-88, at p. IIA-268.)
• "Because the 'of counsel' is neither a partner nor associate, the opinion concluded that both the firm and the 'of counsel' must comply with the fee-splitting rule as to all referral arrangements. (Cal. Comp. on Prof. Resp., Cal Op. 1986-88, at p. IIA-269.)
• "On the other hand, when you and the firm contemplate that the client will pay you directly or indirectly, at your hourly rate, for work performed by you, you need not comply with the fee-splitting rule." (Cal. Comp. on Prof. Resp., Cal Op. 1986-88, at p. IIA-269 and Los Angeles Bar Association Formal Opinion 392, p. 95.)

What is permissible?

"Cali, is there any situation in which I can work with other lawyers who are not my partners or associates or shareholders, without compliance with the written disclosure and consent provisions of rule 2-200?" wailed Sam.

"Yes, Sam, there are a few," Cali said soothingly. "The Supreme Court in Chambers approved of the three- point criteria in State Bar Formal Opinion No. 1994-138 to determine that no division of fees occurs under rule 2-200, which I recited above.

"Suppose that you are retained periodically by the XYZ law firm to assist in specific matters for XYZ's clients. You might work on a single matter or for a limited period to meet temporary staffing needs or to provide special expertise not available in the firm. Suppose also that you work exclusively for the firm or that you concurrently work in your office and on projects with Cathy Counsel, another solo practitioner. Other than working on particular matters, you have no other formal relationship with XYZ or Cathy Counsel and both XYZ and Cathy contemplate that your ongoing relationship is not permanent," Cali set up the hypothetical.

"Suppose that you are directly compensated by XYZ or Cathy who both include your time as part of its ordinary periodic fee billings to their clients, which billings disclose your identity as one of the attorneys that has provided services and the nature of those services," Cali continued.

"You may be compensated in the following ways without having to comply with rule 2-200:

1. You may be paid an hourly rate that is less than the hourly rate for the outside lawyer's services billed to the client. For example, if you were paid $100 per hour but the client was billed $150 for all of your services.
2. You may be paid the amount billed to the client for your time as the fees are paid by the client. For example, your hourly rate is $200 per hour for a project and every dollar paid to XYZ and Cathy for work performed on that project is immediately paid to you. (Cal. Comp. on Prof. Resp., Cal Op. 1994-138, at p. IIA-369.)

"For other arrangements which do not meet these criteria, you must comply with rule 2-200," Cali concluded.

"Cali, I have got to go to a deposition. But I need help in figuring out which of the other situations I am in comply with rule 2-200 and whether I can do anything to repair non-compliance in other situations. Can you help me?" Sam asked anxiously.

"Sam, let's sit down and figure all of these things out. I think we can find ethical solutions to most of the circumstances in which you find yourself and we can plan how to comply with rule 2-200 in all future situations. Good luck with your deposition," Cali answered.

Tune in next month as California Joan helps Sam explore other fee-splitting situations and helps him find ethical solutions to his dilemmas.

Ellen Peck is a former judge of the State Bar Court, a past chair of the State Bar's Committee on Profession-al Responsibility and Conduct and a member of the Commission to Revise the Rules of Professional Conduct. A private practitioner in Escondido, she is a visiting professor at Concord University School of Law, where she teaches professional responsibility, and is a co-author of The Rutter Group's California Practice Guide — Professional Responsibility.

Certification

This activity has been approved for Minimum Continuing Legal Education credit by the State Bar of California in the amount of one hour in legal ethics.

The State Bar of California certifies that this activity conforms to the standards for approved education activities prescribed by the rules and regulations of the State Bar of California governing minimum continuing legal education.

Self-assessment test

Answer the following questions after reading the MCLE article on ethical pitfalls of practicing law abroad. Use the answer form provided to send the test, along with a $20 processing fee, to the State Bar. If you do not receive your certificate within four weeks, call 415-538-2504.

1. There is no rule within the Rules of Professional Conduct of the State Bar of California governing divisions of attorney's fees between lawyers; fee-splitting rules regulate only referral fees from lawyers to non-lawyers.



2. The purpose of rule 2-200 is to protect the consumer of legal services by requiring written disclosure so that a client will know the extent of and the basis for fee sharing by the client's attorneys.



3. Another purpose of rule 2-200 is to protect the rights of lawyers within law firms and law corporations to divide fees without regulation while requiring higher duties from sole practitioners who work jointly on cases.



4. Shareholders in the same law corporation must disclose the terms of their division of fees in writing to all law corporation clients.



5. Rule 2-200 writing requirements protect consumers because clients should not be expected to mentally retain fee-splitting information throughout the pendency of the case.



6. Rule 2-200 prohibits referral fee arrangements between lawyers only.



7. The law firm of Prosecute, Defend & Settle hired Terry Tempo-rary from time to time to perform legal services on a big anti-trust class action case defending Macro-Hard. The firm does not need to comply with rule 2-200 if it pays Terry on a monthly basis at a rate of $75 per hour for every hour worked, even though the firm bills Macro-Hard for Terry's time at $125.



8. If a lawyer is not a partner or associate within the same firm, no referral fee may be paid to that lawyer by the firm unless a client has orally approved of the payment of the referral fee.



9. ABC law firm and XYZ law firm, independent law firms, are co-counsel for Paul Plaintiff in a products liability case against Big Motor Co. regarding the design defects of its SUV automobile which cause it to roll over and burst into flames. ABC has a contingency agreement with Paul for attorney's fees of one- third of any recovery it obtains. ABC and XYZ have orally agreed that XYZ will get one-half of whatever ABC gets from Paul as attorney's fees. ABC may pay the fee to XYZ because the co-counsel relationship is the same as being a "partner" within the meaning of rule 2-200, and therefore their deal is exempt from the rule.



10. Assume the same facts as in question 9 and add these facts: ABC is prohibited from re-negotiating its contingency fee with Paul for the purpose of obtaining a greater contingency fee so that it may have sufficient money to cover its fee-splitting arrangement with XYZ law firm.



11. Sally Solo and Paula Practition-er are both sole practitioners and have independent law practices. The have entered into a joint venture to represent Victor Victim, a plaintiff in an employment discrimination case against International Inc. Sally has a contingency fee agreement with Victor; Paula has no agreement with Victor. Sally can pay Paula a percentage of her fee from Victor as long as the percentage reflects the proportion of work Paula performed on the case because their joint venture agreement makes them partners within the meaning of rule 2-200, without the necessity of obtaining Victor's written consent to the fee sharing.



12. Able Attorney referred Perry Plaintiff's personal injury case to Barbara Barrister for handling and performed no legal services for Perry other than referring the case. Barbara may not pay Able a referral fee unless she obtains the written consent from Perry after a written disclosure of the terms of the fees shared with Able and the total fee charged is not increased due to the referral fee paid.



13. Cal Counsel was "of counsel" to the law firm of Competent, Best & Service Law Group. On contingency fee cases in which Cal Counsel gave legal advice to members of the firm, Cal would receive 10 percent of the Law Group's legal fees. Because of Cal Counsel's "of counsel" relationship with the firm, no rule 2-200 compliance was necessary.



14. Lawyers who divide fees pursuant to rule 2-200 must also take care that the fee is not unconscionable.



15. Peter Plaintiff retained Alice Advocate to represent him in a personal injury auto accident case against Darla Driver and agreed to pay Alice one-third of any recovery as attorney's fees. Alice associated Bertha Barrister, a sole practitioner, as co-counsel in handling the case. Bertha took direction from Alice, used Alice's office to perform all services and used Alice's office address under her name on all pleadings. Although Bertha does not have a separate fee agreement with Peter, Alice may pay Bertha 50 percent of the attorney's fees she receives from Peter because Bertha is functioning as her "associate" or "employee."



16. Assume the same facts as in question 15 but add these new facts: When Alice receives her contingency fee from Peter's case and refuses to pay Bertha 50 percent of the fees, in an enforcement action, Bertha may not recover 50 percent of Alice's fees but may recover an amount equal to the reasonable value of her services from Alice.



17. The law firm of Excellent, Fearless & Great represented Harvey Homeowner in a construction defect arbitration case against Big Builder Inc. The firm retained Irma Inveterate, of the Construction Defect Law Group, a renowned specialist in trying construction defect cases, to assist it at the arbitration. The firm agreed orally to pay Irma $2,000 per day of arbitration within 10 days of submission of her bill. The firm does not need to comply with rule 2-200.



18. Malign, Maraud & Mangle ("MMM"), a law firm, retained Auve Counsel, an independent lawyer, to perform legal services for a variety of MMM's clients from time to time. MMM's client billings included Counsel's name, the tasks he billed for, the number of hours he worked, and billed them for that work at Counsel's regular rate of $325 per hour for all work performed. When the clients paid their bills, MMM distributed the amount attributable to Counsel's billings directly to Counsel. MMM does not need to comply with rule 2-200.



19. One of the components used to measure whether an outside attorney working in the office of another attorney should be exempt from rule 2-200 is that the outside lawyer has no expectation of receiving a percentage fee.



20. Rule 2-200 protects the consumer of legal services because the written consent requirement "impresses upon the client the importance of his or her consent" and empowers the client's right to reject proposed fee sharing.