Nonprofits are in a class of their own

By Diane Karpman

Karpman

Writing for a unanimous California Supreme Court, Chief Justice Ronald George may have given the legal profession a visionary decision in Frye v. Tenderloin (www.courtinfo.ca.gov/opinions/documents/S12761). Yet it is firmly based upon historical precedent. The case suggests that a knee-jerk application of the ethical rules may not be appropriate in all circumstances, especially for nonprofits where there may be constitutional concerns.

The entire legal services community was astonished when one of their clients, blessed with their representation, subsequently attempted to personally keep the fees generated by the case. The client claimed that failure to satisfy various rules justified fee disgorgement. Can you believe that a client would attempt to play the rule “card” to deny a lawyer a fee? Shocking!

The 25-page decision seems to be saying that in some circumstances, automatic disgorgement “is disproportionate to the wrong.” The court even mentioned the notorious Birbrower case. Until Birbrower (1998) 17 Cal. 4th 119, lawyers didn’t really understand that “unauthorized practice of law” statutes applied to them. Those silly lawyers believed the UPL statutes applied to notarios, financial planners and paralegals, but not to members of the bar.

In Frye v. Tenderloin, the Supreme Court cites a group of historic decisions in which the U.S. Supreme Court explained that the ethical obligations of lawyers cannot be used to circumvent lawyers’ or organizations’ exercise of their First Amendment rights. In other words, constitutional rights can trump technical state proscriptions on lawyer conduct. Virginia, Arkansas, Florida, Georgia, Mississippi, South Carolina and Tennessee would enact legislation, or industries (e.g., railroads) would use the rules to frustrate organizational goals.

Union and civil rights lawyers were constantly harassed by staid bar organizations as a method of blocking social change, like school desegregation, enactment of New Deal legislation or providing competent counsel to injured railroad workers. Some of the rules, which are not as stringently applied when they involve the exercise of the First Amendment, include advertising and solicitation, case “origination,” unauthorized practice and fee splitting. These “legal aid, mutual benefit and advocacy groups” advance public interests and provide access to those without means to obtain counsel. 

This case may provide incentives for new types of nonprofit practice models, which are already being depicted in the media. On the TV show “In Justice,” about an Innocence Project, the employees all seem to be practicing law, while investigating and directing the lawyers. Overly enthusiastic investigators must be supervised. Go to LACBA.com for an outstanding article on investigator supervision and ethics (“Private Eyes”).  

The lynchpin of Frey v. Tenderloin is the absence of a profit motive, which the court suggests means that the lawyer’s independent judgment will not be impaired. The court nevertheless requests that the State Bar consider regulations. After all, Eliot Spitzer has been or is investigating 501(C)(3)s, because they too can implode, explode or be manipulated.