Ethical Rule 1.5(e) provides the exclusive framework for dividing fees among lawyers in different firms. Thus, a contract between a firm and its departing lawyers that purports to govern post-departure disposition of fees must comply with ER 1.5(e) or it is ethically unenforceable. Such contracts also cannot restrict a lawyer’s right to practice in violation of ER 5.6 (a). [ER 1.5(e), 5.6(a)]
Client contacted and retained a law firm ("the Firm") where the Inquiring Attorney was employed as an associate. The Inquiring Attorney met with Client and assumed responsibility for Client's contingent fee case. About five to six weeks later Client discharged the Firm, and directed that the Firm take no further action on his behalf.
Shortly thereafter the Inquiring Attorney left the Firm and established his own practice. Client then retained the Inquiring Attorney to represent him in the case, about two months after Client discharged the Firm. Client does not want the Firm to participate in the case; accordingly the Firm has not assumed joint responsibility for the representation, and will perform no further work on the case. Only a very small amount of work was performed on the case during the five to six weeks the Firm represented the Client, and the Inquiring Attorney has performed a substantial amount of work on the case since he established his own practice.
The case is still pending and no fee has yet been earned. The Firm, however, has informed the Inquiring Attorney that it expects to divide any fees ultimately earned in the case under the terms of the employment contract the Inquiring Attorney signed upon accepting employment with the Firm. The relevant provision of the contract, titled "Fees and Costs Division following Termination," purports to govern division of fees between the Firm and its former attorneys in cases originating with the Firm but taken elsewhere by departing attorneys.
The contract sets forth several formulae for determining the Firm's percentage share of fees earned in such cases. The formulae are based on a number of factors, including how old and how far the case is into the litigative process when resolved, how much time passes between the attorney's departure from the Firm and the resolution of the case, and the type of resolution (i.e. settlement, arbitration, jury verdict, etc.). One representative example is:
The firm shall receive [45 percent plus (2.5 percent times the number of months, not to exceed 8 months, that the firm represented the client on such case after the date that the client first retained the firm)] of the fee from any such case that settles more than ninety days after an answer to a lawsuit is filed of more than ninety days after a request for arbitration is submitted, and before the verdict or award or decision is returned on the case....
The formulae do not factor in, and indeed do not even address, the relative amounts of legal work performed in a given case by the Firm and the departing attorney. The contract indicates that one basis of the Firm's right to the prescribed share of fees is the Firm's incurring substantial marketing expenses in connection with attracting clients to the Firm.
Because the case has not yet been resolved it is not yet clear which contract provision will purportedly apply in this case.
Whether the Inquiring Attorney will violate any ethical rules if he divides fees in this case pursuant to the terms of the contract.
ETHICAL RULES INVOLVED
ER 1.5: FEES
(e) A division of fee between lawyers who are not in the same firm may be made only if:
(1) the division is in proportion to the services performed by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation;
(2) the client is advised of and does not object to the participation of all the lawyers involved; and
(3) the total fee is reasonable.
ER 5.6: RESTRICTIONS ON RIGHT TO PRACTICE
A lawyer shall not participate in offering or making:
(a) a partnership of employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement.
Comment: Division of Fee
A division of fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm. A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist. Paragraph (e) permits the lawyers to divide a fee on either the basis of the proportion of services they render or by agreement between the participating lawyers if all assume responsibility for the representation as a whole and the client is advised and does not object. It does not require disclosure to the client of the share that each lawyer is to receive. Joint responsibility for the representation entails the obligations stated in ER 5.1 for purposes of the matter involved.
ER 1.5(e) sets forth the exclusive ethically permissible framework for dividing fees among lawyers in different firms. The committee concludes, as at least four other committees explicitly or implicitly have (Michigan Standing Committee on Professional and Judicial Ethics, Op. RI-245, November 15, 1995; Pennsylvania Bar Association Committee on Legal Ethics and Professional Responsibility, Informal Opinion 95-26, March 28, 1995; Utah Ethics Advisory Opinion Committee, Op. #132, August 26, 1993; and Philadelphia Bar Association Professional Guidance Committee, Op. 87-24, April, 1988), that the rule applies to contracts, like the one at issue here, which purport to govern post-departure disposition of fees between a firm and its departing lawyers who take cases with them.
A division of fees which materially deviates from the rule's requirements is ethically impermissible, even if made pursuant to the terms of an employment contract between lawyers. Therefore the Firm will be entitled to a share of the fee in this case only if the rule permits it, without regard to what the contract says, and since the Firm is not assuming joint responsibility for the representation it will be entitled only to a share of the fee proportionate to the amount of work performed on the case during the five to six weeks it represented the Client. If that results in a share for the Firm different than what the contract would provide, the Inquiring Attorney is ethically bound to follow the rule.
Marketing efforts are not "services" within the meaning of ER 1.5 (e) (1); for purposes of the rule "services" means legal services provided to clients. Therefore marketing efforts may not ethically serve as a basis for claiming a share of fees, even if they directly resulted in Client retaining the firm in the first place.
"[ER 1.5 (e)] permits the lawyers to divide a fee on either the basis of the proportion of services they render or by agreement between the participating lawyers if all assume responsibility for the representation as a whole and the client is advised and does not object." ER 1.5, Comment: Division of Fee. There is no other ethically permissible basis for dividing fees, and the Inquiring Attorney is therefore bound to follow the rule if and when a division of fees becomes appropriate in this case.
These types of contractual provisions may also violate ER 5.6 (a), which states that a lawyer "shall not participate in offering or making...a partnership or employment agreement that restricts the rights of a lawyer to practice after termination of the relationship, except an agreement concerning benefits upon retirement...". As the Committee has noted, "[t]he restrictions contained in the ER 5.6 are rooted in the concern that restrictive covenants among lawyers will diminish the public's ability to employ counsel of choice, which interest outweighs a lawyer's interest in the potential unfair competition for existing clients." Op.95-04 at 3. A contract between a firm and a departing attorney which leaves the latter unable to afford to represent a client effectively "limits the freedom of [the client] to choose a lawyer" (Comment to ER 5.6) in violation of the rule; this would be true, moreover, even if the contract otherwise complied with ER 1.5(e). See Utah Ethics Advisory Opinion Committee, Opinion #132, at page 2 (to same effect).
Since the Inquiring Attorney has continued to represent Client after his departure from the Firm, it appears that the contract has not operated to restrict the Inquiring Attorney's rights to practice, at least as it applies to this case. The Committee expresses no opinion about the enforceability of the agreement. The Inquiring Attorney can continue his representation of Client on the premise that the contract was not enforceable. Lawyers, however, should take care to ensure that contracts of this type comply with both ER 5.6(a) and ER 1.5(e).