State Bar of Arizona Ethics Opinions
99-12: Conflicts of Interest; Division of Fees with Nonlawyers; Independent Professional Judgment; Lawyer Referral Service
A lawyer employed by an architectural firm may not
provide legal services to the firm's clients, where the firm pays the attorney a salary but charges the clients an hourly rate for the lawyer's services, because of possible conflicts of interest and impermissible fee-sharing with non-lawyers. [ER 1.7, 1.8(f), 5.4, 7.1]
The inquiring attorney is considering an in-house counsel position with an architecture firm. In addition to acting as in-house counsel, the attorney would handle real estate and land use matters for the firm's clients. The firm would pay the attorney a salary and would charge clients an hourly rate for the attorney's services.
May a lawyer provide legal services both to an architectural firm and to its clients, where the firm pays the lawyer a salary and bills the clients an hourly rate for the lawyer's services?
RELEVANT ETHICAL RULES
ER 1.7 Conflict of Interest: General Rule
(a) A lawyer shall not represent a client if the representation of that client will be directly adverse to another client, unless:
(1) The lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and
(2) each client consents after consultation.
(b) A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interest, unless:
(1) The lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation. When representation of multiple clients in a single matter is undertaken, the consultation shall include explanation of the implications of the common representation and the advantages and risks involved.
ER 1.8 Conflict of Interest: Prohibited Transactions
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(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) The client consents after consultation;
(2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and
(3) information relating to representation of a client is protected as required by ER 1.6.
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ER 2.1 Advisor
In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law, but also to other considerations such as moral, economic, social and political factors, that may be relevant to the client's situation.
ER 5.4 Professional Independence of a Lawyer
(a) A lawyer or law firm shall not share legal fees with a non-lawyer, [except in limited circumstances, none of which apply here]
(b) A lawyer shall not form a partnership with a non-lawyer if any of the activities of the partnership 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 professional judgment in rendering such legal services.
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ER 7.1 Communications and Advertising Concerning a Lawyer's Services
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(r) A lawyer or his partner or associate or any other lawyer affiliated with him or his firm may be recommended, employed or paid by, or may cooperate with, one of the following offices or organizations that promote the use of his services or those of his partner or associate or any other lawyer affiliated with him or his firm if there is no interference with the exercise of independent professional judgment in behalf of his client:
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(4) any bona fide organization that recommends, furnishes or pays for legal services to its members or beneficiaries, provided the following conditions are satisfied:
(A) such organization, including any affiliate, is so organized and operated that no profit is derived by it from the rendition of legal services by lawyers, and that, if the organization is organized for profit, the legal services are not rendered by lawyers employed, directed, supervised or selected by it, except in connection with matters where such organization bears ultimate liability of its members or beneficiary;
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The proposed situation poses at least two ethical problems: (1) the lawyer's representation of both the architectural firm and its clients may violate ER 1.7 and create potential conflicts of interest; and (2) the compensation arrangement violates ER 5.4 regarding sharing legal fees with a non-lawyer which could lead to interference with the lawyer's independence of professional judgment.
First, the lawyer's dual role creates at least the appearance of a potential conflict. Underpinning Ethical Rules 1.7, 1.8 and 5.4 is the principle that an attorney's loyalty is essential to the attorney-client relationship. Ariz. Op. 96-05, Comment to ER 1.7, Matter of Evans, 113 Ariz. 458, 556 P.2d 792 (1976). In the proposed situation, every client that the attorney counseled would be potentially adverse to the interests of the attorney's employer, calling into question the attorney's loyalties.
Generally, the possibility of a conflict is not enough to create an ethical violation. The Comment to Ethical Rule 1.7 makes clear that its focus is on prohibiting actual conflicts, not potential conflicts: "The critical questions are the likelihood that a conflict will eventuate and, if it does, whether it will materially interfere with the lawyer's independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client." Comment to ER 1.7.
Where circumstances are fraught with substantial potential conflicts, however, the Committee has concluded that an ethical violation would exist. See, e.g. Ariz. Op. 96-05 (referring a client to a medical clinic in which the attorney has an interest constitutes entering into a business transaction with the client in violation of ER 1.8); Ariz. Op. 96-11 (Company representing tax payers sought to hire bankruptcy lawyer). While Ethical Rule 1.7 leaves to an attorney's discretion the decision whether to represent a client where the potential exists for a conflict of interest as long as the client consents after disclosure of the potential conflicts, an attorney in the proposed situation would have to stay vigilant and advise clients to seek individual representation the moment their interests turned adverse to those of the attorney's employer. In this regard, the proposed situation poses risks but not insurmountable obstacles.
The proposed situation poses another problem. The firm's payment of a salary to the attorney while billing clients an hourly rate for the attorney's services would directly violate ER 5.4(a), prohibiting sharing legal fees with a non-lawyer. Ariz. Ops. 96-11, 93-01, 85-07. In analogous situations, the Committee has found that such an arrangement was strictly prohibited by ER 5.4(a) and additionally was problematic for several other reasons. Ariz. Op. 93-01 (ER 5.4 prohibits a lawyer from forming a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law).
ER 5.4(b) will be violated if the inquiring attorney forms a "partnership" with the architectural firm, which is owned and controlled by non-lawyers, since one of the firm's activities consists of the practice of law. In the past, the Committee has construed "partnership" broadly and has even applied the term to employer-employee arrangements. See, e.g. Ariz. Op. 96-11 (company representing taxpayers before the Internal Revenue Service sought to employ bankruptcy attorney); Ariz. Op. 93-01 (attorney proposed to associate with non-lawyer business offering complete eviction services).
The proposed arrangement also violates ERs 5.4(c) and 1.8(f)(2) if the firm, in its role as the attorney's employer, in any way directed or regulated the lawyer's professional judgment in rendering legal services to clients. Even if the firm agreed to comply with these Rules by refraining from influencing the attorney's representation of clients, the structure of the proposed arrangement would allow the firm to indirectly influence representation of clients by controlling matters such as the attorney's time and workload. Ariz. Op. 96-11.
The proposed situation also would invoke ER 7.1(r)(4) concerning lawyer referral services because the firm would refer clients to its attorney. While such an arrangement may not fit a literal reading of the Rule, the Committee has interpreted it broadly in the past. Ariz. Op. 96-11, 85-07 (law firm sought referral arrangement with company providing services related to employment compensation, including representation before DES). Therefore, any clients of the firm must have the option of selecting other counsel, among other rights, and the firm must file annual reports with the appropriate lawyer disciplinary authority describing the details of its arrangement. ER 7.1(r)(4)(E).
Finally, the proposed arrangement would create problems under ER 5.3 with regard to a lawyer's responsibility for non-lawyer assistants, despite the fact that the firm in the proposed arrangement would contract directly with the clients. In Ariz. Op. 93-01, the Committee applied ER 5.3 to an analogous situation in which an attorney proposed to associate with a non-lawyer business that provided complete eviction services. In that opinion, and other formal opinions referenced therein, the Committee explained that the proposed arrangement would violate the spirit of ER 5.3 because the attorney would not have supervision and control over non-lawyer colleagues who provide services to the client that might affect the client's legal rights. Ariz. Op. 93-01 stated:
[T]he lawyer would violate ER 5.3 in so cooperating in view of the fact that the consulting service was a completely independent entity, and that the lawyer had no means of ensuring that the consulting service's conduct was compatible with the lawyer's professional obligations. . . [A]n attorney may not provide legal services in association with a non-lawyer unless the non-lawyer's activities relating to the lawyer's representation of the client are subject to the attorney's supervision and control.
The rationale for the prohibition on providing legal services in cooperation with a member of another profession or working as a salaried employee of a non-lawyer and providing legal services to clients who pay more for the services than the services cost the employer was stated in Emmons, Williams, Mires & Leech v. California State Bar, 6 Cal. 3d 565, 573-74, 86 Cal. Rptr. 367, 372 (1970). "[F]ee splitting between lawyer and layman . . . poses the possibility of control by the lay person, interested in his own profit, rather than the client's fate. . . " Id. Such a prohibition avoids the possibility of a non-lawyer's interference with the exercise of a lawyer's independent professional judgment and ensures that the total fee paid by a client is not unreasonably high. See ABA Formal Opinion No. 87-355. Prohibition also avoids encouraging non-lawyers to engage in the unauthorized practice of law. See ABA Informal Opinion No. 86-1519.
The prohibition on providing legal services in cooperation with members of another profession has been criticized, however, as preventing the development of "full-service" practices in which members of different professions work to meet the specialized needs of clients. See ABA/BNA Lawyers' Manual on Professional Conduct § 41:802. Critics suggest that a lawyer's duty to exercise independent judgment on a client's behalf renders the prohibition redundant as a protection against non-lawyer influence. See Hazard & Hodes, The Law of Lawyering, 473 (1985 & Supp. 1987) (the rule bans innovative forms of practice even in situations where the risk of harm to a client is minimal); Brown, Emerging Changes in the Practice of Law, 1978 Utah L. Rev. 599, 609 (the rule poses obstacle to development of full-service professional offices); Huber, Competition at the Bar and the Proposed Code of Professional Standards, 57 N.C.L. Rev. 559, 581 91979 (it may be useful for a lawyer to work jointly with other professionals to provide clients with an array of expertise); Quinn, "Multidisciplinary Legal Services and Preventive Regulation," Lawyers and the Consumer Interest: Regulating the Market for Legal Services, 329 (R. Evans & M. Trebilcock, eds. 1982) (multidisciplinary firms made up of lawyers and members of other occupations may benefit consumers by reducing costs and creating new services).
Despite these criticisms, however, this Committee consistently has held that Arizona's Rules of Professional Conduct prohibit arrangements such as the one presented in the instant case.
In summary, the proposed arrangement poses a potential for conflicts of interest in violation of ERs 1.7 and 1.8. This potential, however, is insufficient to find that the arrangement would violate ERs 1.7 and 1.8 under all circumstances. Nevertheless, the proposed arrangement directly violates ERs 5.4 and 7.1 and, thus, is impermissible.