State Bar of Arizona Ethics Opinions

90-14: Professional Independence of a Lawyer
10/1990

Propriety of law firm compensating its non-lawyer marketing director by a base monthly fee plus quarterly bonuses. Three dissents.



FACTS:

The inquiring law firm requests an opinion on the propriety of measuring a non-lawyer’s compensation as a percentage of the firm’s revenues.

The firm proposed to retain a marketing director, who is not a lawyer, to help develop and expand the firm’s practice areas. The marketing director would receive a base monthly fee in addition to quarterly bonuses. The bonuses would equal a fixed percentage of the increased revenues derived from those areas of practice which the marketing director was hired to develop.

The compensation scheme is intended to create an incentive for the marketing director, yet the firm is concerned that such an arrangement may be construed as unethical fee splitting.
 

QUESTION:

Is it ethically proper for a law firm to measure compensation paid to its nonlawyer-marketing director as a percentage of the firm’s quarterly increase in revenues?
 

SUMMARY OF OPINION:

A law firm that pays a non-lawyer incentive compensation which is measured by a percentage of increased revenues is not in violation of the Arizona Rules of Professional Conduct.
 

ETHICAL RULE CITED:

ER 5.4. Professional Independence of a Lawyer

(a) A lawyer or law firm shall not share legal fees with a non-
lawyer, except that:

(3) a lawyer or law firm may include non-lawyer employees
in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.
 

FORMER DISCIPLINARY RULE CITED:

DR 3-102. Dividing Legal Fees with a Non-Lawyer

(A) A lawyer or law firm shall not share legal fees with a non-
lawyer, except that:

(3) A lawyer or law firm may include non-lawyer employees
in a compensation or retirement plan, even though the
plan is based, in whole or in part, on a profit-sharing
arrangement, providing such plan does not circumvent
another Disciplinary Rule.
 

RELEVANT PRIOR OPINIONS:

A.B.A. Informal Opinion 1440 (August 12, 1979) (A.B.A. Standing Committee on Ethics and Professional Responsibility, “Formal and Informal Ethics Opinions” (1985), p. 341).

Massachusetts Bar Opinion 84-2 (May 18, 1984) (ABA/BNA Lawyers’ Manual on Professional Conduct, “Ethics Opinions 1980-1985," p.801:4608).
 

OPINION:

Prior to February 1, 1985, Arizona followed its version of the Model Code of Professional Responsibility which prohibited law firms from sharing legal fees with non-lawyers. None of the exceptions to the original version of DR
3-102 expressly allowed for the compensation of employees as a percentage of revenues. Nevertheless, the American Bar Association Committee on Ethics and Professional Responsibility, when faced with facts similar to
those here opined that such a compensation scheme did not violate the Model Code. A.B.A. Informal Opinion 1440 (August 12, 1979).

That Opinion responded to an inquiry of a law firm which employed a non-lawyer office administrator to manage the firm’s nonprofessional business matters. The firm proposed to pay the administrator a fixed annual salary supplemented by a percentage of the firm’s net profits. This compensation scheme was designed to encourage the administrator to increase the firm’s operating efficiency and productivity. The A.B.A. Committee concluded that this proposal did not violate DR 3-102 because the compensation related to the net profits and business performance of the firm and not to any particular legal fees.

The A.B.A. Committee distinguished between legal fees and firm revenue after concluding that the administrator’s compensation arrangement did not violate the policy behind DR 3-102. Both DR 3-102 and its counterpart in the Arizona Rules, ER 5.4, were designed to prevent control of the lawyer by the non-lawyer, who may be more concerned with his own financial return than with the firm’s clients’ interests. In Informal Opinion 1440, the A.B.A. Committee noted that the non-lawyer did not participate in any decisions involving professional judgment.

Faced with facts substantially similar to those in A.B.A. Informal Opinion 1440, the Massachusetts Bar Committee reached the opposite conclusion in Massachusetts Bar Opinion 84-2 (May 18, 1984). That Opinion also involved a law firm which proposed to pay a non-lawyer office administrator a fixed salary plus a Committee distinguished A.B.A. Informal Opinion 1440 by noting that the American Bar Association, on February 5, 1980, had amended DR 3-102 (A) (3) after the A.B.A. Committee had issued that Informal Opinion. (105 Reports of American Bar Association, 1980, p. 288). The amendment added the underlined portion to the original language of the Rule:

A lawyer or law firm may include non-lawyer employees in a compensation or retirement plan, even though the plan is based, in whole or in part, on a profit-sharing arrangement, providing such plan does not circumvent another Disciplinary Rule.

Because Massachusetts had adopted no similar amendment, the Massachusetts Bar Committee concluded that it was not ethically proper for a law firm to compensate a non-lawyer employee based on a percentage of the firm’s profits. The Massachusetts Opinion ignores the fact that the A.B.A.’s amendment to DR 3-102 (A) (3) was not in effect when A.B.A. Informal Opinion 1440 was written. Apparently, the Massachusetts Bar Committee disagreed with the distinction made in Informal Opinion 1440 between sharing legal fees and sharing a law firm’s revenues.

The Arizona Supreme Court adopted the Model Rules of Professional Conduct effective February 1, 1985. The language of ER 5.4 (a) (3) is substantially similar to DR 3-102 (A) (3) as amended by the A.B.A. and quoted above. Both of those Rules apply to “employees” of a lawyer or law firm. Although it is unclear from the inquiry whether the marketing director would be an employee of the firm or an independent contractor, the policy of the Rules to prevent the control of a lawyer’s rendition of professional services by a non-lawyer is equally applicable in both situations. Assuming that the marketing director would not participate in any decisions involving the professional judgment of the firm’s lawyers, the planned compensation system does not appear to violate the policy behind the Rules regardless of the marketing director’s status as employee or independent contractor.

Two strong arguments support the ethical propriety of the inquiring firm’s proposal. First the A.B.A. Committee stated in its Informal Opinion 1440 that language such as that in ER 5.4 (a) prohibits fee-sharing but not profit-
sharing. Thus, ER 5.4 (a) does not proscribe the compensation arrangement of the inquiring firm. Second, even if the Arizona courts were to reject the reasoning in A.B.A. Informal Opinion 1440, ER 5.4 (a) (3) specifically permits an employee compensation plan based on a profit-sharing arrangement.

Both of the above argument rest on the assumption that the marketing director has no influence over any lawyer’s exercise of professinal judgment. If this assumption is incorrect, the firm’s proposal violates the ethical policy behind ER 5.4.
 

Editor’s Note:

Three members of the Committee dissented from the majority opinion. The dissent reads as follows:

“This dissent disagrees with the committee’s opinion in two respects, which result in a negative answer to the question posed. First, as a lawyer’s fees constitute his revenue, the sharing of that revenue by means of a fixed percentage constitutes the sharing of legal fees proscribed by ER 5.4 Whether the same conclusion would be reached if the sharing were of the law firm’s net profits, as apparently was the case in ABA Informal Opinion 1440, need not here be answered. The conclusion of this dissent that sharing of revenue constitutes fee sharing is supported by Opinion 89-4 of the Florida Bar Professional Ethics Committee. There the committee ruled that if commissions paid to a non-lawyer hired to engage in permissible marketing activities would be tied to legal fees derived from business brought to the firm by the non-lawyer’s efforts, payment of those commissions would constitute a violation of the rule which forbids a lawyer to divide a legal fee with a non-lawyer.

“Second, the exception in subparagraph (a) (3) of ER 5.4 for contributions for a non-lawyer in a compensation or retirement plan, applies, in the view of the dissenters, to profit sharing, pension, and similar plans, and does not apply broadly to any ‘compensation’ plan. To conclude otherwise would be to make the exception for a conpensation plan so broad as to virtually negate the proscription on fee sharing.”



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