Opinion 2004-3
(June 2004)

The inquirer has asked for guidance on the ethical propriety of a proposed law firm and its compensation and business plan. The plan is set forth in the inquiry, which is attached hereto as Exhibit A and made a part hereof.

There is a preliminary question not raised by the inquirer, but which the Committee feels must be addressed. The inquiry does not clarify who the “client” of the law firm would be. It is the Committee’s understanding that federal law may require that any petition on behalf of a foreign national be signed by the employer, and that the employer is the inquiring law firm’s client. However, in fact the law firm may have two clients, namely the potential employee and the employer. As such, conflicts of interest under Pennsylvania Rule of Professional Conduct (the “Rules”) 1.7 must be always considered and the Committee assumes as a threshold issue that the requirements of that section will be met. In this regard, Rule 5.4c is also important, not only as discussed below but also for the overriding importance that a lawyer always exercise independent professional judgment in rendering legal services for a client.

The first issue to address is that of the proposed compensation for the non-lawyer employee. Rule 5.4(a) provides that in general, a lawyer or law firm “shall not share legal fees with a non-lawyer.” However, there is an exception to this prohibition found in Rule 5.4(a)(3) which provides that, “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.”

Thus, the question to be decided as to “compensation” is whether (however denominated) the compensation plan is in actuality “shar(ing) legal fees” or a “compensation plan based on profit sharing.”

Clearly, any law firm “profits” are obtained from legal fees, and thus in its simplest sense, any “compensation plan” by definition is based on a share of fees paid by clients. Thus, it is necessary to consider the reason for the prohibition in order to understand its scope. Rule 5.4 (c) states that, “A lawyer shall not permit a person who recommends . . . the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services. “The policy goal is that the non-lawyer not be allowed to interfere with the lawyer’s practice, including specifically the lawyer’s judgment of steps that need to be taken on behalf of the client, even if it reduces “net profits.” The interests of the client are paramount, and the economic interests of the non-lawyer in maximizing “net profits” is not permitted to dilute or change the obligation of loyalty to the client’s interests.

The issue therefore is whether the “compensation” plan is structured in a way to encourage or motivate a non-lawyer to seek to influence representation of a specific client. Thus, a share of firm-wide “net profits” by a non-lawyer employee, tied to the total of firm profits, and not the gross proceeds of fees from cases brought in by the non-lawyer employee, nor tied to limited types of cases would not be prohibited. Another issue to consider, although not dispositive is whether all like-situated non-lawyer employees are treated in the same fashion under the compensation plan.

On the other hand, if the bonus plan by design is limited to a percentage of the profits generated from the fees earned just on cases referred by the Marketing Director, then the “compensation plan” would actually be a sophisticated “fee sharing arrangement” and hence prohibited. As the firm grows and different matters are referred through various sources, the profit sharing plan must be based on all the profit from all the cases handled by the firm. If for some reason none of the case referred by the Marketing Director produced any profit, but the firm was profitable because of other referral sources in other matters, the Marketing Director would still have to be entitled to his 20% of all the firm profits in order for the plan to be considered in compliance with Rule 5.4a3.

As regards the inquirer’s business plan, the inquiry raises the question of recommendations to the law firm's clients to use the placement services of the placement company. Any recommendation by the law firm to its clients to use the placement services of the placement company is subject to the conflict of interest rules under Rule 1.7b(1), with which you must comply.

As far as solicitation of business is concerned, the inquirer asks whether the Marketing Director, having sent out written communications clearly permitted under Rule 7.3a, can follow up with a telephone or in person solicitation. Of course, the written solicitations are subject to the restrictions of Rule 7.1 (not false or misleading). With regard to the follow-up telephone call, it would seem that before any client is referred to the law firm, the lawyer will have had no prior professional relationship with that individual, and therefore the Marketing Director, when acting as Marketing Director for the law firm, may not make such a telephone call. To do so would be a violation of Rule 7.3a through Rule 8.4a. However, once an attorney client relationship is formed with the employer, the law firm and the lawyer would at that point have a “prior professional relationship” with the human resource contact at the employer, the putative client.

Again, addressing the solicitation issue, the inquirer asks whether, when acting as an officer of the placement company, the Marketing Director may make personal solicitations with the human resource managers. Here again, the reality is that the law firm Marketing Director is motivated by his salary and profit participation, and is therefore acting on behalf of the lawyer, and is similarly restricted from the personal solicitation.

The Philadelphia Bar Association's Professional Guidance Committee provides, upon request, advice for lawyers facing or anticipating facing ethical dilemmas. Advice is based on the consideration of the facts of the particular inquirer's situation and the Rules of Professional Conduct as promulgated by the Supreme Court of Pennsylvania. The Committee's opinions are advisory only and are based upon the facts set forth. The opinions are not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any other Court. They carry only such weight as an appropriate reviewing authority may choose to give it.