Economic Factors Driving Increase In Nonlawyer Payment Inquiries

“Because of the market, there are more people looking for more creative ways to generate business,” says Craig Simpson, a legal ethics and professional responsibility attorney in Pittsburgh, PA, noting that in recent years he's seen an upturn in the number of inquiries from attorneys about compensation arrangements with nonlawyers.

Simpson attributed the rising number of inquiries at least in part to the rising attorney population.

“When I was admitted to practice, I think we had something like 30,000 attorneys [in Pennsylvania] ' but now there are 70,000 and we have not had a corresponding general population increase,” Simpson says.

Ethics lawyer James C. Schwartzman of Stevens & Lee in Philadelphia agrees. “There are more lawyers competing for the same finite pot of cases,” which is forcing attorneys to find more creative ways to generate business, Schwartzman says, noting the way he often describes his legal ethics practice: “When the economy is good, my practice is very good; when the economy is bad, my practice is even better.”

“It's been ingrained in our professional culture that you cannot pay a nonlawyer for referring a case to you,” says ethics attorney Abe Reich of Fox Rothschild in Philadelphia, citing the classic example of plaintiffs firms using “runners” to solicit business in exchange for referral fees.

But the advent of legal marketing made the issue more complex as more and more attorneys and law firms began to utilize the services of nonlawyers in an attempt to drum up business, Reich says.

“I get these inquiries actually not infrequently,” Reich adds. “Most law firms in the city have consultants to perform various functions for them, some of which are directly related to generating business. The most obvious [examples] are marketing consultants: while a lot of big firms have their own in-house marketing folks ' a lot of midsized firms hire marketing consultants.”

When attorneys ask him what is and what is not permitted in a payment arrangement with a nonlawyer, Reich says he takes a “literalist” approach to the Rules of Professional Conduct: “I am comfortable recommending to lawyers who make these inquiries that there's nothing wrong with hiring consultants, nothing wrong with consultants recommending clients to the firm, nothing wrong with consultants promoting the firm ' as long as at the end of the day [lawyers] are not paying a quid pro quo for a case that comes to the firm.”

In SCF Consulting, Senior Judge James J. Fitzgerald III, writing for the majority, said the alleged arrangement in which Scott C. Freda ' SCF Consulting's sole member ' was to receive 5% of the firm's annual profits generated by cases he assisted with violated Rule of Professional Conduct 5.4, which bars, with few exceptions, attorneys from sharing legal fees with nonlawyers.

According to the opinion, SCF alleged it was induced by Barrack Rodos to work exclusively on the firm's behalf in securities class actions in exchange for both a fixed annual consulting fee and a 5% cut of any profits gained from cases on which SCF worked.

SCF alleged that the firm subsequently refused to make the profit-share payments, however, according to the opinion. Following discovery, the firm moved for summary judgment and Philadelphia Court of Common Pleas Administrative Judge Gary S. Glazer granted the motion, finding that the fee-sharing aspect of the alleged payment arrangement ran afoul of Rule 5.4.

On appeal, Fitzgerald, joined in the majority by Judge Jacqueline O. Shogan, affirmed Glazer's ruling rejecting SCF's argument that the agreement fell within the exception to Rule 5.4 that allows nonlawyer employees to participate in profit-sharing compensation or retirement plans.

“As the trial court accurately noted, appellant was not an employee of the firm participating in a formalized program benefiting employees based upon the profitability of the firm,” Fitzgerald said. “Therefore, the exception in Rule 5.4(a)(3) is unsustainable in the instant case because there is a direct link between the specific fees and specific payment to appellant, a nonlawyer.”

Judge Sallie Updyke Mundy noted her dissent, but did not pen an opinion explaining her reasoning.

Zack Needles is the Managing Editor of The Legal Intelligencer, the Philadelphia-based ALM sibling of this newsletter. He can be reached at 215-557-2373 or [email protected]. Follow him on Twitter @ZackNeedlesTLI.