Another day, another stupid legal ethics ruling. This one – ABA Formal Opinion 475: Safeguarding Fees That Are Subject to Division With Other Counsel , released last week – seems innocuous enough, not to mention dull as dishwater. But like so many ethics decisions, Formal Opinion 475 elevates form over substance to the detriment of many solo and small firm lawyers and our clients and ensures that the way that lawyers practice will never advance beyond the 19th century.
Before diving into an analysis of Formal Opinion 475, here’s some quick background on fee-splitting. As most lawyers are aware, the ABA Model Rules allow lawyers in separate firms to split fees so long as the split is disclosed to and approved by the client and proportionate to the work performed by each firm. ABA Model Rule 1.5 defines a division of fee as “a single billing to a client covering the fee of two or more lawyers who are not in the same firm.” Often, we associate fee-splitting as a phenomenon unique to personal injury cases where a lawyer may refer a large contingency matter to another firm with the expectation of a referral fee. But fee-splitting is common in other scenarios as well – such as co-counsel arrangements or where a law firm brings on multiple lawyers either to bring to bear expertise that it lacks or to represent the client as part of the same matter but on proceedings in other jurisdictions. (Side note: in this regard, co-counsel or “special counsel” arrangements differ from working with freelancers who do not represent the client, and instead work directly for or under the lead law firm).
In the “of counsel” or “special counsel” situations, theoretically each individual law firm could enter into a separate representation agreement with the client and transmit individual invoices that the client pays separately. However, it’s a pain in the neck for a client to be billed at different intervals and to send separate checks to multiple lawyers. So generally, it’s customary for the lead firm to send the client a single bill that reflects each lawyer’s time. With this approach, the client has a single invoice and a single point of payment, and the lead firm is responsible for cutting checks to each individual lawyer who worked on the case.
It’s at this point that Formal Opinion 475 comes into play. Formal Opinion 475 addresses how a firm must handle those shared fees that are earned and collected from the client prior to disbursement to the outside lawyers. Naturally, when a client pays an advance retainer, the lead firm must hold the funds in trust until the fee is deemed earned. Now, Opinion 475 says that even when a lead firm collects earned fees from clients that will be shared with those outside lawyers who worked on the case, the lead firm must first deposit those funds into a trust account before distributing them to the other lawyers. The rationale is that the outside lawyers with whom the fees will be shared are third parties, and lawyers are obligated to “safeguard” that a third party’s property under Model Rule 1.15 in the same way that it must safeguard a client’s property.
As I mentioned earlier, while Formal Opinion 475 sounds innocuous enough in theory, it will be a disaster in practice. Under Formal Opinion 475, a simple transaction – lead firm deposits checks in operating account and cuts check to outside lawyer – now morphs into a multi-step drawn out process. Now, the lead firm must first deposit the client’s earned fee into a trust account (or establish a trust account if it doesn’t have one already), then, after the check clears (could be as long as a week), the firm must transfer the funds from the trust account to the operating account, and finally disburse payment to the outside lawyers. And don’t forget – after the transaction is concluded, the lead firm must record it. As a result, the outside lawyers may wait two or three weeks before getting paid, while the lead lawyer will have to endure three more circles of administrative hell.
And for what purpose? Hmm…Will requiring the lead firm to put funds in trust protect the outside lawyers from being cheated out of their share of the fee? Not likely, if they’re dealing with lawyers like this. Certainly, this scheme doesn’t protect clients, since once they’ve paid the bill they’re off the hook. The only plausible rationale that I could come up with for this nonsense is that it’s a covert way to increase IOLTA funds.
Not only is there no upside to Formal Opinion 475, but the opinion is completely out of step with how many solo and small firm lawyers practice today. With technology facilitating collaboration, a solo — for example, a generalist litigator — doesn’t need the backing and concomitant overhead of a biglaw to access the expertise to handle an IP or employment matter and instead can co-counsel or bring in special counsel on a project basis. Similarly, a small firm handling the contract and HR-type matters for a small business or municipality doesn’t need to refer the client out when a specialized energy or telecom matter comes in the door and can instead, bring in a special counsel with the necessary expertise. These types of arrangements represent the best of both worlds by giving clients a handpicked team of experienced and expert lawyers for a fraction of the cost of biglaw, where the client would most likely be consigned to a bunch of associates. Meanwhile, firms that once offered clients a seamless collaboration experience will either be forced to put up with this additional rigamarole – or escape by sending the client five different invoices.
Come on ABA – please, use a little common sense. I can’t imagine that this opinion was actually needed and now that it’s in place, it’s yet another annoyance that solo and small firm lawyers have to deal with that makes serving clients economically and efficiently more difficult than it was before.