Sometimes it’s not easy getting paid. With some customers, it seems the check is always in the mail — and legal clients are no exception. So, like everyone else, lawyers are always trying to find new ways to accept payment for legal services rendered.
Of course, the Rules of Professional Conduct necessarily limit the options available to lawyers seeking to accept alternate forms of payment. This is because, first and foremost, lawyers must place their client’s interests ahead of everything else. For that reason, some less-than-traditional forms of payment may impermissibly interfere with an attorney’s ability to exercise independent judgement on their client’s behalf by giving the attorney a vested interest in the outcome of the case.
So, most lawyers understandably tread lightly when seeking to implement alternate payment methods and some wisely seek the guidance of the New York State Bar Association’s Committee on Professional Ethics prior to accepting payment in unusual forms, as recently occurred in Opinion 913 (March 22).
At issue in this case was whether a lawyer could ethically accept a hybrid fee for legal services, where the fee consisted of a reduction of the lawyer’s typical hourly rate in exchange for an equity interest the client’s company.
In reaching its decision, the committee first noted that Rule1.5(a) prevents attorneys from accepting certain fees if, upon a review of the facts, a reasonable lawyer would have a “definite and firm conviction that the fee is excessive.” If that inquiry is answered in the negative, then, as the committee explained, the next step is to examine the limitations of Rule 1.8(a).
The committee reviewed Rule 1.8, which prevents lawyers from engaging in business transactions with clients unless certain conditions are met and then looked to the interpretation of similar rules by other jurisdictions when presented with the issue of whether an attorney may accept equity in a client’s company as a form of payment. After reviewing the analysis of other ethics boards, the committee concluded that a lawyer could accept an equity interest as payment pursuant to Rule 1.8:
“We therefore join other ethics committees and authorities in concluding that a lawyer who wishes to accept an equity interest in a client must comply with the provisions of Rule 1.8(a). This means that the terms of the transaction must be fair and reasonable to the client, fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client, with the client being advised of the desirability of seeking independent legal advice and given a reasonable chance to do so, and the client signing a writing that describes the transaction and the lawyer’s role in the deal, including whether the lawyer was acting for the client in the matter.”
However, the committee noted one final caveat to this proposed fee arrangement: the very real possibility that accepting an equity interest in a client could create a conflict of interest between attorney and client. The committee explained that Rule 1.7(a) allows a lawyer to proceed with an equity interest fee arrangement only if “the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation…(and) obtain(s) the client’s informed consent, which may involve information beyond that required by Rule 1.8(a).”
Thus, it is ethically permissible for attorneys to accept an equity interest in a client’s company as payment for legal services, subject to the conditions set forth above. So for those attorneys seeking a creative way to receive payment from a client, an equity interest in the client’s company is a viable alternative to more traditional forms of payment. And you can take that to the bank.
The Hon. John E. Bernacki is a Pittsford Town Court Justice. His law firm, John E. Bernacki Jr. PC, is located in Pittsford. He can be reached at www.johnbernackilaw.com.