The Wisconsin Supreme Court held recently that a law firm could pay a paralegal a percentage of the gross proceeds from cases on which the paralegal worked. The Wisconsin Office of Lawyer Regulation had argued that the compensation plan violated the prohibition on sharing legal fees with a non-lawyer, In re Weigel, 817 N.W.2d 835 (Wis. 2012).
The opinion represents the latest chapter in a long-running debate about how lawyers can compensate their non-lawyer colleagues. This has been a contentious issue, and the decision in the Wisconsin case highlights the continuing controversy.
ABA Model Rule 5.4(a) states bluntly that a “lawyer or law firm shall not share legal fees with a non-lawyer.” The comment supporting that prohibition mentions “the lawyer’s professional independence of judgment” and “traditional limitations on permitting a third party to direct or regulate the lawyer’s professional judgment.”
Taken literally, it would seem that this general principle precludes lawyers from employing any non-lawyers. After all, most law firms derive all or nearly all of their revenue from legal fees. Bars have therefore always acknowledged that the fee-sharing prohibition only applies to the direct sharing of fees as the law firm receives them, not the sharing of net income that the law firm earns after paying expenses.
The debate has largely focused on another ethics provision, which permits law firms to include non-lawyer employees in a “compensation … plan, even though the plan is based in whole or in part on a profit-sharing arrangement,” ABA Model Rule 5.4(a)(3).
Bars in many states have permitted non-lawyer employees to share in a law firm’s overall profits, Georgia LEO 05-4 (March 19, 2007). The issue becomes much more complicated with profit-sharing arrangements that are based on a subset of a law firm’s overall revenues or profits.
Interestingly, the ABA Model Guidelines for Utilization of Paralegal Services explain that lawyers should be permitted to compensate “more handsomely” a paralegal “who aids materially” in a “particularly profitable specialty of legal practice.” That is the approach that the Wisconsin Supreme Court adopted, in joining a number of other states who permit such arrangements. For example, a 1992 Michigan Legal Ethics Opinion allowed a compensation plan focusing on paralegals working in a law firm’s “sports and entertainment law practice,” Michigan LEO RI-143 (Aug. 25, 1992).
In contrast, the ABA Model Guidelines for Paralegals prohibit compensation plans based on the “fees generated from any particular case.” Some bars recognize the same prohibition, District of Columbia LEO 322 (Feb. 16, 2004). Several bars have applied the same general principle to non-lawyer employees helping with law firm marketing efforts, New York LEO 887 (Nov. 15, 2011); Philadelphia LEO 2004-3 (June 2004).)
Thus, the bottom line in most states is that lawyers can pay their non-lawyer colleagues based on overall firm profits, but not on profits or revenues from any particular matter. States disagree about compensation plans that take a middle ground, by sharing the profits earned in a particular practice area.
Most bars’ vigorous rejection of matter-specific arrangements might seem strange, given the articulated basis for the fee-sharing prohibition: concern about the lawyer’s independent judgment. It is difficult to imagine a lawyer’s judgment being affected because the lawyer has agreed to share with a non-lawyer colleague a percentage of fees earned in a particular matter.
The prohibition actually seems to focus as much on another ethics rule, which indicates that a “lawyer shall not give anything of value to a person for recommending the lawyer’s services,” ABA Model Rule 7.2(b). Thus, bars may worry that matter-specific fee sharing will encourage what has traditionally been called “running and capping.” That commonly used phrase refers to law firm employees who improperly solicit clients for the firm in return for some reward. But rather than focusing on prohibited “running and capping” itself, bars prohibit compensation plans that might encourage such improper conduct.
The ABA Model Guidelines for Paralegals acknowledge the obvious — that lawyers “may compensate a paralegal based on the quantity and quality of the paralegal’s work and the value of that work to a law practice.” Under this universal rule, law firms are essentially left to police themselves. With a wink and a nod, a law firm could give a “performance bonus” to a paralegal, marketing director or other non-lawyer employee at least roughly based on increased revenues or profit generated in a particular matter. As in other areas, lawyers must follow the ethics rules even where it would be easy to hide a violation.
Tom Spahn practices as a commercial litigator at McGuireWoods in McLean, Va. He regularly advises a number of Fortune 500 companies on issues involving ethics, conflicts of interest, the attorney-client privilege and corporate investigations. A version of this column originally appeared in Lawyers USA, sister publication to The Daily Record.