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Examining Ethics: Strategic alliances: ethical implications

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Patricia Foster

A carefully constructed strategic alliance can provide powerful growth opportunities for almost any business enterprise. Lawyers have long recognized the economic benefits to be derived from relationships with lawyers outside their firms, many of which involve fee-sharing arrangements. These alliances frequently involve situations where a particular skill set or expertise is not available within a firm, and a collaborative approach between firms is desirable. In this column we consider the requirements of Rule 1.5(g) of the New York Rules of Professional Conduct, which governs the sharing of legal fees between law firms.

Consider the situation of the attorney whose practice focus is narrow, deep and limited to intellectual property (IP) matters. He has just been notified by a client of a potential trademark infringement. The Japanese client, which manufactures and markets a popular snack item, alleges that a Korean competitor has introduced a nearly identical product that is similarly priced and has a strikingly similar trade dress. After a stroll through the international foods aisle of the local supermarket where he observes the products side by side, the IP attorney concludes that there is a likelihood of confusion. He also realizes that if the infringement claims cannot be resolved informally, the firm may require the assistance of a seasoned litigator. He ponders the possibility of referring the case to a litigation firm in exchange for receiving a share of the fee. Upon a careful review of Rule 1.5(g), the IP attorney concludes that he cannot receive a fee for simply referring the case to another firm and doing nothing more. The rule does, however, provide some options.  Rule 1.5(g) provides:

A lawyer shall not divide a fee for legal services with another lawyer who is not associated with the same law firm unless: (1) the division is in proportion to the services performed by each lawyer, or by a writing given to the client, each lawyer assumes joint responsibility for the representation; (2) the client agrees to the employment of the other lawyer after a full disclosure that a division of the fees will be made, including the share each lawyer will receive, and the client’s agreement is confirmed in writing; and (3) the total fee is not excessive (emphasis added).

The rationale for these requirements is readily apparent. The client is entitled to know that an attorney outside the firm will provide some or all of the legal services in resolving the issues and is also entitled to give a “thumbs up” or a “thumbs down” to the engagement of another firm as well as the fee-sharing arrangement. Moreover, the client is entitled to a fee that will not be excessive.

Rule 1.5(g)(1)  

Under circumstances where firms are permitted to share fees because legal services will actually be provided by both firms, it is essential that the firms structure a meaningful division of the fee based on their relative contributions in advance of the delivery of the engagement letter to the client. Roy D. Simon, professor of legal ethics emeritus, Hofstra University School of Law, has noted that Rule 5.1(g)(1) contemplates some flexibility in structuring the fee-sharing arrangement and that a division of the fee “in proportion to the services performed” need not precisely reflect hours spent by each lawyer. He points out that both qualitative factors (as measured by the difficulty of the work performed) and quantitative factors (as measured in terms of hours worked) may be taken into account.

There appears to be more flexibility in structuring the fee-sharing arrangement under circumstances where the arrangement is permitted because both firms have agreed to assume joint responsibility for the matter. The implications of assuming joint responsibility are substantial, however, especially for the referring firm, when the potential for ethical and professional lapses are taken into account. In essence, Rule 1.5(g) encourages lawyers to refer matters to lawyers outside their firms who have the requisite expertise. Professor Simon opines that a lawyer who agrees to undertake joint responsibility must do more than merely keep adequate malpractice coverage in force or risk personal assets to pay a malpractice judgment.

Rule 1.5(g)(2)

Rule 1.5(g)(2) includes three requirements: (1) full disclosure of the proposed arrangement, including the share of the fee to be received by each lawyer; (2) consent by the client to the employment of the other lawyer; and (3) written confirmation by the client of the arrangement.

These explicit requirements point to a need for a thorough understanding of all aspects of Rule 1.5(g), as well as the need to carefully evaluate the potential risks and rewards, prior to proposing the fee sharing arrangement.

Summary

The IP attorney has concluded that he cannot simply refer a case involving a possible trademark infringement to an attorney in another firm and receive a share of the fee without doing more. He understands the underlying policy considerations of the rule. After all, clients are not chattel to be bought and sold. He realizes that his options under Rule 1.5(g) are limited, and that he must explore the possibilities diligently. He must first identify one or more competent litigation attorneys with whom a collaborative arrangement might be structured.

Regardless of what form the arrangement takes, the IP attorney and his firm must conduct the requisite due diligence, address the complex issues attendant to the arrangement, and be prepared to document all aspects of the arrangement while remaining focused on the firm’s responsibilities to its client. Strategic alliances can be beneficial both to a firm and its clients as long as they are structured carefully from a compliance and risk management perspective.

Patricia C. Foster is a corporate/securities law attorney whose firm provides comprehensive legal services to the investment management industry.

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