Exceptions to the Prohibition

Model Rule 5.4(a) states the bar on sharing legal fees with a nonlawyer and, in the same sentence, announces that exceptions follow.¹ There are four. An agreement with the lawyer's firm, partner, or associate may provide for payments to the lawyer's estate or to specified persons over a reasonable period after the lawyer's death. A lawyer who buys the practice of a deceased, disabled, or disappeared lawyer may pay the agreed purchase price to that lawyer's estate or representative. A lawyer or firm may include nonlawyer employees in a compensation or retirement plan, even one based in whole or in part on profit sharing. And a lawyer may share court-awarded legal fees with a nonprofit organization that employed, retained, or recommended employment of the lawyer in the matter.² Each carves a hole in a rule that otherwise reaches every nonlawyer, so a payment that fits none of the four, and that is not outside the meaning of sharing, remains forbidden.

The exceptions gather where the dangers behind the prohibition are weakest. Those dangers are that a layperson will hold a direct stake in an individual client's matter³ and that outsiders will interfere with or direct the lawyer's exercise of professional judgment.⁴ When the purchase price of a practice goes to a nonlawyer estate, the seller has stopped practicing, so the second danger is less likely to arise.⁵ When employees take part in a plan built on the firm's profits, they work under the lawyer's direct supervision, and their return depends on the performance of the whole office, so none of them acquires a stake in a particular client's matter.⁶ Each exception is taught below with its own mechanism.

Because the exceptions are narrow, the exam turns on matching a payment to the exact terms of the exception claimed. A profit-sharing retirement plan for employees is permitted; a percentage of the fee in one specific matter, paid to the same employee, is the arrangement the bar exists to stop.⁷ The first exception concerns the death of a lawyer and the money that may then pass to the lawyer's estate or to chosen survivors.

Death Benefits to Estates

Rule 5.4(a)(1) lets a firm keep its promise to a deceased lawyer's family. It provides that an agreement by a lawyer with the lawyer's firm, partner, or associate may provide for payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate or to one or more specified persons.⁸ The recipients, an estate or a surviving spouse or child, are ordinarily nonlawyers, and the firm pays them from income that consists of legal fees. Without the exception, honoring the promise would put the firm in conflict with the bar on sharing fees with laypersons.

The exception covers three kinds of payment. The firm, its partners, or its associates may pay a death benefit to the deceased lawyer's estate or survivors, continue retirement benefits in the nature of a death benefit, or buy out the deceased lawyer's equity interest, which means purchasing the deceased lawyer's share of the practice.⁹ None of the three pays a layperson for bringing in or working on a client matter, and that difference lets the exception sit beside a prohibition aimed at exactly that kind of payment.

Three terms of the text mark its boundaries. First, the payment must rest on an agreement between the lawyer and the firm, a partner, or an associate. Lawyers who practice together fix the terms in advance, before anyone knows which clients will produce which fees, and the recipient takes only what the agreement provides. Second, the payments must run over a reasonable period of time. The rule names no number of years, so the test is whether the schedule looks like the winding up of one lawyer's affairs, as installments spread over a few years do. A stream of payments with no end looks different, because it gives a layperson a permanent interest in fees from clients the deceased lawyer never served. Third, the payments follow the lawyer's death; the text authorizes no payment of this kind to a layperson while the lawyer is alive.

An exam stem in which a deceased partner's relative receives firm money therefore raises two questions: what agreement the payment rests on, and how long it runs.

The brother's payments fail on the time limit alone. Being named was enough, because the phrase specified persons does not confine recipients to spouses, children, or even relatives. The two terms that decide cases are therefore the agreement and the period, and a stem that identifies the payee but says nothing about the schedule has not yet told you whether the exception applies. The exception also speaks of an agreement with the lawyer's own firm, partner, or associate, so a promise made to a nonlawyer outside the firm gets no shelter from its text.

The companion rule on ownership, taught later in this chapter, borrows the same estate-administration logic. Rule 5.4(d)(1) allows a fiduciary representative of a deceased lawyer's estate to hold the lawyer's stock or interest for a reasonable time during administration.¹⁰ Both provisions give the estate a window in which to wind down the deceased lawyer's affairs, and neither gives a layperson a permanent place in the practice.

Purchase of a Practice

Rule 5.4(a)(2) addresses the sale of a practice whose owner can no longer run it. A lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to Rule 1.17, pay the agreed-upon purchase price to that lawyer's estate or other representative.¹² The exception is needed because of who receives the money. The seller cannot collect the price personally, so it goes to an executor, a guardian, or another representative, and those payees are ordinarily nonlawyers.¹³ Without an express exception, paying them for a fee-earning practice would raise the question whether the buyer is sharing fees with a layperson. The rule answers by providing that the bar does not prevent paying the agreed price to the estate or representative.¹⁴

Rule 1.17 governs the sale itself and is taught elsewhere, so this exception needs only two points from it. The first is coverage. The text of Rule 1.17 speaks of a lawyer or law firm selling a practice, but its commentary extends the rule to the practice of a deceased, disabled, or disappeared lawyer, and Rule 5.4(a)(2) confirms that reading.¹⁵ The second is a condition of every sale: the selling lawyer must have ceased to practice law, or to practice in the area sold.¹⁶ That condition also explains why the exception is tolerable. The independence concern behind the fee-sharing bar is that outsiders will interfere with or direct the buyer's professional judgment, and a seller who has left practice, speaking only through an estate or guardian, is poorly placed to do that.¹⁷

This exception differs in structure from the death-benefit exception taught just before it, which rests on an agreement between a lawyer and the lawyer's own firm, partner, or associate.¹⁸ Here an outside lawyer buys the practice and pays an agreed price for it.

A price fixed as a dollar figure is the clear case. The buyer may pay it at closing or in structured installments, and the payment is permitted even though the payee is a nonlawyer.¹⁹ The total is set when the sale closes, so the estate receives the same amount whether the acquired clients generate large fees or small ones, and the payee holds no stake in any particular matter. A fixed price paid at once or in installments is likewise plainly not the equivalent of dividing a fee with a lawyer outside the firm under Rule 1.5(e).²⁰

Buyers and sellers can also agree on a formula instead of a number, and that is where the doubt arises.

The difference between the two prices lies in what the payments are calculated from. A percentage price is computed from the buyer's earnings on legal services performed after the sale. That supports a stronger argument that the payments divide legal fees with a nonlawyer when the estate or guardian receives them, and with a lawyer outside the firm when the selling lawyer receives them.²¹

The opposing argument is respectable, which is why the question stays open rather than closed. Rule 1.17(b) requires the sale of the entire practice or practice area, so a price pegged to the profits of the practice as a whole may not amount to sharing the fee earned in any particular matter. Supporters of the arrangement also point out that Rule 5.4(a)(2) excepts payment of the agreed-upon purchase price, and that the seller's withdrawal from practice lowers the risk of outside interference.²² The authorities therefore treat a profit-percentage price as questionable, and an exam answer should treat it the same way.

A fact pattern in this area should be sorted by its price term before it is labeled. A fixed price paid to the estate or representative of a deceased, disabled, or disappeared lawyer under a Rule 1.17 sale is permitted, whether it is paid at once or in installments. A price measured as a percentage of future profits calls for spotting the issue, presenting both sides, and concluding that its propriety is unsettled, neither clearly forbidden nor clearly allowed. The exception also reaches only the agreed price paid to the estate or other representative, and it says nothing of payments to anyone else.²³

Nonlawyer Compensation Plans

Rule 5.4(a)(3) deals with the people who work inside the law office. It provides that a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.²⁵ A profit-sharing arrangement ties what employees receive to how much the firm earns over a period, and a law firm's profits consist largely of legal fees. The words in whole or in part mean the plan may rest entirely on firm profits or may combine a profit-based component with other pay. The general bar applies to lay employees just as it applies to outsiders, so a firm that wants to reward its staff through a share of its success needs this express permission.²⁶

Ordinary pay to staff never requires the exception at all. A lawyer may compensate nonlawyer assistants even though the money to pay them is earned through the practice of law.²⁷ A later section on payments that are not sharing returns to these everyday payments, so the question here is what the exception adds. It adds permission for a retirement plan or an incentive compensation system measured, in whole or in part, as a share of the office's overall profits during a set period of time.²⁸ A salary stays the same in a good year and a bad one, but a profit-based plan pays more when the firm's legal business does better, which is the kind of link the core prohibition targets. That difference explains why a profit-based plan needed an express exception when a salary did not.

The exception is tolerable for two separate reasons, and they do different work. The first is supervision: employees within the office are subject to the lawyer's direct supervisory control, which sets them apart from an outside party who answers to no one in the firm.²⁹ The second reason does the subtler work, because supervision alone could not explain why some employee payments stay barred. A profit-sharing plan rests on the overall business performance of the office and is not linked to the specific fees attributable to a particular client matter.³⁰ A single client's matter can move an employee's pay only by moving the whole firm's profit. The risks inherent in sharing fees with laypersons are therefore substantially mitigated in this setting.³¹

The exception ends where pay begins to be measured against one matter. A lawyer may not make an arrangement under which a nonlawyer, whether employed by the lawyer or not, receives a portion of the specific legal fees earned in a particular matter, because that would give a layperson a direct stake in an individual client's case.³² Employment status therefore does not decide the question. A paralegal on the payroll is as supervised as any other employee, yet supervision cannot save a per-matter share, because the direct stake has returned. Calling the arrangement a plan changes nothing either, since a payment calculated from one matter's fee remains a per-matter share under any label, a point the later treatment of disguised fee sharing develops.

A stem that pays an employee out of fee money should be sorted by one question: what is the payment measured against? Two scenes with identical dollar amounts show how the answer moves.

The two paralegals receive the same $12,000 from the same pool of fee revenue, so neither the amount nor the source of the money separates them. The measure does. The first payment is a slice of one matter's fee, and the second is a slice of the firm's whole performance.

Court-Awarded Fees and Nonprofits

Rule 5.4(a)(4) permits a lawyer to share court-awarded legal fees with a nonprofit organization that employed, retained, or recommended employment of the lawyer in the matter.³⁴ The three exceptions before it concern money moving between a lawyer and people tied to the lawyer's own practice, such as a deceased lawyer's estate or the office staff. This one concerns an outside organization that is often the reason the lawyer has the case at all, such as a legal-aid group or a civil-rights organization that placed the client with the lawyer or hired the lawyer directly. An organization is a nonlawyer and a fee award is a legal fee, so without a specific permission the split would fall under the general prohibition.³⁵ The exception is drawn narrowly enough that each of its conditions has to be checked.

The three verbs in the third step tie the nonprofit to the matter itself. A nonprofit employs the lawyer when the lawyer is on its staff, retains the lawyer when it hires outside counsel to handle a client's case, and recommends employment when it refers a client to the lawyer. A nonprofit with no such connection to how the lawyer came to the matter has played none of the named roles.

Three features make the exception tolerable, and each answers a different danger behind the core prohibition. First, the recipient is a nonprofit, which has no economic incentive to interfere in the lawyer's relationship with the client.³⁶ Second, the fee is awarded by a court and paid by the opposing party, which removes any risk that the client will be burdened with excessive fees.³⁷ Third, the award is the product of successful litigation that is recognized as serving a public purpose.³⁸ A majority of an ABA committee relied on those three points in concluding that a flat bar on sharing court-awarded fees with nonprofits was unnecessary to accomplish the purposes of the rule against fee sharing.³⁹

The two limits written into the text, court-awarded fees and nonprofit recipients, do different work, and dropping either one collapses the reasoning. The court-award limit protects the client: a fee the opposing party pays cannot burden the client with excessive fees, while a contingent fee paid from the client's recovery carries no such assurance. The nonprofit limit protects the lawyer's independence. The Ethics 2000 Commission concluded that the threat to independent professional judgment is less here than where a for-profit organization is involved.⁴⁰

The word nonprofit in a stem is the feature most likely to mislead, because the exception requires more than the right kind of recipient. The recipient's status settles only the second step of the screen, and the first step can still fail.

A for-profit referral company that recommended the lawyer fares no better, even when the fee at stake was court-awarded. It satisfies the first and third steps but is not a nonprofit, and its profit motive is the pressure the exception's reasoning assumes to be absent.

The exception reached the Model Rules through the 2002 revisions. A majority of the ABA committee had favored allowing the sharing, but one member dissented. The dissenter argued that the exception contravened the plain language of the rule then in force, which contained no nonprofit exception, and questioned the conclusion that lawyers working for or with not-for-profit organizations are inherently less likely to be pressured by lay parties.⁴¹ The ABA nonetheless adopted paragraph (a)(4) in 2002 as part of the Ethics 2000 revisions.⁴²

State adoption was not universal. Of the forty-seven states and the District of Columbia that had reviewed their ethics rules after the Ethics 2000 revision, fourteen had chosen, as of 2016, not to add paragraph (a)(4).⁴³ In those jurisdictions the express permission is missing, so a split of a fee award with a nonprofit has nothing in the rule to rest on. The Model Rule is the baseline for an exam answer, and a stem that names a jurisdiction signals the need to ask whether it adopted the exception.

The Rhode Island Supreme Court voiced the central objection to the exception. Its worry was counterfeit public-interest groups that could negotiate with lawyers to represent litigants and favor whichever lawyer would share the highest portion of any later fee award with the nonprofit corporation.⁴⁴ That worry attacks the first feature of the exception, because the premise that a nonprofit has no economic incentive holds only for a genuine nonprofit. A sham group that wears the label and bids for lawyers on the size of the share restores the very lay stake the prohibition targets. The same court rejected the argument that the no-fee-sharing rule impaired the First Amendment rights of cooperating attorneys who volunteer their services to a nonprofit, noting that a pro bono attorney whose efforts produce a court-awarded fee may still make a voluntary donation to the nonprofit, although a prior fee-sharing agreement cannot exact it.⁴⁵