Disguised Fee Sharing

Disguised Fee Sharing

Rule 5.4(a) bars a lawyer or law firm from sharing legal fees with a nonlawyer, and the easiest way around a bar like that is to give the payment a different name.¹ If calling a payment a consulting charge, a marketing fee, or an administrative cost took it outside the rule, one paragraph of drafting would cure every fee split, and the rule would catch only lawyers who were careless with vocabulary. It does not work that way. Hazard and Hodes read shall not share legal fees to bar any financial arrangement in which a nonlawyer's profit or loss is directly related to the success of a lawyer's legal business, and a test built on profit and loss looks past names to the flow of money.² Three questions follow: who paid whom, for what, and whether the nonlawyer's return rose and fell with the lawyer's legal business.

Attorney Grievance Commission of Maryland v. Chapman applied that inquiry to a loan modification business. Mr. Chapman believed that Mr. Weiskerger, a nonlawyer, had a good reputation in the loan modification field, and after several meetings about mutual business opportunities the two agreed to a consultant arrangement. Mr. Chapman testified that he did not consider loan modification work to be legal work. He also acknowledged that a major reason for the arrangement was a change in the law that barred nonlawyers from collecting fees up front for such work, a change that in his opinion expressly excluded lawyers.³

The consultant agreement spelled out how the money would move. Each client would sign a retainer agreement with the firm for one lump-sum fixed price, and that price covered both the firm's own services and the fees the firm would pay the consultant. The firm would deposit everything it collected into its escrow trust account and, once the deposits cleared, pay the consultant the fees to which it was entitled. The consultant submitted the initial retainer agreement and stated on a separate form the amount of the retainer and the fee it intended to charge for its services.⁴ On paper, the consultant was a vendor to the firm. In operation, the client wrote one check to a law firm, and part of that check went on to a nonlawyer.

The court looked at the transaction from the client's side. The clients believed they were engaging a law firm to help with their foreclosure and loan modification problems, they paid their fees to the law firm, and a reasonable client would take those fees to be payment for what the firm did. A firm may consult an expert and pay that expert an appropriate fee, the court said, but this arrangement operated more as a pass through, meaning money collected from the client and handed on, or as a sharing of the fees obtained for the work with the consultant.⁵

Mr. Chapman's testimony that loan modification was not legal work did not rescue the arrangement. The court described it as a payment of $200 per case to run the loan modification work done by JW Capital through the Chapman firm, thereby avoiding legal requirements that would otherwise have applied to JW Capital, and it held that regardless of how the arrangement was characterized, it was a fee sharing arrangement for work contracted through a law firm and violated MRPC 5.4.⁶ That description fits Mr. Chapman's own account of why the arrangement existed, since the law he cited kept nonlawyers from collecting fees up front.⁷ The consultant earned more with every case routed through the firm, which is the tie between a nonlawyer's return and a lawyer's legal business that the rule targets.

The court also rejected a separate claim for want of clear and convincing evidence, observing that the statutes limiting fee and billing practices for nonlawyers in this very business show that no law license is needed to assist in the field.⁸ The fee-sharing holding therefore stood without any finding that the consultant was practicing law. It rested on where the money went.

The court drew the line on the other side with an example of its own. A lawyer or firm may repeatedly engage an expert to assist in representation for a flat fee, with that fee paid as part of a fixed fee set at the outset of the engagement, and if the fees are disclosed to the client and agreed to by the client, there is no ethical violation.⁹ Each feature of that example answers a danger in the Chapman arrangement. A flat amount gives the expert no stake in how the matter turns out, and a price set at the start cannot swell as more clients arrive. Disclosure and agreement mean the client knows a third party is involved and what that party does, so the client's belief about who is providing the service matches reality.

The engineer is paid out of the same client fee that funded JW Capital, so the source of the money cannot be what separates the two. The difference lies in the nonlawyer's role and in how the nonlawyer is paid. An engineer retained to assist the lawyer, at a disclosed flat price, is a cost of the representation. A consultant whose work runs through the firm and who collects a set amount on every case is a participant in the firm's fees, and relabeling that participation as a consulting charge does not change it. An exam stem that dresses a per-case payment as a vendor fee, or has the lawyer insist that the nonlawyer's services were not legal ones, is inviting the answer the Maryland court rejected.