Ethics Advisory Opinion 14-02

Utah State Bar
Ethics Advisory Opinion Committee 

Opinion Number 14-02 

Issued January 14, 2014

ISSUE

1.         Is an Agreement between a non-lawyer Marketer and a Law Firm where the Marketer conducts telephone marketing to solicit and refer clients to Law Firm in violation of the Rules of Professional Conduct where the payment to the Marketer matches a percentage of the fees paid to the Law Firm by the clients referred to the Law Firm by the Marketer?

2.         If the Agreement is in violation of the Rules of Professional Conduct must the Attorney retained by Marketer to enforce the Agreement inform the appropriate professional authority pursuant to Rule 8.3(a)?
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Ethics Advisory Opinion 13-05

Utah State Bar

 Ethics Advisory Opinion Committee

Opinion Number 13-05

 Issued September 10, 2013

 ISSUE

 

1.         To what extent may an attorney participate in an “on-site” fee/retainer funding program to obtain and finance attorney retainer or litigation funds?

 OPINION

 

2.         A lawyer may not participate in an “on-site” fee/retainer funding program, under the circumstances set forth herein, as such would violate the provisions of Rules of Professional Conduct 1.7(a) (Conflict of Interest: Current Clients), Rule 1.8(a) (Acquire a pecuniary interest adverse to the client).  The lawyer may, however, obtain a waiver of the conflict by complying with the terms of Rules 1.7(b) and 1.8(a), including making full disclosure and obtaining “informed consent” confirmed in writing.  Adequate measures must also be taken to safeguard the lawyer’s independent judgment under Rule 5.4(c) (A third party may not direct or regulate the lawyer’s professional judgment.)
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Ethics Advisory Opinion No. 12-03

UTAH STATE BAR ETHICS ADVISORY OPINION COMMITTEE

Opinion No. 12-03
Issued December 13, 2012

ISSUE

1. May a community association management company profit from legal work performed by the company’s in-house attorney?

OPINION

2. A community association management company’s profiting from legal work performed by the company’s in-house attorney constitutes the improper sharing of fees with a non-lawyer in violation of Utah Rule of Professional Conduct 5.4(a).[1]

BACKGROUND

3. An attorney is employed as in-house counsel for a community association management company. Although the company does not profit from the legal work the attorney performs, the company believes that other community association management companies routinely profit from the legal work performed by their respective in-house attorneys. Specifically, these companies collect a fee from their clients for legal services at a rate that is higher than the cost the companies incur in employing their corporate attorneys. The issue addressed in this Opinion stems from this practice.

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Ethics Advisory Opinion No. 06-03

Issued December 8, 2006
1. Issue:
Under what circumstances may a Utah lawyer be personally involved in a lending transaction to finance a client’s cause of action or obtain funds for the payment of the lawyer’s legal fees and expenses?

2. Conclusion: (a) A lawyer may not directly or indirectly represent a lender to the lawyer’s client in connection with a loan that is made for the purpose of enabling the client to pay the lawyer’s fees or costs. (b) A lawyer may not participate in a contingent, non-recourse loan with a third-party lender to finance the costs and expenses of litigation where the terms of the lending arrangement create the potential that the financial risk to the lawyer of the lending arrangement are lessened if the lawyer obtains no recovery for the client.
3. The Committee has received two separate requests regarding the propriety of financial transactions between Utah lawyers and third-party lending sources. Although the factual backgrounds are substantially different, they both raise similar questions concerning lawsuit funding for clients who may not be in a position to pay a lawyer’s ongoing fees or costs up front.
4. Background for EAOC File No. R0206: In the first situation, a Utah lawyer (“Lawyer”) has clients who cannot pay Lawyer’s retainer or flat fee because they do not have sufficient available cash on hand, although they are employed and could repay a loan over time. Lawyer proposes to organize and manage a consumer money-lending company (“Affiliated Lending”) as a limited liability company that would be capitalized and owned by Lawyer’s relatives. Affiliated Lending would be a manager-managed limited liability company (“LLC”), and Lawyer would be the sole manager of the LLC. Lawyer would review loan applications, initiate and service loans for Affiliated Lending. Lawyer also would receive compensation from Affiliated Lending for these services. Affiliated Lending would consider and make loans to the public, as well as to Lawyer’s clients. If the client were subsequently to default on a loan, any judicial collection action would be referred by Affiliated Lending (presumably acting through its manager-lawyer) to a third-party collection agency. Lawyer would never represent Affiliated Lending in pursuing a collection action against one of Lawyer’s clients.1
5. In referring clients to Affiliated Lending, Lawyer would explain potential conflicts of interest to the client in a written disclosure. This disclosure would explain that Affiliated Lending is owned by Lawyer’s relatives, that Lawyer manages Affiliated Lending, that the client has the right to have the arrangement reviewed by independent counsel, that there would be severe repercussions to the client if there is a default on a loan, and that a potential conflict could arise between Lawyer and the client if the client did default. The client would be required to sign this written disclosure before applying for a loan from Affiliated Lending. The loans would be made at or below market rates for comparable high risk, short-term loans.2
6. Analysis: The proposed lending-fee arrangement here places Lawyer in a dual relationship with conflicting loyalties. On the one hand, Lawyer owes a duty of loyalty to the client, while, at the same time, Lawyer owes a duty of loyalty to Affiliated Lending as its sole, managing employee. The relationship between Affiliated Lending and the client is adverse: Affiliated Lending is a creditor of the client. As such, Lawyer’s duties to both the client and Affiliated Lending are in conflict. More importantly, Lawyer’s dual loyalties make it difficult, if not impossible, for Lawyer to provide objective, unbiased advice and representation to the client where, by doing so, the interests of Affiliated Lending might be impaired, or the personal interests of Lawyer in Affiliated Lending might be adversely affected.
7. For example, Lawyer has an interest in causing Affiliated Lending to make a loan to the client that is sufficient to pay Lawyer’s fees, whereas it may not be prudent for Affiliated Lending to make such a loan, or for the client to obtain such funds on the terms offered. Lawyer’s personal interest in the loan proceeds also may taint the lawyer’s judgment in negotiating and documenting the loan. Further, Lawyer’s loan documents and credit negotiations with the client might be called into question if the client subsequently were to default on the loan.
8. Rule 1.6(a) 3 provides:
A lawyer shall not reveal information relating to the representation of a client, unless the client gives informed consent, the disclosure is impliedly authorized in order to carry out the representation or the disclosure is permitted by paragraph (b).4
9. Comment [2] of this rule describes client confidentiality as a “fundamental principle in the client-lawyer relationship” and notes that the principle “contributes to the trust that is the hallmark of the client-lawyer relationship.” Comment [4] of Rule 1.6 further notes that “[t]his prohibition also applies to disclosures by a lawyer that do not in themselves reveal protected information but could reasonably lead to the discovery of such information by a third person.”
10. Here, information that Lawyer learns about the client may prejudice the client in either the negotiations to obtain the loan or in the lender’s efforts to collect the loan. If Lawyer were to withhold this information from the lender, Lawyer’s duty of loyalty to the lender likewise would be compromised. On the other hand, if Lawyer were to reveal sensitive information to the lender, then Lawyer’s duty of confidentiality to the client is compromised.
11. Rule 1.7 provides, in part:
(a) Except as provided in paragraph (b) a lawyer shall not represent a client if the representation involves a concurrent conflict of interest. A concurrent conflict of interest exists if: . . . .
(2) there is a significant risk that the representation of one or more clients will be materially limited by the lawyer’s responsibilities to another client, a former client or a third person or by a personal interest of the lawyer.
(b) Notwithstanding the existence of a concurrent conflict of interest under paragraph (a), a lawyer may represent a client if:
(1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;
(2) the representation is not prohibited by law;
(3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or another proceeding before a tribunal; and
(4) each affected client gives informed consent, confirmed in writing.
(Emphasis added.)
12. As is made clear by Comment [1] of Rule 1.7: “Loyalty and independent judgment are essential elements in the lawyer’s relationship to a client. Concurrent conflicts of interest can arise from the lawyer’s responsibilities to another client, a former client or a third person or from the lawyer’s own interests.” (Emphasis added.)
13. Further, Comment [8] of Rule 1.7 provides:
Even where there is no direct adverseness, a conflict of interest exists if there is a significant risk that a lawyer’s ability to consider, recommend or carry out an appropriate course of action for the client will be materially limited as a result of the lawyer’s other responsibilities or interests. . . . The mere possibility of subsequent harm does not itself require disclosure and consent. The critical questions are the likelihood that a difference in interests will eventuate and, if it does, whether it will materially interfere with the lawyer’s independent professional judgment in considering alternatives or foreclose courses of action that reasonably should be pursued on behalf of the client.
(Emphasis added.) And, as stated in Comment [9] of Rule 1.7, “a lawyer’s duties of loyalty and independence may be materially limited . . . by the lawyer’s responsibilities to other persons, such as fiduciary duties arising from a lawyer’s service as a trustee, executor or corporate director.”
14. Comment [13] of Rule 1.7 addresses the subject of third persons who pay for a lawyer’s service:
A lawyer may be paid from a source other than the client, including a co-client, if the client is informed of that fact and consents and the arrangement does not compromise the lawyer’s duty of loyalty or independent judgment to the client. See Rule 1.8(f). If acceptance of the payment from any other source presents a significant risk that the lawyer’s representation of the client will be materially limited by the lawyer’s own interest in accommodating the person paying the lawyer’s fee or by the lawyer’s responsibilities to a payer who is also a co-client, then the lawyer must comply with the requirements of paragraph (b) before accepting the representation, including determining whether the conflict is consentable and, if so, that the client has adequate information about the material risks of the representation.
(Emphasis added.)
15. Here, if the client defaults on the loan, Lawyer will be required to take certain steps on behalf of Affiliated Lending to collect the obligation. Those efforts will place Lawyer in an adverse position to the client, even if Lawyer is not directly involved in any judicial collection proceedings. For instance, prior to initiating a collection action, Affiliated Lending must give the client notice of default, make a demand for payment and, where appropriate, negotiate modified repayment terms with the client. Presumably, all of these activities will be conducted by Lawyer as the manager of Affiliated Lending. During these negotiations, Lawyer might still be representing the client. In addition, as the principal spokesperson for Affiliated Lending, it will be difficult, if not impossible, for Lawyer to represent Affiliated Lending adequately in its collection activities if Lawyer is not involved in reviewing and approving recommendations made by the third-party collection agency. Finally, if Lawyer is representing the client in a bankruptcy, Affiliated Lending’s loan will be directly affected by Lawyer’s services for the client.
16. Other services provided by Lawyer for the client also could affect Affiliated Lending. For example, if Lawyer is retained by the client to defend a criminal proceeding, the outcome of the criminal proceeding could affect the client’s ability to repay the loan, particularly if the client is incarcerated, required to pay a fine, or required to pay restitution to a victim. All of these situations place Lawyer in the untenable position of having divided loyalties between Lawyer’s client and Lawyer’s employer.
17. In the case before us, Affiliated Lending is not a client of Lawyer, but, as Lawyer’s employer, it is a “third person” to which Lawyer has duties and responsibilities and in which Lawyer has a familial, personal and financial interest. With such duties and responsibilities, the proposed arrangement compromises the loyalty and independent judgment of Lawyer to the client.
18. The appropriate inquiry is whether the arrangement would materially interfere with Lawyer’s independent professional judgment in considering alternatives, or foreclose courses of action that reasonably should be pursued on the client’s behalf.5 Violations commonly occur when Lawyer has a financial or proprietary interest that may be affected by the advice given to the client.6 Here, Lawyer has a direct financial interest in the client’s loan from the Lending Company, a familial interest in the owners of the Lending Company, and a personal interest in the future success of the Lending Company.
19. In addition, the prohibitions in Rule 1.8(a) and (b) may be implicated by the proposed arrangement. Lawyer has a close familial relationship with the owners of Affiliated Lending and is a key employee of the company. Under certain circumstances, the relationship between Lawyer and the lender may be so close as to blur the distinctions between Lawyer and the entity, especially in the mind of the client. In such circumstances, a lending arrangement like the one proposed may run afoul of Rule 1.8(a).7 Comment [1] of Rule 1.8 is instructive:
A lawyer’s legal skill and training, together with the relationship of trust and confidence between lawyer and client, create the possibility of overreaching when the lawyer participates in a business, property or financial transaction with a client, for example, a loan or sales transaction or a lawyer investment on behalf of a client. The requirements of paragraph (a) must be met even when the transaction is not closely related to the subject matter of the representation, as when a lawyer drafting a Will for a client learns that the client needs money for unrelated expenses and offers to make a loan to the client.
20. Comment [3] of Rule 1.8 further provides:
The risk to a client is greatest when the client expects the lawyer to represent the client in the transaction itself or when the lawyer’s financial interest otherwise poses a significant risk that the lawyer’s representation of the client will be materially limited by the lawyer’s financial interest in the transaction.
21. Thus, there is a clear conflict of interest under both Rules 1.7(a)(2) and 1.8(a). We next examine whether the facts permit the lawyer to seek the client’s “informed consent” to such a lending arrangement. Lawyer proposes to require that the client sign a written disclosure. This disclosure would explain the relationship between the lender and Lawyer, would advise the client of the right to have the arrangement reviewed by independent counsel, would explain the consequences to the client if there is a default on the loan, and would further explain that a potential conflict could arise between Lawyer and the client if the client defaulted on the loan.
22. Some conflicts cannot be waived because Lawyer’s personal interest in obtaining the waiver casts doubt about the effectiveness of the client’s consent and about the adequacy of the information provided by Lawyer to the client in seeking the consent.8
23. “Informed consent” is defined in Rule 1.0(f) as denoting “the agreement of a person to a proposed course of conduct after Lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of action.” If the client is asked to consent to a possible future conflict, the effectiveness of a waiver is generally determined by the extent to which the client reasonably understands the material risks that the waiver entails.9
24. Here, Lawyer is employed by the debtor-client’s lender, earns a fee for services performed for the lender in making a loan to the client and also has a personal interest in both the lender and in the loan proceeds. We conclude that this combination of conflicts is so problematic that a lawyer could not “reasonably believe[ ] that the lawyer [would] be able to provide competent and diligent representation to [the] client.”10
25. For the reasons stated above, the proposed funding arrangement creates a nonconsentable conflict of interest under Rule 1.7.
26. Background for EAOC File No. R0506: In the second situation, a Utah lawyer proposes to borrow money in the form of a contingent, non-recourse loan from an independent third-party lending company (“Third-Party Lender”) for the purpose of financing the costs and expenses of litigation. The client is not a party to the agreement and the client gives written informed consent to the arrangement. Before the loan is approved, the lawyer is required to sign a litigation-funding agreement (“Agreement”) that contains carefully structured provisions to avoid conflict with Rule 1.6 (Confidentiality of Information) and Rule 1.8 (Conflict of Interest). The essential terms of the agreement are:
* Funding fee options. The lawyer can borrow up to 80% of the litigation costs from Third-Party Lender. If the lawyer is successful and receives a recovery for the client, the lawyer is obligated to repay to the Third-Party Lender the lesser of the funding or the recovery, plus an additional funding fee. The funding fee is calculated using one of three options available to the lawyer. Under Option 1, the funding fee is equal to the amount of the funding advanced (i.e., the equivalent of 100% return on the funding 11). Under Option 2, the funding fee is equal to a percentage of the funding that depends on when the recovery is obtained (85% of the funding if the recovery is obtained within 24 months, ranging to 125% of the funding if the recovery is obtained after 36 months). Under Option 3, the funding fee is a negotiated percentage (e.g., 5%) of the net recovery (gross recovery minus litigation expenses), subject to a negotiated cap on the funding fee expressed as a multiple of the funding advanced (e.g., 5 times the funding). 12
* The client is not a party to the Agreement. The only parties to the Agreement are Third-Party Lender and the lawyer. However, the lawyer must provide the client with reasonable and adequate information about the material risks and reasonable alternatives to entering into the Agreement.
* The client must sign a disclosure and consent form. Before the lawyer may enter into a contract with Third-Party Lender, the lawyer is required to disclose fully the lending arrangement to the client, and the client must give written consent to the Agreement.
* There is no expressed security interest in lawyer’s fees or client recovery. Third-Party Lender requires that lawyer establish a bank account at Third-Party Lender’s bank to be utilized by Third-Party Lender for funding advances for the borrowing lawyer and by lawyer for making payments to Third-Party Lender. Third-Party Lender is granted a security interest in this account. Third-Party Lender’s conditional right to payments under the Agreement is not secured by any lien, security interest or assigned interest upon or in any funds held by the borrowing lawyer in any other account, the lawyer’s interest in the contingent fee agreement with the client, or any funds held by the client. The lawyer, however, agrees upon a recovery to “subordinate” the lawyer’s right to repayment by the client of costs advanced directly by the lawyer for the client, to Third-Party Lender’s right to repayment of the funding and the funding fee.13
* Repayment is contingent only upon recovery. If the borrowing lawyer does not obtain any recovery for the client in the case, then the lawyer owes nothing and is not obligated to pay any amounts advanced by Third-Party Lender.
* Lawyer will not pass Third-Party Lender’s fees to client. The fee for the funding that is owed to Third-Party Lender by the lawyer may not be passed on to the client in any way, nor can the lawyer charge a different fee to the client based upon the fact that the client’s case is being funded. The client will also not be held responsible for paying any funding fees owed by the lawyer to Third-Party Lender.
* No solicitation of clients. Third-Party Lender will have no involvement in soliciting, obtaining or referring any client or in the lawyer’s decision to file suit on behalf of the client.
* Lawyer has involvement, interest, and control of litigation. Third-Party Lender will exercise no control or influence on the lawyer’s handling of the case or on any decision that requires the exercise of the professional judgment of the lawyer.
* Client confidentiality is addressed. Third-Party Lender will require the lawyer to provide to Third-Party Lender limited information about the client or case for the purpose of processing the funding requests, but only with the written consent of the client. This information would include monthly expense statements, copies of pleadings in the case, agreements between the lawyer and the client regarding payment of legal fees and expenses, and a signed statement by the client at the end of the case verifying the total expenses incurred. Although the Third-Party Lender retains the right to audit the litigation expenses of the lawyer, the Third-Party Lender may not obtain information relating to the representation beyond that authorized by the client.
27. Analysis: The Committee addressed third-party lending agreements in two previous opinions. In Opinion 97-11,14 we considered whether a lawyer could finance the expected costs of a case by borrowing money from a third-party lender pursuant to a non-recourse promissory note, where the note was secured by the lawyer’s interest in a contingent fee in the case. In that opinion, we did not approve of the non-recourse loan and concluded that because a security interest in the recovery of contingent fees from a particular case was to be granted, Rule 5.4 15 was implicated. We stated: “Upon that grant, Lender has an interest in the attorney’s contingent-fee award, which Lender has the right to attach upon a default in payment on the loan.”16 Accordingly, the lawyer’s grant of a security interest in a contingent fee to secure a loan constituted the sharing of fees with a non-lawyer in violation of Rule 5.4(a).
28. In contrast, the Committee has approved a third-party lending agreement involving a low-interest, recourse loan to the lawyer who used the potential fees from the case as collateral. In Opinion 02-01, we concluded that the proposed financial arrangement did not have the objectionable features found in Opinion 97-11:
Here, the lending institution has no interest in the lawyer’s contingent-fee award because, under the separate loan agreement between the lawyer and the lender, the lawyer is obligated to repay the loan whatever the outcome of the case. Because this obligation is not contingent, the lawyer is not compromised, as was the lawyer under the arrangement described in Opinion 97-11. Similarly, in this case, the client, by separate agreement, remains obligated to the lawyer for the payment of litigation costs. The lawyer is not compromised because the client’s obligation is not contingent upon the outcome of litigation. The arrangement described above simply makes it easier for clients and attorneys to finance litigation and is mutually beneficial to both.17
29. The requestor here contends that, because Third-Party Lender will not receive a security interest in the client’s recovery or in the lawyer’s contingent fee, Opinion 97-11 is not applicable. However, in light of Opinion 02-01, ethical issues regarding the lawyer’s professional independence of judgment are not so easily satisfied. The Agreement provides Third-Party Lender with a return of the amount funded, but not to exceed the recovery, plus a funding fee based on the amount funded 18 if the lawyer receives a recovery for the client. If the lawyer receives no recovery for the client, the non-recourse nature of the loan absolves the lawyer of any liability to repay the amount funded or to pay a funding fee. The economic aspects of the Agreement may impair the lawyer’s independence of judgment and may materially limit the lawyer’s representation of the client. Similar impairments and limitations were the thrust of the Committee’s conclusion in Opinion 02-01.
30. For example, assume the lawyer funds litigation costs of $100,000 under a net-recovery contingent fee of one-third, 19 borrowing $80,000 from Third-Party Lender under Option 1, and obtaining a recovery of $100,000 for the client. The lawyer would be obligated to pay Third-Party Lender the original $80,000, plus the funding fee of the same amount, for a total of $160,000. This would result in a net, out-of-pocket loss to the lawyer of $80,000, for which the client would have no liability. 20 More significantly for our analysis, $60,000 of the out-of-pocket loss to the lawyer is avoided under the Agreement if there is no recovery by the client. The outcome is similar under Option 2. 21
31. Rule 1.7 is implicated by such an arrangement, as is made clear by Comment [1] to the rule, “Loyalty and independent judgment are essential elements in the lawyer’s relationship to a client. Concurrent conflicts of interest can arise from the lawyer’s responsibilities to another client, a former client or a third person or from the lawyer’s own interests.” (Emphasis added.) Comment [10] to Rule 1.7 further states, “The lawyer’s own interests should not be permitted to have an adverse effect on representation of the client.” We must examine whether the lawyer’s potentially large debt obligation in this arrangement would have an adverse effect on his representation of the client.
32. Rule 1.5 is also implicated by the proposed funding arrangement: “(a) A lawyer shall not make an agreement for, charge or collect an unreasonable fee, or an unreasonable amount for expenses.” Comment [5] of Rule 1.5 further provides: “An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client’s interest.”
33. Because under Options 1 and 2 the payment of the funding fee is the personal obligation of the lawyer and is based on the amount funded and not on the amount of the recovery ultimately obtained, there is potential that the lawyer will have financial incentives that are, or may be, adverse to the client’s best interests. First, the lawyer has an incentive to set a very high percentage retention to the contingent-fee arrangement with the client, which, in turn, might be “unreasonable” under Rule 1.5.
34. Second, even if the contingent fee is reasonable, a lawyer who participates in a nonrecourse, contingent loan will be vulnerable to several potential ethical dilemmas. The lawyer’s personal financial obligations to Third-Party Lender potentially could place the lawyer’s financial interests in conflict with the client’s interests and affect the exercise of the lawyer’s independent judgment on behalf of the client, especially in situations where the lawyer learns during the course of the case that the amount of the potential recovery is likely to be small. 22 It is possible that the amount of the funding and funding fee owed to Third- Party Lender, which is a personal obligation of the lawyer, might exceed the lawyer’s contingent fee interest in the recovery. 23 The lawyer could be faced with the unusual predicament of being tempted to intentionally abandon the case or lose the case at trial to circumvent the personal financial consequences from receiving insufficient recovery.
35. Option 3 may not create the same potential that the lawyer is advantaged by obtaining no recovery for the client in a case where an insubstantial recovery is probable. Under Option 3, the funding fee that is the personal obligation of the lawyer is not based on the amount funded, but is based on the net recovery (gross recovery minus litigation expenses). Assuming that the funding recoverable by the Third-Party Lender under Option 3 is the lesser of the amount funded or the recovery (as it is under Options 1 and 2), it is mathematically impossible for the lawyer to be able to reduce the lawyer’s losses by obtaining no recovery for the client. This is because the funding fee, being a percentage of the net recovery, does not become a positive number until the gross recovery exceeds the funding plus the litigation expenses directly paid by the lawyer. 24
36. Rule 1.7(a)(2) states that a lawyer has a concurrent conflict of interest if there is a significant risk that the representation of the client will be materially limited by the lawyer’s responsibilities to a third party Lender or by the personal interest of the lawyer. We conclude that under Options 1 and 2, the lawyer’s personal interest involving the potentially large funding and funding fee payment obligations combined with the potential that the financial risk to the lawyer of the lending arrangement is lessened if the lawyer obtains no recovery for the client, present a significant risk of compromising the lawyer’s ability to provide independent counsel and of materially limiting the lawyer’s representation of the client. We conclude that when a lawyer may have a financial incentive under the terms of a lending arrangement to obtain no recovery for the client, that the conflict of interest is not consentable. 25 The lawyer’s original analysis of the case may be that such a risk is not “material” and that, should the analysis of the case change at a later time, the conflict analysis would be re-visited. But, we think that is an unrealistic view of the dynamic of such a contingent-fee case. As the probability of a large recovery might diminish over time to a point where the lawyer’s interests become significantly different from the client’s, there will be no light bulb that goes on in the attorney’s head to induce a reassessment of the conflict. 26 We conclude that the overall framework of Options 1 and 2 of the litigation-funding Agreement presents a conflict of interest to which the lawyer may not seek the client’s consent.
37. Option 3 of the litigation-funding Agreement does not present the potential that the lawyer will have a financial incentive not to obtain a recovery for the client. However, Option 3 of the litigation funding Agreement does involve a non-recourse loan and such arrangements do create a significant risk of compromising the lawyer’s duty of independent judgment and duty of client loyalty. 27 Therefore, Option 3 creates a conflict of interest under Rule 1.7 (a) (2), but this conflict of interest may be consented to by the client.
38. Accordingly, a lawyer may not participate in Options 1 or 2 of the contingent, non-recourse loan program described, because the representation will create a significant risk that the representation of the client will be materially limited by the personal interest of the lawyer, who has the potential to reduce the financial risk of the loan program to the lawyer by obtaining no recovery for the client. A lawyer may ethically participate in Option 3 of the contingent, non-recourse loan program described, if the lawyer complies with Rule 1.7 (b) and obtains the informed consent of the client, confirmed in writing.
Footnotes
1. We assume, however, that, as the manager of Affiliated Lending, Lawyer would be the principal contact person for the third-party collection agency and would be involved in, or would at least review and approve, decisions about how to prosecute and collect the defaulting client’s loans.
2. Typically, this type of arrangement would be used in representing clients where large up-front fees are required, such as bankruptcies, defense of criminal matters and the like.
3. All citations to the “Rules” in this opinion are to the Utah Rules of Professional Conduct, adopted November 1, 2005, by the Utah Supreme Court.
4. None of the exceptions stated in Rule 1.6(b) are applicable to these questions.
5. See also RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 121 cmt. c(ii) (2000); see, generally, GEOFFREY C. HAZARD, JR. & W. WILLIAM HODES, THE LAW OF LAWYERING § 11.8 et seq. (3d ed. 2001).
6. See In re Bond, 723 N.Y.S.2d 811 (App. Div. 2001) (conflict of interest when lawyer arranged loan from his wife and mother to clients to enable them to avoid foreclosure action).
7. Rule 1.8(a) provides:
A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless:
(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;
(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and
(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction, including whether the lawyer is representing the client in the transaction.
8. The recent case of In re McGregory, Docket No. 05-6054EM (Bankr. 8th Cir., March 24, 2006), is a good example of the application of this principle. In McGregory, a lawyer for a Chapter 13 debtor also was employed as a “home mortgage consultant” for a bank. In this capacity, the lawyer arranged home mortgages for Chapter 13 debtors to enable them to refinance their existing home loans, reduce the interest rates on their mortgages and obtain additional cash from the equity in their homes. While representing a Chapter 13 debtor, and with the written consent of the debtor, the lawyer arranged for such a loan from the bank. The loan benefitted the debtor by reducing the debtor’s mortgage interest rate, reduced the debtor’s monthly mortgage payments and generated sufficient cash to make a full payment to the debtor’s unsecured creditors. Nevertheless, the Bankruptcy Court found the lawyer had an impermissible conflict of interest in representing the debtor while being employed by the debtor’s lender, and the 8th Circuit affirmed: “[T]his type of dual representation, particularly in the bankruptcy context, presents such an inherent and impermissible conflict that it cannot be waived.” Id. at 8.
9. See Rule 1.7, cmt. [22].
10. Rule 1.7(b)(1) and cmt. [2], cl. 3).
11. In light of the risks to Third-Party Lender, a yield equal to 100% or more on the loan may not be unreasonable in the commercial marketplace. We make no comment on the commercial propriety of the funding fees charged by Third-Party Lender.
12. The third option was not included in the sample Agreement submitted by the requestor. Our understanding of Option 3 is based on the narratives provided by the requestor. We have assumed that under Option 3, as under Options 1 and 2, the amount of the funding recoverable by the Third-Party Lender from the lawyer cannot exceed the recovery.
13. If and to the extent that this arrangement gives Third-Party Lender a priority (vis-a-vis general creditors of the lawyer) in the lawyer’s rights to recovery from the client of the portion of the litigation expenses funded directly by the lawyer (i.e., the 20% or more of the litigation expenses the Third-Party Lender does not fund), then this arrangement may violate Rule 5.4(a), Utah Rules of Professional Conduct, as explained in Utah Eth. Adv. Op. 97-11, 1997 WL 770890 (Utah St. Bar). Given the Committee’s disposition of this request under Rule 1.7 of the Utah Rules of Professional Conduct and the lack of details regarding this “subordination” in the request, the Committee expresses no opinion on whether costs should be afforded different treatment than fees under Rule 5.4(a) and our Opinion 97-11, or on whether this arrangement violates Rule 5.4(a).
14. Utah Eth. Adv. Op. 97-11, 1997 WL 770890 (Utah St. Bar).
15. Rule 5.4(a) provides that a lawyer or a law firm “shall not share legal fees with a non-lawyer”, except under the limited circumstances authorized in the Rule.
16. Id. 14.
17. Utah Eth. Adv. Op. 02-01, at 6, 2002 WL 231939 (Utah St. Bar).
18. The amount of the yield to the lender is irrelevant to the ethical implications of this arrangement.
19. “Net recovery” here means that the client is obligated to repay the costs advanced by the lawyer dollar for dollar from any recovery (but no more than the recovery), with the remainder—the net— subject to the contingent-fee percentage.
20. The lawyer’s contingent fee in this example is $0: (100,000 recovery – 100,000 in costs) x 1/3 = $0. The lawyer’s out-of-pocket loss is ($20,000 of costs funded directly by Lawyer + $160,000 repayment obligation to Third-Party Lender) – 100,000 cost recovery = $80,000 loss. Of this $80,000 loss, $60,000 can be avoided by the lawyer under the Agreement if there is no recovery by the client.
21. Assume Option 2 is selected by the lawyer, and the recovery occurs in the 38th month. The lawyer’s out-of-pocket loss is $100,000. The lawyer is obligated to repay Third-Party Lender the funding of $80,000, plus a funding fee of $100,000 (1.25 x 80,000), for a total of $180,000. The lawyer has also directly funded $20,000 of costs. The total costs to the lawyer of $200,000 minus the $100,000 cost recovery results in a $100,000 net loss to the lawyer. Of this net loss, $80,000 can be avoided under the Agreement if there is no recovery by the client.
22. At inception of the lending arrangement, the lawyer presumably believes that the anticipated recovery would justify the associated loan costs. As the case progresses, however, the likelihood and amount of the recovery may diminish. Nevertheless, the lawyer’s obligation to the lender remains the same.
23. In the above example using Option 1 and $100,000 in litigation costs, assume the actual recovery to be $250,000 and that the lawyer took the case on a ? contingent-fee basis calculated on net recovery. The lawyer would still be out-of-pocket a net $30,000: ($250,000 recovery – $100,000 in costs) ? ? = $50,000 contingent fee to the lawyer, or $30,000 less than the lawyer’s net obligation to Third-Party Lender of $60,000 plus the lawyer’s direct payment of costs of $20,000. Of this $30,000 loss, the Lawyer avoids $10,000 of the loss if there is no recovery by the client.
24. Assume Option 3 is selected and the lawyer negotiates a funding fee of 5% of the net recovery (gross recovery minus litigation expenses), subject to a cap of 5 times the funding. Using the hypothetical of a $100,000 recovery with $100,000 of litigation expenses, the lawyer’s out-of-pocket loss is $0. The lawyer is obligated to pay Third-Party Lender the funding of $80,000, plus a funding fee of $0: ($100,000 gross recovery – 100,000 total costs) x .05 = $0. The lawyer has directly paid $20,000 of costs. The total costs to the lawyer is $100,000, equal to the $100,000 cost recovery, resulting in $0 loss to the lawyer. If the recovery is reduced to $50,000, the lawyer’s out-of-pocket loss is $20,000: (funding of $50,000 owed to the Third-Party Lender + funding fee of $0 + $20,000 of costs directly paid by lawyer) – $50,000 cost recovery = $20,000 net out-of-pocket loss. Lawyer cannot, however, avoid any portion of this net out-of-pocket loss by obtaining no recovery for client.
25. Under these circumstances, the lawyer can not reasonably believe that the lawyer will be able to provide competent and diligent representation to the affected client. See, Rule 1.7(b)(2).
26. Even if that did happen and the lawyer concluded that a nonconsentable conflict had arisen, the prejudice to the client of withdrawing at such a point would be unacceptable.
27. Utah Eth. Adv. Op. 97-11, 1997 WL 770890 (Utah St. Bar); Utah Eth. Adv. Op. 02-01, at 6, 2002 WL 231939 (Utah St. Bar).

Ethics Advisory Opinion No. 02-01

Issued February 11, 2002
¶ 1 Issue:
Do the Utah Rules of Professional Conduct preclude a Utah lawyer from financing litigation costs through a loan from a third-party lending institution, if (a) the lawyer is obligated to repay the loan and (b) the client, by separate agreement with the lawyer, is obligated to reimburse the lawyer for such costs?

¶ 2 Conclusion: The Utah Rules of Professional Conduct do not preclude such litigation-financing arrangements, provided the lawyer discloses to the client the terms and conditions of the loan, the client consents, and the lawyer, but not the client, is obligor on the loan.
¶ 3 Background: A Utah State Bar lawyer seeks an advisory opinion regarding the ethical propriety under the Utah Rules of Professional Conduct of participating in a “recourse” loan program,1by which the lawyer would finance the costs of litigation for his client through a third-party lending institution offering loans to lawyers for litigation expenses.
The primary features of a typical program include:
The program allows a lawyer, often a personal-injury lawyer seeking to finance a contingent-fee case, to raise the money at low cost to be invested in litigation expenses. This is accomplished through a low-interest, recourse loan to the lawyer or law firm who uses the potential fees from the case as loan collateral.
Under the terms of the loan, the lending institution advances reimbursable litigation costs, as defined in the loan agreement, to the lawyer. The brochure of one such lending institution claims it advances 95% to 100% of the lawyer’s case costs.
The lawyer pays monthly interest charges on funds advanced under the loan, and remits the loan principal upon settlement or resolution of the case. By a separate agreement with the client, the lawyer ultimately recoups litigation expenses and interest charges from the client if the case is successful.
If the case is abandoned or lost, the lawyer is obligated to repay advanced costs and expenses and any outstanding interest to the lender. The lawyer may elect not to receive funding from the lending institution on a particular case if the potential for success is not deemed high enough. The client remains obligated to repay the lawyer for such advanced costs under a separate agreement between the lawyer and the client.
The lending institution recommends the lawyer add language to the client fee agreement that discloses the case-financing transaction. A sample client letter discloses, “If no recovery is obtained, you will be obligated only for disbursements and charges as described below.” Such disbursements include photocopying, messenger service, computerized research, videotape recordings, travel expenses, experts, investigators, etc. In disclosing the financing arrangement, the letter states, “You acknowledge and agree that we [the law firm] may borrow funds from time to time to pay certain of the costs referred to above and agree that, in addition to reimbursing us for the amount of such costs, you also will reimburse us for any interest charges and related expenses we incur in connection with such borrowings.”
¶ 4 Variations of such financing arrangements are possible, but the essential features for purposes of this opinion are that the lawyer is obligated to the lending institution to repay the loan principal, and the client is obligated to reimburse the lawyer for advanced litigation costs, plus any applicable interest.
¶ 5 Analysis: The letter requesting our opinion notes a concern with our Opinion 97-11,2 dealing with a “non-recourse” cost-financing program. In that opinion, we concluded, “An attorney’s grant of a security interest in a contingent fee from a particular case to secure a loan constitutes the sharing of fees with a non-lawyer in violation of Utah Rules of Professional Conduct 5.4(a).”3In other words, the lender’s fee was contingent upon the lawyer’s contingent fee. The Committee disagreed with the lender’s contention that such an arrangement did not involve fees, but merely a repayment of costs. The opinion added, “Once a security interest in the recovery of contingent fees from a particular case is granted, Rule 5.4 is implicated. Upon that grant, Lender has the right to attach upon default in payment of the loan.” That particularized interest would “compromise the lawyer’s judgment in a number of ways,” primarily by creating potential conflicts between the lawyer and the lender, thereby undermining the lawyer’s duty of independent professional judgment and the duty of client loyalty.4
¶ 6 The proposed financing arrangement explained above has none of the objectionable features described in Opinion 97-11. Here, the lending institution has no interest in the lawyer’s contingent-fee award because, under the separate loan agreement between the lawyer and the lender, the lawyer is obligated to repay the loan whatever the outcome of the case. Because this obligation is not contingent, the lawyer is not compromised, as was the lawyer under the arrangement described in Opinion 97-11. Similarly, in this case, the client, by separate agreement, remains obligated to the lawyer for payment of litigation costs. The lawyer is not compromised because the client’s obligation is not contingent upon the outcome of litigation. The arrangement described above simply makes it easier for clients and attorneys to finance litigation and is mutually beneficial to both.
¶ 7 Many other state counterparts to this Committee have considered the professional ethics issues arising under financing arrangements similar to those in this opinion. These advisory opinions have analyzed the proposed financing arrangement in light of their respective rules’ prohibitions against fee-splitting arrangements and the lawyer’s “independent judgment.” In Utah, these ethical standards are found in Rule 5.4(a).5The various state bar ethics opinions summarized in the Appendix to this opinion have invariably concluded that litigation-financing arrangements similar to those described above are permissible, provided the attorney remains obligated on the loan and there is full disclosure to the client. Our research has not disclosed a contrary opinion, and we generally concur with the reasoning and conclusions of these opinions.
APPENDIX
Florida
Formal Advisory Opinion No. 86-2, State Bar of Florida (April 15, 1986), asks whether “[l]awyers may charge a lawful rate of interest on liquidated fees and costs either as provided in advance by written agreement or upon reasonable notice.” The com mittee’s answer, in its entirety, states, “The Committee finds no basis for distinguishing between fees and costs advanced for the purpose of charging interest. Accordingly, the Committee concludes that the Code of Professional Responsibility does not prohibit in advance by written agreement or, in the absence of a written agreement, upon reasonable notice. It is the Committee’s view that 60 days would constitute reasonable notice.”
Georgia
Formal Advisory Opinion No. 92-1, State Bar of Georgia (January 14, 1992), describes a system for payment of certain costs and expenses in contingency-fee cases where the law firm sets up a draw account with a bank, secured by a note from individual firm lawyers. When a client makes a payment toward expenses incurred on the case, the law firm credits the client’s account, and if the case is settled or verdict paid, the firm pays off the client’s share of the money advanced on the loan. If no verdict or settlement is obtained, the lawyers are contractually obligated to repay the loan, although the client remains ultimately liable to the lawyer, not the bank, to reimburse such expenses. The opinion raises two issues: whether the bank loan to the lawyer compromises the attorney -client relationship and whether it is ethical to charge clients interest. As to the first issue, the opinion concludes there is no ethical impropriety provided the lawyers “make sure that the bank understands that its contractual arrangement can in no way affect or compromise the lawyer’s obligations to his or her individual clients.” The opinion similarly concludes on the second issue, “[I]t is permissible to charge interest on such advances only if (i) the client is notified in the contingent fee contract of the maximum rate of interest the lawyer will or may charge on such advances; and (ii) the written statement given to the client upon conclusion of the matter reflects the interest charged on expenses advanced in the matter.”
Illinois
Opinion No. 92-9, Illinois State Bar Ass’n (January 22, 1993), posits a different factual arrangement. The question was whether the lawyer may ethically help clients obtain financing. Under the proposed arrangement, the lawyer pays an initial fee of $500 for which he is given the right to submit loan applications from clients. If the loan is approved, the client becomes solely responsible on the loan, but the attorney receives the loan proceeds less a 10% fee. The opinion concluded that an “attorney may ethically assist clients in obtaining loans for payment of attorney fees, providing the attorney protects the client’s confidences and meets his fiduciary obligation of complete disclosure.”
Missouri
Informal Opinion No. 970066, Missouri Bar Ass’n (August 20, 2001), asks, “If an Attorney borrows money in order to fund the litigation expenses in a case, may an attorney pass the interest on the loan through to the client?” In a terse answer, the Opinion concludes the “Code of Professional Responsibility does not prohibit an attorney from charging a lawful rate of interest on liquidated fees and costs, either as provided in advance by written agreement or, in the absence of a written agreement, upon reasonable notice.”
New Jersey
120 N.J.L.J. 252, N. J. Advisory Comm. on Professional Ethics (July 30, 1987), discusses whether “it is appropriate for the firm to advance disbursements” in a contingency fee case. The financing arrangements are virtually identical to those described in the Utah inquiry. Consistent with its counterparts, the Committee found “nothing unethical or contrary to the letter of the rules of the Court, or Rules of Professional Conduct in the proposed provision.”
Ohio
Opinion 2001-3, The Supreme Court of Ohio, Board of Commissioners (June 7, 2001), addresses “the ethical propriety of a law firm borrowing money, using the funds to advance costs and expenses of litigation in a personal injury matter accepted on a contingent fee basis, and then passing the interest fees and costs of the loan to the client as expenses of litigation.” Again, the financing arrangements are virtually identical to those described in the Utah inquiry. The Ohio Board found: “[T]here is no rule prohibiting a lawyer from obtaining a loan from a third party institution for use in advancing the expenses of litigation provided the loan is not secured by the client’s settlement or judgment. However, the client should be informed.”
Texas
Tex. Comm. on Professional Ethics, Op. 465, V. 54 Tex. B.J. 76 (1991), discusses two issues: whether an attorney may “ethically own an interest in a lending institution which loans money to personal injury clients of the attorney,” and whether the attorney “may borrow money from a lending institution for case expenses . . . and ethically charge, or pass on, to the client, as part of the expense, the outofpocket [sic] interest or finance charges of the lending institution.” The Committee found “an attorney may properly own an interest in a lending institution which loans money to personal injury clients of the attorney,” and that “an attorney may properly borrow money from a lending institution for case expenses for a personal injury client, and charge, or pass on, to the client the actual out-of-pocket interest or finance charges of the lending institution.”
Tennessee
Advisory Ethics Opinion 98-A-659, Board of Professional Responsibility of the Supreme Court of Tennessee (July 9, 1989), draws a similar conclusion from similar facts described in the Utah inquiry. The Board concludes “a lawyer may advance or guarantee certain expenses” by means of “a lending company or recommending such services to clients.”
Footnotes
1.A “recourse loan” in this context is one for which the lawyer would be liable to a lending institution irrespective of the outcome of litigation being financed. See Black’s Law Dictionary (“recourse loan” under “loan” entries) (7th ed. 1999).
2.Utah Ethics Adv. Op. 97-11, 97 WL 770890 (Utah St. Bar).
3.Id. at 1.
4.Id. at 2.
5.“A lawyer or law firm shall not share legal fees with a nonlawyer” with noted exceptions, none of which is applicable here. Professional Independence of a Lawyer, Utah Rules of Professional Conduct 5.4(a) (2001).

Ethics Advisory Opinion No. 02-03

(Issued February 27, 2002)
¶ 1 Issue:
What are the ethical obligations of an insurance defense lawyer with respect to insurance company guidelines and flat-fee arrangements?

¶ 2 Opinion: An insurance defense lawyer’s agreement to abide by insurance company guidelines or to perform insurance defense work for a flat fee is not per se unethical. The ethical implications of insurance company guidelines must be evaluated on a case by case basis. An insurance defense lawyer must not permit compliance with guidelines and other directives of an insurer relating to the lawyer’s services to impair materially the lawyer’s independent professional judgment in representing an insured. If compliance with the guidelines will be inconsistent with the lawyer’s professional obligations, and if the insurer is unwilling to modify the guidelines, the lawyer must not undertake the representation. Flat-fee arrangements for insurance defense cases are unethical if they would induce the lawyer improperly to curtail services for the client or perform them in any way contrary to the client’s interests. Obligations of lawyers under the Utah Rules of Professional Conduct, including the duty zealously to represent the insured, cannot be diminished or modified by agreement.
Insurance Company Guidelines
¶ 3 Opinion Request Concerning Insurers’ Guidelines. The Ethics Advisory Opinion Committee has received a request for an ethics advisory opinion concerning insurance company guidelines for counsel who are employed to defend litigation brought by a third party against an insured. The requestors state that insurance companies doing business in Utah have incorporated in their defense-counsel retainer agreements certain billing protocols or guidelines governing attorneys’ procedures and payments that raise ethical issues.
¶ 4 Prior Opinions. Although issues pertaining to insurance company guidelines have been the subject of considerable discussion elsewhere,1 they have not been addressed directly by this Committee.2 When ethical concerns about insurance company guidelines have been raised in ethics opinions from other jurisdictions, the opinions are generally consistent with the summary set forth in ABA Opinion No. 01-421:
A lawyer must not permit compliance with “guidelines” and other directives of an insurer relating to the lawyer’s services to impair materially the lawyer’s independent professional judgment in representing an insured.
Although most of the ethics opinions on insurance company guidelines take a general approach, a few—while acknowledging that certain guidelines may be appropriate—have taken issue with particular guidelines. For purposes of illustration, portions of selected ethics opinions from other jurisdictions are set forth in Appendix A. We do not intend to imply agreement with the conclusions of these opinions. Rather, we wish to describe more fully the kinds of concerns that have been raised elsewhere, many of which are raised directly in the request before us.
¶ 5 Montana Supreme Court Decision. The Montana Supreme Court has issued an opinion that addresses these topics, but only after having determined that the insured is the sole client of the defense lawyer. Under that structure, the court noted that defense counsel (a) does not have a “blank check” to escalate litigation costs, (b) should consult with the insurer, (c) must charge reasonable fees, and (c) can be held accountable for its work. The Montana court then held that “defense counsel in Montana who submit to the requirement of prior approval [obtaining consent of the insurer prior to taking certain actions] violate their duties under the Rules of Professional Conduct to exercise their independent judgment and to give their undivided loyalty to insureds.”3
¶ 6 The Insurer-Defense Attorney Relationship. We do not decide whether, under Utah law, the insurer may or may not be a co-client of defense counsel. This is a legal question about which the Committee is not authorized to issue an opinion.4Courts in other jurisdictions have addressed the issue,5but the Utah Supreme Court has not determined whether a lawyer employed to represent an insured party in the defense of litigation also represents the insurer. We recognize not only that the Utah Supreme Court has not addressed this matter but that, even if it is assumed that the insurer is not a client, there are significant legal issues pertaining to the relationship between defense counsel and insurer.6The formation of an attorney-client relationship is a matter of substantive law external to the Utah Rules of Professional Conduct and in Utah, as in other states, depends upon the facts of the particular case including the intent and conduct of the parties.7As noted in the Scope comment to the Utah Rules of Professional Conduct:
[F]or purposes of determining the lawyer’s authority and responsibility, principles of substantive law external to these Rules determine whether a clientlawyer relationship exists. Most of the duties flowing from the clientlawyer relationship attach only after the client has requested that the lawyer render legal services and the lawyer has agreed to do so. But there are some duties, such as that of confidentiality under Rule 1.6, that may attach when the lawyer agrees to consider whether a clientlawyer relationship shall be established. Whether a clientlawyer relationship exists for any specific purpose can depend on the circumstances and may be a question of fact.
¶ 7 Our authority does not extend to the determination of legal question.8 Issuance of an opinion on the matters before us does not require that there be a determination of the legal question of whether a lawyer employed as defense counsel represents both insured and insurer. Accordingly, in this opinion, we address the lawyer’s ethical obligations in the event both the insurer and the insured are clients. We also address the lawyer’s ethical obligations in the event only the insured is a client. In the absence of controlling law to the contrary, who the lawyer represents may be determined at the outset by agreement of the insured, the insurer and the lawyer.
¶ 8 Insurance Company Guidelines. The requestors did not provide the Committee with copies of particular guidelines. Instead, they inquired generally about the ethical implications of guidelines, stating that certain tasks will only be paid at specified rates (e.g., written discovery will only be paid at paralegal rates) and that unless preapproval from an adjuster is obtained for certain tasks, defense counsel will not be paid (e.g., pleadings and motions, written discovery, retention of experts, legal research, travel, trial preparation, jury instructions, posttrial motions, appeals).9
¶ 9 The extensive scholarly literature on insurance company guidelines reveals a number of points that are relevant background for our consideration of ethical issues with respect to insurance company guidelines:
* Insurance company guidelines are not identical.
* Insurance companies may not use the same guidelines for every type of insurance defense.
* Considerations of freedom of contract, cost control in the interest of policyholders (including avoidance of unreasonable defense costs), and improving coordination and communications with defense counsel are important motivating factors for insurance companies in promulgating guidelines.
* Insurance company guidelines are similar in some respects to litigation management guidelines established by numerous corporate or governmental entities seeking to control litigation costs.
* There may be a degree of unobvious flexibility in insurance company guidelines, in that insurance companies may permit variance from written guidelines or may reconsider and reverse an initial decision against a particular action upon receiving a satisfactory justification from the defense attorney.
* Insurance company guidelines may include provisions that are unobjectionable from virtually any standpoint, such as:
(a) defining the financial relationship between the insurer and defense counsel (including hourly rates or other fees and permitted charges for expenses);
(b) coordinating the roles of defense counsel and employees of the insurer;
(c) establishing communications procedures between defense counsel and the insurer;
(d) stating the insurer’s objectives, both strategic and financial, with respect to litigation defense;
(e) outlining standard procedures the insurer prefers to follow in handling lawsuits;
(f) identifying which lawyers and nonlawyers will be responsible for the matter;
(g) requiring analysis of the case as a whole and of the need for particular services; and
(h) billing procedures, including frequency of billing and billing format, such as requirements that billings include sufficient information to permit an evaluation of the reasonableness of fees and costs.
On the other hand, many believe that insurance company guidelines may in practice result in an inadequate defense of the insured by requiring or inducing defense lawyers to curtail services for the insured improperly.
¶ 10 The Insurer-Insured Relationship. The insurer and the insured have significant rights and obligations pertaining to the defense of litigation brought against the insured by a third party. For example, in Ellis v. Gilbert,10the Utah Supreme Court stated:
The bare facts of life may as well be faced and reckoned with. If we look behind the facade it is to be seen that where there is insurance, the company actually takes over, employs counsel, investigates the case, interviews the witnesses, controls offers of settlement, and in fact, handles the entire matter.
In Peterson v. Western Casualty and Surety Co.,11while addressing the standard for showing diligence by insurer relying on alleged breach of cooperation clause by the insured, the Utah court noted that an insurance policy providing for interest on judgment “seems to be a recognition of the fact that the delay in payment of the judgment is chargeable to the insurance company, since it controls in the litigation.” In Berlant v. McAllister,12the Court described the insurerinsured relationship as follows:
To begin with we must know that the insurance carrier is obligated by its contract to pay all sums (up to the limits of the policy) which [the insured] may be, or shall become, liable to pay. This means that the carrier cannot be made to pay money until a judgment has been rendered against the insured []. However, this does not prevent the carrier from making a settlement of all claims against its insured before a judgment is rendered. The likelihood of losing the suit, the cost of defending it, and the possibility of settling for a sum less than the foreseeable costs and expenses are all matters which a carrier will consider in determining whether to settle a case or to defend it. The insurance contract provides that the insurer will, at its own expense, investigate, defend or settle any claims against the insured. It does not provide for any representation of its insured in an action against another party. Separate counsel always represents an insured plaintiff when he sues or an insured defendant when he counterclaims. The insurance attorney only represents the insured insofar as any claim is made against him for which the insurance company might be liable.
In Beck v. Farmers Insurance Exchange,13 the Court addressed obligations of the insurer as follows:
In a third-party situation [where the insurer contracts to defend the insured], the insurer controls the disposition of claims against its insured, who relinquishes any right to negotiate on his own behalf. . . . An insurer’s failure to act in good faith exposes its insured to a judgment and personal liability in excess of the policy limits. . . . In essence, the contract itself creates a fiduciary relationship because of the trust and reliance placed in the insurer by its insured. . . . The insured is wholly dependent upon the insurer to see that, in dealing with claims by third parties, the insured’s best interests are protected. In addition, when dealing with third parties, the insurer acts as agent for the insured with respect to the disputed claim. Wholly apart from the contractual obligations undertaken by the parties, the law imposes upon all agents a fiduciary obligation to their principals with respect to matters falling within the scope of their agency.
The Utah Rules of Professional Conduct do not in any way diminish or modify the rights or obligations of the insured or the insurer.
¶ 11 Ethical Obligations Cannot Be Modified by Agreement. A lawyer’s ethical duties under the Utah Rules of Professional Conduct cannot be diminished or modified by an agreement between the attorney and the attorney’s client or between the attorney and a third party. This principle applies equally to agreements concerning insurance company guidelines and fee agreements with insurance companies. For example, an attorney’s obligations to provide competent representation to a client,14to act with reasonable diligence and promptness in representing a client,15to exercise independent professional judgment and render candid advice,16and to supervise properly subordinate lawyers and nonlawyer assistants17cannot be limited by agreement. With respect to attorneys’ fee agreements, the comment to Rule 1.5 states: “An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in any way contrary to the client’s interests.” Accordingly, notwithstanding any agreement pertaining to fees or pertaining to the manner in which litigation may be conducted, lawyers subject to the Utah Rules of Professional Conduct must at all times comply with them.
¶ 12 Consent For Third-Party Payment. Rule 1.8(f) provides:
A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) The client consents after consultation;
(2) There is no interference with the lawyer’s independence of professional judgment or with the clientlawyer relationship; and
(3) Information relating to representation of a client is protected by Rule 1.6.
Rule 1.8(f) applies by its terms to a lawyer employed to defend litigation brought by a third party against an insured, whether or not the insurer is a client. Accordingly, an insured must consent to an insurer’s paying a lawyer employed to defend litigation brought by a third party against an insured. For purposes of Rule 1.8(f), the insured manifests this consent by entering into the insurance contract and accepting the representation offered. No new or separate consent is necessary.
¶ 13 Information Under Rule 1.4(b). Under Rule 1.4(b), the insurance defense lawyer must “explain a matter to the extent reasonably necessary to enable the client to make informed decisions regarding the representation.” With respect to the insured as a client, the lawyer must inform the insured sufficiently to enable the insured to make informed decisions regarding the representation. The lawyer could accomplish this by sending the insured a letter at the outset of the representation informing the insured of relevant information. Although doing so would be a prudent practice, we do not hold that a lawyer must provide a written explanation. In ¶ 17 of this Opinion, we discuss the kinds of information that might be included in a letter to the insured at the outset of the representation.
¶ 14 Limitation of Scope Under Rule 1.2. Many perceived issues concerning insurance company guidelines can be resolved with proper attention to limitations on the scope of the representation under Rule 1.2. Under that rule, the scope of the attorney’s representation may be limited by agreement.18The comments to Rule 1.2 specifically refer to the retention of a lawyer by an insurance company to represent an insured:
The objectives or scope of services provided by a lawyer may be limited by agreement with the client or by the terms under which the lawyer’s services are made available to the client. For example, a retainer may be for a specifically defined purpose. Representation provided through a legal aid agency may be subject to limitations on the types of cases the agency handles. When a lawyer has been retained by an insurer to represent an insured, the representation may be limited to matters related to the insurance coverage. The terms upon which representation is undertaken may exclude specific objectives or means.19
Limitations on the objectives or scope of an attorney’s services should be determined jointly by the attorney and the client. The comment to Rule 1.2 states:
Both lawyer and client have authority and responsibility in the objectives and means of representation. The client has ultimate authority to determine the purposes to be served by legal representation, within the limits imposed by law and the lawyer’s professional obligations. Within those limits, a client also has a right to consult with the lawyer about the means to be used in pursuing those objectives. At the same time, a lawyer is not required to pursue objectives or employ means simply because a client may wish that the lawyer do so. A clear distinction between objectives and means sometimes cannot be drawn, and in many cases the client-lawyer relationship partakes of a joint undertaking. In questions of means, the lawyer should assume responsibility for technical and legal tactical issues but should defer to the client regarding such questions as the expense to be incurred and concern for third persons who might be adversely affected.20
¶ 15 If both insurer and insured are clients, both must agree to limitations on the objectives or scope of an attorney’s services. If only the insured is the client, the insured must agree. The lawyer could obtain the insured’s consent at the outset of the representation by sending the insured a letter informing the insured of the relevant limitations. For example, the claims asserted against the insured may include claims that exceed insurance policy limits, claims that are not covered by insurance, or interests of the insured (such as reputation) that the insurer has no obligation to protect. In these situations, special care should be taken to provide information necessary for the insured to understand and agree to any appropriate limitations and to implement means to provide additional representation the insured may desire.
¶ 16 Although doing so would be a prudent practice, we do not hold that a lawyer must provide a written explanation or obtain the client’s consent in writing. In the next paragraph, we discuss the kinds of information that might be included in a letter to the insured at the outset of the representation. The lawyer could inform the insured in the letter that the insured’s consent to the limitations on the objectives or scope of the lawyer’s services will be presumed unless the insured objects within a specified time period. The insured could manifest consent to the limitations by accepting the defense without objection.
¶ 17 Information That Could Be Provided at the Outset. Subject to any limitations on confidential information under Rule 1.6(a),21which may apply if the insurer is also a client, the insurance defense lawyer could provide the insured with information such as the following:
(1) the fact of the lawyer’s selection by the insurer to defend against the claim and appropriate information concerning the lawyer;
(2) the identity of the insurer;
(3) the identity of the lawyer’s client or clients (i.e., whether or not there are multiple insureds who will be clients and whether or not the insurance company will be the lawyer’s client);
(4) relevant policy information, including facts pertaining to the lawyer’s compensation by the insurer;
(5) to the extent they are not disputed by the parties, the insurer’s rights and obligations under the insurance policy with respect to defense and settlement of the litigation;
(6) to the extent they are not disputed by the parties, the insured’s rights and obligations under the insurance policy with respect to defense and settlement of the litigation;
(7) how the representation will be conducted, including any limitations on the objectives or scope of the representation22and the insurer’s normal practices in directing representations including by way of litigation or billing guidelines;
(8) how settlement proposals will be handled;
(9) that, unless the insured objects and subject to the requirements of the Utah Rules of Professional Conduct, the lawyer intends to proceed in accordance with the directions of the insurer;
(10) issues pertaining to confidential information and obtaining consents to convey confidential information between insured and insurer;23
(11) issues pertaining to avoidance and resolution of conflicts of interest;24
(12) risks to the insured, including the implications of the insurer’s rights, obligations, and procedures and any other relevant risks, such as an excess judgment or noncovered claims; and
(13) the insured’s right to hire a lawyer at the insured’s expense, including for purposes other than defense of the claim.25
While the foregoing items are provided as non-exhaustive illustrations, we do not hold that a defense lawyer must address every item in every case. Under Rule 1.4(b), the insurance defense lawyer must explain the matter to the extent reasonably necessary to enable the client to make informed decisions regarding the representation.
¶ 18 Professional Independence Under Rules 1.8(f) and 5.4(c). Rule 1.8(f)(2) requires that a lawyer accepting compensation for representing a client from one other than that client assure that “there is no interference with the lawyer’s independence of professional judgment or with the client-lawyer relationship.” This rule applies to a lawyer employed to defend litigation brought by a third party against an insured, whether or not the insurer is also a client.
¶ 19 Rule 5.4(c) provides: “A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.” Rule 5.4(c) applies to a lawyer employed to defend litigation brought by a third party against an insured, whether or not the insurer is a client. Rule 5.4(c) expressly prohibits a lawyer from permitting a person who employs or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering the legal services. Rule 5.4(c) draws no distinction between advice and action and speaks directly to professional judgment in rendering legal services. This is not to say, however, that the scope of the lawyer’s representation may not properly be limited as provided in Rule 1.2. To the extent the scope of the lawyer’s representation properly is limited, the lawyer is not authorized to render services outside the scope of the representation. But agreements respecting insurance company guidelines or flat-fee arrangements with insurance companies cannot free the lawyer from the obligation to exercise independent professional judgment both in setting limits on the representation and in rendering services within the scope of the representation.
¶ 20 Summary of Analysis of Insurance Company Guidelines. With these principles in mind, we conclude that an insurance defense lawyer’s agreement to abide by insurance company guidelines is not per se unethical and that the ethical implications of insurance company guidelines must be evaluated on a case-by-case basis. An insurance defense lawyer must not permit compliance with guidelines and other directives of an insurer relating to the lawyer’s services to impair materially the lawyer’s independent professional judgment in representing an insured.26Obligations of attorneys under the Utah Rules of Professional Conduct cannot be diminished or modified by an agreement between the attorney and the attorney’s client or by an agreement between the attorney and an insurer. Before accepting a representation of an insured party that will be governed in part by insurance company guidelines, a defense lawyer must determine that compliance with the guidelines will not be inconsistent with the lawyer’s professional obligations. If compliance with the guidelines will be inconsistent with the lawyer’s professional obligations, and if the insurer is unwilling to modify the guidelines, the lawyer must not undertake the representation.
¶ 21 After accepting a representation of an insured party that is governed in part by insurance company guidelines, a defense lawyer must at all times comply with the Utah Rules of Professional Conduct, including Rules 1.1 (competent representation), 1.2 (limitation of scope of representation), 1.3 (diligence and promptness), 1.4 (communication requirements), 1.8(f) (consent), and 5.4(c) (no direction or regulation of the lawyer’s professional judgment). If the lawyer determines that the insurer’s interpretation or application of the guidelines in particular circumstances is in any way inconsistent with the lawyer’s professional obligations under the Utah Rules of Professional Conduct, and if the insurer will not withdraw its interpretation or application of the guidelines, the lawyer must still act in conformity with the Rules.27
¶ 22 In any case where an insurer’s refusal to authorize services that the lawyer, in her independent professional judgment, believes are necessary to comply with the Utah Rules of Professional Conduct, the lawyer should consider the following options:
(1) communicating with the insurer and the insured in an attempt to resolve the matter,28
(2) obtaining the agreement of the insured to pay for the services (perhaps with a reservation of rights to seek payment from the insurer at a later time);
(3) agreeing to provide the services without compensation (and perhaps reserving the right to seek compensation from the insurer at a later time); or
(4) withdrawing from the representation.
If withdrawal is necessary because of an irreconcilable conflict between the insured and the insurer, the lawyer should comply with all applicable provisions of Rules 1.7 and 1.16 and any applicable rules of court.
Flat-fee Arrangements
¶ 23 A Request on Flat-Fee Arrangements. The Committee has also received a separate request for an advisory opinion concerning ethical issues raised by flat-fee arrangements with insurance companies under which counsel is employed to defend a case or a group of cases for a flat fee. Because this request raises some of the same issues and analysis discussed in connection with insurance company guidelines for defense attorneys, we consolidate the two requests to issue a single opinion.
¶ 24 Applicable Rules and Prior Opinion 136. Rule 1.5 of the Utah Rules of Professional Conduct addresses ethical issues relating to attorneys’ fees. As we wrote in Opinion No. 136, “Fixedfee contracts . . . are not prohibited by Rule 1.5 of the Utah Rules of Professional Conduct” and, further, “The only specific types of fees expressly prohibited by Rule 1.5 are contingent fees in divorce and criminal defense cases.”29
¶ 25 In Opinion No. 136, we addressed the question of whether a client’s advance payment made as a “fixed fee” or “nonrefundable retainer” could be considered to be earned by the lawyer when received and, therefore, not required to be deposited in a trust account. We stated that fixedfee contracts or nonrefundable retainers are not expressly prohibited by Rule 1.5, and that the issue became whether such arrangements should be considered per se unreasonable under the Rule. We adopt a similar analysis here. Rule 1.5 does not expressly prohibit flat-fee arrangements. We conclude, therefore, that flat-fee arrangements, including flat-fee arrangements with liability insurance carriers, are not per se unethical. It does not follow, of course, that all flat-fee agreements are in compliance with the Utah Rules of Professional Conduct.
¶ 26 Improper Curtailment of Services. The comment to Rule 1.5 provides:
An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in any way contrary to the client’s interest. For example, a lawyer should not enter into an agreement whereby services are to be provided only up to a stated amount when it is foreseeable that more extensive services probably will be required, unless the situation is adequately explained to the client.
Thus, Rule 1.5 prohibits flat-fee arrangements with insurers if the proposed arrangement would improperly curtail services to be provided to the client that would normally be within the scope of the representation. For example, a flat-fee agreement that is so low as to induce the lawyer to shirk his duties to the insured would be unethical. A lawyer may, of course, provide the necessary services for little or no additional fee, but the lack of further funding (from the insurer, for example) will not justify cutting corners on the lawyer’s ethical obligation to the client. Such situations should be fully explained to the insured. On the other hand, a flat-fee arrangement that is so high as to result in a clearly excessive fee would also violate Rule 1.5(a).
¶ 27 Compliance with the Rules. Our conclusion that flat-fee arrangements with insurance carriers are not per se unethical does not free a lawyer from strict compliance with the applicable rules or standards of professional behavior. To provide some guidance to members of the Utah Bar, we will address some of the ethical considerations.
¶ 28 Rule 1.1 requires a lawyer to provide “competent representation to a client.” This includes the “thoroughness” and “preparation reasonably necessary for the representation.” A lawyer is also required to act with “reasonable diligence and promptness” under Rule 1.3. It is often stated that a lawyer is to represent her client “zealously.”30A lawyer should strictly adhere to these ethical standards, regardless of the nature of the fee arrangement or remuneration paid to the lawyer. Lawyers entering into flat-fee arrangements with insurance companies must use extra caution to assure that the representation they provide to the insured complies with these ethical obligations. Lawyers may not compromise these standards even if the financial arrangement to which they agreed with the insurance company results in a more-than-expected time commitment or worse-than-expected financial result for the lawyer. This also means, of course, that the lawyer should avoid entering into any flat-fee arrangement if there is reasonable cause to believe that future time and financial pressures may prevent the lawyer from providing competent, thorough, diligent and prompt representation to the insured.
¶ 29 Under Rule 1.2, the lawyer must abide by the client’s decisions concerning the objectives of the representation (subject to certain guidelines) and must consult with the client regarding the means by which the objectives of the litigation will be pursued. A lawyer should not enter into a flat-fee agreement with an insurer that would prevent meaningful participation by the insured in determining the objectives of the representation and the means of pursuing them. This may require, as a matter of prudence, consultation with the insured prior to entering into the flat-fee arrangement.
¶ 30 The comment to Rule 1.5 provides, “Where someone other than the client pays the lawyer’s fee or salary . . . , that arrangement does not modify the lawyer’s obligation to the client. . . . [S]uch arrangements should not interfere with the lawyer’s professional judgment.” Rule 1.8(f) expressly requires the lawyer to maintain her “independence of professional judgment” when someone other than the client pays the lawyer’s fee. These rules apply to a lawyer’s representation of an insured, just as they do in all other relevant cases. A lawyer who enters into any type of flat-fee arrangement with an insurer must use caution to assure that she exercises independent professional judgment on behalf of the insured. This is particularly important in situations where the scope of the case has unexpectedly increased beyond the attorney’s original expectations in agreeing to a fixed fee.
¶ 31 It has been suggested that flat-fee arrangements should be prohibited to protect the interests of lawyers in maintaining profitable fee arrangements with insurance companies. It is not this Committee’s role to regulate the competing economic interests of lawyers and insurance companies. Rather, it is our role to interpret the Utah Rules of Professional Conduct and to encourage ethical behavior for the protection of those who receive legal representation. Nothing in the Utah Rules of Professional Conduct prohibits flat-fee arrangements, and it would be improper for us to impose such a restriction where the Utah Supreme Court has chosen not to do so. Our discussion of some of the relevant concerns will provide guidance to lawyers and should promote competent representation for insureds who receive legal representation. As in any other case, the disciplinary procedures of the Utah State Bar and other legal proceedings are available to insureds who believe their lawyers have compromised their ethical duties because of a flat-fee arrangement with the insurer.31
¶ 32 In rendering this opinion, this Committee is aware of the arguments concerning economic and market factors vigorously promoted in the literature by both the insurance industry and the insurance defense bar. We are also mindful of our limited role, which is to interpret the Utah Rules of Professional Conduct and provide guidance to the members of Bar. Our role is not to regulate the market for legal services or to influence the economics of purchasing or providing legal services. Lawyers and insurance companies are free to negotiate fee arrangements that suit their respective economic interests so long as no lawyer on either side violates the Utah Rules of Professional Conduct. Insurance companies and lawyers may enter into fee arrangements that limit the amount of compensation the lawyer will be paid. We emphasize, however, that lawyers entering into such arrangements must use care to assure that their representation complies with all applicable ethical standards, even if the fee arrangement requires the lawyer to perform services for a reduced rate or even without compensation.
¶ 33 Conclusion: An insurance defense lawyer’s agreement to abide by insurance company guidelines or to perform insurance defense work for a flat fee is not per se unethical. The ethical implications of insurance company guidelines must be evaluated on a case by case basis. An insurance defense lawyer must not permit compliance with guidelines and other directives of an insurer relating to the lawyer’s services to impair materially the lawyer’s independent professional judgment in representing an insured. If compliance with the guidelines will be inconsistent with the lawyer’s professional obligations, and if the insurer is unwilling to modify the guidelines, the lawyer must not undertake the representation. Flat-fee arrangements for insurance defense cases are unethical if they would induce the lawyer to improperly curtail services for the client or perform them in any way contrary to the client’s interests. Obligations of lawyers under the Utah Rules of Professional Conduct, including the duty zealously to represent the insured, cannot be diminished or modified by agreement.
Footnotes
1.See ABA Comm. on Ethics and Professional Responsibility, Formal Op. 99-413; Ala. Ethics Op. RO-98-02; Colo. Bar Assoc. Ethics Comm. Formal Op. 107 (Sept. 18, 1999); Disciplinary Bd., Haw. Sup. Ct., Formal Op. 37 (Mar. 27, 1999); Ind. State Bar Assoc. Legal Ethics Op. 3 of 1998; Iowa Sup. Ct. Bd. of Professional Ethics & Conduct, Op. 99-01 (Sept. 8, 1999); Mass. Bar Op. 00-4; Miss. Bar, Op. 246 (1999); Neb. Advisory Comm., Advisory Op. 00-1; Ohio Op. 2000-3 (June 1, 2000); Penn. Bar Assoc. Comm. on Legal Ethics and Professional Responsibility, Formal Op. 2001-200 (June 28, 2001); R.I. Sup. Ct. Ethics Advisory Panel Op. 99-18 (Oct. 27, 1999); Tenn. Bd. of Professional Responsibility, Sup. Ct. of Tenn., Formal Ethics Op. 2000-F-145; Tex. Ethics Op. 533 (Sept. 2000); Vt. Bar Op. 98-07; Va. Leo 1723 (Nov. 23, 1998); Wash. State Bar Assoc. Formal Op. 195 (1999); Wis. State Bar Comm. on Professional Ethics, Formal Op. E-99-1 (Sept. 10, 1999);In re Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 2 P.3d 806 (Mont. 2000). We have been advised that proposed ethics opinions critical of insurance company billing guidelines were rejected by the Florida Bar Association’s Board of Governors at its December 2000 meeting (proposed opinions 99-2, 99-3 and 99-4) and the Supreme Court of Georgia (proposed opinion 99-R2) (unpublished order Sept. 17, 2001).
2.Utah Ethics Adv. Op. 98-11, 1998 WL 779176 (Utah St. Bar), addressed the ethics of a retainer agreement proposed by the Utah State Office of Recovery Services (ORS) for an attorney who would represent both ORS, as statutory lien claimant with prior rights on recoveries, and individual claimants in recovering medical claims. In that context, the Committee held that the State of Utah could propose a retainer agreement, but cautioned that it was not holding that attorneys representing the State may draft retainer agreements that violate the Utah Rules of Professional Conduct, noting that it would be unethical for the retainer agreement to (1) require the individual claimants to surrender the right to terminate the lawyer or (2) otherwise cause the attorney executing it to violate the Utah Rules of Professional Conduct. The Committee found that the attorney could not agree to conditions that would violate Rule 1.7(b).
3.In re Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 2 P.3d 806, 817 (Mont. 2000).
4.Utah Ethics Advisory Op. Comm. R. Procedure § I(b)(1) (2001) (“Committee opinions shall interpret the Rules of Professional Conduct adopted by the Utah Supreme Court but, except as necessary to the opinion, shall not interpret other law.”) and id. § I(b)(2) (“The following requests are outside the Committee’s authority: . . . (iii) Requests for legal, rather than ethics opinions.”).
5.See, e.g., Cincinnati Insurance Co. v. Willis, 717 N.E.2d 151, 161 (Ind. 1999); In re Rules of Professional Conduct and Insurer Imposed Billing Rules and Procedures, 2 P.3d 806 (Mont. 2000).
6.See, e.g., Paradigm Insurance Co. v. The Langerman Law Offices, 24 P.3d 593 (Ariz. 2001) (express agreement was not a prerequisite to the formation of an attorney-client relationship; when insurer has assigned attorney to represent an insured, lawyer had a duty to the insurer to benefit both the insurer and the insured when their interests coincided; lawyer had duty to a non-client and could be liable for negligent breach).
7.See generally Breuer-Harrison, Inc. v. Combe, 799 P.2d 716, 727 (Utah App. 1990) (a legal malpractice action):
In general, except where an attorney is appointed by a court, the attorney-client relationship is created by contract. . . . The contract may be express or implied from the conduct of the parties. . . . The relationship is proved by showing that a party seeks and receives the advice of an attorney in matters pertinent to the lawyer’s profession. . . . Such a showing is subjective in that a factor in evaluating the relationship is whether the client thought an attorney-client relationship existed. . . . However, a party’s belief that an attorney-client relationship exists, unless reasonably induced by representations or conduct of the attorney, is not sufficient to create a confidential attorney-client relationship. . . . In sum, “[i]t is the intent and conduct of the parties which is critical to the formation of the attorney-client relationship.”
(Citations omitted.)
8.See note 4, supra.
9.We do not, however, assume that the foregoing summary is a complete statement of insurance company guidelines.
10.429 P.2d 39, 42 (Utah 1967).
11.425 P.2d 769, 77172 (Utah 1967).
12.480 P.2d 126, 127 (Utah 1971).
13.701 P.2d 795, 799-800 (Utah 1985) (citations omitted).
14.Utah Rules of Professional Conduct 1.1 & cmt; Rule 1.2 cmt. Refer to Appendix B.
15.Id. 1.3. Refer to Appendix B.
16.Id. 2.1 (“In representing a client, a lawyer shall exercise independent professional judgment and render candid advice”).
17.Id. 5.1; 5.3. Refer to Appendix B.
18.Rule 1.2 provides, in pertinent part: “(a) A lawyer shall abide by a client’s decisions concerning the objectives of representation, subject to paragraphs (b), (c), (d), and shall consult with the client as to the means by which they are to be pursued. (b) A lawyer may limit the objectives of the representation if the client consents after consultation.”
19.Utah Rules of Professional Conduct 1.2 cmt. (2002).
20.The client has the ultimate authority to determine the expense to be incurred. In some situations, the client may determine that no expense will be incurred by designating certain actions that will not be taken.
21.Rule 1.6(a) provides: “A lawyer shall not reveal information relating to the representation of a client except as stated in paragraph (b), unless the client consents after consultation.”
22.For example, the defense lawyer could not represent both insured and insurer as to matters such as insurance coverage. In cases where the claim exceeds policy limits or includes non-covered claims, or where the insured desires services outside the scope of the representation to be paid for by the insurer, the defense lawyer should provide the insured with information concerning limits on the representation and available means of addressing such matters.
23.For example, the letter might include information necessary to inform the insured as to issues pertaining to submission of bills to the insurer or to outside auditing services. See Utah Ethics Advisory Op. 98-03, 1998 WL 199533 (Utah St. Bar).
24.For example, if both insured and insurer are clients, Rule 1.8(g) provides, in pertinent part: “A lawyer who represents two or more clients shall not participate in making an aggregate settlement of the claims of or against the clients . . . unless each client consents after consultation, including disclosure of the existence and nature of all the claims . . . involved and of the participation of each person in the settlement.” If both insured and insurer are clients, or if representation of a sole client insured may be materially limited by the lawyer’s responsibilities to the insurer, conflicts must be addressed as provided in Rule 1.7.
25.For example, unless the policy provides otherwise, the insurer will likely have no obligation to pay the defense lawyer to assert counterclaims or claims insureds may have against third parties, to protect interests of the insured other than defending against the amount of the claim (such as reputation or other interests), or to defend the insured against criminal charges.
26.In addition, a lawyer governed by the Utah Rules of Professional Conduct (such as a lawyer employed by an insurer) must not propose that a defense lawyer enter into an agreement if compliance with the agreement, including guidelines and other directives of an insurer relating to the lawyer’s services, would impair materially the defense lawyer’s independent professional judgment in representing an insured.
27.We believe that, in many cases, perceived conflicts may be resolved by consultation.
28.Under Rule 1.4(a), the insurance defense lawyer must keep the client or clients “reasonably informed about the status of a matter and promptly comply with reasonable requests for information.”
29. Utah Ethics Adv. Op. 136, 1993 WL 755253 (Utah St. Bar) (citing Rule 1.5(d)).
30.See, e.g., Utah Rules of Professional Conduct, Preamble.
31.See Fla. Bar Professional Ethics Comm., Op. 982 (1998) (a lawyer may accept a set fee per case from an insurance company to defend all of the insurer’s third party insurance defense work unless the lawyer concludes that her independent professional judgment will be affected by the arrangement); Conn. Bar, Professional Ethics Comm., Op. 9720 (1997) (flat-fee arrangement with insurer permissible; lawyer’s obligations to client remain); Ohio Ethics Op. 977 (1997) (flat-fee arrangement with insurer permissible if agreement is reasonable and adequate, not excessive or so inadequate that it compromises professional judgment; representation must be competent and zealous); Ore. Ethics Op. 199198 (1991) (flat-fee arrangement with insurer permissible provided lawyer fulfills ethical duties to insured); contra, American Insurance Assoc. v. Kentucky Bar Assoc., 917 S.W.2d 568 (Ky. 1996)
APPENDIX A & B
APPENDIX A
Hawaii:
[P]rovisions which prohibit activity which, in the lawyer’s professional judgment, are necessary in the representation of the client or provisions which provide a [disincentive] to perform those tasks are ethically unacceptable. As an example, unreasonable restrictions on preparation and discovery, and the limitation on compensable communication among attorneys in an office regarding a legal matter would, in all likelihood, affect an attorney’s independent judgment on behalf of the client.1
Indiana:
[I]f the negotiated financial terms result in a material disincentive to perform those tasks which, in the lawyer’s professional judgment, are reasonable and necessary to the defense of the insured, such provisions are ethically unacceptable. Especially troublesome are those provisions of the subject agreement which tend to curtail reasonable discussion between members of the defense team on a daytoday basis, and which seek to dictate the use of personnel within the lawyer’s office. Another example of a provision resulting in a material disincentive provides that if the senior litigator performs a particular service, e.g., argument of motions and other court appearances, conduct of depositions, or review of medical records or legal research, which could have been performed ‘suitably’ (in the carrier’s view) by an associate or paralegal, the service may be billed only at the hourly rate for the associate or paralegal. Similarly, the contract provides that once an associate attorney is assigned to a given matter, another associate may not be substituted without prior approval of the carrier. Such impairments of the responsible attorney’s exercise of professional judgment as to the assignment of the most effective member of the litigation team to a given task is ethically impermissible. Lastly, to require, or even permit, counsel to rely upon legal research by an unsupervised paralegal invites legal malpractice—a breach of counsel’s duty to the insured—and is intolerable. Such provisions, even though intended merely to achieve cost efficiency, infringe upon the independent judgment of counsel, and tend to induce violations of our ethical rules.2
Massachusetts:
For example, an insurer’s litigation guidelines may mandate that all deposition notices be drafted by paralegals, although the precise content of some deposition notices may require significant substantive and strategic legal input. If the lawyer has a reasonable basis to believe that the creation of a particular deposition notice presents too complicated a task for a paralegal to perform competently, then the lawyer’s ethical obligations, as described above, compel the lawyer not to delegate that task. In the event that the lawyer’s decision subsequently is challenged by the insurer who is paying his or her fees, then the Committee believes that the lawyer must consider whether the issue is significant enough to warrant withdrawing from the representation under Rule 1.16(a)(1).3
Ohio:
It is improper under DR 5107(B) [Avoiding Influence By Others Than The Client] for an insurance defense attorney to abide by an insurance company’s litigation management guidelines in the representation of an insured when the guidelines directly interfere with the professional judgment of the attorney. Attorneys must not yield professional control of their legal work to an insurer. Guidelines that restrict or require prior approval before performing computerized or other legal research are an interference with the professional judgment of an attorney. Legal research improves the competence of an attorney and increases the quality of legal services. Attorneys must be able to research legal issues when they deem necessary without interference by nonattorneys. Guidelines that dictate how work is to be allocated among defense team members by designating what tasks are to be performed by a paralegal, associate, or senior attorney are an interference with an attorney’s professional judgment. Under the facts and circumstances of a particular case, an attorney may deem it necessary or more expedient to perform a research task or other task, rather than designate the task to a paralegal. This is not a decision for others to make. The attorney is professionally responsible for the legal services. Attorneys must be able to exercise professional judgment and discretion. Guidelines that require approval before conducting discovery, taking a deposition, or consulting with an expert witness are an interference with an attorney’s professional judgment. These are professional decisions that competent attorneys make on a daily basis. Guidelines that require an insurer’s approval before filing a motion or other pleading are an interference with an attorney’s professional judgment. Motion by motion evaluation by an insurer of an attorney’s legal work is an inappropriate interference with professional judgment and is demeaning to the legal profession. If an insurer is unsatisfied with the overall legal services performed, the insurer has the opportunity in the future to retain different counsel.4
Rhode Island:
[Provisions] that require the insurer’s preapproval for specified legal services, extend beyond the financial and working relationship between the insurer and defense counsel, and infringe upon the attorneyclient relationship between the insured and the inquiring attorney. For example, the insurer’s prior approval is required before defense counsel engages in the following: conducting legal research in excess of three hours; filing counterclaims, crossclaims or thirdparty actions; visiting the accident scene; preparing substantive dispositive motions or briefs; customizing interrogatories or document requests; and scheduling depositions. The insurer’s prior approval is also required before defense counsel incurs expenses related to any of the following: retaining expert witnesses; scheduling independent medical examinations or peer reviews; instituting surveillance; and conducting additional investigations. To the extent that the insurer reserves unto itself the right to withhold approval for reasonable and necessary legal services to be provided to an insured, these provisions of the guidelines impermissibly interfere with the independent professional judgment of the inquiring attorney. By agreeing to abide by the preauthorization provisions, an attorney impermissibly abdicates the obligations imposed by Rule 2.1 and Rule 5.4(c). Therefore, the inquiring attorney may not agree to them. Furthermore, such provisions result in a material disincentive to provide legal services that are reasonable and necessary to the defense of the insured. See Indiana Bar Assoc. Op. 3 (1998). A material disincentive creates a conflict of interest pursuant to Rule 1.7.5
Washington:
A billing guideline that arbitrarily and unreasonably limits or restricts compensation for the time spent by counsel performing services which counsel considers necessary to adequate representation, such as periodic review of pleadings, conducting depositions, or in preparing or defending against a summary judgment motion, endeavors to direct or regulate the lawyer’s professional judgment in violation of RPC 5.4(c). A billing guideline that imposes ‘defacto’ or arbitrary rates for certain services performed by a lawyer, such as compensating a lawyer at prevailing paralegal rates when the firm does not employ paralegals, operates as a disincentive to performance of those services on violation of RPC 5.4(c).6
APPENDIX B
Relevant Portions of the Utah Rules of Professional Conduct
Rule 1.1—Competence
A lawyer shall provide competent representation to a client. Competent representation requires the legal knowledge, skill, thoroughness, and preparation reasonably necessary for the representation.
The comment to Rule 1.1 provides, with respect to thoroughness and preparation:
Competent handling of a particular matter includes inquiry into and analysis of the factual and legal elements of the problem, and use of methods and procedures meeting the standards of competent practitioners. It also includes adequate preparation. The required attention and preparation are determined in part by what is at stake; major litigation and complex transactions ordinarily require more elaborate treatment than matters of lesser consequence.
The comment to Rule 1.2—Scope of Representation provides, with respect to agreements limiting the scope of representation:
The client has ultimate authority to determine the purposes to be served by legal representation, within the limits imposed by law and the lawyer’s professional obligations. . . An agreement concerning the scope of representation must accord with the Rules of Professional Conduct and other law. Thus, the client may not be asked to agree to representation so limited in scope as to violate Rule 1.1 or to surrender the right to terminate the lawyer’s services or the right to settle litigation that the lawyer might wish to continue.”
(Emphasis added.)
____________________________________________________________________________
Rule 1.3—Diligence
A lawyer shall act with reasonable diligence and promptness in representing a client.
The comment to Rule 1.3 notes, however, that: “A lawyer has professional discretion in determining the means by which a matter should be pursued. See Rule 1.2.”
____________________________________________________________________________
Rule 1.4—Communication
(a) A lawyer shall keep a client reasonably informed about the status of a matter and promptly comply with reasonable requests for information.
(b) A lawyer shall explain a matter to the extent reasonably necessary to enable the client to make informed decisions regarding the representation.
____________________________________________________________________________
Rule 1.8—Conflict of interest: prohibited transactions.
. . . .
(f) A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) The client consents after consultation;
(2) There is no interference with the lawyer’s independence of professional judgment or with the clientlawyer relationship; and
(3) Information relating to representation of a client is protected by Rule 1.6.
(g) A lawyer who represents two or more clients shall not participate in making an aggregate settlement of the claims of or against the clients or in a criminal case an aggregated agreement as to guilty or nolo contendere pleas, unless each client consents after consultation, including disclosure of the existence and nature of all the claims or pleas involved and of the participation of each person in the settlement.
____________________________________________________________________________
Rule 5.1—Responsibilities of a partner or supervisory lawyer
(a) A partner in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that all lawyers in the firm conform to the Rules of Professional Conduct.
(b) A lawyer having direct supervisory authority over another lawyer shall make reasonable efforts to ensure that the other lawyer conforms to the Rules of Professional Conduct.
(c) A lawyer shall be responsible for another lawyer’s violation of the Rules of Professional Conduct if:
(1) The lawyer orders or, with knowledge of the specific conduct, ratifies the conduct involved; or
(2) The lawyer is a partner in the law firm in which the other lawyer practices, or has direct supervisory authority over the other lawyer, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action.
____________________________________________________________________________
Rule 5.3—Responsibilities regarding nonlawyer assistants
With respect to a nonlawyer employed or retained by or associated with a lawyer:
(a) A partner in a law firm shall make reasonable efforts to ensure that the firm has in effect measures giving reasonable assurance that the person’s conduct is compatible with the professional obligations of the lawyer;
(b) A lawyer having direct supervisory authority over the nonlawyer shall make reasonable efforts to ensure that the person’s conduct is compatible with the professional obligations of the lawyer.
(c) A lawyer shall be responsible for conduct of such a person that would be a violation of the Rules of Professional Conduct if engaged in by a lawyer if:
(1) The lawyer orders or, with knowledge of the specific conduct, ratifies the conduct involved; or
(2) The lawyer is a partner in the law firm in which the person is employed, or has direct supervisory authority over the person, and knows of the conduct at a time when its consequences can be avoided or mitigated but fails to take reasonable remedial action.
Appendix A Footnotes
1.Disciplinary Bd., Haw. Sup. Ct., Formal Op. 37 (Mar. 27, 1999).
2.Ind. State Bar Assoc. Legal Ethics Op. 3 of 1998.
3.Mass. Bar Op. 00-4.
4.Sup. Ct. of Ohio, Bd. of Commissioners on Grievances and Discipline, Op. 2000-3 (June 1, 2000).
5.R.I. Sup. Ct. Ethics Advisory Panel Op. 99-18 (Oct. 27, 1999).
6.Wash State Bar Assoc., Formal Op. 195 (1999).

Ethics Advisory Opinion No. 02-04

Issued March 15, 2002
¶ 1 Issue:
May a lawyer, who is also a certified public accountant employed by an accounting firm, contemporaneously conduct from an office at the accounting firm public accounting services as an employee of the accounting firm and a law practice independent from the accounting firm without violating the Utah Rules of Professional Conduct?

¶ 2 Opinion: A lawyer who is a certified public accountant and employed by an accounting firm may not contemporaneously practice law and accounting from the offices of the accounting firm without violating Rule 5.4(b) of the Utah Rules of Professional Conduct. Accounting is a “law-related service,” and, when accounting services are provided by an active lawyer, the lawyer is subject to the Utah Rules of Professional Conduct while engaged in either profession. The lawyer is, therefore, prohibited by Rule 5.4(b) from forming a business association with a non-lawyer to provide the accounting services when the lawyer is contemporaneously engaged in the practice of law.
¶ 3 Factual Background: A lawyer (“Lawyer”) who is also a certified public accountant (“CPA”) is employed by an accounting firm owned by other CPAs (“Accounting Firm”). Lawyer is an employee of Accounting Firm, but does not have an ownership interest in the firm. Lawyer desires to conduct the professional practices of accounting and law from his office at Accounting Firm. Lawyer will pay Accounting Firm rent for the fair market value of office space, computer and furniture, receptionist and other Accounting Firm resources used by Lawyer in the legal practice, calculated on an hourly basis. Lawyer will develop his own clients, but may accept referrals from CPAs employed by Accounting Firm. Lawyer will directly and separately bill clients for legal services performed, and will not pay any referral fees to Accounting Firm. Lawyer will maintain confidentiality of law client files by maintaining these files separately from the accounting files of Accounting Firm.
¶ 4 Analysis: In the Committee’s prior opinions, we have found that, under certain circumstances, a lawyer engaged in a law-related occupation will be subject to the Utah Rules of Professional Conduct while engaged in either occupation.1These opinions are consistent with opinions issued by the American Bar Association prior to its adoption of ABA Model Rule 5.7 in 1994.2
¶ 5 Model Rule 5.7 addresses circumstances under which a lawyer who provides “law-related services” is subject to the ABA Rules of Professional Conduct. Under the rule, if the services are not provided in circumstances that (a) are distinct from the lawyer’s provision of legal services to clients, or (b) are provided by a separate entity, but the lawyer fails to take reasonable measures to assure that persons obtaining the law-related services know that the services of the separate entity are not legal services and that the protections of the attorney-client relationship do not exist.3
¶ 6 The Utah Supreme Court has not adopted Model Rule 5.7. While the Committee has noted that Model Rule 5.7 is consistent with its analysis in prior opinions,4 the Committee has not endorsed the rule, as the decision to adopt any new rule is exclusively within the purview of the Utah Supreme Court.5
¶ 7 In our Opinion No. 98-08, we did use the definition of law-related services found in Model Rule 5.7(b) to find that accounting services are law-related services:
We note that an accounting firm fits the Model Rule 5.7 definition of law-related services as those that (a) might reasonably be performed in conjunction with, and in substance are related to, the provision of legal services, and (b) are not prohibited as the unauthorized practice of law when provided by a non-lawyer.6
¶ 8 In Opinion No. 98-08, the Committee concluded that a law firm could own an accounting-practice subsidiary staffed by employees other than the law firm’s employees. However, the law firm’s lawyers would be subject to the Rules of Professional Conduct in connection with the subsidiary’s providing accounting services unless the law firm made reasonable attempts to inform the accounting clients that (a) they were not receiving legal services, and (b) they were not protected by the attorney-client relationship. Opinion No. 98-08 did not address the issue presented here of a lawyer who desires to practice law and public accounting contemporaneously from the offices of the accounting firm that employs the lawyer as an accountant.7
¶ 9 Consistent with our prior opinions, we hold that the Utah Rules of Professional Conduct do not preclude a lawyer who is also appropriately trained and licensed practice public accounting from contemporaneously engaging in the occupations of law and public accounting. Accounting services are law-related services; hence, the work of the lawyer in the accounting occupation will inevitably include the practice of law.8Thus, a lawyer will be considered to be engaging in the practice of law while engaged in an accounting practice and will, therefore, be subject to the Utah Rules of Professional Conduct in the performance of both occupations.9
¶ 10 Because the standards of practice in the accounting profession may conflict with the Rules of Professional Conduct, simultaneous compliance may impose substantial burdens on the lawyer who provides accounting services. For example, accounting rules or principles may call for certain disclosures regarding a client for accounting services, while the Rules of Professional Conduct preclude such disclosures without the client’s consent. The standards and rules governing the accounting profession regarding conflicts of interest may also be less demanding than Rules 1.7, 1.9 and 1.10 of the Rules of Professional Conduct. These burdens are, however, justified to protect a lawyer’s clients from unethical behavior by a lawyer in the provision of legal services under circumstances where it is difficult, if not impossible, to differentiate the legal services from the law-related services of public accounting.
¶ 11 With this analysis as background, we address whether Lawyer, who is also a CPA and an employee of Accounting Firm, may contemporaneously provide accounting services as an employee of Accounting Firm and conduct a separate law practice from the offices of Accounting Firm. We hold that this arrangement violates Rule 5.4(b) of the Utah Rules of Professional Conduct.
¶ 12 Rule 5.4(b) provides: “A lawyer shall not form a partnership with a non-lawyer if any of the activities of the partnership consist of the practice of law.” Under the facts set forth in this opinion, Lawyer is engaged in the practice of law while providing the law-related service of accounting. Accordingly, Rule 5.4(b) precludes Lawyer from forming a partnership with a non-lawyer to provide the public accounting services.10
¶ 13 In Utah Ethics Advisory Opinion 00-03, the Committee noted that the purpose of Rule 5.4 is “to protect the lawyer’s professional independence of judgment.”11 Recognizing that the wording of the rule addresses only a partnership, and that the request concerned the formation of a small business corporation between a lawyer and a non-lawyer, the Committee concluded that the small business corporation posed the same risk to the lawyer’s professional independence of judgment. We stated:
Here, the request proposes equal ownership with a nonlawyer of a small business corporation. That form of affiliation presents, however, no less of a threat to the lawyer’s professional independence of judgment than does a partnership. We conclude, therefore, that Rule 5.4(b)’s ethical prohibition applies to the proposed arrangement.12
¶ 14 The employer-employee relationship between Lawyer and Accounting Firm creates no less danger to Lawyer’s professional independence of judgment. Indeed, it can be argued that Lawyer’s independence of professional judgment is at greater risk in the employee-employer relationship at issue than the equal ownership in a small business corporation addressed in Opinion 00-03.
¶ 15 In that opinion, the Committee concluded that a lawyer who was also a real estate title officer could not form a small business corporation (with equal ownership) with a non-lawyer to assist clients in challenging their real estate taxes without violating Rule 5.4(b). We stated, however, that the lawyer could form the small business corporation with a non-lawyer without violation of the Rules of Professional Conduct if the lawyer withdrew from the practice of law. In reaching this conclusion, the Committee cited with approval ABA Formal Opinions 297 and 239, which held that a lawyer could not enter into a partnership with an accountant to perform law-related services permissible for non-lawyers.13 Also, ABA Formal Opinion 305 clarified that a lawyer could enter a partnership with an accountant to perform services permissible to non-lawyers if the lawyer withdrew from the practice of law and refrained from holding himself out as a lawyer.14
¶ 16 Conclusion: A lawyer may contemporaneously engage in the practice of law and public accounting from the same office, but will be required to comply with the Rules of Professional Practice in the conduct of both occupations. If the lawyer is employed by an accounting firm, his contemporaneous practice of law and public accounting from the accounting firm’s office violates Rule 5.4(b). The lawyer may practice accounting as an employee of the accounting firm without violation of Rule 5.4(b) only if he withdraws from the practice of law and refrains from holding himself out as a lawyer.
Footnotes
1.Utah Ethics Advisory Op. 01-05, 2001 WL 829237 (Utah State Bar) (attorney functioning in law-related profession of real estate brokerage who holds himself out as an active or inactive lawyer, will be subject to the Utah Rules of Professional Conduct while engaged in the law-related profession); Utah Ethics Advisory Op. 30 (Utah State Bar, Oct. 14, 1976) (attorney who is president of a title company must comply with the ethics rules of a lawyer in both occupations); Utah Ethics Advisory Op. 17 (Utah State Bar, Nov. 28, 1973) (lawyer engaged in a real estate business is held to the ethical standards of a lawyer in both occupations); Utah Ethics Advisory Op. 5 (Utah State Bar, Jan. 13, 1972) (attorney selling life insurance is held to ethical standards of an attorney in both professions).
2.ABA Comm. on Ethics and Professional Responsibility, Formal Op. 328 (1972) (lawyer contemporaneously practicing law and accounting from the same office must conform to the Code of Professional Responsibility in conducting the activities of both occupations); ABA Comm. on Ethics and Professional Responsibility, Informal Op. 709 (1964) (same for lawyer conducting real estate brokerage business from his law office).
3.
(a) A lawyer shall be subject to the Rules of Professional Conduct with respect to the provision of law-related services, as defined in paragraph (b), if the law-related services are provided:
(1) by the lawyer in circumstances that are not distinct from the lawyer’s provision of legal services to clients; or
(2) by a separate entity controlled by the lawyer individually or with others if the lawyer fails to take reasonable measures to assure a person obtaining the law-related services knows that the services of the separate entity are not legal services and that the protections of the client-lawyer relationship do not exist.
(b) The term “law-related services” denotes services that might reasonably be performed in conjunction with and in substance are related to the provision of legal services, and that are not prohibited as unauthorized practice of law when provided by a nonlawyer.
ABA Model Rules of Professional Conduct 5.4 (2001).
4.Utah Ethics Advisory Op. 01-05, at ¶ 7 n.6, 2001 WL 829937 (Utah St. Bar) (Model Rule 5.7 is consistent with prior opinions of the Committee holding that a lawyer engaged in a law-related occupation is subject to the Rules of Professional Conduct in both occupations.); Utah Ethics Advisory Op. 98-08, at 2, 1998 WL 716635 (Utah St. Bar) (same).
5.Utah Ethics Advisory Op. 98-08, at 3 n.5, 1998 WL 716635 (Utah St. Bar).
6.Id. at 3.
7.The issue presented here was also not addressed in Utah Ethics Advisory Op. 146A, 1995 WL 283828 (Utah State Bar). In that opinion, we held that a lawyer employed by a financial planner as its in-house lawyer could under certain circumstances provide legal services to the financial planner’s clients independent of the financial planner. However, in Opinion 146A, the lawyer was not employed by the financial planner to provide anything other than legal services.
8.See ABA Comm. on Ethics and Professional Responsibility, Formal Op. 328 (1972).
9.Id.
10.Rule 5.4(b) has been criticized by some as being overly restrictive. We state no view on this because, as we have stated in a prior opinion, it is not within the authority of this Committee to amend Rule 5.4. Utah Ethics Advisory Op. 00-03, at n.20 & accompanying text, 2000 WL 347738 (Utah State Bar). Any amendment of Rule 5.4 must be submitted to and approved by the Utah Supreme Court.
11. Id. at 2.
12.Id.
13.ABA Comm. on Ethics and Professional Responsibility, Formal Op. 297 (1961); ABA Comm. on Ethics and Professional Responsibilities, Formal Op. 239 (1943).
14. ABA Comm. on Ethics and Professional Responsibilities, Formal Op. 305 (1962).

Ethics Advisory Opinion No. 02-07

Issued: September 13, 2002
¶ 1 Issue:
Under Rule 5.4 of the Utah Rules of Professional Responsibility, may a Utah lawyer (a) hire a paralegal, not otherwise associated with the lawyer or the lawyer’s firm, as an independent contractor, or (b) compensate an employee paralegal or other firm employee based on a percentage of the lawyer’s fees.
¶ 2 Conclusion: Utah lawyers may hire outside paralegals on an independen-contractor basis, provided the paralegal does not control the lawyer’s professional judgment. In addition, if the amounts paid for services are not tied to specific cases, Utah lawyers or law firms may share fees with nonlawyer employees in a compensation plan.
¶ 3 Background: A Utah lawyer contemplates hiring outside paralegals and compensating them on a per task basis. The lawyer seeks our opinion on whether such an arrangement complies with the Utah Rules of Professional Responsibility. While the lawyer’s inquiry is limited to hiring outside paralegals, it raises related issues about whether compensation for paralegals and other professionals, either as independent contractors or employees, can be tied to fees the lawyer generates. We take the occasion to resolve both the lawyer’s inquiry and to reiterate and clarify our prior opinions on these issues.
¶ 4 Analysis: The plain language of Rule 5.4,1as well as official comments to the Rule, and our opinions interpreting it, stress its underlying rationale: “protect[ion of] the lawyer’s professional independence of judgment” and overriding loyalty to the client against potential conflicts.2The proposed contractual arrangement here is between the lawyer and an outside, independent paralegal. This arrangement does not violate either the letter or spirit of Rule 5.4, assuming the paralegal compensation is totally independent from the lawyer’s relationship with, and compensation from, the client. The same rationale would apply to other third parties the lawyer hires, such as expert witnesses, copy centers, computer specialists, etc.
¶ 5 Under Rule 5.4(a), the lawyer in such a relationship would not be sharing legal fees with the non-lawyer paralegal or other third-party professional. Our rationale for this conclusion is the same as that in Opinion 02-01, in which we concluded that a lawyer would not be sharing legal fees with a non-lawyer financing company that underwrote litigation under a “recourse” loan to the lawyer.3The non-lawyer paralegal, as with the financing company in Opinion No. 02-01, has an independent contractual relationship with the lawyer and is paid for work done, no matter the outcome of any legal matter.
¶ 6 Succinctly stated, the contemplated lawyer-paralegal relationship is permissible under the Utah Rules of Professional Conduct because the lawyer’s professional judgment is not compromised.
¶ 7 The same concept applies to employee-paralegals. Rule 5.4(a) forbids the sharing of legal fees, except in three instances, one of which is the inclusion of a “nonlawyer employee” in a “compensation plan” under Rule 5.4(a)(3). The Rule does not presume to define the boundaries of an acceptable compensation plan. We have previously held, however, that compensation of nonlawyer employees may be based upon a percentage of gross or net income provided: (a) compensation is not tied to specific fees from a particular case; (b) there is nothing in the nature of the arrangement that would tend to impair the independence of the law firm or lawyer; and (c) no other rule of professional conduct is violated.4
¶ 8 Conversely, Rule 5.4 precludes a compensation plan tied to a sharing of lawyer fees for independent paralegals. Given the rule’s underlying rationale of preserving lawyer independence, the apparent difference between the permissible sharing of fees for employee-paralegals and the impermissible sharing of fees with an independent contractor stems from the nature of the lawyer/paralegal relationship. The employee-paralegal, being an employee of the lawyer, is not in a position to exert undue influence on the lawyer. The independent paralegal would be in a less subordinate role. The rule’s distinction between permissible and impermissible compensation arrangements for employee-paralegals and independent paralegals is thus consistent with its underlying purpose.
Footnotes
1.The text of the relevant portions of Rule 5.4 reads:
(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that: . . . .
(3) 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.
(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.
(c) A lawyer shall not permit a person who recommends, employs, or pays the lawyer to render legal services for another to direct or regulate the lawyer’s professional judgment in rendering such legal services.
(d) A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for a profit, if: . . . .
(3) A nonlawyer has the right to direct or control the professional judgment of a lawyer. . . .
2.See, e.g., Utah Rules of Professional Conduct 5.4, cmt; Utah Ethics Advisory Op. 02-04, 2002 WL 448569 (Utah St. Bar) (Rule 5.4(b) prohibits lawyer from forming a business association with non-lawyer accounting firm where the lawyer is contemporaneously engaged in the practice of law); Utah Ethics Advisory Op. 02-01, 2002 WL 231939 (Utah St. Bar) (Rule 5.4 does not preclude litigation financing arrangements, provided lawyer’s professional independence is not compromised); Utah Ethics Advisory Op. 00-03, 2000 WL 347378 (Utah St. Bar) (lawyer may form business relationship with a non-lawyer to engage in law-related activities only if the lawyer withdraws entirely from the active practice of law).
3.Utah Ethics Advisory Op. 02-01, 2002 WL 231939 (Utah St. Bar).
4.Utah Ethics Advisory Op. 139, 1994 WL 579849 (Utah St. Bar).

Ethics Advisory Opinion No. 00-03

(Approved March 9, 2000)
Issue: May a Utah lawyer who is also a real estate title officer ethically enter into a partnership with or form a small business corporation with a nonlawyer for the purpose of assisting clients in challenging their real estate taxes?

Opinion: No. Even if the proposed activities can also be performed lawfully by nonlawyers, a lawyer may not ethically form a partnership or other business association with a nonlawyer if any of the activities of the partnership consist of the “practice of law.” Nor may a lawyer practice with or in the form of a business organization if a nonlawyer owns an interest in that organization. A lawyer may form a business relationship with a nonlawyer to engage in such activities only if the lawyer withdraws entirely from the active practice of law.
Facts: A lawyer who is currently licensed to practice law in Utah is also licensed as a real estate title officer. He owns a title company and practices law part time. He proposes to form a small business corporation with a nonlawyer to assist clients in challenging their real estate taxes in return for a percentage of any resulting decreases in taxes. Each shareholder would have equal ownership. The corporation would also offer similar services to Utah counties in return for a percentage of any resulting increases in tax revenues. The request suggests that most but not all challenges on behalf of taxpayers would be resolved without an appearance before the applicable tax board or commission. The request claims that nonlawyers may assist taxpayers in proceedings before such tax boards and commissions.1
Analysis: Rule 5.4 imposes limitations on a lawyer’s affiliation with nonlawyers in order “to protect the lawyer’s professional independence of judgment.”2Rule 5.4(b) prohibits a lawyer from “form[ing] a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.”3Here, the request proposes equal ownership with a nonlawyer of a small business corporation. That form of affiliation presents, however, no less of a threat to the lawyer’s professional independence of judgment than does a partnership. We conclude, therefore, that Rule 5.4(b)’s ethical prohibition applies to the proposed arrangement.4
The issue presented to this Committee is, therefore, whether the representation of taxpayers in tax commission proceedings for the purpose of challenging real estate tax assessments is “the practice of law” within the meaning of Rule 5.4.
The Rules do not define the practice of law. In interpreting Utah Code Ann. § 78-51-25, which prohibits the practice of law by those not licensed as lawyers, the Utah Supreme Court has held that activities prohibited to nonlawyers include a wide variety of activities beyond “appearing in court.”5The Court has also stated:
The practice of law, although difficult to define precisely, is generally acknowledged to involve the rendering of services that require the knowledge and application of legal principles to serve the interests of another with his consent. It not only consists of performing services in the courts of justice throughout the various stages of a matter, but in a larger sense involves counseling, advising and assisting others in connection with their legal rights, duties, and liabilities.6
Here, the proposed affiliation with a nonlawyer is for the purpose of representing clients in adversary proceedings before local tax boards and commissions that will determine the extent of the client’s tax liability under applicable law. Such advocacy would seem to fit comfortably within the Supreme Court’s definition of the practice of law, as “assisting others in connection with their legal rights, duties and liabilities.”7
The request alleges, however, that nonlawyers may lawfully assist taxpayers in proceedings before county tax boards. Whether or not this is true, the “practice of law” for purposes of Rule 5.4′s ethical prohibitions on affiliations with nonlawyers may be broader than the “practice of law” for purposes of substantive law prohibitions on the unauthorized practice of law. Rule 5.4 and its predecessors8have, at least, consistently been so interpreted in ABA ethics opinions and the ethics opinions of other state bars.
The ABA Committee on Ethics and Professional Responsibility has considered the application of Rule 5.4 on several occasions in factual contexts similar to that presented here. In 1940, the ABA Committee considered the propriety of a proposed partnership between a lawyer and a nonlawyer licensed to present patent applications to the United States Patent Office. Applying Canon 33, the Committee held:
The representation of persons in the presentation of patent applications is the practice of law when performed by an attorney. Thus, an attorney may not form a partnership with a layman for the rendition of such services even though the layman is permitted to represent patent applications by the United States Patent Office.9
The ABA Committee modified this opinion four years later, allowing such a partnership, but only if the lawyer refrained completely from holding herself out as a lawyer in any regard.
We have held that certain activities constitute the practice of law when engaged in by a lawyer despite the fact that those activities may lawfully be engaged in by one not a lawyer. A lawyer may properly enter into partnership with a layman if the activities of the partnership and of the lawyer member are confined to those which may be carried on by the layman, provided the lawyer renounces or refrains from holding himself out as a lawyer and from carrying on any activities which may not properly be carried on by the layman.10
In 1961, the ABA Committee applied these same principles to a proposed partnership between a lawyer and a public accountant, holding that “[a]n attorney may not form a partnership with an accountant if the attorney has a separate law practice or if the partnership furnishes service which would be considered legal services if done by a lawyer.”11The Committee clarified a year later that a lawyer could enter into a partnership with an accountant to perform services permissible for nonlawyers if the lawyer “withdraw[s] from the practice of law and refrain[s] from holding himself out as a lawyer.”12
In 1973, after the adoption of the Model Code, the ABA Committee considered “whether a lawyer may properly have a partnership with a non-lawyer who is an agent licensed by the United States Treasury Department if the activities of the partnership are limited to those permitted to non-lawyers pursuant to [Treasury Department guidelines].”13Applying DR 3-103(A), the Committee held that “[t]he practice by a lawyer of representing others before the Internal Revenue Service is the practice of law.” Citing Formal Opinions 297 and 305, the Committee acknowledged that, “if the lawyer does not hold himself out as a lawyer or maintain a law office, he properly (at least in theory) may form a partnership with an enrolled agent for the purpose of practicing before the Internal Revenue Service, provided that the activities of the partnership are limited to those that do not constitute the practice of law.”14
Ethics committees in other states have also held that for purposes of Rule 5.4 or its predecessors a lawyer may be engaged in “the practice of law” even if the same activities could be lawfully engaged in by a nonlawyer. The Kansas Ethics Committee, for example, held that “[r]epresenting someone in a social security appeal is the practice of law when done by a licensed attorney, regardless of whether such activity also can be performed by nonlawyers.”15
The New York State Ethics Committee responded to an inquiry nearly identical to that presently before this Committee. They considered whether a lawyer might affiliate with a nonlawyer to represent homeowners in small claims proceedings to reduce real estate taxes, if the lawyer were to refrain from holding himself out as a lawyer.
Applying DR 3-103(A), which is identical to Rule 5.4(b), the New York Committee found that the proposed activity was the “practice of law” for purposes of the ethical prohibition on a partnership with a nonlawyer.
We have no difficulty in concluding that the activity proposed herea lawyer representing homeowners in judicial or administrative proceedings challenging real estate taxes constitutes the practice of law. When a lawyer represents a client in a litigation or quasi-litigation proceeding, the lawyer is practicing law whether or not a nonlawyer is legally permitted to perform the same function.16
We agree. When a lawyer represents a client for a fee in an adversary proceeding that will determine legal obligations of the client, the lawyer is engaged in the practice of law for purposes of Rule 5.4′s prohibitions on affiliation with a nonlawyer whether or not a nonlawyer may lawfully engage in the same representation. This is true whether the adversary proceeding takes place in a court of general jurisdiction or before an administrative agency, board or commission. In each instance, the lawyer is “advising and assisting others in connection with their legal rights, duties, and liabilities”17and is advocating the client’s legal rights in a public tribunal. Such advice, assistance and advocacy is within the domain in which Rule 5.4 seeks to protect the lawyer’s professional independence.
The request does not specify whether the lawyer intends to identify himself as a lawyer in connection with services rendered by the proposed small business corporation. The question arises, nonetheless, whether he could avoid Rule 5.4′s ethical prohibitions on affiliation with a nonlawyer by refraining from holding himself out as a lawyer in connection with the proposed corporation.
The New York Committee considered this alternative and concluded that it was not an acceptable solution because it would violate ethical prohibitions against dishonesty and misrepresentation. The Committee reasoned that “both the adjudicating tribunal and the opposing party in the proceedings challenging homeowners’ real estate taxes are entitled to know that the homeowner’s representative is a member of the bar, rather than a person untrained in legal proceedings.”18
We believe there is force in this reasoning. In addition, so long as the lawyer continues actively to engage in the practice of law in other contexts, it cannot be truly said that he is not holding himself out as a lawyer. It will be publicly known that he is a lawyer whether or not he chooses to identify himself as such in connection with the proposed business with a nonlawyer. One can imagine that clients might seek him out over nonlawyers who render the same service for the very reason that he is trained as a lawyer and possesses the knowledge and skills associated with that training. So long as the lawyer is actively engaged in the practice of law in any context, he must be held to the standards of the legal profession, including Rule 5.4′s prohibitions on affiliation with nonlawyers.19
This is not to say, however, that one trained and licensed as a lawyer may not choose to withdraw from that practice and pursue another profession. Consistent with ABA Opinions 201, 257, 297 and 305 discussed above, we believe that a lawyer who refrains from holding himself out as a lawyer in any context may enter into a partnership or other business association with a nonlawyer so long as he confines his activities to those in which a nonlawyer may lawfully engage. Thus, assuming that a nonlawyer can lawfully represent taxpayers before local tax boards and commissions, a current lawyer would be free to enter into the proposed partnership if he withdrew completely from the active practice of law.
Rule 5.4′s prohibitions on affiliation with nonlawyers have been the subject of substantial criticism.20In August of 1999, the ABA Commission on Multidisciplinary Practice recommended that the Model Rules of Professional Conduct be amended to permit a lawyer (subject to certain regulations designed to safeguard the lawyer’s professional independence) to partner with a nonlawyer even if the activities of the enterprise include the practice of law. Those recommendations have not yet been accepted, however, by the ABA House of Delegates. More importantly for our purposes, the Utah Supreme Court has not yet seen fit to amend Rule 5.4. Unless and until it does, Rule 5.4 prohibits affiliations by a lawyer with a nonlawyer of the kind proposed here.
Footnotes
1.In issuing this Opinion, we impose the following three assumptions and reservations:
a. We express no opinion on the legal issue of whether a small business corporation may provide legal services under Utah law. Ethics Advisory Op. Comm. R. Proc. § III(b)(3).
b. As it is not relevant to the holding in this Opinion, we have not considered and express no opinion as to the ethical propriety of the contingent-fee arrangement described in the original request.
c. A determination of whether representation of taxpayers by nonlawyers before a tax board or commission is the unauthorized practice of law is beyond the scope of our jurisdiction, and we express no opinion on that issue. For purposes of this Opinion, we assume that such representation does not violate Utah law.
2.Rule 5.4 cmt.
3.Rule 5.4(d) provides a parallel prohibition with regard to practice in the form of a professional corporation: “A lawyer shall not practice with or in the form of a professional corporation or association authorized to practice law for profit, if . . .[a] nonlawyer owns any interest therein . . . .”
4.See, e.g., S. Car. Ethics Op. 93-05, 1993 WL 851338 (S. Car. St. Bar 1993) (“Rule 5.4(b) applies not only to partnerships, but also to other organizations that lawyers are involved in managing.”).
5.Utah State Bar v. Petersen, 937 P.2d 1263, 1267-68 (Utah 1997) (holding that a nonlawyer who had prepared wills, divorce papers and pleadings and conducted legal research on behalf of clients for a fee had engaged in the unauthorized practice of law in violation of § 78-51-25).
6.Utah State Bar v. Summerhayes, 905 P.2d 867, 869-70 (Utah 1995) (holding that the practice of “third-party adjusting-i.e., representing injured parties for the purpose of obtaining settlements from the tortfeasor’s insurance company-is the unauthorized practice of law and rejecting arguments that such practice is authorized by the Utah Insurance Code).
7.Id.
8.Utah Rules 5.4(b) and (d) were adopted without modification from ABA Model Rules of Professional Conduct 5.4(b) and (d). Those sections are “substantially identical” to DR 3-103(A) and DR 5-107(C) in the Rules’ predecessor, the ABA Model Code of Professional Responsibility. Those Code provisions had their origin, in turn, in ABA Canon 33, which provided: “Partnerships between lawyers and members of other professions or non-professional persons should not be formed or permitted where any part of the partnership’s employment consists of the practice of law.”
9.ABA Comm. on Ethics and Professional Responsibility, Formal Op. 201 (1940).
10.ABA Comm. on Ethics and Professional Responsibility, Formal Op. 257 (1944) (emphasis added).
11.ABA Comm. on Ethics and Professional Responsibility, Formal Op. 297 (1961). See also ABA Comm. on Ethics and Professional Responsibility, Formal Op. 239 (1942) (holding that “[i]t is improper for a practicing attorney to form a partnership with a certified public accountant to act as consultants in federal tax matters and represent taxpayers before the Bureau of Internal Revenue and the Board of Tax Appeals”).
12.ABA Comm. on Ethics and Professional Responsibility, Formal Op. 305 (1962), quoting ABA Formal Op. 225.
13. ABA Comm. on Ethics and Professional Responsibility, Formal Op. 1241 (1973).
14.Id. at 496. The ABA Committee expressed skepticism, however, that those conditions could be met in practice: “[A]s a practical matter, it is difficult if not impossible for the Committee to visualize such a situation, and if any part of its activities could be construed to constitute the practice of law, such a partnership would be improper.”
15.Kans. Ethics Op. LEO 93-11 (Kans. St. Bar 1993). See also, e.g., Maine Ethics Op. No. 79 (1987) (“The ‘practice of law’ as used in rules like 3.2(a)(2) [parallel to Rule 5.4(b)] has typically been interpreted as including services in fact performed by lawyers . . . even though non-lawyers may and do perform the same service.”); Mich. Ethics Op. Cl-1117 (1986), quoting Cl-25 (“[s]ome services, though a layman can perform them, may constitute the practice of law when performed by a lawyer-for example, the preparation of income tax returns”); N.Y.C. Bar Op. No. 80-25 (“Even if the services performed by a corporation may be done by a lay person, the services . . . involve activities, which when performed by a lawyer, may well involve the practice of law.”).
16.N.Y. Ethics Comm. Op. 662,1994 WL 120206 (N.Y. State Bar).
17.Summerhayes, 905 P.2d at 869-70.
18.Id.
19.We have held previously that a lawyer who practices a second profession will be subject to the ethical standards of a lawyer in both professions. See Utah Ethics Advisory Op. 5 (Utah St. Bar Jan. 13, 1972) (A practicing attorney who sells life insurance faces solicitation and conflict of interest problems and is held to the ethical standards of an attorney in both professions”). The ABA Committee on Ethics and Professional Responsibility enunciated this same principle in Informal Decision 709 (1964) in response to the inquiry of a lawyer licensed as a real estate broker regarding ethical issues involved in receiving a real estate commission. The ABA Committee stated: “Although you have a real estate broker’s license your letterhead indicates that you are engaged in the practice of law and are a member or associate in a law firm. A real estate brokerage business is so closely related to the practice of law that, when engaged in by a lawyer, it constitutes the practice of law.”
20.See, e.g., Thomas R. Andrews, Nonlawyers in the Business of Law: Does the One Who Has the Gold Really Make the Rules?, 40 Hastings L.J. 577 (1989); Louis M. Brown, Emerging Changes in the Practice of Law, 1978 Utah L. Rev. 599, 609; Roger C. Cramton, Delivery of Legal Services to Ordinary Americans, 44 Case W. Res. L. Rev. 531, 564-78 (1994); Susan Gilbert & Larry Lempert, The Nonlawyer Partner: Moderate Proposals Deserve a Chance, 2 Geo. J. Legal Ethics 383 (1988); Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of Lawyering: A Handbook on the Model Rules of Professional Conduct 804 (2d ed. 1990).

Ethics Advisory Opinion No. 97-11

(Approved December 5, 1997)
Issue:
May an attorney finance the expected costs of a case by borrowing money from a non-lawyer pursuant to a non-recourse promissory note, where the note is secured by the attorney’s interest in his contingent fee in the case?

Conclusion: An attorney’s grant of a security interest in a contingent fee from a particular case to secure a loan constitutes the sharing of fees with a non-lawyer in violation of Utah Rules of Professional Conduct 5.4(a).
Facts: “Attorney” has consulted with a private individual who is not an attorney (“Lender”). Lender proposes to loan to Attorney an agreed-on amount to be used for costs and expenses in pursuing a matter on behalf of Attorney’s client (“Client”). Attorney and Client have a contingent-fee agreement under which Attorney is responsible for costs, and under which Attorney is entitled to a percentage of the recovery. A promissory note would be executed under which an interest rate would be calculated on the basis of the risk of loss of the case and the fact that Attorney’s portion of the recovery would be the only source of repayment of the funds. Funds would be disbursed by Attorney in periodic draws as expenses were incurred.
The loan agreement would also state that Attorney would pay Lender the first proceeds of his share of any recovery until the amount of the note, plus interest, was paid. However, the loan would be “nonrecourse” to Attorney; that is, in the event the loan is not repaid, the Attorney could not be held personally liable by Lender for repayment. As security for the loan, Attorney would assign to Lender his interest in the contingent-fee agreement with Client. A security agreement and financing statement would be signed and proper filings with the appropriate authorities would be made to perfect Lender’s security interest. Client would specifically consent to the loan in writing. Lender would agree that he has no right to direct or influence the litigation, that his sole contact with Attorney would be for Attorney to report on the progress of the case, and that Lender could audit expenses paid from loan proceeds for genuineness.
Analysis: Except in certain circumstances, none of which apply to the matter before us, Rule 5.4(a) prohibits a lawyer or law firm from sharing legal fees with a nonlawyer.1The Comment to Rule 5.4 states that the rule “expresses traditional limitations on sharing fees,” and that “[t]hese limitations are to protect the lawyer’s professional independence of judgment.”
Lender contends that the proposed arrangement does not involve “fees,” because it is merely the repayment of “costs.” We disagree. First, the proposed source of repayment is from Attorney’s share of the award under the contingent-fee agreement with Client. Attorney agreed to accept responsibility to pay costs and took the risk that he would not recover them out of his share of the award. For our purposes, all of his receipts are “fees.” Even if we were to view the first funds coming to Attorney as reimbursement of costs, however, it is clear that, due to the interest factor on the loan, some amounts from the pure “fee” portion of the recovery could have to be paid to Lender to pay the note in full.
Lender also contends that, because Attorney has merely agreed to repay the loan with interest, as opposed to granting a percentage in legal fees received, the proposed loan is merely like any other non-recourse loan. Again, we disagree.2We are not troubled by the fact that Attorney needs to borrow funds to run his practice. Many attorneys and firms borrow money and grant security interests in their accounts receivable generally as collateral for the loan. Likewise, it is axiomatic that most attorneys’ primary, if not sole, source of revenue is from fees generated from matters undertaken on behalf of clients. Taken to its logical extreme, a Rule 5.4 prohibition on lawyers’ meeting their loan repayment obligations from fees received would mean not only the lawyers could not borrow money to run their practices, but that they could not pay for any goods or services on credit.3
However, once a security interest in the recovery of contingent fees from a particular case is granted, Rule 5.4 is implicated.4Upon that grant, Lender has an interest in the attorney’s contingent-fee award, which Lender has the right to attach upon a default in payment on the loan. That particularized interest in the contingent fees of a case could compromise the lawyer’s judgment in a number of ways. For example, the lawyer’s judgment may be impaired in drawing up the proposed budget for expenses. He may be influenced in recommending that a client accept a settlement offer because of the impact it may have on the repayment of the debt with Lender. The fact that Lender may agree not to be involved in decisions involving the case or that Client may agree in writing and in advance does not save the proposed arrangement, as Rule 5.4(a) makes no exception for such cases.5
Accordingly, we find that an attorney may not finance the costs of a contingent-fee case in which a non-recourse promissory note is secured by the attorney’s interest in the contingent fee.
Footnotes
1.(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
(1) An agreement by a lawyer with the lawyer’s firm, partner, or associate may provide for the 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;
(2) A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer; and
(3) 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.
Utah Rules of Professional Conduct 5.4(a).
2.See In re Van Cura, 504 N.W.2d 610 (Wis. 1993) (unethical fee splitting found when law firm agreed to finance its product-liability litigation with nonlawyer consulting firm in return for which consulting firm would receive half the fees received from such cases).
3.See ABA Formal Op. 320 (1968), which held a financing plan did not constitute a per se violation of Rule 5.4 where a lawyer charged a client a fixed fee, took a promissory note for the fee, and then sold the note to a bank at a discounted price. The note was endorsed to the bank “without recourse,” and the attorney had the right to repurchase the note prior to the bank’s instituting any legal action on it. The plan, however, specifically excluded contingent fees.
4.See Utah State Bar Ethics Advisory Op. No. 139, 1994 WL 579849 (“[P]rovided no other rule of professional conduct is violated, compensation of non-lawyer employees may be based upon a percentage of gross or net income so long as it is not tied to the fees from a particular case.”)
5. If neither Lender nor Client is an attorney, the Rules of Professional Conduct would not apply to them, and a loan transaction between Lender and Client, where Client signs the promissory note and secures the note by granting a security interest in his share of the recovery, would not violate the Rules. We caution, however, that attorneys should be aware of Rule 8.4(a), which provides that a lawyer may not “violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another.”
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Ethics Advisory Opinion No. 96-08

(Approved November 1, 1996)
Issue:
May an attorney represent a person who seeks to obtain payment under the terms of a client-solicitation agreement entered into with another attorney, where the agreement involved the payment of a “finder’s fee” to the person?

Opinion: Although a “finder’s fee” agreement between an attorney and a client may be a violation of Rule 5.4(a) of the Utah Rules of Professional Conduct, the Rule governs the ethical conduct of attorneys . Thus, the solicitation agreement did not violate any duty of the non-lawyer parties under the Utah Rules of Professional Conduct. Therefore, absent a violation of Rule 3.1 concerning non-meritorious actions, the plaintiff’s new attorney may seek recovery under the solicitation agreement on behalf of his non-lawyer client.
Analysis: In this request for an ethics opinion, the following facts were alleged: A non-lawyer client (“Client”) engaged a Utah attorney (“Attorney A”) to consider a potential case against an employer. Attorney A felt the potential claim had merit, but, given the particular facts of the case, concluded it would be economical only if at least 100 plaintiffs with similar claims were involved. He offered the client a “finders fee of $500 per head” (the “Solicitation Agreement”) if the client could get a least 100 other people to sign up with the attorney as individual plaintiffs. Client agreed and found such other plaintiffs, who engaged Attorney A, and they successfully pursued their claims in court. Attorney A collected contingent fees from the plaintiffs.
Client then made demand on Attorney A to pay under the Solicitation Agreement. Attorney A refused, saying that such an agreement was never entered into, and, even if it was, such an agreement is not permitted under the Utah Rules of Professional Conduct. Attorney B, who has been engaged by Client to pursue a claim against Attorney A to recover under the Solicitation Agreement, seeks guidance as to whether instituting such a suit would itself violate Rules 8.4.1
First, for purposes of this opinion, we will assume, without deciding, that the Solicitation Agreement was entered into by Attorney A and that it violated Rule 5.4(a), which limits the ability of a lawyer to share legal fees with a non-lawyer.2However, the Rules of Professional Conduct only apply to lawyers. Therefore, while Attorney A may have acted unethically and violated the Rules by entering into the Solicitation Agreement, such unethical conduct does not impose any restrictions on Client nor does it automatically render the Solicitation Agreement void or a nullity as a matter of contract law.3
Second, even if the conduct of Attorney A in entering into the Solicitation Agreement was improper, the impropriety occurred at the time of the formation of the agreement. Nothing in the institution of an action later to enforce such an agreement on behalf of Client would amount to Attorney B’s “knowingly assisting or inducing” Attorney A to violate the Rules under Rule 8.4(a).
It is for the courts to decide whether the Solicitation Agreement was void ab initio as violative of public policy.4Attorney B should, however, be aware of Rule 3.1, which reads, in part: “A lawyer shall not bring or defend a proceeding, or assert or controvert an issue therein, unless there is a basis for doing so that is not frivolous, which includes a good faith argument for an extension, modification, or reversal of existing law.” If there were a clear expression by the Utah Legislature or courts that lawyers’ finders’-fee agreements were void as against public policy and unenforceable, Attorney B could be ethically restrained from pursuing a contract-based theory of recovery for Client under Rule 3.1. The Committee is not aware of any such expression, however.
However, even if there were such a Legislative or judicial expression that voided the Solicitation Agreement, Attorney B would not be ethically foreclosed from pursuing other legal action and theories on behalf of Client.
Conclusion: If there is no violation of Rule 3.1, Attorney B may undertake to represent Client who seeks monetary recovery under a “finder’s fee” agreement with Attorney A.
Footnotes
1.Rule 8.4 provides as follows:
It is professional misconduct for a lawyer to:
(a) violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another; . . . (d) Engage in conduct that is prejudicial to the administration of justice.
2.Rule 5.4(a) provides as follows:
(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:
(1) An agreement by a lawyer with the lawyer’s firm, partner, or associate may provide for the 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;
(2) A lawyer who undertakes to complete unfinished legal business of a deceased lawyer may pay to the estate of the deceased lawyer that proportion of the total compensation which fairly represents the services rendered by the deceased lawyer; and
(3) A lawyer or law firm may include nonlawyer employees in compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement.
3.We do not address the extent to which any solicitation was inconsistent with Rule 7.3 of the Utah Rules of Professional Conduct.
4.See, e.g., Peterson v. Anderson, 745 P.2d 166 (Ariz. App. 1987) (fee-splitting arrangement between attorney licensed to practice in the state and attorney not licensed to practice in state, nor admitted pro hac vice was contrary to public policy and unenforceable); but see Atkins v. Tinning, 865 S.W.2d 533 (Tex. App. 1993) (although fee-splitting agreement might subject attorney to professional discipline, agreement itself was not invalid solely because it violated his professional duties.)