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.

ANALYSIS

4. Rule 5.4(a) of the Utah Rules of Professional Conduct, “Professional Independence of a Lawyer,” sets out the basic principle that applies to the issue presented. It reads in relevant part: “[a] lawyer or law firm shall not share legal fees with a nonlawyer . . . .”

5. As its title suggests, the purpose of Rule 5.4 is to protect the professional independence of lawyers and prevent problems that might otherwise occur when non-lawyers, such as corporate employers, assume positions of authority in business arrangements with lawyers. See ABA Comm. on Prof’l Ethics & Responsibility, Formal Op. 392 (1995) [hereafter ABA Op.].

6. These arrangements cause particular concern because non-lawyers are not bound by the ethical mandates regarding independence, conflicts of interest, confidentiality, fees, and other important provisions that govern lawyers’ conduct. See id. Without these constraints, non-lawyers are free to pursue their own interests, which may be disadvantageous and detrimental to their clients’ best interests. See Emmons, Williams, Mires & Leech v. State Bar, 86 Cal.Rptr. 367, 372 (1970) (“[F]ee splitting between lawyer and layman . . . poses the possibility of control by the lay person, interested in his own profit, rather than the client’s fate . . . .”).

7. For example, in the situation presented to the Committee, some community association management companies have been establishing and charging clients fees for legal services provided by in-house counsel. Although the Committee has not been presented with any evidence suggesting that these fees are excessive, there is nothing to prevent these companies from setting unreasonable rates—something an attorney could not do under Utah Rule of Professional Conduct 1.5. This causes special concern because these companies are, by their nature, highly motivated by profits and concerned with the “bottom line.” SeeABA Op.

8. Rule 5.4(a) eliminates this and other problems by preventing non-lawyer employers from viewing and using their legal departments as profit centers. This conclusion is significantly bolstered by the opinions of several other ethics committees who have considered this issue. Indeed, there appears to be a consensus that non-lawyer employers may not profit from the legal work performed by their in-house or corporate attorneys. See e.g., Va. State Bar Standing Comm. on Legal Ethics, Op. 1838 (2007) (“[C]orporate counsel cannot be used to generate profits for an employer, as that would be considered fee splitting with a non-lawyer and a violation of Rule 5.4(a).”); State Bar of Ariz. Comm. on the Rules of Prof’l Conduct, Op. 99-12 (1999) (“A lawyer employed by an architectural firm may not provide legal services to the firm’s clients, where the firm pays the attorney a salary but charges the clients an hourly rate for the lawyer’s services, because of . . . impermissible fee-sharing with non-lawyers.”); ABA Comm. on Prof’l Ethics & Responsibility, Formal Op. 392 (1995) (“If a corporate in-house lawyer provides services to third persons for a fee, the lawyer violates Model Rule 5.4(a) if the lawyer turns over to the corporation any portion of the fee beyond the cost to the corporation of the services provided.”); Tex. Prof’l Ethics Comm., Op. 490 (1993) (“A lawyer who is a salaried employee of a bank may not under the Texas Disciplinary Rules of Professional Conduct participate in the preparation of loan application documents for bank customers if the bank charges the customers a specific fee for the lawyer’s services with respect to the loan application documents.”); Ala. State Bar Office of Gen. Counsel, Op. 1992-13 (1992) (“A fee-splitting problem under Rule 5.4 exists only when a non-lawyer agency makes a profit from the rendition of legal services by one of its salaried lawyers.”); Ill. State Bar Ass’n, Op. 90-20 (1991) (“In this case, the consumer-client would pay the institution for the preparation of the trust. The institution would then keep a portion of that fee and provide payment to the attorney. This sharing of legal fees violates Rule 5.4(a).”); N.Y. State Bar Ass’n Comm. on Prof’l Ethics, Op. 618 (1991) (“[T]he evil arises only when a lay agency earns a profit from the rendition of legal services by its salaried employee.”); Phila. Bar Ass’n Prof’l Guidance Comm., Op. 88-26 (1988) (“[E]xtraordinary care must be taken to insure that [an employer] does not receive more compensation from the client for legal services than is paid to the lawyer.”); Mass. Bar Ass’n Ethics Comm., Op. 84-1 (1984) (“[I]t would be unethical fee-splitting for a non-lawyer employer of an attorney to bill a third party more for that attorney’s services than the actual cost of such services to the employer . . . .”); Dallas Bar Ass’n Legal Ethics Comm., Op. 1982-3 (1982) (“An attorney is considered to be sharing legal fees with a nonlawyer or forming a partnership with a nonlawyer for the practice of law if the employing corporation reaps any benefit, reward or profit from the attorney’s provision of legal services to third parties.”).

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Ethics Advisory Opinion No. 12-02

UTAH STATE BAR ETHICS ADVISORY OPINION COMMITTEE

Opinion No. 12-02
Issued December 13, 2012

ISSUE

  1. What are the ethical and practical considerations applicable to attorneys representing clients in the state of Utah under flat fee or fixed fee agreements (hereinafter referred to as “flat fee agreements”)?

OPINION

  1. The permissibility of flat fee agreements in Utah is well established, subject always to the requirements of the Utah Rules of Professional Conduct. Utah lawyers may use such agreements under circumstances that ensure that clients will not be charged an unreasonable fee, as prohibited by Rule 1.5, and that client funds will not be comingled with the attorney’s funds as prohibited by Rule 1.15. Whether a flat fee arrangement complies with these rules depends heavily on an analysis of the applicable facts and circumstances. Except in rare circumstances where a fee may reasonably be earned upon receipt, as described in this opinion, fee agreements should not describe such fees as “non-refundable,” as such fees are always subject to refund in the event they are or become unreasonable under the particular facts of the case. Representation that a flat fee is nonrefundable is deceptive and violates Rule 8.4.

 

  1. Recent cases on the permissibility of flat fee agreements under the Utah Rules of Professional Conduct implicate several questions regarding the permissibility of such, as well as practical considerations faced by lawyers using such agreements. Such questions are addressed below.

ANALYSIS

  1. What fee agreements are relevant to this opinion?
  1. The term “flat fee” and “flat fee agreement” are used in this opinion to refer generally to fee agreements wherein the client agrees at the inception of a matter to pay a fixed sum to the attorney in exchange for which the attorney agrees to perform a particular scope of work. Flat fees are essentially a species of advance payment retainers, wherein the client provides the attorney with payment at the beginning of the relationship in exchange for work to be performed later. Examples of flat fees include a criminal defense attorney that agrees to handle the defense of a misdemeanor case through trial for a fixed sum, a commercial litigator that agrees with a corporate client to conduct all aspects of the discovery phase of a particular case for a specified sum or a transactional or patent attorney that agrees to create and file specific documents or handle certain aspects of a transaction for a fixed sum.
  2. Clients pursuing flat fee agreements often do so in order to avoid the negative consequences of the billable hour or to obtain representation where paying for legal services by the hour is not feasible. Hourly clients are generally required to make regular monthly or quarterly payments to the attorney, which may be undesirable or impossible for some clients. Attorneys paid by the hour are not rewarded for performing their work as efficiently as possible, which may increase costs. Corporate clients often use flat fee agreements to ensure that legal fees do not exceed pre-budgeted amounts. Certain types of collection or criminal defense cases raise the specter that any funds held by the client or in the attorney’s trust account may be subject to seizure by the client’s creditors or forfeiture by government officials, and thus become unavailable to compensate the attorney. Each of these concerns may be appropriately addressed by flat fee agreements.
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Ethics Advisory Opinion No. 12-01

UTAH STATE BAR ETHICS ADVISORY OPINION COMMITTEE

Opinion No. 12-01
Issued January 10, 2012

ISSUE

1. Three related questions are before the Committee. The attorney states that she separately represented a woman and a man (the “wife” and “husband,” respectively), both prior to their marriage. She subsequently represented both parties after they were married. The parties subsequently went to trial seeking a divorce (the “divorce”). The first question is whether representation of the wife, prior to the marriage of the parties, in litigation (the “separate action”) constitutes a conflict which would preclude the attorney from representing the husband on appeal in the divorce? Second, does the fact that the attorney testified at the divorce trial as a percipient witness, preclude her from representing the husband on appeal. Third, does representation of the wife in litigation involving both husband and wife against a third party during the course of their marriage (the “joint litigation”), wherein, notwithstanding the attorney’s vigorous but unsuccessful advocacy of the wife’s position, the wife was dismissed from the case, preclude the attorney from representing the husband on appeal in the divorce, particularly where the attorney now believes the trial court was correct in dismissing the wife from the joint litigation?
OPINION
2. Because it does not appear to “involve” a “substantially related matter,” representation of the wife in the separate action prior to the marriage would not necessarily preclude the lawyer from representing the husband on appeal in the divorce. The mere fact of the wife’s dismissal or that the lawyer agreed or disagreed with the court’s decision dismissing her from the joint litigation involving both parties is not a determinative factor to this opinion. The fact that the lawyer testified during the divorce proceedings as a percipient witness, is likewise most likely not a relevant factor, subject to the caveats set forth in the Analysis

below. Where, however, the lawyer represented both the husband and wife against a third party in the joint litigation during the course of the marriage, the joint litigation and the divorce appear to be “substantially related” because they “involve the same transaction or legal dispute.” It would therefore be a violation of the duty of loyalty and independence under the Utah Rules of Professional Conduct for the lawyer to undertake representation of the husband on appeal in the divorce without the informed written consent of the wife.

BACKGROUND

3. Prior to the marriage of the parties involved, the attorney represented the wife in the joint litigation. The issues before court in no way involved the future husband. Subsequently the parties married. During the course of their marriage, the attorney represented both husband and wife against a third party in the joint litigation. The wife’s standing to sue was at issue in the joint litigation and in spite of the lawyer’s vigorous advocacy of her position, the court dismissed her from the litigation. The lawyer disagreed with this ruling at the time, but later came to accept the court’s decision as a correct one.
4. The couple then initiated divorce proceedings. The attorney recognized that there would be an obvious conflict and thus declined to represent either party at trial. As a result of the long standing attorney-client relationship with the husband, the attorney was called and did testify as a percipient witness regarding the husband’s procurement of certain property rights and other matters which were apparently not a violation of confidentiality or otherwise privileged under the Utah Rules of Professional Conduct. According to the attorney, she did not assume a position advocating on behalf of either party in the trial court and testified only as to non-contested issues. She represents that on appeal she would not be placed in a position of advocating her own credibility as a witness at the trial. However, representation of the husband on appeal of the divorce would perhaps, although not necessarily, require the attorney to argue that at least one of the positions, specifically in the joint litigation matter, previously advocated by the lawyer on behalf of the wife in that litigation, was incorrect.
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