MARYLAND STATE BAR ASSOCIATION, INC.
COMMITTEE ON ETHICS
ETHICS DOCKET NO. 2001-16
FEE SHARING
By letter dated February 2, 2001, addressed to Charles S. Winner, Chairman of the Maryland State Bar Ethics Committee, you have asked for this Committee’s views as to the ethical propriety of a proposed fee agreement. The circumstances giving rise to your inquiry, paraphrased, are as follows:
Your firm has provided representation to a Maryland corporation (the “Corporation”) in several matters over the last several years. Recently, the Corporation has initiated litigation against an accounting firm and has retained the services of another Maryland firm, as well as a Florida firm, to represent it in connection with the litigation. The Maryland litigation counsel and Florida litigation counsel (“the Florida firm”) were retained to represent the Corporation solely on a contingency fee basis, pursuant to which the Corporation and the two firms have agreed that the firms would charge a certain percentage contingency fee, divided between them, in the event of a successful outcome of the litigation. The Florida firm has also accepted responsibility for the payment of expenses in connection with the litigation, with the recovery of such expenses to come from the gross proceeds of any judgment or settlement realized for the Corporation.
The complicating fact which leads to your inquiry is that the Corporation has also sought to retain the services of your firm, as special litigation counsel, to assist the two other law firms in their representation. Your firm is willing to undertake the representation as special counsel and to assist the other two firms, but only on the basis that you would be paid for services rendered, on a monthly basis, up to an agreed total dollar figure, coupled with a five percent contingency fee payable to your firm in the event of a successful pursuit of the litigation to judgment or to settlement. The Corporation has agreed to this arrangement on the understanding that the non-contingency portion of your fee will be paid by the Florida firm as an expense of litigation and that your firm will be retained separately and directly by the Florida firm as “special counsel” to that firm. The Florida firm has indicated its willingness to employ your firm as “special counsel” consistent with the Corporation’s wishes, provided that it is ethically permissible. The Florida firm sought the input of the Ethics Committee of the Florida Bar about the proposed fee arrangement and the Florida Bar declined to render an opinion, in a letter of January 24, 2001 in which the Florida Bar states, among other things, the following:
Because the client, case and the other law firm are all in Maryland, whether you can enter into such an agreement will be based upon the Maryland Bar ethics rules, not Florida. I advise you to contact the Maryland Bar regarding these issues prior to entering into any arrangement for fees with the Maryland law firm.
In your letter of inquiry, you have described the specific details of the proposed fee arrangement as follows: (we have eliminated references to specific names and amounts in the interest of preserving confidentiality).
1. The Corporation will agree to retain your firm to represent its interests in the pending litigation on a contingent fee basis, providing for payment of five percent (5%) of the gross recovery in that litigation. The fee agreement between your firm and the Corporation will provide that all expenses in the litigation will be borne either by the Corporation or by the Florida firm. The fee agreement between your firm and the Corporation will further provide that the Florida firm will retain your firm as “special counsel” and will pay your firm, on an hourly basis, up to a certain agreed upon capped amount.
2. The Florida firm will agree to retain your firm as “special counsel” and to pay your firm on an hourly basis up to the agreed upon capped amount. The Florida firm will, in its own fee arrangement with the Corporation, agree to advance all expenses associated with the litigation, including amounts paid to retain one or more “special counsel”. The Corporation will, in its fee arrangement with the Florida firm, agree that amounts paid to “special counsel” will be regarded as expenses that the Florida firm will be entitled to recover from the gross proceeds of any settlement or judgment rendered in favor of the Corporation in the litigation.
3. Both the agreement between your firm and the Corporation, and the agreement between your firm and the Florida firm, will specifically refer to one another and each agreement will, to the extent necessary, provide that, if the arrangement between your firm, the Florida firm and the Corporation is regarded as “joint representation”, neither the Corporation nor the Florida law firm regards any such “joint representation” as presenting any conflict of interest.
Although your letter does not state it specifically, this Committee assumes that the other Maryland law firm, which is also representing the Corporation (together with the Florida firm) on a contingent fee basis, has been consulted about and has agreed to the foregoing.
ANALYSIS
We address first the contingent fee aspect of your arrangement. The Maryland Rules of Professional Conduct do not prohibit modified contingent fee agreements. The Rules do require, however, that a lawyer’s fee be reasonable. See Rule 1.5. Under the fee arrangement you propose, the Corporation will pay your firm a contingency fee and it will pay the Florida firm and the other Maryland firm a contingency fee (to be divided between them). Rule 1.5(c) provides, in pertinent part:
The terms of the contingency arrangement shall be communicated to the client in writing. The communication shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal, litigation and other expenses to be deducted from the recovery, and whether such expenses are to be deducted before or after the contingency is calculated.
Thus, such a modified contingency arrangement between the Corporation, your firm and the Florida firm is not prohibited, provided that the Corporation is fully informed of the proposed arrangement and consents to same in writing, and provided that the total fees paid by the Corporation are reasonable, upon consideration of the various factors set forth in Rule 1.5. Your contingency agreements must make clear that “expenses” (including fees to “special counsel”) are to be deducted and whether this will occur before or after the contingency is calculated.
To the extent that this arrangement could be deemed to be the division of fees between your firm and the other firms, which the comment to Rule 1.5 defines as “a single billing to a client covering the fee of two or more lawyers who are not in the same firm”, the arrangement must also be consistent with Rule 1.5(e). That section provides that a division of fees between lawyers who are not in the same firm may be made only if:
(1) the division is in proportion to the services performed by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation;
(2) the client is advised of and does not object to the participation of all the lawyers involved; and
(3) the total fee is reasonable.
You have advised us that under the contemplated arrangement, all of the lawyers will assume joint responsibility for representation of the Corporation. Such an undertaking would require that each of the firms assumes the obligations set forth in Rule 5.1 for the purposes of this litigation. See Comment to Rule 1.5(e). Nevertheless, if the Corporation agrees, in writing, to the assumption of joint responsibility as required by the Rule, such an arrangement appears consistent with the foregoing Rules, assuming that the total fee for services is reasonable.
The second aspect of your inquiry is the Corporation’s request that the non-contingent portion of your firm’s fee be paid by the Florida firm, which will retain your firm as “special counsel” for purposes of this litigation. You indicate that, if ethically permissible, you would enter into a separate and direct fee arrangement with the Florida firm, as if the Florida firm were another client of your firm in the pending litigation. This Committee has not addressed such an inquiry previously, and has found little guidance in opinions from the ABA or the ethics committees of other states. Having examined our own Rules, comments thereunder and having discussed your question at length, this Committee has concluded that the arrangement is ethically permissible subject to you having satisfactorily addressed the concerns identified below.
The Maryland Rules of Professional Conduct do not prohibit, per Se, such an agreement. However, any such agreement should take into account the possible conflicts of interest that could arise. Although your inquiry letter states that your firm will be retained by the Florida firm, this Committee is of the view that your client would be the Corporation and that the Florida firm would merely be paying your fees. You, therefore, need to be sure you satisfy Rule 1.8(f) which provides that:
A lawyer shall not accept compensation for representing a client from one other than the client unless:
(1) The client consents;
(2) There is no interference with the lawyer’s independence of professional judgment or with the client’s lawyer relationship; and
(3) Information relating to representation of a client is protected as required by Rule 1.6.
Thus, assuming that the Corporation consents to this arrangement in writing, and assuming that the agreement allows your firm to exercise independent professional judgment, and protects the confidentiality of the Corporation, and assuming that such an arrangement would not adversely affect your firm’s relationship with the Corporation or compromise your duty of loyalty to the Corporation, such an agreement, in our view, is permissible under the Rules of Professional Conduct.
In sum, if all parties are fully informed and consent to the fee arrangement you propose, if your firm’s exercise of independent professional judgment in representing the Corporation is not impaired, and if the total fees payable by the Corporation pursuant to such an agreement are reasonable, the fee arrangement you propose appears to be permissible under the Maryland Rules of Professional Conduct.
We trust that the foregoing addresses your concerns and thank you for your inquiry.