October 31, 1991
A law firm which prepares to embark on a long term consulting arrangement with an entity of nonlawyers shall affirmatively and specifically communicate lawyer ethical obligations to the consultant, should ensure that the consulting firm has been provided with a complete copy of the Michigan Rules of Professional Conduct, and make other reasonable efforts to ensure that the consultant understand those rules.
A long term contract by which a law firm plans to acquire consulting services properly (a) leaves the client responsible for witness fees and other costs, and, (b) where the consultant is to be remunerated on a contingency fee basis, contemplates that the consultant will not furnish witness services.
A lawyer's contract with a consultant to provide analysis, research or evaluation to the lawyer is not a "court cost" or "expense of litigation" to the client.
A law firm's agreement to pay an independent contractor consultant on a contingency basis a share of the tax savings realized by clients of the law firm in appeals before the Tax Tribunal in which the consultant's services have been used violates rules against sharing legal fees with nonlawyers.
References: MRPC 1.8(e)(1), 5.3, 5.4(a); RI-75; MCL 205.735(5); State Bar of Michigan v Galloway, 422 Mich 188 (1985); Dupree v Malpractice Research Inc, 179 Mich App 54 (1989).
A law firm representing clients in the field of real and personal property tax appeals plans to utilize the services of a consulting firm with expertise in this field. The consulting firm would function as an independent contractor, but not as a witness, expert or otherwise, in any hearing in a tax appeal.
The law firm would engage the services of the consultant on a long term but nonetheless case-by-case basis. The law firm expects to be compensated on a contingency fee basis, and proposes to in turn pay the consultant 25% of the tax savings realized by clients in successful representations in which the consultant has played an advisory role. The relationship between the law firm and the consulting firm would be formalized in a written agreement, whereby the consultant recognizes its obligation to maintain client confidentiality. Each client remains responsible for other costs of the contemplated Tax Tribunal proceedings, including expert witness fees.
The law firm asks whether any aspect of this prospective arrangement would violate Michigan Rules of Professional Conduct.
Certain features of the prospective contractual arrangement vis-a-vis the Rules of Professional Conduct can be readily addressed. The draft contractual provision regarding confidentiality provides:
"3. Confidentiality. Consultant acknowledges the sensitivity of the matters to which it will have access and acknowledges and agrees to maintain the strictest confidentiality with respect to LAW FIRM clients and LAW FIRM client business matters discovered in connection with services provided under this agreement and that it will, at all times while this agreement is in effect, conduct itself in such a way as to become compatible with professional and ethical obligations of LAW FIRM'S employee."
While this language represents a well-intentioned effort to assure compliance by the consulting firm with the law firm's ethical responsibilities, it would seem advisable and necessary to expand the scope of this clause in the contract. MRPC 5.3 states:
"With respect to a nonlawyer employed by, retained by, or associated with a lawyer:
"(a) a partner in a law firm shall make reasonable efforts to insure 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; and
"(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 relevant facts and 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."
Thus, the law firm must take steps to ensure that conduct of the consultant is compatible with the professional obligations of lawyers. While absolute assurance in matters involving human conduct can never be attained, it would be an improvement if the contract recited that the consultant firm had been supplied with a complete copy of the Michigan Rules of Professional Conduct, had had an opportunity to discuss with the law firm any features thereof the consulting firm did not understand, and that consultant recognizes law firm's obligations thereunder and will make every effort to assure that the law firm's responsibilities in that respect are carried out punctiliously. The draft agreement deals with confidentiality, which is but one aspect of the law firm's manifold ethical responsibilities.
It might seem that because Tax Tribunal work does not constitute the "practice of law" the fulfillment of the minimal requirement to review the Michigan Rules of Professional Conduct would be gratuitous. However, in RI-55 we concluded that a lawyer or a law firm involved on behalf of clients in administrative proceedings, where the clients could be represented by nonlawyers, nonetheless is engaged in "legal matters" which come within the ambit of the ethics rules. Thus, MRPC 5.3 applies, and requires that a consultant affiliated with a law firm be fully cognizant of the firm's ethical obligations, and in this circumstance the firm must affirmatively and specifically communicate those ethical obligations to the consultant. That means not simply providing a copy of the Rules for perusal, but discussion with the consultant sufficient to assure the firm that the consultant understand the firm's ethical obligations and the consultant's role in fulfilling those obligations completely.
It is important to note that assessment appeals before the Tax Tribunal is one area of administrative practice in which nonlawyers are statutorily authorized to represent third parties, MCL 205.735(5); see also, State Bar v Galloway, 422 Mich 188 (1985). In this inquiry, therefore, concerns about prohibiting the consulting firm from engaging in the unauthorized practice of law would be ill-founded, because the consulting firm, with or without affiliation with a law firm, could deliver such services.
The proposed agreement appears to correctly recognize that the client remains responsible for costs and expenses of litigation, including witness fees, as required by MRPC 1.8(e)(1). Thus, a potential problem has been avoided, so long as the terms of the contract are not later altered by mutual agreement for the convenience of the parties. As the consultant is to be paid on a contingency basis, it could not legally receive compensation on that basis if it supplied expert witness services. In Michigan contingency fees for expert witnesses are deemed void as against public policy, inter alia for the reason that witnesses should not have monetary incentives to suborn their testimony and transform them into advocates anymore than is already the case. Dupree v Malpractice Research Inc, 179 Mich App 254 (1989).
A more pressing issue is whether the law firm may compensate the consultant as the proposed contract contemplates, or must the client be the source of the consultant's fee as "court costs or expenses of litigation" pursuant to MRPC 1.8(e)(1). Since the Tax Tribunal is not a "court," and the consultant's fee is not something paid to the "court," fixed by statute or court/administrative rule, nor taxable as a cost if the client prevails, the "court costs" portion of MRPC 1.8(e)(1) is not applicable.
As to "expenses of litigation," one court has interpreted former Code of Professional Responsibility DR 5-103(B), the predecessor of MRPC 1.8(e), in addressing the propriety of a divorce lawyer compensating a consulting accountant directly and without recourse to the client, saying:
"The Supreme Court Rule applies to the attorney-client relationship and does not address the propriety of any agreement between an attorney and those whose services he employs in aid of litigation. The rule specifically allows the attorney to advance expenses of litigation including those for investigation and the only restriction is that the client remains ultimately responsible. [The accountant's] services in this case may properly be characterized as expenses of investigation as it was [the lawyer's] personal, professional duty to investigate and consider the tax consequences in the respective divorce actions. [citation]" Theuerkauf v Sutton, 102 Wis 2d 176, 306 NW2d 651, 663 (1981).
The Theuerkauf court reasoned that in the situation of an accountant supplying tax advice to a divorce lawyer fashioning a property settlement, the consultant's work product represents professional service the lawyer owes to the client, and thus properly constitutes a charge to the lawyer rather than the client. See also, Wright v Wright, 284 NW2d 894 (Wis 1979).
In this inquiry the consultant will provide evaluative, investigative and other professional expertise that would and should otherwise be furnished by the law firm (in contrast, say, to appraisal expertise furnished by an expert witness), and is correctly the firm's cost of preparation and research needed to put the firm in a position to render the requisite level of legal service competently. Therefore, this consultant's fee is not an "expense of litigation" and the compensation arrangement does not otherwise run afoul of MRPC 1.8(e)(1).
Another question presented by this proposed arrangement is the impact of MRPC 5.4 which prohibits the sharing of legal fees with nonlawyers. The American Bar Association Canons of Professional Ethics (1908) contained no prohibition against fee sharing with nonlawyers. However, the ABA Ethics Committee ruled against such arrangements in 1925 in Op 8, and this view was formalized in 1928 with the promulgation of Canon 34, to which MRPC 5.4 traces its origin.
As a general rule, lawyers are thus prohibited from sharing fees with nonlawyers who perform services for them, and they may not pay nonlawyers a share of the fees rather than a fixed salary or wage. Simon, Fee Sharing With Nonlawyers, 98 Yale L J 1069, 1083 (1989); Florida Bar v Shapiro, 413 So 2d 1184 (Fla, 1982); Florida Bar v Sagrans, 388 So 2d 1040 (Fla, 1980). The rule has been strictly enforced, even against nonprofit, public interest organizations whose legal activities otherwise enjoy first amendment protection pursuant to In re Primus, 436 US 412; 98 S Ct 1893 (1978). Thus, an ACLU staff lawyer was prohibited from turning over to an ACLU affiliate a court awarded lawyer fee, despite a contractual promise to do so, ACLU/Eastern Missouri Fund v Miller III, 803 SW2d 592 (Mo, 1991).
One danger presented by fee splitting is that a nonlawyer may "cut corners" in order to maximize profits under the fee sharing arrangement. In this inquiry, this concern is addressed by the law firm's control of the representation matter, including the right to utilize the consultant only in the law firm's discretion. The law firm remains bound by the ethics rules to see that the client receives competent representation, MRPC 1.1, and advice on a variety of matters, both law and nonlaw, MRPC 2.1.
Another rationale for the prohibition against fee sharing with nonlawyers is the observation that fee splitting encourages nonlawyers to practice law:
"[T]he underlying purpose of regulating the practice of law is not so much to protect the public from having to pay fees to unqualified legal advisors as it is to protect the public against the often drastic and far reaching consequences of their inexpert legal advice." In re Baker, 8 NJ 321, 339, 85 A2d 505, 514 (1951), quoted with approval in In re Conduct of Griffith, 304 Or 575, 748 P2d 86 (1987) (en banc), and Committee on Prof Ethics v Lawler, 342 NW2d 486 (Iowa, 1984).
The Michigan Supreme Court in phrasing MRPC 5.4(a)(3) has been quite explicit in applying the prohibition against sharing legal fees with nonlawyers, making an exception only for "nonlawyer employees" who may be compensated in whole or in part under a "profit sharing arrangement." The Court considered, when it adopted the ethics rules the then existing rule and its longstanding judicial construction, saw the wisdom of providing an exception and did so, but limited that exception to nonlawyer employees.
Whether a person is an employee or an independent contractor is a question of law beyond the jurisdiction of this Committee. Since the facts as presented characterize the consultant as an independent contractor, the exception for "nonlawyer employees" in MRPC 5.4(a)(3) is inapposite, and the arrangement for compensating the consultant is prohibited by MRPC 5.4(a).