Lawyer-Nonlawyer Business Ventures: a Limited Affair

, New York Law Journal

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Devika Kewalramani
Devika Kewalramani

The practice of law is a profession, not a business. One practical application of this tenet is that the New York Rules of Professional Conduct require lawyers to maintain professional independence and to keep legal practice separate from nonlegal services. However, the rules afford lawyers certain specific limited opportunities to engage with nonlawyers to provide legal and nonlegal services to clients and nonclients.1

Prohibited Business Models

Regarding legal services, the guiding ethical principle is that the lawyer must exercise independent professional judgment on behalf of a client not directed or controlled by a nonlawyer. The rules also generally require a strict separation between legal services rendered by lawyers and nonlegal services offered by nonlawyers. These rules in combination prohibit certain joint lawyer-nonlawyer business models.

• Partnerships. May a tax lawyer and an accountant form a partnership to advise clients? No. Rule 5.4(b) flatly bans lawyers from forming partnerships with nonlawyers (i.e., share profits and losses) if any of the activities of the partnership consist of the practice of law. See NYCLA Op. 687 (1991) (lawyer may employ an accountant to advise clients on tax planning, but the accountant may not have an ownership stake in the law firm).

• For-Profit Practice. May a nonlawyer be a partner in a law partnership? No. Rule 5.4(d) bars nonlawyers from having any ownership interest in the profits generated by a lawyer or law firm, acting as member, director or officer or a position of similar responsibility in the firm, or having the right to direct or control a lawyer's professional judgment, unless specifically exempted.

• Sharing Legal Fees. May a lawyer pay a nonlawyer providing services to the lawyer a fraction of legal fees? No. A lawyer is prohibited from sharing legal fees with a nonlawyer under Rule 5.4(a). So, if a nonlawyer's compensation depends on the lawyer's receipt of legal fees in specific cases, Rule 5.4(a) is violated. See N.Y.S. Bar Op. 733 (2000) (lawyer may not compensate a nonlawyer with a percentage of fees from a matter referred to the lawyer's firm); N.Y.S. Bar Op. 885 (2011) (lawyer may not reduce fees as part of an arrangement to accept referrals from a nonlawyer by refunding the balance owed to nonlawyer back to clients); N.Y.S. Bar Op. 565 (1984) (paying marketing companies a commission or percentage of fees for introducing clients to a lawyer is improper). However, N.Y.S. Bar Op. 917 (2012) observed that a law firm may pay a bonus to a nonlawyer marketer based on the number of clients obtained through advertising if the amount paid is not calculated with respect to fees paid by clients. Rule 5.4(a) also forbids giving a nonlawyer a stake in the outcome of a particular case or cases.

Of course, all law firm employees are ultimately paid from fees received by the law firm, and this is not proscribed. The prohibition is against paying the nonlawyers an amount dependent on the amount of fees collected. Thus, paying a paralegal a bonus of 15 percent of all fees on cases she refers to the firm would violate Rule 5.4(a). See N.Y.S. Bar Op. 927 (2012) (where a client pays a single fee directly to a nonlawyer, a portion of which is then paid to the lawyer is improper because the nonlawyer is essentially acting as a referral agent for fees and the lawyer is sharing legal fees with a nonlawyer).

• Unauthorized Practice. May a lawyer hire a nonlawyer to practice law on behalf of the lawyer? No. Under Rule 5.5(b), a lawyer is barred from assisting a nonlawyer in the unlicensed practice of law. While lawyers can hire nonlawyers to assist them, a lawyer must adequately supervise nonlawyer employees. See Rule 5.3.

Permissible Business Models

Despite the traditional prohibitions, the rules allow some leeway for arrangements where lawyers may provide legal and nonlegal services together with nonlawyers.

• Approved "Systematic and Continuing" Joint Business Models. One permissible model for lawyer-nonlawyer arrangements is a "strategic alliance" or contractual relationship with a nonlegal professional or professional service firm under Rule 5.8(a). Such a contractual relationship allows sharing out-of-pocket expenses and costs but not profits or legal fees pro rata. To illustrate, a law firm and an architectural firm may enter into an office sharing arrangement to rent office space that is divided equally between the two firms, with each firm contributing half the total rent. If the law firm's rent payment exceeds its share of costs and expenses, the law firm may be deemed to be improperly sharing legal fees and profits with a nonlawyer.

The Appellate Divisions maintain a list, pursuant to Section 1205.3 of the Joint Appellate Division Rules, of nonlegal professions with which lawyers and law firms may enter into "strategic alliances," "contractual relationships" or "cooperative business arrangements" on a "systematic and continuing" basis. Under Rule 5.8, the professions that can be placed on the list must satisfy rigorous standards on ethics, education, training and licensing. The professions currently approved are: architecture, certified public accountancy, professional engineering, land surveying and certified social work.

So, a lawyer or law firm may enter into a systematic and continuing relationship with an accounting firm to provide legal/nonlegal professional services to clients, sharing premises, general overhead or administrative costs and services on an arms-length basis. They may also engage in joint advertising and promotion. Comment [2] to Rule 5.8.

Nevertheless, Rule 5.8 still prohibits such nonlawyer professionals from (i) having any ownership or investment interest in the law firm, (ii) exercising managerial or supervisory rights or powers relating to the practice of law, (iii) sharing fees with lawyers or (iv) receiving or giving any monetary or other tangible benefit in exchange for referrals. Nonlawyer professionals are also barred from making decisions regarding accepting or terminating client engagements, compensating and advancing lawyers and legal staff, the manner of hiring or training lawyers, and financial and budgetary concerns for the law firm.

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