DETROIT — The Wisconsin Supreme Court held recently that a law firm could pay a paralegal a percentage of the gross proceeds from cases on which the paralegal worked. The Wisconsin Office of Lawyer Regulation had argued in In re Weigel that the compensation plan violated the prohibition on sharing legal fees with a non-lawyer.
The opinion represents the latest chapter in a long-running debate about how lawyers can compensate their non-lawyer colleagues. It has been a contentious issue, and the Wisconsin decision highlights the continuing controversy.
American Bar Association Model Rule 5.4(a) states bluntly that a “lawyer or law firm shall not share legal fees with a non-lawyer.” The comment supporting that prohibition mentions “the lawyer’s professional independence of judgment” and “traditional limitations on permitting a third party to direct or regulate the lawyer’s professional judgment.”
Taken literally, it would seem that this general principle precludes lawyers from employing any non-lawyers. After all, most law firms derive all or nearly all of their revenue from legal fees.
Bars, therefore, have always acknowledged that the fee-sharing prohibition applies only to the direct sharing of fees as the law firm receives them, not the sharing of net income that the law firm earns after paying expenses.
The debate has largely focused on another ethics provision, which permits law firms to include non-lawyer employees in a “compensation … plan, even though the plan is based in whole or in part on a profit-sharing arrangement” (ABA Model Rule 5.4(a)(3)).
The issue becomes much more complicated with profit-sharing arrangements that are based on a subset of a law firm’s overall revenues or profits.
Interestingly, the ABA Model Guidelines for Utilization of Paralegal Services explain that lawyers should be permitted to compensate “more handsomely” a paralegal “who aids materially” in a “particularly profitable specialty of legal practice.”
Generally speaking, attorneys can pay their non-lawyer colleagues based on overall firm profits, but not on profits or revenues from any particular matter.
The rejection of matter-specific arrangements might seem strange, given the articulated basis for the fee-sharing prohibition: concern about the lawyer’s independent judgment. It is difficult to imagine a lawyer’s judgment being affected because the lawyer has agreed to share with a non-attorney colleague a percentage of fees earned in a particular matter.
The prohibition actually seems to focus as much on another ethics rule, ABA Model Rule 7.2(b), which indicates that a “lawyer shall not give anything of value to a person for recommending the lawyer’s services.”
Thus, the worry may exist that matter-specific fee sharing will encourage what has traditionally been called “running and capping.” That commonly used phrase refers to law firm employees who improperly solicit clients for the firm in return for some reward.
But rather than focusing on prohibited “running and capping” itself, compensation plans that might encourage such improper conduct are prohibited.
The ABA Model Guidelines for Paralegals acknowledge the obvious: lawyers “may compensate a paralegal based on the quantity and quality of the paralegal’s work and the value of that work to a law practice.”
Under that universal rule, firms are essentially left to police themselves. With a wink and a nod, a law firm could give a “performance bonus” to a paralegal, marketing director or other non-lawyer employee at least roughly based on increased revenues or profit generated in a particular matter.
As in other areas, lawyers must follow the ethics rules, even when it would be easy to hide a violation.
Thomas Spahn is a commercial litigator at McGuireWoods in McLean, Va.