Legal Ethics Corner: Ethical Issues in Compensating Contract Attorneys

By Ryan Stahl, Scherer Smith & Kenny

The use of contract attorneys is commonplace in the practice of law today. Large law firms and solo practitioners utilize contract attorneys to supplement their own staff resources for transactional and litigation tasks. Despite a general requirement that a client consent in writing to fee-splitting arrangements, few contract attorneys enter into fee-splitting agreements consented to by the client for whom they render legal services. Is this ethical?

California Rule of Professional Conduct 2-200 (“Rule 2-200”) governs financial arrangements among attorneys and requires clients “consent[] in writing” to any “division of fees” unless such fees are divided between “a partner of, associate of, or shareholder with” the attorney proposing such an arrangement. At first read, Rule 2-200 appears to require client consent. Contract attorneys, who are typically engaged on a project or short-term basis, would not fit the definition of a partner (which California Corporations Code section 16101 defines in part as a “coowner[] of a business for profit”) or shareholder (which California Rule of Professional Conduct 1-100 (“Rule 1-100”) defines in part as “a shareholder of a professional corporation”). By virtue of their contractor status (assuming they are properly classified as such), they do not appear to be associates, which Rule 1-100 defines as “an employee or fellow employee who is employed as a lawyer.” (For a discussion of ethical issues related to payments to contract attorneys employed by legal staffing agencies, see the California State Bar’s Formal Opinion No. 1992-126. Such payments are outside of the scope of this article.)

While the text of Rule 2-200 appears to require written client consent for the use of contract attorneys, the California State Bar’s Formal Opinion No. 1994-138 (“Opinion No. 1994-138”) sets forth a limited exception to Rule 2-200’s requirements so long as three conditions are met. First, the compensation paid to the contract attorney cannot be contingent on whether the client’s attorney is actually paid by the client. Second, the amount paid to the contract attorney cannot be “negotiated [or] based on fees” paid by the client. Third, the contract attorney cannot have any “expectation of receiving a percentage fee.” Opinion No. 1994-138 was approved of by the California Supreme Court in Chambers v. Kay (2002) 29 Cal.4th 142.
In practice, the exception set forth in Opinion No. 1994-138 generally allows contract attorneys to be compensated hourly, or at some set rate, without triggering the requirements of Rule 2-200 and presuming Opinion No. 1994-138’s requirements are met. Other arrangements such as an agreement to pay a contract attorney a fixed percentage of a contingency fee would not fall within this exception and would therefore be subject to the requirements of 2-200.

For further reading on this subject, see Opinion No. 1994-138 and Chambers, supra.

 

About the author
Ryan Stahl is an associate at Scherer Smith & Kenny.  He practices civil litigation with a focus on employment litigation and counseling.