Many standard fee arrangements between attorney and client involve an attorney charging an hourly rate or flat fee for performing legal services, with the client paying the bills. But it does not always work out that way. For example, if the client is a minor, it may be the client’s parent or guardian who pays the legal bills. Or, in another example, a client may seek legal services in exchange for providing their lawyer with an ownership interest in the client’s new business venture.
Although entering into business transactions with clients or accepting payment from a party other than the actual client are both common and acceptable situations, there can be additional ethical considerations. What is permissible under the rules? When might an attorney want to consider turning down such requests?
Below are tips to keep in mind when atypical compensation structures are being considered.
Business transactions
Becoming an investor in a client’s business implicates the Rules of Professional Conduct. Rule 1.8.1 of the California Rules of Professional Conduct provides that “[a] lawyer shall not enter into a business transaction with a client, or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client,” unless the three requirements are met:
• The transaction’s terms, and the lawyer’s role in the transaction, are fair and reasonable to the client and disclosed in writing.
• The client is afforded the opportunity, by written advisement, to seek independent counsel regarding the transaction.
• The client provides “informed written consent” to the terms of the transaction and the lawyer’s role in it.
Determining whether a financial arrangement between attorney and client is “fair” typically means considering “fairness” from the client’s perspective, not the attorney’s. Courts and bar associations reviewing such an arrangement may focus on whether there is any suggestion that the attorney is financially trading off of the client’s confidences and secrets or otherwise taking advantage of their knowledge of the client’s confidential information. This is particularly important due to the concern that attorneys could place their financial interests above the interests of their clients, thereby potentially creating a conflict.
The ABA in its Formal Opinion 00-418 (July 7, 2000) recognized that investment in a client’s business may actually be a preferable arrangement for attorneys working for start-ups or other similar types of companies. For example, stock options can compensate attorneys in the long term where low current cash flows make legal services otherwise cost-prohibitive. The ABA advises that acquiring an ownership interest, whether as a traditional investment opportunity or in lieu of a cash payment for legal services, is not prohibited.
In comparison, the California Bar issued Proposed Opinion Interim No. 21-0003. Applying Comment [6] that Rule 1.8.1 does not apply to in-house counsel where the lawyer is offered the same compensation terms as those offered to other employees, the California Bar discussed the factors at play to determine whether an in-house lawyer’s compensation was like other employees.
Even if compliance with Rule 1.8 is not required, there remains a significant risk that an in-house counsel’s representation is materially limited by that financial interest, such as if a potential merger or acquisition had an effect on the lawyer’s stock. If so, it is possible that a material limitation conflict under Rule 1.7(b) is triggered. As detailed by the Southern District of California in Gurvey v. Legend Films, Inc., an in-house lawyer may need to advise their client corporation to seek independent counsel and provide written consent before entering into a business transaction by which the counsel acquires an ownership interest in the company.
Rule 1.8.1 also requires that the client be advised, in writing, of the right to independent counsel before entering into a business arrangement. If the client chooses to consult with independent counsel, that can help confirm the overall reasonableness of the transaction and potentially increase the likelihood that the agreement will survive a critical inspection in the future. Nevertheless, clients may, and have the right to, decide not to consult independent counsel after being fully advised.
Finally, the client must provide informed written consent to the transaction’s terms and the lawyer’s role in it.
While there is nothing inherently unethical about these non-traditional financial arrangements or investments, an initial consideration of Rule 1.8 can help attorneys implement steps to ensure such financial arrangements with their clients are proper. It may also be prudent for attorneys to seek advice from colleagues or other attorneys to review the investment’s terms. Such steps help avoid the appearance of bias.
Accepting payment other than from the client
Regardless of who pays the lawyer’s fees, the lawyer’s duty remains, foremost, to the client. See Sharp v. Next Entertainment, Inc., 163 Cal. App. 4th 410, 429 (2008) (a conflict might arise where the lawyer tailors representation to “please the payor rather than the client[,]” which can become “more pronounced” if the lawyer seeks to be rehired by the same payor later).
In accordance with the professional rules, a lawyer cannot charge or accept compensation for representing a client from one other than the client unless: (a) there remains no interference of the lawyer-client relationship or the attorney’s independent professional judgment; (b) confidential client information remains protected; and (c) the lawyer obtains the client’s informed written consent “as soon thereafter as reasonably practicable.” See Ca. R. of Prof. Conduct Rule 1.8.6(a)-(c).
Comment [4] to Rule 1.8.6 recognizes California’s practical shift from former Rule 3-310 by permitting attorneys to obtain the client’s written consent as “reasonably practicable.” This may be at play, for example, when a family member hires an attorney to represent an incarcerated individual. When this written consent is sought, attorneys should advise their client of the risks – such as if the payor tries to influence the attorney-client relationship, interfere with the attorney’s exercise of independent professional judgment, or seek access to confidential or privileged information.
Considering these types of practical steps can help ensure that attorneys get paid for their services, but that payment occurs in a way that comports with their ethical duties.