On Dec. 19, 2017, the Pennsylvania Supreme Court held in SCF Consulting, LLC v. Barrack, Rodos & Bacine, that a fee-sharing agreement between a law firm and non-lawyers was not per se unenforceable. Given the commonality of the general prescription of ABA Model Rule 5.4 against sharing legal fees with a non-lawyer, subject to certain limited exceptions, the decision by the highest court in Pennsylvania warrants attention. New Jersey's version of the rule, R.P.C. 5.4, is essentially comparable to that of Pennsylvania.

The facts were that a law firm had an oral contract with a consulting firm, pursuant to which the law firm would pay the consultant a percentage of the law firm's annual profits for those matters originated by the consultant or on which the consultant performed substantial work. The law firm purportedly breached the agreement, leading to the suit. The law firm argued such a contract was unenforceable based on public policy and, in particular, the prohibitions of Pennsylvania's Rule 5.4 and the inapplicability of its exceptions.

The Pennsylvania Bar Association appeared as amicus and noted the dilemma of, on the one hand, not approving of fee-sharing arrangements that violate Rule 5.4, but on the other hand, not wishing to reward a law firm that deceived the non-lawyer consultant into thinking it had a valid agreement, and then reneging. It suggested a bright-line rule invaliding the contractual remedy, but recognizing quasi-contractual avenues of recovery.

While the majority of the court agreed that the case should not have been dismissed, there was agreement on the basic principle as to rejecting the view that such agreements are automatically unenforceable. The concurrence objected to a bright-line rule and argued for case-by-case determination. A separate concurring and dissenting opinion would have gone further, and not punished the non-lawyer, holding that the agreement at issue did not violate public policy, and refer the law firm to disciplinary board for prosecution. A separate dissenting opinion would have simply held the fee-splitting contract unenforceable, which is the majority view.

The flexible approach outlined in SCF—not allowing a law firm to escape liability by virtue of having entered into an agreement violative of Rule 5.4—remains a minority viewpoint. New York and the District of Columbia were cited by the Pennsylvania Bar Association as representative of this viewpoint.

New Jersey's Supreme Court has not addressed the issue recently, but held in 1972 in In re Bregg, 61 N.J. 476 (1972), that under the predecessor to RPC 5.4 (DR 3-102) precluding fee sharing, a lawyer violated this rule by remitting portions of his fees to a non-lawyer who referred legal matters to him. The non-lawyer was charged with a disorderly persons offense of practicing law without a license; New Jersey maintains that exposure for the non-lawyer in N.J.S.A. 2C:21-22(b)(2) (a person engages in the unauthorized practice of law if he/she “derives a benefit” from such practice.) Bregg was reinforced in In re Weinroth, 100 N.J. 343 (1985).

The policy for the rule against fee-sharing, as articulated in Weinroth, “is to ensure that any recommendation made by a non-attorney to a potential client to seek the services of a particular lawyer is made in the client's interest, and not to serve the business impulses of either the lawyer or the person making the referral; it also eliminates any monetary incentive for transfer of control over the handling of legal matters from the attorney to the lay person who is responsible for referring in the client.” (emphasis in original).

We note that in the situation of third-party funding, comparable concerns may exist, and yet New Jersey recognizes the validity of third-party funding. (See Village Supermarket, Inc. v. Mayfair Supermarkets, Inc., 269 N.J. Super. 224 (Law Div. 1993)). In Village Supermarket, Mayfair Supermarkets funded opposition by others to a variance application; the court found nothing “inherently evil” in this, though it was a factor in terms of the overall evidence. Third-party funding does not make named plaintiffs antagonistic to the interest of a proposed class. (McLendon v. Continental Group, Inc., 113 F.R.D. 39 (D.N.J. 1986)). If a commercial entity that specializes in a particular industry and consults with companies in that business identifies a potential legal issue, and refers that client to an attorney, that commercial entity could agree to finance the litigation. If the reality of the transaction is such that the consultant has found a reputable law firm for the client, and is compensated from the ultimate fee to the lawyer so that the client is not paying two sets of fees, it is not materially different. New Jersey also recognizes referral fees with lawyers in the specialized case of referral of matters to certified civil trial attorneys, even where they do no work and perform no services. It is hard to distinguish the rationale from the case just hypothesized. We also recently opined on the need for flexibility based on the JAMS model.

Barrack, Rodos dealt with the situation where the lawyers entered into an agreement with the non-lawyers and sought to take advantage of the situation. New Jersey would not have been sympathetic to the non-lawyer, and might even have prosecuted it. Nonetheless, if the integrity of the process and best interest of the client is the century-old driving force behind the policy, it may not be in the best interest of the client to have such an inflexible rule. A client could achieve the same result with the consultant acting as third-party funder, but if not able to obtain that funding, and the non-lawyer consultant provides value, the policy considerations against a black-letter rule seem questionable in all cases.

We previously addressed the recent opinion of three Supreme Court committees that condemned the payment of a marketing fee as part of its online business model. We noted our agreement with the result, but also advocated for alternative solutions that abide by the policies behind our rules of professional conduct, but also adapt to the changing and current needs of clients and society. New Jersey may sit comfortably in the majority of states that render such agreements per se unenforceable, and even punish the non-lawyer as well as the lawyer, but the time has come to abandon a one-size-fits-all approach.

There is much to be gleaned from the various opinions in Barrack and the Pennsylvania Bar Association's brief. As we previously noted, and reiterate, the New Jersey Supreme Court would do well to refer the matter for study rather than wait for the next test case to arise.