Following an $8 million settlement in a personal injury suit, the New York Court of Appeals held that a fee-sharing agreement between two lawyers was enforceable, even though it violated ethics requirements. The court said that counsel’s failure to inform her client and obtain consent to the fee split was a “serious ethical violation,” but it did not allow her to sidestep the otherwise-enforceable contract. The unanimous February 9 opinion in Marin v. Constitution Realty, LLC seems to go against a developing trend toward voiding unethical fee-sharing agreements.
Failure to disclose to client
The case involved serious injuries to a construction worker who fell from a Manhattan building. Counsel of record hired co-counsel and agreed to pay him 20 percent of the attorneys’ fees if the case settled before trial. However, no one informed the client of the agreement or obtained his consent, although there was evidence that counsel of record had led her co-counsel to believe that the client had been informed. Just six months later, counsel fired the co-counsel and advised him that his portion of any fee would be based on quantum meruit. Three years later, the case settled for $8 million. Co-counsel moved to enforce the fee-sharing agreement.
Fee-splitting requires client disclosure
Every jurisdiction in the country has some form of Model Rule 1.5(e), which permits fee sharing between lawyers who are not in the same firm, but requires that the client agree to the arrangement in writing, including the share that each lawyer will receive.
Affirming the trial court and the intermediate court of appeals, the New York high court held that the failure to disclose to the client and get his consent did not void the fee-sharing agreement, as counsel of record had argued.
Quoting from its 2009 opinion under the former Code, the court said “it ill becomes defendant … to seek to avoid on ‘ethical’ grounds the obligations of an agreement to which [she] freely assented and from which [she] reaped the benefits.” The court said that having benefitted, counsel could not “use the ethical rules as a sword” to invalidate the fee-sharing agreement.
Not the majority view?
Although the Marin court did not consider the Restatement (Third) of the Law Governing Lawyers, the opinion likely accords with the view set out in § 47, which says that “a lawyer who has violated a regulatory rule or statute by entering into an improper fee-splitting arrangement should not obtain a tribunal’s aid to enforce that arrangement, unless the other lawyer is the one responsible for the impropriety.” Here, as the court noted, co-counsel, who was trying to enforce the agreement, thought that counsel of record had informed the client, which under the Restatement analysis might suggest that the “other lawyer” was responsible for the ethics breach.
But more broadly, there seems to be an emerging majority view that fee-sharing arrangements that don’t comply with Rule 1.5(e) are simply invalid. See Benjamin C. Cooper, Taking Rules Seriously, 35 Cardozo L. Rev. 267 (Oct. 2013) (a “significant majority of the courts [that] have looked at the issue conclude that such agreements are unenforceable,” citing cases). The justification for that position is that it would be against public policy if a lawyer could enforce an unethical fee agreement through court action, even though the lawyer would be subject to discipline for entering into the agreement. However, as Marin illustrates, there are opinions that come out the other way.
Take care before you share
It seems self-evident that the best way to stay out of trouble is to comply with the client-disclosure-and-consent requirement of your jurisdiction’s version of Rule 1.5(e). But if you are involved either in trying to enforce or to invalidate a fee agreement that does not comply with the rule, you will need to weigh the relevant case authorities carefully, in light of the divergent approaches that courts have taken.