Ethics Opinion 1038

By Committee on Professional Ethics

GAVEL7

New York State Bar Association

Committee on Professional Ethics

Opinion 1038 (12/6/14)
Topic:  Legal fees – sharing with nonlawyer, partnership with nonlawyer
Digest:  New York lawyer with New York-based practice may not partner with nonlawyer or practice in law firm owned by parent firm that has nonlawyer partner.
Rules:  5.4; 8.5.

FACTS

1. A law firm based in Washington, D.C. includes a nonlawyer partner, which is permitted by the D.C. Rules of Professional Conduct.  The firm is interested in associating with a New York-admitted lawyer, who is also licensed in D.C., to handle New York cases, staff an office in New York and have a primarily New York-based practice.  The firm is contemplating having the New York lawyer join the firm as a partner or forming a “wholly-owned subsidiary law firm” in New York to be “independently managed/operated” by the New York lawyer.  We understand the term “subsidiary law firm” to mean a firm whose partnership interests are owned entirely by the D.C. firm.

QUESTIONS

2. May the New York lawyer join the D.C. firm as a partner?
3. May the New York lawyer practice in a subsidiary partnership of the D.C. firm?

OPINION

4. Rule 5.4(a) of the New York Rules of Professional Conduct (the “Rules”) provides, “A lawyer or law firm shall not share legal fees with a nonlawyer,” with exceptions not applicable to the question presented.  Rule 5.4(b) provides, “A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.”  Rule 5.4(d) provides, “A lawyer shall not practice with or in the form of an entity authorized to practice law for profit, if: (1) a nonlawyer owns any interest therein . . . (2) a nonlawyer is a member, corporate director or officer thereof or occupies a position of similar responsibility . . . or (3) a nonlawyer has the right to direct or control the professional judgment of a lawyer.”
5. Comment [1] to Rule 5.4 states, “These limitations are to protect the lawyer’s professional independence of judgment.”  Comment [2] notes, “This Rule also expresses traditional limitations on permitting a third party to direct or regulate the lawyer’s professional judgment in rendering legal services to another.”
6. Implicit in the inquiries here is the question whether New York’s rules govern the proposed conduct of the New York lawyer. Choice of law questions are governed in New York by Rule 8.5, which provides as follows:

(a)A lawyer admitted to practice in this state is subject to the disciplinary authority of this state, regardless of where the lawyer’s conduct occurs.  A lawyer may be subject to the disciplinary authority of both this state and another jurisdiction where the lawyer is admitted for the same conduct.
(b) In any exercise of the disciplinary authority of this state, the Rules of Professional Conduct to be applied shall be as follows:

(1)For conduct in connection with a proceeding in a court before which a lawyer has been admitted to practice (either generally or for purposes of that proceeding), the rules to be applied shall be the rules of the jurisdiction in which the court sits, unless the rules of the court provide otherwise; and
(2) For any other conduct:

(i)If the lawyer is licensed to practice only in this state, the rules to be applied shall be the rules of this state, and

(ii)If the lawyer is licensed to practice in this state and another jurisdiction, the rules to be applied shall be the rules of the admitting jurisdiction in which the lawyer principally practices; provided, however, that if particular conduct clearly has its predominant effect in another jurisdiction in which the lawyer is licensed to practice, the rules of that jurisdiction shall be applied to that conduct. [Emphasis added.]

7. We view the “conduct” at issue here to be (i) practicing in New York in a partnership with a nonlawyer partner and (ii) sharing legal fees from New York matters with a nonlawyer partner.  Applying Rule 8.5(b) to that conduct, we believe that entering into either of the arrangements proposed here, and the profit-sharing that results, would not be conduct “in connection with” a New York proceeding, even if the lawyer were to undertake New York litigation.  Consequently, the applicable choice-of-law rule is that set forth in Rule 8.5(b)(2).  Under that provision, the choice of law will depend on (1) the jurisdiction in which the lawyer “principally practices,” and (2) whether the lawyer’s conduct — i.e., entering into a partnership that includes nonlawyers or sharing fees with nonlawyers – “clearly” has its “predominant effect” in D.C.
8. The inquiry specifies that the lawyer will handle New York cases and have a practice based primarily in New York, so it seems clear that the lawyer “principally practices” in New York.  This means that Rule 5.4 will apply to the proposed conduct unless, in the words of Rule 8.5(b)(ii), the conduct “clearly has its predominant effect” in D.C., in which case the D.C. Rules would apply.
9. In N.Y. State 1027 (2014) we considered how to determine the location of the “predominant effect” when the conduct in question relates directly to the provision of legal services in a particular matter, and we advised looking to various factors relating to the circumstances of the particular matter. Here, however, the conduct does not relate to any particular matter, but rather relates to the entire operation of the partnership – specifically, practicing in New York in a partnership with a nonlawyer partner and sharing legal fees from New York matters with the nonlawyer partner.  In these circumstances, the “predominant effect” of the conduct is “clearly” in New York.  Two of our prior opinions interpreting Rule 8.5(b) – N.Y. State 911 (2012) and N.Y. State 889 (2011) – help to frame our conclusion.
10. In N.Y. State 911, a New York lawyer proposed to establish the New York office of a UK law firm that, as permitted by English law, included UK nonlawyers in ownership and supervisory positions.  We concluded that New York Rule 5.4 prohibited the association because  “[e]ven if the lawyers in question are also licensed in the UK, the predominant effect of their conduct, in practicing law from a New York office on behalf of New York clients, would be in New York.”
11. Similarly, in N.Y. State 889, we were asked whether a lawyer licensed in New York and D.C. could practice in a D.C. firm with a nonlawyer member.  Because the lawyer principally practiced in D.C. and received a majority of revenue from D.C. cases and matters, we concluded that Rule 5.4 did not prohibit the proposed arrangement, even if the lawyer undertook “occasional litigation in New York.”  We noted, however, that:
Our conclusion as to choice of law is premised on the particular facts of the inquiry. . . .  Different facts could lead to a different result.  For example, if a major portion of the revenue of the lawyer or the law firm were derived from the practice of law in the State [of] New York, then, depending on the particular facts, Rule 8.5 could make applicable the prohibitions of New York Rule 5.4.  Certainly if the partnership were created for the very purpose of litigation in New York, establishing it in the District of Columbia would be ineffective to circumvent the New York rules on fee sharing.
12. Under New York’s Rule 5.4 it is clear that both forms of practice proposed in the inquiry are prohibited.  As noted, Rule 5.4(b) expressly prohibits forming a partnership with a nonlawyer.
13. The question of practicing in a “wholly-owned subsidiary law firm” in New York that is owned by a partnership that has a nonlawyer member is not addressed directly by the language of Rule 5.4, but the result is the same. Rule 5.4(b) would plainly prohibit the lawyer from partnering, either directly (as proposed in the first question) or indirectly (through a subsidiary structure which ultimately has the effects of partnership) with a nonlawyer.  Cf., Rule 8.4(a) (lawyer may not violate the Rules “through the acts of another”).  But even if the inquiring lawyer were only an employee of either entity, without a partnership interest, Rule 5.4(d) would prohibit him from practicing “with or in the form of an entity authorized to practice law for profit, if . . . a nonlawyer owns any interest therein” or “has the right to direct or control the professional judgment of a lawyer.”
14. We need not decide whether the undertaking that the New York lawyer would “independently manage/operate” the New York firm would surmount the ordinary incidents of law firm ownership with respect to directing or controlling the New York lawyer’s professional judgment.  The term “owns any interest therein” clearly extends to an indirect ownership interest such as that proposed by the subsidiary relationship, where one or more nonlawyers own an interest in a partnership that in turn owns the entirety of the ownership interests in the New York firm.

CONCLUSION

15. A New York-based lawyer practicing primarily in New York may not join a D.C. firm that includes a nonlawyer partner.  The lawyer is also prohibited from practicing in a firm organized as a wholly-owned subsidiary of that D.C. firm.

(41-14)

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