Fee Splitting And Public Policy

The Pennsylvania Supreme Court remanded a matter involving allegations that a law firm split fees with a non-lawyer entity

This appeal concerns the enforceability of an asserted fee-splitting agreement between a law firm and a lay entity.

Appellant SCF Consulting, LLC lodged a civil complaint against Appellee, the law firm of Barrack, Rodos & Bacine, in the common pleas court. Appellant averred that it had maintained a longstanding oral consulting agreement with the law firm, which the firm purportedly breached in 2014. According to Appellant, the arrangement was for the solicitation of institutional investors to participate in securities class actions, and remuneration was to be in the form of a two-and-one-half to five-percent share of the firm’s annual profits on matters “originated” by Appellant’s principal or on which he provided substantial work.

The agreement may be enforceable notwithstanding the fee-split issue

The ultimate outcome of this case may turn on factual findings concerning Appellant’s culpability, or the degree thereof, relative to the alleged ethical violation. We would hold only that the contract cause of action is not per se barred by the purported infraction on Appellee’s part and, accordingly, the county court’s bright-line approach to the unenforceability of the alleged consulting agreement should not be sustained.

The above expression represents the view of only two Justices. A majority of the Court, however, agrees that the present contract action should not have been dismissed. See Concurring and Dissenting Opinion at 4 (Baer, J., joined by Todd, J.). Accordingly, the dismissal will be overturned, and the common pleas court will be in a position of making its own judgment as to the relevance of any wrongful conduct on Appellant’s part, without present guidance from this Court.

The order of the Superior Court is reversed, and the matter is remanded, through the intermediate court, to the common pleas court for further proceedings.

Justice Dougherty concurred. 

Justice Baer concurred and dissented

To avoid such distortion of the professional conduct rules, I would hold that the public policy of this Commonwealth requires that lawyers and law firms be estopped from invoking their own ethical violations as a defense to payment under fee-sharing contracts entered into in violation of RPC 5.4…

In my view, this Court can both avoid the perils arising from unethical fee-sharing contracts and preserve contractual agreements so as to ensure that the parties obtain the fair and reasonable compensation to which they are entitled by enforcing such feesharing contracts, but sanctioning, swiftly and harshly, attorneys who violate the disciplinary rules in this regard.

Justice Wecht dissented

Our Rules of Professional Conduct aim to protect the clients that lawyers represent. Relevant to this case, this policy is vindicated by Rule 5.4, which generally invalidates fee-splitting between lawyers and non-lawyers. The difficulty presented is that lawyers might invoke or deploy this rule as a shield or escape hatch so as to take advantage of non-lawyers who have helped generate fees but who are unfamiliar with the Rule barring lawyers from sharing those fees. This case provides our Court the burden and the opportunity to confront and, perhaps, ameliorate this dilemma.

In a thoughtful effort at resolution, the Opinion Announcing the Judgment of the Court (“OAJC”) states that the contract action may proceed provided that the court first explores the parties’ relative culpabilities with regard to any ethical violation. I would eschew such a discretionary approach, which seems likely to promote or at least allow idiosyncratic, inconsistent, and unduly subjective outcomes. Instead, I would adopt a  bright-line rule barring such fee-splitting agreements as unenforceable at law, but allowing non-lawyers to seek judicial relief in equity. Thus, I respectfully dissent

Justice Donahue joined the dissent. (Mike Frisch)