In-House Counsel Ethics: Fee Sharing Implications

Posted on 10-31-2017

By: Devika Kewalramani MOSES & SINGER LLP

Lawyers are prohibited from sharing legal fees with non-lawyers unless an exception applies. The issue of fee sharing infrequently arises for in-house counsel as they are typically salaried employees who usually do not receive fees for advising their corporate employers.

ON THE RARE OCCASION THAT IN-HOUSE ATTORNEYS represent their employer-client in litigation and arbitration matters, ethical issues involving fee sharing and the unauthorized practice of law may be implicated. N.Y. State Ethics Opinion 1121 (Opinion 1121 issued by the New York State Bar Association, Committee on Professional Ethics (the Committee) in May 20171 dealt with two issues:

(1) whether in-house counsel for a company may remit the entire attorney’s fee portion of an arbitration award to the claimant company without violating the fee-sharing rule and (2) whether remittal of attorney’s fees to its corporate employer would constitute aiding the non-lawyer company in the unauthorized practice of law.

In Opinion 1121, the inquiring in-house counsel was employed by a corporation that provided medical equipment to individuals through prescribing physicians. In-house counsel handled general corporate matters and arbitrations involving denial of insurance claims and occasionally litigated them. If the claimant corporation made a monetary recovery resulting from the arbitration, the amount would be bifurcated with a portion of the award being paid for (1) the incorrect denial by the insurance provider for the medical equipment and (2) attorney’s fees awarded to the attorney-of-record. Industry practice required the paying insurance companies to distribute the attorney’s fees award to the attorney-of-record and not directly to the corporation. After receipt by the attorney-of-record, the only means by which the employer-corporation could recover the attorney’s fees was by way of sharing fees.

The Committee previously analyzed the fee-sharing prohibition in Rule 5.4(a) of the New York Rules of Professional Conduct (NY Rule 5.4(a))2 in its earlier ethics opinions involving remitting attorney’s fees to a non-lawyer client or employer. For example, N.Y. State Ethics Opinion 906 (Opinion 906)3 barred an in-house lawyer from sharing legal fees awarded in litigation with a not-for-profit organization, based on NY Rule 5.4(a). There, although the lawyer was employed by the not-for-profit organization that represented third parties, the lawyer was not representing the not-for-profit organization itself. The Committee noted that New York Rule 5.4(a) is different from ABA Model Rule 5.4(a)(4), which expressly permits a lawyer to share court-awarded attorney’s fees with a non-profit public interest organization where the lawyer prevailed in a litigated matter on behalf of the organization. The Committee distinguished Opinion 906, where the in-house lawyer proposed to share fees not with the client who won fees for itself, but rather with the not-for-profit entity sponsoring the litigation on behalf of the prevailing third party. In contrast, N.Y. State Ethics Opinion 10964 found that the feesharing rules were not violated because the statutory fees were awarded to the non-lawyer prevailing party/client rather than directly to the lawyer.

Based on the above, Opinion 1121 concluded that in-house counsel here was employed by the prevailing party and litigated the claim on behalf of its for-profit employer and not on behalf of third parties, thereby permitting counsel to share the attorney's fee portion of the award with its non-lawyer employer, without violating NY Rule 5.4(a). Additionally, New York no-fault insurance law and the applicable American Arbitration Association rule provided that the claimant (i.e., the corporation by way of subrogation) was entitled to payment of all components of the award, including attorney’s fees, even if the actual check for attorney’s fees was made payable to the attorney-of-record.

Finally, the Committee addressed whether remitting the attorney’s fees to the non-lawyer employer would violate Rule 5.5(d) of the New York Rules of Professional Conduct (NY Rule 5.5(d)),5 which prohibits a lawyer from aiding a non-lawyer in the unauthorized practice of law. It noted that whether a particular activity constitutes the unauthorized practice of law is a legal question outside the Committee’s jurisdiction. However, the Committee pointed out that Section 495 of the New York Judiciary Law might apply: first, Section 495(2) permits a moneyed corporation authorized to do business in New York to receive an assignment of claim under a subrogation agreement, and second, Section 495(5) allows a corporation to employ attorneys in its own immediate affairs or in any litigation to which it is a party.6

Opinion 1121 provides guidance on how in-house counsel may serve their corporate employer without bending or breaking the ethics rules. This may be a growing trend. With the increasingly expanding role of in-house counsel today, where they are on the front lines of litigation and arbitration involving their corporate clients, ethics issues will inevitably be on the upswing. These issues tend to be complex and require careful scrutiny of many factors and circumstances surrounding in-house counsel’s activities, roles, and responsibilities.

Devika Kewalramani is a partner at Moses & Singer LLP and co-chair of its Legal Ethics & Law Firm Practice. Ms. Kewalramani focuses her practice on legal ethics, professional discipline, risk management, and compliance. She serves as the chair of the Committee on Professional Discipline of the New York City Bar Association.

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1. New York State Bar Ass’n Comm. on Prof’l Ethics, Op. 1121 (2017). 2. . New York Rules of Prof’l Conduct R. 5.4 (2017). 3. New York State Bar Ass’n Comm. on Prof’l Ethics. Op. 906 (2012). 4. New York State Bar Ass’n Comm. on Prof’l Ethics, Op. 1096 (2016). 5. New York Rules of Prof’l Conduct R. 5.5 (2017) 6. N.Y. Jud. Law § 495 (LexisNexis 2017)