OBA Ethics Counsel
Ethics Opinion No. 321
Adopted April 20, 2006
TOPIC: Provision of ancillary or law-related services.
INQUIRY: A lawyer owns an interest in a chiropractic clinic ("Clinic") to which he refers his personal injury clients in full compliance with the disclosure, fairness and consent requirements of Rules 5.7 and 1.8(a), as well as Oklahoma Bar Association Ethics Opinion No. 316. Under these facts:
- If the Clinic defers receipt of its fees and expenses until after settlement proceeds are received, is the attorney in violation of the Rule 1.8(e) restriction, or providing financial assistance to a client in connection with pending or contemplated litigation, or does the transaction constitute an impermissible "proprietary interest in the cause of action or subject matter of litigation" being conducted by the attorney under Rule 1.8(j)?
- If the client disputes or otherwise attempts to reduce the charges and fees of the Clinic, has an non-consentable conflict of interest arisen between the attorney and the client?
- If the attorney has a 50% contingency fee agreement with the client, will the receipt of a quarterly net profits interest from the Clinic in addition to the contingent fee for the legal services violate the restrictions in Rule 1.5?
- The deferral of fees and charges by the Clinic and the lawyer's proprietary interest in the Clinic would be a violation of Rule 1.8(e) and could constitute violations of Rule 1.8(j) and other rules, depending on the significance of the lawyer's interest in the Clinic and in the fees and charges to be received by the Clinic from the client.
- The lawyer would have a non-consentable conflict if he were to represent the client in a fee dispute with the Clinic because of his ownership interest in the Clinic. If the lawyer represented neither the client nor the Clinic in the dispute, he would not have a non-consentable conflict in continuing his representation of the client in the personal injury litigation if he reasonably believed that he would be able to continue to provide competent and diligent representation of the client as required by Rule 1.7(b)(1).
- The lawyer would not be in violation of the statutory limit on contingent fees because of his interest in the Clinic if that interest and the arrangement with the client otherwise complied with the restrictions of the applicable statute, 5 O.S. §7.
In addressing the issues presented, it is assumed that:
- there has been compliance with the requirements of recently adopted Rule 5.7 (a)(2) to fully inform the client that (i) the Clinic's services are not legal services and (ii) no client-lawyer relationship exists with the attending chiropractor or any other of the Clinic's personnel; and
- there has been compliance with all of the disclosure and consent requirements of Rule 1.8(a), as follows:
- the charges and services of the Clinic:
- are fully disclosed and transmitted in writing to the client in a manner in which they could reasonably be understood, and
- are fair and reasonable;
- the client is advised in writing of the desirability of seeking independent counsel on whether to use the services of the Clinic;
- the client provides a written signed consent to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction with the Clinic;
- the signed consent from the client indicates that he or she is fully informed of the conflict of interest arising by reason of the lawyer's personal interest in the Clinic and expressly waives the conflict.
Oklahoma Bar Association Ethics Opinion 316 was issued in 2001 and deals with the respective rules and requirements applicable to a law related business transaction between a lawyer and a client. However, this opinion was issued before the adoption of Rule 5.7 in September of 2002, which more directly addresses the issue.
1. Clinic's Deferral of its Fees and Expenses
The first of the specifically addressed issues is whether the deferral of the allocation of fees until settlement proceeds are received constitutes the provision of legal services in violation of Rule 1.8(e)(1). 1
While the inquiry is somewhat vague, it is assumed that the Clinic is agreeing only to defer receipt of its fees and expenses until the matter is resolved and that the fees and charges will be payable regardless of the outcome of the litigation. Otherwise, the contingent fee arrangement with the lawyer would arguably be void and unenforceable under 5 O.S. §71. Even so, however, the arrangement is violative of Rule 1.8.
Comment 10 to Rule 1.8 of the ABA 's Model Rules of Professional Conduct indicates that the purposes of the provision are to avoid taking action which might encourage clients to pursue lawsuits that might not otherwise be brought and to avoid giving lawyers too great a financial stake in the litigation. While the Rule does permit payment of court costs and expenses of litigation, the fees of the Clinic would not constitute court costs and expenses of litigation.
Comments to this Rule and other authorities make it clear that loans or guaranties of loans advanced for living expenses, or providing free housing are violations of this rule, although the sanction imposed may be mitigated by the circumstances. The same lawyer was the subject of both public censure and then suspension in the cases of State of Oklahoma, ex. rel Oklahoma Bar Association v. Smolen, 837 P.2d 894 (Ok. 1992) and State of Oklahoma, ex. rel Oklahoma Bar Association v. Smolen, 17 P.3d 456 (Ok 2000). In both cases, the lawyer had made non-interest bearing loans to his indigent clients for living expenses for humanitarian reasons. In both instances, he was determined to be in violation of Rule 1.8(e). In the second Smolen case, the Oklahoma Supreme Court noted that:
The rule against attorneys providing financial assistance to clients for living expenses is based upon the common law prohibitions against the practice of champerty and maintenance. The evils associated with champerty and maintenance intended to be prevented by Rule 1.8(e)'s prohibition are: (1) clients selecting a lawyer based on improper factors, and (2) conflicts of interest, including compromising a lawyer's independent judgment in the case and creating the potentially conflicting roles of the lawyer as both lawyer and creditor with divergent interests. 2
The respondent in State of Oklahoma, ex rel. Oklahoma Bar Association v. Boettcher, 798 P.2d 1077 (1990) arranged for his client to obtain a loan from a finance company in order to cover his house payments during the pendency of the litigation. The loan was not made or guaranteed by the lawyer, but his firm had an interest in the finance company which was formed primarily to lend money to the respondent's clients. The court found that the finance company had been formed primarily to lend money to the respondent's clients. The case was actually decided under DR 5-103(B) which prohibited a lawyer from advancing or guaranteeing financial assistance to a client (other than court costs or expenses of litigation) while representing the client in pending or contemplated litigation. The connection between the respondent's firm and the finance company was determined to be a violation of this disciplinary rule.
In the circumstances posed here, the lawyer's ownership interest in and assumed control over the Clinic and its business practices would make the Clinic's deferral of its fees and expenses a violation of Rule 1.8(e) on the part of the lawyer. The effect of such action is the precise type of situation that the comment indicates the Rule is designed to avoid. A person in need of chiropractic care due to injuries received in an accident would seem to be attracted to the lawyer and the Clinic in an effort to defer his obligation to pay the costs of the Clinic's care until his case had been finally resolved.
This arrangement could possibly also constitute a violation of Rule 1.8(j)2 which also has its origins in the common law prohibitions against champerty and maintenance. The purpose of the rule is to prevent conflicts of interest that would interfere with the lawyer's independent judgment on the client's behalf and to avoid having the lawyer have too great an interest in the representation. The comment to the rule notes that if a lawyer acquires an ownership interest in the litigation it will make it more difficult for the client to discharge the lawyer if the client so desires.
However, we must be careful to distinguish between an improper proprietary interest in the litigation and a permissible business transaction with the client as noted above. The lawyer's interest in the inquiry is a net profits interest in all of the Clinic's business and is not directly tied to the particular litigation. On the other hand, we can assume that in many situations, the results of the client's litigation will have a direct impact on the amount received by the lawyer as a result of his interest in the Clinic. 3
Upon initial analysis, it would seem that the lawyer's interest in the Clinic is not the same as a proprietary interest in the litigation. If the client had assigned to the lawyer his right to recover damages for his injuries, that would give the lawyer a direct proprietary interest in the outcome of the litigation. He would be taking from the client what the client would otherwise have received. On the other hand, the interest in the Clinic's net profits is neutral to the client. The net amount of the recovery to the client would be the same regardless of whether the lawyer had the interest in the Clinic. Moreover, since the client would be obligated to ultimately pay the fees and charges of the Clinic regardless of the outcome of the litigation, the interest of the lawyer in the litigation is not tied to the Clinic's fees and charges, unless it is clear that the client would not be able to pay those fees and charges without realizing proceeds from the litigation.
Nevertheless, there could be a violation of Rule 1.8(j) if the aggregate interest of the lawyer in the results of the litigation were so great as to impair the exercise of his independent judgment for his client: if the interest is so great as to result in a personal interest which conflicts with that of the client in violation of Rule 1.7(a)(2) and impairs his independent judgment in violation of Rule 2.1. Thus, the actual amount of the net profits interest of the lawyer and any other ownership rights in the Clinic, as well as the likelihood that the Clinic would ultimately recover its fees and charges regardless of the outcome of the litigation, will impact this determination.
Other ethical issues that could arise from the described arrangement include:
- whether any understanding the lawyer might have with the Clinic regarding the Clinic's referral of its patients to the lawyer comply with Rule 7.2(b)(4)3;
- whether the lawyer is able to adhere to the mandates of Rule 2.1 to exercise his independent judgment and render candid advice to the client regarding the bias and credibility issues that may arise if any of the Clinic's professionals are required to testify as to the nature and extent of the client's damages and injuries if the recovery by the Clinic is perhaps in some direct or indirect way dependent upon the testimony; and
- whether the obligation to be candid with the court requires disclosure to the court of the relationship.
2. Conflict if Client Disputes Amount of Clinic's Fees.
If the client seeks to reduce the amount of the fees owed to the Clinic, and the amount of fees directly impacts what the lawyer will receive from his interest in the Clinic, there would seem to be a clear non-consentable conflict of interest under Rule 1.7(a)(2) 4if the lawyer were to represent the client in his challenge of the Clinic's fees or represent the Clinic in defense of that challenge. Under Rule 1.7(b)(3), a conflict is non-consentable if it involves the representation of one client against another client. If the lawyer also represented the Clinic, but had no interest in the Clinic, it would be directly addressed in the rule. Certainly, the representation of the client would be no less problematic where the lawyer did not represent the Clinic but owned an interest in the Clinic. His interest in the Clinic would obviate any reasonable expectation that the lawyer could provide the independent, objective advice and zealous representation to which the client is entitled in a dispute between the two.
A related issue is whether the lawyer could continue to represent the client in the personal injury litigation in spite of the client's challenge of the Clinic's fees, even if the lawyer does not represent either the client or the Clinic in the fee dispute. Under Rule 1.7(b), a lawyer may continue to represent a client notwithstanding a personal interest conflict of interest that the lawyer may have if the lawyer reasonably believes that he will be able to continue to provide competent and diligent representation of the client and the client gives informed, written consent to the conflict. Under the facts of the inquiry, the lawyer would have disclosed his interest in the Clinic to the client and the client would have given a written consent to the terms of the arrangement between the lawyer and the Clinic. However, in the case of a dispute, there should be a second written consent from the client after the lawyer has expressed to the client the lawyer's belief that he could continue to provide competent and diligent representation of the client in the personal injury matter notwithstanding his adverse personal interest in the client's dispute with the Clinic.
3. Contingent Fee Amount and Effect of Net Profits Interest in Clinic.
Section 7 of Title 5 of the Oklahoma statutes imposes a limit on the amount of any contingent fee to which a lawyer may be entitled to 50% of the net amount of the proceeds of the judgment or settlement. If the arrangement between the client and the Clinic is simply to defer the fees and charges until the litigation is finally resolved, then the lawyer arguably does not have a contingent interest in the litigation greater than the 50% which he is allowed under the statute. If the arrangement between the client and the Clinic is that the client will be required to pay the Clinic only if judgment or settlement proceeds are received, the arrangement with the Clinic and arguably the contingent fee agreement with the lawyer, would be void and unenforceable under 5 O.S. §7.
In conclusion, while a lawyer's interest in a law-related business to which client are referred is permissible under the guidelines and principles set out in the authorities noted in this opinion, the interaction between the lawyer's responsibilities to the client in a pending litigation and the direct interest of the lawyer in that litigation through the law-related business may be result in violations of the cited Rules of Professional Conduct. The lawyer's interest in the Clinic which provides financial assistance to the client through the deferral of its fees and charges represents a clear violation of Rule 1.8(e), particularly in light of the Boettcher case. The arrangement is fraught with further ethical risks under the other rules discussed above.
1. The second sentence of this statute provides: Provided that all such contracts [contingent fee contracts] in personal injury or wrongful death cases including, but not restricted to, cases in which jurisdiction is in the Industrial Commission, shall be void and unenforceable (1) if secured as a result of the intervention of any laymen, association, or corporation for compensation, or promise of compensation, or anticipation of gift, compensation or hope of reward, or (2) where any laymen, association or corporation has a direct or indirect interest in, or growing out of, any judgment arising out of such claim recovery or compensation from, or settlement of any such claim.
2. Rule 1.8(j) provides:
(j) A lawyer shall not acquire a proprietary interest in the cause of action or subject matter of litigation the lawyer is conducting for a client, except that the lawyer may:
- acquire a lien granted by law or contract to secure the lawyer's fee or expenses; and
- contract with a client for a reasonable contingent fee in a civil case.
3. This provision allows a lawyer to refer persons to a non-lawyer professional pursuant to an agreement not otherwise prohibited by the rules that provides for the other person to refer persons to the lawyer if:
- the reciprocal referral agreement is not exclusive; and
- the client is informed of the existence and nature of the agreement.
4. This provision prohibits a lawyer from representing a client if there is a significant risk that the representation would be “materially limited” by the lawyer's personal interest.