Can a law firm take a contingent-fee or ownership interest in a client's new product that the firm helps market, and must it disclose that interest to potential buyers?

Plain-English summary

The Committee addressed a law firm approached by a potential client with a new product. The client wanted the firm to open doors to purchasers and negotiate sales contracts, and the firm wanted an economic interest in the product's development. The firm posed five questions about taking a contingent fee tied to sales, investing in the client's corporation or a separate buyer entity, disclosure duties to purchasers (including purchasers who are present or former clients), and receiving a fee from investors the firm developed.

The opinion applied Rule 1.7(b) (the general conflicts rule), Rule 1.8(a) (business transactions with a client) and Rule 1.8(f) (third-party compensation), and Rule 1.9 (former clients). It concluded the controlling principle is knowing and informed consent by the client after disclosure. It noted that Rule 1.8(a)'s restrictions do not apply to a standard commercial transaction for products or services the client usually markets, because the lawyer has no special advantage and the lawyer's interest usually does not adversely affect the representation. The opinion stated, in capitalized text, that it views business relationships with clients like the one presented as dangerous and strongly advises lawyers and firms against participating in them, and noted that loyalty is essential and a lawyer may not continue representing a client if the lawyer's business interests affect the representation.

Answering the specific questions, the opinion concluded: (a) the firm may take the representation on a contingent fee, blended or pure, based on sales arising from the lawyer's contacts; (b) the firm is not precluded from investing in the client's corporation or a separate entity buying the product; (c) and (d) the firm has an ethical obligation to disclose its representation of the client to potential purchasers, including present or former clients, and to disclose its business interest to the extent necessary to avoid misrepresentation under Rules 4.1 and 4.3; and (e) the firm may receive a fee or consideration from investors it develops to purchase the product. The opinion noted it had addressed similar economic-interest questions in I.A.O. No. 50, also grounded in full disclosure and informed consent.

Currency note

This opinion was issued in 1992, interpreting the Mississippi Rules of Professional Conduct (adopted effective June 22, 1994, and amended February 5, 1999). Mississippi did not adopt the ABA's 2002 Ethics 2000 revisions wholesale, but subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a firm take a contingent fee tied to sales of a client's product?

A: The opinion concluded yes; the firm may take the representation on a contingent fee, blended or pure, based on sales arising from the lawyer's contacts, subject to disclosure and the client's informed consent.

Q: Can the firm also invest in the client's product or venture?

A: Per the opinion, the firm is not precluded from investing in the client's corporation or a separate entity buying the product, again grounded in disclosure and informed consent.

Q: Does the firm have to tell potential buyers about its interest?

A: The opinion concluded the firm must disclose its representation of the client to potential purchasers, including present or former clients, and disclose its business interest to the extent necessary to avoid misrepresentation under Rules 4.1 and 4.3.

Citations and references

Rules of Professional Conduct (Mississippi; cf. Model Rules):

• MRPC 1.7(b) (conflict of interest; lawyer's own interest) (cf. Model Rule 1.7)
• MRPC 1.8(a) (business transactions with a client) (cf. Model Rule 1.8)
• MRPC 1.8(f) (third-party compensation) (cf. Model Rule 1.8)
• MRPC 1.9 (duties to former clients) (cf. Model Rule 1.9)
• MRPC 4.1, 4.3 (truthfulness to others; dealing with unrepresented persons) (cf. Model Rules 4.1, 4.3)

Other opinions cited:

• Mississippi Bar I.A.O. No. 50 (April 11, 1992): lawyer or firm representing an insurer in which a firm lawyer was a stockholder.

See also

• MS Bar Ethics Op. 209: Fee-Sharing With Referral Service
• MS Bar Ethics Op. 211: Insurer Control of Defense Counsel

Source

• Landing page: https://www.msbar.org/ethics-discipline/ethics-opinions/formal-opinions/202/
• Original PDF: https://www.msbar.org/media/1457/35a_et_op_202.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

ETHICS OPINION NO. 202

OF THE MISSISSIPPI BAR

RENDERED September 04, 1992

CONFLICT OF INTEREST- A lawyer or law firm may acquire an economic interest in goods and services marketed by a client to others provided such interest is disclosed and the client gives knowing and informed consent to such representation.

The Ethics Committee of The Mississippi Bar has been requested to render an opinion on the following factual situation:

A lawyer and his firm, is approached by a potential client with a new product. The client wishes to use the law firm to open doors to potential purchasers, and negotiate any deals and contracts regarding the sale of the new product. The law firm believes that the product is a winner, and would like to have an economic interest in the development of the product.

a. Can the law firm accept the representation on a contingent fee, blended or pure, based on sales consummated arising out of lawyer's contacts?

b. Is the law firm precluded from investing in the client's corporation or a separate corporate entity purchasing the product?

c. Does the law firm (with a contingent fee or ownership interest have any disclosure requirements to the potential purchaser?

d. Does the law firm have any disclosure requirements (either as to the contingent fee or conflict of interest) if the potential purchaser is a former or present client?

e. Can the law firm who develops investors to purchase the product receive a fee or consideration from the investors?

MRPC Rule 1.7 states the general rule for conflicts of interest. MRPC Rule 1.7(b) provides: "A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third

person, or by the lawyer's own interest, unless the lawyer reasonably believes: (1) The representation will not be adversely affected; and (2) the client has given knowing and informed consent after consultation. The consultation shall include explanation of the implications of the representation and the advantages and risks involved."

MRPC Rule 1.8 and 1.9 further expound on the question of conflict of interest, specifically, transactions which are prohibited and which involve former clients. MRPC Rule 1.8(a) provides in part: "A lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or pecuniary interest adverse to a client unless:

(1) the transaction and terms on which the lawyer acquires the interests are fair and reasonable to the client and are fully disclosed...;

(3) the client consents in writing.

MRPC Rule 1.8(f) further provides that:

A lawyer shall not accept compensation for representing a client from one other than the client unless:

(1) the client consents after consultation;

(2) there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship.

The underlying rule to be considered in the above factual situation and in any other situation where potential conflicts of interest may arise during the attorney-client relationship is knowing and informed consent on the part of a client after disclosure. The restrictions of MRPC Rule 1.8(a) do not apply to standard commercial transaction between a lawyer and a client for products or services that the client usually markets. The reason being that the lawyer has no advantage in dealing with the client and the lawyer's own interests usually do not have an adverse effect on the representation of the client.

HOWEVER, THE ETHICS COMMITTEE VIEWS BUSINESS RELATIONSHIPS WITH CLIENTS SUCH AS PRESENTED IN THIS FACTUAL SITUATION AS DANGEROUS AND WOULD STRONGLY ADVISE LAWYERS AND LAW FIRMS AGAINST PARTICIPATING IN SUCH ACTIVITIES.

As with all attorney-client relationships, there could possibly come a time when a conflict arises after representation has been untaken that may require the attorney to withdraw from such representation. Loyalty to a client is essential and a lawyer may not continue to represent a client if the lawyer's business interests affect such representation. In addressing the specific questions propounded to the Ethics Committee in the above factual situation, the Committee is of the opinion that: (a) The law firm may accept the representation on a contingent fee, blended or pure, based on sales consummated which arise out of a lawyer's contacts; (b) A law firm is not precluded from investing in a client's corporation or a separate corporate entity purchasing the product; (c) & (d) The law firm has an ethical obligation to disclose the law firm's legal representation of its client to potential purchasers including present or former clients. The law firm further has the obligation to disclose its business interest to the extent necessary to avoid misrepresentation as required by MRPC Rule 4.1 and 4.3; and (e) The law firm may receive a fee or consideration from investors should the law firm develop investors to purchase the product.

The Ethics Committee has previously addressed conflicts of interest questions regarding lawyers obtaining economic or proprietary interests during the course of representation. I.A.O. #50 rendered April 11, 1992, by this Committee addressed the question of lawyers or a law firm representing an insurance company of which a lawyer in the law firm was a stockholder. That opinion, like the instant opinion, is founded on the principals of full and complete disclosure to clients of such relationship and informed consent being obtained from all concerned.