Can a New Jersey law firm affiliate with a foreign law firm and pool profits as compensation for referring clients to each other?

Plain-English summary

The Committee was asked about an affiliation between a New Jersey law firm (firm A) and a London firm (firm B). The two would remain separate firms but, under an extensive agreement, would assist each other in developing client relationships and would pool a portion of each firm's net profits at year end, distributing the pool by a formula unrelated to the volume of business referred. Where lawyers from both firms worked on a matter, fees would be divided under RPC 1.5(e); where only one firm worked, no referral fee would be paid.

The Committee read the agreement's "clear thrust" as establishing a system of reciprocal client referrals and a method of compensating each firm for providing new clients and work to the other. It distinguished RPC 1.5(e), noting (by analogy to the treatment of temporary lawyers and to ABA Informal Opinion 1440 (1979), which permitted a lay office administrator to share in net profits) that profit-based compensation tied to a firm's overall performance is not the kind of per-matter fee division RPC 1.5(e) governs.

The operative problem instead lay in RPC 7.3(d), which bars a lawyer from compensating or giving anything of value to a person or organization to recommend or secure the lawyer's employment, except for permitted public communications and bona fide lawyer-referral-service fees. The Committee concluded that the agreement did involve an effort to compensate or give something of value (shared profits and "best efforts" to make reciprocating referrals) to an organization (the other firm) in return for that firm's efforts to recommend or secure the lawyer's employment, because best efforts to refer clients were the heart of the agreement's purpose and obligations. (The full-text mirror of this opinion ends within this analysis; the linked official source controls.)

Currency note

This opinion was issued in 1995, before New Jersey's adoption of the 2004 revisions to the Rules of Professional Conduct. 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 Treat this page as historical context, not current guidance.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: Why did profit-pooling between the two firms run into RPC 7.3(d)?

A: The Committee concluded the pooled profits and "best efforts" to make reciprocating referrals were compensation or something of value given to an organization in return for recommending or securing the lawyer's employment, which RPC 7.3(d) prohibits.

Q: Did the arrangement violate the fee-division rule, RPC 1.5(e)?

A: The Committee distinguished RPC 1.5(e), reasoning that compensation tied to a firm's overall net profits, rather than to the receipt of a particular fee, is not the kind of per-matter fee division that rule governs. The problem it identified was under RPC 7.3(d).

Q: Would a simple cross-border affiliation always be barred?

A: The opinion's concern was the agreement's central purpose of paying for reciprocal referrals through pooled profits. Per the opinion, RPC 7.3(d) is grounded in protecting the public from profit-oriented schemes to steer clients to particular lawyers.

Background and rules framework

The opinion interpreted New Jersey RPC 7.3(d) (the bar on compensating a person or organization for recommending or securing the lawyer's employment, except for permitted communications under RPC 7.1 and bona fide referral-service fees; compare Model Rule 7.2(b)) and distinguished RPC 1.5(e) (division of fees between lawyers; Model Rule 1.5(e)). The analysis turned on characterizing the pooled-profit, best-efforts-to-refer structure as compensation for referrals rather than a fee division, and on RPC 7.3(d)'s purpose of guarding against profit-driven steering of clients.

Citations and references

Rules of Professional Conduct:

• MR 7.2 / NJ RPC 7.3(d) (compensating a person or organization to recommend or secure the lawyer's employment)
• MR 1.5 / NJ RPC 1.5(e) (division of fees between lawyers)
• NJ RPC 7.1 (permitted public communications)

Other opinions cited:

• ABA Informal Op. 1440 (1979): a lay office administrator may share in a law firm's net profits without dividing legal fees with a nonlawyer

See also

• CO Bar Formal Op. 38: Referral Fee From a Title-Examining Lawyer
• NJ ACPE Op. 696: Attorney as Executor and Referral to Spouse's Real Estate Agency

Source

• Full text (Justia mirror): https://law.justia.com/cases/new-jersey/advisory-committee-on-professional-ethics/2005/acp681-1.html
• Issuing authority: New Jersey Supreme Court Advisory Committee on Professional Ethics, via the NJ Courts Supreme Court Committees page

Original opinion text

Reproduced from a full-text mirror of the official opinion for research purposes. The mirror's copy ends within the opinion's analysis; the linked official source controls and contains the complete text.

4 N.J.L. 1487, July 17, 1995

141 N.J.L.J. 1540, July 17, 1995

OPINION 681

Affiliation with Foreign Law Firm Based in Part upon Referral of Clients with Pooling and Distribution of the Firms' Respective Profits

The opinion of this Committee has been sought relative to ethical questions arising out of an affiliation between a New Jersey law firm and a foreign law firm. The inquirer's description of the circumstances is as follows:

Law firm A, which has offices located in various states, including New Jersey, and law firm B, which is located in London, England, would be closely affiliated with one another, but would not merge into a single law firm. The purpose of the proposed affiliation would be to provide enhanced legal services by making easily available to clients the combined expertise of lawyers in both firms.

No referral fees would be paid by either firm if attorneys from only one of the firms performed work for a particular client, even if that work was referred by one firm to the other. If attorneys from both law firm A and law firm B worked on a matter for the same client, then the fee charged to the client would be divided in accordance with RPC 1.5(e) - that is, the division would be in proportion to the services provided by each firm, consent to the participation of all the lawyers involved would be obtained from the client, and the total fee would be reasonable.

At the end of the fiscal year, a portion of each firm's profits would be pooled, and then distributed between the two firms in accordance with a specified formula, unrelated to the amount of any business referred from one firm to the other. (As a practical matter, this probably would be accomplished by a single year-end payment from law firm A to law firm B, or vice versa.)

[A] and [B] desire, on the terms set forth in this Agreement, to engage in certain collaborative projects with the objectives of: (1) assisting each other to enhance their existing client relationships and to develop new client relationships; (2) expanding the firms' respective international practices; and (3) developing an international network of lawyers.

Although the agreement submitted by the inquirer is extensive, the clear thrust is to establish a system of referring clients to each other, and a method of compensating each firm for its efforts in providing new clients and new work to the other firm. Article V, Incentive Arrangement, section 5.1 of the agreement provides:

The firms believe that each firm will benefit from the growth of the other firm. To provide a system to compensate each firm for its assistance to the other firm in its efforts to develop new work from existing clients and new work from new clients, while exposing neither firm to the risk of excessive burden, the firms have developed the arrangement set forth in this Article V.

Article V proceeds to call for the law firms to "pool" a portion of each law firm's overall net profits to be distributed in accordance with a specified formula unrelated to the amount of business referred by one firm to the other.

[T]he firm has no obligation to reveal to the client the compensation arrangement with the temporary lawyer. RPC 1.5(e), relating to division of a fee between lawyers does not apply in this instance because the gross fee the client pays the firm is not shared with the temporary lawyer. The payments to the temporary lawyer are like compensation paid to nonlawyer employees for services and could also include a percentage of firm net profits without violation of the Rules....Similarly, in ABA Informal Opinion 1440 (1979), a lay office administrator was permitted to share in a law firm's net profits as part of the administrator's compensation. The opinion found that the profit sharing did not constitute dividing legal fees with a non lawyer "because the compensation relates to the net profits and business performance of the firm and not to the receipts of particular fees."

[A] Lawyer shall not compensate or give anything of value to a person or organization to recommend or secure the lawyer's employment by a client, or as a reward for having made a recommendation resulting in the lawyer's employment by a client except that the lawyer may pay for public communications permitted by RPC 7.1 and the usual and reasonable fees or dues charged by a lawyer referral service operated, sponsored or approved by a bar association.

Quite distinct from the concerns of RPC 1.5(e), RPC 7.3(d) bars a lawyer from compensating another for making referrals to that lawyer, except in the case of certain lawyer referral services. As recognized in earlier opinions of this Committee, RPC 7.3(d) is grounded in a concern for protecting the public from various profit-oriented schemes to steer clients to certain lawyers, especially in circumstances where a client is likely to rely on the referral as connoting an endorsement of competence, expertise, integrity or some other positive value. The profit motive beyond such schemes is recognized as undermining the likelihood of independent or disinterested judgements about such positive qualities.

The Committee concludes that under the language of RPC 7.3(d), the agreement does in fact involve an effort to "compensate or give something of value" (i.e., shared profits, "best efforts" to make reciprocating referrals) to an "organization" (i.e., the other law firm) in return for that firm's efforts "to recommend or secure the lawyer's employment ..., or as a reward for having made a recommendation ...." As described above, best efforts to refer clients are the heart of the purpose and affirmative obligations under the agreement. Referrals constitute at least two of the three declared purposes (the third - "developing an international network of lawyers" - either is simply just another way of talking about referrals, or else is not actually addressed anywhere in the substantive provisions of the agreement.