Can a lawyer who runs or works with an R&D tax-credit business pay or receive referral fees from lawyers and from the business?

Plain-English summary

A New York patent attorney wants to start or work with a business that advises clients on, and prepares, IRS research-and-development tax-credit applications, services that licensed non-lawyer Enrolled Agents may also perform. Because the same factors that determine patentability also determine tax-credit eligibility, and some tax-credit clients would also be the lawyer's law-firm clients, the lawyer asked whether the lawyer's own firm ("RD1") could pay referral fees to lawyers who refer clients, and whether the lawyer could receive a referral fee from a separate firm ("RD2") as either an employee or an unaffiliated referrer. The committee answers only as to the lawyer's own conduct.

For the lawyer-owned firm, the committee finds the tax-credit services are not distinct from the lawyer's legal services under Rule 5.7(a) (same operative facts as the patent work) and would be the practice of law when performed by a lawyer (N.Y. State 779), so the Rules apply to them, including Rule 1.7's conflict analysis for dual practice. Rule 7.2(a) then bars paying for client referrals except through a Rule 5.8 contractual relationship (inapplicable; a tax-credit business is not a listed non-legal professional service, and 5.8 bans paying for the referral anyway) or a Rule 1.5(g) fee division (inapplicable; the proposal is a bare referral, not proportional to work, and the referring lawyers would not assume joint responsibility). So RD1 may not pay lawyer referral fees.

For the non-lawyer-owned firm, the answer turns on the lawyer's role. As an employee doing purely marketing work that is not the practice of law, the lawyer could receive a referral fee; but if the marketing involves applying law to facts so as to be the practice of law, the lawyer could not be employed by a non-lawyer-owned entity at all (citing BCL section 1503, Judiciary Law section 495, and Rule 5.4(d)). As a non-employee, the lawyer may receive a referral fee even when making the referral is the practice of law, provided the lawyer is not otherwise involved in or benefiting from the underlying transaction and obtains the client's informed consent under Rule 1.8(f); if the lawyer is involved in the underlying transaction, the lawyer must advise the client of the arrangement and credit the client with the referral fee (citing N.Y. State 845 and related opinions, and distinguishing 1086 and 981).

In practice

Under this opinion, a lawyer building a side tax-credit business cannot use it to pay lawyers for client referrals unless the payment fits Rule 1.5(g)'s proportional-services or joint-responsibility requirements or another Rule 7.2 exception, because the work is treated as legal services. The opinion holds a lawyer can take a referral fee from a non-lawyer-owned tax-credit firm only if the lawyer's role there is not the practice of law (otherwise the non-lawyer-ownership bars apply), and that an unaffiliated lawyer-referrer may take a referral fee under Rule 1.8(f) when not involved in the underlying transaction, but must disclose and credit the fee to the client when the lawyer is involved.

Common questions

Q: Can a lawyer's own tax-credit business pay referral fees to lawyers who send clients?

A: Per the opinion, no, unless the payment satisfies Rule 1.5(g) (proportional services or written joint responsibility) or another Rule 7.2 exception. A bare referral fee does not qualify, and the tax-credit work is treated as legal services subject to the Rules.

Q: Can the lawyer take a referral fee as an employee of a non-lawyer-owned tax-credit firm?

A: Per the opinion, only if the lawyer's activities there are purely non-legal (such as drafting marketing copy). If they amount to the practice of law, the lawyer could not be employed by a non-lawyer-owned entity at all under BCL 1503, Judiciary Law 495, and Rule 5.4(d).

Q: Can an unaffiliated lawyer take a referral fee from the tax-credit business?

A: Per the opinion, yes, if the lawyer is not involved in or benefiting from the underlying transaction and obtains the client's informed consent under Rule 1.8(f). If the lawyer is involved in the transaction, the lawyer must disclose the arrangement and credit the referral fee to the client.

Background and rules framework

The opinion applies New York Rule 7.2 (no paying for client referrals, with exceptions), Rule 1.5(g) (fee division between unaffiliated lawyers), Rule 5.7 and 5.8 (responsibilities for and referrals to non-legal services), Rule 1.7 (dual-practice conflicts), Rule 1.8(f) (compensation from one other than the client), and Rule 5.4(d) (no practice in a non-lawyer-owned entity). These correspond to ABA Model Rules 7.2, 1.5, 5.7, 1.7, 1.8, and 5.4.

Citations and references

Rules of Professional Conduct:

• New York Rules of Professional Conduct 7.2(a); 1.5(g) (and Comment [7]); 5.7(a); 5.8; 1.7(a) (and Comment [10]); 1.7(b)(4); 1.8(f); 5.4(d)
• ABA Model Rules 7.2, 1.5, 5.7, 1.7, 1.8, 5.4 (analogues)

Statutes:

• New York Business Corporation Law section 1503; New York Judiciary Law section 495 (bars on non-lawyer ownership of law practice)

Other opinions cited:

• N.Y. State 779 (2004); 1135 (2017); 1155 (2018); 1015 (2014); 206 (1971): dual practice, distinctness, and practice-of-law
• N.Y. State 845 (2010); 1086 (2016); 981 (2013); 667 (1994); 626 (1992); 576 (1986); 461 (1977): referral fees from non-legal service providers under Rule 1.8(f)

See also

• NY State Bar Op. 1166: Lawyer-Owned IP Consulting Firm, Fee-Sharing, and Supervision
• NY State Bar Op. 1196: Referring a Client to a Sibling-Owned Litigation Funder
• NY State Bar Op. 1172: Retired Lawyer's Referral Fee on Transferred Wills

Source

• Landing page: https://nysba.org/ethics-opinion-1162/