Can my firm pay class-action clients a share of the court-awarded attorneys' fees we earned by objecting to a settlement on their behalf?

Plain-English summary

A law firm separately represented several business members of a plaintiff class, who had retained the firm to investigate the fairness of a proposed class-action settlement. The firm's written retainer agreement said the clients would not share in any court-awarded attorneys' fees. The firm filed an objection that revised the settlement and increased the recovery for the whole class, and the court found the firm's work benefitted the class and awarded attorneys' fees to the firm. The revised settlement also gave the named plaintiffs extra amounts in recognition of their expense and inconvenience. After the award, the firm proposed to distribute part of its fee to its own clients in similar recognition of their expense and inconvenience. The court did not authorize or direct that distribution.

The Committee concluded the proposed distribution would violate Rule 5.04(a)'s prohibition on sharing legal fees with a nonlawyer. It acknowledged that one stated reason for the rule (preventing nonlawyers from soliciting clients for lawyers) was not literally present, but found the proposed payment carried a significant risk of a similar evil: by rebating part of a fee awarded for a successful objection, a firm would be holding out the possibility of similar payments in future class actions, encouraging class members to hire the firm to file objections in the hope of a share of any fee award. The absence of a binding agreement to pay a rebate did not remove that encouragement.

The Committee also noted that the court's fee award was meant to compensate the firm for the value it conferred on the whole class, not to pay the firm's clients for raising the objection. If the clients deserved special compensation beyond their enhanced settlement shares, that was a matter for the court to determine; a court-ordered award to the clients would not raise the risks the rule guards against.

Currency note

This opinion was issued in 1998, under the Texas Disciplinary Rules of Professional Conduct that took effect January 1, 1990. Texas did not adopt the ABA's Ethics 2000 revisions; its rules have been amended only piecemeal since (including the March 1, 2005 amendment to the fee rule, Rule 1.04, and the comprehensive 2021 revisions adopted by Texas Supreme Court order). 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 give its clients part of a court-awarded fee as a thank-you for their trouble?

A: The Committee concluded no. It held that distributing any portion of court-awarded attorneys' fees to nonlawyer clients, even framed as recognition of the clients' expense and inconvenience, is prohibited fee-sharing with a nonlawyer under Rule 5.04(a).

Q: Does it matter that the clients had agreed in writing not to share in the fee award?

A: The opinion treated the firm's proposal as arising after the fee award (the retainer had said the clients would not share in court-awarded fees), and it concluded the distribution would violate Rule 5.04(a) regardless, because the conduct itself was the prohibited sharing.

Q: Why did the Committee bar this even though no one solicited clients here?

A: The Committee reasoned that rebating part of a fee awarded for a successful objection would hold out the possibility of similar payments in future class actions, encouraging class members to hire the firm to file objections in hope of a share of any fee award, a risk similar to the one the rule guards against.

Q: Could the clients have been compensated some other way?

A: The opinion observed that any special compensation to the clients for their expense and inconvenience was a matter for the court to determine, and that a court-ordered award to the clients would not involve the risks behind Rule 5.04(a).

Background and rules framework

The opinion interprets Texas Disciplinary Rule 5.04(a) (professional independence of a lawyer; ABA Model Rule 5.4), which provides, with exceptions not relevant here, that a lawyer or law firm shall not share or promise to share legal fees with a nonlawyer. The Committee read the rule's purpose through Comment 1 to Rule 5.04: the limitations exist to prevent lay solicitation of clients for lawyers and to avoid encouraging or assisting nonlawyers in the practice of law.

Citations and references

Rules of Professional Conduct:

• MR 5.4 (professional independence; sharing fees with nonlawyers)
• Texas Disciplinary Rule 5.04(a) and Comment 1

See also

• TX Ethics Op. 531: Corporation Charging Subsidiaries Market-Based Fees for Legal Services
• TX Ethics Op. 558: Paying a Lender a Percentage of a Contingent Fee as Fee-Sharing
• TX Ethics Op. 577: Billing Markup on Outside Lawyer Work as Fee Division

Source

• Landing page: https://www.legalethicstexas.com/resources/opinions/opinion-526/
• Original PDF: https://tcle-web.s3.amazonaws.com/public/documents/Opinion_526.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative. The source text encoded curly quotation marks, apostrophes, and omission marks with unreadable characters; these have been restored as standard quotation marks, apostrophes, and ellipses.

QUESTION PRESENTED

May a law firm, which has received court-awarded attorneys' fees for representing several members of a plaintiff class in a successful attempt to modify the terms of a class-action settlement agreement, distribute to the represented members of the class a portion of the fee awarded?

STATEMENT OF FACTS

Several businesses, which were members of a plaintiff class in a class action, were represented, separately from the class, by a law firm retained by the businesses to investigate the fairness to these businesses of a proposed settlement of the class action. A written retainer agreement between the law firm and the represented businesses stated that the clients would not share in any court-awarded attorneys' fees in the case. The law firm did not represent the class as a whole. The businesses were not owned by lawyers.

After investigation, the law firm filed an objection on behalf of the client members of the plaintiff class. The law firm's representation of the businesses resulted in a revision of the proposed settlement's terms resulting in an increase in the recovery for all members of the class. Counsel for the class and counsel for the defendants agreed, and the court found, that the efforts of the law firm benefitted the class as a whole. Accordingly, the court awarded attorneys' fees to the law firm for its work in the case.

The revised class action settlement, as approved by the court, awarded to the named plaintiffs in the case (which were not clients of the law firm) certain amounts over and above those sums to which these plaintiffs were entitled as general members of the class. This court-approved award was in recognition of the expense and inconvenience the named plaintiffs incurred as parties and as representatives of the class. Because the law firm's clients also incurred the expense and inconvenience of prosecuting their objection (to a successful conclusion and for the benefit of the entire class), the law firm expressed to its clients an intent to distribute a portion of its fee award to these clients in similar recognition, provided such a distribution would be permissible. The idea of such a distribution did not arise until after the court's approval of the revised settlement agreement and the award of attorneys' fees. The court did not authorize or direct that such a distribution be made by the law firm.

DISCUSSION

The proposed distribution appears on its face to be a clear violation of the long-standing rule against a lawyer's sharing legal fees with a nonlawyer. This rule is set forth in Disciplinary Rule ("DR") 5.04(a) of the Texas Disciplinary Rules of Professional Conduct, which provides, with exceptions not here relevant, that "A lawyer or law firm shall not share or promise to share legal fees with a nonlawyer. ..."

However, it is suggested that the reasons supporting this rule do not apply to the facts of this case. The primary reasons for the rule are expressed as follows in Comment 1 to DR 5.04:
The provisions of Rule 5.04(a) express traditional limitations on sharing legal fees with nonlawyers. The principal reasons for these limitations are to prevent solicitation by lay persons of clients for lawyers and to avoid encouraging or assisting nonlawyers in the practice of law. ...
In this case, the first reason cited in the comment does not appear to be involved in the traditional sense in view of the fact that there is no question of a lawyer's paying a share of fees to a layperson for soliciting clients for the lawyer. Nevertheless, the committee believes the proposed disbursement by the law firm involves a significant risk of a very similar evil. By "rebating" a portion of attorneys' fees awarded for a successful objection to a class-action settlement, a law firm would inevitably be holding out the possibility of similar payments in other class actions for class members that might retain the law firm to raise objections to proposed settlements. The fact that there was not in this case, and might not be in future cases, a binding agreement to pay a rebate would not eliminate the encouragement for class members to hire the law firm to file objections in the hope or expectation of a share of an attorneys' fee that might be awarded to the law firm.

In this case, the court's award of attorneys' fees to the law firm was intended to compensate the law firm for the value conferred on the whole class and was not approved as a means of paying the law firm's clients for raising the objection. If the law firm's clients deserved special compensation (over and above their shares of the settlement as enhanced by their successful objection), that was a matter for the court to determine. Any award by the court of compensation to the client businesses would not involve the potential risks that are the reason for the prohibition set forth in DR 5.04(a).

CONCLUSION

Under the Texas Disciplinary Rules of Professional Conduct, a law firm may not distribute to nonlawyer clients a portion of court-awarded legal fees for successful prosecution of an objection on behalf of such clients to a proposed class-action settlement.

Tex. Comm. On Professional Ethics, Op. 526 (1998)