Opinion 190

The purpose of this opinion is to clarify the meaning of the requirement in RPC 1.10(e) that a disqualified lawyer who is screened from participation in a matter is "apportioned no part of the fee therefrom."

Issues:

(A) Recent inquiries from members of the Bar have asked whether RPC 1.10(e) requires a disqualified lawyer who is screened from a particular matter pursuant to RPC 1.10 to exclude from the lawyer’s compensation the "gross fee" received by the law firm in the screened matter, or only the portion of the fee from the screened matter that represents the firm’s "profits."

(B) Inquiries have also been made by members of the Bar as to whether compliance with the notice requirement of RPC 1.10(e)(2)violates the prohibition of communicating with a person represented by counsel contained in RPC 4.2.

Discussion:

A. Interpretation of RPC 1.10(e)

The underlying rationale of RPC 1.10(e)is to allow law firms and their nonscreened lawyers to fully participate in a matter in which the law firm would otherwise be disqualified and to fully participate in the fee from such matter. The rule only prohibits the screened lawyer’s compensation being directly tied to the fee from the screened matter. The comments to ABA Model Rule 1.11 (a), which prohibits a former government lawyer from receiving any "part of the fee" from the screened matter, supports this rationale:

[The rule] do[es] not prohibit a lawyer from receiving a salary or partnership share established by prior independent agreement. [The rule] prohibit[s] directly relating the attorney’s compensation to the fee in the matter in which the lawyer is disqualified. (emphasis added.)

See, Manning v. Fort Deposit Bank, 619 F. Supp, 1327 (WD TN 1985) (wherein the court stated that one of the elements to be considered in evaluating whether the screening procedure is adequate is whether the disqualified lawyer "shares in firm earnings" from the screened matter.)

It is the Rules of Professional Conduct Committee’s opinion that RPC 1.10(e) allows the law firm to pay its costs, expenses, and overhead (including attorneys’ salaries) from the fee received from the screened matter, despite any indirect benefit that a disqualified lawyer may receive from such payments. The disqualified lawyer would be barred from participating in the distribution of the "profit" portion of the fee from the screened matter.

Because there almost as many financial arrangements among law firms as there are law firms, a rule of reason and good faith in calculating the screened lawyer’s compensation must be applied by the law firm, consistent with the purpose and spirit of RPC 1.10(e). As the comments to ABA Model Rule 1.11(a) indicate, the purpose of the rule is to prohibit law firms from including any part of the fee from the screened lawyer in determining the amount of the disqualified lawyer’s compensation, whether such compensation is structured as disguised salary, bonus, or other arrangement.

1. Disqualified Equity-Holding Lawyers

Regarding a personally disqualified partner, shareholder, or other equity-holding lawyer in a law firm, it is the Committee’s opinion that the requirement in RPC 1.10(e) that a disqualified lawyer be "apportioned no part of the fee" from the screened matter means the "earnings" or "profits" received from such matter. The Committee is also of the opinion that a personally disqualified lawyer should not receive less compensation than would otherwise be paid to the disqualified lawyer solely because the law firm takes on the representation of a screened matter.

To illustrate the foregoing, assume that a law firm’s fee from a screened matter is $10,000. Assume further that approximately 30% of the fee represents wages actually paid to firm employees or expenses actually incurred on the matter; another 30% represents a fair apportionment of the firm’s overhead; and the remaining 40% represents earnings or profit on the screened matter. Lastly, assume that the screened partner is normally entitled to receive 20% of firm profits. Thus, the screened lawyer’s share of the firm’s profits would be reduced by 20% of the firm’s profit of $4,000 from the screened matter (i.e., 40% of $10,000) or $800.

2. Associates or Other Non-Equity Lawyers

In the case of a disqualified associate or other non-equity holding lawyer in the law firm, it is the Committee’s opinion that such lawyer may be paid a regular salary, but may not share in any bonus, distribution, or other additional compensation that is directly based upon the fee received from the matter in which the lawyer is screened. A disqualified associate or other non-equity holding lawyer in a law firm may receive a bonus, distribution, or other benefit that is based upon a prior independent agreement or other previously established criteria by the law firm for determining compensation for similarly situated lawyers, provided such compensation does not include any part of the profit from the screened matter.

3. Accounting Obligations

It is the Committee’s opinion that the law firm must put into place such accounting practices and procedures that are necessary to insure that the profits received from a screened matter are identified in such a manner that the personally disqualified lawyer does not share in it. The burden of proof of compliance is upon the law firm.

It is also the Committee’s opinion that the determination of the profit portion of the fees received by the law firm from a screened matter may be made at the end of the law firm’s accounting period. The law firm is not required by RPC 1.10(e) to segregate or otherwise place the "profit" portion of the screened fee into trust, a reserve account, or other such arrangement.

B. Notice Requirements

It is the Committee’s opinion that the notice requirement of RPC 1.10(e) does not violate RPC 4.2 because (1) the notice to be provided to the former client is not the "subject matter of the representation," and (2) the notice is "authorized by law" within the meaning of RPC 4.2 because the Rules of Professional Conduct require it.

[amended 2009]