Tuesday, August 29, 2017
Tony Sebok has posted to SSRN Unmatured Attorneys' Fees and Capital Formation in Legal Markets. The abstract provides:
Attorneys in the United States are under increasing pressure to change and adopt practices commonly found in the world of finance and business. Over the past thirty years the bar and legal academics have debated what to do; the focus of this debate has been over changes to MRPC 5.4 to allow partnerships between attorneys and non-lawyers or partnerships owned by non-lawyer shareholders.
One of the reasons attorneys are debating changes in Rule 5.4 is that the practice of law depends on capital, and the old methods for raising capital are no longer sufficient. Rather than raise capital from non-lawyers by partnering with them or selling equity to them, I recommend that attorneys look to their own fees as a source of capital.
I argue that there is confusion among state bar ethics committees and some ethics commentators about whether the sale of future, or unmatured, fees is unethical. The argument that lawyers may not sell unmatured fees is based on the claim that it would be fee-splitting. I argue that those who think that the sale of unmatured fees is fee-splitting are relying on a theory of Rule 5.4 called the Direct Relation Test, which takes as its premise that it is unethical for an attorney to allow a non-lawyer to invest in her productive capacities with the aim of earning a profit. I argue that the Direct Relation Test is incoherent, and cannot be consistently maintained in a system, like ours, that allows attorneys to factor their earned fees. I also argue that the Direct Relation Test is a deontological principle that lacks normative appeal.
I conclude that ethics committees, courts, and legal ethicists should reject the Direct Relation Test and recognize that the sale of unmatured fees is not fee-splitting.