Practice boundaries and structure - Law firm and other forms...

Learning Outcomes

After reading this article, you will be able to identify the rules governing law firm structure, fee sharing, and associations with nonlawyers. You will understand the requirements for forming and naming a law firm, the limitations on business arrangements with nonlawyers, and the ethical rules for selling a law practice. You will be able to apply these principles to MPRE-style questions.

MPRE Syllabus

For the MPRE, you are required to understand the ethical rules governing the structure and operation of law firms and other forms of legal practice. This article focuses your revision on:

• Defining a "law firm" and recognizing its various forms.
• Identifying when lawyers may or may not share fees with nonlawyers.
• Understanding restrictions on partnerships and business associations with nonlawyers.
• Recognizing the rules for naming law firms and use of trade names.
• Applying the rules for the sale of a law practice or practice area.
• Knowing the limitations on contractual restrictions on a lawyer’s right to practice.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is generally prohibited for a law firm?
   1. Sharing legal fees with a nonlawyer office manager as part of a retirement plan.
   2. Forming a partnership with a nonlawyer if any activities involve the practice of law.
   3. Using the name of a deceased partner in the firm name.
   4. Paying a nonlawyer vendor for marketing services.
2. A lawyer wishes to sell only the estate planning portion of her practice and continue practicing probate law. Which is required?
   1. She must cease all legal practice.
   2. She must sell the entire practice.
   3. She must cease accepting new estate planning matters.
   4. She must increase client fees to cover the sale.
3. Which arrangement is permitted under the Model Rules?
   1. A law firm appoints a nonlawyer as executive vice president with authority over legal work.
   2. A law firm pays a nonlawyer employee a bonus based on firm profits.
   3. A law firm allows a nonlawyer to own shares in the firm indefinitely.
   4. A law firm forms a partnership with an accountant to provide legal services.
4. A lawyer agrees not to represent clients in a certain area as part of a settlement. Is this proper?
   1. Yes, if the client consents.
   2. Yes, if the agreement is in writing.
   3. No, such restrictions are prohibited.
   4. No, unless approved by a court.

Introduction

Lawyers must comply with strict rules regarding the structure and operation of law firms and other forms of legal practice. The Model Rules of Professional Conduct set clear boundaries on fee sharing, business associations, firm naming, and the sale of a law practice. Understanding these rules is essential for avoiding discipline and answering MPRE questions correctly.

Key Term: Law Firm
An association of lawyers authorized to practice law, including partnerships, professional corporations, sole proprietorships, and lawyers employed in legal services organizations or legal departments.

Forms of Law Practice

A "law firm" includes any group of lawyers practicing together, whether as a partnership, professional corporation, or other authorized association. Lawyers working together in a legal services organization or a corporate legal department are also considered a law firm for ethical purposes. Whether lawyers constitute a firm depends on how they present themselves to the public and their internal arrangements.

Key Term: Partnership with Nonlawyer
An arrangement where a lawyer and a nonlawyer jointly own or manage a business that provides legal services. This is prohibited if any activities involve the practice of law.

Fee Sharing and Nonlawyer Involvement

Lawyers are generally prohibited from sharing legal fees with nonlawyers. This rule protects the lawyer’s professional independence and prevents outside influence over legal judgment.

Permitted exceptions include:

• Payments to a deceased lawyer’s estate or specified persons as a death benefit.
• Payments to a nonlawyer employee as part of a compensation or retirement plan, even if based on firm profits.
• Payments to a nonlawyer for marketing or client development services, provided the nonlawyer does not recommend the lawyer’s services.

Key Term: Fee Sharing
The division of legal fees between a lawyer and another person. Fee sharing with nonlawyers is generally prohibited, with limited exceptions.

Key Term: Nonlawyer Ownership
Any arrangement where a nonlawyer owns an interest in a law firm, serves as a corporate director or officer, or has the right to direct or control a lawyer’s professional judgment. This is not allowed.

Restrictions on Business Associations

Lawyers may not form a partnership or other business entity with a nonlawyer if any of the activities involve the practice of law. Nonlawyers cannot serve as corporate directors or officers in a law firm or have any right to control a lawyer’s professional judgment. These restrictions prevent nonlawyers from influencing legal services.

Law Firm Names and Trade Names

A law firm may use the names of current or deceased members if there is a succession in the firm’s identity. Trade names are permitted if they are not misleading and do not imply a connection with a government agency or public legal services organization. The name of a lawyer holding public office may not be used in the firm name during any substantial period when the lawyer is not actively practicing with the firm.

Key Term: Trade Name
A name used by a law firm that is not the name of one or more of its members. Trade names are allowed if not misleading and do not imply a government or public connection.

Sale of a Law Practice

A lawyer may sell all or part of a law practice, including goodwill, to one or more lawyers or law firms. The seller must:

• Cease practicing law in the area sold (or entirely, if the whole practice is sold).
• Give written notice to clients about the sale, their right to seek other counsel, and that consent to transfer files is presumed if no action is taken within 90 days.
• Ensure that client fees are not increased due to the sale.

If only an area of practice is sold, the lawyer must stop accepting new matters in that area.

Key Term: Sale of Law Practice
The transfer of all or part of a lawyer’s practice, including goodwill, to another lawyer or law firm, subject to specific requirements under the Model Rules.

Contractual Restrictions on Practice

Lawyers may not enter into agreements that restrict their right to practice after leaving a firm, except for retirement benefit agreements. Similarly, a lawyer may not agree to a restriction on the right to practice as part of settling a client’s case.

Key Term: Restriction on Right to Practice
Any agreement that limits a lawyer’s ability to practice law after leaving a firm or as part of a settlement. Such restrictions are generally prohibited.

Worked Example 1.1

A law firm employs a nonlawyer as office manager and pays her a year-end bonus based on the firm’s profits. She does not direct legal work or own any part of the firm. Is this arrangement proper?

Answer:
Yes. A nonlawyer employee may receive compensation or a bonus based on firm profits, as long as the nonlawyer does not own an interest in the firm or control legal work.

Worked Example 1.2

A lawyer and an accountant form a partnership to offer both legal and accounting services to clients. The partnership advertises legal services to the public. Is this permitted?

Answer:
No. Lawyers may not form a partnership with a nonlawyer if any of the partnership’s activities involve the practice of law.

Worked Example 1.3

A lawyer sells the estate planning portion of her practice to another lawyer but continues to handle probate matters. She accepts a new estate planning client after the sale. Is this allowed?

Answer:
No. After selling an area of practice, the lawyer must cease accepting new matters in that area.

Exam Warning

Be careful: Fee sharing with nonlawyers is only allowed in narrow circumstances. Any arrangement that gives a nonlawyer control over legal work or firm profits outside of a compensation or retirement plan is prohibited.

Revision Tip

Remember, any agreement that restricts a lawyer’s right to practice after leaving a firm—except for retirement benefits—or as part of a settlement is not allowed.

Key Point Checklist

This article has covered the following key knowledge points:

• A law firm includes partnerships, professional corporations, sole proprietorships, and lawyers in legal services organizations or legal departments.
• Fee sharing with nonlawyers is generally prohibited, except for death benefits, compensation or retirement plans, and certain payments for services.
• Lawyers may not form partnerships or business associations with nonlawyers if any activities involve the practice of law.
• Nonlawyers cannot own an interest in a law firm, serve as corporate directors or officers, or control legal work.
• Law firm names may include deceased members but must not be misleading or imply a government or public connection.
• The sale of a law practice or area of practice requires cessation of practice in that area, written client notice, and no fee increases.
• Contractual restrictions on a lawyer’s right to practice after leaving a firm or as part of a settlement are generally prohibited.

Key Terms and Concepts

• Law Firm
• Partnership with Nonlawyer
• Fee Sharing
• Nonlawyer Ownership
• Trade Name
• Sale of Law Practice
• Restriction on Right to Practice