State Bar of California Board of Trustees Approves Minor Amendment to Rule of Professional Conduct 5.4; Submits to Supreme Court of California

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By Kirstin Jensvold-Rumage

At the State Bar of California Board of Trustees meeting on September 24, 2020 [Agenda Item 54-123], the Board approved an amendment to California Rule of Professional Conduct 5.4, as proposed by the Task Force on Access Through Innovation of Legal Services (ATILS), and will submit the recommended amendment to the Supreme Court of California for final approval. [25:2 CRLR 88–90]  At the time the task force was convening, Rule 5.4 current rule permitted fee-sharing between a lawyer or a law firm and a nonprofit organization only if the fee shared came from a court-awarded fee.  The new amendment expands possible fee-sharing by permitting a lawyer to share a legal fee where the fee arises from a settlement or other resolution of the matter, provided, among other things, that the recipient qualifies as a non-profit under section 501(c)(3) of the Internal Revenue Code. According to the staff memo, ATILS recommended the amendment because it would “directly enhance the ability of a nonprofit legal services organization to expand its activities and funding options through sharing in legal fees that are achieved through a settlement.”

The path to this amendment began in October 2018, when the Board of Trustees launched the ATILS Task Force to identify possible regulatory changes to enhance the delivery of and access to legal services. [25:2 CRLR 88] [24:2 CRLR 119] In July 2019, the ATILS Task Force issued for public comment sixteen options for innovation in the delivery of legal services. After review of public comment, the final seven recommendations were presented to the Board, including the amendment to Rule 5.4.

The Board initially approved the ATILS Task Force recommendations for amendments to Rule 5.4 in a meeting on March 12, 2020, releasing the amendment for a 60-day public comment period, and directing the State Bar Committee on Professional Responsibility and Conduct (COPRAC), which provides opinions on issues involving professional ethics, to receive and review the public comments submitted.

Following the initial public comment period, which expired on May 18, 2020. COPRAC determined that the sharing of non-court-awarded fees with a nonprofit organization merited its own subsection to the rule (a)(6), and the Committee also suggested that additional language be added to the rule to ensure additional safeguards.  Specifically, COPRAC recommended that the rule require that the lawyer enters into a written agreement with the nonprofit organization to divide the fee; the lawyer to obtain written consent from the client after a full written disclosure regarding the division of fees, including the identity of the nonprofit organization to benefit from the fee share; and that the total fee charged by the lawyer would not be increased solely by reason of the agreement to divide fees. The Board of Trustees accepted these proposed amendments and re-released the rule for an additional comment period ending on August 28, 2020.

As set forth in the September 24, 2020 staff memo, public comment on the amendment included concerns of “unscrupulous referral activity” between non-profit organizations and lawyers, such as repeated referrals from a non-profit to the same attorneys and firms. Other commenters noted the amendment might incentivize non-profits looking for operating funds to pressure a client and attorney to premature settlement. However, the memo notes that the amendment to Rule 5.4 does not change the current restrictions on a lawyer paying compensation to a person or entity that is conducting a referral business. Following consideration of all public comments received, the COPRAC opted to leave the text of the proposed rule unchanged and instead add clarifying revisions to the comments, and the Board of Trustees voted to adopt the recommended amendment without further revision.

This amendment will become binding and operative once approved by the Supreme Court of California. At this writing, the Supreme Court of California has not approved the amendment.

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