Rule 5.4—Nonlawyers and Law Firms
I. RATIONALE AND HISTORY
A. Professional Independence
The main purpose of Rule 5.4 is to protect lawyer's independence from nonlawyer influences. This protection involves three prohibitions on nonlawyer involvement in lawyer activities. First, with some exceptions, lawyers may not share fees with nonlawyers. Rule 5.4(a). Second, nonlawyers may not own interests in law firms. Rule 5.4(b), (d)(1). Third, nonlawyers may not have authority to govern law firms or direct lawyers' professional judgment. Rule 5.4(c)-(d).
B. Two Variations From Model Rule 5.4
The Model Rule is identical to Minnesota Rule 5.4, with two minor variations. Minnesota Rule 5.4(a)(5) allows lawyers to pay estates for deceased lawyers' services. Minnesota Rule 5.4(d)(2) allows nonlawyer governance authority of law firms to the extent such governance is allowed under the Minnesota Professional Firms Act. Kenneth L. Jorgensen & William J. Wernz, New Directions in Professional Conduct: The Devil is in the Details, BENCH & B. OF MINN., Sept. 2005, at 14.
C. Profession Changes, Rule Does Not
DR 3-102, 3-103, and 5-107(C) of the 1969 ABA Model Code of Professional Responsibility were similar to current Model Rule 5.4. Although there have been numerous and important changes since 1968 in the ways lawyers work with nonlawyers, these changes are not reflected in Rule 5.4.
D. Rule's Importance and Limits
Rule 5.4 serves important regulatory purposes. However, these are apparently so well understood that Rule 5.4 has not been a frequent subject of discipline or of commentary by the Office of Lawyers Professional Responsibility (OLPR). OLPR's disciplinary attention has centered on fee-splitting prohibitions under Rule 5.4(a). OLPR's regulatory attention has centered on its responsibility for receiving filings under the Professional Firms Act.
E. Related Rules and Authorities
Rule 5.4 is closely related to Rules. The comments to Rule 5.4 are brief and unimportant. The RESTATEMENT (THIRD) OF THE LAW GOVERNING LAWYERS § 10 (2000) follows Model Rule 5.4 fairly closely.
F. The Professional Firms Act
Rule 5.4(d)(2) allows whatever nonlawyer governance authority may be allowed by the Minnesota Professional Firms Act, Minn. Stat. ch. 319B. Consideration of the Act is beyond the scope of this treatise. Since 1973, the Act (or its predecessor) has required law firms organized for limited liability to make annual filings with OLPR. Minn. Stat. § 319B.11 subdiv. 4; R. B. Reavill, To All Professional Corporations Organized to Practice Law, BENCH & B. OF MINN., Dec. 1973, at 9. The Act was extensively amended in 1997. Edward J. Cleary, New Laws for Lawyers, BENCH & B. OF MINN., Oct. 1998, at 32. The OLPR website lists several articles explaining filing procedures and consequences of not filing. Among these is Susan Humiston, Is Your Firm Complying With the Professional Firms Act?, BENCH & B. OF MINN., Nov. 2017. The OLPR website also has a web page, "Professional Firms," under "Lawyer Resources" at http://lprb.mncourts.gov.
II. MULTI-DISCIPLINARY PRACTICE AND OTHER PROPOSED LIBERALIZATIONS
A. Modest Changes
Several attempts have been made to enable nonlawyers to participate more fully in law firms, particularly in law firm ownership. In Minnesota and most states, these attempts have produced some changes, but have fallen far short of their ambitions. In a few other states and in other countries (especially the United Kingdom and Australia), substantial changes have been made.
B. MULTI-DISCIPLINARY PRACTICE
The largest of these proposals was the Multi-Disciplinary Practice (MDP) movement, led by the ABA, to foster more flexibility in law firm structures. As discussion by different states of the ABA MDP proposals crested near the beginning of this century, the "dot.com" bubble burst, and corporate scandals erupted, including those involving Enron and its accountants, Arthur Andersen. The MDP movement foundered, for at least two reasons. First, the large accounting firms that had championed MDP did not make themselves welcome by involvement in corporate scandal. Second, the magnitude of scandal, and the failure of professionals, including lawyers, to prevent corruption, suggested that relaxation of professional standards was not desirable. The Minnesota Supreme Court rejected proposals for accepting some of the ABA MDP recommendations.
C. Articles
Excellent discussions of these developments are found in the following articles. Edward J. Cleary, Multidisciplinary Practice: Minnesota Moves Forward, BENCH & B. OF MINN., Oct. 2001, at 14; Edward J. Cleary, Multidisciplinary Practice & Professional Independence, BENCH & B. OF MINN., Sept. 1999, at 18; Kent A. Gernander, 20/20 Vision, BENCH & B. OF MINN., Jan. 2010, at 22.
D. MDP Cousins
The ferment involving lawyers working with nonlawyers produced two regulatory changes. First, Rule 5.7, "Responsibilities Regarding Law-Related Services," specified that lawyers would be subject to the Rules when working with nonlawyers, and providing services related to legal services. In Minnesota, several law firms provide law-related services, but the scale of these services is modest. Examples of law-related services include lobbying, trust administration, and employment counseling. Second, Rule 7.2(b)(4), adopted in 2005 and based on a Model Rule, regulated reciprocal referral agreements, including agreements with nonlawyers.
III. WHO IS A LAWYER OR NONLAWYER?
A. Foreign Lawyers
ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 01-423 (2001) takes the position that lawyers licensed and trained in a foreign country are not nonlawyers under Rule 5.4. Therefore, American lawyers may form partnerships with them. Rule 11, R. Bd. Law. Exam., titled, "License for Foreign Legal Consultants," prescribes the conditions and limitations for foreign lawyers to offer services in Minnesota.
B. Restricted CLE Status
A lawyer on restricted status is still a lawyer. Minn. R. State Bd. of Continuing Legal Educ. 12 makes this clear by referring to, "a lawyer on restricted [CLE] status."
C. Statutory Provisions
1. Minn. Stat. § 319B.08 subdiv. 1 provides that an owner's ownership interest must be acquired by the firm within ninety days after becoming "disqualified to practice all the pertinent professional services." If this does not occur, the firm automatically loses its status under the Professional Firms Act, its authority is terminated and it is governed as a business entity. If the firm's name includes the word "professional" or an abbreviation thereof, that part of the name must be eliminated.
2. Minn. Stat. § 319B.02 subdiv. 17 defines "professional" as one "licensed by the laws of the state of Minnesota or similar laws of another state to furnish one or more ... professional services ... . Professional includes a natural person who is licensed or otherwise authorized to practice law under the laws of a foreign nation".
D. Suspended Lawyer
It appears that a lawyer suspended for at least ninety days cannot continue to own shares in a law firm corporation. In one case, the Supreme Court found in unnecessary to address this issue, even though a one-year suspension was imposed. The suspension was, quite unusually, imposed retroactively, with fewer than ninety days remaining at the time of the suspension order. In re Perl, 407 N.W.2d 678, 682 (Minn. 1987).
IV. RULE 5.4(a) GENERALLY PROHIBITS FEE SPLITS WITH NONLAWYERS
A. Long-Established Prohibition
Fee-splitting with nonlawyers has been prohibited for over a century. Model Code Prof'l Resp. DR 3-102 (1969); ABA Canons Prof'l Ethics 33-35 (1908). Under the doctrine of "champerty," the law also prohibited sharing litigation proceeds with nonlawyer financiers of litigation. Hackett v. Hammel, 185 Minn. 387, 241 N.W. 68 (1932); Huber v. Johnson, 68 Minn. 74, 70 N.W. 806 (1897). Although the doctrine of champerty was abolished in 2020, the prohibition on fee-splitting remains. Maslowski v. Prospect Funding Partners, LLC, 944 N.W.2d 235 (Minn. 2020).
B. Policy
The ABA has stated a policy reason for prohibiting fee-splitting with nonlawyers: "[F]ee splitting between lawyer and layman ... poses the possibility of control by the lay person, interested in his own profit, rather than the client's fate ... ." ABA Comm. on Ethics and Prof'l Responsibility, Formal Op. 95-392 (1995) (quoting Emmons,...
