B&L urges Pa Supreme Court to Protect Innocent Non Lawyers in Fee Sharing Agreements
Law360, Philadelphia (March 20, 2017, 7:13 PM EDT) — Pennsylvania’s highest court has been urged to bar Barrack Rodos & Bacine from using state legal ethics rules to get out from under an oral fee-sharing agreement it entered with a non-attorney consultant who claims the firm owes him $1.5 million for work on a securities case.
A brief filed with the state’s Supreme Court by the aggrieved consultant on Wednesday argued that a decision voiding his contract under rules that bar lawyers from sharing fees with laypeople had essentially allowed BRB to reap a benefit by engaging in unethical behavior.
“Pennsylvania law cannot allow BRB to reap a windfall by duping a non-attorney into entering a compensation plan rendered unenforceable as a result of BRB’s ethical malfeasance,” the brief said. “Equity, fairness, and public policy cannot allow an attorney to induce a non-attorney to enter an agreement that the attorney knows is barred by the specialized rules of the legal profession, accept valuable services from that non-attorney, and disclaim any responsibility to make payment for those services on the basis that the agreement is void against public policy.”
The justices took up the case in February after two lower courts found that Pennsylvania’s rules of professional conduct barred Scott Freda, the owner of SCF Consulting LLC, from enforcing a contract that would have allowed a share of the profits for assisting BRB with a securities case on behalf of institutional investors.
SCF alleged in a February 2015 lawsuit that, after more than a decade of service under the fee-sharing arrangement, the firm ceased honoring the contract and denied it compensation for work performed on a case that yielded a nearly $200 million settlement.
According to court records, Freda had an oral agreement that called for a fixed consulting fee plus 5 percent of profits on cases he originated and 2.5 percent of profits on cases he worked on that were originated by other members of the firm. Freda says the firm owes him $1.5 million as a result of its breach of contract.
A Philadelphia County judge, however, granted preliminary objections in April 2015 after finding that the profit-sharing arrangement was not enforceable under Rule 5.4 of the state’s professional conduct code.
That rule, with certain exceptions, bars lawyers and law firms from sharing legal fees with a nonlawyer.
Freda argued on appeal that he fit into one of those exceptions allowing a law firm’s nonlawyer employees to be included in a compensation or retirement plan based in whole or in part on a profit-sharing arrangement.
A three-judge Superior Court panel issued a split decision in July, however, concluding that Freda was not eligible for the exception because he was not an employee of the firm.
The brief filed on Wednesday argued that appellate courts across the country had ruled that it was unethical to prevent innocent parties from enforcing contracts that attorneys had entered into in violation of ethics rules.
“Those courts have held that where an attorney induces an non-attorney into entering an agreement that violates [ethics rules], the non-attorney is entitled to enforce that agreement against the attorney as long as the non-attorney is not [at equal fault,]” the brief said.
An attorney for BRB did not immediately return a message seeking comment on Monday.
SCF is represented by Gavin Lentz and Peter Bryant of Bochetto & Lentz PC.
Barrack Rodos & Bacine is represented by Raymond Quaglia and Matthew Vahey of Ballard Spahr LLP.
The case is SCF Consulting LLC v. Barrack Rodos & Bacine, case number 7 EAP 2017, before the Pennsylvania Supreme Court.