Fee Arrangements for the Mtv Generation
| Publication year | 2003 |
| Pages | 37 |
| Citation | Vol. 32 No. 10 Pg. 37 |
2003, October, Pg. 37. Fee Arrangements for The MTV Generation
Vol. 32, No. 10, Pg. 37
The Colorado Lawyer
October 2003
Vol. 32, No. 10 [Page 37]
October 2003
Vol. 32, No. 10 [Page 37]
Ethics for Colorado Lawyers Special Issue
Fee Arrangements for The MTV Generation
by Alec Rothrock
by Alec Rothrock
Alec Rothrock, Denver, is a shareholder in the law firm of
Burns, Figa & Will, P.C. - (303) 796-2626 - and a member
of the Colorado Bar Association Ethics Committee
Greta Greyhair's 10:00 a.m. appointment showed up - both
of them - in baggy shorts, black concert-tour T-shirts, and
baseball caps (backwards, of course, in the fashion of the
day). For want of Mountain Dew, Jason and Justin drank
Sprite. Jason did the talking. He explained that, like in the
last few months he and Justin had been making decent money
creating and selling computer games to a few large computer
software companies. Something about swarthy gladiators
spurting blood, and salacious maidens with navel rings
appealed to boys aged 8 to 12. The customers were pleased
with sales. They demanded ever more product from Jason and
Justin
Jason's mother began to worry. Ever since Jason finished
college and moved back home, he rarely emerged from the
basement, where he and Justin had set up shop. She left
sandwiches for them at the top of the stairs. Justin slept on
what they came to call "Justin's Couch" in a
corner of the laundry room - much to the dismay of
Jason's father. He was convinced that most of their
research and development consisted of staring at Internet
porn. Jason and Justin denied it as a gross exaggeration.
More to the point, Jason's father wanted the boys out of
the house, or at least paying rent.
One day, Jason's father suggested that Jason and Justin
form their own company. They might make more money, enough to
put a deposit on an apartment. They should talk to a lawyer.
Jason's father called his brother for the name of the
lawyer who got his brother some money after he choked on a
bone at the Crab Shack. He also got the names of two other
lawyers and gave all three names to Jason. One lawyer
requested a $15,000 retainer. Jason burst out laughing and
hung up. Jason gave up on the second lawyer, who never called
back, despite two voice messages. The third name was
Greta's.
Greta suggested that they set up an LLC. Justin said he liked
rap music. Greta explained the nature of an LLC and its
benefits. Jason and Justin liked the idea and said it sounded
like that was what they wanted. Greta said she charged $210
per hour. Jason asked whether Greta thought the job would
take a full hour. Greta explained that it was not enough just
to form an LLC. There were tax issues, copyright issues,
licensing issues, issues relating to the business
relationship between Jason and Justin, and, possibly, issues
relating to leasing office space and borrowing start-up
money. Greta said a $15,000 retainer was about right. Jason
and Justin stood up to leave. Then Jason asked if Greta could
just take a piece of the LLC as her pay. Greta said she would
think about it and call them back.
Greta called the Colorado Bar Association ("CBA")
and asked for the CBA Ethics Committee Hotline. She got the
names and telephone numbers of two lawyers. The first one was
on vacation, so she called the second one. That lawyer
referred her to CBA Formal Ethics Committee Opinion 109,
"Acquiring an Ownership Interest in a Client"
("Opinion 109").1
Greta read Opinion 109. It endorses and supplements American
Bar Association ("ABA") Formal Opinion 00-418,
"Acquiring Ownership in a Client in Connection with
Performing Legal Services" (July 7, 2000). Greta read
that accepting payment in the form of an ownership interest
in a client's company can be done, provided the lawyer
complies with various Colorado Rules of Professional Conduct
("Colorado Rules" or "Colo. RPC"). Colo.
RPC 1.8(a) forbids a lawyer from entering into a
"business transaction" with a client or acquiring
an "ownership, possessory, security or other pecuniary
interest adverse to a client" unless:
(1) the transaction and terms on which the lawyer acquires
the interest are fair and reasonable to the client and are
fully disclosed and transmitted in writing to the client in a
manner which can be reasonably understood by the client;
(2) the client is informed that use of independent counsel
may be advisable and is given a reasonable opportunity to
seek the advice of such independent counsel in the
transaction; and
(3) the client consents in writing thereto.
These conditions were not particularly onerous, Greta
thought. She wondered whether it mattered how she held the
ownership interest - in her individual name, in the name of
her law firm (a professional corporation), or in the name of
another entity. She concluded that, from the standpoint of
the ethics rules, it probably did not matter. According to
Opinion 109, the "same ethical issues must be addressed
whether the ownership interest is acquired directly by the
lawyer, by the lawyer's firm, or (in taking advantage of
an investment opportunity offered to the lawyer) by an
investment partnership controlled by the lawyer or by members
of the lawyer's firm."2
Nevertheless, if Greta accepted an ownership interest in the
name of her firm, she ran a mild risk of violating Colo. RPC
5.4(d). That rule requires lawyers who practice law through
professional corporations to comply with Colorado Rules of
Civil Procedure ("C.R.C.P.") 265. C.R.C.P. 265
provides that professional companies may be established, and
may exercise their powers and privileges, solely for the
purpose of conducting the practice of law.3 However, Opinion
109 seemed to say that it would not be unethical for her firm
to own the stock as long as its ownership of the stock was
"incidental to the rendering of the professional service
for which it was formed," and did not "rise to the
level of an independent business purpose."4
Greta was more concerned about conflicts of interest. What if
she disagreed with how Jason and Justin ran the company?
However, ABA Opinion 00-418 said that representation of a
company in which the lawyer owns stock "creates no
inherent conflict of interest under Rule 1.7," because
"the lawyer's legal services in assisting management
usually will be consistent with the lawyer's stock
ownership."5
In addition, the amount of stock owned by the lawyer in the
client enterprise is significant in evaluating the potential
for conflict; the smaller the lawyer's ownership
interest, the lower the potential for conflict.6 Opinion 109
recommends that the lawyer disclose the following prior to
the consummation of the transaction:
that there are potential conflicts that may arise resulting
from the lawyer's investment and/or actions as an equity
owner;
that such conflicts may, under certain circumstances, require
the lawyer to withdraw from the representation if those
conflicts rise to the level that continued representation
would violate the Rules of Professional Conduct (Colo.
RPC1.16(a)):
that as an equity owner, the lawyer may in the future vote
her or his equity interest as she or he sees fit in the
lawyer's own self-interest, regardless of the wishes of
the management of the client.7
Opinion 109 also states that, as with...
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