Paying the peddler.

• Author: Hornsby, Will
• Position: THE ETHICAL MARKETER - Column

LET ME START BY APOLOGIZING FOR THE TITLE OF THIS COLUMN TO THOSE FINE PROFESSIONALS IN LAW FIRMS WHO DO BUSINESS DEVELOPMENT. Unfortunately, paying the peddler it is the only alliteration I could come up with. Nevertheless, this column looks at the state ethics rules that set out the boundaries of compensation for law firm employees who are responsible for the sales function.

Two ABA Model Rules govern the flow of money from a law firm to someone who recommends the firm's services, including in-house employees. Rule 7.2 and Rule 5.4 have different rationales and apply under different circumstances, even though they often overlap. Model Rule 7.2(b) prohibits a lawyer from giving anyone anything of value for recommending the lawyer's services. The rule then provides three exceptions. The one relevant to this discussion permits a lawyer to pay the reasonable costs of advertising. Model Rule 7.2 is designed to prohibit what is generically called "ambulance chasing." If a lawyer's agent is compensated for signing up new clients, so the theory goes, it will stir up unnecessary litigation, contribute to fraudulent claims and pander to notions of unjust enrichment. This rationale and disdain for lawyer solicitation goes back to the 19th century, when state barratry statutes criminalized the conduct.

A version of Rule 7.2 is in place in nearly every jurisdiction. Read in its most literal interpretation, the rule forbids a law firm from paying its marketing staff for doing anything more than "advertising" the firm's services. However, in 2002, the ABA amended its comment to the rule to state "A lawyer may compensate employees, agents and vendors who are engaged to provide marketing or client development services, such as publicists, public relations personnel, business development staff and Web site designers."

The comment to Rule 7.2 would seem to create a safe harbor for sales personnel within the firm, or even agents. Indeed, there is no dispute they can be compensated. The problem arises from the other rule that governs the flow of money, Model Rule 5.4. This rule imposes prohibitions on the division of fees between lawyers and lay people. In pertinent part, the rule states, "A lawyer or law firm shall not share legal fees with a non-lawyer, except that: (3) a lawyer or law firm may include non-lawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit-sharing arrangement."

The rationale...