State Bar Association
sharing between lawyers and nonlawyers; aiding the unauthorized practice of law
Digest: Where an insurance carrier has paid a claimant corporation’s attorney
fees in an arbitration directly to the company’s in-house counsel as attorney
of record, and where the company is entitled to recover reasonable attorney
fees under relevant New York law, the in-house counsel may remit the attorney
fees to the company without violating the rule against fee-sharing.
1. The inquirer is in-house counsel to XYZ
Corporation (“XYZ”), an equipment manufacturer that provides medical equipment
to individuals through prescribing physicians. The physicians typically file a
claim with the patient’s insurance company, seeking payment to XYZ for the cost
of the prescribed equipment under provisions of New York’s no-fault insurance
law and the applicable regulations thereunder.
The insurance company either approves the claim and pays XYZ for the
prescribed equipment, or preliminarily denies the claim, in which event XYZ
contests the denial at an arbitration.
2. The inquirer, an in-house lawyer at XYZ,
handles general corporate matters on behalf of XYZ and also litigates
arbitrations regarding denied insurance claims on behalf of XYZ. XYZ wants its in-house counsel to represent
it at more of these arbitrations instead of engaging outside counsel. XYZ’s
in-house counsel perform no legal work on behalf of third parties. They receive a salary and do not receive any
bonus or other amount relating to the volume or value of successful arbitration
3. If a claimant such as XYZ recovers money
as a result of an arbitration, settlement or award after litigation, the amount
is paid in a bifurcated remittance: (1)
principal and interest on the medical equipment cost denied incorrectly by the
insurance company is paid to XYZ; and (2) attorney fees and, where applicable,
reimbursement of the arbitration filing fee is paid to XYZ’s counsel of
record. The insurance company draws from
no-fault funded accounts to pay the principal and interest, and from a separate
account to cover attorney fees. The
inquirer states that insurance companies generally require the attorney fee
award be issued to the attorney of record, and will not pay the attorney fee
portion directly to the applicant, XYZ company.
4. A. May in-house counsel for XYZ remit the entire
attorney fee portion of the arbitration award to the claimant, XYZ, or would
such a remittal constitute fee-sharing?
B. Would a remittal of attorney fees to XYZ
constitute aiding a nonlawyer (XYZ) in the unauthorized practice of law?
Legal Fees to the Client
5. Rule 5.4(a) of the New York Rules of
Professional Conduct (the “Rules”) prohibits a lawyer from sharing legal fees
with a nonlawyer, except under certain circumstances that are not applicable
here involving deceased lawyers and retirement plans.
6. It is our understanding that, as a
condition to providing medical equipment to an individual, XYZ requires the
individual to assign to XYZ his or her claim against the insurance company by
way of subrogation. Thus, XYZ is the
owner of the claim against the insurance company and is the appropriate “party”
to the claim against the insurance company.
7. This Committee has interpreted the
applicability of the fee-sharing prohibition in Rule 5.4(a) in several
inquiries involving remitting attorney fees to a nonlawyer client or employer.
In N.Y. State 1096 (2016), we concluded that an outside lawyer could permit a
non-lawyer client to keep some or all of the statutory attorney's fees awarded
in a civil rights lawsuit, because the statutory fees were awarded to the
“prevailing party” rather than to the lawyer and therefore did not fall within
the prohibition against sharing legal fees with a nonlawyer. We observed that a lawyer’s decision to
decline or waive the right to some or all of the statutory fees awarded
directly to a client was not the type of fee-sharing encompassed in Rule
5.4(a). The analysis in Opinion 1096
turned in large part on the fact that the statutory attorney fee award was to
the “prevailing party,” and thus to the client rather than directly to the
lawyer. See N.Y. State 1096 ¶7 (citing
various New York State fee-shifting statutes).
Thus, if the client gave any part of the fee award to the lawyer, the
client would be sharing attorney fees with the lawyer, rather than the other
8. In N.Y. State 906 (2012), this Committee
addressed whether an in-house lawyer employed by a not-for-profit organization
that was not a law firm could share legal fees with the not-for-profit. We noted that New York did not adopt ABA
Model Rule 5.4(a)(4), which expressly permits a lawyer to share court-awarded
attorney fees with non-profit public interest organizations where the lawyer
has prevailed in a litigated matter on behalf of the organization, and we
therefore concluded that sharing fees with a not-for-profit is prohibited under
New York's Rule 5.4(a). In
distinguishing Opinion 906, N.Y. State 1096 (2016) explained that, in Opinion
906, the inquirer was a lawyer employed by a not-for-profit organization that
was representing third parties, such as civil rights plaintiffs, and not
representing the not-for-profit organization itself. Thus, in Opinion 906, the
inquirer proposed to share fees not with the client who had won fees for itself
(as in Opinion 1096), but rather with a not-for-profit organization that had
sponsored the litigation on behalf of a prevailing third party.
9. The facts in this inquiry are
distinguishable from those in both Opinion 1096 and Opinion 906. Here, the inquiring lawyer is an in-house
counsel employed by the prevailing plaintiff (unlike the outside lawyer in
Opinion 1096), and in-house counsel litigates the claim on behalf of the for-profit
employer and not on behalf of third parties (unlike the staff lawyers employed
by the non-profit representing prevailing third parties in Opinion 906). In addition, settlements and arbitral awards
are bifurcated into a remittance of the principal and interest on the medical
equipment claim to XYZ, and a separate remittance of attorney fees to the
attorney of record in the proceeding. However, the statute authorizing the
attorney fee award here convinces us that the analysis in Opinion 1096, not
Opinion 906, applies to this inquiry.
10. New York insurance law provides that, where
the claimant proves a valid claim, “the claimant shall also be entitled to
recover his attorney’s reasonable fee for services necessarily performed in
connection with securing payment of the overdue claim ....” N.Y. Ins. Law §5106: Fair Claims of
Settlement (emphasis added).1
Although the inquirer states that the arbitration panel remits payment
of principal and interest to XYZ when XYZ recovers on its claims, and a
separate attorney’s fee check to the attorney of record, the statute provides
that the claimant is “entitled” to the attorney fee award -- not the
attorney. Similarly, the rules of the
AAA for New York no-fault claims governing the form and scope of the award
(which may apply here) separately designate the portion reimbursable to the
claimant for the filing fee, reasonable attorney’s fees, and interest on the
claim. Thus the claimant is entitled to
payment of all components of the award, including the attorney fees,
notwithstanding that the check for attorney fees is made out to the attorney of
record. Because the claimant is entitled
to the attorney fees under both New York Insurance Law and AAA rule, we
conclude that in-house counsel may sign over to XYZ the attorney fee portion of
the award without violating Rule 5.4(a)’s prohibition on fee-sharing.
in Unauthorized Practice of Law
11. The inquirer also asks if turning over the
attorney fee awards here would aid a nonlawyer in the unauthorized practice of
law. Rule 5.5(b) prohibits a lawyer from
aiding a nonlawyer in the unauthorized practice of law. Section 495 of the New York Judiciary Law
generally prohibits a corporation from practicing or appearing as an
attorney-at-law for any person, soliciting any claim, or taking an assignment
of a claim for the purpose of representing any person in the pursuit of a civil
12. Whether particular activity constitutes the
unauthorized practice of law is a legal question that is beyond the
jurisdiction of this Committee. However,
the inquirer may wish to consider two exceptions to the prohibitions of
Judiciary Law §495 that may apply here.
First, Section 495(2) allows a moneyed corporation authorized to do
business in New York to receive an assignment of a claim under a subrogation
agreement. Second, Section 495(5) allows
a corporation to employ attorneys in its own immediate affairs or in any
litigation to which it is a party.
13. Where an insurance carrier has paid a
claimant corporation’s attorney fees in an arbitration directly to the
company’s in-house counsel as attorney of record, and where the company is
entitled to recover reasonable attorney fees under relevant New York law, the
in-house counsel may remit the attorney fees to the company without violating
the rule against fee-sharing.
1See also 11 NYCRR 65-4.6
(Insurance Department regulations providing for limitations on attorney fees
pursuant to section 5106 of the Insurance Law).