Can a lawyer work with a counterfeit-investigation company that locates infringers, recommends the lawyer, and takes a share of the recovery?

Plain-English summary

ABC Corporation located and investigated counterfeiters of its client's protected designs in exchange for 40% of the amount recovered. The client selected an attorney recommended by ABC in each state, ABC documented the infringement, the attorney (or ABC) sent a cease-and-desist letter, and any recovery was deposited in the attorney's trust account and distributed 40% to the attorney, 40% to ABC, and 20% to the client. The committee was asked whether this violated the Rules, in particular Rule 1.5(c) and Rule 5.4.

The committee said the active involvement of a third party carries a real danger of ethical violations, but identified the conditions under which the representation could proceed. Under Rule 1.2(a), the client, not ABC, must have the ultimate decision on whether to accept a settlement. Under Rule 1.4(a), the lawyer must keep the client informed directly, not merely through ABC. Under Rule 1.5(c), the lawyer must have a written contingent-fee agreement with the client that includes both the lawyer's fee and the fee to be paid to ABC out of any recovery. Under Rule 1.6(a), the lawyer must obtain the client's consent before revealing case information to ABC. Under Rule 5.4(a), a lawyer may not share legal fees with a non-lawyer; the committee treated ABC's payment as a separate expense paid out of the recovery, not part of the lawyer's fee, and warned that an 80% lawyer's fee shared with ABC would violate both 5.4(a) and the reasonableness requirement of Rule 1.5(a). Under Rule 5.4(c), the lawyer must not let a person who recommends him direct or regulate his professional judgment, so case decisions must be made by the client. Finally, under Rule 5.5(b), the lawyer must not assist ABC in the unauthorized practice of law, such as by ABC's preparation of the cease-and-desist letter.

Currency note

This opinion was issued in 1991, before the South Carolina Bar's adoption of the 2005 revisions to the Rules of Professional Conduct. Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Can a lawyer take cases referred by a recovery company that takes a cut of the proceeds?

A: The committee said it is permissible only under specific conditions: the company's share must be a separate expense, not a split of the lawyer's fee (Rule 5.4(a)), and it must be set out in a written contingent-fee agreement (Rule 1.5(c)).

Q: Who must control the case and any settlement?

A: The committee said the client, not the company, must select the lawyer, make the case decisions, and decide whether to settle (Rules 1.2(a) and 5.4(c)), and the lawyer must communicate with the client directly (Rule 1.4(a)).

Q: What are the unauthorized-practice and confidentiality limits?

A: The committee said the lawyer must not assist the company in the unauthorized practice of law, such as drafting cease-and-desist letters (Rule 5.5(b)), and must get the client's consent before sharing case information with the company (Rule 1.6(a)).

Background and rules framework

The opinion applies Rule 1.2 (scope of representation), Rule 1.4 (communication), Rule 1.5 (fees, including the contingent-fee writing requirement in 1.5(c) and reasonableness in 1.5(a)), Rule 1.6 (confidentiality), Rule 5.4 (professional independence, including the fee-sharing bar in 5.4(a) and the no-direction rule in 5.4(c)), and Rule 5.5 (unauthorized practice), each corresponding to the like-numbered Model Rule. The committee allowed the structure only with the client in control and the company's cut treated as a separate, disclosed expense.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 5.4(a) / Model Rule 5.4: a lawyer shall not share legal fees with a non-lawyer.
• South Carolina RPC 5.4(c) / Model Rule 5.4: a lawyer shall not let a person who recommends him direct his professional judgment.
• South Carolina RPC 5.5(b) / Model Rule 5.5: a lawyer shall not assist a non-lawyer in the unauthorized practice of law.
• South Carolina RPC 1.5(c) / Model Rule 1.5: a contingent-fee agreement must be in writing.
• South Carolina RPC 1.6(a) / Model Rule 1.6: a lawyer shall not reveal information relating to the representation without the client's consent.
• South Carolina RPC 1.2(a) / Model Rule 1.2 and RPC 1.4(a) / Model Rule 1.4: the client decides whether to settle, and the lawyer must keep the client informed.

See also

• SC Bar Ethics Op. 01-03: Paying for Internet Leads
• SC Bar Ethics Op. 05-20: Splitting a Contingent Fee

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-91-32/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 91-32

ABC Corporation is in the business of locating and investigating counterfeiters of its client's protected designs in consideration for 40% of the amount recovered at settlement of trial. The client selects an attorney who is recommended by ABC in each state where large quantities of counterfeit merchandise is discovered. ABC locates the infringer and documents the evidence of infringement including purchase of a sample. The attorney then sends, or ABC hand delivers, a pre-designed cease and desist letter to the infringing party. The attorney and ABC then determine a fair damage amount based upon the cooperation of the infringer and the size and/or willfulness of the infringement. Upon settlement or trial of the matter the amount recovered is deposited in the attorney's trust account and is distributed 40% to the attorney, 40% to ABC and 20% to the client.

Question:
Does the attorney's conduct in this matter violate the Rules of Professional Conduct, in particular Rule 1.5 (c) and Rule 5.4?

Summary:
The active involvement of a third party, in this case the ABC corporation, in the conduct of a client's case presents a situation which is fraught with the potential danger of ethical violations. However, if the lawyer in this matter (a) communicates fully with the client concerning the status of the case, (b) obtains the client's consent before revealing information concerning the case to a third party, (c) has written contingent fee agreement which includes not only the attorney's fee but also the client's instructions concerning any payment to the ABC corporation; and if the client, and not the ABC corporation, (a) makes the actual selection of the lawyer and (b) makes the final decisions concerning the conduct of the case including settlement negotiations; and if the ABC corporation (a) refrains from directing or regulating the lawyer's professional judgment in the conduct of the case and (b) refrains from the unauthorized practice of law; if all these conditions are met then the proposed representation could be carried out without violating the Rules of Professional Conduct.

Opinion:
Since the proposed representation involves a third party other than the lawyer and the client it has the potential to be violative of a number of the Rules of Professional Conduct. Rule 1.2 (a) clearly states that "a lawyer shall abide by a client's decision whether to accept an offer to settlement of a matter". So long as the client, and not the ABC corporation, has the ultimate decision on whether or not to accept a settlement offer, there should be no ethical violation.

Rule 1.4 (a) requires a lawyer to communicate with a client concerning the status of a matter. In the proposed arrangement it is important that the lawyer keep the client informed directly, not merely through the ABC corporation.

Rule 1.5 (c) requires that a contingent fee agreement should be in writing and should designate what expenses are to be deducted from the recovery. It is essential that the lawyer should have a written contingent fee agreement with the client which includes, inter alia, both the lawyer's contingent fee as well as the fee to be paid to ABC corporation out of any recovery.

Rule 1.6 (a) requires a lawyer not to reveal information relating to representation of a client without the client's consent. It is incumbent upon the lawyer to obtain the client's consent before revealing information concerning the case to the ABC corporation.

Rule 5.4 (a) states that lawyer shall not share legal fees with a non-lawyer. In the proposed arrangement the fee to be paid to ABC corporation is clearly a separate expense to be paid out of any recovery and not a part of the lawyer's fee. If the lawyer's fee were indeed 80% and it were to be shared with ABC corporation it would be violative not only of Rule 5.4 (a) but also of Rule 1.5 (a) which requires that a lawyer's fee should be reasonable.

A lawyer shall not permit a person who recommends the lawyer to render legal services to another to direct or regulate the lawyer's professional judgment in rendering such services (Rule 5.4 (c)). It is essential not only that the lawyer should communicate with the client concerning the case but also that all decisions concerning the conduct of the case be made directly by the client and not by the ABC corporation.

Finally, Rule 5.5 (b) prohibits a lawyer from assisting a non-lawyer in the unauthorized practice of law. Any attempt by the ABC corporation to engage in the unauthorized practice of law, such as by the preparation of the proposed "cease and desist" letter, could involve the lawyer in an ethical violation.