Fees – Donating a Percentage of an Attorney’s Contingency Fee to Charity Directly from the Proceeds of a Monetary Settlement

You have asked our opinion on the propriety of donating a percentage of your contingency fees to charity. Instead of giving a donation independent of your compensation in a given case, you wish to generate goodwill by letting your clients know of your firm’s commitment to the community and desire to “give back” a portion of the fee earned.

To punctuate this message, you would revise your retainer agreement to request the Client’s consent to the donation and, if the Client so desires, to select the recipient from a small list of eligible charities. Your proposed language would tell the Client that your firm “is willing to donate 1% of the above-referenced attorneys’ fees to one of these charities,” but emphasize that the “donation will only be made with the consent of the Client.” If approved, this 1% donation would appear on the Disbursement Sheet both as a reduction of the attorneys’ fee and as a corresponding donation to be paid from the settlement proceeds.

Recognizing restrictions on fee splitting, your retainer agreement states that this is not intended to be an improper fee sharing arrangement as the charity is unaware of this arrangement, has played no part in the selection, and has provided no service. Your agreement also promises that the Client’s identity and information would remain confidential and would not be revealed to the selected charity.

We would not discourage any lawyer from donating a portion of their income to charity. Nor would we begrudge you the goodwill emanating from your generosity. But no matter how laudable your intentions may be, funding this program from proceeds held in your trust account presents significant ethical issues.

Despite your representation that “the full fee would be earned by our law firm, and we would then donate 1% of that fee to the chosen organization,” your proposed Disbursement Sheet would instead show “a reduction of the attorneys’ fee and a corresponding donation to the charity to be paid directly from the settlement proceeds.”

These seemingly irreconcilable statements lack the clarity required of written contingency fee agreements, and disbursements subject to them. See MARPC 1.5(c). If you are truly reducing your attorneys’ fee by 1%, the Client must get the benefit of that discount and credit for the contribution of funds paid at his or her direction. Conversely, if you are not reducing your fee and you are claiming all of it as income, you must separate your own funds from those belonging to the Client or to third parties. See MARPC 1.15(a) (“hold property of clients or third persons that is in an attorney’s possession in connection with a representation separate from the attorney’s own property”). The best way to accomplish that is to take the full fee into your operating account and to disburse from there.

Unfortunately, if you do take the full fee, you have arguably taken possession of funds which belong to another in violation of the Rules of Professional Conduct. Since the Client signed an agreement directing you to pay the designated organization from the proceeds of settlement, the charity would have an interest in these funds. “Upon receiving funds or other property in which a …third person has an interest,” MARPC 1.15(d) requires that you “promptly notify the … third person” and promptly transmit these funds. Because your retainer agreement would require that this donation be “paid directly from the settlement proceeds,” any undue delay in remitting them would violate your ethical duty to the charity itself.

This same provision may compromise the confidentiality of the settlement itself. As a “third person” entitled to these funds, Rule 1.15(d) would permit the charity to obtain “a full accounting regarding such property.” To the extent that the charity may be deemed a third party beneficiary of your retainer agreement, you would give an organization having nothing to do with the case a right to verify the method by which its donation has been calculated and review all disbursements and fees.

Though it is unlikely that these charities would demand such an accounting, it is quite likely that these organizations will learn of your program and of the cases funding it. Given the small number of eligible charities who may benefit, frequent payments from settlement proceeds will promote the fact that your firm is tithing a percentage of its fees. Indeed, it would not take a mathematician to deduce that a $333.33 donation drawn on your attorney trust account sprung from a $100,000.00 settlement.

At bottom, you cannot build goodwill by keeping your generosity a secret. Since you are “giving back” to the same community in which many of your clients reside, you should expect that clients will discuss this arrangement with others, including those connected with their chosen charity. This may be an excellent way to build goodwill. But tying it to the proceeds of specific cases would unnecessarily jeopardize the secrecy of information relating to the Client’s representation under MARPC 1.6(a).

Given the goodwill you will generate, these charities or persons connected with them may be more inclined to recommend your firm. While MARPC 7.2(c) forbids you from giving “anything of value to a person for recommending the attorney’s services,” it would not be fair to characterize your program as an exchange which implicates this provision. Indeed, the affinity generated from charitable donations may provide both intangible and tangible rewards without presenting ethical concerns.

Since the charity benefitting from the program will have no control over case management or selection, we do not view a donation equivalent to a percentage of your overall fee as impermissible “fee splitting” under MARPC 5.4(a) (an “attorney or law firm shall not share legal fees with a non-attorney”). In this context, we do not believe that the proposed donations would impair your professional independence as an attorney in a manner that would violate this provision.

In conclusion, the Committee believes that you may donate funds equivalent to a percentage of your income without violating rules against referral fees or fee splitting. However, we believe it would be improper to:

  1. Make these donations from funds held in your attorney trust account;
  2. Make the charitable organization a third party beneficiary of your attorney-client relationship or include language which could be construed as entitling the charity to a disbursement of settlement funds; or
  3. Revise your retainer agreement, or create separate forms, to seek the Client’s “consent” to your firm’s charitable donations or to direct such disbursements at the conclusion of a case.

To avoid confusion in the disbursement process, you should separate earned fees from client funds by transferring them into your operating account in compliance with MARPC 1.15. Once received, you may make the desired contribution. It would not necessarily be improper to let the Client designate certain charities, but we would discourage the practice nonetheless. By permitting such designations, especially those memorialized in writing, you assume contractual obligations which may trigger some of the same concerns addressed above.

As your stated objective is to “give back” to your community, we believe that you may avoid these issues by generally informing your clients of your charitable practices, discussing your firm’s history of generous donations to certain causes, or indicating the amount that you have raised in the past. By promoting this program without written contractual commitments, you may raise money for charity without raising ethical concerns.