Lawyers for a Philadelphia securities litigation firm and a consulting company sparred Tuesday over who should suffer the losses when a payment arrangement between the two is alleged to be improper.
Arguing before the Pennsylvania Supreme Court in SCF Consulting v. Barrack, Rodos & Bacine, a lawyer for SCF Consulting said his client should not be punished for a fee arrangement if the nonlawyer was unaware of the limitations set by Rule of Professional Conduct 5.4.
“An inquiry needs to be made as to what it is the nonlawyer understands the arrangement to be,” said George Bochetto of Bochetto & Lentz, who represented SCF. He said his client was not aware that the fee arrangement was impermissible.
In a nonprecedential ruling issued last year, a Superior Court panel ruled 2-1 that SCF was not entitled to an allegedly promised cut of the firm’s profits from cases it worked on because that type of fee-splitting agreement violates state ethics rules. In its appeal to the state’s highest court, SCF argued that it’s entitled to be paid under the alleged agreement even if the agreement violated the Rules of Professional Conduct.
Raymond Quaglia of Ballard Spahr, who represents Barrack, Rodos & Bacine, said they “vigorously dispute there was any deal.”
During Bochetto’s argument, Justice Christine Donohue pointed out that the case involves a “pure commercial deal” between an attorney and a referred nonlawyer. In that case, she said, the court should only seek a resolution that protects the client.
Bochetto said other policies are at issue as well. He said lawyers are bound to be honest in their dealings with laypeople, and therefore should face the consequence if they fail to follow through with a fee agreement.
Justice David Wecht suggested that Disciplinary Board actions could deter lawyer dishonesty, but Bochetto said that may not be enough. Even if a contract is not found to be valid, he said, the nonlawyer should be entitled to equitable relief.
Quaglia said, even though there was no fee-sharing deal between SCF and Barrack Rodos, a nonlawyer party to such a deal should only be entitled to recovery in “truly extreme occasions.”
Despite Quaglia’s contention about the alleged agreement, Justice Kevin Dougherty suggested the two firms had consistently conducted business together, and it wasn’t until the firm won a major verdict that there was any problem with fees.
Quaglia said SCF was entitled to a flat fee and any bonus was discretionary. A percentage was not in place, he said.
But Justice Max Baer posed a hypothetical question involving a law firm that hires a nonlawyer “stringer.”
“What public policy is served by the law firm keeping the money and the stringer getting nothing?” Baer asked.
“The stringer doesn’t do it again,” Quaglia said.
At the Superior Court level, Senior Judge James J. Fitzgerald III, writing for the majority, said the alleged arrangement in which Scott C. Freda—SCF Consulting’s sole member—was to receive 5 percent of the firm’s annual profits generated by cases he assisted with violated Rule 5.4, which bars, with few exceptions, attorneys from sharing legal fees with nonlawyers.
According to the opinion, SCF alleged it was induced by Barrack Rodos to work exclusively on the firm’s behalf in securities class actions in exchange for both a fixed annual consulting fee and a 5 percent cut of any profits gained from cases SCF worked on.
SCF alleged that the firm subsequently refused to make the profit-share payments, however, according to the opinion. Following discovery, the firm moved for summary judgment and Philadelphia Court of Common Pleas Administrative Judge Gary S. Glazer granted the motion, finding that the fee-sharing aspect of the alleged payment arrangement ran afoul of Rule 5.4.