Publication Source: New York Law Journal
Fee-splitting—the term alone sounds ominous. Or perhaps that is simply because the legal profession has very strict prohibitions against splitting fees with non-lawyers. Yet, fee-splitting is not only prohibited for the legal profession, as the prohibition applies to other professions as well. Regardless of the context, it is not permitted, and agreements calling for such a prohibited fee-split are illegal. It is hornbook law that illegal agreements are unenforceable. So what happens when a client seeks to recover damages arising from a breach of such an agreement? Must the client be advised that the courts say 'a plague on both your houses' and sent on their way? The answer is no, or, at least, not necessarily.
While a fee-splitting agreement or issue in a case is unquestionably a serious obstacle with potentially serious ramifications, under certain circumstances such arrangements can be enforced. Careful consideration, however, must be given initially as to what is at stake, the risks involved and the equities at hand. The equitable issue of who, if anyone, is wearing the proverbial 'white hat' and who is wearing the 'black hat' is particularly determinative of whether a court will enforce such an arrangement or leave the parties where it found them.
A Proscribed Practice
Fee-splitting is the practice of a licensed professional sharing with a nonprofessional or entity a portion or, commonly, a percentage of his or her fees received from a client or patient for professional services rendered. The practice is proscribed by law for many professions and is against public policy. New York Educational Law §§6509-a and 6531, along with the Rules of the Board of Regents, 8 NYCRR §29.1, deem it 'professional misconduct' and proscribe such practice for a host of licensed professions, ranging from physicians, dentists and podiatrists to occupational therapists, acupuncturists and chiropractors. As for the legal profession, Rule 5.4(a) of the New York Rules of Professional Conduct mandates that lawyers shall not share fees with a non-lawyer. While the Rules of Professional Conduct do not have the same effect as statutory laws, they are a clear expression of public policy.1
As one would imagine, the policy considerations behind this prohibition are compelling. The government has an interest in guarding against the unauthorized practice of a licensed profession by non-licensed persons.2 The rules and laws also prevent a nonprofessional from having a monetary interest in the outcome of a licensed professional service.3 Allowing a nonprofessional to have such a monetary interest, yet not being constrained by the same ethical rules that professionals typically are, permits the possibility of the nonprofessional improperly influencing the professional's judgment in the rendering of services for patients and clients.4 Accordingly, such rules have the effect of maintaining the integrity of a profession while promoting the paramount concern for the client's or patient's care and interests.
Since such practice is proscribed by law and contrary to public policy, agreements involving fee-splitting are considered 'illegal' agreements.5 Under contract law, agreements to commit an unlawful act or that violate public policy are generally unenforceable.6 As courts have stated, '[n]o court should be required to serve as a paymaster of the wages of a crime, or referee between thieves.'7 Or, as is often said in such instances, the courts 'will leave them where their own acts have placed them.'8 The fact that a defendant may profit because of a court's refusal to intervene is irrelevant.9
Fee-splitting arrangements between professionals and nonprofessionals are a bit unique, however. After all, the statutes and rules prohibiting fee-splitting are generally aimed at regulating a profession and not the public.10 While it is true that ignorance of a law is not a defense, professionals generally do have superior knowledge of the laws and rules governing their profession. This superior knowledge, coupled with the rules against enforcing fee-splitting agreements, creates a ripe scenario for an unsuspecting nonprofessional to be taken advantage of by an unscrupulous professional, leaving the nonprofessional theoretically unable to seek redress from the courts.
The equities of such a case are often quite evident. Indeed, sometimes agreements or ventures that involve fee-splitting are not all that recognizable to the nonprofessional, or even to the professional for that matter. The propriety of an agreement may turn on the simple distinction between paying an employee a fixed salary or bonus derived from income generated by professional fees as opposed to compensation based upon a percentage of the professional fees generated.
For instance, a doctor agreeing with his employee-medical technicians to pay them based upon a percentage of the fees received for tests they performed upon patients has been held to be an illegal fee-splitting agreement.11 So has a law firm agreeing with the office manager of its related debt collection business to share with the manager a percentage of the net profits generated from the collection business in addition to paying the manager a fixed salary.12 Though professional fees are the income source for both a fixed salary and percentage-based compensation, it is the latter's contingent dependency on profit and performance that creates an unacceptable incentive and interest on the part of the nonprofessional in the financial outcome of the professional service being rendered.
But, still, should a nonprofessional be left with no avenue of redress simply because he or she unknowingly entered into such an agreement? While fee-splitting is prohibited, it is generally not a crime. As such, this is where the equities of the case become particularly essential. If the equities are compelling, and it is clear that the nonprofessional was unaware of the illegality of the agreement or at least less culpable than the professional, courts generally are willing to entertain alternative theories of liability, separate and apart from the enforcement of the agreement itself.
Assessing the Equities
As such, when presented with a case involving the enforcement of a fee-splitting agreement, it is important initially to assess the demonstrable equities. The better a plaintiff is able to demonstrate to the court that he or she is wearing the 'white hat,' the greater are his or her chances of having the arrangement enforced in some manner. On the other hand, if the demonstrable facts reveal that the nonprofessional was, in fact, complicit in, or even the instigator of, the illicit arrangement, the likelihood of enforcing the arrangement diminishes substantially.
If the demonstrable facts represent a viable case for enforcement, it is preferable to address the fee-splitting issue directly in the pleadings. First, the defendant-professional may raise the illegality of the agreement as an affirmative defense to the claim, thereby, in essence, using the agreement as both a sword and shield—a sword initially to obtain the benefits of the agreement and, later, using the illegality of the agreement as a shield to prevent the plaintiff's enforcement of the defendant's contractual obligations.13
Second, even if the defendant-professional does not raise illegality as a defense, the illegality of the arrangement is plain on its face and the courts may raise the issue sua sponte.14 Lastly, it will allow the nonprofessional-plaintiff to properly plead the claim from the outset.
Preparing the initial pleading is indeed important. It will allow the plaintiff to cast the opening salvo in the tug-of-war battle over the equities that is essential to the adjudication of the claim. In addition, since the written agreement is unlikely to be enforced by the court, it permits the plaintiff to assert alternative claims for relief. If the equities favor the plaintiff, and the court finds that the nonprofessional is not in pari delicto, or of equal fault, with the professional, courts have been willing to entertain alternative claims in order to accomplish a fair and just result.15
For instance, where the agreement resulted in the nonprofessional rendering services but not being compensated, the courts are willing in certain instances to permit quasi-contract claims such as quantum meruit and unjust enrichment.16 Also, an alternative tort claim for fraud may be viable where the particular facts warrant it.17 Normally such quasi-contract and tort claims would not be viable if the contract governing the obligations of the professional were valid, but the invalidity of the fee-splitting agreement resurrects such claims.18
Nevertheless, these alternative claims may not place the nonprofessional in the same position as if the fee-splitting agreement had been fully performed. For instance, courts may, in equity, use these types of alternative claims to compensate the nonprofessional for the reasonable—as opposed to the agreed upon—value of work performed, or to return the initial capital invested by the nonprofessional in an improper fee-splitting venture, but it may decide not to go so far as to recognize the nonprofessional's contractual right to a percentage of the profits of the professional venture or company into which he or she invested his or her time and money.19
As such, it is important to advise the nonprofessional at the outset of the lawsuit that, if he does prevail, he may not be made whole in relation to the agreement he struck and there may be limitations on the relief awarded. This will assist the nonprofessional in performing the necessary cost-benefit analysis to determine whether proceeding with the claim is worthwhile economically.
Given the uncertainty of the outcome—whether the court will enforce the arrangement and to what extent—there is a strong incentive to settle these types of lawsuits at the outset, and even pre-suit if possible. Indeed, often the professional has an additional motivation to settle: Since these agreements are unlawful and violate professional rules of conduct, it is not uncommon for the courts to refer such matters to the appropriate disciplinary authorities.20
Under the governing statutes and rules prohibiting fee-splitting, such referrals could cost the professionals a lot more than the consideration received from the illegal agreement they entered into, including suspension and revocation of their license.21 And, in the few instances where the agreement does constitute a crime, such as a lawyer splitting a fee with a non-lawyer for referral of business (see N.Y. Judiciary Law §491), a referral to the district attorney's office is also an important consequence for both parties to consider.22
There are ways to assist a client to enforce a bargain of what is otherwise an unenforceable fee-splitting agreement. Like many lawsuits, the outcome is uncertain; however, initially assessing the provable equities of a fee-splitting dispute is particularly essential in assessing the viability of a potential client's claim as the outcome often hinges on whether or not the nonprofessional is less culpable than the professional.
Careful and strategic thought must be given to pleading and prosecuting the matter properly. Winning the war of the equities will likely mean the difference between the court crafting some avenue of redress (short of enforcing the agreement itself) or leaving the parties where their acts have placed them.
Michael J. Antongiovanni is a senior associate at Meyer, Suozzi, English & Klein and a member of its litigation and dispute resolution practice group.
1. Gorman v. Grodensky, 130 Misc.2d 837, 840, 498 N.Y.S.2d 249, 252 (Sup. Ct., N.Y. Co., 1985).
2. NY Eth. Op. 679 (N.Y.St.Bar.Assn.Comm.Prof.Eth.), 1996 WL 421797.
5. United Calendar Mfg. v. Huang, 94 A.D.2d 176, 180, 463 N.Y.S.2d 497, 500 (2d Dept. 1983); see also Ungar v. Matarazzo Blumberg & Associates, 260 A.D.2d 485, 486, 688 N.Y.S.2d 588, 591 (2d Dept. 1999); see also Katz v. Zuckermann, 119 A.D.2d 732, 733, 501 N.Y.S.2d 144, 145 (2d Dept. 1986); see also Rosenberg v. Chen, N.Y. Slip Op. 32218(U), 2010 WL 3384637 (Sup. Ct., N.Y. Co., 2010).
6. Stone v. Freeman, 298 N.Y. 268, 270-271, 82 N.E.2d 571, 572 (1948); see also United Calendar Mfg., 94 A.D.2d 176, 463 N.Y.S.2d 497 (2d Dept. 1983); see also Rasiak v. Gilliam, 2001 WL 36381427 (Sup. Ct., Suffolk Co., 2001); see also Levy v. Richstone, 2008 WL 1923520 (Sup. Ct., N.Y. Co, 2008).
7. Stone, 298 N.Y. 268 at 271, 82 N.E.2d 571 at 572.
9. United Calendar Mfg., 94 A.D.2d 176 at 180, 463 N.Y.S.2d 497 at 500.
10. Gorman v. Grodensky, 130 Misc. 2d 837, 841, 498 N.Y.S.2d 249, 252 (Sup. Ct., N.Y. Co.,1985).
11. Katz v. Zuckermann, 119 A.D.2d 732, 501 N.Y.S.2d 144 (2d Dept. 1986).
12. Gorman v. Grodensky, 130 Misc. 2d 837, 498 N.Y.S.2d 249 (Sup. Ct., N.Y. Co.,1985).
13. See, e.g., Id.
14. See, e.g., Ungar v. Matarazzo Blumberg & Associates, 260 A.D.2d 485, 486, 688 N.Y.S.2d 588, 589 (2d Dept. 1999); see also, e.g., Rasiak v. Gilliam, 2001 WL 36381427 (Trial Order) (Sup. Ct., Suffolk Co., 2001).
15. See Baliotti v. Walkes, 115 A.D.2d 581, 582, 496 N.Y.S.2d 242, 243 (2d Dept. 1985); see also Katz v. Zuckermann, 119 A.D.2d 732 at 733, 501 N.Y.S.2d at 144; see also Rosenberg v. Chen, N.Y. Slip Op. 32218(U), 2010 WL 3384637 (Sup. Ct., N.Y. Co., 2010).
16. See Gorman v. Grodensky, 130 Misc.2d 837 at 841, 498 N.Y.S.2d 249 at 252; see also Katz v. Zuckermann, 119 A.D.2d 732 at 733, 501 N.Y.S.2d 144 at 145; see also Rosenberg v. Chen, N.Y. Slip Op. 32218(U), 2010 WL 3384637 (Sup. Ct., N.Y. Co., 2010); see also Baliotti v. Walkes, 115 A.D.2d 581 at 582, 496 N.Y.S.2d 242 at 243.
17. See Gorman v. Grodensky, 130 Misc. 2d 837 at 841, 498 N.Y.S.2d 249 at 252.
18. See La Rose v. Backer, 11 A.D.2d 314, 320, 203 N.Y.S.2d 740, 746 (3d Dept. 1960) amended, 11 A.D.2d 969, 207 N.Y.S.2d 258 (3d Dept. 1960) and aff'd sub nom. La Rose. v. Backer, 11 N.Y.2d 760, 181 N.E.2d 632 (3d Dept. 1962) (noting that where a contract is unenforceable a claim for quantum meruit may lie); see also Richbell Info. Services v. Jupiter Partners, 309 A.D.2d 288, 305, 765 N.Y.S.2d 575, 589 (1st Dept. 2003) ('a fraud claim may be dismissed as duplicative only as against a defendant against whom the related contract claim is viable').
19. See In re Alu, 302 A.D.2d 520, 755 N.Y.S.2d 289 (2d Dept. 2003) (a claim for quantum meruit entitles the prevailing claimant to the 'reasonable' value of his or her services).
20. See, e.g., Rasiak v. Gilliam, 2001 WL 36381427 (N.Y.Sup.) (Trial Order) (Sup. Ct., Suffolk Co., 2001); see also, e.g., Levy v. Richstone, 2008 N.Y. Slip Op. 31198(U), 2008 WL 1923520 (Sup. Ct., N.Y. Co., 2008).
21. N.Y. Educ. §6511; see also N.Y. Pub. Health Law §230-a.
22. Levy v. Richstone, 2008 N.Y. Slip Op. 31198(U), 2008 WL 1923520 (Sup. Ct., N.Y. Co., 2008).