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Trotter v. Nelson
684 N.E.2d 1150 (Ind. 1997)
Selby, J.
This is an interlocutory appeal from the Noble Superior Court. The
issue before this Court is whether the trial court erred in denying attorney Stephen
Trotter's ("Trotter") motion for partial summary judgment regarding an alleged
agreement with non-attorney Lesa Nelson ("Nelson") whereby Nelson claims she was
to receive money for referring clients to Trotter. The Court of Appeals affirmed the trial
court's decision, holding that the alleged agreement was not unenforceable as a matter of
law." Trotter v. Nelson, 657 N.E.2d 426 (Ind. Ct. App. 1995). The question which we
must answer is whether a referral fee agreement between an attorney and a non-attorney
employee is against public policy and, therefore, unenforceable. We earlier granted
transfer and now hold that the alleged agreement is against public policy and is
unenforceable.
FACTS
This case concerns a disagreement concerning the amount that an
employer owes to a former employee for her past services. Stephen Trotter is a licensed
attorney who practices in Fort Wayne, Indiana. Lesa Nelson is a former employee of
Trotter's. She worked for Trotter from July 1986 through the end of 1989. Although the
record is unclear as to a specific job title or description, Nelson began her employment
in what was essentially a clerical capacity and her duties and responsibilities enlarged
over time. Nelson was not educated or trained as a lawyer and does not hold a license to
practice law.
Nelson initiated this suit because she believed that Trotter had not
fully compensated her for the work that she had done. One of her allegations is that she
and Trotter had an agreement, beginning in early 1987, whereby she was to receive five
percent of any fees which resulted from a personal injury or worker's compensation case
that she had a role in referring to Trotter. There is no written recording between the
parties as to the alleged agreement. n2
At trial, Trotter moved for partial summary judgment on the alleged
agreement. Trotter argued that the alleged agreement did not exist, and, even if it did,
it was against public policy and therefore unenforceable. The trial judge denied the
motion. The court concluded that "material issues of fact exists concerning the
parameters of the agreement or understanding between Plaintiff and the Defendant on the
payment of periodic bonuses or referral fees."
DISCUSSION
. . .
Trotter's argument at trial and on appeal is that, even assuming that
the agreement existed, such an agreement would be contrary to public policy and thus
unenforceable. Trotter notes, and we agree, that the alleged agreement as described by
Nelson is a referral fee agreement. The alleged agreement would require Trotter to pay
Nelson "five percent of the attorney's fees realized by [Trotter], on certain
personal injury cases directed by or through [Nelson] to his office" if any of those
cases resulted in attorney's fees for Trotter. (R. at 32.) This agreement, Trotter argues,
violates Indiana Rules of Professional Conduct 7.3(f). Because the alleged agreement
violates the Professional Conduct Rules, Trotter concludes, it violates the public policy
of Indiana and is unenforceable, and, thus, the trial court erred in denying his motion.
Nelson, on the other hand, argues that the alleged agreement is not a
referral fee agreement. Rather, she counters, the agreement is a profit sharing plan which
is permitted by Conduct Rule 5.4(a)(3). Thus, she concludes, the agreement is not against
public policy and it is enforceable, and the trial court was correct to deny the motion
for summary judgment.
I. Public Policy
Indiana courts have long recognized and respected the freedom to
contract. We recognize a "very strong presumption of enforceability of contracts that
represent the freely bargained agreement of the parties." However, in certain
circumstances a court may declare an otherwise valid contract unenforceable if it
contravenes the public policy of Indiana. Id.
Public policy is a term not easily defined. In the past, Indiana courts
have noted that we first look to the Constitution, the legislature, and the judiciary for
explicit declarations of public policy. In the absence of such a declaration, we
would next look to whether it can be clearly shown that the agreement "has a tendency
to injure the public, or is against the public good, or is inconsistent with sound policy
and good morals as to the consideration or as to the thing to be done or not to be
done." Whether a contract is against public policy in this situation would be a
question of law dependant on the circumstances of the particular case.
Recently, this Court re-emphasized this analysis. We categorized
three situations where courts have refused to enforce private agreements on public policy
grounds: "(i) agreements that contravene statute; (ii) agreements that clearly tend
to injure the public in some way; and (iii) agreements that are otherwise contrary to the
declared public policy of Indiana. We further noted that, depending on the category, we
must approach the analysis in different manners. If an agreement is in direct
contravention of a statute, "then the court's responsibility is to declare the
contract void." If, however, the agreement falls into the more amorphous category of
"otherwise contrary to the declared public policy of Indiana," then the court
must balance five relevant factors: (i) the nature of the subject matter of the contract;
(ii) the strength of the public policy underlying the statute, n3
(iii) the likelihood that refusal to enforce the bargain or term will further that policy;
(iv) how serious or deserved would be the forfeiture suffered by the party attempting to
enforce the bargain; and (v) the parties' relative bargaining power and freedom to
contract.
The Rules of Professional Conduct, as enacted by this Court, contain
both implicit and explicit declarations of public policy. n4
The Indiana Rules of Professional Conduct exist, to a large extent, as a means of
protecting the interests of the public as potential clients. "These Rules and this
Court's willingness to enforce them help ensure that the public is well served by the bar.
Forces that undermine the standards on which the Rules of Professional Conduct are founded
disserve the public by weakening the client-lawyer relationship." Certain of the
Rules are explicit declarations of what an attorney can or cannot do. They are "cast
in the terms 'shall' or 'shall not.'" Prof Cond.R. Preamble, Scope. Some of these
imperatives concern agreements that an attorney can or cannot enter into. The Rules at
issue in this case (Rules 5.4(a) and 7.3(f)) are such imperatives. Rules 5.4(a) and 7.3(f)
are explicit judicial declarations of Indiana public policy and, akin to contravening a
statute, agreements in violation of these rules are unenforceable.
II. Indiana Rules of Professional Conduct 7.3(f)
As noted above, Trotter argues that the alleged agreement is a referral
fee agreement, that it is in violation of Conduct Rule 7.3(f), and that it is
unenforceable. We agree. Conduct Rule 7.3(f) states in pertinent part that "A lawyer
shall not compensate or give anything of value to a person or organization to recommend or
secure his employment by a client, or as a reward for having made a recommendation
resulting in his employment by a client . . ." Ind.Professional Conduct Rule 7.3(f)
(emphasis added). This Rule states the public policy against paying fees in return for
referring clients. Referral fees are disfavored because of their potential effect on the
client. See Model Code of Professional Responsibility EC 2-8 (1986). Specifically, the
client's choice of an attorney should "result from a free and informed choice by the
client," and any recommendation should originate from a disinterested source. Model
Code of Professional Responsibility EC 2-8. Furthermore, when a nonlawyer has a monetary
interest in referring cases to an attorney, then it is the referrer's and not the client's
best interests that are being considered. Thus, any agreement between an attorney and a
layman for the payment of referral fees, that is not otherwise authorized by the Rules of
Professional Conduct, is unenforceable in Indiana.
The agreement, as alleged by Nelson, would pay to her five percent of
resulting fees in certain cases referred to Trotter by Nelson. Thus, Nelson would be
rewarded for having made a recommendation resulting in Trotter's employment by a client.
Any such agreement violates Rule 7.3(f) and would be unenforceable.
III. Indiana Rules of Professional Conduct 5.4(a)(3)
Nelson, at trial and in her brief in opposition to transfer, argues
that the alleged agreement does not fall under Rule 7.3(f); rather, she argues that the
agreement does not contravene the Rules of Professional Conduct because the agreement is
permitted by Rule 5.4(a)(3). Rule 5.4(a)(3) states that "a lawyer or law firm shall
not share legal fees with a nonlawyer, except that: . . . (3) a lawyer or law firm may
include nonlawyer employees in a compensation or retirement plan, even though the plan is
based in whole or in part on a profit-sharing arrangement." (emphasis added). Nelson
concludes that her alleged agreement was a permissible "profit-sharing compensation
plan."
We disagree both with Nelson's characterization of the alleged
agreement and with her argument. Just as with the Rule against referral fees, Rule 5.4(a)
also explicitly prohibits certain attorney action. Rule 5.4(a) prohibits an attorney from
sharing legal fees with a nonlawyer. This Rule states the public policy against
fee-splitting with a nonlawyer. Again, similar to Rule 7.3(f), fee-splitting with a
nonlawyer is disfavored because of its potential affect on the client-attorney
relationship. For example, fee-splitting with a nonlawyer provides the incentive for a
nonlawyer to recommend an attorney's services for their own pecuniary interests rather
than the client's legal best interests. Furthermore, fee-splitting provides a potential
disincentive to the attorney to devote their full time and energy to the client, as the
attorney must share fees with another who has done little to earn it. Finally,
fee-splitting might interfere with the attorney's "professional independence of
judgment." Prof.Cond.R. 5.4, comment. Thus, in general, fee-splitting agreements with
a nonlawyer are contrary to Indiana public policy and unenforceable. n6
As Nelson rightly notes, however, Rule 5.4(a) does permit the sharing
of legal fees with a nonlawyer under certain enumerated exceptions. Nelson argues that the
alleged agreement is in fact a permissible profit-sharing compensation plan under Rule
5.4(a)(3). We disagree. The type of fee sharing which Rule 5.4(a)(3) allows is not what
Nelson is alleging in the case at bar. For the above stated reasons, a profit-sharing plan
with a nonlawyer may not be tied to the receipt of a particular legal fee. However, an
attorney may fashion a profit-sharing plan for his or her nonlawyer employees so long as
the measure of compensation "relates to the net profits and business performance of
the firm, and not to the receipt of particular fees." ABA Comm. On Ethics and
Professional Responsibility, Informal Op. 1440 (1979). Nelson is attempting to
escape the reach of the Rules simply by re-characterizing as a profit-sharing plan what is
clearly a referral fee agreement. The alleged agreement, as Nelson herself describes it,
ties her "bonus" to "certain personal injury cases directed by or through
her" to Trotter. Furthermore, even if Nelson's compensation were not tied to
referrals, the compensation relates to the "receipt of particular fees" and is
not made enforceable by Rule 5.4(a)(3). The agreement as alleged by Nelson is not based
upon a percentage of the overall profits of the law office, nor is it intended to provide
an incentive and reward for input which led to the greater overall efficiency and
productivity of the law office. These are elements that are necessary for a profit-sharing
plan to be permissible under Rule 5.4(a)(3). See ABA Informal Op. 1440. Instead, the
alleged agreement links payment to the referral of clients by a nonlawyer and provides
incentive to engage in the very activity which Rules 5.4(a) and 7.3(f) were enacted to
guard against.
IV. Disposition
To the extent that Nelson's claims for remuneration rely upon the
enforcement of the alleged agreement, we instruct the trial court to grant Trotter's
motion for partial summary judgement. We do this despite the fact that, if Nelson is
correct, Trotter has committed a gross violation of the Conduct Rules and would have
essentially entered into a contract which he knew to be unenforceable and now seeks to
escape. Nevertheless, when a court determines that a contract must be declared void
as against public policy, it does so on the grounds that the good of the public as a whole
must take precedence over the circumstances of the individual, no matter the hardship or
inequities that may result. We note in closing that Nelson is not entirely precluded from
being remunerated for the work she believes she has done; she is precluded only to the
extent that she relies upon the enforceability of the alleged referral fee agreement.
CONCLUSION
We vacate the Court of Appeals opinion and remand this case to the
trial court for further proceedings in accord with this opinion.
Sullivan, Justice, concurring and dissenting.
I respectfully dissent from the majority's conclusion that the trial
court erred in denying summary judgment in this case.
I do not agree that the alleged agreement here is unenforceable under
applicable precedent. I do agree with the majority that our Rules of Professional Conduct
are the equivalent of statutes in our constitutional sphere and, as such, constitute
public policy. I likewise agree that agreements which contravene our Rules are tantamount
to "agreements that contravene statute" under Continental Basketball Ass'n, Inc.
v. Ellenstein Enters., Inc., 669 N.E.2d 134, 139 (Ind. 1996). However, Continental
Basketball provides the following guidance in determining whether an agreement contravenes
statute:
Because we value the freedom to contract so highly, we will not find that a contract contravenes a statute unless the language of the implicated statute is so clear and unambiguous that the legislature intended that the courts not be available for either party to enforce a bargain made in violation thereof.
Id. at 140. Neither of the Rules of Professional Conduct implicated here give any
indication that the courts are not available to enforce such bargains.
Rather, I would find that the alleged agreement here falls within
another category of contracts discussed by the majority, "agreements that are
otherwise contrary to the declared public policy of Indiana." As the majority points
out, the inquiry under this category requires the balancing of five factors. Without
belaboring the analysis, I would find that, to the extent Trotter committed himself
financially to Nelson, this balancing of factors does not relieve him of his obligation to
her. More generally, the purposes of the Rules of Professional Conduct at issue here are
to protect the lawyer's professional judgment, Ind.Professional Conduct Rule 5.4; and to
protect the process of informed selection of a lawyer by potential consumers of legal
services, Prof.Cond.R. 7.3. Absolving Trotter of any obligation that he has to Nelson
under the alleged agreement does not further either of these purposes.
I do concur with the majority to the extent that it finds that summary
judgment on this issue does not preclude Nelson from pursuing Trotter on one or more other
legal theories.