SCF Consulting, LLC, Aplt. v. Barrack Rodos , 175 A.3d 273 ( 2017 )

[J-58-2017]
IN THE SUPREME COURT OF PENNSYLVANIA
EASTERN DISTRICT
SCF CONSULTING, LLC, : No. 7 EAP 2017
:
: Appeal from the Judgment of the
Appellant : Superior Court entered on 7/8/16 at No.
: 1413 EDA 2015 affirming the order
: entered on 4/24/15 in the Court of
v. : Common Pleas, Philadelphia County,
: Civil Division at No. 01613 February
: Term 2015
BARRACK, RODOS & BACINE, :
:
Appellee : ARGUED: September 12, 2017
Chief Justice Saylor delivers an opinion announcing the
judgment of the Court, joined by Justice Dougherty. The
result of reversal of the Superior Court’s order is also
supported by Justices Baer and Todd.
OPINION ANNOUNCING THE JUDGMENT OF THE COURT
CHIEF JUSTICE SAYLOR DECIDED: December 19, 2017
This appeal concerns the enforceability of an asserted fee-splitting agreement
between a law firm and a lay entity.
Appellant SCF Consulting, LLC lodged a civil complaint against Appellee, the law
firm of Barrack, Rodos & Bacine, in the common pleas court. Appellant averred that it
had maintained a longstanding oral consulting agreement with the law firm, which the
firm purportedly breached in 2014. According to Appellant, the arrangement was for the
solicitation of institutional investors to participate in securities class actions, and
remuneration was to be in the form of a two-and-one-half to five-percent share of the
firm’s annual profits on matters “originated” by Appellant’s principal or on which he
provided substantial work. Complaint in SCF Consulting, LLC v. Barrack, Rodos &
Bacine, No. 1613 Feb. Term 2015 (C.P. Phila.), at ¶10. Among the various counts of
the complaint, Appellant advanced causes of action for breach of contract and unjust
enrichment.
Appellee interposed preliminary objections denying the existence of a fee-sharing
agreement and highlighting that any such arrangement would be in violation of Rule 5.4
of the Rules of Professional Conduct. See Pa.R.P.C. 5.4(a) (prescribing, subject to
enumerated exceptions, that “[a] lawyer or law firm shall not share legal fees with a non-
lawyer”). Referencing Wishnefsky v. Riley & Fanelli, P.C., 799 A.2d 827 (Pa. Super.
2002), among other cases, Appellee took the position that the court should refuse, on
public policy grounds, to permit a cause of action to proceed based on an alleged,
impermissible contract.
In reply, Appellant claimed that the asserted consulting agreement qualified as
an express exception to the anti-fee-splitting rule for an employee “compensation or
retirement plan, even though the plan is based in whole or in part on a profit-sharing
arrangement.” Pa.R.P.C. 5.4(a)(3). Alternatively, Appellant posited that Appellee’s
attempt to invoke public policy as a shield was an “audacious defense” which, if
credited, would perversely reward the law firm by allowing it to profit from its own
unethical conduct. See Plaintiff’s Memorandum of Law in Response and Opposition to
Preliminary Objections in SCF Consulting, No. 1613 Feb. Term 2015, at 1, 16. In this
regard, Appellant referenced Grigsby v. Major, 28 Phila. Rptr. 572, 576 (C.P. Phila. Oct.
4, 1994) (refusing to invalidate a fee-sharing agreement between attorneys on the basis
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that it violated the Rules of Professional Conduct, where to do so would result in a
windfall).
The county court agreed with Appellee’s position concerning both the non-
applicability of the exception to Rule 5.4(a)’s prohibition and the unenforceability of the
alleged agreement. See SCF Consulting, No. 1613 Feb. Term 2015, slip op. at 2 (C.P.
Phila. Apr. 24, 2015) (“A court cannot enforce an agreement by a law firm to share fees
with a non-lawyer because it violates public policy as embodied in the . . . Rules of
Professional Conduct.” (citing Wishnefsky, 799 A.2d at 830)). On appeal, the Superior
Court affirmed but limited its treatment to the determination that the Rule 5.4(a)
prohibition against fee-splitting applied on its terms and there was no applicable
exception. See SCF Consulting, LLC v. Barrack, Rodos & Bacine, No. 1413 EDA 2015,
slip op. at 10-11 (Pa. Super. Jul. 8, 2016). Given this resolution, it was the court’s
position that there was no need to address the broader public policy arguments. See id.
at 6 n.3.1 In a footnote, however, the intermediate court observed that an argument
similar to Appellant’s had been rejected in Wishnefsky. See id. The court also declined
to address the potential for recovery under a theory of unjust enrichment, since
Appellant did not pursue that theory in its appellate brief. See id. at 7 n.4.
1
The Superior Court plainly erred in this regard, since the common pleas court had
dismissed the complaint by crediting Appellee’s position that public policy served to
invalidate the alleged consulting agreement. That this sort of arrangement would violate
the law firm’s ethical obligations could not serve to defeat Appellant’s complaint absent
the contested linkage between such violation and the agreement’s enforceability as a
matter of substantive law. Nevertheless, the intermediate court premised the rejection
of an alternative argument that “assum[ed] arguendo that the [alleged consulting
agreement] was in violation of R.P.C. 5.4,” on the bare conclusion that the agreement
violated Rule 5.4. SCF Consulting, No. 1413 EDA 2015, slip op. at 6.
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We allowed appeal to consider whether, or under what circumstances, the
professional conduct rules may be invoked as a defense by a law firm breaching its own
ethical obligations by entering into an impermissible fee-splitting arrangement.2
Other jurisdictions are divided concerning the appropriate judicial response in this
and similar scenarios involving contracts in violation of lawyers’ ethical responsibilities,
and the parties’ arguments track the disparate positions. On the one hand, a majority of
jurisdictions follow the approach of the Supreme Court of Illinois, cited in Wishnefsky,
which generally refuses to enforce agreements that violate professional conduct rules.
See O’Hara v. Ahlgren, Blumenfeld & Kempster, 537 N.E.2d 730, 737-38 (Ill. 1989) (“By
refusing in every case to assist the lay party, courts may deter laypersons as well as
attorneys from attempting such agreements. We believe that, in this way, the public will
be protected more effectively from the potential harms posed by fee-sharing
arrangements.”). On the other hand, a minority of courts decline to accord substantive
effect to such rules, at least where to do so would result in a windfall to offending
attorneys. See, e.g., Marin v. Constitution Realty, LLC, 71 N.E.3d 530, 533 (N.Y. 2017)
(“[I]t ill becomes defendants, who are also bound by the Code of Professional
Responsibility, to seek to avoid on ‘ethical’ grounds the obligations of an agreement to
which they freely assented and from which they reaped the benefits.” (quoting Benjamin
v. Koeppel, 650 N.E.2d 829, 832-33 (N.Y. 1995)). See generally Chunlin Leonhard,
Illegal Agreements and the Lesser Evil Principle, 64 CATH. U.L. REV. 833, 866 (2015)
(advocating that courts should recognize the mixed policy implications of applying a per
se rule of invalidity for contracts that violate public policy).
2
Again, Appellee denies having been a party to any such agreement. At the
preliminary objections stage, however, the allegations of the complaint are taken as
true. See, e.g., Bilt-Rite Contractors, Inc. v. The Architectural Studio, 581 Pa. 454, 457,
866 A.2d 270, 272 (2005).
[J-58-2017] - 4
The Pennsylvania Bar Association filed an amicus brief crystallizing the quandary
in this area of the law, as follows:
The PBA notes that it is clearly this Court’s prerogative to
declare, as have the courts in a majority of jurisdictions, that
the paramount objective of protecting clients is a matter of
public policy, and that this policy will be advanced by
declaring all fee sharing agreements that are inconsistent
with Rule 5.4 to be void as a matter of law. . . .
On the other hand, the PBA recognizes that a lawyer should
not be permitted to intentionally take advantage of an
innocent nonlawyer, by entering into an agreement violating
Rule 5.4, and then raising that violation as a defense to a
claim for the agreed upon compensation. . . . It is
unreasonable for our courts to be placed in a circumstance
where they may be perceived as aiding in attorney
misconduct.
Brief for Amicus Pa. Bar Ass’n at 13-14. As a middle ground, the PBA suggests that
perhaps the Court might wish to consider implementing a per se rule that contracts in
violation of Rule 5.4 are void as against public policy, but to also temper this approach
by permitting quasi-contractual remedies, recovery under the theory of unjust
enrichment, or a disgorgement practice implemented through the Disciplinary Board.
See id. at 14-15.
In In re Estate of Pedrick, 505 Pa. 530, 482 A.2d 215 (1984), this Court explained
that the standards of professional conduct for lawyers do not have the force of
substantive law and pronounced that it was not inclined to “allow our trial courts
themselves to use the Canons to alter substantive law[.]” Id. at 535, 543, 482 A.2d at
217, 221; accord Pa.R.P.C., Preamble and Scope ¶19 (“[N]othing in the Rules should
be deemed to augment any substantive legal duty of lawyers or the extra disciplinary
consequences of violating such a duty.”). We recognize that the circumstances before
the Court in Pedrick were materially distinguishable from those presented in this appeal.
[J-58-2017] - 5
We are aligned, nonetheless, with the broader policy judgment made by our
predecessors, at least to the degree that the conduct rules should not be interposed into
substantive law when non-regulated parties bear no (or substantially lesser)
responsibility relative to the material ethical violations. Accord Peyton v. Margiotti, 398
Pa. 86, 92, 156 A.2d 865, 868 (1959) (“When the parties to a contract against public
policy or otherwise illegal are not in pari delicto, or equally guilty, and when public policy
is considered as advanced by allowing either, or at least the more excusable of the two,
to sue, relief may be granted.” (quoting 8 P.L.E. §109)). As noted, this approach
comports with that of several other jurisdictions, see, e.g., Atkins v. Tinning, 865 S.W.2d
533, 537 (Tex. Ct. App. 1993), and we view it as a variant of the lesser-evil principle
advocated by some commentators. See Leonhard, Illegal Agreements and the Lesser
Evil Principle, 64 CATH. U.L. REV. at 866.3
The ultimate outcome of this case may turn on factual findings concerning
Appellant’s culpability, or the degree thereof, relative to the alleged ethical violation. We
would hold only that the contract cause of action is not per se barred by the purported
infraction on Appellee’s part and, accordingly, the county court’s bright-line approach to
the unenforceability of the alleged consulting agreement should not be sustained.4
3
Certainly, reasonable minds can, and do, differ concerning the appropriate policy
stance, and we are respectful of the courts that believe that the greatest good may be
achieved through a per se approach, on the theory that this most effectively protects
clients at large by discouraging improper agreements.
4
As to the alternative remedies discussed by the PBA, we deem it advisable to permit
one of the main equitable considerations (relative to a non-lawyer’s culpability) to be
assessed in connection with the threshold determination of whether a contract in
violation of professional conduct rules should be declared by the judiciary to be
unenforceable as against public policy.
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The above expression represents the view of only two Justices. A majority of the
Court, however, agrees that the present contract action should not have been
dismissed. See Concurring and Dissenting Opinion at 4 (Baer, J., joined by Todd, J.).
Accordingly, the dismissal will be overturned, and the common pleas court will be in a
position of making its own judgment as to the relevance of any wrongful conduct on
Appellant’s part, without present guidance from this Court.
The order of the Superior Court is reversed, and the matter is remanded, through
the intermediate court, to the common pleas court for further proceedings.
Justice Dougherty joins the opinion and files a concurring opinion.
Justice Baer files a concurring and dissenting opinion in which Justice Todd
joins.
Justice Wecht files a dissenting opinion in which Justice Donohue joins.
Justice Mundy did not participate in the consideration or decision of the case.
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