SCF Consulting, LLC v. Barrack, Rodos & Bacine
175 A.3d 273
| Pa. | 2017Background
- SCF Consulting, LLC sued Barrack, Rodos & Bacine alleging a longstanding oral consulting agreement under which SCF would solicit institutional investors for securities class actions and receive 2.5–5% of annual profits on matters it originated or substantially worked on.
- Complaint asserted claims for breach of contract and unjust enrichment; law firm filed preliminary objections denying the agreement and arguing any fee-sharing would violate the Rules of Professional Conduct (Pa.R.P.C. 5.4/6.4).
- Trial court sustained preliminary objections, holding fee-splitting with a non-lawyer violates public policy and is unenforceable; Superior Court affirmed on the basis that the Rules prohibit fee-splitting and no exception applied.
- Pennsylvania Supreme Court granted review to decide whether and when a law firm may invoke ethical-rule violations to defeat enforcement of a contract it allegedly breached.
- The Court rejected a per se rule of unenforceability and held that contract claims should not be automatically barred; enforceability may depend on factual findings about the non-lawyer’s relative culpability. The Superior Court judgment was reversed and the case remanded.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Enforceability of fee‑splitting agreement between lawyer and non‑lawyer | The agreement either fits an express exception (employee compensation/profit sharing) or, if unenforceable, the firm should not be allowed to profit from its own unethical conduct | Fee‑splitting with non‑lawyers violates Pa.R.P.C. and public policy; courts should refuse to enforce such agreements | Contract claim is not per se barred by the ethical rule; enforceability depends on case‑specific factual inquiry (e.g., relative culpability) |
| Whether Rules of Professional Conduct can alter substantive contract law | Rules do not necessarily preclude enforcement here; denying relief rewards lawyer misconduct | Ethical rules (Pa.R.P.C.) embody public policy and should render such contracts unenforceable | Rules are not substantive law per se; courts should not automatically use them to invalidate contracts without assessing parties’ relative fault |
| Availability of equitable remedies (unjust enrichment/disgorgement) when contract violates RPC | If contract unenforceable, plaintiff may still recover in quasi‑contract or equity; Courts/Disciplinary Board can fashion relief | Defendant emphasizes bar to contract recovery; less focus on equity in early pleadings | Court permits consideration of equitable remedies; remand for further factual development and adjudication of unjust enrichment claims |
| Proper judicial approach: per se rule vs case‑by‑case | Reject per se rule as it can unjustly strip remedies from less culpable non‑lawyers and may embolden bad actors | Favor per se invalidation to protect clients and deter improper fee‑sharing | Court rejects bright‑line per se rule and adopts case‑by‑case analysis (considering relative culpability); several justices concur/dissent on preferred approach |
Key Cases Cited
- Wishnefsky v. Riley & Fanelli, P.C., 799 A.2d 827 (Pa. Super. 2002) (Superior Court decision refusing enforcement of fee‑sharing agreements based on RPC violation)
- O’Hara v. Ahlgren, Blumenfeld & Kempster, 537 N.E.2d 730 (Ill. 1989) (Illinois Supreme Court refusing to enforce fee‑sharing agreements to protect clients and deter such arrangements)
- Mann v. Constitution Realty, LLC, 71 N.E.3d 530 (N.Y. 2017) (New York Court of Appeals criticizing defendants who invoke ethics rules to avoid contractual obligations)
- In re Estate of Pedrick, 482 A.2d 215 (Pa. 1984) (Pennsylvania Supreme Court holding professional conduct rules do not themselves alter substantive law)
- Ballow, Brasted, O’Brien & Rusin P.C. v. Logan, 435 F.3d 235 (2d Cir. 2006) (federal appellate case preventing attorneys from invoking ethical rules to avoid contractual duties)
- Potter v. Peirce, 688 A.2d 894 (Del. 1997) (Delaware Supreme Court: lawyer may not use ethical rule breach to avoid contractual obligations)
- Shimrak v. Garcia‑Mendoza, 912 P.2d 822 (Nev. 1996) (Nevada Supreme Court refusing to permit attorneys to escape obligations by invoking professional rules)