Ethics Opinon 1984-6

I
QUESTION PRESENTED

Client A seeks legal services from Attorney X concerning a matter. Attorney X determines that he does not have the necessary expertise to handle client A's matter. Attorney X refers Client A to Attorney Y, who is subsequently retained by Client A. Attorney X provides no other services to Client A. Attorney X and Y both practice in California. If the total fee billed by Attorney Y to Client A is not increased, and Client A consents in writing to the payment of such a fee, may Attorney Y pay a "referral fee" to Attorney X?

II
SUMMARY

Rule 2-108 of the Rules of Professional Conduct, as amended in 1979, deletes the specific requirement that attorneys' fees be divided only in proportion to the services performed or responsibility assumed by each attorney. Consequently, a California attorney is not prohibited by the Rules of Professional Conduct from paying a "referral fee" to another California attorney provided that:

(1) The client consents in writing to the employment of the other attorney after a full disclosure has been made in writing that a division of fees will be made and the terms of such division; and

(2) The total fee charged by both attorneys is not increased solely by reason of the provision for division of fees and does not exceed reasonable compensation for all services they render to the client. (Emphasis added.)

III
ANALYSIS

The Committee has received a number of inquiries concerning whether it is appropriate under any circumstances for an attorney to pay a "referral fee" to another attorney. Our review of this matter indicates that this issue has been a subject of controversy over the years in California. This opinion is intended to clarify the Committee's position concerning the present rules relating to the division of fees between attorneys.

The American Bar Association has long taken the position that the division of fees by attorneys should be in proportion to the services performed or responsibility assumed by each attorney. Both the original ABA Canons of Ethics and the ABA Code of Professional Responsibility were clear in their statement that division of fees for "pure" referrals was not to be condoned. (See ABA Opinions 97 and 204.) A similar position has also been clearly stated in the recently adopted ABA Model Rules of Professional Conduct.

Prior to 1972, California had adopted no express rule prohibiting the payment of referral fees between attorneys, although some California courts had apparently recognized the existence of the practice of paying referral fees. (See Turner v. Donovan (1935) 3 Cal.App.2d 485, 486-487 [39 P.2d 858].) As early as 1953, however, the Los Angeles County Bar Association, citing the ABA Canons of Ethics, took the position that there was an ethical prohibition against the payment of referral fees. (See Los Angeles County Bar Association Opinions No. 204 (1953) and 232 (1955).) Any doubts concerning this issue were further clarified in 1972 by the adoption of rule 22 of the California Rules of Professional Conduct, which required that fees could be divided between attorneys only in proportion to services performed or responsibility assumed by each. Rule 22, which was recodified in 1975 as rule 2-108, provided as follows:

"(a) A member of the State Bar shall not divide a fee for legal services with another attorney who is not a partner in or associate of his law firm or law office, unless:

(1) the client consents to employment of another attorney after a disclosure that a division of fees will be made;

(2) the division is made in proportion to the services performed or responsibility assumed by each; and

(3) the total fee of the attorneys does not clearly exceed reasonable compensation for all legal services they render to the client."

Subsequent to the adoption of rule 2-108, at least one California Court of Appeal considered the matter of "pure" referral fees, and determined that not only was a "pure" referral fee prohibited by the Rules of Professional Conduct, but that this prohibition was an expression of public policy which rendered a contract for such a fee unenforceable. (Altschul v. Sayble (1978) 83 Cal.App.3d 161, [147 Cal.Rptr. 716].) Other courts also suggested their disapproval of the practice of paying referral fees. (See Dunne and Gatson v. Keltner (1975) 50 Cal.App.3d 560 [123 Cal.Rptr. 430], conc. opn. of Thompson, J.; see also, Breckler v. Thaler (1975) 87 Cal.App.3d 214 [151 Cal.Rptr. 50].)

In 1979, however, rule 2-108 was amended to read as follows, in pertinent part:

"(A) A member of the State Bar shall not divide a fee for legal services with another person licensed to practice law who is not a partner or associate in the member's law firm or law office, unless:

(1) The client consents in writing to employment of the other person licensed to practice law after a full disclosure has been made in writing that a division of fees will be made and the terms of such division; and

(2) The total fee charged by all persons licensed to practice law is not increased solely by reason of the provision for division of fees and does not exceed reasonable compensation for all services they render to the client."

By this amendment, the former requirement of rule 2-108 that division of fees be made in proportion to the services performed or responsibility assumed by each attorney was eliminated. Subsequently, in 1982, the issue of enforceability of a "pure" referral fee was again considered by a California Court of Appeal in Moran v. Harris (1982) 131 Cal.App.3d 913 [182 Cal.Rptr. 519]. In Moran, the court refused to follow the Altschul decision, and held that payment of a pure referral fee did not violate rule 2-108 as amended in 1979. Finding that the 1979 amendment removed any specific ethical prohibition against the payment of a "pure" referral fee, the court held that a contract for the payment of such a fee was enforceable.

The Committee recognizes that strong policy arguments exist in opposition to the payment of pure referral fees and that such fees should be subject to close scrutiny (Moran v. Harris, supra, at 921.) The Committee is persuaded, however, that the clear intent of the 1979 amendment to rule 2-108 was to eliminate the absolute prohibition against the payment of such fees, and that the Moran decision correctly analyzes the present state of the Rules of Professional Conduct relating to the payment of referral fees. Therefore, the Committee concludes that, provided that the requirements of rule 2-108 are observed, no ethical prohibition exists in California with regard to the payment of pure referral fees by a California attorney to another California attorney.

This opinion is advisory only. It is not binding on the State Bar, the Board of Governors, its agents or employees.

Disclaimer: This opinion was issued by the Legal Ethics Committee of the San Diego County Bar Association. It is advisory only and is not binding upon any member of the SDCBA, any other member of the State Bar of California, the State Bar of California or its Board of Governors, or any persons or tribunals charged with regulatory responsibilities. The SDCBA, its officers, directors, agents, and the Legal Ethics Committee members assume no responsibility or liability in rendering this opinion.