Collecting Referral fees – Be sure to follow the Rules of Professional Conduct

Your former client, Julius, has been badly injured in a car accident and needs a lawyer.  Since personal injury law is not your practice area, you contemplate where to refer Julius.  As you open your mail, you note the interest on your student loans is greatly increasing your debt obligations. You ask yourself – what if I collected a referral fee?

Later that day, you meet your good friend, Jan, over lunch to discuss a referral fee arrangement.  Jan recently opened her own personal injury practice after doing mostly transactional work for two years. You have known Jan since law school and trust she will do a fine job representing Julius. You both agree that as a referral fee, she will give you ten percent of any contingency fee she recovers.  Given your trust in your friendship, you don’t put your agreement in writing.

Upon returning to your office, you recommend Jan to Julius and give him Jan’s contact information. You never mention the referral fee agreement. You would rather avoid any awkwardness that may result from discussing it. Besides, Jan said she would inform Julius of the referral fee arrangement between the two of you.

Julius meets Jan at her office and feels comfortable signing her fee agreement.  After he signs it, Jan verbally informs Julius that you will receive ten percent of any contingency fee recovered.  He makes no objection to the referral fee arrangement.

You now have an uneasy feeling that your fee arrangement with Jan requires more consideration in light of the new California Rules of Professional Conduct, effective November 2018.  You begin researching referral fees which occur when a lawyer receives a fee for the referral of a case to another lawyer.  Your research reveals the following:

California Rule 5.4 generally bars fees sharing with nonlawyers

Referral fees are a form of fee sharing. With certain exceptions,[i] Rule 5.4 provides “(a) A lawyer or law firm shall not share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. . . .” (Cal. Prof. Rule of Conduct, Rule 5.4.)  A fee-sharing arrangement between a licensed lawyer and a nonlawyer is an illegal contract and necessarily will run afoul of Rule 5.4(a). (See McIntosh v. Mills (2002) 121 Cal.App.4th 333, 343-346 [finding a fee-sharing agreement between an attorney and non-attorney was illegal, unenforceable and violated former Rule of Professional Conduct 1-320(A)].)  Thus, lawyers may only enter into referral fees with other lawyers.  

Here, you are entering into a fee sharing arrangement with a licensed attorney, and as such, you have not violated Rule 5.4.  You continue your research and find that fee sharing between attorneys is addressed by Rule 1.5.1 as discussed below. 

California Rule 1.5.1 permits fee sharing between lawyers under specific conditions

Rule 1.5.1 provides: “(a) Lawyers who are not in the same law firm shall not divide a fee for legal services” unless the following conditions are met:

(1) the lawyers enter into a written agreement to divide the fee; 

(2) the client has consented in writing, either at the time the lawyers enter into the agreement to divide the fee or as soon thereafter as reasonably practicable, after a full written disclosure to the client of: (i) the fact that a division of fees will be made; (ii) the identity of the lawyers or law firms that are parties to the division; and (iii) the terms of the division; and, 

(3) the total fee charged by all lawyers is not increased solely by reason of the agreement to divide fees

(Cal. Prof. Rule of Conduct, Rule 1.5.1, emphasis added.)[ii]

Here, you and Jan verbally entered into a referral fee agreement whereby Jan will give you ten percent of any contingency fee she recovers. This agreement divides Julius’ fee for legal services and falls short of the rule’s first condition, requiring the referral fee agreement be in writing. Additionally, Jan’s verbal notice to Julius of this agreement is also insufficient.  The second condition requires that Julius consent in writing to the referral fee agreement either when you and Jan entered into it, “or as soon thereafter or reasonably practicable.” (Id.)

Moreover, Julius can only provide written consent to the fee agreement after he is informed in writing of: (i) the fact that there will be a division of fees between you and Jan, (2) the identities of you and Jan as the parties to the fee division, and (iii) the terms of that division.

Finally, it is unclear if the referral fee violates the third condition, requiring the total fee charged by you and Jan “is not increased solely by reason of the agreement.” (Id.)  If the ten percent payment you receive from the contingency fee recovered is in addition to Jan’s fees for legal services, then it would likely violate the rule.  If, however, your payment is derived from Jan’s portion of her fees for her legal services—thereby not increasing the total fee charged to Julius—then the referral fee would likely not be a violation.

ABA Rule 1.5(e) does not permit a “pure referral fee”

ABA Model Rule 1.5(e) allows a division of fees between lawyers who are not members in the same firm only if: (1) the fee division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the client’s representation; (2) the client consents in writing to the share that each lawyer will receive under the arrangement; and, (3) the total fee is reasonable.

Unlike California Rule 1.51, ABA Model Rules 1.5(e) does not allow a lawyer to collect a referral fee unless that fee is in proportion to the services the lawyer performed on a client’s case. In other words, a referring lawyer would have to perform some work in the case and the fee must be in proportion to the work performed.  If a referring lawyer merely referred the client and did nothing more, she is precluded from collecting a referral fee.

Why does California permit referral fees that comply with California Rule 2-200 when the ABA Model Rules do not?  They are permitted because they serve the client’s best interest by encouraging inexperienced attorneys from attempting to handle complex cases in order to earn fees.  If an inexperienced attorney can obtain a referral fee, he or she is more likely to refer the case to competent counsel. Moran v. Harris (1982) 131 Cal.App.3d 913, 921-922.

After having examined the above rules, you say to yourself, “Too bad I didn’t read these rules before Jan and I set up our referral fee arrangement. She and I need to take corrective action as soon as possible to make sure we are in compliance with the rules.”

You take solace in knowing that referral fees agreements not only help connect clients with qualified and competent counsel, but they also help grow your practice, provided you use them ethically and responsibly so that both the client and lawyers benefit from the arrangement.

Alara T. Chilton is an attorney at law.

Read this article on the SDCBA blog


[i] Rule 5.4 (a) contains several inapplicable exceptions to this article’s hypothetical.

 

[ii] The writing requirements of Rule 1.5.1(a)(1) and (2) “may be satisfied by one or more writings.” (Comment to Cal. Prof. Rule of Conduct, Rule 1.5.1.)


**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis. Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**