Ethics Opinon 1987-2


The law firm of Jones & Jones often, but not always, represents XYZ Insurance Company when its insureds are involved in litigation. Paul Plaintiff, during an initial consultation with a Jones & Jones attorney, reveals that he would like to pursue an action against a person who is insured by XYZ. The Jones & Jones attorney notifies Paul Plaintiff that Jones & Jones sometimes represents XYZ and recommends that Paul should see attorney Smith. Paul retains Smith, and Smith wins the case against XYZ insured who is represented by attorney Brown. XYZ had assigned the defense to Brown who is from an unrelated firm. Smith sends a (1) straight fee OR (2) percentage of the award to Jones & Jones.

Have any ethical violations resulted?

Does acceptance of referral fee under these circumstances constitute a conflict of interest?


The referral fee is contingent upon Paul's recovery from the XYZ insured and the strong possibility exists that the fee will be paid from the proceeds of an XYZ policy. Therefore, Jones & Jones may be deemed to acquire a pecuniary interest adverse to XYZ at the time it enters the referral fee arrangement with Smith. Entering a referral fee arrangement with Smith without first providing written disclosure of the terms of the agreement to XYZ and obtaining XYZ's written consent thereto constitutes a violation of California Rules of Professional Conduct, rule 5-101.

The broader ethical duties to maintain inviolate the confidence of the client and to avoid even the appearance of impropriety behoove Jones & Jones to carefully examine the propriety of entering any such referral fee arrangement, even if the strict requirements of rule 5-101 are met.


Rule 5-101

California Rule of Professional Conduct, rule 5-101 provides the guidelines for avoiding the obtaining of an interest adverse to one's client:

"A member of the State Bar shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security, or other pecuniary interest adverse to a client unless (1) the transaction and terms in which the member of the State Bar acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing to the client in manner and terms which should have reasonably been understood by the client, (2) the client is given a reasonable opportunity to seek the advise of independent counsel of the client's choice on the transaction, and (3) the client consents in writing thereto." [Emphasis added.]

Preliminary Assumptions

For the purpose of this opinion, we will assume there is no question as to the propriety of the referral fee arrangement between Jones & Jones (hereinafter J & J) and attorney Smith, and that all disclosures required by rule 2-108 have been made. We also assume the referral fee is contingent and payable only on Paul Plaintiff's recovery and any such fee will be paid from the amount recovered.

As stated, the hypothetical does not clearly reveal the actual relationship of XYZ and J&J at the time of the referral fee transaction. Although the firm "often, but not always" represents XYZ or its insureds , we will assume there is no ongoing contractual relationship between XYZ and J&J whereby the firm has a continuing expectation of referrals from XYZ.


Rule 5-101 prohibits acquiring "an ownership, possessory, security, or other pecuniary interest adverse to a client" unless certain disclosures are made and the client's consent obtained. If the referral fee will ultimately be paid from the proceeds of an XYZ policy, J&J may be deemed to have acquired a pecuniary interest "adverse" to XYZ at the time it entered the referral fee arrangement with Smith.

The preliminary question is the existence or non-existence of the relationship of attorney and client at the time of the transaction. The status of the attorney-client relationship between J&J and XYZ at the time of Paul's consultation is not clear from the facts. If J&J is representing XYZ or any other matter at this time, it should certainly be bound by rule 5-101(1) to make a full written disclosure of the transaction to XYZ and to obtain XYZ's written consent before entering the referral fee agreement. Even if there was no current representation, J&J obviously considered its past relationship with XYZ to be of such an event or nature that it perceived an existing or potential conflict of interest which precluded the firm from representing Paul.

Where a past attorney-client relationship has been terminated, an attorney should not necessarily be precluded from obtaining an interest in the ex-client's property "in the absence of any fraud, or the use or abuse of information derived while the relationship existed and where the attorney has no duty to perform inconsistent with the [acquisition]." (See 20 A.L.R.2d 1280, 1309.)

It is the potential for use or abuse of information derived from the prior attorney-client relationship which is especially relevant to the instant hypothetical and which places the referral fee arrangement within the scope of rule 5-101. Business and Professions Code section 6068 provides in part:

"It is the duty of an attorney:

. . .

(1) To maintain inviolate the confidence, and every peril to himself to preserve the secrets of his client."

The 1983 ABA Rules of Professional Conduct prohibit an attorney from revealing information relating to representation of a client or from using such information to the disadvantage of the client unless the client consents after consultation. (See rules 1.6(a) and 1.8(b).) Further, rule 1.9(b) forbids the use of information relating to former representation to the disadvantage of the former client.

The ethical duty of confidentiality is part of the lawyer's broader duty of loyalty to the client, and it restricts the disclosure or use of information learned from the client; such information cannot be used to the disadvantage of the client or to the advantage of the lawyer or a third party. It is likely that J&J has acquired knowledge of XYZ's litigation procedures and policies for evaluation and settlement of claims, along with knowledge of the best way to deal with various XYZ adjusters. This type of information would be invaluable to Smith in either insuring or maximizing Paul's recovery, a portion of which is guaranteed to return to J&J. Canon 9 of the 1969 ABA Model Code encourages lawyers to "avoid even the appearance of impropriety." The possibility that this information may be revealed, either inadvertently through casual communications between J&J attorneys and Smith, or otherwise, is too great to ignore.

Another concern is the effect of the referral fee obligation on any settlement between Paul and XYZ's insured; it may result in Paul or Smith requiring a larger amount in settlement of the claim and, to the extent that XYZ may pay all or a portion of this settlement, the referral fee arrangement would obviously be prejudicial to XYZ.


Before entering any referral fee arrangement with Smith, either for a straight fee or a percentage of the award, Jones & Jones must disclose the terms of the referral fee agreement to XYZ in writing, allow XYZ a reasonable opportunity to seek advice of independent counsel and obtain XYZ's written consent to the arrangement. In determining whether to enter this type of referral fee arrangement, due consideration should be given to the delicate balance which must be maintained between the firm's own financial interest and its overriding duty to keep client confidence and avoid the appearance of impropriety.

This opinion is advisory only. It is not binding upon the State Bar of California, the Board of Governors, its agents or employees, or the San Diego County Bar Association, or its agents, employees, or members.


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.