Collecting Your Referral Fee

By Carole J. Buckner
Procopio, Cory, Hargreaves & Savitch LLP

Acknowledgement does not equal consent. When you are trying to collect a referral fee from another attorney, one of the requirements is that you must show the client consented to the payment of the referral fee. According to the court in Reeve v. Meleyco, 2020 WL 1429362 (3/24/2020), the client’s acknowledgement regarding payment of a fee does not suffice as “consent” to the payment of the fee. Therefore, the appellate court reversed the jury’s determination that Meleyco had breached the agreement to pay a referral fee to Reeve.

Reeve sued Meleyco for failing to pay a referral fee on a personal injury case. Meleyco represented the client pursuant to a contingency fee arrangement. Meleyco argued the client had not provided “written consent” to the payment of a referral fee as required under former Rule of Professional Conduct, rule 2-200. 

The client had become concerned about Meleyco’s agreement to pay Reeve a referral fee and expressed worry that the 25% referral fee would come out the client’s share of recovery in the case. Meleyco confirmed the referral fee arrangements in a letter to Reeve. Meleyco also responded to the client’s concern regarding payment of the referral fee by writing a letter to the client assuring the client that the 25% referral fee Meleyco had agreed to pay Reeve for the referral would not come from the client’s share of any settlement and would not increase the fees to the client. At the bottom of the letter, the client signed an “acknowledgement” stating that the client had received the letter and understood the contents of the letter. The client testified that “his acknowledgement expressed his agreement that the referral fee could be paid to Reeve.”

Meleyco paid a reduced referral fee to Reeve on one of the settlements in the matter, but later failed to pay the agreed referral fee to Reeve on another settlement completed in 2011. In 2014, Reeve sued Meleyco for breach of contract, quantum meruit and promissory estoppel. The jury awarded more than $75,000 and interest on the breach of contract and quantum meruit causes of action. On appeal, despite the signed acknowledgement and the testimony of the client, the court concluded that the letter did not comply with the consent requirement of former rule 2-200 because it did not reflect the client’s “written consent.” Further the court found that the testimony of the client that he regarded the acknowledgement as consent did not remedy the technical failure to meet the requirements of former rule 2-200.

The court reiterated that established precedent required the client’s “informed, written consent” to the payment of a referral fee, concluding that oral consent was not enough. The court examined dictionary definitions to arrive at the conclusion that “consent is different from disclosure or receipt, and it is also different from understanding.” 

Written consent, the court held, requires “written words expressing agreement or acquiescence, not just words expressing receipt or understanding.” The testimony about intent did not suffice because silence cannot convey written consent. The language of the acknowledgement was not ambiguous, so extrinsic evidence could not be used to resolve the interpretation of the document. Testimony from an ethics attorney that it was “arguable” that the acknowledgement complied with the rule also failed to help Reeve. Ultimately the court held the referral fee agreement was unenforceable as against public policy due to a lack of client consent.

Where a referral fee agreement was unenforceable, the attorney still has an option to obtain recovery of the reasonable value of the services rendered pursuant to a quantum meruit theory. The statute of limitation for such a recovery is two years pursuant to Code of Civil Procedure section 339. Unfortunately, in this case, the work was completed prior to June 30, 2011. Reeve’s complaint was filed more than two years after the completion of the services. Therefore, the court held that the applicable statute of limitation barred Reeve’s quantum meruit claim.

In November of 2018, rule 1.5.1 replaced rule 2-200, which continues to require that the client has “consented in writing.” In addition, timing is critical, as new rule 1.5.1 provides that the client’s consent must be given either at the time the lawyers enter into an agreement to divide the fee, or as soon thereafter as reasonably practicable, after a full written disclosure to the client of the fact that a division of fees will be made, the identity of the lawyers or law firms involved in the division, and the terms of the division. In addition, rule 1.5.1 requires that any agreement to divide fees with lawyers who are not in the same firm does not increase the fees to the client solely by reason of the agreement to divide those fees. Finally, the agreement between the lawyers to divide the fees must also be memorialized in a written agreement.

Careful and timely compliance with the technical requirements of the applicable rule, both among the lawyers involved and also with the client, will best assure that a referral fee will be collectible. Absent compliance with the rule, the timely assertion of a quantum meruit claim will permit the recovery of a reasonable fee.