Fee Sharing and Insurance Disclosure

By Carole J. Buckner

In Hance v. Super Store Industries, 2020 WL 373070, (Jan. 23, 2020), the Court of Appeal for the Fifth District addressed two important ethics rules involving fee sharing and disclosure to the client regarding whether an attorney has legal malpractice insurance.  The underlying matter involved a wage and hour class action brought on behalf of Hance and a purported class.  Attorney William Margolin had referred the matter to attorney Steven D. Waisbren who had limited experience with class actions.  Waisbren brought in attorneys Scott A. Miller and Bonnie Fong.  Hance and a second class representative Riberio signed representation agreements which also provided for fee sharing among the attorneys.  Hance’s agreement additionally stated that Margolin would be paid a referral fee of 15% to 25% of the total fees awarded. 

While the attorneys worked on the case from January through September, 2012, the fee sharing arrangements were negotiated by Miller and Waisbren, followed by an email confirming the tentative agreement in September to provide Waisbren a 30% referral fee, and that Miller was to pay the 15% referral fee to Margolin, to which Waisbren replied “fine.”  Helfgott, a third class representative, was added, by Miller, who forgot to tell Waisbren.

The case settled and the attorneys moved for an award of fees, with Waisbren claiming the emails entitled him to 30% of the fee award.  Miller contended the agreement was unenforceable for several reasons including no final agreement, and lack of client consent by Helfgott, who had withdrawn consent. In addition, Miller claimed the fee sharing agreement was invalid because Waisbren had no legal malpractice insurance and failed to so inform the clients as required by Rule 3-410 of the California Rules of Professional Conduct.  The trial court awarded the fees pursuant to the division agreed to between the attorneys.  But, on appeal, the court reversed and remanded as to the division of fees.

On appeal two issues were critical.  First, Miller contended that the agreement failed to comply with former Rule 2-200 of the Rules of Professional Conduct (now Rule 1.5.1).  Second, Miller claimed that the fee division agreement was invalid because Waisbren failed to comply with Rule 3-410 of the Rules of Professional Conduct (now Rule 1.4.2), requiring that he advise the clients that he lacked professional liability insurance.

The appellate court did not rule on whether the fee division agreement was enforceable under former Rule 2-200.  But it is important to bear in mind the requirements under the new version Rule 1.5.1.  If lawyers who are not in the same firm divide a fee for legal services, they must enter into a written agreement to divide the fee.  In addition, the client must consent in writing, either at the time the lawyers enter into the agreement to divide the fee, or as soon as possible thereafter.  Also, a full written disclosure to the client of the division of the fees, the identity of the lawyers dividing the fee and the terms of the division must be made to the client.  Finally, the total fees charged cannot be increased solely by reason of the agreement to divide the fees.  Miller claimed that Waisbren never accepted the agreement, that one of the clients retracted his consent, rendering the fee division agreement invalid, and that Waisbren breached the agreement.  Although the court did not resolve these issues, the dispute highlights the careful attention fee division agreements merit as well as the requirements under the new Rule 1.5.1.

The court did find that the fee division agreement was unenforceable because Waisbren had not disclosed his lack of professional liability insurance.  Former Rule 3-410 provided that a lawyer who knows that he does not have professional liability insurance shall inform a client in writing, at the time of the client’s engagement of the lawyer, that the member does not have  professional liability insurance.  Current Rule 1.4.2 is similar in content, including in the comments proposed language lawyers may use to so inform their clients.  The purpose of the rule, the court said, was to allow the client to consider that information when making the decision about whether to retain or not retain a lawyer. 

What should the consequences of non-compliance be?  In the absence of case law directly on point, the court looked at other cases in which violations of ethics rules rendered attorney client agreements unenforceable.  The court concluded that the agreement was unenforceable as it violated public policy to the extent it provided for a percentage recovery by Waisbren, and that there was an “overriding public interest to be served by voiding the agreement.”  The court did not want to give uninsured attorneys an incentive to fail to disclose the lack of insurance to their clients by allowing them to benefit from an uninformed client’s consent to a fee division.

The court further addressed whether quantum meruit recovery was available for Waisbren, noting that there was no categorical rule of forfeiture, and indicating that the result should turn on the egregiousness of the attorney’s conduct, the effect on the client, willfulness of the violation, and value of the services, so that the court could fashion a remedy in equity.  The court remanded so that the trial court could address the issue.  Miller argued that any recovery to Waisbren should be limited to his actual hours worked.  But the appellate court remanded to the trial court to address this issue as well, while noting that the Waisbren’s compensation could also take into consideration the value of the referral.

The decision is an important reminder to avoid litigation over potentially unenforceable referral fee arrangements by complying with Rule 1.5.1 and Rule 1.4.2 regarding disclosure as to professional liability insurance at the time of the engagement. 

 

 

Carole J. Buckner is a Partner and General Counsel at Procopio, Cory, Hargreaves & Savitch, LLP.


**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.**