The Ethics of Referrals, Part 1
Ethics, Fees, Firm ManagementPART I: ATTORNEY-TO-ATTORNEY REFERRALS
Business generation consumes the minds of every attorney responsible for ensuring a consistent pipeline of clients and work. General and attorney-focused networking, digital marketing, bar events, speaking engagements, public and nonprofit service, and community sponsorships fill many calendars and budgets. These business development efforts present a variety of opportunities to explore the ethics of referrals. This article is Part I of the series and addresses fee sharing in attorney-to-attorney referrals. Future articles will highlight referrals from other sources, like lawyer referral services, and from professionals like financial services providers or doctors whose client base overlaps with attorneys.
Background
Many lawyers depend on deep networks of referring attorneys to fill their pipelines. Commonly, a prospective client calls one attorney, but the best interests of the client dictate that a different attorney would be a better match. So the initial attorney either has the prospective client call one or more other attorneys, or handles the referral herself. Sometimes, that referral is gratis, meaning the referring attorney receives no direct financial benefit. Other times, that referral is part of the referring attorney’s own business model, meaning the referral provides a direct benefit to the referring attorney, often as a “referral fee.” Both scenarios present unique ethical considerations to address between the attorneys and with the prospective clients. This article focuses primarily on the “for benefit” model.
What is a Referral Fee?
For purposes of this article, a “referral fee” is any direct financial benefit received by the referring attorney in exchange for referring the prospective client to the receiving attorney. These are sometimes called “fee splits,” “finder’s fees,” “joint representation fees,” or other similar names. The Texas Disciplinary Rules of Professional Conduct (“TDRPC”) calls this a “division of fees.” TDRPC 1.04(f).
Historical View of Attorney-to-Attorney Referrals
Historically, attorneys could obtain referral fees in three ways: (1) a fee split based on each attorney’s efforts; (2) a “forwarding attorney” fee or “pure” referral fee; and (3) under a joint representation agreement. See, e.g., Bond v. Crill, 906 S.W.2d 103, 106 (Tex. App.–Dallas 1995, no writ) (citing TDRPC 1.04(f) (1989)). The first method arranged a fee split “in proportion to the professional services performed by each lawyer[.]” Id. Under the third method, the joint representation, the fees are shared not based on effort, but based on a fee sharing agreement between the client and the attorneys where the attorneys split the fee, but the receiving attorney leads the case, and the referring attorney retains ethical and even financial responsibility for the representation. See TDRPC 1.04(f) cmt. 13. The second method–the “pure” referral fee–caused much consternation and division, so much so that the Texas Supreme Court amended TDRPC 1.04(f) in 2005 to eliminate the “forwarding attorney” option for fee splits. See TDRPC 1.04 cmt. 14; Tex. Proff’l Ethics Op. 568 (“The [2005] amendments abolished the pure referral fee.”); id. at Op. 688 (same). The proportional division and the joint representation methods remain in effect today.
The Proportional Division
Fee sharing agreements under the proportional division method are allowed “in proportion to the professional services performed by each lawyer[.]” TDRPC 1.04(f)(1)(i). TDRPC 1.04 comment 12 details several requirements that must be in place to ethically divide fees under this method:
- Each lawyer performs “substantial services” for the client beyond the initial intake;
- A “reasonable correlation” between what each attorney does and each attorney’s share of the fee;
- So long as each lawyer performs substantial services, the division agreed to will control, even if that division isn’t directly proportional to the work done; and
- If the fee is to be divided in direct proportion to the services rendered, the division may occur at the end of the representation, so long as the terms of the arrangement include the basis for the division.
TDRPC 1.04 cmt. 12.
The Joint Representation
The joint representation arises frequently in plaintiff-side personal injury litigation where the client hires an attorney who then recognizes that the client’s best interests would be served by associating counsel skilled in litigating the particular subject matter, e.g., commercial motor vehicle crashes or “bad drug” litigation. Comment 13 provides guidance for how to ethically undertake joint responsibility for representing a client:
- Any referral for joint representation must based solely on the client’s best interest;
- This representation “entails ethical and perhaps financial responsibility for the representation”; and
- The referring attorney (a/k/a the associating attorney) must make “reasonable efforts” to ensure proper and adequate client communication and that the associated attorney is adequately representing the client;
- Ensuring adequate representation requires the referring attorney to reasonably investigate the matter and to refer to an attorney who is reasonably competent to handle it; and
- Ensuring adequate communication requires the referring attorney to monitor the representation to ensure the client is properly apprised–monitoring does not require attendance at depositions, hearings, or trial unless the client benefits.
TDRPC 1.04 cmt. 13.
Client Consent Required
Written client consent to the referral is required, “prior to the time of the association or referral proposed.” TDRPC 1.04(f)(2) & cmt. 15. The consent is only effective if the client is advised of:
- The identity of all lawyers or law firms sharing the fee;
- The method of fee sharing – proportional division or joint representation; and
- The share of the fee (e.g. 60% receiving attorney – 40% referring attorney, or 50% – 50%) or the basis for the division if following a proportional division.
TDRPC 1.04(f)(2) & cmt. 15. If that information is not presented to the client, the referral fee agreement does not comply with TDRPC 1.04, and the attorneys are left with the authority to recover from the client in quantum meruit only and not under the referral fee agreement. TDRPC 1.04(f), (g) & cmt. 15, 16.
Best Practices
Depending on the relationship between the referring attorney and the receiving attorney, two different methods for complying with Rule 1.04(f) are commonly used. In one scenario, the client signs a joint representation agreement with the referring attorney at the outset. That agreement meets the requirements listed above but may be on the referring attorney’s standard fee agreement form. The second scenario requires the client to sign an addendum to an original, single representation agreement consenting to fee sharing after the client has retained the referring attorney (but prior to the joint representation). In either scenario, it’s best to treat the fee sharing portion of the agreement as one would a disclaimer in a contract–written in in bold font, clearly set forth, so that the client can clearly see the fee, the fee split, the method for the fee split, and the identity of each attorney or firm taking on the client’s matter. The representation or engagement agreement is also a good place for attorneys who are undertaking a proportional division of the representation to set out with reasonable specificity who is responsible for what tasks, e.g., Attorney A will handle identifying and engaging experts, and Attorney B will handle identifying and witness statements. The agreement may also carve out tasks for which one attorney is not taking responsibility. This extra step in a representation agreement will help provide clarity to the client about which attorney to contact regarding which activity and may also provide a basis for a defense for one attorney in the event the other fails to perform. The attorneys involved in any referral arrangement should also engage their errors and omissions insurer to be sure that their policy(ies) are adequately structured, particularly for those referring attorneys under joint representation agreements because, even though they may not have a daily responsibility for the representation, they may still be on the line for any malpractice that occurs.
Attorney-to-attorney referrals are a tremendous business development opportunity for both the referring and receiving attorney. The requirements for an ethical agreement are not onerous. The bottom line is this: set a fee that is not unconscionable (TDRPC 1.04(a)); properly communicate with the client (TDRPC 1.03); and follow the requirements for fee sharing agreements (TDRPC 1.04(f)), all the while looking out for the client’s best interest, and the representation can be successful and lucrative for all involved.
