Referrals from other attorneys are a huge source of business for many law practices. But should those referrals prompt the payment of referral fees? Is it OK to insist another lawyer pay a referral fee in exchange for sending a client to them?

Many attorneys assume that paying referral fees to other attorneys is not just accepted, but expected practice. The amount of referral fees paid vary based on jurisdiction and practice area. For example, it is common in many personal injury actions for the retained lawyer to pay the referring lawyer a referral fee equal to 1/3 of what the law firm receives. In other areas, the referral fee can be a percentage of a flat fee or of the initial retainer amount received. In some cases, the referral fee is paid to the referring attorney as soon as the client is retained, and in other instances, it is not paid until the matter is fully resolved.

Although providing a referral fee to another lawyer for sending a potential client is a common practice in many areas, it may not be ethically responsible to do so.

Ethics of Referral Fees

Many jurisdictions follow the same general principles as those contained in the ABA Model Rules. Model Rule 1.5(e), Fees, addresses the issue as follows:

A division of a fee between lawyers who are not in the same firm may be made only if:

(1) the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;

(2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and

(3) the total fee is reasonable.

First, lawyers may ask, “Is payment of a referral fee actually considered a ‘division of fees?’” Most referral fees are calculated as a percentage of the money paid to the retained lawyer as a result of the representation. As such, it seems pretty clear that the fee paid to the retained lawyer is being divided with the referring lawyer. Further support for this argument can be found in that most lawyers do not pay a referral fee purely for the referral itself; a referral fee is generally only paid out if the retained lawyer receives a fee for his or her services, either on a retainer basis or as a percentage of recovery obtained in the action.

Once it is determined that the rule covering division of fees applies, the lawyers must consider whether payment of a referral fee is permissible. According to Rule 1.5(e), such a division is permissible in only two instances: (1) the lawyers may agree to divide the work involved in the representation and divide the fee based upon the proportion of the work performed by each or (2) they may both accept joint responsibility for the representation. (Rule 1.5(e) is silent on how the fee may be divided if each lawyer assumes joint responsibility for the matter.)

Assuming joint responsibility is not something to take lightly, particularly if the reason for referring the client to another lawyer is that the matter is outside of your area of expertise. Assuming joint responsibility means you’re on the hook if malpractice is committed. It also means that the client is considered your client as well as the retained lawyer’s client, with all of the associated attorney-client obligations. In fact, Comment [7] to Rule 1.5 of the New York Rules of Professional Conduct (which generally follow the ABA Model Rules) states specifically, “Joint responsibility for the representation entails financial and ethical responsibility for the representation as if the lawyers were associated in a partnership.” That’s no small responsibility.

Rule 1.5(e) also requires that the client consent not only to the payment of the referral fee, but also to the way the fee will be divided. This must be confirmed in writing.

Not all states follow the ABA Model Rules, but even in states in which payment of pure referral fees are permitted, other ethical rules may impact the payment of those fees. For example, the lawyer may still be required to notify the client that a portion of the fee will be paid to the referring attorney. Rules covering competency may also apply (attorneys must refer only to other attorneys who are competent). And where no “referral fee” per se is paid, but some other exchange is made (such as an agreement to reciprocate with referrals back to the other attorney or where another gift is given to the referring attorney), ethical rules covering advertising, including Model Rule 7.2 may come into play.

A Better Approach to Referrals

Given the potential ethical minefield and potential liability issues that could arise as a result of payment of referral fees, a far better course of action may be to eschew referral fees entirely and take the approach taken by one lawyer who says,

“I love knowing other attorneys who can help my clients get what they need efficiently and effectively. My clients are happy because of the great service they get, I’m happy because I can concentrate on the issues that are my niche while knowing the other issues are being handled, and the other attorney is happy because they have business. It’s a win-win-win situation.”

Why not let the goodwill you engender as a result of sending clients to lawyers who are in a better position to meet the client’s needs serve as your ‘referral fee?’ You’ll be doing what is right for the client and avoiding a potential headache down the road. Not only that, but you’re likely to receive more referrals back to you as a result.

(image: http://www.flickr.com/photos/rosiemrogers/5978677365/)