The Mainstream Model Rule Approach
Most U.S. jurisdictions have adopted a version of ABA Model Rule of Professional Conduct 1.5(e), though some have adopted modified versions.
The ABA Model Rule provides that lawyers in different law firms may divide fees from a matter either 1.) “in proportion to the services performed by each lawyer,” or 2.) in some other way (i.e., not in proportion to the services performed), so long as “each lawyer assumes joint responsibility for the representation.”
What’s “joint responsibility”? The Comment to the Rule says that “[j]oint responsibility for the representation entails financial and ethical responsibility for the representation as if the lawyers were associated in a partnership.” Most authorities suggest this means some form of malpractice liability, but probably not vicarious liability for the conduct of the other lawyer or law firm.
In addition to that requirement of either joint responsibility or division in proportion to services performed, ABA Model Rule 1.5(e) requires that the client agree to the division of fees, “including the share each lawyer will receive.” The client’s agreement must also be confirmed in writing. “Confirmed in writing” does not require that the client sign the agreement, but merely that the agreement be confirmed to the client in writing. Prudent lawyers include this client consent in their engagement letter, or they get the client to sign a separate consent to remove all doubt.
Further, the total fee for the matter, including the share each lawyer or law firm is to receive, must be reasonable.
To comply with the Rule, because each law firm has to either perform services for the client or be jointly responsible for the work, both law firms must have an attorney-client relationship with the client. That can be established in one engagement letter or two.
Varied Approaches Among Jurisdictions
Broadly speaking, the jurisdictions fall into three groups on their requirements for referral fees.
First, some jurisdictions permit “naked” or “pure” referral fees, where the referring firm need not perform any work, nor have any attorney-client relationship with the client on the matters, nor share joint responsibility.
Second, some jurisdictions either precisely or generally follow the approach of ABA Model Rule 1.5(e), discussed above.
Third, two jurisdictions have stricter requirements. To see how the jurisdictions fall generally (some discretion in placement in categories is used) among these three categories, see sidebar on opposite page.
For the details of these rules, the ABA Center for Professional Responsibility has compiled a nice chart describing all these rules and linking to them, posted at americanbar.org/content/dam/ aba/administrative/professional_responsibility/mrpc-1-5.pdf.
Of course, violating an ethics rule—including the rule on fee division—can lead to lawyer discipline.
But there is also a body of law—a little too complex to cover here—about whether a fee-division agreement is enforceable as between the lawyers if the referral-fee arrangement does not comply with the applicable rule.
For example, the lack of client consent, or even the lack of the client’s agreement in writing, would violate many of these rules. Depending on this separate body of law, that may or may not mean that the referral fee agreement is unenforceable. Check your local case law. Or just follow the rule.
Which Rules Apply?
In these times, many referral agreements involve lawyers, matters or clients in different jurisdictions. That can make technical questions of compliance tricky.
Suppose a law firm in one jurisdiction refers a matter to a law firm in another jurisdiction, and the two jurisdictions have somewhat different versions of Rule 1.5(e). Almost every U.S. jurisdiction now has a choice of law rule, usually patterned after ABA Model Rule 8.5(b). So, in theory, it is possible to determine which rule would apply by applying that Rule—or maybe the choice of law rules in several relevant jurisdictions— to the facts.
We’ll leave that analysis to your separate research, but one suggestion: In addition to looking at the black-letter language of each jurisdiction’s Rule 8.5(b), consider the language in the Comment, which makes several important suggestions—that different rules might apply to different conduct by a lawyer in the same matter, that client agreement as to which rules apply might help and that lawyers may be protected from discipline if they make a reasonable guess about which law applies.
Decision-Making Under Uncertainty
Some of us, however, have learned over time that some questions are not worth the trouble to answer in everyday practice. The question of which law applies may be one of them.
Because in some multiple-jurisdiction situations there may well still be uncertainty as to what jurisdiction’s rules apply even after close analysis, and because compliance is often not difficult, one common approach is for lawyers to comply with the most restrictive of the potentially applicable rules. In other words, the State A lawyer referring a matter to State B might easily decide that, to comply with the “applicable” referral-fee rule, that lawyer
would comply with the state—among both State A and State B—whose rule is most demanding. Or, expressed differently, the lawyer might decide to comply with both states’ rules. Typically, these rules are written in a way that this is possible.
An Almost-National Approach
Taken further, if a lawyer’s practice involves routine referral of cases to lawyers in many other jurisdictions, the lawyer could use essentially the same division-of-fees language in engagement agreements for almost all jurisdictions. (As suggested by the sidebar on page 15, a few jurisdictions might require different language, or referral fees might just not be practical there.) For example, to comply with almost every jurisdiction’s version of Rule 1.5(e), a lawyer might draw up language that would:
- identify the firms that would receive a portion of the fee;
- disclose what portion of the fee each firm would receive;
- assert (truthfully, of course) that the total fee is reasonable;
- provide that each firm would assume joint responsibility for the matter;
- indicate that, by signing and agreeing to the language, the client agrees to the division of fees described; and
- require that the client sign the agreement.
It’s true that this approach might run the risk of requiring more of the lawyer than some jurisdictions require. But most lawyers find that these “additional” requirements are in no way burdensome. And the benefits of compliance—or even “overcompliance”— are clear.