A lawyer’s marketing efforts should focus on generating a strong referral pipeline—but can lawyers pay referral fees to non-lawyers?
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In most practice areas, a lawyer’s marketing efforts should focus on generating a strong referral pipeline — from both business colleagues and other lawyers alike. If those efforts are successful, you’ll probably need some guidance on attorney referral fees. Here it is.
There Are Clear Guidelines — Mostly
No referral fees are permitted for non-lawyers
Can lawyers pay referral fees to non-lawyers? Most attorneys know they cannot share fees with non-lawyers. The ABA Model Rules of Professional Conduct, adopted by most states, are quite clear. Rule 5.4 (a) states that “a lawyer or law firm shall not share legal fees with a non-lawyer.” Rule 7.2 (b) states that “a lawyer shall not give anything of value to a person for recommending the lawyer’s services.” A referral fee is certainly something of value. (See Michael Downey’s article in the ABA Litigation Journal, here, explaining the nuances of Rule 7.2 (b) and the “nominal” gifts of gratitude allowed.)
Referral fees are permitted for lawyers
Attorneys can share referral fees with other attorneys, as long as they comply with the governing ethics rules. Under Rule 1.1 of the Model Rules, for example, “lawyers” can only refer to competent lawyers. An experienced attorney may refer cases that do not match their expertise to newer or less experienced lawyers, ensuring that clients receive the best possible representation.
Rule 1.5 (e) specifically governs referral fees between attorneys, and spells out certain requirements, including these three:
- The division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;
- The client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and
- The total fee is reasonable.
A referral fee agreement is crucial in ensuring compliance with ethical guidelines. While the last two clauses are self-explanatory, many lawyers have questions about the meaning of the first clause. Some mistakenly believe that all fee division arrangements must be proportional. The rule is clear that this is not the only option. Non-proportional arrangements are allowed if “each lawyer assumes joint responsibility.” What does this mean?
Joint responsibility implies that both the referring and receiving lawyers would be held liable for any claim of malpractice. Some interpreters of the rule believe that it is enough for a referring lawyer to simply state responsibility in the referral agreement. Others believe that the referring lawyer must actually do something — other than just making the referral — in the actual representation. Regular brief contacts with the client or an occasional review of relevant documents would probably suffice.
Structuring Referral Agreements to Ensure Compliance
When structuring referral agreements you must comply with the ethics rules for attorneys and law firms. A well structured referral agreement should outline the terms and conditions of the referral including the referral fee percentage and payment terms. It should also state the scope of the referral and the responsibilities of each attorney involved.
One thing to include is a joint responsibility provision. This means both the referring and receiving attorney are responsible for each other’s professional actions and duties to clients. This not only complies with the ethics rules but also gives a sense of shared responsibility and trust between the attorneys.
To comply you must review the terms and conditions of the referral agreement thoroughly. Also keep accurate records of the agreement including all communications and any changes to the terms. This will protect the law firm from potential ethical breaches and maintain a professional relationship with the referral partner.
Referral Agreements Must Be In Writing
For a referral agreement to be enforceable it must be in writing and signed by both parties. This formalizes the arrangement and provides a record of the terms agreed. The agreement should state the details of the referral fee arrangement including the percentage of the fee and payment terms.
Compliance with the ethics rules for attorneys and law firms such as the ABA Model Rules of Professional Conduct is key. This includes making sure the client is aware of and consents to the referral agreement. The agreement must also be reasonable and not result in unconscionable fees otherwise it will be unenforceable.
To make it even more enforceable attorneys should document the client’s consent and be transparent throughout the process. By following these guidelines law firms can create referral agreements that will stand up to scrutiny and support ethical legal practice.
Better Safe Than Sorry
Many state rules follow Rule 1.5 (e) very closely, if not verbatim, but some do not. To ensure compliance in your jurisdiction, always check the state rules and apply them rigorously before considering referral fees. Many states have an ethics hotline to answer questions.
And always — even when a fee is not paid — remember to thank your referral source!
Related: Read “Rewarding Your Referral Sources,” by Sally Schmidt, for smart ways to stay in the good graces of your network.