ABA Clarifies Referral Fees Between Lawyers in Formal Ethics Opinion 474

Hinshaw & Culbertson LLP

On April 21, 2016, the American Bar Association ("ABA") Standing Committee on Ethics and Professional Responsibility released Formal Opinion 474, addressing referral fees under Model Rule 1.5(e) and the impact of conflicts of interest under Model Rule 1.7.  The opinion makes clear that pursuant to Model Rule 1.5(e)(1) a lawyer may only receive a fee from referring a case to another lawyer not in the same firm if the referring attorney performs legal services for the client on that referred matter or assumes joint responsibility for the representation.  Rule 1.5(e)(2-3) further mandates that the client must agree to such fee arrangement in writing, including the share each lawyer will receive, and that the total fee must be reasonable.

Thus, because the referring lawyer's professional responsibility to the client continues, fee arrangements under Rule 1.5(e) are subject to the conflict rules provided in Rule 1.7.  If a conflict exists under Rule 1.7, the referring lawyer can only accept the fee and continue to take responsibility for the client in the referred matter if the following requirements under Rule 1.7(b) are satisfied:

(1) The referring lawyer believes he or she will be able to provide competent and diligent representation to each affected client;

(2) The representation is not prohibited by law;

(3) The representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and,

(4) Each affected client gives informed consent, confirmed in writing.

Therefore, if a conflict exists and representation is prohibited because one or more of the conditions under Rule 1.7(b) are not met, then a referring lawyer in a state where the Model Rules apply cannot accept a fee for that referred matter. 

This differs from California Rule of Professional Conduct 2-200, which does not require ongoing responsibility to the client by the referring attorney.  Instead, Rule 2-200(A) provides that a lawyer may divide a fee for legal services if:

(1) The client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division; and,

(2) The total fee charged by all lawyers is not increased solely by reason of the provision for division of fees and is not unconscionable as that term is defined in rule 2-400.

Compliance with Rule 2-200 is non-delegable and failure to comply will prohibit any referral or fee splitting arrangement. 

Another difference between the Model Rules and the California Rules is when the client's written consent to a division of fees among attorneys must be obtained.  Rule 1.5(e)(2) uses the future tense in the phrase “including the share each lawyer will receive” to describe the fee division agreement.  As the opinion points out, "[t]he use of the future tense envisions that the fee division agreement will precede the division of fees."   Thus, under the Model Rule, the division of fees must be agreed to either before or within a reasonable time after the representation is commenced.  Alternatively, in California, client consent is not required to occur prior to the commencement of work.  A client's written consent may come at any time before the division of fees is made, including after the services have been fully performed.  Cohen v. Brown (2009) 173 Cal. App. 4th 302, 320.

The ABA's complete opinion, which walks through multiple hypothetical situations, can be found on the ABA's website: http://www.americanbar.org/content/dam/aba/administrative/professional_responsibility/aba_formal_opinion_474.authcheckdam.pdf.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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