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RE: Advisory
Opinion 92-01
Arkansas
Bar Association
DATE: December 2, 1992
SUBJECT: Referral Fees
Referral
fees are historically defined as fees that are apportioned
between lawyers, or are paid by one lawyer to another
lawyer. Such fees have traditionally been looked on
askance by
the legal profession as being a "finder's fee"
or "forwarding fee" for attorneys who are
perceived as merely scouting for desirable clients.
Such a view, if ever appropriate, is certainly not
justified now.
The ethical law on referral
fees changed dramatically on January 1, 1986, with
the adoption of the Arkansas Rules of Professional
Conduct. Rule 1.5(e) provides for three basic scenarios.
1)
The referring attorney may assist the client in locating
an attorney
who is able to represent the client. Typically attorneys
do this on a gratis basis, accepting no fee
from
the client, accepting no responsibility for the work
subsequently
performed by the accepting attorney, and performing
no other work for the client in the matter. However,
the referring attorney may charge the client a fee,
reasonable
under Rule 1.5 (a), for the services provided in locating
the accepting attorney. Any fee received would come
from the client directly, and therefore would not
fall into the
commonly defined category of a "referral fee."
in this scenario
the only responsibility accepted by the referring
attorney
is to carry out competently the task of selecting
the second
attorney.
2)
The referring attorney may recommend to the client
that the matter
be handled by, or in connection with, another attorney,
whether
a larger firm, another lawyer in the same community,
or
a "specialist" in a metropolitan area. Implicit
in that recommendation
is that the first lawyer will be paid out of the fee
to be received by the second lawyer. Rule 1.5(e) places
three
requirements on a proper fee. (1) The client must
be properly
and timely informed of the participation of the second
attorney and must not raise any objection consent.
The
attorney should counsel the client as to the advantages
and
disadvantages of bringing in a second attorney. (2)
The total
fee must be reasonable. If the first attorney had
accepted
the matter on a 30% contingency fee, presumably that
percentage is reasonable. To increase that percentage
because
of the addition of a second attorney would likewise,
presumably,
be unreasonable. The referral fee is to be paid out
of the attorneys' share, not to be an additional charge
against
the client. (3) The distribution of the fee between
the attorneys
is in proportion to the services performed by each
lawyer.
For example, one attorney may handle pleading and
discovery;
the other, hearings and the trial. On the other hand,
one
attorney may simply provide as a hometown conduit
of information
to the client, and the second attorney may be entrusted
with the entire litigation. The client need not be
informed as to the manner of distribution between
the attorneys.
If the attorneys adopt this approach, that is the
division
of the fee based upon the time and effort put into
the case,
the attorneys are responsible, from a standpoint of
malpractice
liability and disciplinary sanctions, for their own
efforts,
but are not responsible under rule 1.5(e) for the
work of
the other attorney. (Whether they might be responsible
for the
acts or omissions of the other attorney based upon
their knowledge
or their involvement according to principles of the
common
law is a question not to be answered by this opinion,
for questions of law are outside the scope of this
committee).
3)
This approach is perhaps the most common and, since
1986,
has been specifically authorized by Rule 1.5(e). This
approach
is identical to the second except for the third element.
The attorneys may divide the fee on any basis they
wish,
regardless of how much or how little work (if any)
either attorney
does, provided that the two attorneys enter into a
written
agreement with the client. The agreement should expressly
state and clearly notify the client that each lawyer
accepts
joint responsibility for the complete representation.
See
Wolfram, Modern Legal Ethics 512 (1986). The
agreement
should be signed by the client. The statement provides
a legal basis for the client to sue either attorney
for alleged
malpractice committed by the other. The statement
in
effect says that the attorneys are treating themselves
as ad
hoc partners in a single 'firm for this particular
representation.
In particular, the referring attorney remains fully
responsible to the client for any deficiencies in
the representation
by the lawyer who has been brought into the representation.
Again, the ultimate distribution of the fee between
the attorneys need not be disclosed to the client.
In
both the second and third scenarios, the attorneys
are also acting as part of a single firm for purposes
of disciplinary responsibility for the particular
matter. See the fourth paragraph of the Comment to
Rule 1.5. Rule 5.1 requires that an attorney with
supervisory authority over another attorney must take
reasonable efforts to ensure that the other conforms
to the ethical standards. The comment to Rule 5.1
states in the fourth paragraph: ". . . . a partner
in charge of a particular matter ordinarily has direct
authority over other firm lawyers engaged in the matter.
. . . The supervisor is required to intervene to prevent
avoidable consequences of misconduct if the supervisor
knows that the misconduct occurred." Comparable
standards apply when the lawyers are linked by a referral
agreement.
Although
typically analyzed in terms of the commencement of
personal injury cases, division of fees among lawyers
may also be appropriate when the lawyer withdraws
from a case and is replaced by another, when one lawyer
is professionally disciplined during the life of the
agreement, or when an out-of-state co-counsel is involved.
See ABA/BNA Lawyers' Manual on Professional Conduct
41:701 (1991).
Referral
fees can play a valuable role in service to the public.
Without referral fees, younger attorneys or attorneys
in small communities or smaller firms may be reluctant
to accept cases perceiving themselves inadequate to
serve the client effectively. Conversely, such attorneys
may be reluctant to associate another lawyer or refer
to another lawyer, because of the loss of a fee or
a reduced fee. Such a decision may deprive the client
of a more qualified attorney. See Hazard, The Law
of Lawyerinq (2d Ed. 1991) page 121. With proper
knowledge and use of referral fees, those attorneys
may have a role in litigation, may continue to serve
their clients, may benefit from the tutelage of more
experienced attorneys, and may be compensated.
NOTICE
"This
is an opinion only of the Arkansas Bar Association
which is a voluntary association of attorneys licensed
to practice in the State of Arkansas, and reliance
thereon is voluntary and relieves any Association
member from liability for the content hereof. This
opinion is intended to be the Association's best interpretation
of the Model Rules of Professional Conduct as promulgated
by the Supreme Court of Arkansas as that code applies
to the written facts presented to the Committee."
ARKANSAS
BAR ASSOCIATION
By:_______________________________
Howard W. Brill
Reporter for Professional
Ethics
and Grievances Committee
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