REFERRAL FEE AGREEMENT PITFALLS

The practice of securing a referral fee when referring cases from one lawyer to another is big business in California. Usually these relate to contingent fee tort cases with the agreed referral fee being a given percent of total fees recovered.

 

Hundreds of attorneys across the state routinely refer cases to attorneys whose specialty matches the client’s particular case. While dozens of law firms solicit referral business with agreements to pay a referral fee, not all firms are eager to honor their agreements. Some have found a way to manipulate the client in a way that ostensibly permits the referred attorney to renege on the referral fee promise.

 

Rule 2-200 Governs Referral Fee Agreements

 

Rule 2-200 of the California Rules of Professional Conduct establishes the process that must be followed before a referral fee agreement is enforceable.

“(A) A member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless:

(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 ...”

Until 1975 the rules of professional conduct prohibited referral fees from being paid for a pure referral. Previously, a fee division was required to be “in proportion to the services performed or responsibility assumed... [by the referring lawyer].” Since 1975 a “pure referral” has been ethical and legal if, but only if the client is informed in writing of the specific terms of the fee division, and then consents in writing to the arrangement.

 

Public Policy Behind Permitting Fee Divisions On Pure Referrals

 

The former rule encouraged unqualified attorneys to process cases beyond their skill levels, hoping to secure a settlement and their entitlement to the full fee. Obviously, this policy worked to the detriment of the many clients.

 

Understandably, many litigation firms preferred not to divide duties or responsibilities with unqualified attorneys. This thinking led many firms to pay referral fees without compliance of the then-existing rules.

 

The rule change of 1975 was hailed as better public policy because it encouraged untrained lawyers to get clients into the most skilled hands possible. “If the ultimate goal is to assure the best possible representation for a client, a forwarding fee is an economic incentive to less capable lawyers to seek out experienced specialists to handle a case.” Moran v. Harris (1982) 131 Cal.App.3d 913,921-922.

 

The 1975 change also mandated that the client be informed in writing of the specific terms of the fee division and that the client’s consent be in writing.

 

Failure to Conform to Rule 2-200 Leaves Fee Division Contract Unenforceable

 

The failure to secure the client’s written consent authorizing the fee division leaves the referring attorney with an unenforceable contract for a fee division. Unenforceable because it has been deemed better public policy by the State Bar and the California Supreme Court to deny the referring attorney the promised fees than to deny the client a veto power over a fee splitting arrangement.

 

Failure to scrupulously follow the dictates of Rule 2-200 is tantamount to handing the referred lawyer the ethical grounds to refuse to pay the agreed referral fee. When the referring lawyer sues to recover the promised fee, this failure also ensures that he/she will fall victim to a motion for summary judgment.

 

Even where the referred attorney promises (orally or in writing) to pay the referral fee and be responsible for securing the client’s consent, the referring attorney is without remedy if the consent is not obtained. Subsequent pleas of fraud or equitable entreaties such as estoppel and unjust enrichment will fall on deaf judicial ears when the referring attorney is flailing around for an exception to the mandate of Rule 2-200. The public policy behind Rule 2-200 will trump every argument the referring attorney can muster.

 

Client Consent Not Required Within a Law Firm

 

As the rule states, client consent to a fee split is not required when the attorneys are associates or partners within the same firm. In that limited setting there is no impediment to an associate or partner being paid a percentage of the firm’s total fee derived from a particular case.

 

In Chambers v. Kay (2002) 29 Cal.4th 142, the referring attorney tried to come within this “law firm” exception by contending he and the referred attorney were engaged in a joint venture. The court rejected Chambers’ argument despite his having shared costs and had been requested by Kay to serve as co-counsel in the case.

 

The Supreme Court held that by “imply[ing] a joint venturer exemption, we essentially would stretch the rule’s exemptions ‘so as to cover situations which were not contemplated by the rule.’” (Id., 152)

 

Timing Regarding When Consent May Be Obtained

 

Consider this not-so-hypothetical situation: Attorney A refers a client to Attorney B, and obtains from B a fee division agreement. Lawyer A gets B’s promise to secure the informed signed consent. Attorney A does nothing further. When the case settles three years later, Attorney A seeks payment pursuant to the written fee division contract between the lawyers. Attorney B, however, claims that payment would be unethical because the client never signed the consent. At this point Attorney B is quite correct, notwithstanding his failed promise to secure the consent.

 

Attorney A then locates the client, provides full written disclosure of the fee splitting arrangement, and belatedly secures client’s written consent to the fee division. Upon receiving the signed consent Attorney B raises the objection that the consent is invalid because it was obtained after disbursement of the client’s funds.

 

In Mink v. Maccabee (2004) 121 Cal.App.4th 835, 838, the consent was obtained after the case settled. The court concluded: “Thus, while we agree with Mink that written [fee division] agreements are preferable to oral ones, and that written consents obtained early in the process are preferable to those obtained after-the-fact, those preferences are not contained in Rule 2-200, and therefore cannot invalidate a written consent which complies in all respects with the plain language of the rule.”

 

So long as the consent is obtained before the fee division, the contract becomes enforceable and complies with Rule 2-200.

 

Client’s Purported Subsequent “Revocation” of the Consent

 

Add to the foregoing not-so-hypothetical assumption: after Attorney A finally secures written consent, referred Attorney B responds by motivating the client to revoke that consent.

 

While there are no reported decisions dealing with this subject, the author has been involved with two such cases. One resulted in an unpublished decision, and the other as an expert witness.

 

Consider the temptation to some referred attorneys if they could circumvent a substantial referral fee by simply persuading the client to revoke his/her consent. Most satisfied clients would be sympathetic to their attorney’s “sincere” request to avoid paying a referral fee to some early-on attorney who “is trying to grab some money from my hard work on your behalf.” If simple persuasion were not enough, what would be the response if Attorney B offered the client $100,000 to secure that revocation?

 

The client is neither a party nor a third party beneficiary to the fee division contract. The idea that a fully performed contract can be nullified by someone not a party to the agreement is most unsettling. Clearly, neither attorney has a right of unilateral rescission once there has been substantial or full performance. What legal principle could justify the instability created if an uninvolved client could dissolve the agreement when neither party has that power?

 

The referring attorney could never rely on the efficacy of the agreement so long as Attorney B held the client’s confidence.

 

Two Decisions Applicable to Purported Revocations

 

Although Margolin v. Shemaria (2000) 85 Cal.App.4th 891, did not deal directly with the revocation issue, it does offer helpful dicta supporting the importance of stability in the referral fee contract. Margolin involved a 50/50 fee agreement after the client was orally supplied the details of the agreement.

 

The court affirmed the trial court’s directed verdict in favor of the referred attorney because Rule 2-200 requires written disclosure to the client.

 

The court discussed the significance of a written consent, stating that “[r]equiring the client’s written consent to fee sharing impresses on the client the importance of his or her consent, and of the right to reject the fee sharing. Additionally, it benefits the attorneys themselves because it ensures that the client will not later claim there was no consent…” (Id., p. 903) (Emphasis added.)

 

More recently, purported revocation of the consent was the central issue in a 2002 case that resulted in an unpublished decision that rejected the contention that the client could subsequently revoke consent previously given. This unpublished case held that “the revocation itself [was] of no legal significance.”

 

Although an unpublished decision is inappropriate for citation, the persuasive language of the unanimous opinion is undeniable: “As the Court of Appeal explained in Margolin ... Rule 2-200's requirement of informed written consent by the client ‘ensures that the client will not later claim there was no consent.’ This protection afforded the referring lawyer by the client’s written authorization, recognized in Margolin, would be meaningless if the client retained the right to revoke that consent: There would be no need to ‘claim there was no consent’; the consent would simply be withdrawn whenever the lawyer to whom the case had been referred convinced the client to do so (thereby capturing all the fees for himself or herself).”

 

The California Supreme Court denied the referred attorney’s Petition for Review. Again, not a decision for citation, but one can readily deduce that the Supreme Court has noted the logic of denying clients a right of revocation.

 

While either attorney may secure the client’s written consent, only the most naive referring attorneys would delegate this responsibility.

 

___________________________

Dana Hobart is a partner in

O’Reilly & Hobart and can be

reached at GdanaHobart@aol.com