Law Firm Guide to Attorney Referral Fees

There is a lot of confusion about attorney referral fees. Some attorneys and law firms aren't quite sure about what's ethical and what's allowable. This mini-guide to attorney referral fees takes a closer look at attorney referral fees and how lawyers can have attorney referral agreements and stay within the rules.

What Is an Attorney Referral Fee?

It is common for attorneys to refer business to other lawyers, and when this happens, the referring attorney may receive a lawyer referral fee in return. How attorney referral fees are arranged can be complex, but they must always fall within the rules governing lawyers. Here are some examples of when there may be a referral agreement between attorneys.

Example 1: An experienced attorney decides to pass on taking a case that doesn't require her high skill level. She decides to refer the case to a new attorney who has his own small law firm. If there is an attorney referral fee agreement between them, the attorney receiving the referral will need to pay a lawyer referral fee according to that agreement. 

Example 2: A new attorney doesn't have the capacity to take on a new case because she doesn't have enough experience. She decides to refer the case to a more experienced law firm. If there is an attorney referral agreement between her and the law firm, the law firm will pay an attorney referral fee to the referring attorney.

These are just two examples of when an attorney may pay a lawyer referral fee. But it's important to note that any referral fee agreement between attorneys must comply with the ethics rules governing attorneys and law firms.

What Lawyer Referral Fees Are Allowed/Disallowed?

There are some attorneys who completely shy away from lawyer referral fees because they don't want to get in trouble. In many cases, the inclination to avoid trouble is a good one especially if there is a lack of understanding about what is allowed and what isn't. First, let's take a look at the rules regulating lawyer referral fees and attorney referral fee agreements.

The American Bar Association (ABA) Model Rules of Professional Conduct have clear rules about attorney referral fees. These rules have been adopted without much change in some states. Check with your state rules to be sure of the rules for your practice. Model Rule 5.4(a) states that an attorney is not allowed to share legal fees with anyone who isn't an attorney. And Rule 7.2(b) says that a lawyer isn't allowed to give anything of value to someone for recommending the lawyer's services. However, when you go deeper into the Model Rules, Rule 1.5(e) talks about exceptions to this general rule.

Attorney referral fees are allowed under the following circumstances:

• 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.

It's also important to note that the rules also state that an attorney can only refer a client to another “competent” attorney. In other words, if an attorney refers a client to an attorney who they know can't handle the case or who doesn't have sufficient skills or experience, they could be in violation of the rules.

The ABA Model Rules governing lawyer referral fees aim to ensure that attorneys aren't incentivized to refer clients simply to receive fees without doing any of the work. For obvious reasons, referrals tainted by greed or negligence can harm people seeking legal help and ultimately harm the legal industry.

Each state has its own rules regarding lawyer referral fees. And while some state rules follow the ABA Model Rules very closely some have added their own requirements so take the time to investigate your state's lawyer referral fee rules before you enter into an attorney referral agreement.

Here's an Example of a Scenario Where an Attorney Referral Fee May Be Allowed:

A solo practitioner is slammed with work so he decided to refer some of his cases to another small law firm. He agrees to handle certain aspects of the case while the other attorney files all the required paperwork. The client agrees to the arrangement and all associated fees. The attorney referral agreement is in writing.

When you enter into an attorney referral agreement, be sure that your attorney referral fee percentage is reasonable and that the agreement is in writing.

What Does Joint Responsibility Mean?

Joint responsibility means that lawyers are not only responsible for their professional actions and duties but also for the professional conduct and actions of the lawyer or lawyers with whom they are working.

It is similar to the responsibility that partners in a law firm share for each other's behavior. As such, attorneys need to take great care when deciding whether to enter into joint responsibility for the representation of a client.

When attorneys make a joint responsibility agreement, they become responsible for each other's fiscal and ethical behavior with regard to their agreement.

Note that when a lawyer refers a client to another attorney, the original attorney's obligation to the client continues. If the referred attorney performs substandard or questionable ethical work, the original attorney is responsible since they brought the new attorney on board and remained jointly responsible for the case.

Due to the nature of legal work and the associations that attorneys and firms make with one another and with other entities and individuals, joint responsibility issues frequently arise. Such issues may include conflicts of interest surrounding the representation of a client or because of associations and agreements between attorneys, firms, entities, and clients.

When attorneys are jointly responsible for one another, rules and precedents hold that the conflicts of one attorney or a firm are ascribed to the other.

In other words, it is possible for an attorney with no conflicts to associate themselves with a firm or another lawyer who does have a conflict of interest and subsequently be deemed to have conflicts.

Working with an ethics lawyer is key to preventing this and other issues from occurring in the context of joint responsibility.

Best Practices for Attorney Referral Agreements

Since both lawyers in a referral agreement are jointly responsible for the case, referring a case can be risky. Here are some best practices for entering into a referral agreement.

• Make Expectations Clear: Attorney referral agreements should be crystal clear about what each attorney on the case is expected to do. If only one attorney will be physically handling the case, make sure that your agreement states this fact. Otherwise, spell out in detail the responsibility of each attorney. The last thing you want is a misunderstanding about responsibilities in the middle of a client case.
• Spell Out Attorney Referral Fee Percentages: This is one place where you don't want to make any assumptions. What percentage of the fee will the referring attorney receive? Depending on where your practice is located, a typical attorney referral fee percentage can be 30% or more. Or, the attorney referral fee percentage can be less than 30%. You need to figure out what the typical attorney referral fee percentage is in your state and what is considered reasonable.
• Refer to Trusted Attorneys: When the ABA Model Rules state that you must refer to a competent attorney, they are making you responsible for the behavior of any attorney you refer a case. This means that if the attorney makes huge mistakes, you could be sued for malpractice. This is why it's generally preferred to refer cases only to attorneys you know and trust. If you haven't worked with them before, you need to check their reputation to be sure that they are competent enough to serve your client.
• Pay Your Fees: If you are an attorney who has received referrals, don't run out of the fee. If you fail to live up to your attorney referral fee agreement you won't be trusted again. If you're balking at paying a fee “just for a referral” consider it the price of doing business without having to do any of the legwork to find the client. Help yourself build trust in the legal industry by paying your lawyer referral fees promptly.

How to Make a Fee-Sharing Agreement Enforceable

Fee-sharing agreements between lawyers must follow certain rules in order to be enforceable. In all cases, agreements between lawyers for the sharing of fees must be ethical and follow the precepts of all relevant laws.

In every state except California and a few others, attorneys are prohibited from collecting fees based on a fee-sharing agreement when they have not done an appropriate amount of work to earn those fees. In other words, outside of the Golden State, an attorney must perform some work for the fees they are paid, even if from a referral.

For instance, in California, it is acceptable for a criminal defense attorney to receive a referral fee for simply recommending a civil lawyer and not performing any work on the civil case. However, in other states, this practice is prohibited. The criminal lawyer would have to engage in some sort of work to earn the referral fee.

Is My Fee-Sharing Agreement Enforceable?

Determining whether your fee-sharing agreement is enforceable can be accomplished by complying with the following:

• Written disclosure of the fee-sharing agreement to the client or clients;
• Written consent provided by the client of the fee-sharing agreement;
• Zero fee increases due to the existence or addition of a fee-sharing agreement;
• Total fee that is not unconscionable.

Regarding the first two bullet points, there can be no doubt that the client knew of and consented to the fee-sharing agreement, hence, the existence of the written notification and written consent requirements.

The last two points show that fees must not rise solely because of a fee-sharing agreement and that fees must not be unconscionable. These two rules keep attorneys focused on the needs of their clients instead of legal profiteering.

Can Lawyers Pay Referral Fees to Non-Lawyers?

In short, it is not permissible for lawyers to pay referral fees to non-lawyers. Because the rules establishing this prohibition are written in clear statutory language, there's no room for lawyers looking to engage in this practice.

Two of the rules governing kickbacks and the sharing of fees with non-lawyers are Rule 5.4(a) and Rule 7.2(b). The former states that a lawyer shall not share legal fees with a non-lawyer. The latter is just as clear, providing that no lawyer shall give anything of value to anyone for having recommended their services.

Referral fees paid by one attorney to another, however, are allowable by the ABA and are governed by Rule 1.5(e).

Attorney Referral Fees: Final Thoughts

All aspects of attorney's fees are governed by the ABA for the protection of the clients and their attorneys. It is always of utmost importance that attorneys understand and are up to date on the rules and regulations surrounding the setting of fees. Anything less could result in damage to your clients, reputation, and professional license.

The next time you decide you want to create an attorney referral agreement with another lawyer, check the rules and get advice from other lawyers who've done it before. And with intuitive legal practice management software like Smokeball, you can even keep track of your referral sources. To learn more, schedule a free demo today!