May 2005Volume 93Number 5Page 236

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Attorney Fees

Fee Not-So-Simple: Referral Fee Dos and Don’ts

It's permissible to refer cases to other lawyers and share in the fee, as long as all the requirements are met. But just because you can share a fee doesn't necessarily mean you should.

A general practitioner just can't – shouldn't, in fact – try to handle every type of case, or every case, that comes in the door. Attorneys who concentrate their practices will likewise want to decline most cases that fall outside of their skill areas, nor can they effectively handle every prospective case that does fall within their areas of expertise. What to tell those prospective clients who were hoping to retain you for their cases?

One option that's easy and always viable is to refer such individuals to one or more bar association's referral numbers. For example, ISBA maintains the Illinois Lawyer Referral Service, whose number is (217) 525-5297.

One virtue of choosing this option is that it's easy. Additionally, in referring a case to a bar association's referral number, you may be helping to support the bar association and its professional and community endeavors, since many bar associations do not charge the caller for the referral, but do charge their referral attorneys a percentage of the fees resulting from the referrals.

Another option is to refer those cases that you prefer not to handle to another attorney, perhaps in return for a referral fee from that attorney. Lawyers have long entered such fee-sharing arrangements with fellow counselors, and it's permissible under the Illinois Rules of Professional Responsibility to do so – but only if you make sure that your arrangement comports with those rules. Moreover, you'll want to be sure that the referral fee you request is reasonable for practice in your locale, and that you, the prospective client, and the attorney to whom you refer cases are all on the same page with respect to the amount of the referral fee.

Reasonableness, client consent

Illinois Rule of Professional Responsibility 1.5 should be your first source when you have any question about fees. In addition to requiring that attorney fees be reasonable and providing the various factors to be considered in determining reasonability, the rule permits a lawyer to share fees with someone else who's not in the same firm as long as the arrangement is disclosed to the client in writing, and the client agrees, also in writing.

Don't expect the courts to look the other way if you enter into an agreement that doesn't have the client's consent. As the first district appellate court said in Albert Brooks Friedman Ltd v Malevitis, 304 Ill App 3d 979, 985, 710 NE2d 843, 847 (1st D 1999), "the client's rights rather than the lawyer's remedies have always been this state's greatest concern." The court ruled in that case that any fee-sharing agreement that the client didn't know about is unenforceable as a matter of public policy. .

The written agreement must state that the fees are to be divided between the attorneys and describe how the fees are to be divided and what each attorney is to be responsible for doing in the case. RPC 1.5(f).

The rule goes on to state that the division of fees shall be made in proportion to the services performed and responsibility assumed by each lawyer, except where the primary service performed by one lawyer is the referral of the client to another lawyer. In that case, the division need not be proportional, but the referring attorney must agree to be legally responsible for the performance of services to the same extent as would any partner of the receiving attorney, and, again, the receiving attorney must disclose to the client that the referring attorney will be paid, and how much he'll be paid, for the referral. RPC 1.5(g).

Illinois courts have construed "legal responsibility" to mean financial responsibility in the event of malpractice on the part of the receiving attorney. Elane v St. Bernard Hospital, 284 Ill App 3d 865; 672 NE2d 820 (1st D 1996); In re Storment, 203 Ill 2d 378; 786 NE2d 963 (2002). For that reason, you'd better be comfortable with and confident of the quality of work that anyone to whom you refer a case will do.

This may not mean that you have to stay on top of what's going on in the case, but noting any deadlines under applicable statutes of limitation and following up to make sure that, say, a complaint has been filed in timely fashion isn't a bad idea. Also, if the client calls you for some handholding in the course of the matter, be responsive and follow up with the receiving attorney.

Beyond that, if the case is completely outside your expertise–which may be the main reason you want to refer it out–you may want to think twice about seeking a referral fee. Remember, you'll be on the hook for malpractice liability to the same extent as if you were partners with the receiving attorney.

How much is too much?

How much should you expect to receive as a referral fee? Anecdotal reports from a number of attorneys in practice around the state suggest that percentages vary widely and, of course, are always subject to negotiation. And, indeed, you might think that it's difficult either to charge a competitive fee or to know what's reasonable – the key requirement that the ethics rules reiterate over and over again – without finding out what your fellow attorneys charge.

However, don't even think about using ISBA or other bar association resources to name percentages or dollar figures. The U.S. Department of Justice, representing the Federal Trade Commission, wrote in a 1993 letter to the South Suburban Bar Association that "[it] is concerned about creation or implementation of an information exchange if it would likely facilitate collusion or otherwise would reduce competition. Exchanges of fee information are particularly sensitive, competitively."

Some published guidance in addition to that cited above is available to help you determine what referral fee may be reasonable. ISBA Advisory Opinion on Professional Conduct No. 90-18 (January 1991) concludes that the Rules of Professional Conduct impose no restrictions on the way such reasonable fee may be divided between the lawyers. But, of course, the total amount of the fee charged to the client must be reasonable. RPC 1.5(h).

In Corcoran v Northeast Illinois Regional Commuter RR Corp, 345 Ill App 3d 449, 803 NE2d 87 (1st D 2003), an Illinois court did discuss numbers and percentages. The court upheld the referring attorney's request for enforcement of a referral fee of 40 percent of the receiving attorneys' 25 percent contingency fee because all of the requirements of RPC 1.5, including reasonableness, had been met, even though the receiving attorneys had waived their own fee.

As in setting a percentage for a contingent fee case, of course, arguments based on the degree of difficulty of the case, the amount of work required or performed, or the risk of nonrecovery, may be made for upward or downward departures from any figure named by either a referring or a receiving attorney. Setting a referral fee, then, appears to be to some extent a matter of guesswork – and in any particular case, you should always consider it negotiable.

The ickiness factor

The perceived guesswork, however, discourages some attorneys from even attempting to charge referral fees. Some opt for charging merely nominal fees. And some feel that certain types of cases, including employment matters, lengthy contested divorces or custody disputes, don't lend themselves to referral fee arrangements. Such cases tend to be extremely labor-intensive on the part of the attorney who handles them, and may require a large amount of work before there's any realistic chance of any substantial remuneration.

In fact, many attorneys don't like the idea of referral fees at all. Just as a client may understandably be put off by the notion that part of the fees coming out of his pocket are going to someone who isn't apparently doing any work for it, some attorneys, too, feel, notwithstanding the rules of ethics that permit the practice, that there's something "icky" about charging or paying fees for referring cases to others.

Additionally, there's an excellent argument for taking the attitude that "what goes around comes around." The idea is that if you refer a case to another attorney who you think has more time and/or expertise and/or rapport with the client than you do, you'll receive non-monetary dividends from your action in the form of a happy client, who may refer to you friends and associates whose cases you may like better, and a friendly colleague who may likewise refer other cases to you and who may be available when you need some help.

Some attorneys suggest that instead of charging a referral fee, you agree to refer certain kinds of cases that may come to you to one or more attorneys in return for their referring certain kinds of cases that may come their way to you. Some also suggest that a receiving attorney might consider sending some nice gift, such as a pricey bottle of wine, theatre tickets, or fancy chocolates, to show appreciation for the referral.

Agreed referral arrangements or "gifts" in exchange for referrals, however, are fraught with perils, both ethical and legal. First, these arrangements might very likely be interpreted as "economic benefits" within the meaning of RPC 1.5, which must be disclosed and agreed to in writing by the client. Second, tax liability might attach to so-called "gifts" that are understood, whether explicitly or not, to be in exchange for referrals. The prudent attorney, then, will not enter into any referral arrangement without being certain to dot the i's and cross the t's of all ethical and statutory requirements, including client consent after disclosure and income tax reporting.

It's also worth bearing in mind that a short note saying "thanks" may be appreciated and remembered by the recipient more than anything. A simple note of thanks also raises no compliance or liability issues.

Variations on the fee

What if you learn that an attorney to whom you've referred cases has been raking in the fees without telling you about them – and without paying you the agreed-on sum? Your first step, of course, will be to stop referring cases to or doing any other business with that attorney.

You may also, of course, choose to sue. If the receiving attorney's fee agreements include RPC 1.5 referral fee clauses naming you, your claims may be fairly straightforward.

If the agreements don't comply with RPC 1.5, you still may be able to prevail under a theory that the receiving attorney violated his fiduciary duty to you as a joint venturer, see Holstein v Grossman, 246 Ill App 3d 719, 616 NE2d 1224 (1st D 1993) and Larry Karchmar Ltd v Nevoral, 302 Ill App 3d 951, 707 NE2d 223 (1st D 1999), or tortiously interfered with your prospective economic advantage, see Karchmar and Anderson v Anchor Organization for Health Maintenance, 274 Ill App 3d 1001, 654 NE2d 675 (1995), or breach of an implied contract to share fees, see Stefanich, McGarry, Wols & Okrei, Ltd v Hoeflich, 260 Ill App 3d 758, 632 NE2d 1064 (3d D 1994).

Remember that you may not pay a referral fee to a nonlawyer, such as a real estate agent or an investment advisor. RPC 5.4 and 7.2(b); see also ISBA Advisory Opinion on Professional Conduct No. 99-02 (September 1999). Court decisions have excepted bar association referral services from this rule (see Richards v SSM Health Care, Inc, 311 Ill App 3d 560, 724 NE2d 975 (1st D 2000); RPC 7.2(b)), judges (see Elane v St. Bernard Hospital, 284 Ill App 3d 865, 672 NE2d 820 (1st D 1996)), and attorneys who have been disbarred (see In re Storment, 203 Ill 2d 378, 786 NE2d 963 (2002)).

An attorney may accept a fee for referring a client to a nonlawyer for the provision of non-legal services only if certain conditions are met. See ISBA Advisory Opinion on Professional Conduct No. 97-04 (January 1998) (re: under what restrictions an attorney can receive a percentage of an investment advisor's fee in exchange for referring a client to the advisor). Accepting a referral fee is considered a business transaction with the client, not the provision of legal services, and is governed by Rule 1.8 of the Illinois Rules of Professional Conduct.

As Advisory Opinion 97-04 observes, case law interpreting Rule 1.8 provides that when a lawyer enters into a business transaction with the client it triggers a presumption of undue influence by the lawyer. To rebut the presumption, the lawyer generally must show by clear and convincing evidence that the transaction – including the fee the lawyer earned for referring the client to the nonlawyer for nonlegal services – was fair, that the client had the opportunity for independent advice of counsel prior to entering into the transaction, and that the client consented to the arrangement after full disclosure.

And what is "full disclosure"? The opinion states as follows: "Full disclosure would include informing the client about the risks of the transaction and the fact that the lawyer would not be involved in any way to protect the client's interest but would continue to receive a portion of the advisor's fee. It would be prudent to put such disclosure in writing."

The opinion goes on to say that "[l]iability for this business transaction, and costs of defense in connection with it, may not be covered by the lawyer's malpractice insurance policy. The lawyer must also comply with the law governing investment advisors and the payment of referral fees." •

Helen W. Gunnarsson, a lawyer in Highland Park, is an Illinois Bar Journal contributing writer.



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