What Is An Attorney Referral Fee Agreement?
An attorney referral fee agreement is a legally binding provision between two or more attorneys outlining the "going price" for referring cases from one to the other. The referring attorney gets their "cut" of legal fees by receiving a portion of the legal fees collected from the referring client according to the agreement terms. The most common scenario is for a referring attorney to send a case to an attorney who specializes in handling a particular type of case . A divorce attorney may not have the time or resources to pursue a personal injury claim so they refer the claimant to a personal injury attorney who compensates them for the referral. Disbarred attorneys will often send their clients to licensed attorneys who pay a referral fee because they are unable to practice law.
The purpose of paying a referral fee is that it’s a win-win for the attorneys and clients. The referring attorney can continue making money off of a previously referred case for no additional effort, and the referring client staves off a potentially disastrous situation without spending any additional time or resources.
Key Components Of A Referral Fee Agreement
The key elements of a referral fee agreement must clearly articulate the terms under which the attorney is referring a case or matter to another attorney. For example, in a personal injury case, the referring attorney expects to be compensated if the case is settled or a verdict entered. Additionally, the agreement should specify the terms when the referral fee is to be paid. If the referring attorney wants the referral fee paid on an installment basis, the agreement should specify when the installments are due.
The amount or percentage of the referral fee varies from jurisdiction to jurisdiction, but in most jurisdictions the attorney is permitted to receive a percentage of the entire fee being earned by the firm that is handling or assuming responsibility for the referred matter. Some jurisdictions permit attorneys to share fees received from insurers. It is advisable for the attorney to periodically inquire as to the status of the matter which is referred to another attorney and if it is settled, the referring attorney should specifically ask for the referral fee and request that it be paid immediately.
Fee Sharing: Legal And Ethical Considerations
While an attorney referral service can be a great way to expand the range of services your law firm offers, it’s important to remember that fee-sharing agreements between participating attorneys are not as simple as "You refer me a customer, and I’ll give you a percentage of the revenue generated." There are strict legal and ethical guidelines and requirements when it comes to attorney-to-attorney referrals.
As the American Bar Association (ABA) puts it, "General rule: Fee-splitting between lawyers who are not in the same firm is permitted if the two lawyers divide responsibility for the representation, the division is disclosed to the client, and the client consents in writing."
We’ll break down this definition below.
The first guideline to keep in mind is that the attorney referral service you partner with deals only with clients. They’re clients who might need a legal referral, but there’s no certainty that they will.
Requiring that the potential client in question needs legal help helps avoid the risk that an attorney referral service could pass along referrals to candidates in exchange for a fee, regardless of their legal needs. In short, any referral must be legitimate; the client must need legal assistance.
As mentioned above, the general rule is that both attorneys share responsibility for the case. The two attorneys must split responsibility for representing the client: The referring attorney must agree to:
If the referring attorney doesn’t agree to perform these tasks, then the referring attorney should not be paid for the referral.
What’s the point of the above requirement? Why does it matter that both attorneys involved share responsibility for the case?
If the referring attorney isn’t responsible for the case and the referred client suffers damages due to the referring attorney’s negligence, the referring attorney can’t be held liable for that negligence or responsible for paying for the damages. The problem would lie with the attorney who wasn’t the referrer. This guideline protects the client from having to chase down the referring attorney for answers or potentially having two incompetent attorneys on a case instead of one.
There’s no way around this requirement. The referring attorney must take some action on the client’s behalf. If there are severability issues, then the referring attorney might have to actually perform some professional services for the client. These services could be as simple as preparing the potential client’s file for the primary attorney. But since these services aren’t likely to take much time, it’s also easy to see how this requirement might end up being an inconvenience to some referring attorneys.
In the first sentence of the American Bar Association definition, you saw the general rule about fee-splitting between attorneys «who are not in the same firm.»
In almost all states, attorneys cannot share a fee with another attorney who is not within the same law firm. For example, attorneys in an office could work together and share a fee with each other and not run into any problems because each attorney is in the same firm. However, attorneys in separate offices cannot share a fee, as it would violate ABA model rule 1.5.
When attorneys are in different firms, they can still share a fee if the client gives his or her informed consent in writing. In other words, the two attorneys can share the referral fee if the client agrees to it. If the attorneys do their work separately, the client may not even realize that attorneys from two different firms are working on his or her case.
Also, the Virginia State Bar’s Legal Ethics Opinion No. 184, issued on December 22, 1994, confirms that attorneys in different law firms may share a fee as long as the clients give their consent in writing and the two attorneys split the fees proportionately to the services rendered.
The main takeaway is that clients need to consent in writing to any and all fee-splitting arrangements involving referrals. If the arrangement is going to be complicated or involve multiple attorneys, clients should be given a written explanation of the entire arrangement. Clients should be able to stop participating in the arrangement at any time.
A good example of a reason for this last guideline can be seen in a case involving Michael A. Doskatsch of Manalapan, N.J., and NJSBA member Michael T. Palsrok of Old Pines, N.J. About six weeks after the two attorneys began receiving $5,000 retainers from a client, Doskatsch withdrew from the case, which went to Palsrok. At this point, the original client had spent about $15,000, but Palsrok had only spent three hours addressing the case.
As a result, the client requested a refund of his retainer amount from Doskatsch. The Ethics Committee of the New Jersey State Bar Association eventually found that both attorneys had violated the New Jersey RPC Rule 1.5(a). They failed to explain to the client the manner in which the legal fees would be shared for outside counsel, according to the opinion. As a result, they agreed to reimburse the client $7,500 each.
Sample Attorney Referral Fee Agreement
- The parties to the agreement should be clearly identified at the beginning.
- An identification of the non-referred attorney should be included next, and it should specify his or her status with respect to the agreement.
- The signature block for the referred attorney should follow, and should contain the full name under which the attorney does business, the attorney’s address, telephone number, fax number, and California Bar number.
- The designation of the case should be followed by the address of the court in which it is pending and the case number.
- The next piece of information should state the date on which the agreement was entered into. The date of the agreement can be made to run as of the later date of the signing.
- This section states that the referred attorney agrees not to take any action on the matter until the other attorney consents to its being handled.
- Section (7) permits the referred attorney to file a proof of service in the pending action, but states that only if the referring attorney consents to it may it be dated prior to the date of this agreement.
- This section provides that the referred attorney acknowledges that he or she has received no amount of money for this referral.
- In this section, the parties agree that the referred attorney will file a substitution of attorney into the case, and that the referring attorney will cooperate, even though the referral is for a fixed fee.
- This section refers to an agreement by the referring attorney to pay the referring attorney a fee amounting to typically one-third of the fixed fee, and provides for the deposit of that sum pending payment.
- This language states that neither attorney can do anything to interfere with the others work on the file.
- This section states that the referred attorney will be entitled to 30 days notice before payment of the fee is made, and that upon receipt of such a notice the fee will be placed in a holding account pending mutual agreement to distribute it, or an arbitration or court decision.
- This section states that the referred attorney will direct any inquiries about the status of the case to the referring attorney, and will advise the referring attorney of any inquiries with respect to repayment.
- This section states the referred attorney agrees to indemnify and hold harmless the referring attorney from any claims arising out of the referred attorney’s handling of the matter.
- Section (15) provides that any dispute that may arise between the parties will be resolved by binding arbitration.
- This section simply states that the agreement can be signed with multiple counterparts.
- This section states that the referred attorney agrees to return a copy of the agreement signed by the referring attorney within 30 days of the date the referred attorney initially signs the contract.
Referral Fee Best Practices In Agreement Drafting
To successfully implement referral fee agreements and mitigate potential legal issues, it is important for firms to follow best practices when drafting these contracts. An effective referral fee agreement should be clearly written, ensuring both parties fully understand their rights and obligations. The following tips can help law firms create comprehensive referral fee agreements that are essential for effective referral arrangements:
- Clearly define terms. The referral agreement should specifically state the amount, or a formula for calculating the amount, of the referral fee to be paid, as well as when that payment will be due.
- Include termination provisions. Referral fee agreements should include express provisions regarding the termination of the contract. This ensures there is a clear understanding of how the parties can end an otherwise indefinite agreement.
- Detail enforcement procedures. Although most referral fee agreements do not end up in litigation, specifying enforcement procedures can ensure the parties’ intent is preserved and help them avoid unnecessary conflict.
- Include terms of arbitration in the event litigation is necessary. Alternatively , firms can specify an exclusive jurisdiction and venue where all disputes related to the referral agreement must be resolved.
- Plan for confidentiality. Any matter involving client information or any information that is proprietary or confidential to the firm should generally not be discussed with third-parties, unless the client expressly agrees.
- Designate a governing law. It is a best practice to specify which state’s law governs the referral fee agreement. Referring attorneys and receiving attorneys operating in different states may be subject to different laws, so it is important to know how those laws will affect the referral arrangement.
- Consider your rules. When drafting a referral agreement, refer to the published opinions and ABA Model Rules for your state bar. Your state bar may have some rules that are unique to their state, and some rules can be more stringent than the ABA Model Rules. This can provide insight as to whether a referral fee arrangement will meet your state’s requirements, as well as whether your agreement terms are reasonable.
When drafting a referral fee agreement, properly defining the terms of the relationship and including enforcement provisions can help eliminate disputes from arising between firms. When both parties understand their rights and obligations, they are more likely to have a mutually beneficial relationship.
Don’t Make These Common Mistakes In Referral Agreements
One of the main pitfalls in referral fee agreements is ambiguous terms. When drafting the referral fee agreement, each term must be clearly defined for both attorneys involved. This eliminates any confusion down the road. Should there ever be a dispute between the two parties, the contract would serve as a guide to the meaning behind each term and eliminate any "he said" "she said" disagreements over the terms used in the contract. Some commonly used terms and phrases that can lead to ambiguous interpretations are: "above market value" and "reasonable and customary." Regardless of whether or not these terms are defined within the contract, the attorney who finds himself on the short end of the referral relationship may argue that the term means something different than what it states in the agreement.
Another common mistake is that the referral agreement is not in compliance with state and national referral rules. Each state has different guidelines regarding attorney referral agreement fees. The American Bar Association’s National Model Rules also have some very specific guidelines regarding the referral fee arrangement, which commonly requires that the referring attorney maintain joint responsibility over the outcome of the case. As such, it is important for attorneys to ensure that their agreement is in compliance with any regulations or guidelines that may set out requirements for its enforceability.
Additionally, as with any contract, the failure to put an attorney’s agreement into writing can be problematic. Verbal agreements can be difficult to enforce. Once an attorney has made a verbal agreement regarding the referral fee, the amount of the referral fee may become the subject of a dispute if any unhappy circumstances occur, such as a bad outcome in the referred matter. As such, each attorney should take care to ensure that all agreements are in writing.
The referral relationship is often difficult. When being referred a case, some attorneys try to cash in on the referral fee. As a result, many attorneys, especially those in small or medium sized firms, tend to steer clear of referral agreements. Often times attorneys believe that a referral fee is an unethical or unsavory way to conduct the business of being an attorney. However, when executed properly, without ethical or legal violations, an attorney referral fee arrangement can be a mutually beneficial situation for all parties involved.
Moreover, often times, the most reliable way for attorneys to secure new clients is through referrals from other attorneys. Many attorneys will not refer cases to other attorneys who they have not worked with before. They want to be absolutely sure that they are providing their client with the best representation possible. As such, having a referral fee relationship with another attorney ensures that they are receiving the same type of quality representation from that attorney for their clients.
Conclusion And Additional Resources
In conclusion, attorney referral fee agreements are a critical component of any successful law practice that relies on the formal transfer of clients. However, it is not enough to merely have a referral fee agreement in place. That agreement must be crafted carefully based on the type of relationship involved and the intricate referral fee guidelines imposed by the state bar and the California Supreme Court.
To ensure that you have a solid grasp of the rules and best practices for referral fee agreements , I recommend that you attend the Continuing Education of the Bar course titled Ethical Attorney Referral Fee Agreements and Conflict of Interest Rules for Your Law Firm. This outstanding, all-day course is presented by Barry C. Pruett, an authority on attorney ethics in California and a member of the State Bar’s Standing Committee on Professional Responsibility and Conduct.
