By Lazar Emanuel [Originally published in NYPRR June 2001]
The best of three possible answers to a question on the CLE self-assessment test in the April 2001 issue of NYPRR was: “Under DR 2-103(B), a lawyer may pay a client referral fee to…another lawyer.” The tests that were submitted to us by our subscribers told us that our question had oversimplified the issues surrounding lawyer-to-lawyer referrals. In this article, we have broadened our inquiry to two related questions: (1) “When may a lawyer pay a client referral fee to another lawyer,” and (2) “When may two lawyers divide a client’s fees?”
DR 2-103(B), the provision referred to in our original question, must be read in tandem with DR 2-107(A). DR 2-103 is a long and complicated Rule governing all solicitations and recommendations of legal services. Section (B) of the Rule provides:
(B) A lawyer shall not compensate or give anything of value to a person or organization to recommend or obtain employment by a client, or as a reward for having made a recommendation resulting in employment by a client, except that a lawyer may pay the usual and reasonable fees or dues charged by a qualified legal assistance organization or referral fees to another lawyer as permitted by DR 2-107.
DR 2-107(A) permits two lawyers who are not members of the same law firm to divide a fee for legal services only if:
1. The client consents to employment of both lawyers after a full disclosure that they intend to divide the client’s fees;
2. The division of fees is either (a) in proportion to the services performed by each, or (b) by a writing given to the client in which each lawyer assumes joint responsibility for the representation; and
3. The total fee does not exceed reasonable compensation for all the services rendered to the client.
Three Referral Scenarios
Let’s suppose first that Lawyer A, a suburban lawyer who handles only real estate transactions, is consulted by a good friend and former client with a personal injury claim against a local taxi company. Lawyer A wants to refer the matter to Lawyer B, a Manhattan lawyer who handles only personal injury claims. Lawyer A is not interested in sharing in the fees, wants no further responsibility for the matter, and is too busy to do anything more than make an introductory phone call to Lawyer B. What should Lawyer A do to make his role clear to his former client?
It’s probably a good idea under these circumstances to write a letter to the client saying essentially:
I have referred your claims against ABC Taxi to Lawyer B. You understand that I will not perform any services in connection with this matter and I will not share in any fees earned by Lawyer B. For these reasons, I assume no further responsibility for the representation.
Note: A lawyer who does nothing more than recommend another lawyer is not entitled to share in any fees. [Nicholson v. Nason & Cohen, P.C., 192 A.D.2d 473, 597 N.Y.S.2d 23 (1st Dept. 1991).]
Now let’s assume the same essential facts but substitute the fact that Lawyer A wants to share in the fees paid to Lawyer B but doesn’t have time to do any of the work and doesn’t want to. Let’s also assume that Lawyer B is willing to enter into a retainer agreement with the client providing for a one-third contingency and is willing to share his fees with Lawyer A even though A will do no work. What must Lawyer A and Lawyer B do to avoid violating DR 2-107(A)?
When Client’s Consent Is Required
The two lawyers must get the consent of the client. The consent must make two things clear: (1) that the lawyers intend to divide the fee; and (2) that they assume joint responsibility for the representation. It’s not necessary to state that Lawyer A will perform no or minimal services, so long as it’s made clear that he is equally responsible with Lawyer B for the conduct of the litigation. It’s also not necessary that the lawyers divide the fee in accordance with the value of their respective services.
The Rule does not specify that the client’s consent be in writing, but it’s hard to see how anything other than writing will satisfy all the Rule’s requirements. The consent might read:
I have been informed and understand that Lawyer A has asked Lawyer B to become associated with him in the prosecution of my claims against ABC Taxi. I consent to the employment of Lawyer B and I have entered into a contingency retainer agreement with Lawyer B. I understand that if my claims are successful, Lawyer A and Lawyer B will share in the one-third contingency fee provided for in said retainer agreement. I understand further that Lawyer A and Lawyer B will divide the contingency fee between them as they may decide in their discretion and I consent to such division without any accounting to me. I enter into this consent in reliance on the assurance of Lawyer A and Lawyer B, confirmed by their signatures below, that they assume joint responsibility for this representation.
Meaning of ‘Joint Responsibility’
The two lawyers should understand what is meant by the term “joint responsibility.” Essentially, it means that the lawyers are acting with respect to the one matter in the same way as partners in a law firm act with respect to all the firm’s matters. Each is responsible for the competence of the other and for his ethical violations, malpractice, breach of fiduciary duty, and other acts of misconduct or impropriety. It may turn out in a particular case to be a heavy price to pay for a share in the fees, but it is the price for compensation without effort.
Now let’s change the facts again. Let’s assume that Lawyer A is not willing to assume joint responsibility for the representation but is willing to help with initial investigation of the claim and with the preparation of interrogatories and the conduct of depositions. Let’s also assume that Lawyer B is willing to bear sole responsibility for the representation and is willing to divide his fee with Lawyer A in proportion to the services they each perform.
Under these facts, the client’s consent might be worded:
I have been informed and understand that Lawyer A has asked Lawyer B to become associated with him in the prosecution of my claims against ABC Taxi. I consent to the employment of Lawyer B and I have entered into a contingency retainer agreement with Lawyer B. I understand that if my claims are successful, Lawyer A and Lawyer B will share in the one-third contingency fee provided for in said retainer agreement in proportion to the services performed by each. Lawyer A and Lawyer B shall be free to determine the relative proportions as they may determine in their discretion without accounting to me. I acknowledge and consent that Lawyer B, and not Lawyer A, is responsible for my representation.
The two lawyers should enter into a separate agreement specifying the basis upon which their services will be valued and the fee divided. Their services do not have to be valued equally, but once the total value of each is determined, the fee should be divided in the same proportions.
The New York courts are reluctant to inquire into the relative value of services in a fee-splitting agreement between lawyers. As long as a lawyer has contributed some services and has not refused to perform any of the services he agreed to perform, he will be permitted to recover. To avoid litigation between lawyers, it’s obviously advisable to reduce the fee-sharing agreement to a detailed writing specifying the work that each lawyer will do.
Comparing ABA Rules
We have seen that the New York Rule permits the referring lawyer to share in the fees either by assuming joint responsibility for the matter without contributing any services or by sharing in the services. In this respect, the Rule is the same as present ABA Model Rule 1.5(e).
However, the ABA Ethics 2000 Commission has proposed basic changes to this Rule.
If adopted by the ABA, the new Rule would read:
(e) A division of a fee between lawyers who are not in the same firm may be made only if:
(1) The client agrees, in a writing signed by the client, to the participation of all the lawyers involved, including the share each lawyer will receive; and
(2) The total fee is reasonable.
The Commission’s Comment suggests that it wanted to eliminate the referring lawyer’s option to share in the fees without sharing in the responsibility for the matter, though it might have said so more clearly. Its Comment includes the following:
…A lawyer should only refer a matter to a lawyer whom [sic] the referring lawyer reasonably believes is competent to handle the matter. [See, Rule 1.1.] If the referring lawyer knows that the lawyer to whom the matter was referred has engaged in a violation of these Rules, the referring lawyer should take appropriate steps to protect the interests of the client.
One final note: In a fee-splitting agreement, the total fees of all the lawyers must not exceed “reasonable compensation for all legal services…rendered the client.” [DR 2-107(A)(3).] The measure of reasonableness is not the value of the services as they would have been in the hands of the referring lawyer only. The services of a specialist may be billed at a higher rate than the services of the referring lawyer. The Rule simply requires that the sum of the services be reasonable under all the circumstances.
Lazar Emanuel is the publisher of the New York Professional Responsibility Report. He writes study materials for law students published by Aspen Publishers, Inc.
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