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Sharing Fees and Paying Referral Fees in 2020

Sharing Fees and Paying Referral Fees in 2020Some of us remember the “good old days.” You could share your fees – i.e. pay or receive a referral fee – on almost any terms you wanted so long as both of you accurately reported your income to the IRS. There were times when I would receive a blind call on a personal injury case and just tell my legal assistant to give them the phone number of my good friend Bill/Tom/Craig. Then, nine months later, my good friend Bill/Tom/Craig would take me to lunch and give me a check for a percentage of the recovery on this case I knew nothing about.

That arrangement was referred to as the “naked referral” system and Texas was one of the few states to permit it. This practice became unethical in 1995, with the passage of amended Disciplinary Rule 1.04. Today, referral fees are permitted only if the division of the money is:

                        (i) in proportion to the professional services performed by each; or

                        (ii) between lawyers who assume joint responsibility for the case.

In addition to limiting the circumstances under which a referral fee can be paid, Rule 1.04 requires that the client consent to the arrangement (1) before the referral/handoff, and (2) in writing. This written consent must disclose:

                        (i) the identity of all lawyers participating in the fee, and    

                        (ii) whether the fee division will be based on proportionate services or joint responsibility, and

            (iii) how the money will be divided.

Any purported client consent that does not have this information, “does not constitute a confirmation within the meaning of this rule.” A failure to comply with the rule means at least one of the attorneys can only collect in quantum merit.

A new decision from the Dallas Court of Appeals contains a good summary of the case law involving Rule 1.04.[1] I know about this case because I was hired as an expert witness in the case and testified against the enforceability of an alleged referral fee agreement with the company’s former general counsel. The court struck my affidavit and granted summary judgment enforcing the referral agreement, but the Dallas Court of Appeals reversed and rendered.

I leave it to you to read the decision and its parsing of prior case law, most of which deals with situations where the client knew about and consented to the referral arrangement but failed to confirm the consent in writing. In this case, however, the court found that the company did not know or consent to the referral arrangement even though the general counsel knew and consented. Because of his fiduciary duty to the company-which he breached- neither the general counsel’s self-dealing knowledge of nor his consent to the referral fee arrangement was binding on the company.

The bottom line for lawyers who refer out business for a referral fee is that they must strictly comply with Rule 1.04 if they want to collect. Don’t wait until the money is on the table to find out there is a dispute. The checklist is pretty easy to put together:

  1. Get client consent BEFORE the referral;
  2. Get that client consent IN WRITING;
  3. Include in the written consent the information required by para. f(2); and
  4. Have the lawyer receiving the referral also sign off on the consent.

Don’t just trust everyone’s good faith to pay you a referral fee that violates Rule. 1.04.

[1] Cokin Boies & Young v. Moore, Feb.4, 2020