Can attorneys take referral fees? Sure, but what do you really need to know? Referral fees are addressed in California Rule of Professional Conduct 2-200. Referral and fee splitting arrangements are permissible under Rule 2-200 as long as there is informed written consent from the client after full disclosure, and no increase in the overall fee to the client. Chambers v. Kay 29 Cal 4th 142 (2002). Compliance with Rule 2-200 is non-delegable and is required even where the referred attorney promises to obtain the informed written consent of the client for the referring attorney. Margolin v. Shemaria 85 Cal. App. 4th 891 (2000). Failure to comply with Rule 2-200 will prohibit any referral or fee splitting arrangement. Compagna v. City of Sanger 42 Cal. App. 4th 533 (1996) [also holding that a subsequently negotiated referral fee must be disclosed to the client and, if not, the referral fee reverts to the client].
Although the client must consent to fee splitting in writing, the agreement between the two attorneys need not be in writing and/or be signed by both attorneys. Cohen v. Brown 173 Cal. App. 4th 302 (2009). The client consent may come at any time before the division is made, including after the services are fully performed. Id. However, under proposed rule revisions awaiting California Supreme Court approval, a client’s written consent must be made at the time the lawyers enter into the agreement or as soon as reasonably practicable after entering
into the agreement.
When the requirements of Rule 2-200 are satisfied, agreements between attorneys regarding sharing or splitting fees will be enforced according to their terms even where the referring attorney’s compensation is simply a forwarding or referral fee and the referring attorney performs no additional services on the matter.
Fee Splitting Between Co-Counsel
Again, all agreements to split fees are subject to Rule 2-200. However, a non-complying attorney may still recover the reasonable value of the services provided that it is justifiable on some reasonable basis other than by the agreed percentage of the recovery. Huskinson & Brown v. Wolf 32 Cal. 4th 113 (2004). In the case where the client has not consented to the fee-spliting agreement in accordance with Rule 2-200, quantum meruit recovery may be had only against co-counsel and not against the client. Strong v. Beydoun 166 Cal. App. 4th 1398 (2008). However, where the client has consented to the fee-splitting agreement but the client later fires one of the attorneys, unless that agreement provides otherwise, quantum meruit recovery may be had against the client only. Olsen v. Harbison 191 Cal. App. 4th 325 (2010).
Class actions are different; written disclosure of the referral and approval of the agreement must be given by the court. CRC Rule 3.769. Also Rule 2-200 does not apply to agreements by lawyers leaving or dissolving a partnership.
Potential Liability Issues
Could there be any possible liability for making a bad referral? Well, there may be liability to the client for a “negligent referral,” for example a failure to make a referral until after the running of the statute of limitations. Miller v. Metzinger 91 Cal. App. 3d 31 (1979). However, under certain circumstances a cause of action for indemnity against malpractice claims may be stated by the non-negligent attorney against the negligent attorney. Musser v. Provencher 28 Cal. 4th 274 (2002). But no cause of action lies in favor of the referring attorney against the negligent attorney for loss of the expected share of the fee. Beck v. Wecht 28 Cal. 4th 289 (2002).
Even if you have complied with Rule 2-200 and are not negligent with referring your client over to another attorney, you should still be careful in referring a client. If a client has a bad experience with the referral, your judgment could be called into question by that client and he or she may decide to take their business elsewhere. In this economic climate, you need to retain as many clients as possible and have them speak highly of you. Follow Rule 2-200 and enjoy your referral fees!
Carol M. Langford is a lawyer in Walnut Creek specializing in attorney conduct and State Bar Defense matters. She is also an adjunct professor of professional responsibility at U.C. Berkeley Boalt Hall School of Law.
Filed Under: Ethics Corner