Legal Ethics: Contingent Referral Fees
From Washington Lawyer, March 2004
Contingent Referral Fees
(The March 2004 “Speaking of Ethics” column focuses on Opinion 286, which addresses fees payed by lawyers to other lawyers or non-lawyers. Rules 1.5(e),5.4(a), and 7.1(b)(5) are authoritative in Opinion 286, which permits and disallows certain arrangements. In particular and subject to conditions, legal fee sharing arrangements are allowed between lawyers only, while referrals fees are permitted to be transmitted from lawyers to non-lawyers.)
A payment by a lawyer to another person for the referral of legal business, which is contingent on the lawyer’s receipt of fees from the referred legal business and is tied to the amount of those fees, constitutes the sharing of legal fees. Such sharing can only be done with another lawyer, and only if certain client disclosure and other conditions are satisfied.
Legal ethics rules in the District of Columbia have long contained restrictions on the sharing of fees by one lawyer with another lawyer, and prohibitions on the sharing of legal fees with nonlawyers and on the payment by a lawyer of something of value to another person for the referral of legal work. …
Most of these restrictions continue in the District of Columbia Rules of Professional Conduct (“the Rules”), which became effective in 1991. Rule 1.5(e) establishes conditions under which lawyers not in the same firm may divide legal fees between themselves, and Rule 5.4(a) generally prohibits the sharing of legal fees with nonlawyers. … (T)he Rules liberalized some of the restrictions of the former Code, as they now permit a lawyer to pay consideration to a person for the referral of business to the lawyer, subject to certain disclosure obligations to the client. This provision, contained in Rule 7.1(b)(5), is unique to the District of Columbia.
In this inquiry, we address a question which touches each of these Rules—whether a payment to a lawyer or nonlawyer for the referral of legal business, which payment is contingent on, and tied to, the lawyer’s receipt of revenue from the referred matter, is a sharing of legal fees governed by Rules 5.4(a) and 1.5(e) (and therefore permitted only between lawyers), or is a Rule 7.1(b)(5) referral fee (and therefore payable to anyone). We addressed contingent referral fees in an earlier Opinion (No. 253), where we noted a "tension" between the fee-sharing prohibition of Rule 5.4(a) and the referral fee authorization of Rule 7.1(b)(5). …
In Opinion 253 … (t)he apparent tension or conflict between the fee-sharing prohibition of Rule 5.4 and the referral fee authorization of Rule 7.1(b)(5) was resolved in the Committee’s observation that Rule 7.1(b)(5):
was intended to be a narrow exception to Rule 5.4. Therefore, only those lawyers who disclose to their clients the information required under Rule 7.1(b)(5) can escape Rule 5.4’s general ban against the sharing of legal fees with nonlawyers.After careful consideration of Opinion No. 253, the Committee has decided to issue this Opinion to clarify the reach of Rule 7.1(b)(5) and the status of contingent referral fees under the Rules.
The central factor that determines the legality of contingent referral payments is whether they are payments to an intermediary for the referral of legal business (permitted under Rule 7.1(b)(5) to any recipient) or the division or sharing of a legal fee (lawful under Rule 5.4(a) only if between lawyers and subject to the requirements of Rule 1.5(e) if between lawyers practicing in different firms).
A non-contingent payment for the referral of legal business, i.e., one that is paid regardless of the success or outcome of the representation, is not a division of legal fees. Such payments are simply part of a lawyer’s marketing expenses, payable whether or not they produce revenue for the lawyer. Such payments, once prohibited in the District of Columbia (and still prohibited in most other jurisdictions), are lawful under Rule 7.1(b)(5) of the District of Columbia Rules of Professional Conduct. We believe that such non-contingent payments—such as a cash payment or gift certificate given to a person for each potential client referred to the lawyer—are the ones contemplated by that Rule. Because they are like payments from the general funds of the lawyer for advertising or other marketing expenses, and not from the proceeds of a particular representation, such payments (whether made to a lawyer or nonlawyer) do not run afoul of Rules 1.5(e) and 5.4(a) because they do not involve a division or sharing of legal fees.
On the other hand, the payment of a contingent referral fee, tied to the amount of the lawyer’s fees or recovery on behalf of the client, is not a marketing expense unconnected to the realization of income; rather, it is more akin to a commission, which directly reduces the fee income of the lawyer making the payment. The lawyer making such a payment is, in practical effect, paying some of the proceeds of a specific legal representation to another person.
When so viewed, such a payment is a form of fee sharing, which is prohibited except as between lawyers and except as the requirements of Rule 1.5(e) are satisfied. …
We conclude, therefore, that a payment to a nonlawyer for the referral of business, tied to the amount of revenue received by the lawyer from the referred business, is not permitted under the Rules. If paid to a lawyer, the payment must conform to the requirements of Rule 1.5(e).
We do not believe that Rule 7.1(b)(5) is an exception to the long-standing prohibition of the sharing of legal fees with nonlawyers, because it does not concern the sharing of legal fees. The Rule did mark a departure from prior ethics law in this jurisdiction, but only in its authorization of certain payments to others for the referral of legal business to a lawyer. When such payments are not contingent on and tied to the receipt of fee revenue by the lawyer, they are not a sharing of legal fees. Under this view of Rule 7.1(b)(5), there is no tension with Rule 5.4, as we do not interpret the former to apply to contingent referral payments to nonlawyers.
Adopted: November 17, 1998