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Opinions

Ethics Opinion 369

Sharing of Legal Fees With a Lawyer Referral Service


A lawyer may remit a percentage of fees earned on a matter referred to her by the inquiring "lawyer referral service" only if such fees (1) are derived from litigation matters, as set out in Rule 5.4(a)(5) of the D.C. Rules of Professional Conduct, or (2) are "usual fees" of such a service within the meaning of comment [6] to Rule 7.1.

Applicable Rules

  • Rule 5.4 (Professional Independence of a Lawyer)
  • Rule 7.1 (Communications Concerning a Lawyer’s Services)
  • Inquiry

    The committee has been asked whether the D.C. Rules of Professional Conduct ("D.C. Rules" or "Rules") permit certain payments to a lawyer referral service ("Service"). The Service would direct prospective low-income clients to a network of lawyers willing to work for such clients at modest rates. For each client referred to a network lawyer by the Service, the lawyer would remit to the Service a flat "referral" payment ("Flat Payment") of approximately $200. Should the representation proceed beyond the initial consultation, the network lawyer would further remit to the Service fifteen percent of any fees earned through the representation ("Percentage Payment"). The arrangement would apply to all types of legal representation and would not be limited to litigation matters. The Service is or will be qualified as exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code.[1]

    The Service undertakes to "provide quality assurance and accountability" through a dispute resolution panel. The inquiry does not state whether the Service is open to all D.C. Bar members, whether it requires all participating lawyers to have reasonably adequate malpractice insurance, or whether it will refer cases to lawyers who own, operate, or are employed by the Service.

    For the reasons set forth below, we conclude that (1) the D.C. Rules permit the payment of the Flat Payment and (2) the Percentage Payment is permitted only if within Rule 5.4(a)(5) or comment [6] to Rule 7.1.

    Analysis

    D.C. Rule 7.1 provides that "[a] lawyer shall not give anything of value to a person (other than the lawyer’s partner or employee) for recommending the lawyer’s services through in-person contact." D.C. Rule 7.1(b)(2). The comments to that rule, however, state that "a lawyer may participate in lawyer referral programs and pay the usual fees charged by such programs." D.C. Rule 7.1, cmt. [6] (emphasis added).

    Rule 5.4(a) provides that a lawyer may not share legal fees with a non-lawyer. The purpose of this rule is "to protect the lawyer's professional independence of judgment." D.C. Rule 5.4, cmt. [1].

    In 1989, this committee opined that a non-profit public interest legal services project could receive a percentage (one sixth) of fees paid to attorneys to whom the project referred clients and who agreed to charge reduced fees. D.C. Legal Ethics Op. 201 (1989). Noting that then-applicable Disciplinary Rule 2-103(C) of the D.C. Code of Professional Responsibility expressly permitted "the usual and reasonable fees or dues charged by a lawyer referral service," we found that the Percentage Payment was reasonable and, based upon a survey of referral arrangements in other jurisdictions, usual as well. Id. In reaching this conclusion, the committee noted that the Project’s referral service was "operated for the benefit of the public" and that it was designed "not . . . to procure financial benefit or legal work for a lawyer as a private practitioner" but "to make affordable legal services available to a needy population that might not otherwise be able to retain legal assistance." Id. The opinion added that the arrangement "would apparently also be proper" under Rule 7.1 of the proposed D.C. Rules, which was then pending before the D.C. Court of Appeals, but made no mention of Rule 5.4 of the proposed D.C. Rules. Id. The arrangement, said the committee, "does not impair or control the independent professional judgment of referral attorneys, nor subject them to conflicting interests or divided loyalties." Id.[2]

    In 1998, we concluded that although Rule 7.1(b)(5), which subsequently was removed from the D.C. Rules, permitted a lawyer to pay a non-lawyer for referring business to the lawyer, "a payment to a nonlawyer for the referral of business, tied to the amount of revenue received by the lawyer from the referred business" violated Rule 5.4(a) and was not permitted. D.C. Legal Ethics Op. 286 (1998). Opinion 286 applied generally to referrals and, unlike Opinion 201, was not limited to payments to nonprofit organizations.

    In 2001, we opined that D.C. Rule 5.4 was not violated by a lawyer’s participation in a federal General Services Administration (GSA) program that engaged lawyers to represent federal agencies and that required such lawyers to pay GSA one percent of fees received from such agencies. D.C. Legal Ethics Op. 307 (2001). The fees were used to fund GSA’s operation of the program. Id. We noted that comment [6] to Rule 7.1 "distinguishes between a ‘recognized or established agency or organization’ offering a ‘lawyer referral program,’ to which a lawyer may ‘pay the usual fees charged by such programs,’ on the one hand, and ‘payments to intermediaries to recommend the lawyer’s services’ . . . on the other." Id. The concern about the latter type of arrangement, we said, was grounded in the desire to "prevent[] non-lawyer intermediaries from using their power over lawyers who rely on them for business referrals to influence those lawyers’ ‘professional independence of judgment.’" Id. (citing D.C. Rule 5.4, cmt. [1]). The opinion described the former type of referral arrangements—arrangements that "do not compromise lawyers’ independence" and involve recognized or established agencies or organizations—as a "positive development," but recognized that the D.C. Rules "are less clear than they could be on this issue." Id.; see D.C. Legal Ethics Op. 329 (2005) (noting that the policy considerations underlying the Rule 5.4(a) prohibition are "whether a proposed arrangement would interfere with a lawyer’s independent judgment" and "whether refusing to permit the arrangement would result in fewer legal resources being available for those in need of them").

    As of 2005, then, Rule 5.4(a), comment [6] to Rule 7.1, and Opinions 201, 286, and 307 permitted fees to be divided with a non-lawyer on a percentage basis only where the non-lawyer was a lawyer referral service. At that time, there were four exceptions to the prohibition of Rule 5.4. None related to the inquiry at hand. In 2005, however, an additional exception was recommended by the D.C. Bar. See D.C. Bar Rules of Professional Conduct Review Committee, Proposed Amendments to the District of Columbia Rules of Professional Conduct: Final Report and Recommendations 174-77 (2005) ("Wortham Report"). This exception was adopted by the D.C. Court of Appeals, effective February 1, 2007, and provides that—

    a lawyer may share legal fees, whether awarded by a tribunal or received in settlement of a matter, with a nonprofit organization that employed, retained, or recommended employment of the lawyer in the matter and that qualifies under section 501(c)(3) of the Internal Revenue Code.

    D.C. Rule 5.4(a)(5). The fees covered by this exception, namely those "awarded by a tribunal or received in settlement of a matter," are limited to those "recovered from the opposing party" in a "case[]," D.C. Rule 5.4, cmt. [11], and accordingly are limited to fees arising from litigation.

    The comment adopted along with Rule 5.4(a)(5) recognizes that an arrangement within that subparagraph may involve fee-splitting but states that "the prospect . . . does not inherently compromise the lawyer’s professional independence . . . . A lawyer who has agreed to share legal fees with such an organization remains obligated to exercise professional judgment solely in the client’s best interests." D.C. Rule 5.4, cmt. [11]. The comment further notes that unlike the corresponding Model Rules provision, the D.C. Rule "is not limited to sharing of fees awarded by a court because that restriction would significantly interfere with settlement of cases, without significantly advancing the purpose of the exception." Id.

    The question, then, is whether the adoption of Rule 5.4(a)(5) was intended to repeal, sub silentio, the exception for the "usual fees" of a "lawyer referral service" that are recognized by comment [6] of Rule 7.1 and by Opinions 201, 286, and 307. We think not.

    There was no provision like subparagraph (a)(5) in the D.C. Rules before 2007 and no counterpart in the D.C. Code of Professional Responsibility, which was in force prior to January 1, 1991.[3] Importantly, the discussions in the Wortham Report of proposed subparagraph (a)(5) and of Rule 7.1 do not suggest that adoption of the former would repeal or even narrow the latter’s existing approval of the payment of "usual fees" to lawyer referral programs. See Wortham Report at 174-77, 190-95.

    Although Rule 5.4(a)(5) is narrower than comment [6] to Rule 7.1 in the sense that it is limited to fees derived from litigation matters, it is broader in that it applies not only to lawyer referral programs but to any non-profit organization. Moreover, Rule 5.4(a)(5) covers not only payments to the referring organization from outside lawyers but also from lawyers who are employed or retained directly by the organization. By contrast, comment [6] to Rule 7.1 contemplates only payments by lawyers to whom matters are referred by a lawyer referral service, and then only the "usual fees" of such a service.

    The Flat Payment from the lawyer to the Service would not depend upon the amount of fees paid by the client to the lawyer. Hence the Flat Payment is not a sharing of legal fees and does not violate Rule 5.4(a). D.C. Legal Ethics Op. 342 (2007); D.C. Legal Ethics Op. 286 (1998).[4] The Percentage Payment is a percentage of the fees earned by the lawyer for the representation. As such, it is permissible only if it either comes within subparagraph (a)(5) of Rule 5.4 or is a "usual fee[]" charged by a "lawyer referral program," as noted in comment [6] to Rule 7.1.

    To the extent that matters referred by the Service are not litigation matters, the Percentage Payment is not authorized by Rule 5.4(a)(5). This eliminates subparagraph (a)(5) as a potential basis for Percentage Payments outside the litigation context.

    Therefore, the Percentage Payment is permissible only if it satisfies the requirements of comment [6] to Rule 7.1. That in turn leads to two inquiries—whether the Service is a "lawyer referral service" and, if so, whether the Percentage Payment is a "usual fee" of such an operation.

    The 2007 revision of the D.C. Rules eliminated comment [6]’s references to "recognized or established agency or organization" and "organized legal referral program," but we do not believe that a change in substance was intended. The deletion reflected the Wortham Report’s recommendation, which ultimately was adopted by the D.C. Court of Appeals, to eliminate the rule that permitted payment to anyone—including individuals and for-profit entities—in exchange for referrals. See Wortham Report 190-95. By implication, only the types of referral programs mentioned in the first sentence of this paragraph remain permissible under the post-2007 D.C. Rules.

    Is the Service such a program? The D.C. Rules do not include express criteria for making that determination.The Model Rules do offer such criteria, however, and we agree with the considerations underlying Model Rule 7.2(b)(2), which is analogous to comment [6] to D.C. Rule 7.1. Model Rule 7.2 allows a lawyer to pay the "usual charges" of "a not-for-profit . . . lawyer referral service." ABA Model Rule 7.2(b)(2) (2015). A comment describes lawyer referral services as "consumer-oriented organizations that provide unbiased referrals to lawyers with appropriate experience in the subject matter of the representation and afford other client protections, such as complaint procedures or malpractice insurance requirements." Id. cmt. [6].

    The comment goes on to cite approvingly an ABA standard requiring that such services "not make referrals to lawyers who own, operate or are employed by the referral service." Id.

    We conclude that the Service will constitute a "lawyer referral service" within the meaning of comment [6] to D.C. Rule 7.1 if the Service—

    • is generally open to D.C. Bar members who agree to its reduced-fee prerequisite, see ABA Model Rule 7.2, cmt. [6];
    • takes reasonable steps to ensure that lawyers to whom matters are referred are competent to handle such matters, see D.C. Rule 1.1;
    • does not interfere with the lawyers’ professional independence of judgment;
    • requires only reasonable referral fees (a criterion that is met by its current fifteen percent requirement), see D.C. Rule 1.5(a);
    • requires that all lawyers in its network have reasonably adequate malpractice insurance see ABA Model Rule 7.2, cmt. [6];
    • has a neutral dispute resolution mechanism, see id.; and
    • does not refer matters to lawyers who own, operate, manage, or are employed by the Service, see id.

    The second question is whether the Percentage Payment is a "usual fee." Opinion 201 concluded that a non-profit public interest legal services project could receive a percentage (one sixth) of fees paid to attorneys to whom the project referred clients and who had agreed to charge reduced fees. D.C. Legal Ethics Op. 201 (1989); see D.C. Legal Ethics Ops. 286 (1998) and 307 (2001). Here, the percentage proposed to be remitted to the Service is fifteen percent, which of course is less than one sixth. Moreover, the Service is a 501(c)(3) entity. As noted in the D.C. Rules, see D.C. Rule 5.4(a), cmt. [1], and numerous prior opinions of this committee, see, e.g., D.C. Legal Ethics Ops. 201 (1989), 286 (1998), 307 (2001), and 329 (2005), such entities are unlikely to impair or control the independent professional judgment of the attorneys to whom referrals are made.

    Thus, we conclude that the Percentage Payment is a usual fee within the meaning of comment [6] to D.C. Rule 7.1.

    Conclusion

    Accordingly, we conclude that the D.C. Rules permit a lawyer to remit to the Service the Flat Payment and, if the Percentage Payment is within Rule 5.4(a)(5) or comment [6] to Rule 7.1, the Percentage Payment as well.

     

    Published July 2015

     

    [1] Section 501(c)(3) exempts "[c]orporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes . . . no part of the net earnings of which inures to the benefit of any private shareholder or individual, no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation . . . and which does not participate in, or intervene in (including the publishing or distributing of statements), any political campaign on behalf of (or in opposition to) any candidate for public office." I.R.C. § 501(c)(3) (2015).

    [2] A 1993 opinion observed that the prohibition on fee-sharing was motivated in part by concern "that nonlawyers might control the activities of lawyers and interfere with the lawyers’ independent professional judgment." D.C. Legal Ethics Op. 233 (1993).

    [3] A similar provision, limited to division of court-awarded fees, was recommended by the ABA’s Ethics 2000 Commission and was added to the ABA Model Rules of Professional Conduct in 2002. See ABA Model Rule 5.4(a)(4) (2015).

    [4] We assume without deciding that at approximately $200, the Flat Payment would be reasonable within the meaning of the Rules. See D.C. Rule 1.5(a).