What is a referral fee in law?
Legal referral fees are fees paid to a person or group by another person or group for the referral of legal business on the part of that second person or group. To put it more simply, a legal referral fee is a method of creating business for your law firm. This practice has been around for years and is generally just a regular way of doing business in the legal industry.
When you pay someone a referral fee, that person receives a percentage of the amount of business they refer to you. For example, say the person making the referral accepts a referral fee of 20% – if they refer an automobile accident case with an estimated $10,000 attorney fee, the person making the referral receives $2,000.
There are many scenarios in which referral fees can be utilized . For example, a law office manager might have a list of attorneys to which he or she would refer a case if the firm on his or her team was not able to take the case for some reason (too far outside the geographic area, for instance). The manager could receive a referral fee should the law firm accepting contact the client and take the case. Alternatively, a paralegal for a solo practitioner could depend on referral fees if he or she becomes sick or broken, and is unable to work all of his or her cases – thus, the paralegal can help others in a similar situation by receiving a referral fee, which lets him or her make extra money when time allows, or use referrals for extra cash when unable to work.
Clear as mud? Don’t worry – we’ll elaborate on the subject in the next section.
Legal ethics concerning referral fees
Legal ethics and referral fee regulations in the relevant jurisdictions are constantly changing. It is the responsibility of the practitioner to verify that his or her conduct complies with the current rules. However, most legal ethics rules and opinions admit a referral fee for an affirmative recommendation of counsel.
The American Bar Association provides ethical guidance for state and local bar associations to consider and then implement. ABA Model Rule 1.5 (e) requires that a division of a legal fee to another lawyer is only permissible if (1) the division is made in proportion to the services performed by each lawyer or it is for a different reason (i.e. protection of client interest); (2) the client agrees to the arrangement, preferably in writing; and (3) the total fee is reasonable.
Technical requirements aside, the ABA Model Rules allow for a referral fee arrangement for an affirmative recommendation of counsel.
Other legal ethics rules governing attorney conduct state a monetary referral fee can only be charged for the referral of a new client, not an existing one. These rules further require that the referring attorney must provide the new attorney’s name and contact information to the potential client in order to facilitate the referral. A practicing attorney cannot charge another licensed attorney a referral fee or take part in a joint venture with another attorney unless they are a partner in the same law firm.
Legal referral fee arrangements: common structures
Agreements between referring and receiving lawyers can take on several forms. Some agreements include a percentage agreement as shown in the Example Referral Fee Agreement, which reflects a resolution between the lawyers as to the exact amount of the referral fee. In many cases, instead of a percentage fee, attorneys may agree to an "agreeable" fee to be paid when the matter is concluded.
For example, a case where there is a low upside liability with high defense costs may lead to a recommendation and a consensual agreement that there is no referral fee unless a settlement is reached above a set figure.
In a contingency fee case, many jurisdictions give some guidance regarding acceptable referral fee arrangements. A 25% referral fee is common but the referral fee can be any amount that is under the maximum amount permitted by state law (assuming that it is fair considering all facts and circumstances). However, even in cases where there are no contingencies, many states require that the percentage reflected in the Agreement be disclosed in setting forth the fee in the retainer agreement signed by the clients to avoid a scenario where the referring attorney exercises leverage over the receiving lawyer to demand a larger percentage than what would be allowed otherwise. In many jurisdictions where an attorney makes an unsolicited referral to an attorney they have not done business with before, the receiving attorney responds with a standard engagement letter. The sending attorney wants a referral fee without an engagement letter from the receiving attorney so there is no binding representation to their client or their client’s consent.
Still other jurisdictions do not require any written agreement at all and merely allow for an open referral fee to be paid by the receiving attorney to the sending attorney.
As an alternative to referral agreement terms tied to the fee, many states use other methods of determining the fee. For example, several states permit the referral fee to vary based on the complexity of the work; the legal work done by the referring attorney in the case and percentage of fees generated from the case. This is conceptually the same as dividing the work performed by each lawyer and the resulting fees that flow from the case.
Furthermore, while most jurisdictions reflect an allowance for referral fees within the range of 15% to 33%, some states simply prohibit referral fees over 50%. Other states suggest that referral fees should "not be so large as to disrupt the division of responsibility between" the referring and the receiving attorney. In these states, this can be construed as allowing the sending attorney to receive a fee larger than the receiving attorney without setting a maximum percentage.
The pros and cons of legal referral fees
The exchange of referral fees between lawyers can be highly beneficial to both the referring and receiving lawyers in a case, but it can also open both to the peril of disciplinary action if done improperly.
An important potential benefit to the referring lawyer is an opportunity to monetize a client who doesn’t have the need or ability to pay his or her legal fees but nonetheless has a potentially meritorious case. A valuable potential benefit to the receiving lawyer is the referral itself, which may have enormous potential value, either directly or from the client’s future referrals. Both the referring and receiving lawyers will have a common interest in the successful outcome of the case for the client.
Both lawyers are, however, subject to competing potential conflicts of interest. Each will have to be careful that he or she does not compromise his or her professional responsibility, or the best interests of the client, due to the promise of a future fee. The referring lawyer may be tempted to accept a lesser fee than would be normal, just to allow the other lawyer to have a fee on the case, regardless of the relative value of the work to be done. That is not in the best interest of the client, who would benefit from having the lawyer work on the case who would do it best for the least cost. The receiving lawyer may feel pressure to take on the case, even though he or she knows the case is without merit or that the fee likely won’t be worth the effort required by the case to be handled competently. Both of these possibilities constitute a potential violation of the duty of competence, and the reasonable basis for a fee, owed to the client under Rule 1.1 of the MRPC.
Another conflict involves each lawyer’s own interests in the future prosecution of the case. In particular, the referring lawyer will want to discuss with his or her client the possibility that the referring lawyer will not be entitled to any portion of the fee if the case is assigned to another lawyer, but instead will be paid a one-time payment of whatever is agreed upon between the referring lawyer and the receiving lawyer. Essentially, the receiving lawyer wants the client to know that if he or she rejects the assignment of the case to the receiving lawyer, the referring lawyer will be free to reassign the case to another lawyer who may be less able, or to take the case back and receive up to 20% of the fee. Such a one-time payment or "bonus" can be an accurate way to inform the client of the potential of referral by the referring lawyer to other lawyers; however, it can be easily abused by the receiving lawyer, who can use the "bonus" as leverage over the referring lawyer to have the case assigned to him or her.
This situation highlights the other conflict—between personal interests of the lawyers and those of the client. If the lawyers cannot act without considering the best interests of the client, then they must disclose to the client that the lawyers may have interests in the potential value of the case apart from the client, and that their values may be in conflict. Once the potential conflicts are disclosed, the client can make an informed decision about new representation and whether to sign the retainer agreement in the form proposed (which includes assignment of the case to a particular lawyer).
The most dangerous aspect of the potential multiple representations that can occur in referral relationships is the possibility of two lawyers representing the same client in the same case. Such circumstances lead to the potential for a violation of the fundamental requirement of Rule 1.6 of the MRPC. A lawyer must disclose any material information relating to the representation of a client unless the client consents after consultation, or disclosure is impliedly authorized or required by law. The reference in the rule to the need for "consent after consultation" refers to the subtle but important responsibility of a lawyer to provide the client with all the information necessary to make an informed decision. The assistance of a new lawyer will almost always be in the best interest of the client. However, the referral of an already referred client by the referring lawyer could have the effect of increasing the fee paid to the referring lawyer due to incentives offered by the receiving lawyer, without benefiting the client in any way.
How to negotiate referral fees
Your referral fee agreement with the other practice may be verbal, but you should also exchange emails about it afterwards as it is too confusing to keep straight in your mind otherwise. Two lawyers can get together and agree on a number and then later forget exactly what was agreed upon. So, no matter how simple the agreement, I think it is best to follow up the conversation with email from you to the other lawyer summarizing the agreement, and your inquiry whether that accurately describes the agreement.
In the email, create a fictional scenario to show some of the possibilities. For example, say: I have a case coming up with Juan that I may need to refer. If I do, will you pay me a referral fee of 25% of my fee, subject to the following conditions: (1) If and when the case actually comes to you, we will have another discussion. (2) If you end up turning down the case, I won’t charge you anything and if you find a client instead (a case you would otherwise have turned away) I will take a referral fee of 10%. (3) If you find the client on your own, I will charge you nothing. You can take the case. (4) If we both want the same client, you get to represent the client subject to a co-counsel agreement. (5) I reserve the right to charge more than 25% of my fee, depending on the circumstances. (6) You will alert me to the availability of this referral agreement whenever you come across a new client that you think I would like. (7) If I or my law firm refer a case to you , and if you happen to refer a case to me at the same time, our rates will offset each other, including cases in the future. (8) If there is a dispute, the dispute should be submitted to binding arbitration.
When exchanging emails about referral fees, you will want to mention things like, "I noticed you are being investigated by the State Bar for failing to disclose referral fees. Are you sure you want to enter into an agreement like this?"
When negotiating with a potential co-counsel, it helps to write down your agreement and ask them to sign it so there is not a misunderstanding in the future. At the same time, you can keep the document informal by including niceties such as, "Thanks for posting my updates on your Facebook page."
It might be best to hire an attorney with extensive experience with referral fees to help negotiate your deal. The attorney will know standard practices and help in coming up with a good plan. A lawyer amending a referral fee agreement with another lawyer, for example, might simply send out an email to co-counsel summarizing previous discussion and ask co-counsel to sign the document or risk spoiling the goodwill between the two attorneys. A lawyer sending a referral fee agreement out to a client, on the other hand, might want to send something more formal and use an attorney to review it prior to sending it out.
Alternatives to referral fees
Rather than directly refer a client, a lawyer might enter into a joint venture or teaming agreement with other lawyers. The critical difference from the referral scenario is that the cooperating lawyers might serve their respective clients in separate legal matters, and might seek to share fees and resources. For example, one law firm might handle all consumer protection and wrongful termination work for a small company’s employees, while another handles the real estate and employment aspects of the corporate side of the relationship.
Another example is an association of law firms that might refer work only to other members and have them refer the same type of work back. There is a symbiosis, but no direct quid pro quo in the referral for the fee.
Finally, the International Lawyer Network provides another model of international collaboration in which 5% of fees collected by participating firms go into a common fund used to fund camaraderie events around the world.
All of these models avoid state law prohibitions on referrals, and can provide a more direct and beneficial source of work than simple referral.
Case studies, examples and trends
There are a number of instances in which legal referral fees have been used to create new business for attorneys, and conversely, where legal referral fees have created disputes among attorneys.
For example, consider a situation in which two solo practitioners decide to join forces to create a small five-attorney firm. Prior to the merger, one attorney had a steady flow of clients, while the other one was just starting out and was trying to get his feet under him. Once they teamed up, the "newbie" attorney found himself inundated with clients because he was able to confidently refer them to his more seasoned partner.
A bankruptcy attorney in Florida set up a referral network involving five different law firms. Each firm contributed a flat fee per month. When someone seeking representation visited the website, their contact information was sent to the law firm nearest to them. When that attorney met with the prospective client, he would then send his 4 counterparts the referral fee he received for the case.
While the benefits of working together often outweigh the potential for conflict when it comes to forming a referral network, disputes do happen. For example , one Virginia attorney retained the help of a business development consultant who promised to increase revenue for his practice in exchange for a percentage of that increased revenue for a period of 30 months.
After 18 months, the business development consultant claimed that he was still waiting to see an increase in business in order to get a commission. The attorney told him that, since he had not seen a significant increase in business resulting from the consultant’s services, he would no longer be paying the commission but instead simply paying the monthly fee that is listed in their written agreement.
After receiving this notification, the consultant contacted the attorney to demand payment of his commission, and demanding payment for medical and vacation benefits. He then went on to file a lawsuit against the attorney for breach of contract and quantum meruit (a Latin term meaning "as much as one has deserved," which in this case means that the consultant was suing the attorney to pay him for services rendered). The judge ruled that the contractual relationship between the two men ended when the attorney terminated the agreement.