Exercise caution with referral fees

by James M. Fischer

Lawyers often refer clients to other lawyers. In many cases, the referring lawyer will receive for the referral a portion of the fee earned by the other lawyer.

Rule 2-200 of the California Rules of Professional Conduct discusses, from the ethical vantage point, the validity of the financial arrangement for referral fees.

The consent and disclosure provisions of Rule 2-200 need to be followed scrupulously; the failure to do so will likely invalidate the referring lawyer's right to the referral fee. Little explicit attention has been given, however, to the referring lawyer's duties with respect to the referral itself.

The critical issue is the proper treatment of the relationship between the person referred (the client) and the referring lawyer. If a lawyer-client relationship exists, the lawyer owes an ethical duty of competence to the client in connection with the referral.

Moreover, the lawyer's interest in the referral fee may require disclosure under Rule 3-310(b)(3). Even if no lawyer-client relationship exists, the fact that the lawyer makes the referral may give rise to civil liability if the referral is done without due care or in breach of the lawyer's quasi-fiduciary duties to the client.

Both the nature of the relationship and the scope of the duty of care between the referring lawyer and the client remain unclear at the present.

It can be argued that no lawyer-client relationship exists between the client and the referring lawyer because the client is specifically directed to another lawyer and it is with that other lawyer that a lawyer-client relationship is formed. Under this view the sole ethical rule that governs the referring lawyer's duties is Rule 2-200.

The contrary argument is that a lawyer-client relationship is formed, at least for purposes of the referral, when the client contacts the referring lawyer.

At that time a service, the referral, is provided. This service is specifically intended to benefit the client and is accepted by the client; hence, a lawyer-client relationship may be implied.

Since this issue remains unresolved, the safest course for the referring lawyer is to emphasize to the client that no lawyer-client relationship exists, but it remains a calculated guess whether the disclaimer is effective.

The scope of the referring lawyer's duty of care in making the referral also remains unclear. Although the issue is sometimes presented in somewhat draconian terms, such as suggesting lawyers should never give referrals to persons encountered at receptions, social gatherings and the like who present the lawyer with a litany of legal woes, the situation is not so dire.

One reported case that expressly considered the issue, Tormo v. Yormark, 398 F.Supp. 1159 (N.J. 1975), held that the duty of care could be discharged by the fact that the lawyer to whom the client was referred was a licensed member of the bar; however, the court also noted that additional facts could expand that duty.

Thus, the referring lawyer cannot act in ignorance of facts which would suggest to a reasonable lawyer that further investigation is needed before making the referral. It may also be significant that no referral fee was involved in Tormo.

Finally, the scope of the duty of care remains unclear. Having engaged in positive conduct by making a referral, the lawyer assumes the basic duty to act reasonably.

A number of cases, however, suggest that when a person relies on a lawyer and reposes trust and confidence in the lawyer's advice and recommendations, a fiduciary duty arises.

Although the differences between a duty of reasonable care and a fiduciary duty are not explained in these cases, the normal nomenclature associated with the concept of a fiduciary duty would expand the lawyer's duties, particularly if the lawyer were being paid, i.e., receiving a fee, for the referral.

The receipt of a fee in connection with the referral can be seen as raising a conflict of interest under a fiduciary duty analysis since the referral may be influenced by the lawyer's financial interest in the anticipated fee.

The legal ambiguities associated with referrals bespeak caution to the referring lawyer, particularly when the lawyer is expecting a referral fee. At the minimum, the lawyer should be satisfied that the lawyer to whom the client is referred is competent and able to represent the client.

Any pre-existing relationship the referring lawyer has with the lawyer to whom the client is referred should be fully disclosed to the client in writing. Treating the client as a client for purposes of the referral is the surest way to minimize malpractice exposure.