Fee Sharing in a Changing Moral Climate
by Howard M. Fields
(County Bar Update, November 2004, Vol. 24, No. 10)

 

Fee Sharing in a Changing Moral Climate

 

By Howard M. Fields, Of Counsel to the firm of Parker Mills & Patel LLP, which emphasizes the area of professional liability. Fields has represented dozens of attorneys and law firms, lectures on matters of avoiding malpractice claims, and was counsel for the prevailing parties in Hall v. Superior Court (2003) 108 Cal.App.4th 706, Village Nurseries, LP v. Greenbaum (2002) 10 Cal.App.4th 26, Marshak v. Ballesteros (1999) 72 Cal.App.4th 1514, Levin v. Gulf Insurance Group (1999) 69 Cal.App.4th 1282, and DeLaPena v. Wolfe (1986) 177 Cal.App.3d 481. The views expressed are the opinions of the author.

 

FACT: Most lawyers do not read their malpractice insurance policy before being sued and then mistakenly assume that their carrier will defend them because the claim relates to their law practice. However, lawyers should not expect even a defense to a claim involving any dispute regarding referral fees, apportionment of fees between co-counsel, or fee disputes between successive attorneys. Such claims are usually excluded.

 

Absent an agreement signed by the client, the lawyer with the written contract is entitled to fees pursuant to the contract, but the lawyer who acted as co-counsel, associate counsel, or referring counsel is entitled at most to a quantum meruit recovery from the other lawyer, not the client. How we got to this point illustrates the impact of sincere efforts to legislate morality and later adjust to the realities of social acceptability.

 

Historically, the practice of paying referral fees was recognized as an accepted part of our legal culture. Turner v. Donovan (1935) 3 Cal.App.2d 485.  However, following a national trend led by the American Bar Association, the State Bar of California adopted Rule 22 in 1972, based on the ABA Code of Professional Responsibility. In 1975, Rule 22 was incorporated into California Rule of Professional Conduct 2-108. Subsection (3) provided that an attorney shall not divide a fee with a partner or associate firm unless the client consented to the employment of the other attorney and “the division is made in proportion to the services performed or responsibility assumed by each.” What had been acceptable for decades had suddenly become outlawed unless a lawyer wanted to face a disciplinary proceeding.

 

In Altschul v. Sayble (1978) 83 Cal.App.3d 153, the California Court of Appeal determined that fee splitting agreements that did not comply with Rule 2-108 were void against public policy, and any agreement where the division was not made in proportion to the services rendered was unenforceable even if the contract was entered into prior to the effective date of Rule 22. Altschul may have been welcome news for ethicists and lawyers who had no problem biting the feeding hands, but it was bad news for lawyers with “niche” practices such as workers’ compensation or family law who regularly referred clients to other, often more experienced, attorneys.

 

Shortly after Altschul, the California Supreme Court approved a major change to Rule 2-108, effective January 1, 1979. No longer would referral fees be considered void. The revised rule deleted the requirement that the division of fees be made in proportion to the services performed or responsibility assumed and provided: “The total fee charged by all persons licensed to practice law is not increased solely by reason of the provision for division of fees and does not exceed reasonable compensation for all services they render to the client.” It also provided that the fee sharing agreement had to be in writing signed by the client.

 

Three years later in Moran v. Harris (1982) 131 Cal.App.3d 913, the Court of Appeal took a completely different view from the Altschul court in upholding a fee sharing contact entered into in 1971, calling the reasoning by that court “precipitous and myopic.” The court observed, “If the ultimate goal is to assure the best possible representation for a client, a forwarding fee is an economic incentive to less capable lawyers to seek out experienced specialists to handle a case. Thus, with marketplace forces at work, the specialist develops a continuing source of business, the client is benefited and the conscientious, but less experienced lawyer is subsidized to competently handle the cases he retains and to assure his continued search for referral of complex cases to the best lawyers in particular fields.” (Id. at 921-922.)

 

Since May 1989, Rule 2-200 has governed the conduct of lawyers and referral fees. It provides, “A member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless: (1) The client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division; and (2) The total fee charged by all lawyers is not increased solely by reason of the provision for division of fees and is not unconscionable as that term is defined in rule 4-200.”

 

The hazard of not getting the client’s written consent to the fee division is best illustrated by Margolin v. Shemaria (2000) 85 Cal.App.4th 891, where the court refused to permit the referring attorney to recover any fee pursuant to an oral agreement including a promise to obtain the client’s written consent and where the clients had orally agreed to the referral fee.

 

Two years later, the Supreme Court sent shockwaves through the plaintiff’s bar in Chambers v. Kay (2002) 29 Cal.4th 142, when it determined that absent the client’s written consent, the lawyer with the written fee agreement did not have to share the fee even with former co-counsel who actually worked on the case. The question of whether Chambers was entitled to a quantum meruit recovery was not clearly addressed, a fact made clear in Huskinson & Brown LLP v. Wolf (2004) 32 Cal.4th 453. In that case, a referring lawyer who actually provided some services to advance the client’s case sued to recover fees based on breach of contract and unjust enrichment, and for recovery on a quantum meruit basis. The Supreme Court held that absent written consent a referring attorney is entitled to recover the reasonable value of services rendered while emphasizing that the decision does not increase the attorney fees paid or owed by the client.

 

MORAL: If a fee sharing agreement is not signed by the client, in the event of a suit for breach of contract or quantum meruit do not expect the courts or your insurer to come to the rescue. Following the rule is the best protection for the lawyers as well as the client and the public.

 

This article is intended to inform the reader of potential liability exposures for attorneys. This article reflects general principles only and does not render legal advice. Readers should consult legal, financial, insurance, and other advisors if they have specific concerns. Neither the Los Angeles County Bar Association, Aon and its affiliates nor the author assumes any responsibility for how the information in this article is applied in practice or for the accuracy and completeness of the information. Reproduction without written permission is prohibited. This article is made available by Aon Direct Insurance Administrators, administrators of the LACBA Sponsored Aon Insurance Solutions Program, to the LACBA members.  www.aonsolutions.com

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