Stark Naked Referral Fees
LACBA Update, October 2002

By Diane L. Karpman, former chair, Los Angeles County Bar Association Professional Responsibility & Ethics Committee. Karpman of Karpman & Associates in Los Angeles represents attorneys in disciplinary matters and is an expert consultant and witness on legal ethics issues. The opinions expressed are her own.

When it comes to understanding California’s rule regarding “bare referral fees”, or forwarding fees, it helps to consider the overarching goal of attorney discipline. The primary goal of the attorney discipline system is public protection. Consumers of legal services are entitled to the best representation available. Therefore, a referring lawyer may receive reasonable compensation for referring the case to a more expert attorney because it accomplishes this goal and decreases legal malpractice claims. A referral fee is a better alternative than an incompetent lawyer attempting to master the intricacies of brain surgery or the impact of rollover trust funds on shadow earnings. Referral fees provide incentives to get clients the best legal services possible. The goal is further reinforced by the fact that lawyers have liability for negligent referral. Therefore, if they fail to verify competency, knowledge, and skill, they too can be snared in the potential net of a malpractice claim. Tormo v. Yormark (N.J. 1975) 398 F. Supp. 1159, 1172-1173.

Bar organizations operate lawyer referral services for profit (yet, it is interesting to note that they lack liability for negligent referral). If bar referral organizations receive fees, and lawyers were prohibited from receiving fees, then interesting questions could arise regarding issues involving equal protection in terms of the U.S. and California Constitutions.

But, you say, what if the lawyers don’t really practice and support their grand lifestyle by simply making referrals? Gee, then the lawyers are compensated for doing nothing. Secretly, in our hearts, we believe our work ethic is offended by such practices. However, once again, consider the goal. The consumer is receiving the best legal representation possible.

Some of our rules can be characterized as protectionist in nature, such as the anti-contact rule, which, in essence, prohibits interference with the attorney-client relationship. The majority of our rules create “entitlement” for the benefit of the client. Rule of Professional Conduct 2-200, which permits referral fees, is unequivocally designed as a client “entitlement”, or benefit regulation. However, the vast majority of litigation regarding referral fees is, of course, between lawyers.

Rule 2-200 (Financial Arrangements Among Lawyers) has two sections. Section (A) places certain restrictions on the division of fees. Partners, associates, and shareholders are exempt from these restrictions. Some have said that this favors lawyers working in firms, who can transfer matters “in-firm” with abandon. Rule 2-200(A) requires that any other fee divisions must have client consent in writing after full disclosure of the division in writing. In addition, the total fee charged by the lawyers must not be increased because of the division or be unconscionable.

Beware of relying on the attorney to whom the case is referred. Client consent always must be obtained in writing after full disclosure in writing. Verbal promises by the subsequent lawyer that client consent will be obtained are not worth the paper on which they are written. Even if the client was orally informed about the division, the stringent requirements of Rule 2-200 (A) must be complied with literally for a court to enforce the agreement. This is consistent with client entitlement theories. Just as clients are entitled to be fully informed and to understand how fees are charged in retaining a lawyer, they have a right to understand how a division of fees will occur. Think of Rule 2-200 (A) as being an extension of the theories that mandate written fee agreements (Business and Professions Code sections 6147 and 6148). If client consent is not obtained, such an agreement is an illegal contract that will not receive judicial enforcement. However, note that the Supreme Court is currently reviewing a couple of cases involving these theories, where the client was fully informed, or where the lawyer failed to comply with the technical requirement, yet performed services, so that nonpayment would be a windfall. However, Section (B) of Rule 2-200 permits gifts or gratuities from one lawyer to another as long as they are not in consideration for an agreement or understanding of referrals in the future. Lawyers, just like other people, work and receive compensation for their labor. We have the right to squander our hard earned dollars at Neiman’s, or give them to the Red Cross or another charitable agency (such as the audacious “Save the Forests by Logging”), or give our money to anyone else we want. We just can’t give a fee that is a quid pro quo for a referral.