Pure Referral Fees: Insuring Client Confidence in Complex Personal Injury and Medical Malpractice Cases: Why Proposed Professional Conduct Rule 1.5(F) Alternative 2 Should be Adopted

By Mark A. Abramson and Kevin F. Dugan

The New Hampshire Rules of Professional Conduct and the Attorney Discipline System exist to protect the confidence of the public, or the clients who use our professional services, and to maintain the integrity of our profession.i The New Hampshire Supreme Court has recognized that we as attorneys have a duty to protect the interests of our clients; “however, the legal and ethical methods of performing this duty are solely the responsibility of the attorney.”ii As trial lawyers, we, as many others, try to protect the interests of our clients by providing the most skilled representation available by focusing primarily on one area of the law. To further this goal, we accept client referrals in our specialty from other practitioners, we refer client cases to other practitioners outside of our specialty and we regularly honor referral fees when doing so.

In the past decade, however, there has been an ongoing debate across members of the New Hampshire Bar Association and within the Ethics Committee of the New Hampshire Bar Association about the propriety of these so-called “pure” referral fees. Indeed, the Ethics Committee has recently submitted two alternative versions of Professional Conduct Rule 1.5(f), which governs fee division between lawyers in separate firms, to revise the current rule and to finally end the debate about the propriety of “pure” referral fees. Through this article, we submit that these bare, or so-called “pure,” referral fees are the best way to protect the public interest in receiving quality legal services and the best way to maintain the integrity of our profession, in this increasingly specialized legal economy.

I. The Rule

Our current Professional Conduct Rule 1.5 regarding division of attorney’s fees provides that: . . . .

(f) A division of fee between lawyers who are not in the same firm may be made only if:(1) the client consents to employment of the other lawyer after a full disclosure that a division of fees will be made;(2) the division is made in reasonable proportion to the services performed or responsibility or risks assumed by each; and(3) the total fee of the lawyers is reasonable. N.H. Rules of Professional Conduct, R. 1.5(f), (2005-06) (emphasis added).

II. The Debate

There is no debate, that we are aware of within the New Hampshire Bar, about ensuring that the total fee charged to a client is reasonable or about obtaining a client’s consent prior to a referral being made. Rather, the ongoing debate surrounding this rule involves only subpart (2), due to the difficulty in determining what a “reasonable proportion” of services performed, risks assumed, or responsibility retained, actually is.

The Ethics Committee of the New Hampshire Bar has acknowledged that there are two schools of thought on the issue of responsibilities or risks assumed.iii The first school of thought propounded by some state bar associations is that the responsibilities and risks assumed by a referring attorney are inherent in the competency of the receiving attorney, such as in a legal malpractice situation that might arise from a negligent referral.iv The second school of thought, which the New Hampshire Bar Association Ethics Committee has endorsed, posits that the risks assumed “relate instead to the economic risk borne by the attorney (with respect to out-of-pocket expenses, unpaid legal fees, or the risks inherent in contingency fee cases) in the success of the case, and not the risk that the [receiving] attorney will handle the client’s matter negligently.”v Despite these inherent economic risks in any case referred to another attorney, the Ethics Committee has suggested that this assumption of risk also requires active participation by the referring attorney, who may not be competent to engage in active participation in a complex or technical case, in order to warrant more than a nominal fee. The Committee takes this position despite recognizing that the rule has been amended to require performance or responsibility or risks to be assumed.

We respectfully disagree with this position and submit that it places referring attorneys at risk of engaging in legal representation for which they may not be competent, it places receiving attorneys at additional risk for any negligent representation by the referring attorney, and it places the client at risk of receiving less than the best representation of their interests, which they are entitled to receive. Pure referrals in complex personal injury and medical malpractice cases require referring attorneys to bear a significant risk of receiving no fee, receiving zero gain, or even incurring economic loss just by making the referral. These risks alone justify referral fees under Rule 1.5(f) as long as the client consents to the arrangement.

III. Referral Fees In Personal Injury and Medical Malpractice Cases

The practice of our firm is to accept referrals from other attorneys with the client's knowledge and consent and with the understanding that the referring attorney will retain joint responsibility to the client. In exchange, the referring attorney shares the contingent fee earned. The total fee paid by the client is never effected by a referral fee arrangement with our office. The referring attorney is copied on all relevant correspondence and pleadings, and is invited, but not obligated, to be active in the case. Many attorneys who refer cases choose not to have active involvement in the case, other than to monitor the status through correspondence and updates, because they understand that their core competencies lie in other fields. We believe that this practice is proper and presents a no-lose situation for the client. The client’s case is handled by attorneys who can best represent his or her interests and maximize the recovery, while the costs of representation do not increase. Moreover, the referring attorney is able to fulfill his ethical duties by “associating with another lawyer who possesses the skill and knowledge required to assure competent representation.”vi

Notably, when dealing with complex medical malpractice and personal injury cases, a referral fee can never be “pure”. A “pure referral contract” has been defined as a contract that provides an attorney with a fee for merely forwarding a case to the receiving office.vii When a complex medical negligence or personal injury case is referred, there is never a guarantee that the referring attorney will receive any fee from the referral. As explained above, these cases are generally billed on a contingency fee basis, which means that if the case ultimately cannot be supported or if it loses at trial, then neither fees nor expenses are billed to the client and the attorneys absorb the costs of suit and their services performed as the costs of doing business. These are some of the economic risks that referring attorneys are aware of and assume when they refer cases to other offices, and they are risks that are generally accepted by referring and receiving attorneys alike. Again, the client’s interests remain represented and the client never receives a bill for time spent or expenses incurred. Because there is no guaranteed referral fee in these types of cases, they cannot truly be considered “pure referrals” as defined above.

Despite this reality that there can never be a pure referral fee in a contingency fee case, as there can be in lawyer referral service type situations, where there is a guaranteed fee paid for the referral itself, the Ethics Committee of the New Hampshire Bar has stated that before a division of fees can be made, “both attorneys must have active participation in the case [and] each have performed services for the client.”viii It is our position that sometimes the greatest service an attorney can perform for a client is to refer his or her case to a more specialized and qualified practitioner who will better be able to represent the client’s interests. Active participation in a case in which an attorney has no experience or ability to meaningfully perform should not be required because it does a disservice to the client, whose interest it is our job to protect.

IV. Recommendations and the Law Governing Referral Fees

There is an increasing trend nationwide to allow these so-called “pure” referral fees. Twelve states expressly allow “pure” referral fees in any case as long as the client consents to the fee division in writing.ix Three states expressly prohibit any type of referral fee to be awarded in any case.x The remaining thirty-five states and the District of Columbia substantially follow the ABA Model Rule of Professional Conduct 1.5(e), which allows referrals or a division of fees based either upon the proportion of services rendered or a sharing in the responsibilities of representation.xi The ABA Comments to this rule note that: “A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist.”

This comment, as well as the increasing trend to allow pure referrals in any case, recognize that a referral fee agreement is a private contract between the lawyers involved which places the case in the hands of the attorney who is best able to handle it without increasing the total fee paid by the client. Furthermore, they understand that it is a nearly impossible task to determine whether a fee division is proportionate to risks and responsibilities assumed. Lastly, they recognize that market forces supply the incentives necessary to prevent abuse. Indeed, to ensure that the client’s recovery will be maximized, along with any fee that may be received, the referring attorney will carefully choose the best possible firm to refer cases to. At the same time, the fees paid by the receiving firm are naturally limited by the receiving firm's economic self-interest of providing the best possible representation to the client to achieve the maximum result.

Referral fee systems present a win-win situation for all concerned:

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.xii

Of course, the ultimate goal is to assure the best possible representation for the client. Opponents of fee-splitting cannot dispute that the client is best served when there is a strong incentive to get the case in the most competent hands. Amorphous arguments alleging that referral fee “commercialization” will irreparably harm the legal profession are no longer valid. “[T]he belief that lawyers are somehow ‘above’ trade has become an anachronism.”xiii “[A] lawyer’s need for income should not lead the lawyer to undertake matters that cannot be handled competently and at a reasonable price.”xiv

Unfortunately, this is a very real problem in the present economic environment with more lawyers competing for less cases in increasingly technical areas that require specialized expertise. We believe that referral fee arrangements solve this problem. Few firms and even fewer clients would benefit if New Hampshire attorneys were forced to refer out complex personal injury and medical malpractice cases without receiving a fee in return. The reality in today’s competitive legal economy is that such referrals would not be made in the absence of an economic incentive.

V. New Hampshire’s Proposed Changes to Rule 1.5(f)

Despite advisory opinions and practical ethics articles published by the Ethics Committee of the New Hampshire Bar Association, this debate has continued and attorneys recognize the practical realities of representing clients in these complex cases. In an attempt to conclusively resolve this debate, the Ethics Committee has proposed two alternative changes to Rule 1.5(f), and provided comments for each to explain the rationale for adoption. These alternatives and comments are as follows:

Alternative 1:

(f) A division of fee between lawyers who are not in the same firm may be made only if:

(1) the client agrees in writing to the division;

(2) the division is made in reasonable proportion to the services performed or responsibility or risks assumed by each, and

(3) the total fee charged by all lawyers is not increased by the division of fees and is reasonable. This alternative makes very few changes to the existing rule, other than to ensure that the client consent to the fee division is in writing and that the total fee charged is not only reasonable, but is not increased by the fee sharing agreement.xv It still requires active participation in order to share in the risks and responsibilities of representation and it still contains the language that differs from the ABA Model Rule, which has caused the past two decades of debate.

Alternative 2:

Proposed Modification to Existing NH Rule Permitting Fee Referral Without Regard to Services Performed or Risks Assumed

(f) A division of fee between lawyers who are not in the same firm may be made only if:

(1) the division is made either:

a. in reasonable proportion to the services performed or responsibility or risks assumed by each, or

b. based on an agreement with a referring lawyers;

(2) in either case above, the client agrees in a writing signed by the client to the division of fees;

(3) in either case, the total fee charged by all lawyers is not increased by the division of fees and is reasonable.

New Hampshire Comments to Alternative 2:

The New Hampshire rule differs markedly from the ABA Model Rule because it allows so-called "[pure]" referral fees. The ABA Model Rule allows a division of a fee between lawyers not in the same law firm only where each lawyer actively participates in a matter or assumes joint responsibility and risk for the representation of the client. The New Hampshire rule changes this requirement and allows a division of fee with a forwarding lawyer, regardless of the work performed or responsibility assumed, provided that the client consents in writing to the division of fees and the total fee is not increased because of the fee division and is reasonable. This change from the ABA Model Rule and from the previous New Hampshire rule is intended to facilitate the association of alternate counsel in order to best serve the client and is often but not exclusively used when the division is between a referring lawyer and a trial lawyer.xvi

That two proposals for changes to this rule exist is significant evidence that the debate on this issue is ongoing. We submit that alternative two should be adopted as it is the alternative that ensures the best possible representation to our clients, and it encourages congenial referral relations among members of our bar, thereby improving our profession. To adopt alternative one and require actual participation in a case before a referral fee can be earned will discourage some lawyers from referring cases that would be better handled by another attorney. This practice is not in the best interest of the client, the lawyer or the legal profession and it encourages people to drive up legal fees and drive down the reputation of our profession by providing inadequate representation just to make a quick fee.

VI. Conclusion

The public and our profession are best served by allowing referral fees in all complex personal injury and medical malpractice cases. This arrangement encourages lawyers to refer their clients to the attorneys most skilled in a specialized area of law, it allows the lawyers to receive a referral fee so long as the client consents in writing and the receiving attorney retains responsibility for the case, and it ensures that our clients receive the best representation in their cases that deal with the most important area of all - the client’s health or life. State bar associations should not “by invoking the power to regulate the professional conduct of attorneys, infringe in any way upon the right of individuals and the public to be fairly represented in lawsuits.”xvii By prohibiting referral fees and discouraging the referral of clients to those who will best represent their interests, the public and the profession will suffer.

END NOTES

  1. See Kalled v. Albee, 142 N.H. 747 (1998); In re Grievance Procedures, 115 N.H. 310 (1975).
  2. Wehringer’s Case, 130 N.H. 707, 718 (1988) (internal quotation marks omitted).
  3. NHBA Practical Ethics Article, Referral Fees - Practical Implications of Professional Rule of Conduct 1.5(f), October 1997.
  4. See, e.g., Tormo v. Yormack, 398 F.Supp. 1159, 1166 (D.N.J. 1975).
  5. N.H.B.A. Practical Ethics Article, Supra.
  6. New Hampshire Rule of Professional Conduct 1.1(c)(4).
  7. Fee Sharing Agreements, 7 Am.Jur.2d, Attorneys at Law, §272 (2005).
  8. NHBA Practical Ethics Article, Supra.
  9. See Alabama (Rule 1.5(e)); California (Rule 2-200); Connecticut (Rule 1.5(e)); Delaware (Rule 1.5(e)); Kansas (Rule 1.5(g)); Louisiana (Rule 1.5(e)); Maine (Rule 3.3(d)); Massachusetts (Rule 1.5(e)); Michigan (Rule 1.5(e)); Oregon (Rule 1.5(d)); Pennsylvania (Rule 1.5(e)); and Virginia (Rule 1.5(e)).
  10. See Colorado (Rule 1.5(e)); Texas (Rule 1.5(f)); and Wyoming (Rule 1.5(f)).
  11. See Alaska (Rule 1.5 (e)); Arkansas (Rule 1.5(e)); Arizona (Rule 1.5(e)); District of Columbia (Rule 1.5(e)); Florida (Rule 4-1.5(f) and (g)); Georgia (Rule 1.5(e)); Hawaii (Rule 1.5(e)); Idaho (Rule 1.5(e)); Illinois (Rule 1.5(f)-(j)); Indiana (Rule 1.5(e)); Iowa (Rule 32:1.5(e)); Kentucky (Rule 3.130(1.5)); Maryland (Rule 1.5(e)); Minnesota (Rule 1.5(e)); Mississippi (Rule 1.5(e)); Missouri (Rule 4-1.5(e)); Montana (Rule 1.5(e)); Nebraska (Rule 1.5(e)); Nevada (Rule 155(5)); New Hampshire (Rule 1.5(f)); New Jersey (Rule 1.5(e)); New Mexico (Rule 16-105(e)); New York (Rule 2-107); North Carolina (Rule 1.5(e)); North Dakota (Rule 1.5(e)); Ohio (Rule EC 2-21); Oklahoma (Rule (1.5(e)); Rhode Island (Rule 1.5(e)); South Carolina (Rule 1.5(e)); South Dakota (Rule 1.5(e)); Tennessee (Rule 1.5(e)); Utah (Rule 1.5(e)); Vermont (Rule 1.5(e)); Washington (Rule 1.5(e)); West Virginia (Rule 1.5(e)); Wisconsin (SCR 20.15).
  12. Moran v. Harris, 182 Cal.Rptr. 519, 523-24 (Cal.App. 1982).
  13. Bates v. State Bar of Arizona, 433 U.S. 350, 371 (1977).
  14. ABA Comment to Rule 1.7.
  15. N.H.B.A. Ethics Committee, Proposed Rule 1.5, Alternative 1, (visited March 2, 2006) at: <http://www.nhbar.org/publications/ethics/rule-1-5-fees.asp>.
  16. N.H.B.A. Ethics Committee, Proposed Rule 1.5, Alternative 2, (visited March 2, 2006) at: <http://www.nhbar.org/publications/ethics/rule-1-5-fees.asp>.
  17. Brotherhood of Railroad Trainmen v. Virginia, 377 U.S. 1, 7, 84 S.Ct. 11