Can an Arizona lawyer pay another lawyer a referral fee for sending a client, and when can lawyers in different firms split a fee?

Plain-English summary

A lawyer who handles contingent-fee matters asked when he could pay a "referral" fee to another lawyer who recommended a client to him. The opinion drew a sharp line between paying for a referral and sharing a fee for shared work.

Arizona, unlike some states, does not allow a lawyer to be paid a fee merely for recommending another lawyer or referring a case where the referring lawyer has no further involvement. What Arizona does allow, under ER 1.5(e), is for lawyers who are not in the same firm to divide a single fee billed to the client if three conditions are met: each lawyer receiving a portion of the fee assumes joint responsibility for the representation, the client agrees in a signed writing to the participation of all the lawyers, and the total fee is reasonable. The opinion explains that "joint responsibility" requires, at a minimum, that the referring lawyer accept vicarious liability for any malpractice in the representation. The client must consent to the lawyers' respective roles, but ER 1.5(e) does not require the client to consent to the particular split of the fee among the lawyers.

A referral fee that does not satisfy ER 1.5(e) violates ER 7.2(b), which prohibits a lawyer from giving anything of value for channeling professional work. The opinion notes one boundary: ER 7.2(b) is not violated by a lawyer giving or receiving a "de minimis" gift that is not a "quid pro quo" for referring a particular client.

In practice

Under the Arizona rules as they stood at the time of the opinion, a lawyer who wanted to compensate a referring lawyer had to bring the arrangement within ER 1.5(e): joint responsibility (including vicarious malpractice liability), the client's signed written agreement to all lawyers' participation, and a reasonable total fee. The opinion treats a payment for a bare referral, with no continuing responsibility, as prohibited by ER 7.2(b).

Common questions

Q: Can I pay another lawyer just for sending me a client?

A: The opinion holds that you cannot. Arizona does not allow a referral or finder's fee for merely referring a case where the referring lawyer has no further involvement; such a payment violates ER 7.2(b).

Q: How can two lawyers in different firms split a fee?

A: Only under ER 1.5(e): each lawyer assumes joint responsibility for the representation, the client agrees in a signed writing to all the lawyers' participation, and the total fee is reasonable.

Q: Does the client have to approve how the fee is divided between the lawyers?

A: No. The opinion states that the client must consent to the lawyers' respective roles, but ER 1.5(e) does not require the client to consent to the particular division of the fee.

Q: Can lawyers exchange any gifts for referrals?

A: The opinion says a "de minimis" gift that is not a quid pro quo for referring a particular client does not violate ER 7.2(b).

Background and rules framework

The opinion applies ER 1.5(e) (division of fees between lawyers not in the same firm, Model Rule 1.5(e)) and ER 7.2(b) (payment for recommending a lawyer's services, Model Rule 7.2(b)), framed by the policy in the Comment to ER 1.17 (Model Rule 1.17) that the practice of law is a profession and that clients are not commodities to be bought and sold.

Citations and references

Rules of Professional Conduct:

• MR 1.5(e) / AZ ER 1.5(e) (division of fees between lawyers in different firms)
• MR 7.2(b) / AZ ER 7.2(b) (giving value for recommending services)
• MR 1.17 / AZ ER 1.17 (sale of a law practice; cited for policy)

Other opinions cited:

• Ariz. Op. 02-01: a de minimis gift that is not a quid pro quo is permitted
• Ariz. Op. 86-3: division of fees in proportion to work under a former version of ER 1.5(e)

See also

• AZ Ethics Op. 99-04: Dividing Fees on a Lawyer's Departure
• AZ Ethics Op. 99-06: Internet Referral and Fee Division
• AZ Ethics Op. 99-12: Fee Sharing With a Nonlawyer Firm

Source

• Landing page: https://tools.dev.azbar.org/RulesofProfessionalConduct/ViewEthicsOpinion.aspx?id=509

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

3/2004

Arizona, unlike some other states, does not allow a lawyer to be paid a fee merely for recommending another lawyer or referring a case. Instead, Arizona allows "referral fees" only in the sense that lawyers who are not in the same firm may divide a fee as provided in ER.1.5(e). That rule allows lawyers to divide a single billing to a client if three conditions are met: (1) each lawyer receiving any portion of the fee assumes joint responsibility for the representation: (2) the client agrees, in a signed writing, to the participation of all the lawyers involved: and (3) the total fee is reasonable. "Joint responsibility" requires, at the least, that the referring attorney accept vicarious liability for any malpractice that occurs in the representation. Although the client must consent to the respective roles of the lawyers in the ongoing representation, ER 1.5(e) does not require that the client consent to the particular division of the total fee among the lawyers.

The referral fee that does not satisfy ER 1.5(e) violates ER 7.2(b), which generally prohibits lawyers from paying others for channeling professional work. ER 7.2(b) is not violated, however, by a lawyer giving or receiving a "de minimis" gift that is not a "quid pro quo" for another lawyers referring a particular client.

FACTS [1]

The inquiring lawyer represents clients in contingent fee matters. He seeks clarification of the circumstances in which he can pay a "referral" fee to another lawyer who has recommended a client retain him to handle a particular case.

QUESTION PRESENTED

May a lawyer pay a referral fee to another lawyer?

RELEVANT ETHICAL RULES

ER 1.5 Fees

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

(1) each lawyer receiving any portion of the fee assumes joint responsibility for the representation:

(2) the client agrees, in a writing signed by the client, to the participation of all the lawyers involved, and:

(3) the total fee is reasonable.

ER 7.2 Advertising

(b) A lawyer shall not give anything of value to a person for recommending the lawyer's services except that a lawyer may:

(1) pay the reasonable cost of advertisements or communications permitted by this Rule:

(2) pay the usual charges of a legal service plan or a not-for-profit or qualified lawyer referral service. A qualified lawyer referral service is a lawyer referral service that has been approved by an appropriate regulatory authority; and

(3) pay for a law practice in accordance with ER 1.17

RELEVANT ETHICS OPINIONS

Ariz. Op. 02-01 (January 2002 - interpreting former version of ER 7.1(j) to allow a lawyer to give a de minimis gift that is not a quid pro quo for referring a particular client).

Ariz. Op. 86-3 (March 1986 - interpreting former version of ER 1.5(e) to allow division of fees in proportion to work done without disclosure to client of share each lawyer is to receive).

OPINION

Unlike some other states, Arizona does not allow a lawyer to be paid a "referral fee" or "finder's fee" merely for referring a case to another lawyer where the referring lawyer has no further involvement in the case. Arizona does, however, allow a referring lawyer to share a fee paid to another lawyer so long as the requirements of ER 1.5(e) are met.

Arizona's Rules of Professional Conduct (the Rules) recognize that "[t]he practice of law is a profession, not merely a business." Comment to ER 1.17. See also Rules Preamble, ¶1 ("A lawyer, as a member of the legal profession, is a representative of clients, an officer of the legal system and a public citizen having special responsibility for the quality of justice.")

Just as the practice of law is not merely a business, "[c]lients are not commodities that can be purchased and sold at will." Comment to ER 1.17. Accordingly, the Rules limit the circumstances in which a lawyer or law firm may sell or purchase all or part of a law practice. See ER 1.17. The Rules also generally prohibit a lawyer from "giving anything of value" for recommending the lawyer's services. ER 7.2(b). [2]

Under the Arizona Rules, "[l]awyers are not permitted to pay others for channeling professional work." Comment to ER 7.2. Consistent with these general principles, a lawyer may not be paid a fee merely for recommending that another lawyer handle a particular case.

Rule 1.5(e), however, does allow a "referral fee" in the sense that a lawyer who refers a case to another attorney may share in a single fee paid to the latter attorney if the conditions of the rules are met. See Comment to ER 1.5 (noting that "[e]xcept as permitted by this Rule, referral fees are prohibited by ER 7.2(b)").

ER 1.5(e) governs a "single billing to a client covering the fee of two or more lawyers who are not in the same firm." Comment to ER 1.5. This rule does not apply when multiple lawyers in different firms represent a client in a matter and bill the client separately for their respective work. In that situation, each lawyer's fee is subject to ER 1.5(a) - (d) rather than ER 1.5(e). Nor does ER 1.5(e) apply to the sharing of fees by lawyers associated in a single firm. [3]

A division of fees, in the sense of dividing a single billing to a client by lawyers not in the same firm may offer certain advantages as compare to multiple attorneys each billing a client separately. The comments observe:

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.

Comment to ER 1.5.

Under ER 1.5(e), a division of fees is permissible only if each of three conditions is met. First, each lawyer receiving any portion of the fee must assume joint responsibility for the representation. Second, the client must agree in writing, to the participation of all the lawyers involved. Finally, the total fee must be reasonable.

In specifying when a division of fees is allowed, recently amended ER 1.5(e) differs from Arizona's previous rule. Prior to December 1, 2003, ER 1.5(e) allowed lawyers to divide fees "in proportion to the services performed by each lawyer" without an agreement by the lawyers to be jointly responsible for the representation or the written agreement of the client. Current ER 1.5(e), in contrast, requires that each lawyer assume "joint responsibility" for the representation whether or not the fees are divided proportionally to the services performed. The current rule also requires the client's signed agreement to the participation of all the lawyers involved.

The text of current ER 1.5(e) raises two related issues. First is identifying what constitutes "joint responsibility" for the representation. The second issue is the nature of the required agreement by the client to the "participation of all the lawyers involved." ER 1.5(e)(2).

The Rules do not define "joint responsibility" with respect to ER 1.5(e) or otherwise. Under the former version of the Rules, the comments to ER 1.5 observed that "[j]oint responsibility for the representation entails the obligations stated in ER 5.1 for purposes of the matter involved." ER 5.1 in turn concerned (and still concerns) the responsibilities of partners and supervisory lawyers. Similarly, the comments to ABA Model Rule 1.5(e) state that "[j]oint responsibility for the representation entails financial and ethical responsibility as if the lawyers were associated in a partnership." See also ABA Informal Op. 85-1514 (1985) (noting that "joint responsibility" entails the same financial and ethical responsibility and the same responsibility to ensure adequate representation and communication as one partner would have for another in similar circumstances).

Arizona's current ER 1.5(e) and its comments, however, do not equate the relationship between a referring lawyer and the receiving lawyer to that of a partnership. The comments instead observe that a lawyer should only refer a matter to another lawyer who the referring lawyer believes is competent to handle the matter. The Arizona comment further states that "[i]f the referring lawyer knows that the lawyer to whom the matter was referred has engaged in a violation of these Rules, the referring lawyer should take appropriate steps to protect the interests of the client." Comment to ER 1.5(e).

The "joint responsibility" that a referring lawyer must assume in order to share a single fee is not limited merely by the duties to refer matters only to another lawyer believed to be competent and to take appropriate steps if the referring lawyer learns the other lawyer has violated the ethical rules. These obligations, after all, would exist whether or not the referring lawyer also assumed "joint responsibility" for the ongoing representation.

Other jurisdictions disagree whether "joint responsibility" must entail substantive involvement by the referring attorney, such as supervision of the other lawyer's work, or merely financial responsibility. Compare ABA Informal OP. 85-1514, supra; McFarland v. George, 316 S.W. 2d 662, 671-72 (Mo. Ct. App. 1958) ("responsibility" under Missouri's ethical rules means substantive involvement); Ohio Bd. Comm'rs of Grievance and Discipline Op. 2003-3 (concluding that "responsibility" means referring lawyer must be available to other lawyer and client throughout the representation and remain knowledgeable about progress of matter); Wis. State Bar, Formal Op. E-00-01 (same), with Aiello v. Adar, 750 N.Y.S.2d at 465 (joint responsibility is synonymous with joint and several liability; vicarious liability for any act of malpractice is sufficient assumption of responsibility). See also N.Y. County Lawyers' Association Comm. Professional Ethics Opinion 715 (1996) (referring attorney who assumes joint responsibility in exchange for legal fees is ethically obligated to accept vicarious liability for any act of malpractice that occurs during the course of the representation, but not required to supervise the activities of the receiving lawyer); III. Jud. Ethics Comm. Op. 94-16 ("acceptance of legal responsibility" required by Illinois professional ethics rule "consists solely of potential financial responsibility for any malpractice action against the recipient of the referral"); Chicago Bar Association Professional Responsibility Comm. Op. 87-2 at 4 (same).

Under Arizona's recently revised ER 1.5(e), the requisite "joint responsibility" exists if the referring attorney assumes financial responsibility for any malpractice that occurs during the course of the representation. This conclusion comports with the amendments to ER 1.5(e), which delete the prior reference in the comments to ER 5.1 and do not otherwise suggest that a referring attorney must have a relationship comparable to a "partnership" with the recipient of the referral. It also would be somewhat illogical to require a referring attorney to "supervise" the handling of a matter by another attorney believed to be more experienced or capable in a particular area. See Aiello, 750 N.Y.S.2d at 465. Interpreting "joint responsibility" as synonymous with joint liability allows flexibility in structuring the relationship among the attorneys and client involved. A referring attorney may, but is not necessarily required, to also have ongoing supervisory responsibilities or other substantive involvement in the matter."[4]

The role of the referring lawyer in any particular case will also turn on the client's consent. As noted above, ER 1.5(e) requires the client's signed written agreement to the "participation" of all lawyers involved. This provision requires that the client be informed of the respective role of each lawyer in the proposed representation (and any limitations on their respective involvement) and that the client agree in writing to their participation.

ER 1.5(e) does not require that the client agree to the specific share each lawyer is to receive when lawyers divide a single fee. In this respect, Arizona's rule is notably different from the ABA's Model Rule 1.5(e). The Model Rule requires, among other things, that the client "agree to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing." Similar language does not appear in Arizona's ER 1.5(e). Before the Rules were revised in 2003, Arizona's Ethical Rules Review Group had proposed requiring in ER 1.5(e) that the client agree "in a writing signed by the client, to the participation of all the lawyers involved, including the share each lawyer will receive." (Emphasis added.). The italicized language, however, was not included in the rule as approved by the Supreme Court.

Moreover, prior to the 2003 amendments to ER 1.5(e), the rule allowed a division of fees, if, in addition to their requirements, "the client is advised of and does not object to the participation of all the lawyers involved." Ariz. Op. 86-3 (quoting former ER 1.5). A 1986 ethics opinion interpreted this rule as allowing a division of fees in proportion to the amount of work performed "even though the share of the fee that each lawyer is to receive does not have to be disclosed" Id. If, under former ER 1.5(e), clients could be "advised of" the "participation of all the lawyers involved, without disclosure of the share of the fee each lawyer will receive, a similar conclusion would be appropriate with respect to the requirements in current ER 1.5(e) that the client agree in writing "to the participation of all the lawyers involved".[5]

CONCLUSION

For these reasons, under the version ER 1.5(e) now in effect, the client need not agree to the particular share each lawyer is to receive when a fee is divided. Of course, the total fee must be reasonable as required by ER 1.5(a) and any contingent fee, whether or not divided under ER 1.5(e) must also satisfy the requirements of ER 1.5(c).

A referral fee that does not satisfy ER 1.5(e) violates ER 7.2(b), which generally prohibits lawyers from paying others for channeling professional work. ER 7.2(b) is not violated, however, by a lawyer giving or receiving a de minimis gift that is not a quid pro quo for another lawyer's referring a client. See Comment to ER 7.2; Ariz. Op. 02-01.

** [1]** Formal Opinions of the Committee on the Rules of Professional Conduct are advisory in nature only and are not binding in any disciplinary or other legal proceedings. ( State Bar of Arizona 2004)

** [2]** A prohibition similar to that stated in ER 7.2 previously appeared in ER 7.1(j) in the version of the Rules in effect before December 1, 2003.

** [3]** The comments to ER 1.5 further observe that "[p]aragraph (e) does not prohibit or regulate division of fees to be received in the future for work done when lawyers were previously associated in a law firm."

** [4]** As a practical matter, it may be rare that a referring attorney will agree to be jointly responsible, in a financial sense, for a referred matter without also having some ongoing substantive involvement, at least in terms of oversight. Clients also may be hesitant to agree that a portion of their fee may be paid to a lawyer who assumes only financial responsibility for the matter. But this does not indicate that ER 1.5 uniformly

** [5]** The version of Rule 1.5(e) in effect in 1986 also allowed division of fees not in proportion to services performed, so long as the lawyers, by written agreement with the client, assumed joint responsibility for the representation: the client was advised of and did not object to the participation of all the lawyers involved; and the total fee was reasonable. See Ariz. Op. 86-3.