Do the rules of professional conduct apply to an inactive lawyer, and can an inactive lawyer running a side business pay referral fees?

Plain-English summary

The inquiring lawyer was an inactive member of the State Bar who owned and operated an MVD-certified traffic school. As part of marketing the school, the lawyer paid $10 to anyone who referred a student and gave the referred student a $10 discount, and the lawyer planned a mail campaign to attorneys who defend DUI charges describing the school and its referral policy. The lawyer asked whether the conduct rules applied to him as an inactive member and whether the referral payments were permissible.

The opinion first concludes that the Rules of Professional Conduct apply to inactive members. An inactive lawyer remains a member of the State Bar under Rule 32(c) of the Rules of the Supreme Court of Arizona, and the Ethical Rules apply to members regardless of active practice; the Preamble notes rules that apply to lawyers not active in practice, such as ER 8.4 reaching dishonesty or fraud committed in a business.

On the referral payments, the opinion concludes that the inactive lawyer may pay a referral fee to a third party for the traffic-school business so long as the fee is not related to legal services and does not constitute a sharing of legal fees. The opinion draws the line at paying the referral fee to a practicing attorney: an inactive lawyer may not pay the referral fee to a practicing attorney, because that would implicate the rules governing what practicing lawyers may receive for channeling work.

In practice

Under the rules as they stood at the time of the opinion, inactive status does not switch off the conduct rules. The opinion treats a referral fee tied to a genuinely non-legal business (here a traffic school) as permissible when it is not connected to legal services and is not a division of legal fees, while prohibiting the inactive lawyer from routing that fee to a practicing attorney.

Common questions

Q: Do the ethics rules apply to a lawyer on inactive status?

A: Yes. The opinion concludes that an inactive member of the State Bar must comply with the Rules of Professional Conduct, citing Supreme Court Rule 32(c) and the Preamble.

Q: Can an inactive lawyer pay referral fees for a non-legal business?

A: The opinion concludes that an inactive lawyer may pay a referral fee to a third party as long as the fee is not related to legal services and is not a sharing of legal fees.

Q: Can the inactive lawyer pay those referral fees to practicing attorneys?

A: No. The opinion concludes an inactive lawyer may not pay the referral fee to a practicing attorney.

Background and rules framework

The opinion applies the Preamble and ER 8.4 (misconduct, Model Rule 8.4) to establish that the rules reach inactive members and non-professional business conduct, and draws on the principles behind ER 5.4 and ER 7.2 (Model Rules 5.4 and 7.2) on sharing legal fees and paying for referrals to explain why an inactive lawyer cannot pay the referral fee to a practicing attorney. It also relies on Supreme Court Rule 32(c) for the status of inactive members.

Citations and references

Rules of Professional Conduct:

• MR 8.4 / AZ ER 8.4 (misconduct; dishonesty in business)
• MR 5.4 / AZ ER 5.4 (sharing legal fees)
• MR 7.2 / AZ ER 7.2 (paying for referrals)

See also

• AZ Ethics Op. 05-01: Investment Referral Fees and Dual Practice
• AZ Ethics Op. 04-02: Lawyer Referral Fees
• AZ Ethics Op. 99-06: Internet Referral and Fee Division

Source

• Landing page: https://tools.dev.azbar.org/RulesofProfessionalConduct/ViewEthicsOpinion.aspx?id=521

Original opinion text

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

5/2005

An attorney who is on inactive status and not practicing law must comply with the Rules of Professional Conduct. An inactive attorney may pay a referral fee to a third party so long as the fee is not related to legal services and does not constitute sharing of legal fees. An inactive attorney may not, however, pay the referral fee to a practicing attorney.

FACTS[1]

The inquiring attorney ("Attorney") is an inactive member of the State Bar of Arizona. Attorney owns and operates a traffic school, which is certified by the Motor Vehicle Department ("MVD"). The curriculum for the school is established by the MVD, and upon completion of a course from Attorney's traffic school, the student receives a certification which will satisfy certain requirements of the MVD.

As part of Attorney's marketing plan, Attorney pays $10 to any person who refers a student who takes a class at Attorney's school, and Attorney also gives the person referred a $10 discount. Attorney intends to implement a mail campaign directed to attorneys practicing in the area of the defense of driving under the influence charges and advise these attorneys regarding Attorney's school and its referral policy.

QUESTION PRESENTED

1) Do the Rules of Professional Conduct apply to attorneys on inactive status who are not engaged in the practice of law?

2) May the inquiring Attorney pay a referral fee to other attorneys and third parties who refer students to take classes at Attorney's school?

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 5.4 Professional Independence of a Lawyer

(a) A lawyer or law firm shall not share legal fees with a nonlawyer, except that:

(2) a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may, pursuant to the provisions of ER 1.17, pay to the estate or other representative of that lawyer the agreed-upon purchase price;

(3) a lawyer or law firm may include nonlawyer employees in a compensation or retirement plan, even though the plan is based in whole or in part on a profit sharing arrangement; and

(4) a lawyer may share court-awarded legal fees with a nonprofit organization that employed, retained or recommended employment of the lawyer in the matter.

(b) A lawyer shall not form a partnership with a nonlawyer if any of the activities of the partnership consist of the practice of law.

ER 7.2 Advertising

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

(1) pay the reasonable costs 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.

ER 8.4 Misconduct

It is professional misconduct for a lawyer to:

(a) violate or attempt to violate the Rules of Professional Conduct, knowingly assist or induce another to do so, or do so through the acts of another;

RELEVANT ARIZONA ETHICS OPINIONS

Ariz. Op. 02-01 An attorney may give a de minimis gift to an attorney or a non-attorney after a client referral if the gift is an expression of thanks and not a quid pro quo payment.

OPINION

Attorney is on inactive status and is not currently practicing law. Attorney is operating a traffic school under a curriculum approved by the MVD. We are advised that it is not required that a person be admitted to practice law in order to own and operate such a school.

Notwithstanding Attorney's inactive status, Attorney must comply with applicable Arizona Rules of Professional Conduct. Attorney remains a member of the State Bar and is classified as an inactive member pursuant to Rule 32 (c) (1) and (4), Rules of the Supreme Court of Arizona. Attorney's duties and obligations as a member, even an inactive one, include those set forth in the Arizona Rules of Professional Conduct (generally, the "Ethical Rules," or specifically, "ER"). See Ariz. Sup. Ct. R. 41(a). Similarly, paragraph 1 of the preamble to the Ethical Rules provides that lawyers should conduct themselves honorably, regardless of whether they are practicing law. Paragraph 3 of the Preamble notes "there are Rules that apply to lawyers who are not active in the practice of law or to practicing lawyers even when they are acting in a non-professional capacity. For example, a lawyer who commits fraud in the conduct of a business is subject to discipline for engaging in conduct involving dishonesty, fraud, deceit or misrepresentation. See ER. 8.4." Additionally, the Arizona Supreme Court retains continuing jurisdiction over a disbarred attorney. See, In Re Creasy, 198 Ariz. 539, 541 (2000). Thus, it is clear that Attorney remains a member of the State Bar subject to the same Ethical Rules that apply to active members.

The Ethical Rules address the division of legal fees and/or the payment of a referral fee with respect to the performance of legal services. ER 1.5 prohibits the division of legal fees between lawyers who are not in the same firm, except under certain limited circumstances. ER 5.4 prohibits a lawyer from sharing legal fees with a non-lawyer. ER 7.2 provides that a lawyer shall not give anything of value to a person for recommending the lawyer's services.

Attorney is not performing legal services, rather he is operating an independent, MVD-approved traffic school. Therefore, there is no ethical prohibition preventing Attorney from paying a referral fee to a non-lawyer who refers a student to his traffic school.

Attorney has also inquired as to the ethical proprietary of paying a referral fee to attorneys. We have in the past found that de minimis gifts of thanks after a referral has been made are permissible. See Ariz. Op. 02-01. Although Attorney asserts that the nominal nature of the $10 fee makes it permissible, the fact that Attorney is marketing this to attorneys in advance of the referral being made makes it appear to be a quid pro quo referral fee. The referral fee clearly is intended to motivate a person to make a referral who would not have otherwise. The acceptance of this referral fee is likely to give the impression that the referring attorney is motivated by something other than the best interests of the client. Thus, we conclude that an attorney's acceptance of the referral fee, even in the nominal amount of $10, is impermissible. See Ariz. Op. 02-01. Therefore, it is equally impermissible for Attorney to offer a referral fee to a lawyer, because such an offer would constitute knowing assistance with or inducement of a violation of the Ethical Rules in contravention of ER 8.4(a).

CONCLUSION

There is no ethical prohibition to an attorney paying a referral fee to a non-lawyer if the fee is not related to legal services. The attorney may not, however, pay such a referral fee to another attorney for the referral of a client.

[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 2003