Can a law firm accept a 2% 'brokerage fee' from a collection agency for referring small accounts the firm could not collect, when the client consents?

Plain-English summary

A law firm handled collection matters, filing suit on larger claims but returning smaller accounts to the client when demand letters failed. A collection agency wanted those smaller accounts and proposed a "Brokerage Agreement" under which the firm would refer them in exchange for 2% of the gross monies collected, called "brokerage fees," with the agreement stating it added no cost to the clients' contingency fees. The client knew of and consented to the arrangement, and the agency would charge its own standard contingent fee and give the firm 2% of gross receipts. The committee was asked whether the brokerage fees were unethical fee sharing or otherwise problematic.

The committee concluded the receipt of the brokerage fees was not unethical fee sharing per se. It explained that Rule 7.2(c) prohibits certain fee-sharing arrangements, but does not apply here because the sharing is done by a lay agency out of its own fee income, not by a lawyer as a means of attracting business. It cautioned, though, that the same concerns underlying Rule 7.2(c), such as contaminating the lawyer's decision-making and inflating clients' bills, can arise when a lawyer is compensated for referring client work.

The committee stressed that the decision about what to do with the client's uncollected small accounts rests with the client, and the lawyer must give the best advice possible, uncontaminated by the prospect of compensation from the collection agency. Where, as here, the client wishes the accounts referred and the lawyer receives a small percentage, it is not unethical to accept the fee. The client must be fully informed of the firm's financial interest, and the compensation must be reasonable. The committee anchored these requirements in Rule 1.4 (appropriate advice and disclosure), Rule 1.5 (avoiding excessive compensation), and Rule 1.7 (avoiding improper conflicts).

In practice

Under the South Carolina rules as they stood at the time of the opinion, the committee held that a percentage payment a firm receives from a collection agency for referring accounts the firm could not collect is not unethical fee sharing per se, because Rule 7.2(c) targets a lawyer paying for business rather than a lay agency sharing its own income, but that the firm must give the client advice uncontaminated by the prospect of that payment, fully disclose its financial interest (Rule 1.4), keep the compensation reasonable (Rule 1.5), and avoid conflicts (Rule 1.7). South Carolina revised its Rules of Professional Conduct effective 2005, and the advertising and referral rules were renumbered and amended; verify the current text of Rules 7.2, 1.4, 1.5, and 1.7 before relying on the specific subsections cited.

Common questions

Q: Is it fee sharing for a firm to take a cut of a collection agency's fee on referred accounts?

A: The committee concluded it is not unethical fee sharing per se, because Rule 7.2(c) addresses a lawyer paying for business, and here the sharing comes from a lay agency's own fee income.

Q: Can the lawyer's advice about referring the accounts be affected by the payment?

A: The committee concluded no: the decision rests with the client and the lawyer must give the best advice possible, uncontaminated by the prospect of compensation from the agency.

Q: What must the firm do before accepting the payment?

A: The committee concluded the firm must fully inform the client of its financial interest (Rule 1.4), keep its compensation reasonable (Rule 1.5), and avoid improper conflicts of interest (Rule 1.7).

Background and rules framework

The opinion interprets South Carolina RPC 7.2(c) (fee sharing and paying for recommendations), 1.4 (advice and disclosure), 1.5 (reasonable fees), and 1.7 (conflicts), corresponding to the like-numbered Model Rules. The committee distinguished the lay agency's sharing of its own income from a lawyer paying for business.

Citations and references

Rules of Professional Conduct:

• South Carolina RPC 7.2(c) / Model Rule 7.2: restrictions on paying for recommendations and fee sharing.
• South Carolina RPC 1.4 / Model Rule 1.4: advice to and disclosure to the client.
• South Carolina RPC 1.5 / Model Rule 1.5: reasonable fees.
• South Carolina RPC 1.7 / Model Rule 1.7: conflicts of interest.

See also

• SC Bar Ethics Op. 03-07: A firm sharing a title insurance premium in a real estate closing
• ABA Formal Op. 474: Referral fees and conflicts of interest

Source

• Landing page: https://www.scbar.org/for-lawyers/quicklinks/legal-resources/ethics-advisory-opinions/ethics-advisory-opinion-03-09/

Original opinion text

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

UPON THE REQUEST OF A MEMBER OF THE SOUTH CAROLINA BAR, THE ETHICS ADVISORY COMMITTEE HAS RENDERED THIS OPINION ON THE ETHICAL PROPRIETY OF THE INQUIRER’S CONTEMPLATED CONDUCT. THIS COMMITTEE HAS NO DISCIPLINARY AUTHORITY. LAWYER DISCIPLINE IS ADMINISTERED SOLELY BY THE SOUTH CAROLINA SUPREME COURT THROUGH ITS COMMISSION ON LAWYER CONDUCT.

Ethics Advisory Opinion 03-09

FACTUAL SUMMARY
Law Firm represents clients in collection matters. When the clients’ claims fall above a certain monetary threshold, suit is filed for the client if demand letters fail to produce results. Where the clients’ claim amounts fall under that dollar threshold, the claims accounts are sent back to the client after demand letters fail to generate results. A collection agency is seeking to obtain the business of collecting on the lower dollar accounts that otherwise would be returned to the client after collection efforts fail. The client wishes for Law Firm to refer small claims the Law Firm is unable to collect to the collection agency. The collection agency has presented the Law Firm with a “Brokerage Agreement” calling for the law firm (denominated the “Billing Service” company) to refer accounts from client “Business/Medical Practices” in exchange for payment of two percent of the gross monies collected on referred accounts. The two percent payments are called “brokerage fees.” The proposed “Brokerage Agreement” states that “this agreement adds no monetary cost to the clients’ contingency fees.” Client is aware of the Brokerage Agreement and consents to Law Firm entering into the agreement. The collection agency intends to charge a standard contingent fee and give up a share of it, equaling two percent of gross receipts to Law Firm.

QUESTION PRESENTED
Do the “brokerage” fees to be received by Law Firm involve unethical fee sharing or pose any other problems under the Rules of Professional Conduct?

SUMMARY
The receipt of the “brokerage fees” under proposed plan does not constitute unethical fee sharing per se but nonetheless raises disclosure issues and reasonable fee issues that need to be addressed.

OPINION
Certain types of fee sharing arrangements are prohibited under Rule 7.2(c), but that rule is not applicable here because the sharing is being done by a lay agency out of its fee income, not by a lawyer as a means of attracting business. The same concerns that underlie Rule 7.2(c), such as contamination of the decision-making process and inflation of clients’ bills, can apply to cases where lawyers receive compensation for referring client work, however.

The decision of what to do with the client’s uncollected small accounts rests with the client, and the lawyer is duty-bound to give the best advice possible, uncontaminated by any prospect of compensation from a collection agency. If, as here, it is the client’s wish that matters be referred to the collection agency with the lawyer receiving compensation on a small percentage basis, it is not unethical for the lawyer to accept that fee.

The client needs to be fully informed of the Law Firm’s financial interest in the transaction, and any compensation received by the Law Firm needs to be reasonable. Support for this position rests on the lawyer’s obligation to give appropriate advice to the client under Rule 1.4, the lawyer’s duty to avoid collecting excessive compensation under Rule 1.5, and the lawyer’s obligation to avoid improper conflicts of interest under Rule 1.7