Referral fees are ubiquitous in the legal profession and have been so for time immemorial. Referral fees create win-win opportunities. They allow referring attorneys to profit from their relationships and take care of their clients in areas where they do not have expertise. They also give receiving attorneys the opportunity to receive cases and earn a livelihood, which sometimes result in extraordinary fees. Most importantly, they ensure that clients receive representation from an attorney often better equipped to handle the matter than the referring attorney.

Unfortunately, this win-win premise too often hits roadblocks in the real world. In recent years, there has been a growing trend of disputes in trial and appellate courts about whether attorneys are obligated to pay referral fees under the circumstances of a particular case. The economic reality is that when a case is resolved, the referring attorney has an enormous interest in getting paid, but the receiving attorney may have buyer’s remorse. Often, the receiving attorney pours years of hard work into the case and is rewarded with a large contingency fee — lucrative fruit sometimes in the millions of dollars. The receiving attorney may be tempted to keep all the fruits of their labor despite the referral fee agreement.

A decision not to pay a referral fee obviously has business consequences and can create a lose-lose situation — a loss to the referring attorney because the fee would not be properly paid, a loss to the receiving attorney because the referring attorney would no longer trust them for refusing to comply with the referral fee contract and may send future lucrative cases elsewhere, and a loss for the client who may find themselves involved in a fight between attorneys over fees. This article examines the basics of referral fee agreements in Michigan, some trends in case law, and suggestions to ensure compliance with applicable ethics rules so as to avoid possible disputes.¹

MRPC 1.5(E) AND CLIENT OBJECTIONS TO REFERRAL FEES

In recent years, Michigan courts have seen increasing instances of win-win opportunities turning into lose-lose situations. The risk-reward calculus has led to a number of instances where the receiving attorney with the alleged referral obligation has chosen to fight rather than pay. Given this trend, it is imperative for referring attorneys — who lose their leverage once they refer the client — to protect themselves in the event the referral fee agreement is not honored.

Michigan Rule of Professional Conduct 1.5(e) permits attorney referral fees and outlines the rules attorneys must follow when in making such agreements. Recent trends in the law show that some attorneys to whom cases were referred are trying to use MRPC 1.5(e) and the close relationship they develop with the underlying client as a shield to avoid paying the fee properly owed to the referring lawyer. MRPC 1.5(e) provides:

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

(1) the client is advised of and does not object to the participation of all the lawyers involved; and

(2) the total fee is reasonable. (Emphasis added.)

By the time a case resolves — often years after the referral — the receiving attorney is at an immense advantage because they have established a close relationship with the client, whereas the referring attorney generally has no contact with the client after the referral. As a result, the client often feels indebted to the receiving attorney, who they see as their champion. Some attorneys have obtained a letter or affidavit from the client objecting to paying the referral fee years later. Fortunately, courts recognize this unfair advantage, and the trend in the law is toward enforcement of referral fee obligations and recognizing that the referring attorney’s rights are established at the time of retention, not when the attorney fee is eventually received.

MICHIGAN COURT OF APPEALS ON CLIENT OBJECTIONS

A Michigan Court of Appeals case, Babi v. Estate of Herman, is instructive.² In Babi, the plaintiff alleged that he and attorney Herman had a professional relationship wherein Babi referred clients in exchange for a fee.³ In 2018, Babi met with the underlying client, Terri Popilchak, whose husband had recently died at a hospital under circumstances suggesting the possibility of medical malpractice.⁴

Babi referred the matter to Herman on or about the same day Mr. Popilchak died.⁵ Roughly four years later at a hearing on a motion to approve a settlement, Herman solicited testimony from Mrs. Popilchak, who disputed that she had entered into an attorney-client relationship with Babi and said that Babi had not referred her to Herman.⁶ Based on this testimony, Herman refused to pay Babi a referral fee, and Babi filed suit.⁷

Herman moved for summary disposition, arguing, in part, that the client’s objection to paying the referral fee was dispositive and he was not ethically able to pay Babi a fee under MRPC 1.5(e).⁸ Babi responded, arguing, in part, that the client’s objection at the settlement hearing could not be dispositive because it came years after the referral was made.⁹ The trial court granted summary disposition for the defense, agreeing that the underlying client’s objection was dispositive even though it came four years after the referral, but the Court of Appeals reversed that decision in yet another example of Michigan courts protecting attorney referral fees.

Regarding the timing of a client’s objection to the referral fee under MRPC 1.5(e), the Court of Appeals sided with Babi, reaffirming one of its prior decisions which was affirmed in part and reversed in part by the Michigan Supreme Court on an unrelated issue. The Court of Appeals held that Law Offices of Jeffrey Sherbow v. Fieger & Fieger (Sherbow I) remained binding law regarding the timing of a client’s objection to a referral fee.¹⁰ In Sherbow I, the Court of Appeals held that an objection to a referral fee agreement by a client must be made at the time the client was advised of the agreement. At issue in the Babi appeal was whether the Sherbow I holding remained good law because it was affirmed in part and reversed in part. In Babi, the Court of Appeals held that the Sherbow I holding on the timing of a referral fee objection by a client remained good law:

The Supreme Court’s decision in Sherbow [I] to reverse this Court was limited to the determination that an attorney-client relationship was not required under MRPC 1.5(e). Accordingly, because the Supreme Court did not reverse Sherbow [I] in its entirety, the remaining portions of that opinion remain good law and are controlling.¹¹

Sherbow I and Babi provide important guidance on MRPC 1.5(e) regarding advising clients of referral fee agreements and the relevance or possible dispositive nature of clients’ objections to such an agreement — all depending on when clients may have objected. The rulings in these cases are supported by reasons well-articulated by the U.S. District Court for the Eastern District of Michigan in Idalski v. Crouse Cartage Co.¹² For example, permitting an untimely client objection to be dispositive would be unwise because “[t]o allow subsequent events, such as a mere change of heart, to upset the referral arrangement is inconsistent with basic contract law.”¹³ Additionally, “it would be unwise as a matter of policy to permit a client by whim or fancy, or perhaps more nefarious motives, to undo a referral contract after the lawyers’ work is finished but before final payment.”¹⁴

THE REQUISITE ATTORNEY-CLIENT RELATIONSHIP

In addition to advising the underlying client of the referral fee agreement, a second critical aspect of a valid agreement is ensuring that the referring attorney has established an attorney-client relationship with the referred client. This article does not cover that issue, but the authors direct readers to begin with a review of Sherbow II on the requirements for establishing the necessary attorney-client relationship as a prerequisite to an enforceable referral fee agreement.¹⁵ Sherbow II held, in part, that the attorney-client relationship requirement can be satisfied by limiting it “to the act of advising the individual to seek the services of the other attorney if the referring attorney and client expressly or impliedly demonstrate their intent to enter into a professional relationship for this purpose.”¹⁶

BEST PRACTICES TO PROTECT REFERRAL FEES

Compared to many jurisdictions, Michigan’s ethics rules on creating valid and enforceable referral fee agreements are more accommodating of such fees. Many jurisdictions have laws that are less favorable to attorneys and require, for example, referral agreements in writing and signed by the underlying client and have the fee amount equal an amount proportionate to the services each attorney performs.¹⁷ Since Michigan’s rules are more tolerant, Michigan attorneys often fail to give them the attention they deserve when referring matters.

As evidenced by the many referral fee dispute cases in Michigan’s trial and appellate courts, attorneys who are referred matters and later have buyer’s remorse may attempt to take advantage of the referring attorney’s lackadaisical approach to referring a matter and ensuring compliance with MRPC 1.5(e). The authors offer the following advice to protect against disputes and ensure Michigan continues to support referral fee agreements between lawyers.

First, when a matter is referred, send the referred client and receiving attorney an email or letter outlining the agreement. The State Bar of Michigan provides a template for such a letter.¹⁸ Second, the referring attorney is well-advised to participate in the likely engagement letter with the receiving attorney so the engagement agreement acknowledges that there was a relationship between the referring attorney and the client, the client consents to the fact of the referral fee, and the parties agree to be bound by Michigan law. Third, the referring attorney — if their involvement was only the referral itself — should nonetheless seek status updates from the client and receiving attorney.

In engaging in these specific practices, it would be very difficult for the receiving attorney, who years later obtained an outstanding result, to avoid payment of the referral fee obligation. According to Michigan Ethics Opinion RI-234, “both the referring lawyer and the receiving lawyer are responsible to see that the client is properly advised and does not object to the participation of the lawyers.”¹⁹ While RI-234 provides that the attorneys may agree that one or the other will ensure compliance, it is always in the referring attorney’s best interests to personally ensure compliance to avoid possible future disputes.²⁰

Lastly, if a dispute arises between the referring and receiving attorneys, RI-224 provides that the attorney holding disputed funds must keep them in a segregated trust account.²¹ Specifically, “[a] lawyer who receives fees which are subject to a claim for a referral fee by another lawyer must notify the other lawyer of receipt of the fees, provide an accounting of the fees received, and keep the disputed fees in a segregated trust account pending resolution of the dispute.”²²

CONCLUSION

Regarding referral fee agreements, sellers should beware and protect themselves. MRPC 1.5(e)’s requirements are not burdensome, and complying with them will further the win-win scenarios originating from attorney referrals in Michigan.

The authors thank Kenneth M. Mogill for his assistance with this article. Mogill is an adjunct professor at Wayne State University Law School, where he teaches professional responsibility, and a former chair of the State Bar of Michigan Standing Committee on Professional Ethics.