Focus on Professional Responsibility
February, 2000
By: Thomas K. Byerley, Regulation Counsel

Sharing Legal Fees

Lawyers frequently call the Ethics Helpline with questions concerning the propriety of sharing legal fees with others. Inquiries concern the ethics ramifications of sharing of legal fees with other lawyers, other professionals, or non-lawyers.

The Michigan Rules of Professional Conduct offers some guidance on fee sharing issues. For example, as to fee sharing among lawyers, MRPC 1.5(e) provides:

"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."

Further, MRPC 5.4(a) applies to fee sharing with non-lawyers. That rule provides:

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

1. an agreement by a lawyer with the lawyer's firm, partner, or associate may provide for the payment of money, over a reasonable period of time after the lawyer's death, to the lawyer's estate, or to one or more specified persons;
2. a lawyer who purchases the practice of a deceased, disabled, or disappeared lawyer may pay to the estate or other representative of that lawyer the agreed-upon purchase price pursuant to the provisions of Rule 1.17; and
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."

Sharing Fees With Other Lawyers

MRPC 1.5(e) addresses the frequent situation where a lawyer confers with a potential client and finds that the lawyer lacks the expertise or time to handle the legal need of the client. The client is then referred to another lawyer. Under MRPC 1.5(e), the referring lawyer may receive a "referral fee", as long as the client is advised of and does not object to this referral and the total fee is reasonable. Some unusual variations to this "normal" scenario, however, have generated ethics opinion guidance from the Standing Committee on Professional Ethics.

In Ethics Opinion RI-124, the Committee opined that a lawyer may pay a referring lawyer a referral fee consisting of a percentage of legal fees billed to the client as long as the client is advised of and consents to this agreement, the client's bill is not increased because of the referral fee, and the total fee is reasonable. Therefore, a referral of a personal injury matter for a percentage of the ultimate contingent fee is ethical.

Ethics opinion RI-234 offers some valuable guidance in referral fee matters. That opinion has three major components. First, before fees may be divided by lawyers who are not in the same firm, the client must be advised of the identity of the lawyers who will divide the fee, what services each lawyer will be providing and which lawyers will be responsible for the matter. Second, 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. Third, a referral fee between lawyers may be calculated in a variety of ways, including on a percentage basis. The fee arrangement between the lawyers who divide a fee is a matter of contract between the lawyers.

If a lawyer cannot accept a client because of a conflict of interest, it is not ethical for that lawyer to receive a referral fee for referring the client to another lawyer. See RI-116. Similarly, if a lawyer is not competent to handle a particular matter and the client does not consent to the payment of a referral fee, the lawyer still has an ethical duty to refer the client to competent counsel without a referral fee. See RI-158. However, a lawyer who refers a client to another lawyer because the referring lawyer will be testifying in the matter on behalf of and consistent with the interests of the client is not prohibited from accepting a referral fee. See RI-211.

Sometimes an actively licensed lawyer will refer a case to another lawyer and then be disciplined for professional misconduct. Ethics opinion RI-030 opines that the disciplined lawyer, even if not currently an active member of the State Bar, may receive a quantum meruit portion of the referral fee for the services performed by the lawyer before the period of suspension or disbarment.

Michigan lawyers may pay an out-of-state law firm a referral fee for recommending the lawyer's services to an out-of-state client needing services in Michigan, as long as the terms of the referral fee comply with the ethics rules of both jurisdictions. See RI-199.

A lawyer who receives fees that are subject to a claim for a referral fee by another lawyer must notify the other lawyer of the receipt of the fees in a timely manner. See RI-224. The lawyer receiving the fee must also provide an accounting of the fees received and keep the disputed fees in a segregated trust account if there is a dispute concerning the division of the fee.

Sharing Fees With Non-Lawyers

Sharing fees with non-lawyers is governed by MRPC 5.4(a). As stated in the comments to that rule, "[t]he provisions of this rule express traditional limitations on sharing fees. These limitations are to protect the lawyer's professional independence of judgment." This rule is now being actively debated on the national level, as the issue of multidisciplinary practice comes to the forefront. As the rules currently stand, however, legal fees may not be shared with individuals who are not lawyers, with limited exceptions.

Lawyers may share legal fees with registered, not-for-profit lawyer referral agencies. In ethics opinion RI-075, the Ethics Committee opined that a not-for-profit lawyer referral service registered with the State Bar of Michigan may charge as a referral fee a percentage of the fee collected by the assigned lawyer. Ethics opinion RI-032, dealing with a nonprofit legal hotline service, reaches a similar result.

Ethics opinion RI-216 states that an estate of a deceased lawyer may properly receive legal fees that are paid after the death of the lawyer. In that opinion, the committee noted that the ". . . rationale for these limited exceptions is that they do not aid in the practice of law by nonlawyers and they present very little opportunity for interference with the independent professional judgment of the lawyer."

Employees of the lawyer may also share legal fees in appropriate circumstances. As stated in MRPC 5.4(a)(3), non-lawyer employees may be included in the law firm's compensation and retirement plan, even though the plan is based on a profit-sharing arrangement. Ethics opinion RI-143 states that a law firm may pay a legal assistant employee compensation based upon a set salary and a percentage of the net profits of the practice area in which the legal assistant is employed.

Lawyers may not give anything of value to a person who recommends the lawyer's services, other than paying the reasonable cost of advertising or by participating in a not-for-profit referral service. See RI-191. Furthermore, ethics opinion RI-146 opines that a lawyer may not accept a referral fee from other professionals for sending the lawyer's clients to the other professional, due to conflict of interest considerations.

A difficult fee sharing issue arises when a court awards a lawyer and the client financial sanctions during litigation. Ethics opinion RI-303 advises that the sharing of this "fee" between lawyer and client may be justified if the lawyer's retainer agreement with the client explicitly allows the sharing.

In addition to the ethics opinions summarized here, there are numerous other ethics opinions that address fee sharing issues between lawyers and others.