Within the context of an ongoing lawyer-client relationship, may a lawyer accept a referral fee from an insurance agent, investment advisor, or other person who provides a product or service to the client ("service provider") for referring a client to that service provider.
This difficult question has been the subject of conflicting ethics opinions in other jurisdictions.ee, for instance, Utah Eth. Op. 99-07 (Utah State Bar Ethics Advisory Opinion Committe1999) (referral fees permissible although lawyer has heavy burden to show compliance with Rule 1.7 and 1.8); Mich. Eth. Op. RI-317, 2/14/00 (Michigan State Bar Committee on Professional and Judicial Ethics, Informal Opinion (lawyer may direct client to investment advisor in return for referral fee, provided that client consents in writing after full disclosure); Conn. Eth. Op. 94-25 (Connecticut Bar Association Committee on Professional Ethics 1994) (referral fees permissible under Rules 1.7 and 1.8); Ohio Eth. Op. 2000-1, 2/11/00 (Ohio Supreme Court Board of Commissioners on Grievances and Discipline)(Ohio lawyers may not participate in program in which financial services group pays referral fees to lawyers who steer clients to firm for investment advice); Ariz. Eth. Op. 98-09 (Arizona Committee on the Rules of Professional Conduct 1998) (referral fees not permissible under Rule 1.7 and 1.8). This question, in more limited form, has also been the subject of two opinions. Inquiry No. 98-12 and Inquiry No. 95-78, by the Pennsylvania Bar Association Legal Ethics and Professional Responsibility Committee. See also American College of Trust and Estate Counsel, ACTEC Commentaries on the Model Rules of Professional Conduct, 105 (Rule 1.5), 107 (Rule 1.7) (3rd Ed. 1999) (stating that a lawyer should not accept any referral fee from a nonlawyer because such arrangement, even with full disclosure and client consent, involves too great a risk of overreaching by the lawyer, the potential for actual or apparent abuse, and may be a conflict of interest, and recommending that in jurisdictions that permit the payment of referral fees, the lawyer should fully disclose such fee to the client).
In response to recent inquiries by several lawyers, and several solicitations received by members of the Committees in which service providers offered to pay referral fees to lawyers, the Committees feel that a more generalized opinion on this subject may be helpful to members of the bar.
The Committees believe that the strict letter of the Rules permit a lawyer to accept a referral fee from a service provider, provided that the lawyer is scrupulous in determining under the particular circumstances that payment of the referral fee will not impact the lawyer-client relationship or the lawyer's exercise of independent professional judgment and that the client consents to the arrangement on the basis of full disclosure and consultation.
As a preliminary matter, frequently the preferred practice for a lawyer who is offered a referral fee will be for the lawyer, rather than accepting the referral fee, to negotiate a reduction in the fee that the client will pay the service provider. In other situations, such as if the service provider is willing to pay a referral fee but not to reduce the service provider's charge to the client, the preferred practice for a lawyer offered a referral fee may be for the lawyer to accept the referral fee and then to remit that fee to the client, either directly or as a credit against the lawyer's fee. In the latter case, the lawyer's bill should clearly show the lawyer's fee before the credit, the amount and source of the credit, and the lawyer's fee after the credit.
If the lawyer wishes to rebate or credit the referral fee to the client, the lawyer must satisfy both Rule 1.7(b) and Rule 1.8(f). Both rules address the conflicts of interest the lawyer faces in accepting a referral fee from a service provider and the procedure the lawyer should follow in handling such conflicts.
Rule 1.7(b) provides:
A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person, or by the lawyer's own interests, unless:
the client consents after full disclosure of the circumstances and consultation; there is no interference with the lawyer's independence of professional judgment or with the client-lawyer relationship; and information related to the representation of a client is protected as required by Rule 1.6.
Because Rules 1.7(b) and 1.8(f) are similar, they will be analyzed together in this opinion. Both rules address the potential conflict between the client's interests and the lawyer's own interests.
Under both Rule 1.7(b) and Rule 1.8(f), the lawyer must make an independent judgment that the potential conflict will not affect the lawyer's professional judgment or the lawyer-client relationship. If, and only if, the lawyer concludes that the potential conflict will not affect the lawyer's professional judgment, and if that decision satisfies Rule 1.7(b)'s reasonableness requirement, the lawyer may, after full disclosure, ask the client to waive the potential conflict and consent to the lawyer's acceptance of the referral fee.
The potential conflict may not be waived if the lawyer concludes, or reasonably should conclude, that the lawyer's representation will be adversely affected or the lawyer's independence of professional judgment will be impaired. In such a case, the lawyer may not accept the proposed referral fee.
In evaluating the potential conflict, the lawyer must consider the possibility that the client will not be satisfied with the service provider and how the lawyer would respond in such a situation. The lawyer must not consider the case of clear malfeasance on the part of the service provider (in which case the lawyer may have a duty to inform the client of the malfeasance), but also how he or she would respond if the lawyer of the client concludes that the service provider was negligent or simply providing poor service to the client. In such instances, it is clear that the lawyer's loyalty must lie with the client, that the lawyer must advise the client that the service provider was negligent or providing poor service, and that the client therefore should consider switching service providers.
If the lawyer concludes that the representation, the lawyer-client relationship, and the lawyer's professional judgment will not be adversely affected, the lawyer must then obtain the client's consent to the lawyer's acceptance of the referral fee after full disclosure.
In evaluating whether the lawyer may reasonably conclude that the lawyer's acceptance of the referral fee would not impair the lawyer-client relationship or the lawyer's professional judgment, and whether or not the lawyer made full disclosure and obtained the client's informed consent, the Committees suggest that the following factors be considered:
1. The fullness of the disclosure, and whether the disclosure and the client's consent were in writing. The lawyer must disclose fully to the client the source and amount of the referral fee, as well as whether it will be paid once or on a periodic basis. This disclosure should be in writing as part of the client's consent to the lawyer's acceptance of the fee. As part of the disclosure, the lawyer should also advise the client that the client may obtain the desired service from other qualified providers, not just the one recommended by the lawyer, and that others would provide a similar service but not pay a referral fee. (ft. Of course, a lawyer should always refer the client to an appropriate service provider, considering the client's needs, the skill of the service provider and the fee charged by that provider).
2. The client's level of sophistication, experience, and judgment. If the client's level of sophistication, experience, or judgment it limited, securing the requisite informed consent may be more difficult or not possible. Note that Rule 1.14 [Client under a disability] may impose other obligations on a lawyer who represents a client under a disability.
3. Whether the client sought independent advice, or was advised by the lawyer to seek independent advice, with regard to the lawyer's acceptance of the referral fee.
4. The reasonableness of the referral fee, both absolutely and in relation to the time and labor spent by the lawyer in representing the client, and the duration over which the referral fee will be paid, and the scope and extent of the engagement.
If the service provider is also a client or former client, the lawyer must consider the lawyer's responsibilities to the service provider under the Rules and the possible conflict of interest under Rules 1.7, 1.8 and 1.9 between the lawyer's representation of the provider and the lawyer's representation of the client. When recommending to a client a service provider who is also a client, the lawyer should disclose to the client that the service provider is also a client.
A referral fee paid by a service provider to a lawyer involved in a complex representation of a client, in which the lawyer's fees are many times the size of the referral fee, might be reasonable, whereas the same fee, paid to a lawyer who handled a simple transaction for the client, may not be acceptable.
In the context of Rules 1.7 and 1.8, the reasonableness of the referral fee is only one circumstance in determining whether the lawyer may reasonably conclude that the lawyer's acceptance of the referral fee would not impair the lawyer-client relationship or the lawyer's professional judgment, and whether or not there was full disclosure and informed consent.
An excessively large referral fee would not, in and of itself, establish a violation of Rules 1.7 and 1.8. However, some authority supports the conclusion that an excessively large referral fee may violate Rule 1.5(a), which provides: "A lawyer shall not enter into an agreement for, charge, or collect an illegal or clearly excessive fee." Ad. Op. 93-01, 1004 WI 904187 (Ill. St. Bar. Assoc.). Rule 1.5(a)(a) - (a)(8) sets forth several factors to be considered in evaluating the propriety of a fee, including the time and labor involved, the customary fee charged for similar services, and the experience, reputation, and ability of the lawyer or lawyers performing the services. Whether in a particular case the total compensation received by the lawyer, considering both the fees paid directly by the client and any referral fees from a service provider, is illegal or clearly excessive, will be determined on a case-by-case basis in accordance with Rule 1.5(a) and other applicable law. Accepting payment from a service provider (perhaps part of the insurance provider's annual insurance commission or investment management fee) for a period when the lawyer does little or no work for the client may violate Rule 1.5(a).
Conclusion: A lawyer should exercise extreme caution when offered a referral fee by a service provider. Before accepting a referral fee, the lawyer must reasonably believe that accepting the fee will not interfere with the lawyer's exercise of independent professional judgment and duty of loyalty, and the client must consent to payment of the fee only after full disclosure and consultation. In many cases, the above analysis will lead the lawyer to conclude that the lawyer may not accept the fee or should rebate the fee to the client.
This opinion does not address other state or federal laws or ethical rules that may deal with the question whether a lawyer may accept a referral fee from a real estate broker, insurance agent, investment manager, or other service provider.