Wisconsin Lawyer: Managing Risk: Refer with Caution:

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    Managing Risk: Refer with Caution

    Referring cases can be lucrative, and getting referrals can help your business as well, but be cautious when seeking a referral fee. By accepting a fee for the referral, you have accepted joint responsibility for the outcome of the case. Don't assume it's in good hands.

    Thomas J. Watson

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    Wisconsin LawyerWisconsin Lawyer
    Vol. 83, No. 12, December 2010

    Thomas J. Watson

    Thomas J. Watson, Marquette 2002, is senior vice president and director of communications at Wisconsin Lawyers Mutual Insurance Co., Madison. Contact him at com Tom.Watson wilmic wilmic Tom.Watson com.

    For many law firms, referrals are an important part of building and maintaining a strong practice. It is common for lawyers to refer clients to other attorneys who may be better suited to handle a case geographically or based on the practice area. It can be lucrative for both the firm doing the referring and the firm getting the case. That’s why many firms rely on referrals as an important source of income.

    Some lawyers, however, have learned the hard way that the act of merely “referring” a case and agreeing to accept a fee for doing so can be enough for the referring attorney to be targeted in a malpractice claim and held responsible if the case is mishandled.

    This recently happened in a matter in which a law firm handling a case on referral missed a statute of limitation deadline, resulting in dismissal of the case. The firm did not have malpractice insurance and the lawyer who made the referral was suddenly faced with a malpractice claim, seeking to hold him responsible for the other law firm’s error.

    In my discussions with lawyers about referrals, it has become clear to me that many lawyers do not take the necessary precautions when referring cases. Some do not follow the Wisconsin Supreme Court Rules. They sometimes simply refer the case and wait for their share of the fee, essentially washing their hands of the case until its conclusion. One lawyer told me, “Lawyers who refer cases to me rarely check back in and ask me about the progress of the case. I guess they assume I’ll handle it and they’ll get their fee.”

    The State Bar’s Professional Ethics Committee very recently issued an opinion on the responsibility of lawyers when referral fees are received, asserting that there is “shared responsibility” between the referring lawyer and the lawyer who takes on the case. (See Ethics Opinion EF-10-02 elsewhere in this issue.)

    The Milwaukee law firm of Warshafsky, Rotter, Tarnoff & Bloch devotes its practice to personal injury cases. The largest source of the firm’s cases is referrals from other lawyers, who work with the firm on a referral or co-counsel basis and make fee-sharing agreements. Victor Harding has been with the firm for more than 20 years. “Many lawyers that refer cases to us don’t check in to see how the case is progressing. They don’t often monitor the case, although we’re pretty well-known in the area and many of our referrals come from lawyers who know us well. We try to keep them up-to-date as much as possible, but some of them don’t check with us.”

    Brian Anderson, claims counsel with Wisconsin Lawyers Mutual Insurance Company, says it’s a big mistake to refer a case and then forget about it. “While referrals can be lucrative, they also pose certain risks if not done properly. Simply referring the case and leaving it to the firm to which you referred it isn’t enough. You may be doing a disservice to the client and placing your firm at risk of a claim.”

    The Rules

    Wisconsin Supreme Court Rule 20:1.5(e) allows for a division of fees between lawyers who are not in the same firm. As the Professional Ethics Committee states in its opinion, this section provides that each lawyer assumes the same ethical responsibility for the representation as if the lawyers were partners in the same firm. The decision to maintain a fee interest in a case that you are referring may make good business sense and may be profitable for your practice. However, it must be kept in mind that referring attorneys who accept referral fees retain continuing responsibility and liability if that case is not adequately handled.

    The rule can be summarized, in relevant part, as follows: A division of fees between lawyers who are not in the same firm may be made only if 1) the division is in proportion to the services performed by each lawyer or, by written agreement with the client, each lawyer assumes joint responsibility for the representation; 2) the client is advised of and does not object to the participation of all lawyers involved and is informed if the fee will increase as a result of their involvement; and 3) the total fee is reasonable.

    The ethics committee has opined that when a lawyer refers a matter to a lawyer not in the same law firm under the fee-sharing arrangement permitted by SCR 20:1.5(e), the referring lawyer need not be involved in the day-to-day substantive handling of the matter. However, the referring lawyer, in assuming the same responsibility for the representation, must keep apprised of the progress of the case. Harding says you especially want to make sure the statute of limitation isn’t missed. “That’s the one thing you always want to watch when you hand over a case to another firm. Missing the statute of limitation is a killer. There is very little you can do to fix that. So we monitor that very closely.”

    Anderson agrees that monitoring the progress of a case you have referred is extremely important but is something that many lawyers fail to do. Lynn Laufenberg of Laufenberg, Stombaugh & Jassak S.C., Milwaukee, says his firm makes sure the referring lawyer is kept informed of the status of each case. “In all cases, referring counsel is copied with all correspondence and pleadings, as well as calendaring information. They are also invited to contact us at any time with questions or to get more detailed updates. We are careful to define the extent of referring counsel’s active participation at the outset.” Mike Jassak of the same firm adds, “This type of involvement with the referring attorney not only keeps them apprised of what is going on with any given claim they have referred to our office, but also provides the opportunity for them to assist and provide insight into the prosecution of the claim.”

    Anderson also says the client has to approve of the arrangement, as stated in the supreme court rule. Harding says that every lawyer who either refers cases or accepts referrals should be aware of this requirement. “The client must sign on to the agreement, know about it, and know how the fee is going to be split. We do that in every case.”

    How to Do It Right

    Anderson has a five-point checklist for referring lawyers who expect a referral fee:

    • Maintain contact with the receiving firm.

    • Ensure that deadlines are being met.

    • Maintain contact with the client.

    • Verify that the firm to which the matter has been referred has professional liability insurance coverage with adequate limits.

    • Communicate in writing with both the client and the receiving firm and identify your role, the referral-fee agreement, and the role and responsibilities being taken by the receiving firm.

    What is the best way to do these things? As the referring lawyer, you are obligated to obtain the client’s informed consent to discuss the possible referral with another lawyer and you must obtain the client’s signed consent in writing to the terms of the referral. Make sure you stay informed as to the performance of the receiving lawyer. Is that lawyer handling the matter in a way that conforms to the Rules of Professional Conduct? Periodically review the status of the matter with the receiving lawyer, the client, or both. Make sure the client knows that he or she can continue to contact you about the matter and make sure you are available if the client calls. As the referring lawyer, you retain an attorney-client relationship with the client. Your ongoing protection of the client’s interests in part justifies the fee you are to receive for referring the case.

    In addition, as the referring lawyer, you have the supervisory duty to refer legal matters only to lawyers who are competent to handle the matter in question. In this regard, a lawyer referring a matter to another lawyer, especially in circumstances in which the referring lawyer may have a financial stake in the referral, must select the receiving lawyer solely for that lawyer’s ability to provide the legal services that the client needs and not because that lawyer may be willing to enter into a fee-sharing arrangement.

    The ethics committee has also opined that both the referring lawyer and the lawyer to whom the matter is referred must reach a common understanding of their respective joint responsibilities as well as their individual responsibilities to the client. This understanding is fundamental to the proper exercise of the lawyers’ respective obligations to the client. The client should be informed in writing of that common understanding. SCR 20:1.4 addresses this issue.

    Anderson says many lawyers are reluctant to ask the firm to which they are referring a case about that firm’s malpractice insurance coverage. “I don’t have any statistics on this, but I suspect that is a question that rarely gets asked.”

    One lawyer I talked to about referrals backed up Anderson’s suspicions. “In all the years I’ve been taking referrals, I’ve never been asked whether I even had malpractice insurance,” he said.

    Conclusion

    Although the sharing of fees and the imposition of equal responsibility under SCR 20:1.5(e) do not create a legal partnership, lawyers should be mindful of the enhanced obligations created when the lawyer receives a referral fee. The referring lawyer is still the client’s lawyer and maintains a lawyer-client relationship throughout the course of the matter, even though the lawyer to whom the matter is referred will usually be the lawyer responsible on a day-to-day basis for the handling of the case. When you refer a case and maintain a fee interest, you’re not simply handing off the case to another lawyer to handle as he or she wishes. You still have responsibility to the client and, as Anderson says, you are still on the hook regarding the proper handling of the case and the outcome.

    Ask the firm taking the case about its professional liability insurance coverage, and make sure that you are included in the written fee agreement and that the client has signed off on the arrangement.

    Referring cases can be lucrative and getting referrals can help your business as well. But don’t assume a referred case is in good hands. Make sure – especially if you don’t know the receiving firm as well as you should. Laufenberg says, “In my experience, most problems arise in referral relationships because there is a lack of communication and up-front definition of expectations and responsibilities. Caution should be especially exercised in accepting requests to serve as Wisconsin counsel for out-of-state firms.”




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