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  • InsideTrack
  • May 18, 2016

    Ethical Dilemmas: Referral Fees and Conflicts of Interest

    May 18, 2016 – When do referral fees generate conflicts of interest? In the case of a longtime client’s daughter, referred to another lawyer for a case in a different practice area, when must you comply with informed consent and when might the referral fee generate a conflict of interest?

    Question

    For many years, Lawyer has represented, in transactional matters, a successful small company owned by a husband and wife. Their adult daughter was recently injured in an automobile accident. At her parent’s suggestion, the daughter contacted Lawyer. Because Lawyer does not practice personal injury law or litigation, the daughter asked Lawyer to refer her to a personal injury lawyer. While Lawyer will not assist the personal injury lawyer in the preparation or litigation of the case, Lawyer expects to receive a fee for the referral. The other driver involved in the accident was making deliveries in a truck owned by an auto parts company. Lawyer represents the auto parts company in transactional matters with its suppliers and customers. What are Lawyer’s ethical obligations?

    Answer

    First, pursuant to SCR 20:1.5(e)(3), the “referring lawyer” in a fee-sharing arrangement represents the referred client for purposes of the Rules of Professional Conduct, even if the “referred to lawyer” performs all of the legal services in the matter.1

    SCR 20:1.5(e)2 permits lawyers who are not in the same firm to divide a fee under certain limited circumstances. It provides two alternative methods for fee-sharing: the division must be based on the services provided by each lawyer, or each lawyer must assume the same ethical responsibility for the representation.

    SCR 20:1.5(e)(3) describes the true referral fee. It states:

    (e) A division of a fee between lawyers who are not in the same firm may be made only if the total fee is reasonable and …

    (3) pursuant to the referral of a matter between the lawyers, each lawyer assumes the same ethical responsibility for the representation as if the lawyers were partners in the same firm, the client is informed of the terms of the referral arrangement, including the share each lawyer will receive and whether the overall fee will increase, and the client consents in a writing signed by the client.

    ABA Comment [7] to SCR 20:1.5 provides guidance:

    [7] Paragraph (e) permits the lawyers to divide a fee either on the basis of the proportion of services they render or if each lawyer assumes responsibility for the representation as a whole. … Joint responsibility for the representation entails financial and ethical responsibility for the representation as if the lawyers were associated in a partnership.

    Consequently, the “referring lawyer” in a fee-sharing arrangement represents the referred client for purposes of the Rules of Professional Conduct.

    Have an Ethical Dilemma?

    Ethical dilemmas affect every lawyer’s practice. This series of questions and answers appears each month in InsideTrack. The answers, offered by the State Bar’s ethics counsel Timothy Pierce and assistant ethics counsel Aviva Kaiser, are intended to provide guidance only and are not legal authority. Each situation will depend on the facts and circumstances involved.

    As a State Bar member, you have access to informal guidance in resolving questions regarding Wisconsin’s Rules of Professional Conduct for Attorneys. To informally discuss an ethics issue, contact Pierce or Kaiser. They can be reached at (608) 229-2017 or (800) 254-9154, Monday through Friday, 9 a.m. to 4 p.m.

    Second, SCR 20:1.5(e)(3) requires that the referred client be informed of the terms of the referral arrangement, including the share each lawyer will receive and whether the overall fee will increase. The referred client must consent3 in a writing signed by the referred client. SCR 20:1.5(e) also requires that the total fee be reasonable.

    Third, pursuant to SCR 20:1.1, a “referring lawyer” should only refer a matter to a lawyer whom the referring lawyer reasonably believes is competent to handle the matter.4

    Fourth, referral fee arrangement subjects both the “referring lawyer” and the “referred to lawyer” to the conflict provisions of SCR 20:1.7.5

    SCR 20:1.7(a)(1) prohibits concurrent representation of clients who will be directly adverse to each other. The adult daughter (the referred client) and the auto parts company (a current client) are directly adverse, even though the matters are wholly unrelated.6 Absent informed consent from each affected client, a lawyer may not act as an advocate in one matter against a client the lawyer represents in some other matter, even when the matters are wholly unrelated. Consequently, to receive a fee for referring the daughter to a personal injury lawyer, Lawyer must obtain the informed consent of both the adult daughter and the auto parts company, and must meet the requirements of SCR 20:1.7(b).7

    In Case You Missed It: Read Past Ethical Dilemmas

    Ethical Dilemmas appears monthly in InsideTrack. Check out these topics from recent issues:

    • Responding to a Subpoena for Client Documents, March 16, 2016

      What are the obligations of a lawyer upon receiving a subpoena for client documents?

    • Ethical Responsibilities of Stand-by Counsel, April 20, 2016

      You have been appointed to act as stand-by counsel to a criminal defendant who is representing himself at a trial. There are no Rules of Professional Conduct that talk about this type of situation. So just what are your ethical duties?

    Endnotes

    1 ABA Standing Comm. on Ethics & Prof’l Responsibility, Formal Op. 474, 4/21/16.

    2 SCR 20:1.15(3) provides:

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

    (1) the division is based on the services performed by each lawyer, and the client is advised of and does not object to the participation of all the lawyers involved and is informed if the fee will increase as a result of their involvement; or …

    (3) pursuant to the referral of a matter between the lawyers, each lawyer assumes the same ethical responsibility for the representation as if the lawyers were partners in the same firm, the client is informed of the terms of the referral arrangement, including the share each lawyer will receive and whether the overall fee will increase, and the client consents in a writing signed by the client.

    ABA Model Rule 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 division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;

    (2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and

    (3) the total fee is reasonable.

    While the language of SCR 20:1.5(e) differs from ABA Model Rule 1.5(e), each rule requires that each lawyer assumes joint responsibility for the representation.

    3 Informed consent is defined in SCR 20:1.0(f):

    (f) "Informed consent" denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.

    4 ABA Formal Op. 474; ABA Comment [7] to SCR 20:1.5.

    5 ABA Formal Op. 474.

    6 ABA Comment [6] to SCR 20:1.7.

    7 SCR 20:1.7(b) states:

    (b) Notwithstanding the existence of a concurrent conflict of interest under par. (a), a lawyer may represent a client if:

    (1) the lawyer reasonably believes that the lawyer will be able to provide competent and diligent representation to each affected client;

    (2) the representation is not prohibited by law;

    (3) the representation does not involve the assertion of a claim by one client against another client represented by the lawyer in the same litigation or other proceeding before a tribunal; and

    (4) each affected client give informed consent, confirmed in a writing signed by the client.


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