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  • October 26, 2010

    Referral fees: New ethics opinion clarifies the referring and receiving attorneys' obligations

    A new ethics opinion clarifies a lawyer’s obligations when making referrals for a fee. Wisconsin Formal Ethics Opinion EF-10-02 reaffirms and replaces E-00-01, which has been withdrawn. The following article explains the obligations described in the opinion, which includes a duty to “step in” if the receiving lawyer is ever unable to serve the client’s legal needs.
    Referral fees: New ethics opinion clarifies the referring and receiving attorneys’ obligations 

    By Joe Forward, Legal Writer, State Bar of Wisconsin

    Nov. 17, 2010 – Referring clients can be a good source of income for lawyers and law firms that collect fees for the referral, but lawyers should remember that a referral fee is justified by a shared responsibility. That is, a referring lawyer maintains ethical and financial responsibilities associated with the referral.

    In a forthcoming Wisconsin Lawyer column, attorney Thomas Watson of Wisconsin Lawyers Mutual Insurance Company explains the importance of understanding the referral-attorney role. He notes a case in which a law firm handled a matter on referral, and missed a statute of limitations deadline, causing a dismissal. The law firm did not have adequate malpractice insurance, and the referring attorney was suddenly faced with a malpractice claim.

    “In my discussions with lawyers about referrals, it’s clear that many lawyers do not take the necessary precautions when referring cases,” Watson writes. “They sometimes simply refer the case and wait for their share of the fee, essentially washing their hands of the case until its conclusion.”

    Ethics opinion EF-10-02

    Under Supreme Court Rule 20:1.5(e), that’s a mistake. In October, the State Bar’s Standing Committee on Professional Ethics issued Wisconsin Formal Ethics Opinion EF-10-02, which responds to a rule change that took effect in 2007 and supplants opinion E-00-01. State Bar Ethics Counsel Tim Pierce says the opinion expands upon but does not change E-00-01.

    “We took the opportunity to expand upon the older opinion, and to clarify some of the things that were not previously addressed,” Pierce said. “For instance, the opinion clarifies the meaning of ‘shared responsibility’ or ‘joint responsibility’ in referral situations.”

    Before 2007, SCR 20:1.5(e) imposed “joint responsibility” on the referring and receiving lawyers. Under the new rule, SCR 20:1.5(e)(3) determines that “each lawyer,” meaning the referring and receiving lawyer, “assume[] the same ethical responsibility for the representation as if the lawyers were partners in the same firm.”

    EF-10-02 answers the question of whether the rule change imposes different ethical standards than the one that imposed “joint responsibility.” In the committee’s opinion, the answer is no – referring lawyers still have the same ethical and financial responsibilities, and that has not been a source of confusion. But EF-10-02 goes further to help lawyers understand their obligations.

    For instance, the opinion discusses a referring lawyer’s responsibility if concerns arise with respect to the receiving lawyer’s conduct. Lawyers now have more guidance with respect to their ongoing duty as a referring lawyer. But, according to Watson, lawyers should pay more attention to that duty.

    “Caution is required when seeking a referral fee, because by accepting a fee for the referral, you have accepted joint responsibility for the outcome of the case,” Watson writes.

    The referral agreement

    Consider the situation in which a client calls a personal injury lawyer with a tax problem, but the attorney is not equipped to handle the case. The personal injury lawyer (referring lawyer) refers the case to an outside tax lawyer (receiving lawyer) for a fee. Although the tax lawyer is handling the case, the referring personal injury lawyer still has underlying obligations.

    “This issue is not frequent, but I do get regular calls about it,” said Pierce, who responds to lawyers’ questions through the Ethics Hotline. “Historically, referrals and fees were sort of unspoken agreements. But the rules now require such agreements to be reduced to writing.”

    Aside from “assum[ing] the same ethical responsibility for the representation as if the lawyers were partners in the same firm,” SCR 20:1.5(e) requires that “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.”

    “Now you have the question of whether the contract for a referral fee is enforceable, notwithstanding any disciplinary violation,” Pierce said. “But a disciplinary rule violation does not automatically translate into a contract that is void for public policy reasons.”

    The opinion states that a referring lawyer and the lawyer to whom the matter was referred “must reach a common understanding of their respective joint responsibilities as well as their individual responsibilities to the client.”

    Ethical and financial responsibilities

    EF-10-02 reaffirms that lawyers must inform the client that the referring lawyer maintains a lawyer-client relationship with the client, remains ethically and financially responsible, and will be available to the client. But what does that mean?

    Ethically, the referring lawyer must keep tabs on the status of the matter. That is, the referring lawyer must “remain sufficiently aware of the performance of the lawyer to whom the matter was referred.” In other words, the referring lawyer should be available to address concerns regarding the receiving lawyer’s compliance with the rules of professional conduct.

    Because the referral fee is justified by the underlying lawyer-client relationship, lawyers may not accept referral fees if the lawyer-client relationship cannot be established.

    For example, a lawyer that has a conflict of interest with a client cannot refer the client for a fee, unless the client provides an express waiver. A lawyer that would unable to serve as the client’s primary lawyer, for whatever reason, cannot refer the client for a fee.

    In addition, the referring lawyer must refer legal matters only to lawyers who are competent to handle the matter in question, and must select a lawyer based on that lawyer’s ability only. That is, lawyers cannot base referral decisions on fee arrangements with other lawyers.

    Finally, the referring lawyer assumes financial responsibility for a case, although the responsibility is secondary to the financial responsibility assumed by the lawyer to whom the matter was referred. According to EF-10-02, financial responsibility typically involves paying or advancing payment of costs associated with the handling of the matter. But the initial referral agreement should spell out the financial responsibilities of the parties.

    Conduct of receiving lawyer

    Unlike E-00-01, EF-10-02 guides lawyers when the conduct of the receiving lawyer is at issue. Given that a referring lawyer has an underlying lawyer-client relationship with the client, the referring lawyer has a duty to “step in” if the receiving lawyer is otherwise unable to fulfill their obligations to the client.

    That is, if a receiving lawyer is unable to adequately represent the client, for whatever reason, the referring lawyer must take reasonable actions to protect the client’s interests.

    Reasonable action might require a court appearance to request a continuance, or assisting the client in locating other counsel. It does not require the referring lawyer to assume the case. But the referring lawyer “must be prepared and competent to undertake limited actions.”

    For more information, contact Tim Pierce at the ethics hotline at (608) 250-6168 or (800) 444-9404, ext. 6168, Monday through Friday, 9 a.m. to 5 p.m. Also look for Thomas Watson’s column, “Refer with Caution” in the December Wisconsin Lawyer.

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