FORWARDING FEES: DOES THE MODEL RULE IMPROVE THE SITUATION?

Canon 34 of the Canons of Professional Ethics provided that: "No division of fees for legal services is proper, except with an- other lawyer, based upon a division of service or responsibility."'

This was an endeavor to formulate the sentiment of some of the members of the bar that referral fees should not be allowed. This feeling was based on the belief that lawyers should only earn fees for providing services of a legal n a t ~ r e . ~

Forwarding or referral fees are usually created when a client seeks the services of an attorney who is unable to offer his services either because of a lack of expertise, time, resources or various other factors. The attorney then suggests another attorney to the client and if the referred attorney accepts the case, a fee may be owed to the forwarding attorney merely because of his recommendati~n.~

Even though Canon 34 and following rules held referral fees to be unethical, the bar had a long practice or custom of allowing one- third of the fee earned to be paid to the forwarding a t t ~ r n e y . ~ So long as he had the approval of his client, the forwarding attorney became entitled to the one-third "finders fee" by merely recom- mending another 1awyer.The service performed or responsibility assumed by the forwarding attorney had no bearing on the amount of his fee.B

Disciplinary Rule 2-107 of the Code of Professional Responsi- bility,? which replaced the old canons in 1970: precluded any fee award where the attorney had not assumed his proportionate share of the services.@ DR 2-107 provided that:

1. Canons of Professional Ethics of the American Bar Association, Canon 34. 2. H. DRINKER, LEGAL ETHICS 189 (1953). 3. Id. 4. Id. 5. Id. 6. Id. 7. MODEL CODE OF PROFESSIONAL RESPONSIBILITY DR 2-107 (1979). 8. Id., preface. 9. Id. at DR 2-107.

230 The Journal of the Legal Profession

A) A lawyer shall not divide a fee for legal services with an- other lawyer who is not a partner in or associate of his law firm or law office unless:

1) The client consents to employment of the other lawyer after a full disclosure that a division of fees will be made; 2) The division of fees is made in proportion to the services performed and responsibility assumed by each; 3) The total fee of the lawyers does not clearly exceed reasona- ble compensation for all legal services they rendered the client.

B) This Disciplinary Rule does not prohibit payment to a for- mer partner or associate pursuant to a separation or retirement agreement.1°

All three of the conditions must have been satisfied before fees could properly be divided." There was little disagreement that the total fees must be reasonable and the client must consent after a full disclosure.12 The disagreement was over the proportional re- quirement of services performed and responsibility assumed by each attorney.13 California, Maine, Massachusetts and Texas are the only states in which straight referral fees are permitted. That is, no services or responsibilities are required of the referring attorney."

In 1959, after being contacted about a possible defamation ac- tion, Melvin Belli suggested that another attorney be associated on the case. J.P. Tonkoff was associated on the case and a contingent fee arrangement was created giving one-third of any recovery as attorney fees.16 In 1977, after the defamation action had been com- pleted and an award recovered, Melvin Belli brought an action to recover one-half of the attorney's fees recovered by the surviving partners of Tonkoff.16 The court concluded as a matter of law there was not sufficient evidence of a fee agreement between Tonk- off and Belli. The court went on to say that even if there were such an agreement, it could only be a "finder fee," unenforceable under

10. Id. 11. Palmer v. Breyfogle, 217 Kan. 128, 535 P.2d 955, 966 (1975). 12. See Franck & Halstrom, Referral Fees: Everybody Does It, But Is It

OK?, 71 A.B.A.J. 40 (1985). 13. Id. 14. Id. 15. Belli v. Shaw, 98 Wash. 2d 569, 657 P.2d 315 (1983). 16. Id. a t , 657 P.2d a t 317.

Forwarding Fees 23 1

Washington law as a matter of public policy due to the violation of DR 2-107. Belli was not entitled to recover any referral fees."

Thus, the Washington courts determined that DR 2-107 of the Code of Professional Responsibility precluded any fee award where the attorney had not assumed his proportionate share of the ser- vices.le This decision was evidence of a continuing practice in the bar of disregarding the mandate of DR 2-107 and paying a referral fee for merely forwarding a case.

In a 1984 ABA survey, a majority of the lawyers polled felt that referral fees were appropriate even though the spirit of DR 2- 107 frowned upon attorneys being compensated for services that are not of a legal nature.'@ To merely recommend or suggest an- other lawyer or refer a case to another lawyer and to do nothing else is not performing a service or discharging a responsibility in the case.20 There must be some actual participation related to a service performed or a responsibility discharged before a lawyer is entitled to a division of the fees.21 Selling a lawyer a client is not a legal service and a lawyer should not get paid for anything but the legal services rendered.2a Members of the public who seek the ser- vices of an attorney cannot be treated as mere merchandise or arti- cles to be traded in the market place by lawyers acting as bro- k e r ~ . ~ ~ Lawyers do not have a proprietary interest in their clients such that they can expect compensation for the loss of a property right if the case is referred to another lawyer.24

There existed a disfavor of any substantial inquiry into the apportionment of a fee between lawyers because of the undesirabil- ity of assigning a quantitative value to the service performed by a lawyer.26 But courts continued to require an actual participation in or handling of the case before there could be any apportionment of

17. Id. a t , 657 P.2d at 319. 18. Id. 19. Reskin, Forwarding Fees are Fine With Most Lawyers, A.B.A.J., Feb.

1985, at 48. 20. McFarland v. George, 316 S.W.2d 662, 670 (Mo. App. 1958); supra note

11 at 966. 21. Id. 22. See id. at 671. 23. See id. 24. See Palmer v. Breyfogle, 535 P.2d at 966. 25. Webb, Referral Fees and the Effect of Disciplinary Rule 2-107, 8 J . LE-

GAL PROF. 225, 226 (1983).

232 The Journal of the Legal Profession

a fee.28 Even though DR 2-107 required actual services to be per-

formed and responsibility to be assumed, it was not intended to require lawyers to trace every minute spent on each case to every penny earned therefr~m.~' All lawyers do not require the same amount of time to perform each task and one should not be penal- ized because his experience or expertise enables him to accomplish the task in a shorter period of time.28

Even though referral fees are contrary to the Code of Profes- sional Responsibility, some believe that referral fees are a neces- sary evil.2B Proponents of the referral fee argue that clients are bet- ter off paying a referral fee than having an attorney inadequately represent them out of fear of losing the entire fee.30 In some cases, unnecessary duplication of services will be performed up to the point where the referring attorney has provided services sufficient to earn a fee.31

Model Rule 1.5(e), which supplants DR 2-107, dtates:

(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, by written agreement with the client, each law- yer assumes joint responsibility for the representation; 2) the client is advised of and does not object to the participa- tion of all the lawyers involved; and 3) the total fee is reas~nable.~~

Under Model Rule 1.5(e), the division of the fee in any man- ner would be permissible so long as the client had agreed in writing that each lawyer would assume respon~ibi l i ty.~~ Assumption of the responsibility is an alternative to a proportionate performance of

26. See, e.g., Belli v. Shaw, 657 P.2d at 322; Palmer v. Breyfogle, 535 P.2d at 966.

27. Fitzgibbon v. Carey, 70 Or. App. 127, 688 P.2d 1367, 1374, review denied, 695 P.2d 49 (1985).

28. See, e.g., Belli v. Shaw, 98 Wash. at , 957 P.2d at 522. 29. Franck & Halstrom, supra note 13, at 40. 30. Id. 31. Id. 32. MODEL RULES OF PROFESSIONAL CONDUCT Rule 1.5(e) (1983). 33. ABA Comm. on Ethics and Professional Responsibility 1514 (1985) (re-

printed in 1 LAWYERS MANUAL ON PROFESSIONAL CONDUCT 801:373, 374 (ABAI BNA 1985).

Forwarding Fees 233

service as justification for a division of fees.34 The assumption of responsibility is comparable to the responsibility assumed by a partner or a law firm under similar circumstances.3b There is a re- sponsibility to assure the adequacy or representation and adequate client cornmuni~ation.~~

Disciplinary Rule 2-108 of the Code of Professional Responsi- bility of the Alabama State Bar,37 which is the counterpart to Model Rule 1.5(e), provides that:

(A) A lawyer shall not divide a fee for legal services with an- other lawyer who is not a partner in or associate of his law firm or law office, unless:

(1) The client consents to employment of the other lawyer af- ter a full disclosure that a division of fees will be made. (B) This Disciplinary Rule does not prohibit payment to a for- mer partner or associate pursuant to a separation or retirement agreement.38

This provision does not require the client to reduce his consent to writing, only that the client be informed of the division of the fees prior to consenting to the employment of the other lawyer. Whereas Model Rule 1.5(e), in addition to requiring consent to be in writing, requires the other lawyer to assume some responsibility, Alabama's DR 2-108 places no such "assumption of responsibility" constraint upon the other lawyer. A liberal reading of DR 2-108 indicates that referral fees are now permissible in Alabama if the client receives a full disclosure, prior to the employment of the other lawyer, that a division of the fees will be made.

Conclusion

It seems that there will be a continuing battle between the philosophers attempting to improve the nobility of the profession and the realists attempting to deal with the practicalities of life. The philosophers believe in quid pro quo, and that attorneys should offer legal services before receiving something in return.

34. Id. 35. Id. 36. Id. at 801: 374-75. 37. CODE OF PROFESSIONAL RESPONSIBILITY OF THE ALABAMA STATE BAR DR 2-

108 (1984). 38. Id.

234 The Journal of the Legal Profession

The realists claim that they are the protectors of the client's inter- ests and that referral fees aid in getting the client effective representation.

While prohibiting referral fees is a good and noble scheme, the reality of the situation tends to indicate that some clients' cases would not be referred to other lawyers if the referring lawyer would not get any fee. In Weil u. N e ~ r y , ~ ~ the Supreme Court of the United States thought that allowing a referral fee would inflate the total cost of representation to the client. Maybe this could be the solution to the problem. If the total fee paid by the client is reasonable, of what consequence is i t if the referring attorney gets a portion? The client pays the same amount regardless of the num- ber and identity of the payees. Model Rule 1.5(e) and DR 2-108 of the Code of Professional Responsibility of the Alabama State Bar are rules which can be enforced and further the client's right to adequate representation.

Timothy C . Hutchinson

39. 278 U.S. 160 (1929).