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(Inquiry No. )
Prohibition on paying referral fee to lawyer who could not have handled the case due to a conflict of interest.
A lawyer who receives a referral from a lawyer who withdrew from a case due to a conflict of interest may not pay a referral fee to the conflicted lawyer for any work done after the referring lawyer discovered the conflict.
Inquiring attorneys want to know if they may ethically pay a referral fee to a lawyer who was forced to withdraw from a case dug to a conflict of interests. The facts are simple. A plaintiff initially consulted a law firm (“the original law firm”) about a personal injury action against Defendant One. After some discovery, the original law firm was forced to withdraw because it had a conflict of interest that prevented the firm from adding a new defendant, Defendant Two, that was primarily responsible for the plaintiff’s injuries. Inquiring attorneys were then substituted for the original law firm. The case eventually settled before trial, with Defendant One contributing 40 % of the settlement proceeds and Defendant Two contributing 60 % of the settlement proceeds.
After the settlement, inquiring attorneys offered the original law firm a referral fee on the portion of the recovery against Defendant One. The original law firm, however, demanded that it also be given a referral fee for the portion of the recovery against Defendant Two.
May an attorney who receives a referral from a lawyer who is disqualified from handling the referred case due to a conflict of interest ethically pay a referral fee to the disqualified lawyer for work done after the referring lawyer learned of the disqualifying conflict?
In BANC 94-2 (1994), this Committee said: “Any sharing of the legal fee with a former law firm must be accomplished in compliance with DR 2-107(A) unless it is pursuant to an agreement to share the fees as a result of a separation from employment, pursuant to DR 2-107(B).” Thus, an analysis of a division of fees between lawyers in different firms begins with DR 2-107, which provides as follows:
DR 2-107 Division of Fees Among Lawyers
A. A lawyer shall not divide a fee for legal services with another lawyer who is not a partner in or associate of the lawyer’s 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 is in proportion to the services performed by each lawyer or, by a writing given to the client, each lawyer assumes joint responsibility for the representation.
3. The total fee of the lawyers does not exceed reasonable compensation for all legal services they rendered the client.
B. This Disciplinary Rule does not prohibit payment to a former partner or associate pursue to a separation or retirement agreement.
In BANC 93-36 (1993), this Committee summarized the requirements of DR 2-107(A) as follows:
[I]n order for the division of fees agreement to be valid the client must first consent to the employment of the second attorney. Further, where the [payment is] not proportionate to the services performed, the client must be given, in writing, an assumption of joint responsibility for the representation by each attorney.
Regarding DR 2-107(A)(1), in the present inquiry the client obviously consented to “employment of the other lawyer” (i.e., the law firm that referred the case to inquiring attorneys) because the client originally hired the referring law firm. The client also consented to the employment of inquiring attorneys because the client hired them. The client may not have known before now that inquiring attorneys intended to divide their fees with the original law firm, but in these circumstances we think that if the client now consents to a division of fees after full disclosure of the basis for the division, that will satisfy DR 2-107 (A) (1).
Regarding DR 2-107(A)(2), a division of fees is proper only if it is either “in proportion to the services performed by each lawyer or, by a writing given to the client, each lawyer assumes joint responsibility for the representation. ” Here, no writing was given to the client by which each lawyer assumed to join responsibility for the representation. Nor could any such writing be valid in these circumstances, because the original law firm was ethically prohibited from handling the personal injury matter due to a conflict of interest. Therefore, the original law firm could not have assumed “joint responsibility” for the representation even if it had wanted to. A law firm that is prohibited from assuming sole responsibility for a matter due to a conflict of interest is also disqualified from assuming joint responsibility for the matter within the meaning of DR 2-107(A)(2).
This committee has not previously discussed whether an attorney who is barred from handling a matter due to a conflict of interest may nevertheless share in the fee for that matter after the attorney refers the matter to another lawyer. However, other ethics committees have so opined. For example, in ABA Informal Op. 1088 (1968), an attorney representing an adopted daughter asked whether it would be proper to share part of his fee with an attorney who referred the matter to him because he (the referring attorney) already represented another party in the same matter and thus could not represent the adopted daughter due to a conflict of interest. The ABA Committee on Ethics and Professional Responsibility said:
[S]ince the adopted daughter’s regular [personal] attorney could not ethically provide any of the services or share any of the responsibility in representing the adopted daughter in the proceeding, it would in our opinion be improper for the attorney retained by her … to pay any part of the fee to her personal attorney.
Moreover, there are compelling policy reasons for denying a share of the fee to a referring attorney for work done after a conflict of interest has arisen. These are the same policy reasons that prohibit an attorney with a conflict of interest from accepting or continuing employment in a matter in the first place. Those policy reasons are eloquently expressed in EC 5-1, which provides as follows:
EC 5-1 The professional judgment of the lawyer should be exercised, within the bounds of the law, solely for the benefit of the client and free of compromising influences or loyalties. Neither the lawyer’s personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute the lawyer’s loyalty to the client.
The original law firm may also have been prevented from opposing Defendant two because Defendant Two is a client or former client whose confidences and secrets could have been used to Defendant Two’s disadvantage ,in violation of DR 4-101(B)or DR 5-108(A)(2). If the original law firm could receive a share of the fees that the inquiring attorney earned after the conflict of interest arose, the original law firm would have a financial incentive to reveal confidences and secrets of its client or former client to the inquiring attorneys to increase the plaintiff’s chances of success; or the original law firm might have an incentive to attempt to influence or control the professional judgment of inquiring attorneys, which would be disloyal to Defendant Two and potentially unfair to the plaintiff.
However, DR 2-107(A) does allow the original law firm to receive a share of the legal fees “in proportion to the services performed” by it on the matter. Thus, inquiring attorneys may pay the original law firm a share of the fees representing the fair value of the work the original law firm did before it discovered a conflict of interest and withdrew in favor of inquiring attorneys. However, the inquiring attorneys may not pay the original law firm any part of the fee based on the recovery against Defendant Two, because the original law firm did not – and could not have done any work to prosecute the case against Defendant Two.
This Committee does not express any opinion as to the precise method of calculating the fair value of the work the original law firm did before it discovered that it had a conflict of interest with Defendant Two, as long as the calculation reflects the fair value of the work the original law firm did on the case before the conflict arose. If the inquiring attorney and the original law firm cannot agree on the fair value of the work done by the original law firm before the conflict arose, then they should ask the court to fix the fee.
The situation would be different if the original law firm had known about the conflict of interest (or should have known about it) when it first accepted the matter. In that case, the original law firm would be entitled to no fee at all. See Silbiger v. Prudence Bonds Corp., 180 F. 2d 917 (2d Cir. 1950) (Learned Hand, J.) But that does not appear to be the situation here, where the conflict of interest arose only after the original law firm learned during discovery about the probable liability of Defendant Two.
Conclusion: Inquiring attorneys may ethically divide the fees with the original law firm in proportion to the work done on the matter by the original law firm, but inquiring attorneys may not share any fees with the law firm that resulted from work done after the original law firm realized (or should have realized) it was prohibited from handling the matter due to a conflict of interest. In particular, inquiring attorneys may not share any part of the fee resulting from the recovery against Defendant Two, because the original law firm was ethically prohibited from prosecuting a suit against Defendant Two.
[Approved by the Executive Subcommittee on May 5, 1998; approved by the Full Committee on May 20, 1998.]