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Most of the Texas lawyers testifying at State Bar of Texas hearings on proposed new civil rules that would cap referral fees are sending a clear message to the Texas Supreme Court — don’t mess with our fees. Over and over again, lawyers are telling a special State Bar committee looking into proposed Rule 8a of the Texas Rules of Civil Procedure, and into disciplinary rules governing lawyer advertising, that the public would be harmed by an attempt to cap referral fees. “I can see no logical reason to impose a maximum amount on the fees,” Houston plaintiffs lawyer Bill Caraway told members of the 2004 Referral Fee Task Force at a hearing on March 3 in Houston. “I’m unaware of any harm to clients under the current system,” said Caraway, a partner in Caraway & Kiatta and president of the Houston Trial Lawyers Association. “I do not see any downside to the referral fee system we have now,” Beaumont plaintiffs lawyer David Starnes said in Houston. “It creates the incentive that best serves the public.” San Antonio plaintiffs lawyer Jim Branton, a partner in Branton & Hall, told the task force in San Antonio on Feb. 4 that since a referral fee doesn’t affect the fee paid by the client, it’s of “no consequence” to the client. “The idea of putting a cap on the amount of referral fee . . . that to me is totally illogical. It has nothing to do with the total amount of fee that’s charged,” said Branton, who has been trying suits for more than 35 years. That’s not to say that all the lawyers testifying at one of five hearings � beginning in El Paso on Jan. 28 � held over the past five weeks totally oppose Rule 8a. Dallas plaintiffs lawyer Michael Parham, a partner in Parham, Jones & Shiver, for instance, told the task force at a hearing on Feb. 25 in Dallas that he favors capping referral fees but only in a way to fix the problem of case-running and lawyers who advertise and then refer out all the cases. He opposes the provision that would require lawyers to disclose their referral fees. Similarly, in Harlingen on Feb. 18, Orrin Johnson, a former president of the State Bar of Texas who is a solo practitioner in Harlingen, told the task force that some “curbing” of the referral fee would help prevent barratry. And Roger Hughes, of Adams & Graham in Harlingen, said he supports a rule that would impose a cap on the “pure referral fee,” which he described as a fee paid to a lawyer simply for forwarding a case to the handling lawyer. “What I’m concerned about is the appearance � what I call the windfall,” testified Hughes, according to a transcript of the hearing. The sixth and final hearing is March 26 in Austin. The hearings are part of an attempt by the State Bar to consider and question proposed Rule 8a, which the Supreme Court approved in 2003. The rule’s effective date was Jan. 1, but the Supreme Court agreed to suspend that date to give the State Bar time to hold public hearings and work up a possible referendum in accordance with �81.024 of the Texas Government Code, which would amend the Texas Disciplinary Rules of Professional Conduct. The 2004 Referral Fee Task Force, chaired by Austin’s Richard “Dickie” Hile, will present a preliminary report to the Bar’s board of directors on April 16 and a final report to the board in June. Rule 8a would cap referral fees at the lower of $50,000 or 15 percent of the fee. Currently, referral fees are not specifically regulated in disciplinary rules, Hile says. Rule 8a also would require lawyers to disclose to a court any referral fees they receive � an issue most lawyers who testified at the hearings oppose, according to testimony in Houston and Dallas and transcripts of hearings in El Paso, San Antonio and Harlingen. Hile, a plaintiffs lawyer at Dies & Hile, says he’s not surprised that not a single lawyer testifying at the hearings came out in full support of proposed Rule 8a. “It pretty well mirrors what the comments were to the Supreme Court during the comment period” before Rule 8a was approved, says Hile, who personally opposes the new rule because he doesn’t believe the rule requiring public disclosure of referral fees benefits clients. The testimony about proposed changes to the Texas Rules of Disciplinary Procedure relating to advertising was mixed. Most of the comment dealt with testimonials. Hile says the task force is looking at Rule 7.02(a), which deals with unjustified expectations, the use of testimonials and the comparison of legal services, and Rules 7.04(k) and 7.04(l), which relate to disclosures and disclaimers in ads. No Surprise The Supreme Court approved Rule 8a in 2003 following a recommendation from the Task Force on Civil Litigation, a committee appointed by the Supreme Court and chaired by prominent plaintiffs lawyer Joseph Jamail of Houston. In addition to a recommendation to heighten disclosure in the referral-fee system, the Task Force on Civil Litigation also asked the Supreme Court to make some class actions opt-in instead of opt-out, to establish new rules for ad litem representation and to adopt a rule that would sanction parties for rejecting “reasonable” settlement offers. [ See "Changes to Class Actions, Referral Fees Proposed," Texas Lawyer, April 14, 2003. page 1.] Jamail says he’s not surprised or concerned that most of the testimony at the hearings comes from lawyers adamantly against regulation of referral fees. “So what? We knew it was going to be controversial,” says Jamail, a partner in Jamail & Kolius. “The purpose of the rule was not to punish the legitimate referral. The purpose of the rule was to curb solicitation through TV ads . . . and make it truth[ful] in disclosure,” he says. But Caraway, president of the HTLA, told the 2004 Referral Fee Task Force that he questions the “motivation” for the rule that would cap referral fees. He says the current market for referral fees works. Caraway also said that the proposal requiring lawyers to disclose their referral fees in court filings is not a good one. He suggested it would impede confidential settlements, and that’s not necessarily good public policy. Corpus Christi lawyer William R. Edwards, of the Edwards Law Firm, told the task force in Harlingen on Feb. 18 that he sees no problem with the referral fee system as it currently exists. He said restrictions on referral fees don’t belong in civil rules, and proposed Rule 8a would hurt lawyers who play by the rules. “The referral practice, in general, helps clients because the referring lawyer is interested in his or her referral fee being as large as it can possibly be. . . . I’m talking about the amount, regardless of the percentage,” Edwards testified. Travis Sales, a partner in Baker Botts and president of the Houston Lawyer Referral Service, asked the task force to find a way to exempt nonprofit groups such as the HLRS from the caps on referral fees. He said the fees the service receives from cases it farms out to lawyers are needed. Effective Advertising Hile says the State Bar is preparing a survey on referral fee practices that should go out to a random sample of 3,000 active members of the Bar this month. The Bar hopes to collect empirical information on the level of fees and the process to assist the task force’s work. “It’s seeking to elicit what the actual practice is: Do you normally have a written contract that has a provision allowing the referral of cases? Do you normally have a written agreement signed by the client authorizing a referral, and if so, does it include the actual division of fees?” Hile explains in an interview. But members of the 2004 Referral Fee Task Force also tried at the hearings to collect the same kind of information. Caraway testified that referral fees in Houston typically range from 25 percent to 33 percent of the total fee. And Edwards, of Corpus Christi, testified in Harlingen that the referral fee in the Rio Grande Valley is generally around 50 percent. David Starnes, the Beaumont solo, told the task force in Houston that a cap on referral fees would severely harm his practice. Starnes said he doesn’t advertise, so he needs referrals to compete � and he gets many of his best suits from referrals. “The incentive to bring cases to me will be gone,” Starnes told the task force. “It creates a disincentive to get the case to the best lawyer. My business comes from those lawyers who are appreciative of me and know I will do a good job for the client.” Robert Ammons, of plaintiffs firm Stevenson & Ammons in Houston, said at the hearing that his firm doesn’t advertise, but nearly all the suits his firm handles come from referrals. He fears a cap on referral fees would harm consumers because, without referral fees, lawyers may choose to try some cases themselves instead of referring them to more qualified lawyers, leading to less-than-optimum compensation for clients. Ammons told the task force the cap would either force him to shutter his firm or advertise. Rule 8a is intended in part to prevent lawyers from advertising for clients with the sole intent of referring out their client base. But in response to questions from task force members at the hearings, most of the lawyers who accept referrals testified that they haven’t seen Texas firms doing it. Houston plaintiffs lawyer Christian Hill told the task force in Houston that some out-of-state firms are advertising in Houston solely to collect clients to refer, but he’s not seen that practice from any Houston firms. “It’s a perception problem,” said Hill, of Christian Hill & Associates. Donald Kidd, an associate with Jim S. Adler & Associates in Houston, told the task force in San Antonio on Feb. 4 that while the firm is an “advertising firm” it is not a “referral mill.” “I want to make sure that the Bar understands that just because someone advertises broadly doesn’t mean that they’re just referring all these cases out. That is a great misconception, and it is not what our firm does,” Kidd said, according to a transcript of the hearing. He said his 44-lawyer firm refers out fewer than 10 percent of its cases. Kidd also testified he believes the current rules regulating advertising are sufficient, and noted that his firm strictly follows the rules. He said the firm discloses in its ads any intent to joint venture litigation with another firm or refer it out. He also expressed concern that the proposed rule requiring disclosure of referral fees would violate the attorney-client privilege, a concern echoed by other lawyers who testified at the hearings. Several lawyers who advertise, not surprisingly, told the task force they oppose any changes to the current disciplinary rules regulating advertising. And Vidal Martinez, a partner in trial firm McFall, Martinez, Sherwood & Breitbeil in Houston, presented the task force with demographic information that suggests the Texas population is becoming less educated. Martinez said advertising is one way people who are less educated can find lawyers. “It’s a pretty efficient marketplace out there. I don’t find a great hue and cry of bad lawyers advertising out there,” he said. Thomas Barnes of the Barnes Law Firm, who does workers’ compensation work, said he finds advertising effective, and dresses in Western attire in some of his advertisements. He noted, “Taste is not an issue if you are talking about effective advertising.”

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