It would be a mistake to change the referral-fee arrangement.
I was at a swearing in for a judicial officer recently where there were Supreme Court justices and there was some informal talk I overheard about abolishing the rule allowing referral fees in Pennsylvania. Is there any proposed rule?
To this writer’s knowledge, there is no proposed rule to abolish Rule of Professional Conduct 1.5(e), which is the rule allowing referral fees to lawyers without quantum meruit as long as the client consents. Presumably, the conversation or rumor heard was misunderstood because it would be difficult to imagine that the Pennsylvania Supreme Court would backtrack and re-establish a rule that prohibited or severely limited referral fees.
To understand why such a rule change would be very negative, one has to understand history, at least in Pennsylvania. Pennsylvania, until 1979, had the traditional view that there could only be referral fees if they were based on quantum meruit. At least back in 1979, quantum meruit was generally accepted as hourly time spent on a case. As a result, before 1979, if a lawyer referred a case, the lawyer could only be paid for time they spent on it.
As can be imagined, there developed a culture of soft corruption where people manufactured time spent to be able to receive a reasonable referral fee. This practice became fairly widespread and was of concern to the Supreme Court justices back in the 1970s.
The other concern was that lawyers who did not want to manufacture these hours did not often refer the case. If a lawyer wasn’t going to get a referral fee for referring the case, then the lawyer would often keep the case. That lawyer might well settle the case for $50,000 or $100,000 and get a nice one-third fee. The problem was that the case may have been worth $500,000 or $1 million, which a more experienced lawyer or a lawyer that emphasized that particular area of law could have gotten.
For ethical lawyers, before 1979, there was always a dilemma. The dilemma was referring the case and receiving next to nothing or referring a case and manufacturing bogus hours to justify a referral fee or just keeping the case and resolving it on behalf of the client. In a perfect world, the obvious answer would be to do what is best for the client. What is best for the client is to refer it to a lawyer who perhaps has the resources, skills and experience to get a better result than the lawyer who originally had the case. But a perfect world does not account for the fact that lawyers are not independently wealthy. For many lawyers, particularly now, to maintain a law practice is a daily and weekly struggle. Many lawyers operate without any full-time support staff. Although computers and technology for those who can use them help the modern practice of law, there is still a lot of wasted time when even those using technology are doing basic secretarial tasks. The idea that a lawyer will refer a case not expecting any money in return is extremely unrealistic.
Because of those reasons, the Supreme Court changed the then disciplinary rules in 1979. The changes are reflected in modern Rule of Professional Conduct 1.5(e). The court wanted to ensure that cases were referred to competent lawyers and, further, the court wanted to stop this soft culture of corruption. As any wise person knows, sinning once makes it much easier to sin again and again.
The rule change reflected in the current Rule 1.5 has no quantum meruit requirement. The lawyer can pick up the phone and refer a case and receive, years later, a one-third referral fee without doing anything. A wise lawyer will confirm everything in writing at the time of the referral. Further, the client has to consent, and that consent should be obtained at the beginning and not the end. The client doesn’t have to be told of the amount or the percentage — only that there will be fee sharing.
Although some members of the public might feel referral fees are a windfall for an attorney, the reality is it is a very good practice to ensure competent representation and an incentive to refer cases. Further, there is nothing that prohibits the referral lawyer from being involved in the case and it is a good idea. Referral lawyers should probably keep track of the case and at the same time ensure that deadlines are met. Many referral lawyers will enter as co-counsel just to be kept up to date, but they don’t have to.
In the past, the referral lawyer might have been held responsible in legal malpractice if a statute was missed. Although that could still be the case, more and more that concept is going away, and more and more there is not the same obligation to a client that a referring lawyer originally had. But it is a wise idea for any referral lawyer just to keep track of a case and ensure the lawyer who is handling the case doesn’t miss a deadline.
For the lawyer who has been referred the case, there are obligations to keep the referral lawyer advised. Further, if there is a settlement, the referral fee has to be placed in escrow and then given to the lawyer who referred the case. A lawyer who settles the case and doesn’t pay the referral fee under Pennsylvania case law is guilty of conversion and that can cause a substantial loss of license.
In recent years, many excellent plaintiffs firms have survived on being referred cases by other lawyers. These firms are very good and have a system where anything else from the client is referred back to the original lawyer.
A rule change that would go back to quantum meruit (and there is some talk that the referring lawyer would now have to pay one-third or 50 percent of all costs) would be a disaster.
Not only would it severely impact on a number of law firms, it would stop dead in its tracks the original purpose of the referral arrangements, which was to ensure competent counsel for clients and to stop the manufacturing of hours to justify some sort of quantum meruit recovery.
Further, if the referring lawyer had to pay a percentage of the costs, which can be substantial, that by itself could preclude a referral. Under those circumstances, the referring lawyer would keep the case and pay the costs (by far less than they really should to get the maximum benefit) and resolve the case at a probably far lower amount.
Therefore, whether the rumors are true or not or whether recent stories about lawyers receiving referral fees for doing no work are causing concern, it would be a major mistake to change or substantially modify the current referral fee arrangement in Pennsylvania.
Fee-dispute panels help to resolve matters quickly.
A client and I have a major dispute as to a legal fee. This dispute is not over $1,000 or $2,000, but is over a six-figure amount of money. The client is threatening disciplinary action and has also filed a complaint with the local bar association’s fee-dispute committee. Should I submit to the bar association’s fee-dispute committee and what are my other options?
First, in evaluating the question, it has to be pointed out that fee disputes are not normally the subject of a disciplinary violation. Of course, there can be a violation if Rule of Professional Conduct 1.5 involving fees is violated. That rule prohibits excessive fees. That rule requires a written fee letter or fee agreement. That rule has certain limitations on contingent fees. That rule allows referral fees. Assuming the fee wasn’t excessive and it is just a bona fide dispute and fraudulent hours are not being alleged, then normally the Office of Disciplinary Counsel is going to dismiss the case. The last thing the Office of Disciplinary Counsel wants to do is become a fee arbitrator or decide fee disputes or contractual disputes between lawyers and clients.
In fact, the general policy of the Office of Disciplinary Counsel over the years has been to refer fee disputes to the local bar association’s fee-dispute committee and then either dismiss the complaint or hold it in abeyance pending the resolution of the fee dispute. Rule 1.5 memorializes that concept in Comments 5 and 6. Comment 5 notes the fee-dispute procedures with the bar association and urges lawyers to conscientiously consider using the fee-dispute committee. Comment 6 to Rule 1.5 notes as follows:
“It is the disciplinary board’s policy that allegations of excessive fees charged are initially referred to fee-dispute committees for resolution.”
Having said that, when matters are submitted to a fee-dispute committee, if a lawyer won’t agree to jurisdiction, sometimes the bar association panel routinely refers the matter to the disciplinary board. But, again, that by itself does not necessarily create a problem unless there are other wrongdoings, such as fraud, misrepresentation or excessive fees.
Every lawyer, when involved in a fee dispute, should consider using the local bar association’s fee-dispute committee. First, it provides a rather timely procedure and a private procedure. The matters are expeditiously handled. There is no appeal from the arbitration type of award by a fee-dispute committee other than those allowed for common-law arbitration, which is primarily for fraud. Therefore, the lawyer is faced with quick and timely resolution and the matter is not going to be drawn out for years in litigation or appeals. The lawyer doesn’t have to read about his or her law firm in the newspaper.
Fee-dispute committees are usually established with two lawyers and one layperson sitting on the panel. The panels are fair, but they do bend over backwards to assist pro se laypeople to ensure they get their viewpoints expressed. The hearings are very informal.
Having said that, there are some drawbacks. One of the major drawbacks is the complexity of the case and the time required. Fee-dispute matters are handled by volunteers. Usually it is expected that a fee-dispute matter will be half a day at most, with the rare exception of a full day. If the matter is going to be multiple days, it is difficult to convene the panel regularly because the members aren’t paid and have other business. Further, because of the nature of these matters, it is difficult for those panel members to give the time necessary if it is a very complex issue.
The second issue is the amount. If one is talking about a substantial sum of money, like six figures, one wants to be able to present the case with the appropriate time and not feel everything has to be done between 1 and 3 p.m. Therefore, a large amount might be better served in the court system. Of course, if it is just one issue, despite the fact it is a large amount, then perhaps the fee-dispute panel can handle the dispute.
There is also the issue of the composition of fee panels. Most fee-dispute panels require at least 10 years of experience to chair a panel. But there are younger lawyers and laypeople. Ten years is not a lot of time practicing law, although those who are practicing 10 years might be insulted by that idea. Therefore, if there is a large amount at issue or if it is a complex matter, it may not be suited for a fee-dispute panel. Although extremely fair and impartial, the fee panels have the mission of not only deciding the case but also trying to ensure the public is satisfied with the mechanism. As a result, sometimes the panel bends over backward to hear a nonlawyer’s case and perhaps will sometimes give more than a court of common pleas might do. That is not because the panels are being unfair but because they are trying to satisfy the purpose of the panel to encourage people to resolve disputes and at the same time give a sense of fairness and not make laypeople feel this is a club for lawyers.
Finally, in evaluating these matters, keep in mind there is the client security fund lurking out there. Although the client security fund by the rules is normally for misuse of funds, in recent years, sometimes the fee dispute with the client security fund has crossed over to quasi-malpractice issues or fee disputes.
One can raise the fact that the client security fund does not have jurisdiction, but remember the client security fund’s rules allow absolutely no one to take an appeal from their decisions. But every lawyer with a fee dispute between himself or herself and the client must be aware there is a possibility the client might submit a claim to the client security fund, particularly if there is a large amount of money at issue and particularly if it has already been paid to the lawyer.
Fee disputes are always unseemly and distasteful for any lawyer. No lawyer really wants to get involved in fee disputes with a client because it undermines business — not only future business from that client but also from friends or other people. Also, every lawyer who has ever sued someone for a fee dispute knows that it often generates a counterclaim alleging negligence or some form of malpractice. When that happens, the lawyer has to put his or her malpractice carrier on notice and start to pay the deductible. If the lawyer doesn’t put his or her malpractice carrier on notice, then the lawyer must be absolutely certain he or she is going to win the malpractice claim because the carrier will then disclaim coverage if it is not notified and the lawyer gets a judgment against it.
Therefore, any lawyer who is facing fee disputes has to consider all options. But the bottom line is, with rare exception, the fee-dispute panel helps to resolve things quickly, gets the disciplinary board out of the case and often will preclude clients going to the client security fund. Obviously, in a fee-dispute matter, there is no counterclaim for malpractice.
Chester County lawyer Samuel C. Stretton has practiced in the area of legal and judicial ethics for more than 35 years. He welcomes questions and comments from readers. If you have a question, call Stretton directly at 610-696-4243 or write to him at 301 S. High St. P.O. Box 3231, West Chester, Pa., 19381.