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The basics of referral fee agreements between lawyers

9/27/2022

Mary F. Andreoni, ARDC Ethics Education Senior Counsel

Referral fee agreements are good for lawyers and clients. They incentivize lawyers, who lack the time or expertise to handle a client’s matter, to seek out other lawyers to ensure that clients obtain competent representation. But if not done right, a lawyer risks the loss of the fee, malpractice exposure and disciplinary charges. What are the ethics rules governing referral arrangements?  

Ethical Requirements for Referral Arrangements: Rule 1.5(e)

Illinois permits the division of fees between lawyers who are not in the same firm[1] provided that certain conditions outlined in ILRPC Rule 1.5(e)[2] are met.

Rule 1.5(e) provides:

(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 if the primary service performed by one lawyer is the referral of the client to another lawyer and each lawyer assumes joint financial responsibility for the representation;

(2) the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and

(3) the total fee is reasonable.

The Illinois Supreme Court has described these conditions as being "in the nature of a checklist" in which "each *** item[ ] must be crossed off before moving to the next" and "all must be checked off before the fees may be divided." Ferris, Thompson & Zweig, Ltd. V. Esposito, 2017 IL 121297, ¶35, 418 Ill.Dec. 242, 252, 90 N.E.3d 400, 410. All of these conditions must be satisfied for a fee-sharing agreement to be enforced. Id.

The provisions of Rule 1.5 embody Illinois's public policy of placing the rights of clients above any remedies of lawyers seeking to enforce fee-sharing arrangements. Accordingly, a fee-sharing agreement that violates the provisions of Rule 1.5 is against public policy and is unenforceable. Esposito, 2017 IL 121297, ¶38, 418 Ill.Dec. 242, 252, 90 N.E.3d 400, 410; Bennett v. GlaxoSmithKline LLC, 2020 IL App (5th) 180281, ¶ 53, 440 Ill. Dec. 281, 151 N.E.3d 1184.

  •  Each Lawyer Assumes Joint Financial Responsibility: Rule 1.5(e)(1)

Initially, the division of fees must be in proportion to the services performed by each lawyer, or where the primary service performed by one lawyer is the referral of the client to another lawyer, both lawyers must assume joint financial responsibility for the representation.

The phrase “joint financial responsibility”, while new in the 2010 version of the Rule, is in keeping with the rule as it existed in predecessor versions and does not represent a change in the law and means exactly as it is described in Comment [7] to the rule: “Joint financial responsibility for the representation entails financial responsibility for the representation as if the lawyers were associated in a general partnership." Ferris, 2017 IL 121297, 33, 418 Ill.Dec. 242, 252, 90 N.E.3d 400, 410, quoting Comment [7] to Rule 1.5(e) (citing In re Storment, 203 Ill. 2d 378, 786 N.E.2d 963, 272 Ill. Dec. 129 (2002)).

This means that the referring lawyer can be held vicariously liable for the negligence of the receiving lawyer as though they were partners. For that reason, you should refer a case only to a lawyer you reasonably believe is competent to handle the matter. You should also check with your malpractice carrier and ask the receiving lawyer for a copy of their malpractice insurance policy. Finally, check “Lawyer Search” on the ARDC website to determine the current status of a lawyer’s license, disclosure of malpractice insurance, and any disciplinary history.

  • Client Consent Confirmed in Writing: Rule 1.5(e)(2)

Next, the client must agree, in writing, to the referral of the case and the fee-sharing arrangement between the referring lawyer and the receiving lawyer, including how much each lawyer will receive. Rule 1.5 "require[s] disclosure of fee-sharing arrangements in order to preserve a client's right to be represented by the attorney of his or her choosing." Ferris, 2017 IL 121297, ¶38, 418 Ill.Dec. 242, 253, 90 N.E.3d 400, 411.

The Court in Ferris addressed what must be included in the disclosure to the client. Unlike previous versions of Rule 1.5, the Court determined that disclosure need only include how fees will be divided between the referring and receiving lawyers and how much each lawyer will receive. Agreeing to assume joint financial responsibility is an obligation between the lawyers, as the Court held in Ferris, and, as such, does not require express notice to or agreement by the client in the written agreement mandated by subsection (e)(2). Ferris, 2017 IL 121297, 34, 418 Ill.Dec. 242, 252, 90 N.E.3d 400, 410. Nonetheless, it is advisable that the written agreement adequately reflects that the client received sufficient information to evidence that the client’s consent was informed[3] and in accord with the rest of Rule 1.5, particularly subsection b, requiring lawyers to communicate the scope of the representation and the basis or rate of the fee to clients.

The client’s consent must be confirmed in writing.[4] Oral referral fee agreements, without the client’s signed consent, even if the client is aware of it and presumably agrees to it, are not enforceable. See Naughton v. Pfaff, 2016 IL App (2d) 150360, ¶ 64, 404 Ill. Dec. 744, 57 N.E.3d 503 (recovery of attorney referral fees must be based on a written fee-sharing agreement consented to by the client as required by Rule 1.5).

While Rule 1.5(e) does not expressly state when client consent must be obtained, the rule contemplates that consent to the fees the lawyers involved “will receive” be obtained implies that consent be obtained preferably before or within a reasonable time after the representation begins (ILRPC 1.5(b) and 1.0(e)) but at least before any fees are divided. See Edelson PC v. Girardi, 20 C 7115 (N.D. Ill. Aug. 9, 2022).

It is the responsibility of both referring and receiving lawyer to obtain the client’s written consent. Bennett v. GlaxoSmithKline LLC, 2020 IL App (5th) 180281 at p. 60 (April 21, 2020) (held that each lawyer had an obligation to ensure that the clients consented, in writing, to the shared representation and the shared fee arrangement; as neither lawyer provided this information to the clients, the fee-sharing arrangement between the lawyers violated public policy and is unenforceable).

  • Total Fee is Reasonable: Rule 1.5(e)(3).

Finally, the total fees charged to the client must be reasonable, as assessed pursuant to the factors set forth in Rule 1.5(a). Ferris, 2017 IL 121297, ¶32, 418 Ill.Dec. 242, 252, 90 N.E.3d 400, 410. In other words, the total fee charged to the client should be no greater than it would have been if there had been no fee-sharing and is the same as it would have been if there had been a single lawyer or law firm working on the case.

Other Questions

Some issues not squarely addressed by Rule 1.5(e) are: can an Illinois lawyer enter into a referral fee agreement with an out-of-state licensed lawyer? Retired or Inactive status Illinois lawyer? Disciplined lawyer? Can a lawyer conflicted out receive a referral fee?

Non-IL licensed Lawyer

ISBA Op. 21-04 (May 2021) opined that the Illinois Supreme Court in In re Storment, 203 Ill.2d 378 (2002) implied that an agreement to pay a referral fee to an out-of-state lawyer is permitted under the rules so long as the agreement complies with the Illinois Rules of Professional Conduct and the corresponding rules of the foreign jurisdiction.[5] In Storment, the Court found no violation of then Rule 1.5(g)(2) as Storment, who was still licensed in Illinois but disbarred under his Missouri license, could assume joint responsibility for the matter referred to the Missouri lawyer.

Retired or Inactive Lawyer

Lawyers on Inactive or Retired status may receive fees for referral agreements made while on Active status but paid out after the lawyer has gone on Inactive or Retired status. See Elane v. St. Bernard Hospital, 284 Ill.App.3d 865, 220 Ill.Dec. 3, 672 N.E.2d 820 (1996) (fee arrangement involving a referring lawyer who later becomes a judge is enforceable as long as it is consistent with IL RPC Rule 1.5's provisions as to client consent and the assumption of legal responsibility by the referring lawyer). Lawyers cannot enter into referral agreements after they have gone on Inactive or Retired status. See Thinking About Retirement? Explaining the Differences Between Inactive v. Retired Status, ARDC website (Oct. 2021)  

Disciplined Lawyer

IL Supreme Court Rule 764(h) governs legal compensation a lawyer disbarred or suspended six months or more may receive for fees earned before the entry of discipline.

IL Supreme Court Rule 764 provides:

An attorney who is disbarred, disbarred on consent, or suspended for six months or more shall comply with each of the following requirements. Compliance with each requirement shall be a condition to the reinstatement of the disciplined attorney. Failure to comply shall constitute contempt of court.

(h) Compensation Arising from Former Law Practice. Provided that the disciplined attorney complies with the provisions of this rule, the disciplined attorney may receive compensation on a quantum meruit basis for legal services rendered prior to the effective date of the order of discipline. The disciplined attorney may not receive any compensation related to the referral of a legal matter to an attorney or attributed to the “good will” of his former law office.

[Emphasis added.]

While a disciplined lawyer subject to the rule may petition a tribunal for the quantum meruit portion for legal services performed by the lawyer before the effective date of discipline, it appears that no similar provision is made in the case of compensation related to the referral of a matter. The last sentence of Rule 764(h) states that the disciplined lawyer may not receive “any compensation” related to the referral of a matter. Thus, based solely on the text, a disciplined lawyer subject to Rule 764 who did no actual work on a case and is just the referring lawyer, is barred from seeking compensation arising from a referral made prior to the effective date of discipline. See Ferris, 2017 IL 121297, ¶40, 418 Ill. Dec. 242, 254, 90 N.E.3d 400, 412 (a rule of professional conduct must be read using its plain language, and courts are not permitted to "insert a condition [the Illinois Supreme Court] did not express when the rule was adopted.").

Referred Lawyer Conflicted Out

ISBA Op. 90-11 (Jan. 1991) concluded that a lawyer cannot receive a referral fee if the lawyer would have been prevented from handling the case directly due to a conflict of interest. If the referring lawyer has a conflict, it is not difficult to conceive that any advice to go to a specific lawyer could be seen as selecting one's adversary in a matter in which the referring lawyer also has a pecuniary interest in the outcome. See ABA Formal Op. 474 (April 21, 2016) citing ISBA Op. 90-11 as supporting the conclusion that referral fee arrangements under ABA Model Rule 1.5(e) must comply with the conflict of interest provisions of ABA Model Rule 1.7 in order for the referring lawyer to collect a referral fee.

Conclusion

The enforceability of a referral fee agreement depends on following the strict requirements of Rule 1.5(e). Failing to satisfy these requirements could result in regulatory scrutiny or the loss of the fee. Additionally, referral fees do not come without some risk. Entering into a referral fee arrangement should be worth the risk of being held jointly liable for the negligence of the receiving lawyer.


[1] Rule 1.5(e) does not prohibit or regulate the division of fees to be received in the future for work done when lawyers were previously associated in a law firm, or payments made pursuant to a separation or retirement agreement. Comment [8] to Rule 1.5(e); Larsen v. D Constr Inc., 2021 IL App (1st) 191999, 189 N.E.3d 1004, 454 Ill. Dec. 443 (agreement to pay fees to a former associate pursuant to a separation agreement does not need to comply with the requirements of Rule 1.5(e), so long as such payment does not otherwise violate Illinois public policy).

[2] Prior to 1980, Illinois prohibited the sharing of fees by lawyers who were not in the same firm where the only service provided by a lawyer was the referral of a client to the receiving lawyer. Ferris, 2017 IL 121297, ¶ 26. With the adoption of the Illinois Code of Professional Responsibility (Ill. S. Ct. Code of Prof'l Res. R. 1-101 et seq. (eff July 1, 1980)) in 1980, fee-sharing agreements that were based upon client referrals were permitted, provided they satisfied significant safeguards designed to protect the client. Ferris, 2017 IL 121297, ¶ 26.

[3] Under ILRPC Rule 1.0(e): “’Informed consent’ denotes the agreement by a person to a proposed course of conduct after the lawyer has communicated adequate information and explanation about the material risks of and reasonably available alternatives to the proposed course of conduct.”

[4] “Confirming in writing” is defined in ILRPC Terminology Rule 1.0(b): “’Confirmed in writing,’ when used in reference to the informed consent of a person, denotes informed consent that is given in writing by the person or a writing that a lawyer promptly transmits to the person confirming an oral informed consent. See paragraph (e) for the definition of “informed consent.” If it is not feasible to obtain or transmit the writing at the time the person gives informed consent, then the lawyer must obtain or transmit it within a reasonable time thereafter.”

[5] Each state has its own rules regarding lawyer referral fees. While many states, like Illinois, closely follow the ABA Model rule and do permit referral fees among lawyers, there can be some important differences in their requirements (e.g., Florida rule limits referral fees in personal injury cases to 25%) and a few states (e.g. Colorado) prohibit referral fees.