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July 15, 2011
When is fee-splitting OK?

Should lawyers be allowed to split fees with private lawyer referral services or at least pay a flat fee per referred case?

The question was raised by former Board of Governors member D. Culver “Skip” Smith during the Special Committee on Lawyer Referral Services June 22 meeting and hearing at the Bar’s Annual Convention. He chaired the board committee that studied the issue 25 years ago and which led to amending Bar rules to allow private services, as long as they complied with Bar rules.

When it came to fees, Smith said it could be seen as hypocritical that Bar rules prohibit sharing or splitting fees with nonlawyers in all cases except one — with nonprofit lawyer referral services approved by the Bar. Essentially those are programs run by area voluntary bars, plus the statewide program run by the Bar. (If a lawyer takes a referral from one of these services, a percentage of the final fee, typically 10 or 15 percent, reverts to the service to help fund its operations. The services also collect a small up-front fee from the callers who accept a referral.)

Private referral services can only collect a flat fee for joining, but not bill according to the number of potential clients sent to a law firm. There are variations on this system; some private services allow firms to buy a certain percentage of calls received from a specified area code with a higher fee if the firm wants a larger percentage of the calls.

“For-profit referral services, it seems to me, are not going to stay in business charging an annual subscription fee or an annual membership fee. They want their money per case,” Smith said. “I believe that a per case flat fee is not fee-sharing. . . . Lawyers expect to pay something per case for these referrals in this day and age. Obviously, you don’t pay a percentage like half of the fee, but a flat fee that’s not based on the size of the fee.”

Bar Ethics Counsel Elizabeth Tarbert explained to the committee why the Bar disagrees.

“The reasons that we prohibit fee-sharing with nonlawyers generally are to stop a nonlawyer from having control over the lawyer’s independent professional judgment in representing clients and providing active counsel and good competent advice to their clients,” she said. “Generally, the control follows the money, and if the nonlawyer has the money, the nonlawyer is the one calling the shots.”

With the local bar-run programs, the Bar has direct control and can revoke a program if it violates Bar rules, Tarbert said, eliminating the risk the service will meddle in how a case is handled.

Historically, Smith said the Bar concluded, when it recommended allowing private referral services, that neither it nor the Supreme Court had any direct control over private operations. So the rules were drawn to prohibit lawyers from joining those services unless they complied with all Bar rules. Those strictures include registering with the Bar, following the advertising rules, and filing quarterly reports listing subscribing attorneys.

One recent change in the rule, Tarbert told the committee, is referral services must state in their ads that they are referral services. Most other changes in the past 25 years, she added, have been tweaks.

Smith spends much of his time advising lawyers and law firms on ethics matters and has seen the interplay between law firms and the burgeoning number of referral companies.

That includes problems with services advertising for clients with debt or foreclosure issues. The Legislature banned up-front fee collections for those services, unless they are legal fees for a lawyer, thereby causing many debt and foreclosure relief companies to seek an association with a law firm or to operate as a referral service. The problem, Smith said, is many seek to collect the fees up front and then give the lawyer a portion — clearly prohibited fee-splitting. In other cases, lawyers were asked to “kick back” part of the fee — also prohibited.

Because of technology, Smith warned, the enforcement of regulations on referral services will be hard. For example, he noted that referral services must comply with Bar advertising rules. But in the age of the Internet, referral services can use websites as part of their advertising and can change those daily, weekly, or even hourly.

“If the lawyer has to determine that the LRS meets the ad rules including websites, how does the lawyer do that?” Smith asked. “How practically can we expect lawyers to do that policing of lawyer referral services?”

[Revised: 11-21-2014]