Referral fees, or fee sharing, among attorneys have become so commonplace that it may be easy to forget about the headache that they can cause to attorneys and clients alike. Our focus today is on the potential consequences of unpermitted fee arrangements, also known as “finder’s fee” arrangements. These types of arrangements between attorneys are not permissible under the American Bar Association Model Rules of Professional Conduct. In particular, one fairly recent case highlights the consequences that can arise out of such an improper fee arrangement.
The case was a 2018 class action lawsuit brought in the United States District Court of Massachusetts. [1] For purposes of this Insight, the full underlying details of the suit are not relevant. What is relevant is that in 2018, the judge overseeing the suit ordered an investigation into the fees that the attorneys had requested. The investigation was initiated following multiple reports from the Boston Globe that questioned the representations that some of the attorneys had made to the court in requesting those same fees. [2] As a result of that investigation, it was discovered that one of the firms had concealed a preexisting “finder’s fee” arrangement from not only the court, but also its client, and owed the “referring” attorney a little over $4 million in the suit as a result. [3]
In sum, the firm had created an arrangement with the “referring” attorney to influence potential clients to hire said firm. [4] The “referring” attorney would then collect a 20% “finder’s fee” if the firm was appointed and thereafter obtained settlement or judgment. [5] At no point did the “referring” attorney enter an appearance on behalf of the clients or conduct any work on the matters. Most importantly, it was discovered that the arrangement was actively concealed from the firm’s client. [6]
The investigation concluded that the arrangement was a clear violation of several rules, including Rule 1.5(e). As a result of the improper arrangement, among several other issues, the firm’s attorney’s fees in the matter were reduced by $10 million and the matter was referred to the Massachusetts Board of Bar Overseers for potential disciplinary proceedings. Most recently, the “referring” attorney unsuccessfully sued the law firm involved in the matter in Texas for the fees he asserts are owed to him. [7] Unfortunately, the consequences of this arrangement are ongoing.
Massachusetts is one of several states which has adopted a version of Rule 1.5(e) from the Model Rules set forth by the American Bar Association. While states may have different variations of the Rule (i.e., several states require that work be split proportionally between the attorneys) the language generally remains the same. In Massachusetts, 1.5(e) allows attorneys to receive a fee for making and accepting referrals under its Rules of Professional Conduct. [8] Specifically, Rule 1.5(e) of the Rules of Professional Conduct allows for referral fees between attorneys who are not in the same firm with the following conditions: (1) the client must be notified before or at the time he or she enters into a fee agreement for the matter, (2) the client must consent to the arrangement in writing and (3) the fee must be reasonable in its totality. [9]
The above-described case serves as a reminder of the importance of establishing proper referral fee arrangements in accordance with Rule 1.5(e). [10] It also serves as a reminder that the Rules of Professional Conduct are designed to protect the client and avoid waste of time, litigation, and other costs. Therefore, clients should always feel comfortable inquiring into any fee sharing arrangements presented to them. Massachusetts attorneys and law firms can ensure compliance with Rule 1.5(e) by implementing policies pertaining to the same. Further, attorneys should ensure that all referral fee agreements are in writing, provide any necessary disclosures pertaining to the arrangement, including an unambiguous provision explaining to the client their right to consent or, likewise, right to refuse consent to the arrangement, and finally, the signature of the client should he or she consent to the arrangement.
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[1] See Arkansas Teacher Retirement System v. State Street Bank and Trust Company, 512 F.Supp.3d 196 (D.Mass. 2020).
[2] See id. at 210: “For example, it was reported that staff attorneys who were represented as having a regular rate of $335 to $500 an hour, were typically paid $25 to $40 an hour. Moreover, the article pointed out that different hourly rates had been attributed to the attorneys who were double-counted by different firms, which suggested that those rates may have been fabricated . . .”.
[3] See id. at 231.
[4] See id.
[5] See id. at 231–232; 252.
[6] See id. at 234 (“The [investigation found] that [the plaintiff’s firm] engaged in consistent, conscious, and calculated efforts to conceal Chargois from almost all participants.”).
[7] See “Referral fee case against Labaton ends with a jurisdiction whimper” by Alison Frankel (Reuters, March 4, 2022).
[8] See Mass. R. Prof. C. 1.5.
[9] See id. at 1.5(a). There are several factors to assess whether a fee is excessive: (1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent.
[10] See Saggese v. Kelley, 837 N.E.2d 699 (Mass. 2005): “Although the primary responsibility for compliance will fall on referring lawyers, lawyers to whom referrals are made are not absolved of all responsibility, and should confirm, before undertaking such representations, that there has been compliance with [R]ule 1.5(e).”
