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special / Legal Ethics

An anticipated evolution of fee-sharing

Collaboration of attorneys often results in a great benefit to the client. This can take the form of direct assistance, such as multiple attorneys working together to provide legal services and advice to common clients. Or it can happen indirectly, such as where one attorney assists in pairing clients with the right lawyer. Regardless of what the respective roles are, in many cases, all of the lawyers involved want to be compensated for their efforts. When the attorneys work in different firms, they should carefully address the sharing of the fees so that the joint nature of their efforts remains a benefit to the client.

Currently, California Rules of Professional Conduct, Rule 2-200 provides the primary guidance for this. The rule precludes an attorney from dividing a fee for legal services with any other lawyer who is not the first lawyer's partner, associate, or fellow shareholder unless (1) the client has consented in writing to the fee split "after a full disclosure has been made in writing" that a division will be made and its terms, and (2) the total fee charged to the client is not increased by the fee split and not otherwise unconscionable.

In Mink v. Maccabee, 121 Cal. App. 4th 835 (2004), the 2nd District Court of Appeal addressed the timing of such an agreement, and concluded that the client's written consent can be obtained as late as just before the money is paid out. There, one attorney sought a referral fee based upon an oral agreement with another lawyer. But the referring attorney failed to obtain the client's consent to the division until months after the litigation matter had resolved. The court reached two conclusions. First, Rule 2-200 could not reasonably be read to require client consent at any time other than prior to any division of fees. Second, although writings may generally be preferable to oral agreements, Rule 2-200 did not require that the fee-splitting agreement between the attorneys be in writing.

But these two conclusions may soon become obsolete. The process of revising the Rules of Professional Conduct continues. In November 2016, the State Bar of California's Board of Trustees approved a number of proposed rules. The California Supreme Court's approval is the only remaining hurdle for them to become effective.

In some respects, California's fee-sharing rules will be unchanged. Perhaps most significantly, California will remain one of the minority of jurisdictions that permit true referral fees, amounts paid for simply connecting a client and attorney without providing legal services. In contrast, the majority of states have adopted some version of Model Rule 1.5, paragraph (e). That rule requires that, to be entitled to a portion of a fee, a lawyer must work on and remain responsible for the representation.

Despite the unchanged allowance of pure referrals, the fee-sharing standard is currently postured to start requiring attorneys to perform more on the front end to safeguard against problems on the back end. If approved in its present form, proposed Rule 1.5.1 will replace Rule 2-200 and bring two more significant, material changes to the current fee-sharing rule. Both are intended to increase client protection. The first will require that the fee-sharing agreement between the lawyers be in writing. Paragraph (a) in the draft rule provides, "Lawyers who are not in the same law firm shall not divide a fee for legal services unless: (1) the lawyers enter into a written agreement to divide the fee." This may protect the client (and the lawyers) from becoming entangled in a dispute between the fee-sharing lawyers regarding whether a referral fee was promised, or the terms of such an agreement.

The second proposed material change is the requirement that the client's informed written consent to the fee division be obtained at or near the time the lawyers enter into the written agreement to divide the fee. So, the rule will no longer permit a last-minute dash to obtain client consent before distribution of a referral fee. A comment to the proposed rule indicates that the written agreement between the attorneys and the written consent of the client may be in either a single document or contained in separate documents.

The Rules Revision Commission has reasoned that deferring disclosure of the proposed fee division and obtaining the client's consent to the time the fee is actually divided (or about to be) denies the client a meaningful opportunity to consider the concerns the rule is intended to address. Requiring informed written consent to the fee division allows the client to decide whether a referral fee should be paid at all, to determine whether the attorneys' fee is reasonable, and to insure that the lawyer representing the client is sufficiently incentivized.

This change will also serve lawyers well. Under the current rule, a client or the other lawyer could potentially exploit attorneys or force concessions because a significant amount - or even all - of the services have been completed. So, attorneys who delay in obtaining client consent could find themselves in a predicament when a client will not agree to a given distribution, or when the other lawyer claims entitlement to a different portion of the fee. These scenarios can result in payment delays and potentially additional proceedings that eat away at the fees. With the changes, because a written agreement (or two) must be reached at the onset, there should be no reason for disputes or delays in distribution of proceeds once a matter has concluded.

Whereas it is possible that the proposed rule could change before its promulgation, it represents a sound evolution from the current one. Although the requirements will not impose a mandate until the Supreme Court approves them, there is no time like the present to begin adopting these practices. Attorneys and their clients will both benefit.

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