Fee divisions among lawyers (Rule 1.5.1)

Special Coverage

PROPOSED RULES OF PROFESSIONAL CONDUCT

Last month, the State Bar of California delivered its complete proposed Rules of Professional Conduct to the California Supreme Court. Those proposed rules contain several with material changes that practitioners need to be aware of, which would be effective if the California Supreme Court adopts them. This article discusses fee divisions among lawyers.

California has historically been in the minority of states that permitted a "pure" referral fee. Current California Rules of Professional Conduct Rule 2-200(A) states that "[a] member shall not divide a fee for legal services with a lawyer who is not a partner of, associate of, or shareholder with the member unless: (1) The client has consented in writing thereto after a full disclosure has been made in writing that a division of fees will be made and the terms of such division; and (2) The total fee charged by all lawyers is not increased solely by reason of the provision for division of fees and is not unconscionable as that term is defined in rule 4-200." California's rule means that a lawyer can be compensated for referring a matter to another lawyer without requiring the referring lawyer to continue to work on it. Unlike Model Rule 1.5(e), a California referral lawyer's fee is not required to be limited to the actual work done on the matter or if the lawyer assumes joint responsibility.

Subsection (a) of proposed new Rule 1.5.1 states: "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; (2) the client has consented in writing, either at the time the lawyers enter Into the agreement to divide the fee or as soon thereafter as reasonably practicable, after a full written disclosure to the client of: (i) the fact that a division of fees will be made, (ii) the identity of the lawyers or law firms that are parties to the division, and (iii) the terms of the division; and (3) the total fee charged by all lawyers is not increased solely by reason of the agreement to divide fees."

Subsection (b) adds: "This Rule does not apply to a division of fees pursuant to court order."

A comment to the rule clarifies that "[t]he writing requirements of paragraphs (a)(1) and (a)(2) may be satisfied by one or more writings."

Rule 1.5.1 does not change the basic California rule that a pure referral fee is permissible, subject to the preconditions of the rule. However, there are three significant changes that practitioners must comply with, should the rule be passed by the Supreme Court.

First, an agreement between lawyers to share a fee under Rule 1.5.1 must be in writing. Current Rule 2-200 does not contain an express writing requirement.

Second, the client must give written consent to the division of the fee after full written disclosure at or near the time that the lawyers enter into the agreement to divide the fee. Under current case law, client consent can come at any time prior to the fee division. Mink v. Macabee, 121 Cal. App. 4th 835 (2004). The new rule would change that.

Third, and finally, the full written disclosure required shall contain (1) the fact that a division of the fees will be made, (2) the identity of the lawyers or law firms that are parties to the division, and (3) the terms of the division. Identity disclosure does not exist in current Rule 2-200.

Current Rule 2-200(B)'s language has been moved to Proposed New Rule 7.2(b).

Noncompliance with current Rule 2-200 renders a fee sharing agreement not enforceable, Chambers v. Kay, 29 Cal. 4th 142, 155-61 (2002). This result is unlikely to change if the new rule is approved.

The policy underlying California's referral fee rule, with its preconditions, has always been to assure that a client's representation is not adversely affected by any lawyer fee sharing arrangement. The proposed changes in Rule 1.5.1 seek to better reach that goal, to eliminate ambiguities, and to increase client protection. Requiring fee division agreements among lawyers to be in writing and consented to in writing by the client at or near the time the lawyers enter into the agreement to divide the fee provides the client with a meaningful opportunity address any concern with the arrangement, and would provide clarity to all involved. As a practical matter, it should also significantly reduce the opportunities for complications that currently exist, as, for example when a client objects to the arrangement after the work has been done, and/or where misunderstandings develop between the parties (and at times, their employees) when the outcome of a case differs from that which was expected, either positively or negatively. These complications can create complex disputes and sometimes, downstream litigation.

Rule 1.5.1 will not be effective until and unless approved by the California Supreme Court. There is no harm, however, for lawyers to consider adopting the practices now, given the practical benefit clarity provides.

Rule 1.5.1 Fee Divisions Among Lawyers

(Proposed rule adopted by the board on Nov. 17, 2016)

(a) 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;

(2) the client has consented in writing,* either at the time the lawyers enter into the agreement to divide the fee or as soon thereafter as reasonably* practicable, after a full written* disclosure to the client of: (i) the fact that a division of fees will be made, (ii) the identity of the lawyers or law firms* that are parties to the division, and (iii) the terms of the division; and

(3) the total fee charged by all lawyers is not increased solely by reason of the agreement to divide fees.

(b) This rule does not apply to a division of fees pursuant to court order.

Comment

The writing* requirements of paragraphs (a)(1) and (a)(2) may be satisfied by one or more writings.*