March 24, 1992
A lawyer may pay a referring lawyer a referral fee consisting of a percentage of legal fees billed to the client as long as the client is advised of and does not object to the participation of all the lawyers involved, the client's bill is not increased because of the referral fee, and the total fee is reasonable.
References: MRPC 1.5(e); RI-32.
A law firm specializing in labor and employment law receives referrals of clients from lawyers outside the firm. The firm provides legal services to the referred clients and bills its clients on an hourly basis.
In order to encourage referrals, the firm proposes to pay a referral fee to referring lawyers for each referred client served by the firm. The amount of the proposed referral fee will be 20% of all billings to the referred client during the first year following the referral plus 10% of all fees billed to the client during the second year following the referral. Upon commencement of the representation the firm will advise the referred client of the participation of all lawyers involved and provide an opportunity for the client to object; if the client objects, no referral fee will be paid. The total fee paid by the referred client is reasonable.
The firm asks whether its proposed referral fee policy is ethically permissible.
The division of fees between lawyers who are not in the same firm is governed by MRPC 1.5(e), which states:
"(e) A division of a fee between lawyers who are not in the same firm may be made only if:
"(1) the client is advised of and does not object to the participation of all the lawyers involved; and
"(2) the total fee is reasonable."
The Comment section which explains MRPC 1.5(e) states, in part:
"A division of fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm. A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist. Paragraph (e) permits the lawyers to divide a fee on agreement between the participating lawyers if the client is advised and does not object. It does not require disclosure to the client of the share that each lawyer is to receive."
The Comment that accompanies each rule does not expand or limit the scope of the obligations, prohibitions, and counsel found in the text of the rule. MRPC 1.0(c).
Although referral fees most often consist of a percentage of contingent fees, there exists no ethical prohibition against computing a referral fee based upon a percentage of hourly billing receipts. The committee has previously opined that a legal referral service consisting of lawyers may properly receive a referral fee, including a percentage of legal fees generated by the work it refers to other lawyers, so long as the arrangement otherwise complies with MRPC 1.5(e). RI-32.
It appears that the referral fee arrangement proposed by the inquirer does not violate MRPC 1.5(e) and may therefore be utilized. This result is limited to an interpretation of MRPC 1.5(e). Nevertheless, the conduct contemplated by the inquirer may implicate other ethics rules, including MRPC 1.5(a), 1.7(b), 1.8(j), and 7.2(c).
The fee to the client may not be increased to cover the cost of the referral fee, and the fee charged the referred client should be consistent with fees charged other clients of the firm for similar work. Otherwise the personal interests of the law firm in encouraging referrals conflicts with the lawyer's duties of loyalty and fairness to the client. Similarly, the referral fee itself should not be so large as to act as a disincentive to the performing law firm to fully perform for the client. See MRPC 1.7(b).