March 29, 1994
A lawyer may enter into an agreement to share office space with another lawyer and calculate the "rent" due as a percentage of gross revenues, as long as client confidences are protected.
A referral fee may be based on a percentage of the revenue earned on referred cases, as long as the division of fees is disclosed to the client and the client does not object.
References: MRPC 1.5(a) and (e), 1.4, 1.14; RI-32, RI-124, RI-133, RI-158.
Lawyer A has a guardianship and conservatorship practice and proposes to share space and the services of a secretary with Lawyer B. Lawyer A also proposes to refer existing guardianship and conservatorship files to Lawyer B for further handling, and will be available to Lawyer B for consultation. In consideration for this arrangement, Lawyer B would pay Lawyer A one-third of the gross revenue generated by Lawyer B's entire legal practice for two years, with a cap of $15,000 for each year. Lawyer A asks if this arrangement is permissible under the Michigan Rules of Professional Conduct.
There is no per se ethical prohibition to the proposed arrangement. Depending on how the arrangement is characterized, however, the disclosure and consent provisions of MRPC 1.5(e) may be implicated. If the consideration to be paid by Lawyer B is simply "rent" for the office space and secretarial assistance, MRPC 1.5(e) does not apply. If, however, it is a referral fee, then the arrangement involves the division of fees between lawyers, and MRPC 1.5(e) must be followed. MRPC 1.5(e) 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 lawyers involved; and
"(2) the total fee is reasonable."
In RI-133 one lawyer proposed to rent office space to another with the amount of rent calculated on the basis of the lawyer/tenant's gross revenues. The Committee found MRPC 1.5(e) to be inapplicable, because the lawyer/landlord would not be working on any of the lawyer/tenant's cases and there were no other indication of an association between the two lawyers. In such circumstances, the lawyer/landlord was not participating in the arrangement as a lawyer, so that no division of fees as between lawyers was involved. Not was the situation viewed as involving the division of fees with a nonlawyer. Instead, the arrangement was found to involve a permissible basis for the calculation of rent, as an alternative to a more traditional flat rate arrangement, so long as client confidences were protected in determining the amount of rent due under the formula.
Even if the proposed arrangement cannot be characterized as simply "rent," but is instead a referral fee as between lawyers, it is permissible to base the amount of the referral fee on a percentage of the gross revenue generated in connection with the matters referred. RI-124. In the case of a referral fee, MRPC 1.5(e) applies and the client must consent to the involvement of all the lawyers. The total fee must also be reasonable. The factors for determining whether the fee is reasonable are laid out in MRPC 1.5(a). In the context of referral fees, the client should not be charged a higher fee to cover the referral fee. See RI-158, RI-32.
How should the arrangement in this matter be characterized? The present arrangement differs in several crucial aspects from that presented in RI-133. First, unlike the situation in RI-133, the proposal presented involves the referral of existing files as a major element of the deal. In addition, Lawyer A proposes, as a part of the arrangement, to be available for consultation in connection with the matters referred, and presumably to be paid for the consultation. These features make the arrangement appear more like a division of fees than a simple rental agreement. On the other hand, the provision of office space and secretarial assistance is also an important aspect of the deal, and the consideration to be paid is calculated on Lawyer B's gross revenues from all matters handled, not just those referred by Lawyer A.
Because the proposed arrangement includes, as a major element, the referral of cases and the professional involvement of Lawyer A, it should be viewed as a referral fee and the requirements of MRPC 1.5(e) should be applied, at least to the extent that the consideration to be paid by Lawyer B is a percentage of gross revenues on referred cases. The total fee charged the client by both lawyers must be reasonable under MRPC 1.5(a). MRPC 1.5(e) is not implicated to the extent that the consideration to be paid is a percentage of revenues in cases not referred by Lawyer A.
In disclosing the arrangement to clients and discerning the presence or lack of an objection, the lawyer must consider the client's ability to understand and give meaningful consent. MRPC 1.4, 1.14. This consideration is particularly applicable here where the clients may be incompetent to handle their own affairs. If the client is a competent adult who is serving in the capacity of guardian or conservator, there should be no difficulty making the disclosure and determining the client's wishes. To the extent that the client is the protected person, procedures in the Probate Court relevant to appointment and substitution provided an opportunity for seeking a judicial determination of consent.
In summary, it is permissible to calculate the consideration to be paid by Lawyer B as a percentage of gross revenues. Because the proposed arrangement involves a referral fee, disclosure and consent under MRPC 1.5(e) is required. In addition, the lawyer must be certain that the total fee charged to the clients is "reasonable."