Ethical Considerations When Using an Online Referral Service
As a personal injury lawyer who is only licensed to practice in California, you take great pride in using the latest technology as part of your firm’s day-to-day operations. Effectively incorporating technology into your practice enables you to better serve your clients and bottom line. Recently, you saw a social media ad for an online networking service named “Referral Law, P.C.” (RL[1]) that promises: (1) a national network of lawyers to refer cases and, (2) it will handle the process of collecting referral fees for its members.
Intrigued by RL’s promises, you decide to research it. The California Secretary of State website shows RL is registered as a professional corporation that provides “legal services.” Its Articles of Incorporation state its corporate purpose is to engage in the profession of law and any other lawful activities. It has three directors/shareholders—all licensed to practice law in California. There are no vacancies on RL’s board of directors.
You view RL’s website and learn there is no cost to join but membership requires an applicant: 1) be a licensed lawyer in good standing with their state bar association, 2) have no disciplinary record, and 3) pass an interview with an RL agent. If accepted, a lawyer creates a profile on RL’s website containing information about her experience and legal practice areas.
Additionally, on the RL website, all members can: 1) view other member profiles, 2) post information about a matter they wish to refer, and 3) see such posts. The referring lawyer is notified by email of any lawyers interested in accepting the referred matter and may personally select the lawyer who accepts it (accepting lawyer). If the referring lawyer does not select the accepting lawyer, then interested RL lawyers may contact the potential client directly.
The accepting lawyer then uploads her fee agreement for client signature to RL’s website and RL’s website automatically attaches its own addendum to the fee agreement containing language authorizing client consent to the payment of referral fees or a fee split. RL does not provide a sample addendum available on its website to view before joining as a member.
For hourly and flat fee cases, RL lists the referral fees/fee split as a percentage of the attorney’s fees as follows:
15% for the referring lawyer
20% for RL
65% for the accepting lawyer
For contingency matters, such as personal injury and employment matters, RL lists the referral fees/fee split as a percentage of the attorney’s fees as follows:
30% for referring lawyer
5% for RL
65% for accepting Lawyer
In hourly and flat fee matters, RL will deposit advance fees in its own client trust account. As attorney fees are earned, the accepting lawyer makes an online request for RL to send the billing invoice(s) directly to the client. Once the invoice is paid, RL will make payments as listed above to itself, the referring lawyer and accepting lawyer. In contingency matters, if a client receives a financial recovery, the total amount recovered is placed in RL’s client trust account. Upon the accepting lawyer’s online request, the amounts listed above are paid to itself, the client, the referring and accepting lawyer by direct deposit to the respective bank account.
You believe joining RL will increase your personal injury client base and its promise to handle the referral fee process may save you time and increase your bottom line. You plan to refer California employment law cases to other RL lawyer members, and you may, on occasion, have out-of-state matters to refer. Before joining RL, you want to be confident you are complying with your ethical obligations under the California Rules of Professional Conduct and the State Bar Act. You begin researching the ethical considerations that apply when joining membership organizations, as well as those regarding referral fees and fee splitting. Your research reveals the following:
Rule 5.4(e) and Business and Professions Code section 6155(a) bars lawyers from accepting referrals from an entity operating as an unregistered lawyer referral service.
Rule 5.4(e) states in relevant part, “A lawyer shall not accept a referral from, or otherwise participate in, a lawyer referral service unless it complies with such Minimum Standards for Lawyer Referral Services.” (Cal. Prof. Rule of Conduct, Rule 5.4(e).)
Additionally, Business and Professions Code section 6155 subdivision (a)(1) provides in relevant part “an individual … corporation … or any other entity shall not operate for the direct or indirect purpose, in whole or in part, of referring potential clients to attorneys, and no attorney shall accept a referral of such potential clients,” unless “[t]he service is registered with the State Bar of California and . . . is operated in conformity with minimum standards for a lawyer referral service established by the State Bar” or “is operated in conformity with” standards set by the Supreme Court. (Id. Emphasis added.) In other words, to lawfully operate as a lawyer referral service (LRS), the entity must meet minimum standards in order to be registered and certified by the State Bar as an LRS. (Bus. & Prof. Code § 6068, subd. (a)(1), (f).)
In Jackson v. LegalMatch.com (2019) 42 Cal. App. 5th 760, as modified on denial of rehearing, (Dec. 17, 2019) (“Jackson”), the Court of Appeal examined if LegalMatch.com (“LegalMatch”) constituted an unregistered LRS. LegalMatch connected potential clients to lawyers who purchased its online monthly subscriptions.
Potential clients would insert their information into LegalMatch’s online intake forms. Afterwards, LegalMatch would send this information to lawyers who matched the practice area and geographic location requested by the potential client. When lawyer, Dorian L. Jackson, failed to pay his subscription, LegalMatch sued him. Jackson cross-claimed, asserting LegalMatch was operating an uncertified LRS in violation of Business and Professions Code section 6155.
The Court of Appeal noted Section 6155 does not define the terms “referring” or “referral,” and interpreted “referral” to mean, “the act of directing a potential client to an attorney.” (Jackson at 748 and 773.) The court found LegalMatch does engage in referral activity, since “a referral occurs when an entity engages in the act of directing or sending a potential client to an attorney.” (Id. at 776-777.) The Court of Appeal further observed, “[t]he act of referring is complete when LegalMatch routes a potential client to attorneys who match the geographic location and area of practice … .” (Id. at 777.)
The court further stated:
The fact that the subscribing lawyer evaluates the case and must affirmatively decide whether to reach out to the client does not make Legal Match’s referral incomplete. While a subscribing lawyer may choose to decline to take a case or reach out to a client, the lawyer still receives the potential client’s information and may review the potential matter; the referral has thus already occurred even if the lawyer never speaks to the client. Although this communication occurs online, the situation presented by this case is thus not appreciably different than the more common, traditional scenario in which a potential client asks one attorney for assistance, the attorney instead directs the client to an attorney with expertise in that practice area, and the second attorney declines to respond. Clients in both scenarios would still have received a referral. Similarly, the act of referring is not negated by the fact that LegalMatch communicates to its subscribing lawyers the information provided by potential clients without communicating the client’s identities.
(Jackson at 777-778.)
Based on its analysis, the Court of Appeal concluded as a matter of law that LegalMatch operates for the “direct or indirect purpose, in whole or in part, of referring potential clients to attorneys,” under Business and Professions Code section 6155, subdivision (a)(1). (Jackson at778.)
Notably, the California State Bar sued LegalMatch.com for declaratory relief, asking the court to enjoin LegalMatch from (1) unlawfully operating an uncertified LRS, and (2) operating the LegalMatch website for the purpose of referring any potential client to lawyers in California. In August 2022, the parties settled, and LegalMatch opened a subsidiary in California–LegalMatch California, that is certified by the California State Bar as an LRS.
Here, like LegalMatch, RL uses its online system to direct potential clients to RL Lawyer members who are in the location and practice area needed by the potential client. The referring lawyer is notified by email of any lawyers interested in accepting the referred matter and the referring attorney may personally select the accepting lawyer. If she does not, then interested RL lawyers may contact the potential client.
Under either scenario, RL is using its online system to direct potential clients to RL lawyer members. Indeed, all its members can view posts for referred matters. As such, RL may be operating for the “direct or indirect purpose, in whole or in part, of referring potentialclients to attorneys . . . ” under Business and Professions Code section 6155 subdivision (a)(1) (emphasis added.) If so, RL would be operating as an unregistered LRS in violation of this statute.
Accordingly, if you accept a personal injury case through RL’s website, there is a risk of violating Rule 5.4(e) of the Rules of Professional Conduct, which prohibits lawyers from accepting referrals from, or otherwise participating in an unregistered LRS.
California Rule 5.4 generally bars fees sharing with nonlawyers
A referral fee occurs when a lawyer receives a fee for the referral of a case to another lawyer. Referral fees are a form of fee sharing. With certain exceptions,[2] Rule 5.4(a) provides: “[a] lawyer or law firm shall not share legal fees directly or indirectly with a nonlawyer or with an organization that is not authorized to practice law. . . .” (Cal. Prof. Rule of Conduct, Rule 5.4(a).)
A fee-sharing arrangement between a licensed lawyer and a nonlawyer is an illegal contract and necessarily will run afoul of Rule 5.4(a). (See McIntosh v. Mills (2002) 121 Cal.App.4th 333, 343-346 [fee-sharing agreement between an attorney and non-attorney was illegal, unenforceable and violated former Rule of Professional Conduct 1-320(A)].) Thus, lawyers may only enter into referral fees with other lawyers.
Here, if you become an RL member and accept personal injury clients or refer employment matters to other RL members, you would be entering into a fee sharing arrangement with a law firm that is a professional corporation comprised of three shareholders/directors who are licensed lawyers in California. Additionally, RL’s corporate purpose states it provides legal services, presumably in an effort to comply with Rule 5.4.
California Rule 1.5.1 permits fee sharing between lawyers under specific conditions
Rule 1.5.1 provides: “(a) Lawyers who are not in the same law firm shall not divide a fee for legal services” unless the following conditions are met:
(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.
(Cal. Prof. Rule of Conduct, Rule 1.5.1.)[3]
If you become an RL member and accept a personal injury client referred by another RL member, it is not clear that RL’s addendum to your fee agreement complies with Rule 1.5.1(a)(1), which requires that lawyers not in the same law firm (e.g., you, RL, and the referring attorney (the “Law Firms”)) have a written agreement to divide the fee. Nor is it clear that RL’s addendum constitutes adequate written disclosure to the client regarding: (i) the fact 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, as required by Rule 1.5.1(a)(2). Additionally, the client’s consent is required after these disclosures have been made.
If RL’s addendum does not comply with all the aforementioned requirements, then the Law Firms would be in violation of Rule 1.5.1(a)(1) and (2). Because the division of fees by the Law Firms is based on a percentage of your attorney fees, it does not appear to violate the third condition, requiring the total fee charged by the law firms “is not increased solely by reason of the agreement.” (Cal. Prof. Rule of Conduct, Rule 1.5.1 (a)(3).) If RL’s five percent and the referring attorney’s thirty percent payment was in addition to your attorney’s fees, however, then this would increase the total fee charged to your client. As such, the law firms would be in violation of Rule 1.5.1(a)(3).
ABA Rule 1.5(e) does not permit a “pure referral fee”
ABA Model Rule 1.5(e) allows a division of fees between lawyers who are not members in the same firm only if: (1) the fee division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the client’s representation; (2) the client consents in writing to the share that each lawyer will receive under the arrangement; and, (3) the total fee is reasonable.
Unlike California Rule 1.51, ABA Model Rules 1.5(e) does not allow a lawyer to collect a referral fee unless that fee is in proportion to the services the lawyer performed on a client’s case. In other words, a referring lawyer would have to perform some work in the case and the fee must be in proportion to the work performed. If a referring lawyer merely referred the client and did nothing more, she is precluded from collecting a referral fee. (Moran v. Harris (1982) 131 Cal.App.3d 913, 921-922.)
Here, if you accept a personal injury matter referred from an RL member who is licensed in a state that follows the ABA Model Rules, then the referring attorney’s payment of thirty percent would only be permitted if she worked on the matter with you and her thirty percent was proportional to the work she actually performed. (See, ABA Model Rule 1.5(e).) The same would be true for RL — it would not be able to collect its five percent fee unless it did some work on the matter and the five percent was in proportion to the work it performed.
Additionally, if you refer an employment matter to an RL member licensed in a state that follows the ABA Model Rules, then you would be prevented from accepting a referral fee of thirty percent unless you worked on the matter and your referral fee was proportional to the work you performed. The same would be true for RL — it would not be able to collect its five percent fee unless it did some work on the matter and the five percent was in proportion to the work it performed.
Based on your review of the ethical considerations listed above, you decide its best not to apply for RL membership. Instead, you decide to join your local bar association’s LRS, which is certified with the California State Bar. Additionally, having reviewed the Professional Rules of Conduct concerning fee splitting/ sharing, you are now prepared to receive and give referral fees ethically.
[1] Referral Law is a fictitious company.
[2] Rule 5.4(a) contains several inapplicable exceptions to this article’s hypothetical.
[3] The writing requirements of Rule 1.5.1(a)(1) and (2) “may be satisfied by one or more writings.” (Comment to Cal. Prof. Rule of Conduct, Rule 1.5.1