By Steven Berenson
A recent opinion from the Third District Court of Appeal serves to remind attorneys of the requirements that must be satisfied in order to have a valid and enforceable referral fee arrangement. In Reeve v. Meleyco, 2020 Cal. App. LEXIS 242, client Luoma contacted his friend, attorney Reeve, regarding representation in relation to a traffic accident in which Luoma’s wife was killed and his daughter seriously injured. Reeve referred Luoma to attorney Meleyco. The three met and discussed, among other things, the referral fee that would be paid to Reeve for introducing Luoma and Meleyco. However, the written contingent fee agreement entered into between Luoma and Meleyco made no mention of any referral fee to Reeve.
Though Reeve had some involvement in the representation at first, Luoma soon expressed concerns about both Reeve’s continuing involvement in the matter and the potential that any referral fee to Reeve might come out of Luoma’s portion of any judgment or settlement. Eventually, Meleyco wrote a letter to Luoma stating: “[T]his letter is to assure you that the twenty-five percent (25%) referral fee that I am paying to Bob Reeve will come out of my fee and will not increase the fees to either you or your daughter.” At the bottom of the letter was typed: “I, JAMES G. LUOMA, acknowledge receipt of this letter and understand its contents.” Luoma signed the acknowledgement.
Later, when the case settled, Meleyco and Luoma declined to pay any referral fee to Reeve out of the proceeds of the settlement.[1] Reeve filed suit, and won jury verdicts in the trial court on both breach of contract and quantum meruit theories. Meleyco appealed.
During the relevant time period, fee sharing arrangements between attorneys, including referral fees, were governed by former California Rule of Professional Conduct 2-200, which provided in relevant part: “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: [¶] … [t]he 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 …”
The court interpreted this rule as requiring the client’s informed, written consent to any fee sharing arrangement. The court went on to hold that Luoma’s mere acknowledgement of receipt of the above-described letter did not amount to consent to the fee sharing arrangement. Therefore, the letter failed to satisfy the rule’s informed, written consent requirement. The court when on to hold that while an attorney may be entitled to a quantum meruit recovery in the absence of a valid, written fee sharing agreement, in this case, Reeve’s quantum meruit claim was barred by the applicable two-year statute of limitations. Thus, Reeve failed to recover any of his promised referral fee.
Of course, Rule 2–200 has now been superseded by current Rule 1.5.1. The current Rule carries forward Rule 2-200’s informed written consent requirement. Thus, the holding in Reeve v. Meleyco would not change under the current rule. Additionally, the new Rule specifically requires the written fee sharing agreement to state: “1) the fact that a division of 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 …” Further, the new Rule adds a temporal element to its requirements. Thus, the writing reflecting the fee sharing arrangement must be executed at the time the agreement is entered into, “or as soon thereafter as is reasonably practicable.” Thus, in Reeve v. Meleyco, it is likely that the fee sharing arrangement would have been deemed invalid even if Luoma had provided the required informed written consent. That is because the letter from Meleyco to Luoma was drafted a significant period of time after the original meeting during which the fee sharing arrangement was discussed.
Although in general the November 2018 revisions to the California Rules of Professional Conduct were designed to close the gap between California’s legal ethics rules and the ABA’s Model Rules of Professional Conduct, referral fees are one area where significant differences remain between the two sets of rules. Thus, in addition to the requirements of California Rule 1.5.1, ABA Model Rule 1.5(e)(1) requires that any division of fees “is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation …” Therefore, California’s requirements for a valid fee sharing agreement are less restrictive than those that are in effect in many jurisdictions.
In any event, Reeve v. Meleyco serves as a useful reminder that strict compliance with the requirements of California Rule 1.5.1 is necessary in order for an attorney to create a valid and enforceable entitlement to a referral fee.
[1] There were actually two separate settlements in the case, one with private parties and one with the State of California. Regarding the first settlement with the private parties, Meleyco did send Reeve a $20,000 referral fee, though this amount was much less than the 25% of Meleyco’s fee referred to in the letter to Luoma. Though Reeve challenged this payment as well, the Court held that the statute of limitations had run on this claim. Thus, the opinion only addresses the settlement with the State of California, and that is what is referred to above.