By Leah S. Strickland
Many attorneys rely on referral fees for a significant portion of their revenue. If you clicked the link to read this article, one of those attorneys may be you.
California law permits “fee sharing” among attorneys, as long as the attorneys comply with the requirements of the Rules of Professional Conduct. Rule 1.5.1 provides that lawyers not in the same law firm cannot divide fees unless several requirements are met.
To paraphrase the requirements of the Rule, an agreement to divide fees must be in writing, and the total fees charged by all lawyers may not be not increased simply because of the agreement to divide fees. Rule 1.5.1 subdiv. (a)(1), (3). Finally, as relevant here, the client must consent to the arrangement in writing, after receiving full written disclosure of the fact of the fee division, the identity of the parties to the division, and the terms of the division. Rule 1.5.1 subdiv. (a)(2).
Both attorneys in a fee sharing scenario are required to follow the provisions of Rule 1.5.1. Thus, both attorneys who fail to follow the provisions of Rule 1.5.1 violate the Rules of Professional Conduct. However, one additional consequence of the failure to comply with Rule 1.5.1 is that a contract providing for referral fees is unenforceable, as a matter of public policy. This means that, as a practical matter, the attorney who is doing the referring and who is to receive the referral fee is the party with the primary interest, or at least the financial interest, in ensuring compliance with the provisions of Rule 1.5.1.
A recent opinion sets out what type of writing meets the requirement of written “consent” in the context of a fee sharing arrangement. The opinion, like others before it, concludes that failure to meet the requirements of the Rules of Professional Conduct renders the referral fee agreement unenforceable. The opinion discusses former Rule 2-200, but the language at issue—the Rule’s requirement that “the client has consented in writing”—is identical under both former Rule 2-200 and new Rule 1.5.1. Thus, attorneys who fail to ensure compliance continue to risk not only violation of the Rules of Professional Conduct, but forfeiture of the referral fee under a contract theory.
Reeve v. Meleyco
In Reeve v. Melevco, attorney Reeve referred a client, Luoma (the “Client”), to attorney Meleyco. Reeve and Meleyco agreed that for the referral, Reeve would receive 25% of whatever Meleyco received in fees.
Client was informed of the arrangement orally at the beginning of the representation. Subsequently, Meleyco sent Client a letter informing Client “that the twenty-five percent (25%) referral fee that I am paying to [] Reeve will come out of my fee and will not increase the fees to either you or your daughter.” The Client signed a pretyped acknowledgement stating: “I, JAMES G. LUOMA, acknowledge receipt of this letter and understand the contents.” The Client subsequently testified that his signature agreed that the 25% referral fee could be paid if it did not increase the fees to him and his daughter.
The Court held that the agreement was unenforceable because it did not meet then-Rule 2-200’s requirement of written consent. “[C]onsent must be expressed in writing, [and] silence cannot convey written consent.” Reeve v. Meleyco, 46 Cal. App. 5th 1092, 1099 (Cal. App. 3d Dist. March 24, 2020). While the writing disclosed that a division of fees was to be made and indicated that the Client had received the disclosure and understood its contents, it did not indicate that the Client consented to the arrangement.
“Consent is different from disclosure or receipt,” the Court wrote, and “[w]ritten consent requires written words expressing agreement or acquiescence, not just words expressing receipt or understanding.” Because the Client’s signature indicated merely receipt and understanding, and was silent on the issue of consent, it did not meet this requirement. Moreover, because the writing was unambiguous on the issue of whether the Client was providing written consent—in that it was simply silent—the Court held that the writing was unambiguous and the client’s testimony was inadmissible on the issue of consent. The referral agreement was therefore unenforceable, as a matter of law.
Conclusion
Referral fees are permissible in California, so long as the requirements of Rule 1.5.1 are met. Attorneys who seek to benefit from a referral arrangement are well advised to ensure that the requirements of that Rule are met—including by obtaining the express consent of the Client to the referral arrangement.