To Refer For A Fee or Refrain? That Is the Question For Solo Lawyers

Should solo and small firm lawyers refer cases for a fee…or refrain?  It’s question largely unique to solos.  After all, when lawyers at a firm bring in business that is assigned to or handled by others, they typically receive an origination fee and may continue to collect a percentage of revenue subsequently generated by that client.  Though law firms may devote countless hours to arrive at the appropriate formula for rewarding their rainmakers for business, implementing an incentive system is relatively pain-free.  Because business passes between firm members, lawyers don’t need to disclose the fee split to clients. Nor does the originating partner ever need to look at the matter ever again – he can pass it on to his grinding colleague and play golf and let those referral fees roll in.

Most solos don’t have this same opportunity to generate an additional stream of revenue through business development.  A majority of jurisdictions prohibit solos from referring a matter and collecting a referral fee from lawyers outside their firm unless (1) the client is notified of the referral fee and consents; (2) the referral fee reflects the percentage of the originating lawyer’s contribution to the case and/or (3) both the originating and referring lawyer retain responsibility for the client. Though sadly, many lawyers who practice in jurisdictions that adopt these limitations on referral fees either aren’t familiar with the regulations or if they are, choose to ignore them anyway. But for ethical lawyers, the referral rules pose a significant hurdle in many states, and require the lawyers to jump through all kinds of hoops to achieve compliance (for example, in states where lawyers are required to continue participation, some firms will copy the originating lawyer on all filings in the case and deem the participation requirement sufficient to justify a 20 or 30 percent referral fee).

However, other states are more lenient about referral fees. Virginia is one of those states, as Fredericksburg, Virginia traffic and misdemeanor defense lawyer Andrew Flusche explains. Though Virginia requires client disclosure, it does not require the originating lawyer to stay on board in the case to seek a referral fee.

Of course, the originating lawyer can’t collect a referral fee by fielding a call and passing it on to a colleague. According to Virginia Ethics Opinion 1739, a fee division is not proper if the referring attorney simply makes a referral without assessing the client’s legal matter and determining whether a referral is necessary appropriate. Other than that, Virginia encourages lawyers to refer cases that they are not competent to handle so that a client is assured of competent counsel.

As Andrew’s post describes, he’s taking full advantage of Virginia’s more relaxed referral rules. In fact, five months into 2011, Andrew has already referred out a whopping 270 cases. Andrew adheres to Virginia’s requirements in referring cases – he evaluates clients’ needs and sends them to the best lawyer for the job, rather than the lawyer who might pay the highest referral fee.

Though I once opposed the idea of referral fees, believing that they undermined the collegial nature of our profession, I’ve long since changed my views (except in oddball cases like this where the referred firm doesn’t add value or where referral fees are truly disproportionate, e.g., referring a multi-million dollar class action). Lawyers who invest the resources in, or have a knack for attracting clients should have the ability to receive compensation for their efforts. Likewise, lawyers who would rather not market or who can’t find business can pay a 10 to 30 percent fee to an originating attorney and focus their efforts on the cases sent their way. So long as the referring lawyer takes the time to assess the matter and select a trustworthy attorney based entirely on merit and not the size of referral fees paid.

Many lawyers oppose referral fees. Some believe that cases should be exchanged collegially, while others don’t trust lawyers to direct cases to the best qualified lawyer.  And indeed, while these points hold some weight, we can’t examine the issue of referral fees in a vacuum – but instead, need to consider the alternatives.

These days, most lawyers who aren’t able to generate business through referrals will resort to tactics like pay-per-click and lead generation where a computer picks the clients’ lawyer based on geographic location.  Pay-per-click services don’t necessarily vet the qualifications of lawyers who use them, thus resulting in cases that are directed to incompetent attorneys. By contrast, when lawyers like Andrew Flusche refer cases out, they must adhere to a higher standard.  To comply with applicable ethics obligations on referrals, Andrew’s firm must review the case and determine whether the client needs a lawyer at all.  Then, Andrew must disclose to the client that he’ll receive a referral fee for his effort. In addition, to avoid a lawsuit for negligent referral, Andrew must take care to send cases to trusted, capable colleagues in good standing with the bar. Pay-per click operators aren’t subject to these same safeguards.

I realize that referral fees are distasteful to many lawyers and that there’s wide opportunity for abuse.  At the same time, as the popularity of pay-per click schemes evidence, lawyers are willing to pay for cases – whether it’s payment for a lead as in the case of the Total Attorneys products, or payment of a percentage of the case through a referral service.   In comparison to pay-per-click, good old fashioned lawyer referrals incentivized by cash may be the lesser of two evils.