Attorney Fee Splitting – Everything You Need to Know

What Is Fee Sharing?

Fee sharing is one of the most misunderstood aspects of the business of law. Many of these misconceptions can be traced back to law school. Ethics professors typically only teach the American Bar Association ("ABA") rules – omitting state-specific rules that tend to be much more favorable to the concept. The ABA Model Rule, Rule 1.5(e) prohibits referral fees unless joint responsibility is assumed. Some professors tend to skip over this small caveat in the fee sharing rule (no wonder lawyers are wary of referral fees). Even when a professor takes the care to mention this critical caveat, it's understandable why it might slip past the weary student struggling to stay awake. But the reading for this PR class was no joke since it directly affects a lawyer's bottom line.

When done correctly, fee sharing is not only ethical–it leads to much better outcomes for clients. See Moran v. Harris, 131 Cal.App.3d 913, 922 (1982). Fee sharing among independent lawyers and law firms is a common practice that has existed in the legal field for decades. In fact, the California Supreme Court stated that fee sharing agreements' purpose is to “protect the public and promote the respect and confidence in the legal profession.” Chambers v. Kay, 56 P.3d 645, 654 (2002).

Fee sharing is permissible in contingency, hourly, and flat fee cases as long as “the total fee is reasonable.” Model Rules of Prof’l Conduct 1.5 (ABA 2018). Despite popular belief, contingency fee arrangements are not the only instance in which attorneys may share legal fees. Historically, attorney fee sharing arose from personal injury cases, and personal injury cases are usually based on contingency fees. See Thomas J. Hall & Joel C. Levy, Intra-Attorney Fee Sharing Arrangements, 11 Val. U. L. Rev. 1 (1976). This leads many lawyers to mistakenly believe fee sharing is only permitted in contingent fee cases, which is simply not true. Key takeaway–lawyers may share fees in hourly and flat fee cases, too!

A quick note on the meanings of the terms "referral fees" and "fee sharing." These terms go hand in hand, but they're not quite equal. A referral fee is the payment one lawyer makes to another for referring clients to them. The referring lawyer does not work on the case; she only receives payment for referring the client. In contrast, a fee sharing agreement can be more than just a referral fee; it can also be a joint venture between two independent attorneys to collaborate on a case and receive payments based on the percentage of work each one does.

The tricky part about fee sharing is that states have varying rules. For example, some states ban the payment of pure referral fees altogether, while others allow it. One thing virtually all states can agree on is: fee sharing is permitted if each lawyer assumes joint responsibility for the representation.

Most states require a written contract denoting the fee sharing arrangement. Typically, this agreement must be completed early in the attorney-client relationship. Some states, like California, require a written agreement, including how the fees will be split up and the names of the lawyers splitting the fees (more on California’s requirements below). Having a fee sharing agreement in place allows the client to have the opportunity to consider whether the split could affect them in any way. See Executive Summary of Cal. Rules of Prof’l Conduct, rule 1.5.1.

As a practical matter, clients rarely complain about the practice of fee sharing. Problems with fee sharing usually arise when one lawyer thinks they will get paid but doesn't, or one lawyer refuses to pay the fee.

Is Fee Sharing Legal in Your State?

The short answer is yes (with some caveats), but let's start with a quick law school refresher. Fee sharing rules typically fall under each state's Rules of Professional Conduct. Most states model their Rules of Professional Conduct after the ABA Model Rules. ABA Model Rule 1.5(e) deals with referral fees and requires lawyers to assume joint responsibility for their client's interests when entering into such agreements, as well as putting the agreement in writing, obtaining their client's consent, and ensuring that the fee is reasonable.

Rule 1.5(e) specifically states that a fee division between lawyers who are not in the same firm may be made only if:

1. the division is in proportion to the services performed by each lawyer or each lawyer assumes joint responsibility for the representation;
2. the client agrees to the arrangement, including the share each lawyer will receive, and the agreement is confirmed in writing; and
3. the total fee must be reasonable.

Model Rules of Prof’l Conduct 1.5 (ABA 2018).

The good news is all states allow fee sharing in some capacity. Across the states, referral fee rules can be broken down into three categories: (1) pure referral fees, (2) joint responsibility referral fees, and (3) outliers. These three categories come with different conditions for fee sharing. All states can agree on one thing: referral fees are acceptable if joint responsibility is assumed.

Pure Referral Fee States

In a pure referral fee arrangement, lawyers may receive a referral fee even when they assume no responsibility and perform no work on the case. The general format for pure referral fee rules permit fee division if the client is informed in writing, does not object to the arrangement, and the fee is reasonable. Again, joint responsibility is not required under pure referral fee rules, unlike the ABA rule and many other states.

The pure referral fee states include California, Connecticut, Delaware, Kansas, Maine, Massachusetts, Michigan, Nevada, New Hampshire, Oregon, Pennsylvania, Virginia, and West Virginia. These states generally follow the same rule format (client informed in writing, client does not object to arrangement, and reasonable fee). There are several variations of the rule format, some of which you can see below.

California

Under California law, lawyers may be paid for referring a client to another lawyer without having to continue working on the case. The Court in Moran v. Harris explained the policy considerations for permitting such arrangements:

“If the ultimate goal is to assure the best possible representation for a client, a forwarding fee is an economic incentive to less capable lawyers to seek out experienced specialists to handle a case. Thus, with marketplace forces at work, the specialist develops a continuing source of business, the client is benefited and the conscientious, but less experienced lawyer is subsidized to competently handle the cases he retains and to assure his continued search for referral of complex cases to the best lawyers in particular fields.”

According to the California Rules of Professional Conduct, the following requirements must be met to have a valid and enforceable fee sharing agreement in California:

1. there is a written contract between the lawyers sharing the fee;
2. there is written disclosure to the client, including the fact that there will be a division of fees, the identity of the attorneys involved, and the terms of the fee split;
3. the client has consented in writing either at the time the lawyers enter into the agreement or soon thereafter;
4. the client’s signature on the agreement containing fee splitting disclosures; and
5. the total fees are not increased only because of the fee sharing agreement.

Michigan

Michigan applies an additional requirement to the general format listed above. If the fee division involves an out-of-state attorney, the referral fee must comply with both states' rules. Suppose a Michigan lawyer works with an out-of-state lawyer who resides in a state that requires joint responsibility for referral fees. In that case, the Michigan lawyer is also responsible for compliance with that law. See Michigan Rules of Professional Conduct Rule 1.5.

West Virginia

West Virginia's rule is the most relaxed approach of all the states. It allows fee division as long as the client agrees to the referral. See West Virginia Rules of Professional Conduct Rule 1.5.

Joint Responsibility Referral Fees States

Most states follow the joint responsibility rule. This rule mirrors the ABA model rule 1.5(e), which requires both attorneys to assume joint responsibility when referring a client for a fee. Joint responsibility includes both shared ethical and financial responsibility over the referred matter. Many ethical opinions have interpreted 'joint responsibility" as treating the referred client as a shared client of both the referring and referred lawyers or law firms. Remember that the joint responsibility rule has a few notable state variations.

Florida

In Florida, the referral fee paid to the referring attorney in a contingency matter is capped at 25%. The lawyer assuming primary responsibility may receive a minimum of 75% of the total fees. In contrast, flat rates and hourly matters do not have a cap. See Florida Rules of Professional Conduct Rule 4-1.5.

Alabama

In Alabama, cases billed hourly or flat fee may be referred if the referring attorney assumes joint responsibility for the representation. On the other hand, contingency fee matters may be referred without the referring attorney assuming joint responsibility. See Alabama Rules of Professional Conduct Rule 1.5.

Hawaii

In Hawaii, in addition to assuming joint responsibility, the referral fee must be proportional to the services the referring attorney performed. Currently, case law has not yet assessed whether a fee division qualifies as proportional to the services performed. See Rules of Professional Conduct Rule 1.5.

New Jersey

In New Jersey, joint responsibility is not required if the attorney receiving the referred matter is a "certified attorney." The New Jersey Supreme Court designates attorneys as "certified attorneys" if they demonstrate sufficient expertise and education, have passed an exam, and have been recognized by their peers as having enough skills in a specific area of law. See Jersey Rules of Professional Conduct Rule 1.5.

Wisconsin

In Wisconsin, rather than requiring joint responsibility, Wisconsin requires "ethical responsibility." The two terms are somewhat synonymous, but Wisconsin has more specific requirements. The referring attorney must verify the receiving lawyer's competence, obtain the client's informed consent to the referral and its terms, actively monitor the case, and take action to correct any ethical issues. See Wisconsin Rules of Professional Conduct Supreme Court Rule 20:1.5.

Outlier States

Louisisana

Louisiana is the only state that doesn't follow a pure referral fee or joint responsibility rule. Instead, it follows a unique standard, which permits referral fees so long as the referring attorney provides "meaningful legal services." The definition of "meaningful legal services" remains undefined by the court and legislation. See Louisiana Rules of Professional Conduct Rule 1.5.

Didn't see your state listed above? Click here to see a complete list of fee division rules by state.

Real World Examples of Fee Sharing

Fee sharing and attorney referrals are gray areas of law that create many misconceptions about how the process works. The best way to understand how fee sharing and attorney referrals work is by example. Let's look at some real-life cases dealing with the issues of fee sharing and attorney referrals.

The Importance of Fee Sharing Agreements

In 2002, a California Supreme Court case (Chambers, 56 P.3d at 645) involving fee sharing (not a referral fee), illustrated the dire need for fee sharing agreements. In the real-life case, Attorney Philip Kay requested that his colleague, attorney Arthur Chambers, co-counsel on a sexual harassment case. They sent the client a letter to set forth the fee splitting agreement between Chambers and Kay. The client did not sign nor verbally consent to the letter terms. After the case went to trial and won a significant monetary award, Chambers requested his share of the fee. Kay declined to pay this to him, and Chambers sued him. The California Court found that because the client never consented to the fee sharing arrangement in writing, Chambers was not entitled to any earnings from the award nor recovery for breach of the fee sharing agreement.

Moreover, the Court emphasized that the rules governing fee sharing agreements' are intended to “protect the public and promote the respect and confidence in the legal profession.” Id. at 647. Obtaining consent from the client before sharing fees strongly establishes that the client is aware of the fee splitting and has a meaningful opportunity to determine if they want to participate.

Moral of the story? Always put a fee-sharing agreement in writing, along with other pertinent information such as the identities of the attorneys involved and how fees will be split. Make sure the client signs it.

Joint Liability in Referral Agreements

The Court in Noris v. Silver, 701 So. 2d 1238 (Fla. Dist. Ct. App. 1997) discussed the vicarious liability that a referral agreement may cause in some states. Various states, like Florida, require joint legal responsibility when a fee splitting referral agreement is in place. In this Florida case, Attorney A referred a personal injury client to Attorney B. The client and Attorney B entered a contract that did not reference the division of attorney fees between Attorney A and B, as the Florida Rules of Professional Conduct require.

Attorney B then failed to file the case properly, and the client sued both Attorney A and B for legal malpractice. The court held that if there was an express or implied agreement between Attorney A and B to divide the fee, then both Attorneys are liable for malpractice.

The end result? Depending on the state's law, a referring attorney may become vicariously liable for the attorney who works on the case. Every attorney who wants to refer a client should take that decision seriously, as they may become liable for their actions.

Who We Are and How This Will Change the Industry

Fee sharing is a contentious subject, but it's one that many attorneys see a need for, so the practice continues. It can be a good thing for the client in many cases, and it's an important way for attorneys to get their name out and promote their services. That is why Overture set out to help attorneys navigate the fee-sharing space.

The Overture platform allows one attorney to find another excellent attorney to help them with their legal issues. Overture's goal is to be the co-counsel liaison between lawyers who want to refer cases to other attorneys in different states and legal specialties while complying with state ethics laws.