Opinion 2005-16

(February 2006)

The inquirer has favorably settled a contingent fee case for his plaintiff client and seeks guidance on the permissibility of paying a referral fee to the attorney who referred the case to him.

The time line of representations of the parties is as follows:

The complaint was filed in February 1999 by Attorney 1 at Law Firm A.

In March 1999 Attorney 2 from Law Firm B entered her appearance for the defendant.
In August 1999 Attorney 1 withdrew her appearance on behalf of the plaintiff and attorney 3, also from Law Firm A, entered her appearance for the plaintiff.

In January 2001, Attorney 3 moved to withdraw from representing the plaintiff, and Attorney 4 of Law Firm C, who is the Inquirer, entered his appearance for the plaintiff.

In November 2001 Attorney 2 withdrew her appearance for the defendant and Attorney 5, also from Law Firm B, entered her appearance for the defendant.

In December 2002 Attorney 5 withdrew her appearance for the defendant and Attorney 6, also from Law Firm B, entered her appearance for the defendant.

In March 2003 Attorney 1 joined Law Firm D in its Philadelphia office.

In May 2003 Attorney 6 withdrew her appearance for the defendant and Attorney 7, of a New Jersey office of Law Firm D, entered his appearance for the defendant. Attorney 1 was not aware of her firm’s entry of appearance in the case, as she was not monitoring its progress.

In October 2005 Attorney 4, who is the Inquirer, favorably settled the case for the plaintiff. Attorney 1 is now seeking a referral fee from the Inquirer, Attorney 4. The Inquirer seeks guidance on whether it is permissible to pay a referral fee to Attorney 1 for referring the plaintiff, when Attorney 1 now works at the firm that represented the defendant in the same litigation.

Pennsylvania Rule of Professional Conduct (the “Rules”) 1.5(e) provides that:

  • A lawyer shall not divide a fee for legal services with another lawyer who is not in the same firm unless:

    (1) the client is advised of and does not object to the participation of all the lawyers involved, and
    (2) the total fee of the lawyers is not illegal or clearly excessive for all legal services they rendered the client.
    Comment [4] to Rule 1.5 provides that

    A division of fee is a single billing to a client covering the fee of two or more lawyers who are not in the same firm. A division of fee facilitates association of more than one lawyer in a matter in which neither alone could serve the client as well, and most often is used when the fee is contingent and the division is between a referring lawyer and a trial specialist. Paragraph (e) permits the lawyers to divide a fee if the total fee is not illegal or excessive and the client is advised and does not object. It does not require disclosure to the client of the share that each lawyer is to receive.

    Rule 1.10 IMPUTATION OF CONFLICTS OF INTEREST, GENERAL RULE provides that:

    (a)  While lawyers are associated in a firm, none of them shall knowingly represent a client when any one of them practicing alone would be prohibited from doing so by Rules 1.7, or 1.9, unless the prohibition is based on a personal interest of the prohibited lawyer and does not present a significant risk of materially limiting the representation of the client by the remaining lawyers in the firm, or unless permitted by Rules 1.10(b) or (c).

     (b)  When a lawyer becomes associated with a firm, the firm may not knowingly represent a person in the same or a substantially related matter in which that lawyer, or a firm with which the lawyer was associated, had previously represented a client whose interests are materially adverse to that person and about whom the lawyer had acquired information protected by Rules 1.6 and 1.9(c) that is material to the matter unless:

       (1)  the disqualified lawyer is screened from any participation in the matter and is apportioned no part of the fee therefrom; and

       (2)  written notice is promptly given to the appropriate client to enable it to ascertain compliance with the provisions of this rule.

As regards Rule 1.5e, the plaintiff in this matter would have to have been advised of and not object to the payment of the referral fee before any such payment could be made. Assuming this were to be done, the requirements of Rule 1.10b1&2 would also have to be met. Specifically, all of the following conditions would have to be met in order for there to have been compliance with those Rules:

in May 2003, when Attorney 7 of Law Firm D undertook the representation of the defendant, the plaintiff would had to have received written notice of the fact that Attorney 1 was at the time working at the defendant’s law firm;

Attorney 1 would had to have been screened from the case from the time Attorney 7 of Law Firm D first entered his appearance for the defendant;

the plaintiff would had to have been advised of the screen at that time;

Attorney 1 would not have been and will not be apportioned any of the fee earned by Law Firm D in representing the defendant;

and finally, by analogy, Attorney 1 apportions no part of the referral fee to anyone at Law Firm D, (since Attorney 1 is in essence maintaining her former duty of loyalty with plaintiff’s position in taking the referral fee).

However, the inquiry implies that the discovery was made only very recently that Attorney 1 has been working for the last two and a half years at the firm that represented the defendant. If that is the case, and neither the type of screening and/or notice delineated above was implemented at the time, then the payment of the referral fee is not permissible.

Assuming, arguendo, that the conditions of both Rules 1.5e and 1.10b1&2 have been met, the Committee believes that the inquirer would then have an ethical obligation to determine whether there are outstanding claims by Attorney 1’s original law firm for services rendered to the client by Attorney 1 while at that firm, and if so, alert the client to that issue as required by Rule 1.4 (Communication). In addition, while it is normally beyond the scope of the Committee’s charge to comment on substantive areas of the law, under the circumstances presented the Committee cautions that substantive fiduciary law could very well require that the inquirer actually resolve such issues to protect the client prior to making any referral fee payment to Attorney 1.

CAVEAT: The foregoing opinion is advisory only and is based upon the facts set forth above. The opinion is not binding upon the Disciplinary Board of the Supreme Court of Pennsylvania or any court. It carries only such weight as an appropriate reviewing authority may choose to give it.

What constitutes an effective screen has recently been the subject of litigation. The landmark case of Dworkin v. Gen. Motors Corp., 906 F. Supp. 273, 277 (E.D. Pa. 1995). has recently been augmented by Norfolk Southern Railway Co. v. Reading Blue Mountain & Northern Railroad Co., M.D. Pa., No. 3:03cv736, 10/25/05. The inquirer is urged to review both cases in application to the facts of this inquiry.