Lawyers Battle Over $11 Million Referral Fee

Here's a cautionary tale on splitting fees.

Whether you’re on the sending or receiving end of a case referral with another lawyer, make sure your fee division complies with the ethics rules – and that you put the terms of your arrangement in writing.

Otherwise, you might find entangled in bitter litigation.

It’s happening in Pennsylvania, where a law firm is battling one of its former partners over an $11 million referral fee. At issue is a case involving a client who was badly burned in a gas explosion. The firm referred the case to another firm, which obtained a reported $70 million recovery for the client.

“The agreement called for referral counsel to charge a 40 percent contingency fee and to pay 40 percent of its fee as a referral fee,” according to the ABA Journal.

The partner says he signed the client in 2014, when he was of counsel with his former firm. He was promoted to partner the next year and left to join another law firm in 2016. He said he and his former firm agreed that he could take the case and referral fee – which would amount to approximately $11 million – with him.

The firm says there was no such agreement, according to the ABA Journal, and that the lawyer “secretly solicited and procured” a letter from the client giving him and his new firm the right to all fees.

Read news accounts of the case here, here and here.

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ABA Model Rule of Professional Conduct 1.5: Fees
(a) A lawyer shall not make an agreement for, charge, or collect an unreasonable fee or an unreasonable amount for expenses. The factors to be considered in determining the reasonableness of a fee include the following:

(1) the time and labor required, the novelty and difficulty of the questions involved, and the skill requisite to perform the legal service properly; (2) the likelihood, if apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; (3) the fee customarily charged in the locality for similar legal services; (4) the amount involved and the results obtained; (5) the time limitations imposed by the client or by the circumstances; (6) the nature and length of the professional relationship with the client; (7) the experience, reputation, and ability of the lawyer or lawyers performing the services; and (8) whether the fee is fixed or contingent.

(b) The scope of the representation and the basis or rate of the fee and expenses for which the client will be responsible shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation, except when the lawyer will charge a regularly represented client on the same basis or rate. Any changes in the basis or rate of the fee or expenses shall also be communicated to the client.

(c) A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party. Upon conclusion of a contingent fee matter, the lawyer shall provide the client with a written statement stating the outcome of the matter and, if there is a recovery, showing the remittance to the client and the method of its determination.

(d) A lawyer shall not enter into an arrangement for, charge, or collect: (1) any fee in a domestic relations matter, the payment or amount of which is contingent upon the securing of a divorce or upon the amount of alimony or support, or property settlement in lieu thereof; or (2) a contingent fee for representing a defendant in a criminal case.

(e) A division of a fee 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 is reasonable.

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