State Bar Ethics Opinions cite the applicable California Rules of Professional Conduct in effect at the time of the writing of the opinion. Please refer to the California Rules of Professional Conduct Cross Reference Chart for a table indicating the corresponding current operative rule. There, you can also link to the text of the current rule.
Where an attorney has agreed to participate in a lawyer referral service under a written contract which obligates the attorney to return to the service ten percent of all fees collected over a $300 minimum, may the attorney ethically raise fees to "cover" the percentage paid to the service?
An attorney may not ethically increase fees to cover an amount paid to a lawyer referral service.
Rules 2-102(B); 2-108(A), 2-107; 3-102(15) of the Rules of Professional Conduct of the State Bar of California. Disciplinary Rules 2-103(C)(1) and 2-106, American Bar Association Code of Professional Responsibility. Rule 8.l(a), Minimum Standards for a Lawyer Referral Service in California. Civil Code section 43.95. Alpers v. Hunt (1890) 86 Cal. 78 [24 P. 846]; Emmons, etc. v. State Bar (1970) 6 Cal. App.3d 572, 573-74 [86 Cal. Rptr. 376, 372];, Altschul v. Sayble (1978) 83 Cal.App.3d 133 [147 Cal. Rptr. 716].
The Committee has been asked whether an attorney who participates in a lawyer referral service under a written contract which obliges the attorney to return 10 percent of all fees collected over a $300 minimum may ethically raise fees to recover the referral fee paid to the lawyer referral service. We assume in responding to this request that the lawyer referral service is qualified as such under the Minimum Standards for a Lawyer Referral Service in California. For the reasons hereinafter stated, we are of the opinion that the attorney may not ethically do so.
The participation of a member of the State Bar in a qualified Lawyer Referral Service is permissible (See Rule 2-102(B), Rules of Professional Conduct.)
Regardless of the traditional rule limiting payment of referral fees between attorneys, fee-splitting arrangements between attorneys and qualified lawyer referral services are both legal and ethical. For example, the American Bar Association Committee on Professional Ethics has opined that a bar association may require members of a lawyer referral panel to help finance the referral service by charging either a flat rate or a reasonable percentage of the fees collected. (See A.B.A. Committee on Prof. Ethics Formal Opinion No. 291 (August 1, 1936).) The Los Angeles County Bar Association Legal Ethics Committee has opined that it is not an improper division of fees for an attorney to remit to a bar association a percentage of his fee received in a matter referred to him by the association reference service. (See L.A. Co. Bar Assn. Legal Ethics Comm. Inf. Op. 1965-7.) Indeed, Disciplinary Rule 2-103(C)(1) of the American Bar Association Code of Professional Responsibility expressly provides that an attorney "may request referrals from a lawyer referral service operated, sponsored, or approved by a bar association and may pay its fees incident thereto."
In Emmons v. Williams, Mires & Leech v. State Bar of California (1970) 6 Gal. App.3d 565 [86 Cal. Rptr. 367] the Court considered the potential applicability of the predecessor of rule 3-102(B), Rules of Professional Conduct to the division of fees with a lawyer referral service. There, the referral fee was to be paid to the local Legal Aid Society not to the referral service itself, and the prescribed referral fee (one-third of the recovery) was the highest in the country. The plaintiff brought an action for declaratory relief, asserting that the referral fee he was obliged to pay under the agreement with the San Joaquin Bar Association was illegal under the Rules of Professional Conduct as a proscribed fee-splitting with an unlicensed person. Summary judgment for the defendants was affirmed on appeal. Since the county bar association did not seek individual profit, but sought the fulfillment of public and professional objectives and had a legitimate, non-profit interest in making legal services more readily available to the public, the court of appeal held that none of the public policy objectives of the prohibition against fee-splitting with a lay intermediary would be furthered by prohibiting the collection of the referral fee in question there.
Requiring the attorney here to return to the lawyer referral service ten percent of fees collected in excess of $300 would not necessarily be proscribed. Rule 8.1 of the Minimum Standards for a Lawyer Referral Service in California also would support this practice.
However, the principles enunciated in Emmons, supra, would prohibit the proposed increase of the attorney's fees charged to the client here. In Emmons, the court expressly pointed out one of the policies behind the traditional rule proscribing fee-splitting arrangements between attorneys and non-attorneys. "One objective of fee-splitting inhibitions is avoidance of arrangements which unnecessarily inflate the client's cost." (Emmons, etc. v. State Bar, supra, 6 Cal.App.3d at 574 [86 Cal. Rptr. at 373].)
In Alpers v. Hunt (1890) 86 Cal. 78 [24 Pac. 846], the Court held invalid a contract between a lay person and an attorney whereby the former was to secure the latter's employment by a third person in return for one-third of the fees recovered. The contract was held invalid because it would tend to increase the cost of delivery of legal services.
"Such a practice would tend to increase the amounts demanded for professional services. In such a case an attorney would be induced to demand a larger sum for his services, as he would have to divide such sum with a third person."
(Alpers v. Hunt, supra, 86 Cal. at 88.) Emmons, etc. v. State Bar, supra, cited Alpers as authority for avoiding the inflationary effects of fee-splitting. Since fee-splitting arrangements tend to increase the costs of delivery of the legal services to the clients, they are contrary to public policy and, as in Alpers, have been uniformly held invalid.
Consequently, although fee-splitting arrangements between attorneys and legal referral services may be permissible, such arrangements should be structured in order to avoid the risk of increased costs to the clients. Indeed, Rule 8.1 of the Minimum Standards for Lawyer Referral Service in California provides, in part, that in determining what referral fees paid by member attorneys or fees required by clients, the "primary criteria... shall be whether the fee or combination of fees in question increases an applicant's costs for legal services beyond that which he or she would normally pay . . . :' For the attorney here to recover the amount of the referral fee from the client by increasing fees over what the client would normally pay would not only be inconsistent with "primary criteria" of Rule 8.1 but also inconsistent with the public policy considerations expressed in the foregoing cases.
Furthermore, if the lawyer adds to the fees as contemplated, it may expose the local bar association to liability. (See Civ. Code, 43.95.)
Also analogous is the philosophy of the limitations on permissible divisions fees among attorneys. Rule 2-108(A) off the Rules of Professional Conduct prohibits a division of fees among attorneys unless two prerequisites are satisfied. First, the client must consent in writing alter full disclosure in writing that there will be a division and the terms of the division of the tees. Second, the total fee charged must not be increased and must not exceed reasonable compensation for all services rendered to the client. If permissible fee-splitting between attorneys may not increase the total fees charged to a client, legitimate lee-splitting between attorneys and legal referral services ought not to do so either.
This opinion is issued by the Standing Committee on Professional Responsibility and Conduct of The State Bar of California. It is advisory only. It is not binding upon the courts, The State Bar of California, its Board of Governors, any persons or tribunals charged with regulatory responsibilities, or any member of the State Bar.