Inquiry:
A lawyer has a general practice. He has a number of estate planning clients who could benefit from financial planning advice. He is considering establishing a relationship with a financial planner who would pay him a referral fee for each client he refers. Can the lawyer do so?

Response:
Most opinions on this topic analyze this question under the terms of Rules 1.7(b) (Conflicts of interest: General Rule) and 1.8(a) (Business Transactions with Clients) and 5.4 (Professional Independence of a Lawyer). Joint Formal Opinion of the Philadelphia and Pennsylvania Bar Associations Opinion 2000-100 (2000) also found 1.8(f) (Accepting Compensation from one other than the client) to be applicable.

There have been several ABA ethics opinions issued on this topic. These include ABA Informal Opinion 1482 (1982), which briefly addressed inter alia the following question:

I. May a lawyer in the firm receive a commission from XYZ, Inc. (Where XYZ, Inc. is a client of the lawyer) in return for referring or recommending the services of XYZ, Inc. to an inventor client?

The Opinion stated:

One of the hallmarks of the legal profession is the obligation of a lawyer to exercise professional judgment solely on behalf of his client. The ability of a lawyer to obtain a commission from one client for referring another client to the first client could well work to impair the free judgment of the lawyer in deciding whether the services of the first client are needed by the second client.

However, a lawyer will not violate any Disciplinary Rule of the Model Code in recommending the services of one client to another client so long as the second client consents after the lawyer has made full disclosure of the financial relationship of the lawyer with the first client. DR 5-107(A)(2). See also ABA Formal Opinion 196 (1939), Formal Opinion 304 (1962) and Formal Opinion 331 (1972).

Formal Opinion 331 (1972), which discussed the topic of lawyer as agent for a title insurance company stated:

It is apparent that if the lawyer is financially interested in a title company which will supply title insurance to his client, he must obtain consent of his client after making full disclosure to the client of the circumstances....

The Committee therefore holds that it is not a violation of the Code of Professional Responsibility, per se, for an attorney to act as agent for a title company and to be compensated therefor if such conditions are met.

Other ABA opinions on this topic are summarized in ABA Informal Opinion 1020 (1968) as follows:

The Committee held in Formal Opinion 196 (1939):

It is improper for an attorney to retain one-fourth of the charge for an abstract examination and forward three-fourths of the charge to an abstract company which performs the abstract examination unless such an arrangement is with full knowledge and consent of the client.

Again, in Informal Opinion 526 (1962), the Committee held:

The acceptance by a lawyer of a fee of one-half of one percent of the client's money invested with or through a lay organization would be a commission, compensation or rebate within the meaning of Canon 38, ⁽¹⁾ and if it were received without the knowledge and consent of the client after a full disclosure it would be unethical.

Finally, in Informal Opinion 680 (1963) the Committee held that it would be a violation of Canon 38 for a lawyer to accept a referral fee for recommending the placement of his client's funds in a particular savings and loan association unless his client knows and approves of such arrangement.

The Committee said in the Opinion:

It would be a violation of this Canon for a lawyer to accept payment for recommending _____, Inc., unless his client knew and approved of such payment. Even in that event, the lawyer is serving two masters, a position he should seek to avoid.

...Pertinent in this connection also are two unpublished Informal Opinions-- 277 (1960) and 278 (1960). In 277 the Committee said:

A lawyer should not, even with the approval of his client, accept a commission from an insurance company which issued the policies for which the lawyer gave an advisory opinion.

And in Formal Opinion 278 (1948) the Committee said:

A lawyer may not accept a gratuity from anyone without his client's knowledge and consent, and if he does so the gratuity really belongs to the client, who, of course, may make the attorney's fee more generous by reason of it, but is not bound to do so.

State and local bar association ethics opinions are divided on this issue. ⁽²⁾See, e.g., Joint Formal Opinion of the Philadelphia and Pennsylvania Bar Associations Opinion 2000-100 (2000), which states:

The Rules permit a lawyer to accept a referral fee from a service provider, provided that the lawyer is scrupulous in determining under the particular circumstances that payment of the referral fee will not impact the lawyer-client relationship or the lawyer's exercise of independent professional judgment and the client consents after full disclosure and consultation. ⁽³⁾

While the opinion states that under certain circumstances such a practice is permissible, it also makes the following observation:

As a preliminary matter, frequently the preferred practice for a lawyer who is offered a referral fee will be for the lawyer, rather than accepting the referral fee, to negotiate a reduction in the fee that the client will pay the service provider. In other situations, such as if the service provider is willing to pay a referral fee but not to reduce the service provider's charge to the client, the preferred practice for a lawyer offered a referral fee may be for the lawyer to accept the referral fee and then to remit that fee to the client, either directly or as a credit against the lawyer's fee. In the latter case, the lawyer's bill should clearly show the lawyer's fee before the credit, the amount and source of the credit, and the lawyer's fee after the credit.⁽⁴⁾

Several state bar opinions have found that the acceptance of such referral fees is per se improper. See, e.g. Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio Opinion 2000-1 (2/11/00), which states:

In conclusion, this Board advises that it is ethically improper for a lawyer to accept a fee from a financial services group for referring clients in need of financial services. The referral fee agreement involves an improper business relationship with clients and non-lawyers under DR 3-103(A) and DR 5-104(A). The referral fee agreement creates a financial interest that will affect or reasonably may affect the professional judgment of a lawyer under DR 5- 101(A)(1) and DR 5-107(A)(1) and (2). Full disclosure and consent do not resolve the conflict. While DR 5-101(A)(1), DR 5-104(A), and DR 5-107(A)(1) and (2) provide a full disclosure and consent exception, DR 3-103(A) does not. Because of the joint application of these rules, the full disclosure and consent exception does not apply.

Maryland Opinion 00-34 addressed the question of whether a lawyer who also had an accounting practice could accept a referral fee from a stockbroker when the lawyer made the referral in his capacity as an accountant. The opinion stated that if the referral was made by the lawyer in his capacity as an accountant, the legal ethics rules would not apply, and the lawyer/accountant would be governed by the ethics rules that were in effect for accountants. However, if the referral was made in the lawyer/accountant's capacity as lawyer, acceptance of a referral fee would be improper:

The Committee concludes that the arrangement you propose...would violate Rule 5.4. Disclosure alone does not prevent this arrangement from violating Rule 1.7(b). Rule 1.7(b) provides that regardless of disclosure, the lawyer must reasonably believe that his representation of a client will not conflict with his own interests. Entering into the proposed arrangement would give an attorney a financial incentive to refer a client to the stockbroker regardless of the individual client's needs. Such an arrangement both compromises the attorney's independence and would materially limit an attorney's ability to represent his or her clients. The Comment to Rule 1.7 recognizes this when it states A lawyer may not allow related business interests to affect representation, for example, by referring clients to an enterprise in which the lawyer has an undisclosed interest.

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ENDNOTES

1. Canon 38, which was added to the 1908 ABA Canons of Professional Ethics in 1928, stated:

Compensation, Commissions and Rebates

A lawyer should accept no compensation, commission, rebates or other advantages from others without the knowledge and consent of his client after full disclosure.

2. For a summary of the state and local bar association ethics opinions on this topic, see Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio Opinion 2000-1 (2/11/00), which states:

One view is that disclosure and consent cure such conflict.

Connecticut Bar Ass'n, Informal Op. 97-16 (1997). An attorney may accept a referral fee from a network of associated investment advisor representatives if the referring attorneys abide by certain requirements including disclosure and consent.

Missouri Sup. Ct., Chief Disciplinary Counsel, Op. 960124 (undated). An attorney's participation in a program involving payment of an ongoing fee to an attorney by an investment advisor and securities broker-dealer for referring a client who opens an account will violate Rule 4-1.7(b), unless the attorney fully discloses the relationship and the potential for the attorney to receive a financial benefit as a result of the referral.

Rhode Island Sup. Ct., Ethics Advisory Panel, Op. 99-08 (1999). A lawyer may accept a referral fee from a business associate for referring a client in need of investment services, if permitted by the rules and law governing the other business, but pursuant to Rule 1.8(a) must disclose that fact to the client.

Another view is that disclosure and consent do not cure the conflict.

Kentucky Bar Ass'n, Op. E-390 (1996). A lawyer may not receive compensation structured as a percentage share of a recurring account management fee for the lawyer's referral of a client to an investment advisor, even after disclosure to and consent by the client.

Maryland State Bar Ass'n, Op. 96-17 (1995). A lawyer may not ethically participate in a proposed business arrangement with a financial planning organization pursuant to which the lawyer, following settlement, having previously entered the relationship with the organization, refers a client for financial planning services and receives a commission if the client purchases any financial service. The committee noted in footnote 2 of the opinion that "even with full disclosure to the client, this Committee most probably would not condone the marketing arrangement."

New York State Bar Ass'n, Op. 682 (1996). An attorney may not accept a referral fee from an investment advisor. Disclosure and consent would not cure the conflict.

Vermont Bar Ass'n Op. 98-8 (undated). A lawyer may not accept a referral fee from an investment advisory service even with prior disclosure and consent by the client.

3. The Opinion set forth the following guidelines for lawyers to consider when entering into such referral arrangements:

In evaluating whether the lawyer may reasonably conclude that the lawyer's acceptance of the referral fee would not impair the lawyer-client relationship or the lawyer's professional judgment, and whether or not the lawyer made full disclosure and obtained the client's informed consent, the Committees suggest that the following factors be considered:

. The fullness of the disclosure, and whether the disclosure and the client's consent were in writing. The lawyer must disclose fully to the client the source and amount of the referral fee, as well as whether it will be paid once or on a periodic basis. This disclosure should be in writing as part of the client's consent to the lawyer's acceptance of the fee. As part of the disclosure, the lawyer should also advise the client that the client may obtain the desired service from other qualified providers, not just the one recommended by the lawyer, and that others would provide a similar service but not pay a referral fee. [FN1]

. The client's level of sophistication, experience, and judgment. If the client's level of sophistication, experience, or judgment is limited, securing the requisite informed consent may be more difficult or not possible. Note that Rule 1.14 [Client under a disability] may impose other obligations on a lawyer who represents a client under a disability.

. Whether the client sought independent advice, or was advised by the lawyer to seek independent advice, with regard to the lawyer's acceptance of the referral fee.

. The reasonableness of the referral fee, both absolutely and in relation to the time and labor spent by the lawyer in representing the client, and the duration over which the referral fee will be paid, and the scope and extent of the engagement.

If the service provider is also a client or former client, the lawyer must consider the lawyer's responsibilities to the service provider under the Rules and the possible conflict of interest under Rules 1.7, 1.8 and 1.9 between the lawyer's representation of the provider and the lawyer's representation of the client. When recommending to a client a service provider who is also a client, the lawyer should disclose to the client that the service provider is also a client.

A referral fee paid by a service provider to a lawyer involved in a complex representation of a client, in which the lawyer's fees are many times the size of the referral fee, might be reasonable, whereas the same fee, paid to a lawyer who handled a simple transaction for the client, may not be acceptable.

4. ABA, State and local bar opinions have also concluded that clients should be the beneficiaries of rebates, discounts or gifts given to lawyers in exchange for engaging the services of a third party on the client's behalf unless the client consents after disclosure. See, ABA Formal Opinion 93-379 (1993):

…In the absence of disclosure to the contrary. . . if a lawyer receives a discounted rate from a third party provider, it would be improper if she did not pass along the benefit of the discount to her client rather than charge the client the full rate and reserve the profit to herself. Clients quite properly could view these practices as an attempt to create additional undisclosed profit centers when the client had been told he would be billed for disbursements.

See also Alabama Opinion 89-83 (1989) and Iowa Opinion 00-2 (2000) a digest of which states:

A lawyer may sell "probate and other similar bonds" to clients, but the commissions, rebates, discounts, etc., belong to the client and must be disclosed and credited to the client unless the client consents to their distribution to the lawyer. The lawyer must fully disclose to the client any obligations required by the bonding company. 1101 Law. Man. Prof. Conduct 3601

Compare Alaska Bar Opinion 95-4 (1995):

A lawyer who obtains a discounted airline ticket or hotel room should not charge the client the cost for the undiscounted fare or room. The benefits of any discount must be passed on to the client. [FN2]

FN2. ABA Formal Opinion 93-379 seems to imply that surcharges can be added on to discounted third party services so long as they are disclosed. Opinion 93-379 at 9. The Committee declines to adopt such a standard for Alaska. Given the lawyer's overriding obligation to treat clients fairly and reasonably, we can see no justification for not passing the benefits of discounts on to clients.

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Copyright 1995 by the American Bar Association; Peter H. Geraghty

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