Can a Lawyer Accept Referral Fees or Commissions from Non-Lawyers?

A lawyer 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 to him. Can the lawyer accept the referral fee?

Most opinions on this topic analyze this question under the terms of Rules 1.7 Conflicts of Interest: Current Clients, 1.8 Conflict of Interest: Current Clients: Specific Rules and 5.4   Professional Independence of a Lawyer. Subpart (a) of Rule 1.8 Conflict of Interest: Current Clients: Specific Rules states:

(1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client;

(2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and

(3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.

A corresponding Comment to subpart (a) states:

[3] The risk to a client is greatest when the client expects the lawyer to represent the client in the transaction itself or when the lawyer's financial interest otherwise poses a significant risk that the lawyer's representation of the client will be materially limited by the lawyer's financial interest in the transaction. Here the lawyer's role requires that the lawyer must comply, not only with the requirements of paragraph (a), but also with the requirements of Rule 1.7. Under that Rule, the lawyer must disclose the risks associated with the lawyer's dual role as both legal adviser and participant in the transaction, such as the risk that the lawyer will structure the transaction or give legal advice in a way that favors the lawyer's interests at the expense of the client. Moreover, the lawyer must obtain the client's informed consent. In some cases, the lawyer's interest may be such that Rule 1.7 will preclude the lawyer from seeking the client's consent to the transaction.

See Also the 2002 amendment to Rule 7.2 Advertising of the ABA Model Rules.  This amendment focused on referral agreements between lawyers or other nonlawyer professionals.  The ABA Standing Committee’s Report and Recommendation the ABA House of Delegates regarding this amendment is available here.

There have been several older ABA ethics opinions issued on this topic. These include ABA Informal Opinion 1482 (1982) (Insert link), 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).

A brief history of ABA opinions on this topic is available on the additional resources page which is available here.

State Bar Opinions

State and local bar association ethics opinions are divided on this issue. This division of opinion has caused at least one state bar ethics committee to be unable to reach a consensus on the issue. See, New Hampshire Bar Ethics Committee Opinions 1998-99/10 and 1994-95/2.

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. [FN3]

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. [FN4]

See Also Michigan State Bar Comm. On Professional and Judicial Ethics Informal Opinion RI-317 (2000), Florida Bar Opinion 02-08 (2004), Arizona Opinion 05-01 (2005).

Other opinions also state that referral fees from non lawyers can be appropriate, although their endorsement of the practice is sometimes less than enthusiastic.  See, e.g. Georgia Opinion 03-3, (2004) (While it may be possible to structure a solicitation agreement to comply with ethical requirements, it would be both ethically and legally perilous to attempt to do so.) See Also Utah Bar Association 99-07 (1999):

…the Committee believes it will be very difficult for a lawyer to maintain independence while taking a percentage of an investment broker's services due to a client referral. Nevertheless, the Committee concludes the spirit and specific language of Rules 1.7 and 1.8 require that individual lawyers involved in this type of situation be permitted to consider all of the facts and reach a determination whether a conflict of interest exists. As long as such a determination meets the specific requirements of Rules 1.7 and 1.8 and is objectively reasonable in view of concerns expressed in this Opinion, there will be no ethical violation.

See Also Wisconsin Opinion E-00-04 (2001).

Several state bar opinions have found that the acceptance of such referral fees is per se improper. See, e.g. Maine Board of Board of Overseers of the Bar Opinion 184 (2004) in which the Maine Professional Ethics Commission found that an arrangement between a lawyer and an investment advisory firm whereby the lawyer would act as an agent of the firm and would receive a portion of their investment management fees for so long as the client kept its assets with the firm to be both an unreasonable fee and a violation of the Maine version of ABA Model Rule 1.8:

Not Fair or Reasonable to the Client

Of most direct bearing on this question is Maine Bar Rule 3.4(f)(2)(i), which provides, in pertinent part, as follows:

A lawyer shall not knowingly acquire a property or pecuniary interest adverse to the client …, unless:

(A)    The transaction and terms in which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed to the client in manner and terms which should have reasonably been understood by the client.

The Commission finds that the referral fee at issue here is inherently unfair and unreasonable to the client.[1] The singular purpose and design of this arrangement is to influence the lawyer to make recommendations to the lawyer’s client for the benefit of an investment advisor who is paying the lawyer to do so, in stark contrast to the lawyer’s being motivated by the best interests of the client. This arrangement is so adverse to the fiduciary relationship that is the foundation of the lawyer’s responsibility to the client, that the Commission finds it to be fundamentally and objectively unfair and unreasonable to the client, and therefore in violation of the Bar Rule.[2]

Excessive fee
Maine Bar Rule 3.3(a) provides that a lawyer shall not enter into an agreement for, charge or collect an illegal or excessive fee. The Rule defines a fee as excessive “when, after a review of the facts, a lawyer of ordinary prudence would be left with the definite and firm conviction that the fee is in excess of a reasonable fee.” Factors to be considered as guides in determining the reasonableness of a fee include, among others, the time and labor involved, the skill requisite to perform the service, the fee customarily charged in the locality for similar services, and the responsibility assumed by the attorney.

Note: Footnote 4 of the Maine Bar Opinion gives a detailed summary of several state bar opinions that have been issued on this topic.  See Also the analysis of state bar opinions on this topic that appears in the Utah State Bar Opinion 99-07 (1999), and at page 51:409 of the ABA/BNA Lawyers’ Manual on Professional Conduct.

See Also Maryland Opinion 2004-11 (2004), New York County Bar Opinion 733 (2004), Texas Opinion 536 (2001) West Virginia Opinion 2006-1 (2006), See Also 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.

See Also Board of Commissioners on Grievances and Discipline of the Supreme Court of Ohio Opinion 2003-1 (2003)

Maryland Opinion 00-34 (2000) 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.

In view of the disparity of opinions on this topic, lawyers should carefully check their local rules of professional conduct and ethics opinions before agreeing to accept a referral fee or a commission from a non-lawyer.

For further resources on legal ethics issues as they relate to a lawyer’s acceptance of referral fees, See the state bar ethics opinions and related materials that are listed on the additional resources page and on the following pages: ABA Informal Op. 1482, ABA opinions on referral fees from nonlawyers, and state bar opinions on referral fees/commissions from non-lawyers

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