D.C. Ethics Committee Approves Proposed Referral Fee Arrangement

A new opinion from the Legal Ethics Committee of the District of Columbia Bar

A lawyer may remit a percentage of fees earned on a matter referred to her by the inquiring “lawyer referral service” only if such fees (1) are derived from litigation matters, as set out in Rule 5.4(a)(5) of the D.C. Rules of Professional Conduct, or (2) are “usual fees” of such a service within the meaning of comment [6] to Rule 7.1.

The inquirer

The committee has been asked whether the D.C. Rules of Professional Conduct (“D.C. Rules” or “Rules”) permit certain payments to a lawyer referral service (“Service”). The Service would direct prospective low-income clients to a network of lawyers willing to work for such clients at modest rates. For each client referred to a network lawyer by the Service, the lawyer would remit to the Service a flat “referral” payment (“Flat Payment”) of approximately $200. Should the representation proceed beyond the initial consultation, the network lawyer would further remit to the Service fifteen percent of any fees earned through the representation (“Percentage Payment”). The arrangement would apply to all types of legal representation and would not be limited to litigation matters. The Service is or will be qualified as exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code.

The opinion noted that a number of revisions over the years impacted its analysis

The question, then, is whether the adoption of Rule 5.4(a)(5) was intended to repeal, sub silentio, the exception for the “usual fees” of a “lawyer referral service” that are recognized by comment [6] of Rule 7.1 and by Opinions 201, 286, and 307. We think not.

There was no provision like subparagraph (a)(5) in the D.C. Rules before 2007 and no counterpart in the D.C. Code of Professional Responsibility, which was in force prior to January 1, 1991.  Importantly, the discussions in the Wortham Report of proposed subparagraph (a)(5) and of Rule 7.1 do not suggest that adoption of the former would repeal or even narrow the latter’s existing approval of the payment of “usual fees” to lawyer referral programs. See Wortham Report at 174-77, 190-95.

Although Rule 5.4(a)(5) is narrower than comment [6] to Rule 7.1 in the sense that it is limited to fees derived from litigation matters, it is broader in that it applies not only to lawyer referral programs but to any non-profit organization. Moreover, Rule 5.4(a)(5) covers not only payments to the referring organization from outside lawyers but also from lawyers who are employed or retained directly by the organization. By contrast, comment [6] to Rule 7.1 contemplates only payments by lawyers to whom matters are referred by a lawyer referral service, and then only the “usual fees” of such a service…

We conclude that the Service will constitute a “lawyer referral service” within the meaning of comment [6] to D.C. Rule 7.1 if the Service—

• is generally open to D.C. Bar members who agree to its reduced-fee prerequisite, see ABA Model Rule 7.2, cmt. [6];
• takes reasonable steps to ensure that lawyers to whom matters are referred are competent to handle such matters, see D.C. Rule 1.1;
• does not interfere with the lawyers’ professional independence of judgment;
• requires only reasonable referral fees (a criterion that is met by its current fifteen percent requirement), see D.C. Rule 1.5(a);
• requires that all lawyers in its network have reasonably adequate malpractice insurance see ABA Model Rule 7.2, cmt. [6];
• has a neutral dispute resolution mechanism, see id.
• does not refer matters to lawyers who own, operate, manage, or are employed by the Service, see id.

The committee finds that the charges are a “usual fee” for the service. (Mike Frisch)