| |
Introduction and Scope
As a general rule, a lawyer in Colorado may not pay or accept a referral fee. However, lawyers may pay the "usual charges" of a not-for-profit lawyer referral service or legal service organization. Lawyers and law firms also may engage in cooperative marketing with other firms and may refer clients to each other informally. Law firms may represent clients jointly and share the fees under appropriate circumstances. This opinion is designed to help the lawyer determine the permitted scope of participation in referral services, legal service organizations, and cooperative marketing arrangements with lawyers outside the lawyer’s firm. This opinion does not address cooperative marketing arrangements between lawyers and non-lawyers outside of the referral service context.
Syllabus
Rule 1.5(e) of the Colorado Rules of Professional Conduct ("Rules" or "Colorado Rules") prohibits referral fees. This means that a Colorado lawyer may neither pay nor accept a referral fee. A lawyer may not give anything of value to a person for recommending the lawyer’s services in most circumstances, although certain exceptions exist. Rule 7.2(c)(2) sets forth the long-standing exception permitting a lawyer to pay the usual charges of a not-for-profit lawyer referral service or legal service organization. The Colorado Supreme Court has not clearly defined a "not-for-profit lawyer referral service." Therefore, the lawyer must determine whether a referral service in fact is a legitimate not-for-profit referral organization. A "legal service organization" generally is considered to be a legal aid society or prepaid legal service plan.
The lawyer must evaluate a referral service or legal service organization to assure that the lawyer competently can represent referred clients and may decline representation if necessary. The lawyer also must ensure that the lawyer’s professional judgment remains independent, that confidentiality requirements are not compromised, and that conflicts of interest are avoided. Furthermore, the lawyer’s payment of fees to a referral service must not result in unreasonable fee payments by clients or improper division of fees, either between lawyers or between lawyers and non-lawyers. The lawyer also must make certain that companies purporting to provide advertising of the lawyer’s services are not in fact improper referral agencies and that any advertising of the lawyer’s services complies with the Rules.
Discussion
A lawyer in Colorado may neither pay nor accept a referral fee. Rule 1.5(e) explicitly prohibits referral fees. This Committee has opined informally that an attorney licensed to practice law in Colorado may not accept a referral fee from an attorney in another state where such fees are permitted. "CBA Ethics Comm. Abstract, Second Inquiry," 24 The Colorado Lawyer 755 (April 1995). Nor may a lawyer accept a referral fee from a non-lawyer such as a bank which offers to pay "a percentage of commissions generated" when a client’s funds are invested with the bank on the lawyer’s recommendation.
Furthermore, a lawyer may not pay a referral fee. Rule 7.2(c) provides that "A lawyer shall not give anything of value to a person for recommending the lawyer’s services, except that a lawyer may:
(1) pay the reasonable cost of advertisements [permitted] by this Rule;
(2) pay the usual charges of a not-for-profit lawyer referral service or legal service organization; and
(3) pay for a law practice in accordance with Rule 1.17."
The comment to Rule 7.2(c) explains only that " . . . a lawyer is not permitted to pay another person for channeling professional work. This restriction does not prevent an organization or person other than the lawyer from advertising or recommending the lawyer’s services. Thus, a legal aid agency or prepaid legal services plan may pay to advertise legal services provided under its auspices. Likewise, a lawyer may participate in not-for-profit lawyer referral programs and pay the usual fees charged by such programs." Rule 7.2. (cmt.) The lawyer is given little guidance in evaluating the myriad referral services and legal service organizations that now abound.
What is a "Lawyer Referral Service"?
Although not defined in the Colorado Rules, a "lawyer referral service" has been described in other states as an individual or entity which operates for the direct or indirect purpose of referring potential clients to lawyers regardless of whether the term "referral service" is used. See California Minimum Standards for a Lawyer Referral Service in California, Cal. Code, Bus. and Prof. § 6155 (Supp. 1999); Tex.Rev.Civ.Stat. Art. 320d (Supp. 1999).
An advertising arrangement may be, in fact, a referral service. For instance, if an advertising company offers to provide a lawyer with all personal injury referrals within a particular geographic area in return for a monthly fee, the fee well may be an impermissible referral fee rather than a permissible publication cost. The lawyer must examine such arrangements carefully and assure himself or herself that they are not referral services, or, if they are, that the lawyer may participate without violating any ethical rules.
This Committee informally concluded that a marketing service which published periodic newsletters in which participating lawyers could publish articles, arranged meetings attended by members of business groups to whom participating lawyers could speak, placed ads for participating lawyers in business-related publications, and referred calls to participating lawyers was a for-profit referral agency. Therefore, a lawyer’s payment of an annual membership fee actually was a prohibited payment to a for-profit legal referral service in violation of Rule 7.2(c) and Rule 1.5. CBA Ethics Comm. Abstract, Second Inquiry, 26 The Colorado Lawyer 69 (July 1997).
For-Profit Lawyer Referral Service
Rule 7.2(c)(2) prohibits a lawyer from giving anything of value to a for-profit organization for recommending the lawyer’s services. See People v. Zimmermann, 938 P.2d 131 (Colo. 1997) [lawyer admitted making payments for referrals to unapproved for-profit referral service in violation of Rule 7.2(c)]; People v. Carpenter, 893 P.2d 777 (Colo. 1995) [lawyer who charged other lawyers $50-$75 per month for referrals admitted he operated an unapproved for-profit lawyer referral service, in violation of then-applicable DR 2-103(D)]. However, ABA Comm. on Ethics and Prof. Responsibility ("ABA") Informal Opinion 85-1510 (March 26, 1985) concluded that a lawyer’s participation in a for-profit lawyer referral service without payment of a fee to the referral service did not violate Model Rule 7.2(c), inasmuch as the lawyer did not give anything of value for the referral, even though the referral organization itself was a for-profit business funded by the recipients of its services.
ABA Informal Opinion 85-1510 notes that the Model Rules contain no criteria for lawyer referral services that involve no payment by the lawyer. Likewise, the Colorado Rules contain no such criteria, and it is the opinion of this Committee that a lawyer may participate in a for-profit lawyer referral service that does not require any payment from the lawyer, so long as the lawyer’s participation in the for-profit referral service does not otherwise violate any of the Colorado Rules.
Not-For-Profit Lawyer Referral Service
Historically, state and local bar associations have operated not-for-profit lawyer referral services, and such services long were considered both ethical and admirable, even before lawyers were permitted to advertise. See ABA Comm. on Prof. Ethics and Grievances, Formal Opinion 291 (August 1, 1956). Colorado’s predecessor to Rule 7.2(c), DR 2-103 of the Colorado Code of Professional Responsibility, while prohibiting referral fees generally, permitted a lawyer to pay the usual and reasonable fees or dues charged by certain listed organizations, including "a lawyer referral service operated, sponsored or approved by a bar association." In Colorado, the Metropolitan Lawyer Referral Service, a non-profit referral organization operated by the Denver Bar Association, implicitly was held to be a proper source of referrals in People v. Taylor, 799 P.2d 930 (Colo. 1990).
The requirement that the lawyer referral service be operated, sponsored, or approved by a bar association was deleted in Rule 7.2(c), leaving unclear exactly what constitutes a "not-for-profit lawyer referral service."
"Not-for-profit" is not defined in the Colorado Rules, although the phrase implies to many that the purpose of the organization is eleemosynary. In fact, Colorado non-profit corporations may engage in "any lawful business or activity." CRS § 7-123-101. Thus, a non-profit corporation need not be a charitable, educational, or other organization exempt from taxation under the Internal Revenue Code (26 U.S.C. § 501). Rule 7.2(c) includes no requirement that a non-profit lawyer referral service be a tax-exempt organization or be operated for a charitable purpose. So long as the referral service is organized as a not-for-profit entity, it would appear to comply with the requirements of Rule 7.2(c), regardless of whether it has received tax-exempt status from the Internal Revenue Service.
However, a lawyer who intends to use a purportedly not-for-profit referral service not sponsored by a bar association should verify for himself or herself that the referral service in fact is a legitimate not-for-profit organization and that it is not a profit-making enterprise masquerading as a non-profit entity. In People v. Zimmermann, 938 P.2d at 132, the respondent attorney relied upon the owner’s misrepresentations that his lawyer referral business had been converted from a for-profit company to a non-profit organization. The Court found, under the facts of that case, that the respondent lawyer "deliberately closed his eyes to facts he had a duty to see." Id. If the not-for-profit character of the entity is questionable, for example, because of unreasonably high executive salaries, the lawyer should not participate in the referral service.
ABA Informal Opinion 85-1512 (March 26, 1985) approved a proposal for a not-for-profit lawyer referral service not sponsored by a bar association. In that opinion, the ABA Committee determined that a lawyer’s participation in a proposed not-for-profit Christian religious organization, to be administered by an attorney in private practice, would not violate Model Rule 7.2(c). The organization, all of whose members would be attorneys, planned to establish a network of members interested in providing legal services to mission agencies, missionaries, and their dependents. The members of the organization would be required to pay a nominal membership fee, and could elect to register for referrals. No registration fee would be charged, but a registered lawyer would agree to provide an initial consultation at no charge, and to prepare general law-related information materials to be distributed to targeted potential clients.
The organization proposed to contact various mission agencies throughout the country to advertise its services. A prospective client would be given the names, addresses, and telephone numbers of registered attorney members in the client’s geographical area. The lawyer referred by the organization would not be obligated to accept the representation, and the organization would not share in any portion of the fee received. Moreover, the organization would not in any way regulate the lawyer or interfere with the lawyer’s professional judgment. The Informal Opinion, therefore, concluded that Model Rule 7.2 would not prohibit the lawyer’s participation in this referral program. Id.
The Committee believes that Rule 7.2(c) permits a lawyer to participate in a duly-organized not-for-profit private lawyer referral agency as well as a bar-sponsored referral organization so long as the private referral agency does not require lawyers to accept referred clients, is not compensated on the basis of fees paid by a referred client, does not interfere with the lawyer’s independent professional judgment, and otherwise allows the lawyer to comply with the Rules.
Cooperative Arrangements Among Law Firms
Some law firms have affiliations or relationships with other firms that result in inter-firm referrals. See ABA Formal Opinion 94-388 (December 5, 1994) (discussing various examples of such relationships). Relationships between firms with different expertise, or located in different geographical areas, allow lawyers to make their services available to a broader range of clients. These affiliations may take various forms, and the lawyers and law firms must exercise great care to avoid violation of the Rules.
Maryland Op. 89-27 (1989) concludes that lawyers who practice in various locations may form an association for purposes of referral so long as they comply with the ethical rules on fee division, professional independence, and advertising. Such law firm relationships must "avoid running afoul of Model Rule 7.2(c)’s prohibition on giving something of value for referrals." ABA Formal Opinion 94-388. The ABA opinion concludes that, in general, this means that firms may not contract to refer business to one another (even if they are "affiliated") because the exchange of binding promises would itself constitute giving something of value for referrals in violation of Model Rule 7.2(c). Id. However, firms properly may agree to consider each other for appropriate referrals, and may engage in cooperative marketing that otherwise complies with the Rules. Where affiliated firms agree to undertake joint representation of clients (for example, where one firm handles the client’s tax matters and another firm handles its litigation), conflicts, confidentiality, and disqualification rules also must be considered. Iowa Op. 89-1 (1989).
What is a Legal Service Organization?
The Rules do not define "legal service organization." The Comment to Rule 7.2(c) indicates that "legal service organization" is meant to encompass legal aid societies and prepaid legal service plans.
Legal aid societies are entities that provide legal services to the indigent in civil cases. They typically are not-for-profit organizations supported by public funds or funds raised by bar associations or foundations. Legal aid agencies that receive government funding typically are subject to restrictions on the income level of clients and on the types of legal services that may be performed. The Committee is not aware of any attorneys who either pay or receive fees for participating in legal aid societies.
However, a legal service organization, unlike a referral service, may be a for-profit entity. In fact, prepaid legal service plans generally are operated by for-profit organizations. See ABA Formal Opinion 87-355 (1987) (Rule 7.2(c) permits the lawyer to pay fees to a for-profit legal service plan in which members pay monthly fees to plan sponsors, part of which the sponsor keeps for overhead and profit, and part of which the sponsor pays to the participating attorneys for plan-covered services); CBA Ethics Committee Formal Opinion 81 (permitting Colorado lawyers to participate in for-profit prepaid legal service plans so long as the plans can be operated in compliance with applicable ethical rules) [18 The Colorado Lawyer 1156 (June 1989)].
A lawyer’s participation in a legal service organization must comport with all applicable ethical requirements or the lawyer’s participation may be unethical. For example, ABA Informal Opinion 1392 (June 2, 1977) found unethical a prepaid legal service arrangement whereby a firm sought to form a national network of "resident associates" who would accept referrals and assignments of prepaid legal clients in accordance with a fee schedule. The firm required each "associate" to pay a uniform 10 percent fee for each referral, regardless of allocation of work or responsibility. The opinion concluded that notwithstanding the denomination of the referred attorneys as "associates," the relationship was not, in fact, that of members of the same firm sharing fees, so the fee division, being unrelated to each lawyer’s work or responsibility, was unethical under then-applicable DR 2-107(A)(2), the predecessor to Rule 1.5(d).
What are "Usual Charges"?
The Rules do not define the phrase "usual charges" in Rule 7.2(c). Conn. Informal Op. 87-9 (October 1, 1987) states that the phrase means "fees which are openly promulgated and uniformly applied." This very broad definition was given in the context of analyzing fee arrangements for a bar-sponsored lawyer referral service. The definition alone does not address the numerous issues surrounding referral fees that must be considered in order to determine an appropriate "usual charge" to be applied.
Reasonableness Issues
A lawyer’s fee always must be "reasonable." Rule 1.5(a). Typically, referral agencies and legal service plans require the lawyer participant to agree to limit his or her fees in some manner, such as by providing a free initial consultation or a reduced hourly rate. The issue usually is not excessive fees, but rather whether the lawyer can provide the thorough, competent representation required by Rule 1.1 within the required fee parameters. If the lawyer cannot do so, even by appropriately limiting the scope of representation as permitted by Rule 1.2, he or she should not participate in the referral organization or the legal service organization.
Fee Division Issues
Division of fees between lawyers and non-lawyers is strictly prohibited by Rule 5.4(a). Division of fees between lawyers not in the same firm is governed by Rule 1.5(d), which prescribes the manner in which fees ethically may be divided. It prohibits such divisions unless the division is in proportion to the services performed and responsibilities assumed by each lawyer, the client consents to the employment of an additional lawyer after a full disclosure of the division of fees to be made, the total fee is reasonable, and the division is set forth in writing and signed by the lawyers and by the client with informed consent. If referral fees or fees paid to a legal service organization are based on fees generated by representation of a referred client, one of these rules may be implicated.
Early lawyer referral arrangements typically were bar-sponsored lawyer referral plans, and financing of such plans was permitted by reasonable registration charges to lawyers participating in the plan, or by a reasonable percentage of fees collected by participating lawyers from plan referrals. ABA Comm. on Prof. Ethics and Grievances, Formal Opinion 291 (August 1, 1956). (Note that Formal Opinion 291, issued in 1956, simply stated, without authority, that a percentage fee payment to a bar-sponsored lawyer referral service would not violate the prohibition against fee division.) ABA Comm. on Professional Ethics, Informal Opinion 1076 (October 8, 1968) endorsed Formal Opinion 291 and permitted, in addition, the return of all or part of the lawyer’s initial consultation fee to support the referral service. Many state ethics opinions over the years have relied on Formal Opinion 291 to conclude that a percentage fee arrangement is a proper and ethical way to finance a bar-sponsored lawyer referral program. See Conn. Informal Op. 87-9; Maine Op. No. 133 (June 18, 1993); New York State Bar Assoc. Op. 651 (June 30, 1993); Tenn. Op. 88-F-115 (Sept. 12, 1988); Wisconsin Formal Op. E-88-8 (Sept. 22, 1988).
According to one commentator, the term "usual charges" as used in Model Rule 7.2(c)(2) "incorporated the various methods for compensating lawyer referral services then in existence and included flat enrollment charges as well as percentage fees. . . ." Franck, "Percentage Fees: Available and Ethical," 6 Lawyer Referral Network 1 (Spring 1993). Therefore, one could argue that a percentage fee payment to a referral service is proper, notwithstanding the prohibitions of Rules 5.4(a) and 1.5(d). However, this Committee believes that payment of a percentage fee to a non-bar sponsored lawyer referral service is problematic. Neither the state nor the Colorado Supreme Court has established regulatory authority over lawyer referral services, so there are, perhaps, more opportunities for impropriety with private referral agencies than with bar-sponsored referral agencies.2
Other Ethical Considerations
A lawyer who wishes to participate in a lawyer referral service or a legal service organization also must assure himself or herself that participation will not result in the lawyer’s violation of any other ethical rules. The lawyer’s non-delegable ethical responsibility to protect the client’s interests requires that the lawyer give particular consideration to the rules involving confidentiality, competence, and independence of professional judgment, conflicts of interest, and advertising.
Confidentiality Issues
Rule 1.6 requires the lawyer to maintain in confidence information relating to the representation of a client. The lawyer should scrutinize carefully a referral agency’s intake procedures in this regard. The information disclosed to the referral service at intake should be limited to facts necessary for the referral.
Furthermore, it is not uncommon for a legal service organization to collect legal fees from the client and remit them to the lawyer after deducting the organization’s fees, or for a referral agency to request documentation of fees in order to verify the percentage fee owed by a participating lawyer. The lawyer must be cognizant of circumstances in which a referral service or legal service organization may obtain confidential client information in connection with billing information or other reporting requirements. But see Maine Op. 133, in which the limited disclosure to a bar-sponsored referral agency of fees charged to a referred client was found not to violate the requirement that client confidences and secrets be protected because the percentage fee arrangement is a "usual and reasonable" way of funding a bar association referral service. The opinion includes the assumption that the bar association referral service, as a matter of institutional policy, maintains the confidentiality of the fee amounts reported to it, and that these arrangements are disclosed to prospective clients.
Competence and Independent Professional Judgment
As discussed above, a lawyer who accepts referrals or participates in a legal service organization must be competent to handle the legal problems referred to him or her. The lawyer, therefore, must have the legal knowledge and skill and be able to supply the thoroughness and preparation reasonably necessary for the representation (Rule 1.1) even if the scope of the representation is limited pursuant to Rule 1.2.
Implicit in Rule 7.2(c), and explicit in various opinions such as ABA Informal Opinion 85-1512, is the requirement that a referral agency or legal service organization not be permitted to interfere with the lawyer’s professional judgment in rendering legal services to the client. Since a lawyer may not allow interference with professional judgment, the lawyer may not participate in a referral agency or legal services organization that attempts such interference. Rule 5.4(c). For this reason, the lawyer should be wary of attempts to limit or audit the lawyer’s fees since such attempts may adversely impact the lawyer’s independent professional judgment.
Conflicts of Interest
A conflict of interest can arise if a lawyer’s representation of a client may be materially impaired by the lawyer’s responsibilities to a third person, in this case the referral service or the legal service organization from which the lawyer anticipates future business. Rule 1.7(b). In some cases, the conflict may be waivable if the lawyer reasonably believes the representation will not be adversely affected and the client consents after consultation. Rule 1.7(b).3 In order to obtain client consent after consultation, it may be necessary to disclose to the client the relationship between the referral agency or legal service organization and the lawyer’s firm.
This type of conflict also may arise when informal referrals are made between firms, or when firms belong to a "network" of firms which refer matters to each other on an ad-hoc basis. Where there is no sharing of clients, confidences, fees, or professional engagements, the relationship between the firms would not, as a general proposition, materially limit the client representation, even where the firms advertise their relationship to each other. ABA Formal Opinion 94-388. However, where the firms share clients, or have close business or financial ties that might materially limit the ability of one firm to oppose the other firm’s clients, the conflict potential increases, as do the obligations of disclosure to the clients.
Advertising
Rule 7.1(a) prohibits the lawyer from making false or misleading communications about the lawyer or the lawyer’s services. Rule 7.1(e) requires the lawyer to refrain from knowingly permitting, encouraging, or assisting others to make communications in violation of Rule 7.1 and the other advertising rules, Rules 7.2 through 7.4. Therefore, any lawyer who uses a referral service or who is a member of a legal service organization must take reasonable steps to assure that the referral service or legal service organization does not engage in any false or misleading communications about the lawyer or the lawyer’s services.
ABA Formal Opinion 94-388 advises that law firms involved in an "affiliation" or "network" must provide certain information to avoid misleading the client about the nature of the relationship between the firms. The opinion requires that the following information be given to clients and prospects for whom the relationship between firms is relevant:
(a) whether any professional personnel from the other law firm(s) may be involved in providing the professional services;
(b) whether any part of the fee the client pays will be shared with the other firm(s);
(c) whether profits of the firm the client originally retained will be shared with the other firm(s);
(d) whether the law firms in the relationship conduct common training programs and/or share strategies or expertise; and
(e) whether the firms in the relationship conduct any other common operations or, by contrast, the relationship simply is a common marketing device.
Conclusion
Lawyer referral services perform the laudable tasks of providing information to potential clients about available legal services and helping clients locate competent counsel to assist them with their legal problems. Similarly, legal service organizations make legal services more widely available to clients. Although these arrangements may cause ethical dilemmas, careful design and implementation of referral programs and legal service organizations should enable lawyers to participate ethically.
1. The Committee is aware of formal and informal organizations of lawyers and non-lawyers who market themselves as providers of a broad spectrum of consulting services. For example, a group of lawyers, therapists, and financial advisers may advertise that it comprises professionals who can assist in all aspects of divorce. Such an arrangement must be carefully evaluated by a lawyer wishing to participate because it implicates issues of competence (Rule 1.1), the lawyer’s role (Rules 2.1-2.3), confidentiality (Rule 1.6), conflict (Rule 1.7), involvement in the practice of law with a non-lawyer (Rule 5.4(c), influence on the lawyer’s professional judgment [Rule 5.4(c)], assisting a non-lawyer in the unauthorized practice of law [Rule 5.5(b)], proper advertising (Rules 7.1-7.5), reasonableness of fees (Rule 1.5) and division of fees with non-lawyers [Rule 5.4(a)]. See Ill. Op. 90-21 (1991); Ariz. Op. 91-4 (1991).
2. California, in contrast, requires all lawyer referral services desiring to conduct business in California to: (1) apply to the state bar for certification; (2) comply with the state bar’s standards in order to become certified; and (3) maintain compliance or certification will be withdrawn. See Minimum Standards for a Lawyer Referral Service in California, Cal. Code Bus. & Prof. § 6155 (Supp. 1999). In effect, therefore, all referral services in California are "bar approved" and may charge percentage fees. Texas also regulates attorney referral services, requiring them to obtain state certification which is available only to agencies operated by a governmental entity or a tax-exempt non-profit organization. Tex.Rev.Civ.Stat. Art. 320d, § 5 (Supp. 1999).
3. The Colorado Rules of Professional Conduct also provide that a client’s consent to a conflict cannot be validly obtained if a disinterested lawyer would conclude that the client should not agree to the representation under the circumstances of the particular situation. Rule 1.7(c).
4. As stated above, some advertising mechanisms in fact may be referral services. See CBA Ethics Committee Formal Opinion 83 [19 The Colorado Lawyer 25 (Jan. 1990)], which discusses group advertising and notes that some types of group advertising may be unethical referral services.
Notwithstanding the copyright notice appearing in this publication, formal opinions of the Colorado Bar Association Ethics Committee may be reproduced in single or multiple copies: (a) by libraries for traditional multiple library use, including copies for reserve room use, extra copies for faculty-student dissemination and interlibrary use; (b) by legal practitioners for their own use and the use of members and associates of the firm or office in which they practice; and (c) by individuals for classroom teaching purposes. All other copyright interests are expressly reserved, including without limitation, the right to prohibit copying for resale purposes.
41
|
